Question
From:
(Redacted)
Sent:
Thursday, January 21, 2010 2:28 PM
To:
Verne, B. Michael
Subject: HSRanalysis of proposed lDR swap
Mike,
Ourclient is a master limited partnership ("MLP"). The General Partnerof the MLP ("GP") currently holds all of the MLP general partner interests.The GP also holds about 38% of the MLP's common units as well as incentivedistribution rights ("IDRs"). The remainder of the common units areheld by the public.
TheIDRs, which are a class of limited partner interests separate from the commonunits and with no voting rights, give the GP the right to an increasingpercentage of the MLP's incremental cash from operations as the per unitdistribution to the MLP's limited partners exceeds certain target distributionlevels. All distributions from operating surplus as well as distributions ofprofits or assets on liquidation are subject to the IDR distributionprovisions.
Theparties want to change one of the IDR target distribution levels and one of theIDR distribution percentage payouts (the "splits"). They propose todo this by means of an exchange of the existing IDRs ("ExistingIDRs") for new IDRs ("New IDRs") that will contain theappropriate modifications. The transaction will be accomplished through anamendment to the Partnership Agreement whereby the Existing IDRs will beredeemed and cancelled and the New IDRs will be issued to the GP along with apayment to the GP of $200 million in cash or the issuance to the GP of a $200million promissory note.
Webelieve that this transaction is exempt from the HSR filing requirementspursuant to the "intraperson transactions" exemption of 802.30(a)because at the time of the transaction the GP will "control" the MLPfor HSR purposes as that term has been applied to unincorporated entities wherepayouts of both profits and assets on dissolution are variable.
Rule801.1(b)(1)(ii) provides that for HSR purposes a party has "control"of an unincorporated entity if is has the right to 50% or more of the profitsof the entity or the right to 50% or more of the assets of the entity in theevent of its dissolution. This definition can't be applied directly where IDRscause the percentage payout of profits and assets on dissolution to varydepending on the amount of those payouts. However, the SBP for section 801.1 ofthe rules provides that where both the right to profits and assets upondissolution are variable, control is to be determined by applying the formulafor determining rights to assets upon dissolution to the total assets of theunincorporated entity at the time of the acquisition as if the entity werebeing dissolved. 70 Fed. Reg. 11,504 (2005).
Basedon the book values of assets and liabilities on the MLP's most recentlyprepared balance sheet dated September 30, 2009, the GP would receive more than50% of the payouts if the MLP were liquidated today. Therefore, the GP isdeemed to control the MLP for purposes of 801.1 and the 802.30 exemption willapply.