Question
January 26, 2006
VIA E-MAIL
B. Michael Verne
United States Federal Trade Commission
Premerger NotificationOffice
Bureau of Competition, Room303
6th Street & Pennsylvania Avenue NW
Washington, DC 20508-0001
Re:Reportability of Like-Kind Exchange of Assets
Dear Mike:
Thankyou for speaking with me on the telephone last week about the HSR implicationsof a transaction in which P, a manufacturer, will sell one of its plants toBuyer and will acquire a plant and related assets of G, a manufacturer. Thetransactions will effectuate a like-kind exchange of manufacturing assets. Aswe discussed, and for reasons explained in detail within, P's acquisition ofG's plant will not be HSR-reportable but Buyer's acquisition of P's plant willrequire a filing.
I.The Framework of the Acquisition
The like-kind exchange ofmanufacturing assets takes place within the framework of P's acquisition of allof G's securities pursuant to a Stock Purchase Agreement ("SPA").1Each step of the transaction is discussed in turn below.
Step 1
Pwill form a wholly-owned subsidiary ("G LLC"). A pre-existing,independent third party financial institution ("Institution") willuse its existing Exchange Accommodation Titleholder ("EAT") to form aspecial purpose single-member LLC ("LLC"). A Qualified ExchangeAccommodation Arrangement ("QEAA"), explained in relevant part below,will be executed among P, Institution, EAT, and LLC. Institution also owns apre-existing special purpose entity called a Qualified Intermediary("QI"), a sister entity to EAT.
Step 2
Pwill loan LLC money to be used as part of the purchase price for the purchaseof G's plant. LLC will issue to P a corresponding note on the debt ("PNote"). The rest of the purchase price for G's plant will be financed by Gin return for a note from LLC to G ("G Note"), which will be securedby a senior lien on all of the assets of LLC. An Asset Purchase Agreement("APA") will be executed between LLC and G for the purchase of G'splant by LLC. The APA will provide that if the SPA fails to close, G will havea call right to re-acquire LLC's assets, and LLC will have a right to put itsassets to G. By virtue of the lien and the call right, therefore, G will havethe right to the assets of LLC upon dissolution.2
LLCand G will also execute a Management Agreement under which G will manage the Gplant for LLC. In return, G will receive all of the revenues earned from the Gplant but must pay LLC a fee equal to the sum of debt servicing payments, realestate taxes, common area expenses, and insurance costs. Under the ManagementAgreement, therefore, G will have the right to all of the profits of the Gplant and LLC.
Aswe discussed, because G will have the right to all of the profits of LLC andthe right to its assets upon dissolution, G controls LLC within the meaning of 16 C.F.R. 801.1(b)(1)(ii), even though Institution will own the interests ofLLC indirectly through EAT. From LLC's formation, therefore, LLC and the Gplant are within the person of G under 801.1(a)(1).
Step 3
Pwill acquire the voting and non-voting securities of G under the SPA, whereby Gwill become a wholly-owned subsidiary of P. Because G controls LLC, LLC and theG plant will then be within the person of P.
Step 4
Inpreparation for the completion of the transaction, P and QI will execute anExchange Agreement that will assign to QI the purchase price paid by the Buyerof P's plant, and will specify that QI will subsequently transfer that amountto LLC.3
Step 5
Inthis step P will sell its plant to Buyer under an Asset Purchase Agreement("APA"). The fair market value of the plant will be approximately$65.5 million. As specified in the Exchange Agreement between P and QI, Buyerwill transfer $65.5 million to QI in return for the
plant .4
Step 6
Asset forth in the QEAA and Exchange Agreement, QI will transfer the P plantpurchase price ($65.5 million) to LLC. As consideration for the P plantpurchase price, LLC will transfer title to the G plant to G LLC.5 LLC will use the money to pay both the G Note and the P Note in full. Pwill thus hold title to the G plant unencumbered by debt.
IIHSR Analysis
As wediscussed, only Buyer's acquisition of P's plant triggers an HSR filingobligation, assuming the relevant size thresholds are met and no exemptionapplies. Because the Management Agreement gives G the right to the profits ofLLC and because G and/or P (including G) has the right to LLC's assets upondissolution, G controls LLC upon formation notwithstanding EAT's ownership ofthe LLC interests .6 In addition, once P has acquired the votingsecurities of G in Step 3, P, G, and G LLC will be within the same person.Thus, both the acquisition by LLC of the G plant in Step 2, and the acquisitionof the G plant by G LLC in Step 6, are exempt as intra-person acquisitionsunder 16 C.F.R. 802.30. In both acquisitions, the acquiring and acquired persons are the sameby virtue of G's right at all times to the profits of the G plant and LLC, andits right to LLC's assets (i.e., the G plant) upon dissolution.7Accordingly, neither LLC's nor G LLC's acquisition of the G plant will beseparately reportable.
Iwould appreciate your confirmation of the analysis set forth in this letter,Mike. Thank you again for your attention to this matter.
Footnotes
1 The SPA contemplates the acquisition by P of all securities of two pre-existingcompanies, G and S, from common shareholders, none of whom controls eithercompany. Neither acquisition is HSR-reportable because the value of the votingsecurities of each of the two companies to be acquired by P is less than $50million, as adjusted. In addition, the parties intend to conduct the samelike-kind exchange of manufacturing assets for S as they will for G. Becausethe mechanics of each like-kind exchange will be identical, for purposes ofsimplicity this letter discusses only the acquisition by P of G and thecorresponding like-kind exchange related to G's plant, with the assumption thatthe analysis within applies also to the acquisition by P of S and thecorresponding like-kind exchange related to S's plant.
2 The QEAA provides that if a latertransaction between P and Buyer fails to close, then P will have a call rightto re-acquire the G plant. However, when and if P's call right accrues, G willbe within the person of P, as described below. P will have assigned its right toG LLC, a sister entity to G. Accordingly, either G or the person of which G isa part will at all times be the only persons with the right to the assets ofLLC upon dissolution.
3 If requested, LLC will also granta security interest to an independent Lender to secure the covenants under theManagement Agreement. The grant of the security interest has no HSRimplications.
4 If the APA between P and Buyerfails to close, then under the QEAA, G LLC will exercise its call right(assigned to it by P) for the G plant, in return for nominal consideration andtransactions fees. See supra n.2.
5 As noted supra, for purposes ofHSR analysis, P, the UPE of both G and G LLC, already controls LLC (and thusthe G plant) by virtue of G's right to all of the profits of the G plant andLLC.
6 As described supra, P's call rightfor the G plant will not affect the analysis because it only weighs in favor ofP having a claim to control LLC, and P's call right will accrue only after G iswithin the person of P.
7 16 C.F.R. 802.30 provides that"[a]n acquisition ... in which the acquiring and at least one of theacquired persons are, the same person by reason of 801.1(b)(1) of this chapter. . . is exempt from the requirements of the Act."