Question
From: (redacted)
Sent: Monday, July 31, 20063:14 PM
To: Johnson, Janice C.
Subject: Second transaction of the day
Janice,
The following facts arerelevant to the second transaction that I would ---like to discuss with you atyour earliest convenience. I believe that transaction constitutes anacquisition, but it does not fit cleanly into any of the models I've addressedin the past.
1.Hospital A is a nonprofithospital within "A". Hospital A has assets of ~$80 million (the fairmarket value of which has yet to be determined). "A" has assets andannual sales in excess of $100 million. Prior to closing the proposedtransaction, A will transfer cash and marketable securities to A's UPE (oranother entity existing or to be created within "A") in such amountas will reduce A's assets to a level approximately equivalent of B's asset base.
2.Hospital B is a nonprofithospital within "B". Hospital B has assets of ~$50 million (the fairmarket value of which has yet to be determined). "B" has assets andannual sales in excess of $10 million but less than $100 million.
3.A and B wish to consolidate theiroperations under the common control of a new, 501(c)(3) nonprofit holdingcompany ("HC") that will have a community Board but no corporatemembers. Please confirm that the formation of HC is exempt from the reportingrequirements pursuant to Rule 802.40.
4.A and B will cause theirrespective governing documents to be amended to make HC the sole corporatemember of each of A and B. "A" will exit the market, and A and B willbe controlled by HC. HC will have the power to appoint the members of the Boardof each A and B, and rights to any profits generated by A or B and to theirrespective assets upon dissolution. (Another version has A and B merging intoHC, but that alternative does not appear to raise a material difference in theHSR analysis.) Please confirm that Rule 801.40 does not apply to thistransaction insofar as the formation of HC is in connection with theconsolidation of A and B.
5.Historically, mergers andconsolidations of nonprofit entities have been treated as asset transactionsrather than acquisitions of voting securities as described in Rule 801.2(d), withthe final analysis addressing who ultimately controls whom. In this situation,it appears that HC controls A and B, and that neither A nor B control HC.Neither A nor B will have a right to any profits generated by HC, nor will A orB have any right to HC's assets upon dissolution. Pursuant to state law, thedistribution of HC's assets, if any, will be handled by the county courtresponsible for distribution of charitable assets. HC will have no corporatemember but will be governed by a Board comprised of 15 directors. With respectto the initial Board appointments only, A and B will each appoint 7 directorsand the 14 appointed directors will appoint the 15th director. After theinitial Board selection, the Board will be self-sustaining and neither A nor Bwill have any right to appoint future members of the Board. We contend that thepower to appoint the initial Board should not confer control of HC on A and Bfor HSR purposes, but acknowledge that one might also argue that both A and Bindirectly control the election of the 15th director (via the exercise of a novote), in which case A and B would be ultimate parent entities of HC. On theother hand, if neither A nor B have the power to appoint Board members in thefuture, the practical conclusion appears to be that the HC is its own UPE, andthe UPE of both A and B. Please confirm that neither A nor B controls HC underthese circumstances.
6.The transfer of corporatemembership in A and B to HC appears to constitute a merger or consolidationunder the Act. As such HC appears to be the acquiring person of both A and B.HC is projected to have assets of ~$100 million upon closing and sales of $0.Please confirm (a) that HC is the acquiring person and (b) whether the prioryear's sales of A and B are attributable to HC for purposes of the size ofperson threshold.
7.Assuming that HC is an acquiringperson, there appear to be two acquisitions. We understand that the acquisitionof B involves assets worth less than $56.7 million. We also understand thatneither HC nor "B" would satisfy today's size-of-person threshold. Ifso, the acquisition of B by HC would not be a reportable transaction. Please advisewhether HC's acquisition of B as described is reportable.
8.The parallel acquisition involvesthe change of membership of A, the assets to be acquired of which would beworth less than $56.7 million. While "A" satisfies the higher size ofperson reporting threshold and HC would satisfy the lower size of personthreshold, the assets to be acquired would not satisfy the size of transactionthreshold. Please advise whether HC's acquisition of B as described isreportable.
9.Finally, we wish to confirm thatthe transfer of cash and marketable securities as described in Paragraph 1would not constitute an avoidance scheme for purposes of Rule 801.90. Pleasenote that the transfer of assets from A to A's UPE prior to closing will belimited to categories of assets that would not be considered assets if acquiredby another person, and that there is no intent on the part of A or A's UPE toavoid the Act's reporting requirements.