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Date
Rule
801.1(b)
Staff
Michael Verne
Response/Comments
Company B's standalone balance sheet would be the appropriate balance sheet to use. Company A's balance sheet which includes B's assets is not a regularly prepared balance sheet for B. K Walsh concurs.

Question

From:

(redacted)

Sent:

Thursday, August 21, 2008 7:10 PM

To:

Verne, B. Michael

Cc:

(redacted)

Subject:Determination of Control Question

Mike

Hello. I don't believewe have spoken before, but I work with (redacted).

We wouldappreciate your help in analyzing a "control" question for a client,specifically, whether Company A controls an unincorporated entity, Company B.The formula governing the distribution of Company B's assets upon dissolution("dissolution formula") is variable, as is the formula for thedistribution of profits. We note that

Company A has beenreceiving for some time and is expected to continue to receive more than 50% ofthe income that Company B produces. However, we understand that to determinecontrol for HSR purposes we should look to the last regularly prepared balancesheet and apply the dissolution formula to determine if anyone would have theright to 50% or more of the assets of Company B upon dissolution.

What complicatesthe control analysis in this case is the existence of two regularly preparedbalance sheets which value Company B's assets differently. Company A holds asubstantial interest in Company B (which means that it controls Company B foraccounting purposes) and consolidates Company B'S financial information intoits own financials. Company A's balance sheet reflects Company B's assets atclose to their fair market value. Company B also keeps a balance sheet. However,it reflects a much lower book value for Company B's assets. If the lastregularly prepared balance sheet Company A prepares (which includes Company B'sfinancials) is used, Company A would have the right to 50% or more of theassets of Company B using the dissolution formula. If the balance sheet CompanyB prepares is used, no person would have the right to 50% or more of the assetsof Company B using the dissolution formula.

After reviewingthe March 2005 Statement of Basis and Purpose, informal interpretations, andother HSR Act reference resources, we have been unable to determine whosebalance sheet should be used if there are multiple balance sheets for anentity. We understand that for purposes of determining HSR Act applicability,the PNO's position is that if there are two different asset valuations, thehigher value should be used. Further, if no balance sheet existed for anentity, a pro forma balance sheet should be prepared that reflects the fairmarket value or the acquisition cost of all assets held by the entity.

We believe that itwould be appropriate to use Company A's balance sheet for the determination ofcontrol. Company A's balance sheet values Company B's assets at closer to theirfair market valuation and better reflects what the parties would be entitled toif Company B were actually dissolved. We would appreciate your guidance in thismatter.

About Informal Interpretations

Informal interpretations provide guidance from previous staff interpretations on the applicability of the HSR rules to specific fact situations. You should not rely on them as a substitute for reading the Act and the Rules themselves. These materials do not, and are not intended to, constitute legal advice.

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