Question
From: (redacted)
Sent: Thursday, December 20, 2007 6:08 PM
To: Verne, B. Michael
Subject: Hart-Scott-Rodino AntitrustImprovements Act (the "HSR Act") Questions
Mike:
Thank you for taking the time tospeak with me last week. I am writing to confirm the advice you provided as well as torequest confirmation of our interpretation on one other issue. The facts and the analysis are set forthbelow.
Background
Persons A, B and C (Person C is an LLC) are forming alimited liability company ("Company X") for the purpose of purchasingassets (the "Assets") and assuming certain liabilities of anunrelated third party ("Company Y"). The ownership of commonmembership interests of Company X (being those interests that will generallyshare in the economics of Company X including with respect to profits and thedistribution of assets upon dissolution) will be 30%, 30% and 40%,respectively, as of the time of the acquisition of the Assets. Company X willobtain certain financing to allow it to consummate the acquisition of theAssets and will provide the financing source ("Company Z") with apreferred membership interest (the "Preferred Interest") in Company Xthat will entitle Company Z to the return of its financing plus a percentagereturn (anticipated to be approximately 12%). The terms associated with thePreferred Interest will provide that upon the repayment of the financing andthe payment of the percentage return, thePreferred Interest will be extinguished and the holder thereof will nolonger be entitled to receive any amount from Company X.
Company X's sole asset immediately prior to theacquisition of the Assets will be cash, a substantial portion of which will beused to purchase the Assets or for transaction expenses (in any event Company Xwill have less than $12 million of cash that will not be used for purposes ofthe acquisition of the Assets).
Issue1: Is Company X its own ultimate parent entity?
Rule 801.1(a)(3) provides that"[t]he term ultimate parent entity means an entity which is not controlled by any other entity." Rule801.1(b) further provides that "[t]he term control...means:... (ii) In thecase of 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".
Youconfirmed that the Preferred Interest should not be included for purposes ofdetermining the ultimate parent entity of Company X because it does not entitlethe holder to share in the future economics of Company X, but rather entitlesit only to the receipt of a fixed amount. The remaining membership interests inCompany X will be held by persons A, B and Cin such proportions that at the time of the acquisition of the Assetsnone of them will have the right to 50 percent or more of the profits ofCompany X or the right in the event of dissolution to 50 percent or more of theassets of Company X. Under such circumstances, no member "controls"Company X under the HSR Act and Company X is its own ultimate parent entity.
Issue2: Does Company X fail the "size of party"test
The HSR Act provides in Section 18a (a)(2)(B) thatno filing is required if the acquiring person will hold an aggregate amount ofvoting securities and assets of the acquired personless than $239.2 million but more than $59.8 million unless each of theacquiring person and the acquired person satisfy the "size ofparty" test. In the present situation, the acquired person is engaged inmanufacturing and has total assets and annual net sales in excess of $119.6 million. Company X is a newly formed entitythat has no sales and its only asset is cash a substantial portion ofwhich will be used to acquire the Assets or for transaction expenses. Company Xhas neither a regularly prepared balance sheet nor a statement of income andexpense.
Company X is its own ultimateparent entity, does not have a regularly prepared balance sheet nor any prior sales, its sole asset is cashand it will use a substantial portion of the cash to acquire the Assets and fortransaction expenses (in any event, Company X will have less than $12 millionof cash that is not to be used for the acquisition of the Assets or fortransaction expenses). Pursuant to Rule 801.11(e)(1)(ii), Company X's cash isignored for purposes of determining the size of the party. By ignoring suchcash as an asset, Company X has no material assets (in any event, less than $12million) and thereby fails the size of party test. Since the assets that willbe acquired have a value less than $239.2 million, the size of party testapplies and is not satisfied. Under such circumstances, no filing is requiredunder the HSR Act.
Thank you again for your consideration and assistancein this matter. If you do not believe thisnote reflects the facts discussed on our telephone conversation, or if I havemisstated the advice you gave, or in the case of Issue 2 if you disagree withmy interpretation, please contact me as soon as possible.