Question
April 18, 2006
Mr.Michael Verne
Pre-merger NotificationOffice Bureau of Competition, Room 303
U.S. Federal Trade Commission
Federal Trade Commission
600 Pennsylvania Ave., NW
Washington, DC 20580
Dear Mike,
Followingour telephone discussion of Wednesday, April 12, this letter describes ouranalysis of the Hart-Scott-Rodino ("HSR") Act as it applies to aseries of hypothetical events. I wish to confirm that none of the events wediscussed would be reportable under the HSR Act.
DESCRIPTIONOF ENTITIES
Referringto the entities in the top of the diagram attached with this letter, thehypothetical example relates to a hedge fund directed by a natural person (JohnDoe) who owns 100% of a managing entity, JD Management, LLC. In turn, JDManagement, LLC owns a 33.3% interest in JD Fund, LP, and owns 33.3% of theshares in JD Fund, Corp. (but holds no right to appoint directors). No personis entitled to 50% or more of the profits, or 50% or more of the assets ondissolution, of JD Fund, LP. No person holds 50% or more of the shares, or hasthe right to appoint 50% of more of the directors, of JD Fund, Corp.
JDManagement, LLC also currently owns a 100% interest in a third entity, JDInvestments, LLC, a shell company that holds no assets. JD Investments has nobalance sheet and will not prepare a balance sheet at any time relevant to thishypothetical. Prior to the acquisitions described below, the two JD funds willeach take a 33.3% interest in JD Investments. John Doe controls JD Management,LLC, and through it, makes all investment decisions for the two JD Funds, andJD Investments.
Referringto the entities from the bottom of the attached diagram, the hypotheticalexample includes BUT, Inc., a corporation currently in Chapter 11 bankruptcy.Subject to court and various third-party approvals, BKPT will emerge frombankruptcy on June 1. On that date, various third party creditors holdingclaims against BKPT will receive shares of new common stock in BKPT in exchangefor their claims. In other words, it is expected that the claims will convertinto shares of BKPT common stock on June 1. Seller A and Seller B currentlyhold claims against BKPT, valued at $60 million each.
TIMELINEOF EVENTS
Thesellers have each offered to sell their claims to JD Investments, on two dates:May 1, and May 15. Prior to the May acquisitions, each of the JD Funds (LP andCorp.) will contribute $40 million in cash to JD Investments, and in turn willobtain one-third interests in JD Investments. JD Management, LLC willcontribute $40 million cash to JD Investments, and will retain the remainingone third interest in JD Investments. On May 1, JD Investments will close atransaction with Seller A and purchase its claims for $60 million. On May 15,JD Investments will close a transaction with Seller B and purchase its claimsfor $60 million. On June 1, assuming that bankruptcy proceedings turn out as planned,the claims against BKPT, Inc. convert into shares of common stock in BKPT.
ANALYSIS ULTIMATE PARENTENTITIES
Consistent with ourdiscussion on April 12, we reached the following conclusions:
John Doe is the ultimate parent entityof JD Management, LLC, because he holds 100% of the LLC interests of JDManagement.
While John Doe manages the investmentsof the two JD Funds he is not the ultimate parent of these entities, because he(including any entities he controls under the HSR rules) does not hold 50% ormore of the partnership interests in JD Fund, LP, and he does not hold 50% ormore of the shares in JD Fund Corp., or the right to appoint 50% or more of thedirectors of JD Fund Corp.
After the two JD Funds take one-thirdinterests in JD Investments, John Doe will not be the ultimate parent entity ofJD Investments because he will not hold 50% or more of the LLC interests in JDInvestments.
Each of the JD Funds (LP and Corp.) andJD Investments, LLC is its own ultimate parent entity, because neither JohnDoe, nor any other person, controls any one of them under the HSR rules. Thisis the case even though John Doe, directly or indirectly, has managerialcontrol over those entities.
ANALYSIS SIZE OF PERSONANALYSIS FOR JD INVESTMENTS LLC
With respect to thevarious events described above, consistent with our discussion on April 12, wereached the following conclusions:
The "claims"against BKPT can be considered equivalent to convertible securities, theacquisition of which is exempt under 16 CFR 802.31.
Alternatively, the "claims" againstBKPT can be considered equivalent to cash, because they represent a right toreceive cash from BKPT, the acquisition of which is exempt.
JD Investments' acquisition of claims isnot HSR reportable because the claims are either cash equivalents orconvertible securities.
Thesubsequent conversion of claims into shares of BKPT common stock is apotentially reportable event for JD Investments, but is not reportable in thiscase, for the following reasons:
JD Investments will not acquire greaterthan $226.8 million in voting securities of BKPT, and therefore its acquisitionof BKPT common stock is reportable only if the HSR size of person test is met.
JD Investments' size of person is determinedunder 16 CFR 801.11(e) because it is not controlled by any other person, and will not have aregularly prepared balance sheet before or at the time of the conversion.
JD Investments does not exceed the $11.3million size of person threshold under 801.11(e). The only assets that will bein JD Investments prior to the acquisition of shares through the conversionwill be the claims against BKPT. The full amount of those claims will be usedto acquire the shares of BKPT. The value of the claims, which will be used toacquire BKPT shares, can be deducted from JD Investments total assets becausethey should be viewed either as cash equivalents or as securities of BUT,either of which may be subtracted from JD Investments' total assets fordetermining its size of person under Rule 801.11(e).
Basedon our discussion of this scenario last week, I understand that you agreed withour conclusion that no portion of the transactions set forth above wouldrequire reporting under the HSR Act. Please let me know as soon as possible ifyou have any questions regarding this analysis.
Attachment (StaffComment: refer to image file for attachment)