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Date
Rule
801.1(b)
Staff
Michael Verne
Response/Comments
Agree.

Question

From: (redacted)

Sent:Thursday, December 03, 2009 1:56 PM

To: Verne, B. Michael

Subject: HSR Question

Mike, we would appreciate your advice on thefollowing transaction. Our client, A, is a major investor in LLC, B,which, in turn, is proposing to acquire assets from Company C (the"Acquisition"). The question presented is whether A is the ultimateparent of B or whether B is its own ultimate parent for purposes of an HSRfiling to be made with respect to the Acquisition. The specific factualcircumstances are described below.

FactualCircumstances
  • A is the major investor in B (some 90 percent of equity) and appoints 3 out of 5 of its directors.
  • B has two classes of units outstanding. The Class A units (the "Preferred Units") are held by the various investors, including A. The Class B units are held by management of B.
  • The LLC does not contemplate the payment of "profits" on a regular basis. Rather, distributions ( other than quarterly tax distributions to partners to cover tax liabilities, if any) are expected to be made only on the sale of the LLC itself, a sale of the LLC's assets or another "exit" event where the value of the LLC's assets are monitized. These distributions, when they occur, will be made in accordance with a four step "waterfall" arrangement which works basically as follows:
  • In step one of the waterfall, holders of the Preferred Units receive back the original price they paid for the Preferred Units.
  • In step two of the waterfall, occurring only when full payment is made under step one above, holders of the Preferred Units receive an 8% return on their initial investment.

    • c. In stepthree of the waterfall, occurring only when there has been full payment understeps one and two above, the holders of the Preferred Units and Class Bunits share 50:50 in distributions until the Class B unit holders receive 15percent of the 8% return received by the holders of the Preferred Units instep two described above.

    d. In stepsfour of the waterfall, the holders of the Preferred Units and Class B unitsshare 85:15 in remaining distributions. Under the above describedarrangements, the holders of Class B units are subordinate to the holders ofthe Class A units.

    Payments on liquidation follow the same waterfallarrangement described above.

    HSR Analysis

    1. We would view the payout arrangements withrespect to the LLC as variable in nature, with the result that the HSR controltest would turn on whether anyone investor would have a right to50 percent or more of the assets of B on liquidation after payment of "debts".16 C.F.R. 801.1 (f). Please confirm if our understanding in that regard iscorrect.

    2. It is our understanding that the rights of theholders of the Preferred Units to repayment of the cost of their investmentplus a return of 8% is considered a "debt" of the LLC for purposes of16 C.F .R. 801.1 (f)(the "Preferred Debt"). If a liquidation were tooccur immediately prior to the closing of the Acquisition, based on assetvalues expected to be on the balance sheet of B at that time, it is anticipatedthat step one of the waterfall would not be completed and there would not beenough funds or assets to pay all of the Preferred Debt and other debt (such asthird-party bank loans). As a result, there would be no assets to distribute tothe holders of the Preferred Units or Class B units. If such is the case, it isour further understanding that no One would be considered to control Band Bwould be its own ultimate parent for HSR purposes. Thus any HSR filing requiredon the acquiring side with respect to the Acquisition would be by B and not A.Please advise if you agree that B would be the proper party to file.

    About Informal Interpretations

    Informal interpretations provide guidance from previous staff interpretations on the applicability of the HSR rules to specific fact situations. You should not rely on them as a substitute for reading the Act and the Rules themselves. These materials do not, and are not intended to, constitute legal advice.

    Learn more about Informal Interpretations.

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