Question
From: (REDACTED)
Sent: Tuesday, February 03, 2009 3:57 PM
To: Verne, B. Michael
Cc: (REDACTED)
Subject: HSRreportability determination on acquisition by insurance brokerage firm
Mike:
We are writing toconfirm our recent discussions regarding a proposed acquisition of assets by aninsurance brokerage firm from an insurance company and that insurer's insurancebrokerage affiliate.
As we have statedover the phone, you may assume that the size-of-person test applies and is met.The question that prompted us to call you was whether certain interests beingtransferred to the buyer constitute "assets" for purposes of the HSRAct and therefore need to be taken into account in determining whether thesize-of-transaction threshold is met. If these interests do constitute "assets"for HSR Act purposes, then you may assume that the size-of-transactionthreshold will be met and that the acquisition will be reportable. If theinterests are not "assets," however, then you may assume that thetransaction will not be reportable, given the low value ascribed to the assetsbeing acquired aside from these interests (e.g., personnel records and certainlimited intellectual property rights).
The insurancecompany that is one of the two affiliated sellers in the proposed transactionhas heretofore maintained its own sales and service operation but says it nowplans to rely instead on independent agents. The other seller in the proposedtransaction is an affiliate insurance agency, which "produces" (i.e.,sells) policies predominantly underwritten by the other seller and itsinsurance company affiliates; although we understand that a small percentage ofits business is "producing" policies underwritten by unaffiliatedinsurance companies. The buyer is acquiring certain rights held by the seller insurancecompany with respect to certain customers it insures, as well as related rightsheld by the insurer's affiliated insurance agency. Specifically, the buyer isacquiring the rights to service, continue and renew, and collect allcommissions and other amounts on all insurance policies and contracts andservices that are part of the relevant business (other than accountsreceivable). The buyer is acquiring these rights subject to the right of thecustomers to choose whether or not to do business with it.
The interests whosetreatment we called to inquire about are what are sometimes referred to in theindustry as "Expirations," meaning customer lists and informationabout the identified customers with respect to certain lines of insurance. Thecustomer information that makes up an "Expiration" in the currenttransaction includes: (a) the customer's name, address, and contact person, (b)insurance products purchased by the customer from the seller insurance company,(c) the terms, conditions, premium rates and dates of expiration of suchpolicies, (d) the customer's purchasing preferences to the extent documented,and (e) strategies for placing insurance for the customer to the extentdocumented. This information is proprietary to, and constitutes trade secretsof, the seller (meaning that the seller has a protectible and transferableproperty interest in it).
It is anticipatedthat the buyer will hire a large percentage of the employees of the seller whoheretofore have been responsible for the business functions the seller isdiscontinuing. Such employees are not under any contractual obligation to comework for the buyer and may decline to do so, although the buyer need notconsummate the transaction unless at least a specified percentage of the salesforce, accounting for at least a specified percentage of certain sales of theseller, signs employment contracts with the buyer. The sellers also aretransferring to the buyer all of their rights under any non-solicitation,non-competition, and confidentiality agreements the sellers and theiraffiliates may have with current sales force members whom the buyer anticipateshiring, thus allowing these individuals, if they do agree to come work for thebuyer, to deal freely with the customers whose "Expirations" thebuyer is acquiring. (Once such individuals become employed by the buyer, theseold agreements will be superseded by new agreements between the individuals andthe buyer governing their employment relationship.)
The most valuableaspect of the transaction in the buyer's view is the transfer of the"Expirations" (i.e., policyholder information), subject to theability of sales personnel of the sellers who become employees of the buyer tocontinue dealing with the policyholders whose "Expirations" the buyeris acquiring. This is true notwithstanding the fact that the policyholders willbe under no obligation to do business with the buyer when their policiesexpire. As indicated above and during our discussions, you may assume that thesize-of-transaction threshold would be exceeded if these"Expirations" and the rights being transferred with respect to thenon-solicitation, non-competition, and confidentiality agreements between thesellers and their soon-to-be-former sales force members had to be counted asacquired "assets" in valuing the transaction for HSR Act purposes.
As we explained,there are several informal staff opinions dealing with acquisitions ofinsurance "renewal rights" (Nos. 0809009, 0802002, and 0510017) thatsuggested to us the possibility that the currently-proposed acquisition mightnot be reportable.
The most recent ofthese opinions, issued last September (No. 0809009), involved the acquisitionby a reinsurance company of a reinsurance brokerage business and thesimultaneous acquisition of certain "renewal rights" -i.e., exclusiverights to offer new and/or renewal policies and reinsurance coverages toinsureds of two of the seller's insurance company subsidiaries. According tothe writer
who prompted thisopinion, the policies underlying the "renewal rights" were placed bythe brokerage being sold to the buyer. The writer noted that there was noassurance that the existing policies would, in fact, be renewed and requestedconfirmation from you based on the two earlier opinions that, for this reason,the "renewal rights" did not have to be considered "assets"for purposes of the HSR Act. In response, you confirmed that "renewalrights" are not considered "assets" for HSR Act purposes.
We contacted you toask whether the same reasoning would apply to the "Expirations" beingacquired by the insurance brokerage involved in our current situation, suchthat these "Expirations" (like the "renewal rights"acquired by the reinsurance company in No. 0809009) similarly would be deemednot to constitute "assets" for HSR Act purposes. You have sinceadvised us that in the staffs view the "Expirations" are not"assets" for purposes of the statute.
Further, you haveadvised us that the rights being transferred with respect to thenon-solicitation, non-competition, and confidentiality agreements sellers havewith their sales force members also do not constitute "assets" forHSR Act purposes. You concurred with our assessment that this aspect of theproposed transaction is substantively the same as a prospective employer payinga current employer to waive a non-competition agreement with an employee, whichwas the situation addressed in Informal Staff Opinion No. 0205019. There, aprofessional services company paid a second, competing professional servicesfirm to waive the second firm's non-competition agreements with certainpartners whom the first firm planned to hire as a result of a set oftransactions involving the two firms. You agreed in that instance that thepayments made in exchange for these waivers did not have to be counted towardsthe size-of-transaction threshold, because no asset was being acquired as aresult of such payments. You agreed with us that the same principle applies inour transaction to the rights transfer that similarly will permit formeremployees of the sellers to engage in business activities on behalf of thebuyer that their current agreements with the sellers would prohibit.
In light of theforegoing, you have agreed that the proposed transaction we have beendiscussing does not require notification.
We would very muchappreciate it if you would confirm that this e-mail accurately reflects ourdiscussions and the conclusion the staff has reached. If you require anyadditional information at this stage, please do not hesitate to contact us.
Thank you as alwaysfor your prompt assistance.