Question
From: (redacted)
Sent: Friday, October 24, 2008 9:51 AM
To: Verne, B. Michael
Dear Mr. Verne,
It was great to meet youyesterday during the Back to Basics Workshop. I greatly appreciated the timethat you and the other presenters took in explaining the Hart-Scott-RodinoAntitrust Improvement Act of 1976, as amended (the "HSR Act"). Inall, the seminar was well worth the trip up from Tampa. At the workshop, youindicated that you and the other PNO staff welcomes questions on proposedtransactions that may require a premerger notice filing under the HSR Act. Ourhypothetical is as follows:
We are counsel to CompanyA which is proposing to sell certain aspects of its business. For clarity, wewill refer to those portions of the business which Company A desires to sell asthe "Transferred Business". Company B is the proposed purchaser. BothCompany A and Company B have sales in excess of $100 million, therefore thesize of the person test is met. The Transferred Business has an enterprisevalue of $70 million, consisting of assets with a fair market value of $70 millionand liabilities of $20 million. Company A has various real estate holdings andinvestments that are not associated with the Transferred Business and are notincluded in the enterprise value.
Company A, the seller,desires to structure the transaction as a stock sale. Among other reasons,Company A prefers a stock sale because the taxes payable by the Sellerresulting from a stock sale are less than an asset sale. If structured as astock sale, the purchase price for the capital stock would be approximately $50million (the enterprise value of the Transferred Business, less theliabilities). It is our understanding that this proposed structure would notrequire an HSR filing because the size of transaction test is not met.
Company B, as the buyer,desires to structure the transaction as an asset sale to, among other matters,provide protection against contingent or undisclosed liabilities. If structuredas an asset sale, the Buyer would pay $70 million in cash, assume liabilitiesof $20 million. It is our understanding that this structure would meet the sizeof transaction test and would require an HSR filing. See, e.g., Statementof Basis and Purpose 43 Fed. Reg. 33450 (July 31, 1978) (stating that"assumption of liabilities, if consideration for an acquisition, must allbe valued in computing the acquisition price"); Informal Staff Opinion0701005 (staff agreed that "in the acquisition of assets, the value of anyliabilities being assumed must be added to the value of the assets for purposesof determining whether the size of transaction threshold is satisfied.");Informal Staff Opinion 9405008 (staff comment that "a liability assumed bythe buyer ... must ... be part of the acquisition price").
To limit taxes payable inconnection with the transaction, to segregate the assets associated with theTransferred Business, and to provide Company B with the assurance it is seekingregarding acquiring contingent liabilities of Company A; Company A, the seller,has proposed forming a wholly owned subsidiary, NewCo, LLC. Company A wouldthen transfer all its assets (valued at $70 million) and only agreed upon knownliabilities (valued at $20 million) to NewCo. Company A will sell all theissued and outstanding membership units of NewCo (valued at $50 million) to CompanyB.
It is our understandingthat the transfer by A to NewCo will not require an HSR filing because it is anintraperson transaction and is therefore exempt under Section 802.30. Also,because the Seller is structuring the transaction (using the formation of theNewco-subsidiary and selling the ownership interests of Newco) to meet thesubstance of both the Seller's preference for a stock sale and the Buyer'spreference for an asset sale, it is our belief that Section 801.90 should notapply. Further, because the sale of all of the issued and outstandingmembership units in NewCo by Company A to Company B, by means of a stock sale,is below the current filing threshold of $63.1 million, it is our belief thatan HSR filing would not be required.
Could you please let usknow if you agree with our conclusion that an HSR filing is not required?