Question
Mike,
I am writing concerning the application of the HSR Act and related regulations to a proposed transaction whereby the business of C Corp. will be combined with a portion of the business of S Corp. in a new entity, Newco LLC. Several other entities (the "Investors") will invest cash in Newco LLC. Newco Corp., a corporation, will hold 100% of the voting rights of Newco LLC and approximately! 20%1 of the equity interest in Newco LLC. We analyze this transaction, which is more fully described below, as the formation of an LLC, of which only one holder will have a controlling interest. We conclude, therefore, that only the single controlling member of the newly formed LLC is required to file an HSR Notification. Please let me know if you agree that in spite of the multiple steps2 involved, and in spite of the billions of dollars being invested by multiple parties, only one Hart-Scott-Rodino filing is required.
The chart below graphically represents the equity ownership and voting rights in Newco Corp. and Newco LLC after the final step in the process:
- C Corp. will have contributed its entire business to Newco LLC in the form of C LLC in exchange for A shares in Newco Corp. The A shares represent 20% of the voting shares of Newco Corp. and 100% of the equity of Newco Corp.
- S Corp. will have contributed a portion of its business in the form of S LLC to Newco LLC in exchange for B shares in Newco Corp. and just over 50 % of the equity units in Newco LLC. The B shares to be held by S Corp. represent over 50% of the voting securities in Newco Corp. but no right to the underlying equity of Newco Corp.
- The Investors will have contributed about $3.4 billion in cash to Newco LLC in exchange for B shares of Newco Corp., which represent, in the aggregate, approximately 30% of the voting securities in Newco Corp., but no right to the equity of Newco Corp. The Investors also will hold, in the aggregate, approximately 30% of the equity units in Newco LLC.
- Newco Corp. holds 100 % of the voting units of Newco LLC and 20% of the equity units of Newco LLC
In our view the acquisitions of the voting securities of Newco Corp. are exempt from the requirements of the HSR Act because Newco Corp. holds only exempt assets --a minority interest in an LLC and potentially some cash. We believe that the acquisition of the voting shares of Newco Corp., thus, is exempt under 16 CFR 802.4.
We believe the reportable result of the steps described in Attachment A is the formation of Newco LLC. The formation is accomplished through the contribution of all of C Corp.'s business in the form of an LLC and S Corp's contribution of a portion of its business in the form of S LLC and the Investors' contributions ofcash.3 Because only S Corp. will acquire 50 % or greater equity interest in Newco LLC, only S Corp. is required to file an HSR Act Notification Report for its acquisition of Newco LLC.
If you would like to discuss this letter or the step-by-step process in Attachment A, please call me. I hope you will conclude as we have that only S Corp. is required to file.
Footnote
1 All percentages are approximate.
2. See Attachment A for the detailed steps which will occur just before or at the time of closing.
3. The values of C Corps contribution exceed HSR notification thresholds.
TDS Attachment A