Question
From:(redacted)
Sent:Thursday, February 01, 2007 3:21 PM
To:Verne, B. Michael
Subject:Informal interpretation
DearMike,
Wehaven't spoken in a while. I have a scenario I would like to run by youinvolving a newly-formed LLC and control of unincorporated entities.
Corporation"X" and over 50 individuals and other entities (the "co-investors")intend to form a limited liability company "LLC." The co-investorswould contribute a total of $2 million in exchange for 90% of the votes and 90%of the rights to profits and, upon dissolution, the assets. These shares wouldbe variously distributed among them, but no one co-investor would have 45% ormore of the votes and rights to profits and assets of LLC. X wouldcontribute $49 million and receive shares giving it the right to 10% of thevote and to 10% of the profits or, upon dissolution, the assets of LLC. X willalso receive a preferred right to recover its $49 million investment before anyother shareholders receive any income from the LLC. X willalso serve as managing member of the LLC.
TheLLC will borrow $74 million. The LLC will use the total $125 million in cash tomake an acquisition of stock and assets with a determined purchase price ofthat amount from an acquired person satisfying the $100 million size-of-personthreshold, as adjusted.
As wesee it, LLC is its own ultimate parent entity, because no one will control itby having the right to 50% or more of the profits or, upon dissolution, theassets of LLC. In particular, X's right to return of its investment beforeother shareholders means that the rights to profits and assets both vary overtime. As indicated in the Statement of Basis and Purpose accompanying thecontrol rule for unincorporated entities, 16 C.F.R. s 801.1(b)(1)(ii), in that case control is determined by asking who,if anyone, has rights to 50% or more of "the total assets of theunincorporated entity at the time of the acquisition." 70 Fed. Reg. 11,502, 11,504 (Mar. 8, 2005). As of the transaction date, LLC would have $125million in cash. If dissolved at that moment, X's prior right would mean thatit would first receive $49 million and then 10% of the remaining $76 million,for a total of $56.6 million. The co-investors would split the rest, some $68.4million, but no one of them would receive half or more of that, or $34.2million. X's percentage of the total assets upon dissolution would thus be 56.6/ 125 = 45.28%, and no single co-investor would have 34.2 / 125 = 27.36% ormore. Thus no one would have rights to 50% or more of the assets of LLC upondissolution as of the time of the transaction. As a consequence, LLC would beits own ultimate parent entity.
Thiswould mean that no HSR filing is required, because the transaction size isbelow the $200 million threshold (as adjusted) and LLC does not satisfy the size-of-persontest. As of the acquisition, LLC will not have any regularly prepared balancesheet and no annual income statement. Under rule 801.1(e)(1), LLC's totalassets for the size of person test are all the assets that it holds less allcash it will use for the acquisition. Since LLC will hold no assets other thanthe cash it will use for the acquisition, its total assets are valued at zero.
Arewe right that this transaction is not reportable?
I'm travelingat the moment, but I'll try to reach you this afternoon to discuss, if you'rearound.