Question
From: (redacted)
Sent: Wednesday,March 22, 2006 6:54 PM
To: Verne,B. Michael
Subject: HSRAssistance -- Whether "Assets" Are Being Acquired
Mike
I would appreciate yourguidance in analyzing the following transaction for HSR purposes:
My client, Company A, willenter into an "Asset Purchase Agreement" to acquire the retirementrecordkeeping services business of Company B. In essence, the retirementrecordkeeping services business involves performing the "back-office"functions for 401(k) and other retirement plans. In general (and as anoversimplification), this business ensures that the correct amount of funds isdeposited in the right investment fund and that records for the planparticipants are updated regularly (in the internet age, this updating is nowdone daily as people are able to access their accounts online). The"assets" being acquired are generally described as"Trust/Custodial Relationships" with customers, which would includeassociated contracts to perform the recordkeeping and custodial functions.Other than general intangibles (e.g., good will and customer lists), virtuallyno other assets are being acquired (no leases, facilities, tangible personalproperty, accounts receivable or similar assets are being acquired). Thepurchase price exceeds the size-of-transaction threshold (the size-of-persontest would also be satisfied).
Under ERISA, there must be aplan trustee who will have significant fiduciary responsibilities over the planassets. With respect to almost all of the business that is being acquired,Company B is the trustee (normally, no one else would want to be the trusteebecause of the potential liability under ERISA law in the event of a breach offiduciary duties). In addition, under ERISA, the plan sponsor has the absoluteright to remove Company B as the trustee for any or no reason. If this occurs,all of the contracts that are part of the "Trust/CustodialRelationship" would terminate (usually after a short transition periodduring which all plan assets can be transferred to a new trustee).
Upon the closing of theacquisition, all contracts with the customers in the "Trust/CustodialRelationship" will be assigned by Company B to Company A, provided that,if any of the contracts require the consent of the customer, then they will notbe assigned. In addition, trust relationships cannot be assigned without theconsent of the customer and would remain with Company B. For those contractsthat are assigned, Company A would perform under the contracts in its own namealthough it would not be the trustee. For any contracts that cannot be assignedwithout the customer's consent, Company A will act as an agent for Company Band perform Company B's obligations under the contracts until the consent isobtained (Company A would be entitled to all resulting revenue, subject toassociated expenses). In any event, Company B will remain as trustee until theconsent is obtained.
Shortly after the closing,Company B will seek the consent of the customers for the trustee relationshipto be transferred to Company A (and for any associated contracts that requiredsuch consent in order to be transferred to Company A). Obviously, Company A isexpecting that the customers will be delighted to have Company A be thetrustee, but there are no assurances. In fact, a significant portion of thepurchase price will be paid after the closing and only if consent from most ofthe customers is obtained. Theoretically, a customer could refuse to consent,but not withdraw its business (leaving Company A to continue acting as Company B'sagent). However, we would expect that the customer would either consent orwithdraw its business. In the unlikely event that the customer refuses toconsent, but does not withdraw its business, we expect that Company A willrequire Company B to resign as trustee in order to force the issue (inaddition, the Asset Purchase Agreement would provide that Company A does nothave to continue acting as Company B's agent longer than a period to benegotiated).
Is this situation analogousto Int. #115 in the Premerger Notification Practice Manual (3rd ed.), whichaddressed whether payments under a recruiting agreement, where a seller is paidto assist in persuading its employees to become employees of the buyer, shouldbe included in determining the "acquisition price" for purposes ofthe size-of-transaction test? Int. #115 concluded that the consideration paidunder the recruitment agreement would not be included in the "acquisitionprice" since no "asset" is being acquired. In addition, is thissituation analogous to situations in the insurance industry where a buyer paysa seller to assist in transferring a seller's customers to a buyer? Iunderstand that the payment for assistance in transferring the seller'scustomers would not be considered a payment for an "asset" and, assuch, would not be reportable.
Any guidance that you couldprovide with respect to the foregoing would be most appreciated. Feel free tocall me if my description of the situation is not clear or you need additionalfacts. Thanks. Best regards,