Question
Weare emailing you in order to seek confirmation of our view as to who would beconsidered the ultimate parent entity of our client Company X under the factsand circumstances as described below.
CompanyX is a corporation formed under the laws of Germany. A family consisting offour or more members in the aggregate holds approximately 50.03% of theoutstanding voting securities of Company X.
Inorder to pool their interests both in Company X and in Company Y, the family membershave entered into a pooling agreement (the "Pooling Agreement"). Tofacilitate implementing the provisions of the Pooling Agreement, the familymembers have formed a "Gesellschaft burgerlichen Rechts ("GbR"),which under German law is not a legal entity and cannot be entered in Germancommercial registers. The voting securities of Company X held by family membersare not transferred to the GbR. The GbR does not issue equity interests to itspartners, nor does it actually hold any assets. The individual shareholderseach retain title to their voting securities of Company X. We are advised thatunder German law the individual partners of a GbR assume all rights andliabilities of the GbR and remain personally liable for the debts andobligations of the GbR. A company designated as a GbR does not have an officialregistered company name. Generally, business designations of GbRs must includethe surnames and forenames of all partners.
The family members in the aggregate alsohold in excess of 50% of the voting securities of Company Y, which is notaffiliated with Company X (the companies are involved in different industries).
Decisionsby the family members in this instance are taken in accordance with the terms of the Pooling Agreement. The Pooling Agreementprovides for two managing directors one to manage the interests ofCompany X and the other to manage the interests of Company Y.
Other terms of the Pooling Agreement provide asfollows:
1.All shares ofCompany X are to be deposited with a common custodian, and each family shareholder retains title to his orher shares.
2.The GbR has two managing directors, onewho represents the family members in Company X and the other who represents thefamily members in Company Y. The managing directors are charged with exercisingthe voting rights of the family shareholders in general at shareholders'meetings of each respective company. The Pooling Agreement states that themanaging members of Company X will be a family member of Family Stirpes One andthat the managing member of Company Y will be a family member of Family StirpesTwo.
3.Resolutions of the GbRare adopted at partners' meetings and voting rights correspond to the number of voting shares in CompanyX held by each family shareholder.
4.Voting securities of Company X may bedirectly traded between family shareholders. A sale of voting securities to athird party requires a 75% majorityof all votes; if a family shareholder intends to sell his or her votingsecurities to a third party, the other family shareholders have the right offirst refusal in proportion to their own holdings of Company X.
5.A sale of voting securities held by afamily member in either Company X or Company Y to a third party requires aconsent by both managing directors, thus enabling the managing directors toensure that the restrictions contained in the Pooling Agreement are compliedwith.
6.There is a contractual penalty specifiedin the Pooling Agreement in case a family shareholder fails to abide by therules of the GbR.
7.Should a pool member die, his or herheirs become parties to the Pooling Agreement; should there be more than oneheir, the heirs must appoint a common representative.
8.A participant to the Pooling Agreementcan terminate his or her participation afterproviding an 18-month notice period, effective as of the end of acalendar month.
We believe that a family member's designation to themanaging member of Family Stirpes One of their voting rights attributable totheir voting securities in Company X under the terms of the Pooling Agreement isanalogous to the granting of an irrevocable proxy. A family member can onlyterminate his or her designation of the managing member by withdrawing from thePooling Agreement. Family members can withdraw from the Pooling Agreement andhence terminate their "designation", but this can occur only afterthat family member has indicated his or her willingness to withdraw from the GbRand after the passage of an 18-month period. See Informal Interpretation No. 40of the ABA's Section of Antitrust Premerger Notification Practice Manual (FourthEdition, 2007) ("PNPM"), whereby a revocable proxy will be deemed anirrevocable proxy under certain circumstances, such as the revocation beingeffective only after a certain date or the occurrence of a specified event. Itappears that the facts herein are analogous to facts and circumstancescontained in Informal Interpretation No. 40, because the only way for a familymember to terminate his or her "designation" is for that familymember to withdraw from the Pooling Agreement after providing 18 months'notice. Additionally, as mentioned above, a family member who would otherwiseattempt to vote their securities not in accordance with the terms of thePooling Agreement or who does not abide by the rules of the GbR (which rulesare set forth in the terms of the Pooling Agreement) will suffer a contractualpenalty, or, in other words, an adverse consequence.
Based upon the above, we are of the view that:
1)the GbR is not theholder of the voting securities of Company X and therefore cannot be its ultimate parent entity.
2)The individualfamily members as a "group" who are participants to the Pooling Agreement are not the ultimate parent entity ofCompany X, because the HSR rules do not recognize a group as an"entity" under Rule 801.1(a)(2). It should also be noted that each singlefamily member holds an amount of voting securities of Company X constituting anon-controlling interest, as "control" is defined in Rule 801.1(b).
3)The managing member of Family Stirpes One is the ultimate parent entity ofCompany X. Our view is premised upon the position of the Staff of the PremergerNotification Office as set forth in Informal Interpretations Nos. 40 and 55contained in the PNPM as well as Informal Staff Opinion No. 0604008 (4/12/2006). Thepersonal holdings of voting securities of the managing member of Family StirpesOne combined with the grant of an irrevocable proxy provide this managingmember the ability to vote in excess of 50% of the voting securities of CompanyX.
Kindlylet us know if you agree with our views as set forth above.