Question
December 23, 2005
Via Hand Delivery
Nancy M. Ovuka
Compliance Specialist
Premerger Notification Office
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: December 12-13, 2005 telephone calls
Dear Nancy:
I am writing to confirm the advice that you provided to (redacted)in New York) and me in the above-referencedtelephone calls. In these calls, we posed the following scenarios and youprovided the following advice. Please refer to the attached diagrams thatillustrate each of these steps.
STEP l: Merger
Mr. A controls A-1. A-1 creates A-2, A-3, A-4 (which itselfcreates Various A-4 Subs) and Merger Sub. Merger Sub will merge into Target B(a public corporation that is its own UPE). Target B is the surviving entitybut would be controlled by Mr. A. Mr. A and Target B will file under the HSR Act.
HSR Question Re Step #1 : None.
STEP 2: Target B Sells Assets & Voting Securities
State "X" has a "State Board" that managesretirement funds for public employees and other state institutions of"State X." Assume that State Board is a state agency under the lawsof State X, and is not itself a corporation engaged in commerce.
State Board, along with A-2, forms C-1. State Board has a 99%interest in C-I's profits and in C- assets upon dissolution. A-2 has the other1% interest. C-1 then forms C-2, which then forms C-3 and the Other VariousSubs. C-3 then forms a variety of direct and indirect subsidiaries, including PropcoLLCs and Propco LPs. (There will be more than 200 Propco LLCs and Propeo LPs inall.) As reflected in the diagram, it is possible that the limited partners ineach of the Propco LPs may include corporations; if so, then the corporatelimited partner would have an interest of 1% (or less).
Also as reflected in the diagram, all entities below C-1 are 100%owned by C-1 (directly or indirectly).
Immediately after the Step 1 merger, and pursuant to an agreementthat is contingent on the Step 1 merger, Target B will sell various assets andvoting securities to entities below C-2. More specifically, Target B will sellvarious assets (consisting of improved real property and related equipment) tothe Propco LLCs and Propco LPs, and also will sell various other assets (alongwith the voting securities of several corporations 100% owned by Target B) tothe Other Various Subs.
Please assume further that the commerce and size-of-transactiontests are satisfied, and the sizeof-person test does not apply (transaction> $200 million).
HSR Question Re Step #2 : Is Target B's sale of various assets and votingsecurities to Propco LLCs + Propco LPs + Other Various Subs subject tocompliance under the HSR Act?
Answer : No.
Analysis : With reference to Section 7A(c)(4), Rule 801.1(a)(2) andthe Statement of Basis and Purpose accompanying the promulgation of the HSR Rules, acquisitions by a state agency are not subject to HSR compliance, at least where the state agency is not itself a"corporation engaged in commerce." Absent clarification from theCommission to the contrary, the PNO appliesthis principle, by extension, to acquisitions by noncorporate entities controlleddirectly or indirectly by any such state agency unless there is an interveningcorporation in the control chain.
Here, a state agency controls C-1, which in turn controls(directly or indirectly) each of the actual acquiring entities (Propco LLCs + PropcoLPs + Other Various Subs). C-1 and the acquiring entities all are noncorporateentities, as are the other entities in the chain of control above the acquiringentities and below C1 (with the exception of corporations that serve as nominallimited partners in the Propco LPs). Thus, HSRwould not apply in the case of acquisitions by the Propco LLCs and the OtherVarious Subs, where there are no intervening corporations in the chain ofcontrol. Similarly, HSR would not apply in the case ofacquisitions by Propco LPs, even though they have nominal corporate limitedpartners, as those corporate limited partners have an ownership interest of 1%or less and, accordingly, would not "hold" any of the assets beingacquired by the Propco LPs.
STEP 3: Lease of Real Property & Equipment
Pursuant to an agreement that is contingent on Step #1 and Step#2, the Propco LLCs and Propeo LPs will take the real property and equipmentacquired in Step #2 and lease all of it (the "Propco/A-4 Lease") tothe Various A4 Subs. The Propco/A-4 Lease will have an initial term of20-years, with the lessees having two 10-year renewal options.
The Propco/A-4 Lease will be subject to a temporary lease of thesesame properties from the Propco LLCs and Propco LPs to Target B ("Propco/TargetLease") until such time as the Various A-4 Subs are prepared to operatethe businesses. This temporary arrangement is anticipated to last a few monthsin most cases, but in some cases may take up to one year.
Assume that: (i) the commerce test is met; (ii) thesize-of-transaction test would be met if the transaction were viewed as areportable acquisition; and (iii) the size-of-parties test would be met orwould not apply.
Question Re Step #3 : Assuming that the Propco/A-4 Lease does not exhaustthe useful life of the real property but would exhaust the useful life of thepersonal property ("FF&E") covered under the lease. Assume alsothat, under the terms of the Propco/A-4 Lease, the Various A-4 Subs mustreplace wornout FF&E with new FF&E that becomes part of the leasedequipment and must be turned over to Propco LLCs and Propco LPs at leasetermination. Would the entering into of the Propeo/A-4 Lease be an"acquisition" under HSR, at least with respect to the FF&Eoriginally included under the lease, because such lease would in fact exhaustthe remaining useful life of that FF&E?
Answer : No.
Analysis : HSR only applies in the case of an"acquisition". In the case of assets covered by a new lease, HSR applicability depends on whether the lease effects the presenttransfer of beneficial ownership of the assets covered by the lease. The PNO considers a variety of factors in malting this determination,among which is the question of whether the lease is anticipated to exhaust theremaining useful life of the property so leased. Here, although the lease infact would exhaust the remaining useful life of the FF&E, the lessee isobligated to replace that FF&E with new FF&E that becomes part of theleased property (and reverts to the lessor at the conclusion of the lease). ForHSR purposes, such an arrangement would betantamount to the lease simply not exhausting the remaining useful life of the FF&Ein the first place. Therefore, it would not be viewed as a factor suggestingthe present transfer of beneficial ownership of the leased FF&E.
(As noted, the PNO considers a "variety offactors" as identified in Interpretation #28 of the ABA PremergerNotification Practice Manual 3d in its overall analysis. For purposes of thisconfirmation, please assume that the other relevant factors do not themselvessuggest the present transfer of beneficial ownership.)
I understandthat the PNO does not confirm informal advice inwriting. However, if this letter misconstrues or misrepresents our conversionsin any way, I would appreciate it if you would call me at the number providedabove as soon as reasonably possible. Thank you for your assistance on thismatter.
STEP 1: (referto image diagram)STEP 2: (referto image diagram)STEP 3: (referto image diagram)