Question
November 11, 2005
B. Michael Verne
PremergerNotification Office
Bureau ofCompetition
Federal TradeCommission
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: Applicationof Section 802.1/Ordinary Course of Business Exemption
Dear Mr. Verne:
This letterserves to summarize our discussion yesterday regarding the applicability of theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act ") to the transaction described below. During that phonecall you concurred with our position that, based on the facts presented, an HSR filing would not be required.
Terms ofTransaction
Company A, ourclient, and Company B are discussing a possible transaction whereby Company Awill acquire certain assets from Company B. The size-of-parties andsize-of-transaction tests are satisfied. At issue is whether the transaction isexempt from the filing requirements of the HSR Actpursuant to the "ordinary course of business" exemption set forth inSection 802.1 of the HSR Rules.
Company A is aforeign investment firm. Company B is a major U.S.company engaged in a variety of activities. A division of Company B providesequipment rental and leasing services. Company A intends to acquire certainassets from within that division. Such assets include equipment inventory andleases, and other assets incidental to running the business (such as vehicles,service agreements, and customer and supplier lists). In addition certainpersonnel (between 20-30) will be transferred. However, no intellectualproperty or real estate will be transferred. For an interim period, Company Awill lease office space from Company B in order to conduct the business.Company A expects to relocate the business, and Company B will continue toconduct other aspects of its equipment rental and leasing business out of thatoffice during and after the interim period. The information technology("IT") used in connection with the assets also supports other processingrequirements of the division. Once transferred, Company A will continue to usethis technology under a transitional services agreement until a new IT strategyis developed.
The companiesare negotiating a non-compete agreement related to the assets to be acquired.
The subjectassets consist primarily of used durable goods to be used by Company A solelyfor the purpose of leasing to third parties. Pursuant to Section 802.1(d) ofthe HSR Rules, such assets are exempt from thenotification requirements of the HSR Act,provided they do not constitute an "operating unit" as defined inSection 802.1(a). W e explore this issue in further detail below.
CompanyB/Equipment Rental and Leasing Division
As described inits SEC filings and on its website, Company Bdivides its business activities into several operating divisions, one of whichis its "equipment services" division that rents and leases a widerange of equipment in several different industries ("B Division"). BDivision is divided further into several businesses that focus on leasingcertain types of equipment to certain industries. One of those businessesoffers equipment leases to a specific transportation-related industry ("BBusiness"). The assets to be acquired by Company A are those related tothe leasing of two specific types of equipment within B Business ('`AcquiredAssets"). Assets relating to several other types of equipment within the BBusiness are not being sold.
Company Baccounts for and markets all of its equipment leasing and rental business aspart of B Division. The Acquired Assets represent a very small portion of theassets in B Division. In fact, they represent about 1 % of the total assets ofthe division and generate revenues representing about 1 % of the total revenuesof the division. Individuals who manage the Acquired Assets also manage otherbusinesses within B Division and the B Business. B Division is headquartered inone office, along with all of the businesses within the B Division, and it willcontinue to be headquartered there after the sale of the Acquired Assets.Maintenance facilities owned and operated by third parties who service theAcquired Assets also service other B Division and B Business assets notincluded in the sale and will continue to do so.
The parties arecurrently negotiating a non-compete agreement. Although the exact terms remainuncertain, it is anticipated that the agreement would prevent Company B fromleasing the two specific types of equipment included in the Acquired Assets inthe transportation-related industry of the B Business. Company B will continueto otherwise engage in the equipment leasing business through its B Division,including using the assets within the B Business that have not been divested tolease other types of equipment in the same transportation related industryserviced by the B Business.
HSR Analysis/Application of Section 802.1
As notedearlier, the Acquired Assets consist primarily of used durable goods to be usedby Company A solely for the purpose of leasing to third parties. Under Section802.1 (a) of the HSR Rules, such an acquisition would not beexempt if all or substantially all of the acquired assets comprise an"operating unit." We believe that while B Division could beconsidered a distinct operating unit, as that term is defined in the HSR Rules, the Acquired Assets do not rise to that level. Aspreviously indicated, Company B (through B Division and even B Business) willcontinue in the equipment rental and leasing business following the sale of theAcquired Assets. We note that we have come across several FTC informalinterpretations - with nearly identical fact patterns - where staff found thatthe assets at issue did not comprise an operating unit and that the 802.1exemption applied. For these reasons, we believe - and you have concurred -that it is appropriate to apply the ordinary course of business exemption tothis transaction.
Please let usknow if the foregoing facts and conclusions are inconsistent with yourunderstanding based on our earlier discussion. Thank you for your time andconsideration.