Question
From:(redacted)
Sent: Tuesday. June 10. 2008 5:15 PM
To: Verne, B. Michael
Cc: (redacted)
Subject: HSR Sizeof Person Question
Mike,
This email is amore detailed follow-up on a size of person question I initially raised withyou on the telephone last week. Set forth below is an outline of the structure Iam considering and my preliminary analysis. I would be grateful for your adviceas to whether I am on the right track.
Structure andBackground
A. Natural Person Mcontrols Corporation A by virtue of ownership of 100% of the voting shares ofCorporation A.
B. Corporation A hasregularly prepared financial statements, indicating revenues and assets ofapproximately $25 million at April 30, 2008.
C.Corporation A will contribute substantially all of its assets to New LLC andinitially obtain 100% of its membership interests.
D.Private Equity Fund will then invest cash for debt of, and a minority equitystake in, New LLC. Corporation A will continue to control New LLC.
E. NewLLC will acquire substantially all of the assets of, or the equity of, TargetLLC (exact price and structure to be determined but size of transaction testwill be satisfied).
F. TargetLLC is not controlled by any other entity and is its own UPE.
G. TargetLLC has a regularly prepared income statement and balance sheet indicatingannual net sales and total assets of between $12.6 and $126.2 million.
H.Natural Person M and New LLC do not have regularly prepared financialstatements.
Size of thePerson Test
1. To satisfy the size of person test, generally, eitherthe acquiring or acquired person must have annual net sales or total assetsof$126.2 million or more and the other must have annual net sales or totalassets of $12.6 million or more.
2. As its own UPE with regularly financial statements,the size of Target LLC would be determined by reference to those financialstatements.
3. The size of the UPE, Natural Person M, would bedetermined by creating pro forma financial statements that would include,without duplication, (i) investment assets, voting securities and otherincome-producing property of Natural Person M immediately prior to thetransaction, (ii) the assets indicated on Corporation A's last regularlyprepared balance sheet at the values set forth in such balance sheet at April30, 2008, and (iii) the assets of New LLC immediately prior to the transaction.
Issues/Questions
a.In preparing a combined pro forma balance sheet for Natural Person M,Corporation A and New LLC under Section 801.11 (b)(1), as of what date aretheir assets tested? Corporation A's assets would presumably be determined asof April 30, 2008 (or its last regularly prepared balance sheet date). Would wedetermine the assets of Natural Person M and New LLC as of a time immediatelyprior to the transaction, or should these be determined as of April 30, 2008,i.e., the date of the regularly prepared balance sheet with which the assetswill be consolidated under Section 801.11 (b)(1)?
b.Assuming the assets of Newco LLC are determined as of a time immediately priorto the transaction, is there a basis on which to exclude, in a manner similarto that which would apply under Section 801.11 (e), the cash invested byPrivate Equity Fund immediately prior to the acquisition of Target LLC,substantially all of which will be used for acquisition expenses and purchaseprice?
PreliminaryAnalysisi. If and to the extent applicable, Section 801. 11 (e)would permit deduction of the cash invested by Private Equity Fund to be usedin the acquisition.
ii. ii, However, Interpretation No. 139 in MA...SEGQ:PNQF ANTITRUST LAW, PREMERGER NOTIFICATION PRACTICE MANUAL (4th ed. 2007)suggests that the "pass-through" rule of Section 801.11(e) would notapply, as does Informal Staff Opinion No. 0605019 (http://ww.ftc.gov/bc/hsr/informal/opinions/06050019.htm).
iii. The Editor's Note to Interpretation No. 134 of the PremergerNotification Practice Manual seems consistent with the view that there is abright line rule that precludes application of the pass through rule of Section801.11 (e) if there is a regularly prepared balance sheet for any entity withinthe acquiring or acquired person. In other words, no entity within the UPE getsthe benefit of the pass through rule if any entity within that person has aregularly prepared balance sheet.
iv. On the other hand, Interpretation No. 133 suggests in more general termsthat in preparing a pro forma balance sheet, cash used in the acquisition maybe deducted.
Tentative/PreliminaryConclusion
x. Theassets of Natural Person M and New LLC would be tested immediately prior to thetransaction. The assets of Natural Person M and New LLC so determined would beadded to the assets of Corporation A as set forth on and as of the date of itsregularly prepared balance sheet. In so doing, the pass-through rule of Section801.11(e) would not apply. The cash invested by Private Equity Fund wouldtherefore be counted under Section 801.11(b)(1) as part of the UPE's assetseven if invested 1 hour before the transaction.
y.Possibly, some of the cash invested by Private Equity Fund might be excluded ifPrivate Equity Fund requires that its funds be wired directly to Target LLC orits equity owner if one follows the reasoning in Informal Staff Opinion No.9911008 (http://www.ftc.gov/bc/hsr/infomration/opinions/9911008.htm). Thatletter describes an alternative scenario pursuant to which loan proceeds wereto be paid directly to the seller and were not held at any time by theacquiring person, and in that case, the loan proceeds were not required to beincluded in the acquiring person's pro forma pre-acquisition balance sheet.Could the alternative scenario set forth in Informal Staff Opinion No. 9911008apply here or does that alternative apply only in the case of a funding by acommercial bank lender? If such alternative scenario might apply, whatconditions are there to its application?