Question
3/3/09
FACT STATEMENT RELATING TO:
(1) Definition of "Entity"
(2) Beneficial Ownership
Introduction
Wesubmit this statement on behalf of an investment management company (the"Fund"), a so-called "sovereign wealth fund," that iswholly-owned by the government of a foreign sovereign nation (the"Sovereign") and whose sole mandate since its inception has been tomanage the foreign reserves of its Sovereign. The term "sovereign wealthfund" ("SWF") is a catch-all term popularly used to describe themyriad financial advisory firms that manage a sovereign nation's investmentportfolio. Arrayed along a spectrum, SWFs range from purely autonomousfinancial management companies to ones that are part of the government itself.
Twoissues are raised here. First, is the Fund an "entity" within themeaning of the Hart-Scott-Rodino ("HSR") Act and regulations? If theFund is not an "entity" as defined by 15 C.F.R. 80 1.1 (a)(2), itfollows that the Fund also can be neither a "person" nor an"acquiring person," respectively, under 801.1(a)(I) and 801.2(a).The HSR definition of "entity" provides "[t]hat the teffi1'entity' shall not include any foreign state, foreign government, or agencythereof (other than a corporation engaged in commerce) ...." Section 801.1(a)(2). It is, therefore, a mixed question of law and fact as to whether anygiven SWF is a "foreign agency (other than a corporation engaged incommerce)."
Second,is the Fund or is the Sovereign and its Monetary Authority, on whose behalvesthe Fund manages investments, the beneficial owner(s) of the voting securitiesat issue? Assuming the Sovereign and its Monetary Authority are the beneficialowners of the voting securities for HSR purposes, their acquisition of suchsecurities would appear clearly to be an acquisition by a foreign state, aforeign government or a foreign governmental agency other than a corporationengaged in commerce and, as such, not an HSR "entity."
The Transaction
Inconnection with a major capital-enhancing exercise that involves significant USgovernment support, a leading U.S. bank holding company (the "BHC")has asked the Fund to exchange its current interest in non-cumulativefixed-rate convertible preferred stock of the BHC for common stock of the BHC(the "Transaction"). As a result of the Transaction, the Fund willhold no more than 19.9 percent of the BHC's outstanding voting securities.
The Fund
TheFund is enshrined in the Sovereign's Constitution as a "Governmentcompany." That Constitution imposes numerous public obligations on a classof Government companies that are identified individually in "Part II"of "Schedule V" to the Constitution. Schedule V is entitled "KeyStatutory Boards [Pmt I] and Government Companies [Part II]." Part II ofthat schedule identifies only three Constitutionally sanctioned Governmentcompanies, the first of which is identified by name as [the Fund]. Accordingly,while the Fund was incorporated as a private company under the Sovereign'sCompanies Act, it is Constitutionally treated as a special category Governmentcompany.
TheFund's sole and express legal mandate is to manage the foreign reserves of theSovereign. The investment objective is to enhance the global purchasing powerof these reserves by achieving a reasonable rate of return above globalinflation, within acceptable risk limits. Thc Fund is wholly-owned by theSovereign. The Sovereign and the Sovereign's Monetary Authority are the Fund'sonly clients, and they own all the assets under the Fund's management. Whilethe Fund earns a fee for its services, all investment income is either paid outto the Sovereign and its Monetary authority or reinvested, and, either way,remains the property of the Sovereign and its Monetary Authority. The assetsunder the Fund's management belong not to the Fund but to the Sovereign and itsMonetary Authority.
TheFund's founding and still current Chairman of the Board is the Sovereign'sformer Prime Minister, who served dually in his capacities as Prime Ministerand Chairman of the Fund. The two current Deputy Chairmen of the Fund are,respectively, the Sovereign's current Prime Minister and former Deputy PrimeMinister. Three additional ministers of the Sovereign sit on the Fund's board,in addition to a number of outside directors who were added to the board fortheir expertise.
Asa Government company under the Sovereign's constitution:
Appointment and removal of Directors and the GroupManaging Director of the Fund requires the assent of the Sovereign's electedPresident;
The Fund's financial statements and proposed budgetmust be approved by the Sovereign's elected President; and
The President is entitled, at his request, to receiveany information that is available to the Fund's Directors.
TheFund and certain of its subsidiaries are audited by the Sovereign's Auditor-General,whose primary duty under the Constitution is to audit and report on theaccounts of all the departments and offices of the Government, the PublicService Commission, the Legal Service Commission, the Education ServiceCommission, the Police and Civil Defense Services Commission, the SupremeCourt, all subordinate courts and Parliament.
Beneficial OwnershipEvenassuming that the Fund is considered an entity for HSR purposes, there is aquestion about who will "hold" the BHC's voting securities for HSRpurposes as a result of the acquisition. Although the Fund may have recordtitle to the voting securities, that fact is not outcome determinative to thequestion of who "holds" the securities for HSR purposes. Thedetermination of who "holds" securities turns on the factualdetermination of who beneficially owns them. See 80 1.1 (c). Inthis case, the entirety of the investment assets managed by the Fund belong tothe Sovereign and its Monetary Authority. Ultimately, it is the Sovereign andthe Monetary Authority who bear the risk of loss or gain with respect to theseassets.
Votingdecisions on securities under the Fund's management are generally made by theFund in the ordinary course of business, as is the case, for example, with mostother funds. But, unlike the situation with most fund clients, the Sovereignand the Monetary Authority are entities with the ultimate right to direct thevoting of securities under the Fund's management.
Thepractice of the Fund, the Sovereign and the Monetary Authority in making SECSchedule 13G filings (for passive investments of more than 5% of an issuer'svoting securities acquired by the Fund) is also consistent with the conclusionthat the Sovereign and the Monetary Authority are the beneficial owners of theshares here. In those instances where the Fund makes Schedule I3G filings, theFund makes the filings with itself, the Sovereign and the Monetary Authority asthe reporting persons and allocates the beneficial ownership of the securities(the power to vote and dispose of the securities) between the Sovereign anditself on the one hand and the Monetary Authority and itself on the other.
Authority1.Definition of"Entity." We are unaware of any authority construing the terms "foreignstate, foreign government, or agency thereof (other than a corporation engagedin commerce)" within the definition of "entity." The closestanalogy we have located is the PNO informal interpretation 0711008, construingthe term "agency" of a State for purposes of the same definition. Seehttp://www.ftc.gov/opinions/I0711008.hlm.
2.Beneficial Ownership. See Illustrative Exampleto 80l.l(c): "If a stockbroker has stock in 'street name' for theaccount of a natural person, only the natural person (who has beneficialownership) and not the stockbroker (which may have the record title) 'holds that stock."