Question
From: (redacted)
Sent: Monday, June 11, 2007 8:43 AM
To: Verne, B.Michael
Subject: Control test for LP/LLC's 801.1(b)(1)(ii)
Mike,
I have been hearing questionsregarding the control test for LP/LLC's.
Rule 801.1(b)(1)(ii)defines "control" as
(b) Control. Theterm control (as used in the terms control(s), controlling, controlled by andunder common control with) means:
(1) Either. (i) Holding 50 percentor more of the outstanding voting securities of an issuer or (ii) In the caseof an unincorporated entity, having the right to 50 percent or more of theprofits of the entity, or having the right in the event of dissolution to 50percent or more of the assets of the entity; or
Examples: 2. Astatutory limited partnership agreement provides as follows: The generalpartner "A" is entitled to 50 percent of the partnership profits,"B" is entitled to 40 percent of the profits and "C" isentitled to 10 percent of the profits. Upon dissolution, "B" isentitled to 75 percent of the partnership assets and "C" is entitledto 25 percent of those assets. All limited and general partners are entitled tovote on the following matters: the dissolution of the partnership, the transferof assets not in the ordinary course of business, any change in the nature ofthe business, and the removal of the general partner. The interest of eachpartner is evidenced by an ownership certificate that is transferable under theterms of the partnership agreement and is subject to the Securities Act of1933. For purposes of these rules, control of this partnership is determined bysubparagraph (1)(ii) of this paragraph. Although partnership interests may besecurities and have some voting rights attached to them, they do not entitlethe owner of that interest to vote for a corporate "director" or"an individual exercising similar functions" as required by801.1(f)(1) below. Thus control of a partnership is not determined on thebasis of either subparagraph (1)(i) or (2) of this paragraph. Consequently,"A" is deemed to control the partnership because of its right to 50percent of the partnership's profits. "B" is also deemed to controlthe partnership because it is entitled to 75 percent of the partnership'sassets upon dissolution.
The SBP says
If the right toprofits is variable and the right to assets upon dissolution is fixed, theright to 50 percent or more of the assets upon dissolution will be deemed toconfer control. Conversely, if the right to assets upon dissolution is variableand the right to profits is fixed, the right to 50 percent or more of theprofits will be deemed to confer control. In a situation where both the rightto profits and assets upon dissolution are variable, control will be determinedby applying the formula for determining rights to assets upon dissolution tothe total assets of the unincorporated entity at the time of the acquisition,as if the entity were being dissolved at that time.
Please let me knowif the control test is an "or" test, that is if both the rights toprofits and the rights to assets upon dissolution are determined and investor Ahas the right to 50% or more of the profits and investor B has the right to 50%or more of the assets upon dissolution would there be two UPE's, or is theright to assets upon dissolution only relevant if the right to profits isvariable that is once profit allocation is determined the right to assets upondissolution is not relevant. The example in the SBP describes the result ifboth a right to profits and a right to assets are variable. Under the firstscenario it would be possible to have 4 UPE's two 50% investors with the rightto profits and two different 50% investors with the rights to assets upondissolution (similar to a corporation with 4 UPE's). I would think those situationswould be highly unusual.
As always your guidance isappreciated. Many thanks
(redacted)