Question
October 16, 2007
VIA EMAIL AND REGULAR MAIL
Mr. B.Michael Verne
FederalTrade Commission
PremergerNotification Office
600 Pennsylvania Avenue, N.W.
Washington, DC 20580
Re: Reportability of Proposed Transaction
Dear Mike:
This letter follows upon our telephone conference yesterday relating to several proposed acquisitionsof operating companies by a shell company which is engaged in an initial publicoffering ("IPO") of its LLC interests. Based on the fact pattern wedescribed to you, you concluded that the acquiring person would not meet thesize-of-person test, and therefore the acquisition that meets thesize-of-transaction test would not be reportable under the HSR rules. Based onour telephone discussion and the analysis set forth below, the parties intendto complete the transactions without making an HSR filing. Please advise me assoon as possible if you have any questionsregarding the facts or analysis below, or if you believe a filing is requiredunder the facts described in this letter.
Facts
The acquiror is aholding company ("Shell Co. LLC") established in December 2006. ShellCo. LLC is currently 100 percent owned by another LLC, but that ownershipstructure will change prior to closing of the acquisitions described below.Shell Co. LLC will be made public through an IPO of its LLC interests that willraise approximately $200 million for Shell Co. LLC. Following the IPO, ShellCo. LLC will be its own ultimate parent entity ("UPE"), as no personwill have the right to 50% or more of its profits or assets on dissolution.Following the IPO, Shell Co. LLC intends to make several acquisitions ofoperating companies controlled by three different UPE sellers. One of theseacquisitions will involve the purchase of two different entities controlled bythe same UPE under separate acquisition agreements, so Shell Co. LLC willacquire four individual operating companies in total. For purposes of thisletter, for simplicity and because there are three acquired persons (UPEs), Irefer to these as three acquisitions (with one of the acquisitions involvingthe purchase of two entities from the same UPE). The largest of theseacquisitions meets the HSR size-of-transaction test; the other two transactionsare below the size-of-transaction filing threshold.
Shell Co. LLC preparedaudited financial statements for the period from inception to December 31, 2006and unaudited financial statements for the six month period ended June 30, 2007.While Shell Co. LLC has not generated revenues, it has been active inorganizing for its IPO and arranging for the operating company acquisitions.The June 30, 2007 balance sheet reflects that Shell Co. LLC has lessthan $10 million in total assets. No other balance sheet is expected to beprepared before closing on the three acquisitions, and the funds from the IPOwill not appear on any pre-closing balance sheet. Shell Co. LLC also prepared apro forma balance sheet that reflects Shell Co. LLC as if the contemplatedtransactions had closed on January 1, 2006. All three of these balance sheetshave been filed in its SEC registration statement.
The three acquisitionswill occur serially on the same closing date, with the largest transactionexpected to occur first. The signed letters of intent do not reflect an orderof closing, and the definitive acquisition agreements are still being revised.Nonetheless, the most recent drafts of the acquisition agreements reflect thelargest transaction closing first, though the exact times of the closings arestill in flux. Counsel for parties to the transaction contemplated that thelargest transaction, which meets the HSR size-of-transaction threshold, wouldoccur first for logistical purposes, as it is generally easier in sequentialclosings to address the largest transaction first. In addition, here, the SEChas required that the largest entity to be acquired be treated as thepredecessor entity for purposes of future financial reporting. While this doesnot require it to close first, it is a logical reason for doing so.
HSR Analysis
As we discussed on thetelephone, under the facts described above you confirmed that the pro formabalance sheet would not be treated as a regularly prepared balance sheet.Instead, Shell Co. LLC can rely on its regularly prepared balance sheet of June 30, 2007 fordetermining its size-of-person for its first transaction. See 16 C.F.R. 801.11(c)(2). At the time of the first acquisition, then, Shell Co. LLC will notmeet the size-of-person test because its regularly prepared balance sheet willhave less than $12 million in total assets ($10 million, as adjusted). Youconfirmed that the first transaction (which meets the size-of-transaction test)is not reportable for HSR purposes because Shell Co. LLC will not meet thesize-of-person test and because the value of the transaction is below $239.2million ($200 million, as adjusted). See 15 U.S.C. 18(a)(1)(A).
Following the firstacquisition, Shell Co. LLC's assets under 16 C.F.R. 801.11(b)(1) will include the total assets of the entity acquired in thattransaction, and we said we could assume therefore Shell Co. LLC will have inexcess of $12 million in total assets for purposes of considering thereportability of the second and third acquisitions. However, because we advisedyou that the second and third acquisitions do not meet the size-of-transactionthreshold, you agreed they would not be reportable.
Onthe phone, you stated that this analysis hinges on the order in which thetransactions close. If the acquisition that meets the size-of-transaction test isnot closed first, it would be reportable if Shell Co. LLC's total assets orsales, including those of previously acquired entities, exceed thesize-of-person threshold and the acquired person's assets or sales exceed thesize-of-person threshold.
We asked you whetherthere was any issue if the largest transaction is specified to close first.Shell Co. LLC had not yet formally determined the order in which the transactionswill close before we spoke to you, even though transaction counsel had been inthe process of formulating a closing sequence, and they likely would haveclosed the largest transaction first for the reasons noted above. We understandthat so long as the order of the closings is set forth in the documents, ismotivated by a legitimate business purpose, and the transactions actually closein that sequence, the parties can rely on that closing order in conducting thereportability analysis, even if it may result in the largest transaction notbeing reportable per the analysis set forth above.