Question
May 17, 2007
Mr. B. Michael Verne
Premerger NotificationOffice
Bureau of 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 May 3, 2007 concerning the basis fornon-reportability under the Hart-Scott-Rodino Antitrust Improvements Act of1976, as amended ("HSR Act") for a proposed transaction.
Proposed Transaction
I have set forth below the general transaction wediscussed, although I have added additional details to help further explain theproposed transaction. There is a proposed affiliation agreement whereby anon-stock, non-profit corporation ("Non-profit A") will become acorporate member of another non-stock, non-profit corporation ("Non-profitB") that operates a hospital. In exchange for Non-profit A becoming acorporate member of Non-profit B, Non-profit A will contribute to Non-profit Ban amount equal to 30% of the net book value of Non-profit B. After thetransaction closes, the other corporate member of Non-profit B will be areligious congregation ("Congregation") that currently sponsorsNon-profit B. Non-profit A will have a 30% membership interest in Non-profit Band the Congregation will have a 70% membership interest in Non-profit B.Non-profit A and Congregation are jointly referred to as the Corporate Members.Each of the two Corporate Members will have equal rights, powers andresponsibilities post-close with regard to the operation of Non-profit B exceptthat upon a dissolution of Non-profit B, Non-profit A would have the right to30% of the assets and Congregation would have the right to 70% of the assets.'Further, to ensure compliance with the
Ethicaland Religious Directives for Catholic Healthcare Services and to veto anyprogram or service that adversely impacts or violates such Directives, anydisagreement between the Corporate Members regarding such veto shall beresolved by the Congregation, with ultimate determination by the Roman CatholicChurch as interpreted by the Local Bishop of the Diocese.
As a part of the transaction, amended and restatedbylaws will be adopted for Non-profit B. Under the amended and restated bylaws,the Corporate Members will delegate operating responsibility to a jointcommittee and a board of trustees except for responsibilities reserved solelyfor the Corporate Members which will be subject to a unanimous vote of the twoCorporate Members. There are a substantial number of such reservedresponsibilities for the Corporate Members of Non-profit B including, but notlimited to, amending the bylaws or articles of incorporation, approvingexpenditures and commitments above certain dollar thresholds, changing orreducing services offered, appointing the executive director -- theadministrator in charge of the hospital (in consultation with or onrecommendation by the board of trustees), approving the annual budgets,approving the annual strategic plan and any updates, approving or disapprovinga merger or dissolution, revising the reserved powers, and reserving suchadditional powers as the two Corporate Members jointly determine.
With regard to the joint committee, each of the two CorporateMembers will appoint two representatives to the joint committee. Although theCorporate Members can jointly decide to delegate additional powers to the jointcommittee, the responsibilities of the joint committee outlined in the amendedand restated bylaws include conducting an annual evaluation of and setting thecompensation of the executive director, and appointing and removing the membersof the board of trustees of Non-profit B other than three individuals appointedby Non-profit A, three individuals appointed by the Congregation and thepresident of the medical staff of the hospital who serves as a member of theboard of trustees. The joint committee can only act upon a unanimous vote ofthe four representatives to the joint committee.
The board of trustees will consist of the threetrustees appointed by Non-profit A, the three trustees appointed byCongregation, a number of community trustees appointed by the joint committee,physicians appointed by the joint committee and the president of the medicalstaff of the hospital. The responsibilities of the board of trustees set forthin the amended and restated bylaws include, but are not limited to, conductingthe affairs of Non-profit B and holding powers not otherwise reserved to thejoint committee or the Corporate Members, electing officers other than theexecutive director, appointing and reappointing physicians to the hospitalmedical staff, developing long range strategic plans for approval by theCorporate Members, assessing the quality of patient care, education, andresearch being conducted in the hospital, and reviewing and recommending forapproval by the Corporate Members the annual budgets and assuring the hospitalis managed within the approved budgets. However, no action of the board oftrustees shall be a condition precedent to an action of the Corporate Members.
Conclusions
You agreed that the proposed transaction is notreportable under the HSR Act. Specifically, you confirmed the following:
The only HSR control test applicable tonon-stock, non-profit corporations is having the contractual right presently todesignate 50% or more of the directors of the not-for-profit corporation. 16 C.F.R. 801.1(b)(2).
The board of trustees discussed above isthe same as a board of directors under 16 C.F.R. 801.1(b)(2).
Non-profit A will not control Non-profitB for HSR purposes as Non-profit A will not have the right to designate 50% ormore of the members of the board of trustees of Non-profit B.
Non-profit A will not be deemed to havethe power to designate the directors selected by the joint committee.
The conclusion that Non-profit A does notcontrol Non-profit B for HSR purposes is not impacted by the fact thatNon-profit A will equally control Non-profit B with regard to any powersreserved by the Corporate Members for themselves or designated to the jointcommittee.
The acquisition of a non-controllinginterest in a non-profit corporation, such as the acquisition that will be madeby Non-profit A in Non-profit B, is HSR exempt regardless of dollar value, andthe applicable rule to support this conclusion in the case of a non-stock,non-profit corporation is 16 C.F.R. 801.2(0(3). That rule provides that "[a]ny person who acquires control of anexisting not-for-profit corporation which has no outstanding voting securitiesis deemed to be acquiring all of the assets of that corporation."
Pleaselet me know as soon as possible if you disagree with any of the conclusionsdiscussed above, or if I have misunderstood any aspect of your advice. Thankyou for your assistance in this matter.
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' There also are options I did notraise on our call whereby Non-profit A could increase its membership ownershipinterest in Non-profit B from 30% to 45% by making increased contributions toNon-profit B. This increased ownership would only impact the percentage ofassets that Non-profit A would be entitled to upon the dissolution ofNon-profit B. It would not change other rights including those related to thedesignation of members of the board of trustees. Accordingly, my understandingis that the exercise of these options would not result in any HSR reportingobligation. If you believe this understanding is incorrect, please let me know.