Question
From: (Redacted)
Sent: Thursday, August 27, 2009 5:01 PM
To: Ferkingstad, James H.
Cc: (Redacted)
Subject: Intraperson Transaction Exemption
Attachments:TransactionStructure.pdf
Mr. Ferkingstad:
Thank you forspeaking with me this morning. This email follows up on our conversation regardingwhether the transaction described below requires a filing of a Notification andReport Form for Certain Mergers and Acquisitions under the Hart-Scott-RodinoAct ("HSR"), We believe that the transaction falls within theintraperson transaction exemption set forth at 802,30(a) of the HSR rules,and, therefore, no filing is required. If you concur with this conclusion,please respond to this email accordingly,
In its most basicsense, the transaction involves one 50% owner of a limited liability companyacquiring the other owner's 50% interest in one of the limited liabilitycompany's assets for $150 million. This appears to fit squarely within theexample following 802.30(a). For tax purposes, however, the transaction is notstructured so directly, but rather will occur in multiple steps. Please notethat these steps will occur simultaneously (in the order specified below), andthere are no circumstances or conditions that could cause any particular stepnot to occur. That is, if the first step of the transaction is undertaken, thenall of the other steps will be completed. As a visual aid, I have attached apdf file illustrating the structure on a pre-and post-transaction basis.
Prior to thetransaction, the arrangement between the owners of the subject limitedliability company is as follows: A (its own ultimate portent entity) owns 100%of Midstream A, LLC ("Midstream A"), and B owns 100% of Midstream B,LLC ("Midstream B") (B is actually composed of two funds; since B'scomposition does not affect the exemption analysis, we treat it as a singleentity in this email). A also owns 100% of Y. Midstream A and Midstream B eachown a 50% interest in Holdco, LLC ("Holdco") (that is, each has aright to 50% of Hold co's profits and 50% of Hold co's assets upondissolution). Midstream B's 50% interest in Holdco is the company's only asset.Holdco owns two plants ("Plant 1" and "Plant 2") as well ascertain facilities shared by each plant.
The transactionwill be effected as follows:
In step 1, Holdco will form two newlimited liability communes, Common, LLC and Plant 1, LLC. Holdco willcontribute the shared facilities to Common, LLC, and it will contribute Plant 1and a 50% membership interest in Common, LLC to Plant 1, LLC. Holdco willcontinue to own Plant 2 directly. We believe that this transaction is exemptfrom HSR filing requirements on account of 802.30(a), in that tile acquiringpersons in the formation of each of Common, LLC and Plant 1, LLC, that is, Aand B, are also the acquired persons because t1ley each will be deemed tocontrol Common, LLC and Plant I, LLC after their respective formation. Inaddition, neither new company will hold non-exempt assets on account of802.30(c).
In step 2, Holdco will transfer 100% ofits membership interest in Plant 1, LLC to Midstream A. In exchange therefore,Midstream A's 50% membership interest in Holdco will be redeemed by Holdco.Thus, after giving effect to t1lis step 2 (and for the instant in time beforesteps 3 and 4 are completed), Midstream B will own all of Hold co's membershipinterests, and Midstream A will cease to be a member of Hold co; thus, for thatinstant, A will not control Holdco. We believe that this step is also exemptfrom HSR filing requirements under the 802.30(a) exemption, since A is boththe acquiring person (through its control of Midstream A) and one of theacquired persons (since it also controls Plant 1, LLC for HSR purposes).
Step 3 involves moving Plant 1 into Y.Midstream A will transfer its membership interests in Plant 1, LLC to A, and Awill contribute the membership interests in Plant 1, LLC to Y, such that PlantI, LLC becomes a wholly-owned subsidiary of Y. Then, Plant 1, LLC will bemerged into Y, with Y surviving the merger and owning Plant 1 directly andowning 50% of the membership interests in Common, LLC. We believe all of thesesteps are also exempt from HSR filing requirements under the 802.30(a)exemption .
In step 4, Midstream A will pay B $150million in cash, and B will transfer a 50% interest in Midstream B to MidstreamA (that is, a 50% profits interest and the right to 50% of Midstream B's assetsupon dissolution).
So, after step 4,A and B will each control Midstream B (depending on the percentage ownership ofB, as noted in the third paragraph above, A may alone may control Midstream B).Holdco, as a wholly-owned subsidiary of Midstream B, will be included within A.A will now own 100% of Plant 1 (through its ownership of Y) and 75% of themembership interests of Common, LLC (50% through its ownership of Y and 25%through its ownership of Midstream B); also, just as prior to the transaction,A will own 50% of Plant 2.
The transactioncould have been structured as a direct purchase of Plant 1 between A andHoldco, which would clearly be exempt under 802.30(a). For tax purposes,however, the transaction has been structured as described above, but the resultis the same as the result in a direct purchase. But for the instant in timethat A ceases to control Holdco after step 2, this transaction would clearly becovered by the intraperson transaction exemption set forth at 802.30(a). Webelieve that, since the above steps will occur simultaneously, the fact thatA's control of Hold co ceases for a split second should be ignored.
If you concur inour conclusion that the above-described transaction is exempt from HSR filingrequirements, I would appreciate it if you could respond accordingly. If youhave any questions or would otherwise like to discuss tills transaction in moredetail, please feel free to give me a call. My telephone number is (redacted).
(Refer to imagefile for diagram)