Question
October 7, 2005
VIA ELECTRONIC MAIL
Mr. B. Michael Verne
Compliance Specialist
Premerger Notification Office
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, D.C. 20580
Re: Applicability of theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
15 U.S.C. 18 a (the "Act")
Dear Mike:
Thank youfor taking the time to speak with (redacted) and me yesterday afternoon. I amwriting to confirm the advice you provided us on two issues. The factual backgroundwe provided you with is as follows:
Back ground
Company A is a $106.2 million person, and intends to acquire by way of a mergerall of the outstanding voting securities of Company B, which is not engaged inmanufacturing. The purchase price will be greater than $53.1 million but lessthan $212.3 million.
Issue 1 (Accelerated Payments
Untilrecently, Company B had slightly more than $10.7 million in assets. Recently,Company B made certain payments on an accelerated basis so that its assetswould be less than $10.7 million as of the date of its next regularly-preparedbalance sheet (the most recently regularly prepared balance sheet as of theconsummation of the merger) so as to fail the size-of-person test. These paymentsincluded (i) quarterly dividends paid to shareholders before the usual paymentdate; (ii) payments of accrued interest due on notes prior to the usual paymentdate; (iii) accelerated payments of accounts payable {for example, payinginvoices in 10 days that would have otherwise been payable in 30 days); and(iv) accelerated bonuses paid to owners/managers of Company B (mid-year, whenthey ordinarily would have been paid at yearend). Company B also wrote off of aprepaid expense for work that had been carried as an asset because managementnow believes that the work will never be performed.
Youconfirmed that it was not a Section 801.90 avoidance issue for Company B tomake the above-described payments on an accelerated basis or to write off theabove-described asset in order to fail the size-of person test. Your advice wasthat Interpretation 195 of the ABA Premerger Practice Manual controls eventhough that Interpretation dealt only with accelerated dividend payments.
Issue 2 (Identification of UPE)
Husband andWife, the founders of Company B, directly each hold approximately 22!0 ofCompany B's outstanding voting securities. In the aggregate, therefore, theydirectly hold less than 50% of the outstanding voting securities of Company B,even after accounting for the aggregation required by 16 C.F.R. 801.1(c)(2).
Prior to2000, however, Husband and Wife held more than 50% of Company B's votingsecurities. In 2000, Husband and Wife each established a grantor retainedannuity trust (GRAT") (for a total of 2 GRATs), and each placedjust under 10% of Company B's voting securities in their respective GRAT.Husband was named as the trustee of Wife's GRAT, and Wife was named as thetrustee of Husband's GRAT. In each case, the beneficiaries of the GRAT were thecouple's two minor children (one of whom is still a minor).
In December2004, Husband and Wife each established another GRAT (bringing the total numberof GRATs to four), again with the other spouse named as trustee and thecouple's two children (one of whom was a minor at the time) as beneficiaries.Husband and Wife each gave their respective GRAT approximately 18l0 ofCompany B's outstanding voting securities. Accordingly, after the creation ofthe four GRATs, the ownership of Company B's outstanding voting securities isapproximately as follows:
Husband22%
Wife22%
GRAT 1 (settled by Husband, 2000) 10%
GRAT 2 (settled by Wife, 2000)10%
GRAT 3 (settled by Husband, 2004) 18%
[GRAT 4 (settled by Wife, 2004)18%
The term ofeach GRAT is approximately 10 years. If Husband or Wife dies during the trustterm and the other survives the trust term, the surviving spouse is entitled toa life estate in the corpus of the GRATs of which he or she is not the settlor.In each case, the settlor lacks the power to remove or replace the designatedtrustee.
Youconfirmed that the potential life interest in the corpus of the non-survivingspouse's GRAT does not constitute a reversionary interest within the meaning of16 C.F.R. 801.1(c)(4), since it does not accrue to the settlor (butrather to the settlor's surviving spouse). Therefore, each GRAT is deemed tohold the voting securities contained within it, and none of the GRAT holdingsmust be aggregated with those of any other GRAT or Husband or Wife's individualholdings of Company B's stock, notwithstanding the fact that Husband and Wifeserve as trustee of two GRATs each.
Since thelargest shareholder of Company B is thus Husband + Wife (44%, aggregated asrequired by 16 C.F.R. 801.1(c)(2)), and no person has the contractualpower to designate 50% or more of Company B's directors, Company B is thereforeits own UPE. Along with the conclusion discussed above under Issue 1 regardingCompany B's total assets, the potential acquisition by Company A of all of theoutstanding voting securities of Company B by way of a merger is thus notreportable under the Act.
Thank youagain for your consideration and assistance in this matter. If you do notbelieve this letter reflects the, facts discussed on our telephoneconversation, or if I have misstated the advice you gave, please contact me assoon as possible.