Question
January 11, 2007
Mr.B. Michael Verne
PremergerNotification Office
Bureauof Competition
Federal Trade Commission
7th& Pennsylvania Avenue, NW
Washington, DC 20580
DearMike:
I am writing to confirm my understanding of atelephone conversation we had on December 28, 2006 concerning the potential reportability under the Hart-Scott-RodinoAntitrust Improvements Act of 1976, as amended ("HSR Act") of aproposed transaction discussed below.
Proposed Transaction
The proposed transaction relates to the acquisitionof additional interests in a limited liability company, LLC, by Company A. LLCholds 100% of the voting securities of one issuer of voting securities and 48%of the voting securities of another issuer. LLC has two classes of limitedliability company interests: A units and B units. Company A currently holdsonly A units of LLC representing 40% of the overall number of units of LLC.
Until a certain amount of profits are achieved byLLC, all of the profits of LLC go to the holders of the B units. After acertain level of profitability has been achieved by LLC, profits will bedivided based on the percent of total LLC units held by each holder of the LLCunits. With regard to the distribution of assets of LLC upon dissolution,Company A is entitled to receive approximately 70% of the assets, after thepayment of debts, if the dissolution of LLC occurred in the near future. Overtime, if Company A did not acquire additional units in LLC, its rights toassets upon dissolution of LLC may fall to as low as 40%.
Company A previously loaned LLC $25 million inexchange for a convertible note that can be converted into additional A unitsof LLC. Company A intends to exercise that note at a point in time when itwould be entitled to receive approximately 70% of the assets, after the paymentof debts, if the dissolution of LLC occurred at the time of the conversion.
Company A also is negotiating to buy out theremaining holders of limited liability company interests in LLC, the RemainingInterests. These negotiations will not be completed at the point Company Aexercises the convertible note to acquire additional A units.
Conclusions
You agreed that Company A already controls LLC forHSR purposes under 16 C.F.R. 801.1(b)(1)(ii) at the time of the exercise of the convertible note.Specifically, you agreed that the rights to profits of LLC and the rights toassets of LLC upon dissolution are variable, and thus control of LLC at thetime of the acquisition of additional interests in LLC is solely determined bythe right to assets upon dissolution of LLC, assuming dissolution were to occurat the time of the additional acquisition. You confirmed that as Company Awould control LLC already at the point of the note conversion that theacquisition of additional LLC units regardless of value, through the conversionor otherwise, would be non-reportable under the HSR Act pursuant to 16 C.F.R. 802.30 as an intraperson transaction.
You also confirmed that in valuing the interests thatCompany A holds in LLC for HSR purposes that the value of the 48% interest LLCholds in an issuer of voting securities should be excluded under 16 C.F.R. 802.4, assuming LLC does not have the power to designate 50% or more of theboard of directors of the issuer through the holding of voting securities, contractualrights, or a combination of the holding of voting securities and contractualrights. You agreed that the fact that LLC has an option to acquire theremaining 52% of the issuer is not relevant to whether LLC controls theissuer for HSR purposes, assuming the option has not be exercised and theoption carries with it no current rights for the election or designation ofdirectors.
Finally, you confirmed that assuming arguendo thatCompany A did not acquire control of LLC until the exercise of the convertiblenote, it is not necessary to aggregate in the value of the Remaining Intereststo determine if the conversion of the note is HSR reportable, assuming there isno letter of intent or definitive agreement for the acquisition of theRemaining Interests at the time of the conversion of the note.