Question
From:
(redacted)
Sent:
Thursday, May 21, 2009 5:28 PM
To:
Verne, B. Michael
Cc:
(redacted)
Subject: Reportability of Sale/LeasebackTransaction
Hello Mike-
We wanted to ask you to confirm our analysis of anHSR reportability question related to a sale-leaseback issue. While a few ofthe informal opinions on the FTC's website appear to indicate that suchtransactions would not be reportable, we were unable to find an exampledirectly on point.
Facts
We represent a company that owns, as an incidentalpart of its main business, a fleet of forty-three oceangoing tugs and bargesused for hauling cargo between U.S. ports. Our client proposes to sell thesevessels to a buyer and then lease the substantial majority (32) of them backthrough an arrangement called a "long term time charter" which iscommon in the industry. The reason for the sale/leaseback arrangement is that,due to specific maritime regulations governing the operation of vessels in thecoastwise trade, our client cannot continue directly to operate the vessels,but needs to continue receiving their services in order to fulfill ongoingsupply obligations to unrelated third parties. The sale will be structured sothat the leaseback arrangement will be a condition to (and occur concurrentlywith) the closing of the agreement to sell the vessels.
This will be an arms-length transaction to anunrelated third party buyer which will be selected in an auction process. Bothbuyer/lessor and seller/lessee will exceed the statutory size-of-personthresholds. Our client has had the vessels appraised by an independentappraiser at about $75M. However, given that as a condition to the sale thevessels must remain in their current service (instead of some other, perhaps morelucrative, use) through the leaseback, it is not clear whether the statedpurchase price would satisfy the HSR size-of-transaction threshold.
Under the leaseback agreement, the only rights thebuyer/lessor will acquire are (a) legal title to the vessels and (b) therevenue stream from the lease. The seller/lessee will maintain the exclusiveauthority to direct their use. The initial term of the lease would be fiveyears, renewable depending on then-current business conditions. In addition, inthe event certain contracts that the seller/lessee has with unrelated thirdparties for the supply of cargo to be carried by the vessels are not renewedwhen their terms expire, the vessels used for carrying that specific cargowould "roll off" the long term time charter, and would revert to theexclusive control of the buyer/lessor. Whether these "roll-offs"occur will depend on when the underlying supply contracts expire and whether theyare renewed. Two of the vessels are assigned to fulfill supply contracts set toexpire in six months. The remainder of the vessels covered by the long termtime charter are evenly divided between those assigned to contracts which willexpire in three and a half years and those assigned to contracts that willexpire in five years. The lease will also specify that in the event theseller/lessee breaches its obligations under the lease, exclusive control ofall the vessels will revert to the buyer/lessor. Finally, as noted above,eleven of the forty-three vessels will not be covered by the leaseback from thebeginning. The buyer would assume exclusive control of these vesselsimmediately upon closing of the transaction.
Discussion
By our reading of prior PNO interpretations (seeInformal Staff Opinions 0806007, 0006009 and 9011010), where a sale andleaseback transaction is a bona fide arm's length sale and lease transaction,the PNO characterizes it as the acquisition of a revenue stream by the buyer,deeming the seller to be maintaining beneficial ownership of the assets. Underthis analysis, sale and leaseback transactions are not generally reportable.
Based on this interpretation, we have reached thefollowing conclusions about the specific fact pattern proposed here:
1.Provided the fair market value, as determined in good faith by the boardof directors of the buyer, of the eleven vessels to be acquired at closing thatare not subject to the long term time charter arrangement (and therefore ofwhich the buyer assumes exclusive control immediately upon closing) is notgreater than $65.2 million, no filing would be required for the initialsale/leaseback transaction. The PNO would characterize this initial transactionas (a) the acquisition of assets valued at less than the statutory size oftransaction test and (b) the acquisition of a revenue stream, where beneficialownership of the assets subject to the long term time charter remains with theseller/lessee.
2.Even if the sale/leaseback transaction were characterized as a sale ofassets, the transaction would still not be reportable if the buyer/lessor'sboard determined in good faith that the fair market value of the assets beingacquired in the transaction, including those assets subject to the long termtime charter and those not included in it, and including whatever fair marketvalue it assigned to the lease in its calculations, is not greater than $65.2million.
3.If the initial transaction is not reportable pursuant to the analysis inpoint 1. above, then if any vessels "roll off" the long term timecharter (or in the event the seller/lessee breaches the lease), thebuyer/lessor would need to determine, for the vessel(s) for which it acquiredexclusive control, the fair market value of (a) such vessels at that time, and(b) pursuant to 801.13(b), any vessel(s) of which the buyer/lessor acquiredcontrol in the preceding 180 days. If the sum of (a) and (b) exceeds thethen-current HSR size-of-transaction threshold, then the parties would berequired to notify the transaction and observe the waiting period at that time.Similarly, an HSR filing would be required if the parties did not renew thelease after five years and the buyer/lessor's board determined that the fairmarket value of the vessels at that time exceeded the then-current statutorysize-of-transaction threshold.
We would appreciate it if you could confirm thisanalysis is correct as soon as possible.