Question
Mr. B. Michael Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
7th & Pennsylvania Avenue, NW
Washington, DC 20580
Re: Basis of HSRNon-Reportability for a Repurchase of Voting Securities and Other Transactions
Dear Mike:
I am writing to confirm ourdiscussions of March 31, 2010, May 14, 2010 and June 7, 20 I 0 regarding thenon-reportability under the Hart-Scott-Rodino Antitrust Improvements Act of1976, as amended ("HSR Act"), of the proposed transactions describedbelow.
Proposed Transactions
A privately held company (the"Company") intends to repurchase some ofits issued and outstandingvoting securities as a part of several transactions being undertaken pursuantto a purchase agreement entered into by the Company, its shareholders and otherinvolved parties. The Company has one controlling shareholder for HSR purposes,an irrevocable trust ("Trust A"), and a number of shareholderswho hold a minority voting position in the Company ("MinorityShareholders"). Trust A currently holds all of the shares of a class ofpreferred voting securities ("Class A Preferred Stock"), and theseshares constitute appropriately 90% of the overall voting rights with regard tothe election of the Company's directors. While there are significant economicrights in the common stock, the common stock collectively has less than 10% ofthe voting rights. The repurchase transactions have been initiated in an effortto resolve active litigation about to go to trial that has been brought againstTrust A by several beneficiaries of Trust A who are also among the MinorityShareholders in the Company and who will have their interests acquired.
The repurchase and othertransactions will involve the following:
(1)All of the common stock held in the Company by the Minority Shareholders whohave brought the litigation and trusts for the benefit of themselves and theirissue will be repurchased by the Company;
(2)All of the preferred stock in the Company will be repurchased except for aportion of the Class A Preferred Stock held by Trust A;
(3)Part of the common stock of the Company is held by a corporation ("HoldingCorporation") that holds nothing other than a minority amount of thecommon stock of the Company, other than perhaps cash, cash equivalents andsmall holdings of minority interests in third party securities. The Companywill purchase a majority of the voting securities of the Holding Corporationsuch that Holding Corporation will become a subsidiary of the Company. The onlyother remaining shareholders in the Holding Corporation will be trusts(collectively, "Trust B") for the benefit of the children of PersonA, an individual identified below; and
(4)Trust A will sell all of the remaining outstanding Class A Preferred Stock to anewly formed trust ("Trust C") for $100,000 or less. Upon closing,these shares of Class A Preferred Stock will constitute in excess of 85% of theoverall voting rights with regard to the election of directors to the Company'sboard of directors.
Upon the repurchase and othertransactions, the Company will only have three shareholders. One shareholder isan individual ("Person A"). He is the Chairman of the Board ofDirectors of the Company. While Person A is not acquiring additional shares inthe Company, as a result of the transactions, his percentage interest in theCompany common stock will increase. However, the shares he holds will stillconstitute less than 10% of the overall voting rights with regard to theelection of directors to the Company's board of directors. He is one of threetrustees of Trust A, the current controlling shareholder of the Company.Neither Person A nor anyone else has the power to remove or replace 50% or moreof the trustees of Trust A, and there is no settlor with a reversionaryinterest as the settlor of Trust A is deceased. Person A is only a remote,contingent beneficiary of Trust A. Person A also has trustee roles in othertrusts as described below. Person A supports the proposed transactions. You canassume for purposes of this hypothetical that Person A anticipates that thetransactions will be beneficial to him and that as a practical matter theCompany would not go forward with the proposed repurchases if he was opposed.However, he does not have the power to compel the transactions to occur. Forexample, Trust A must approve the proposed transactions and Person A is justone of three trustees of Trust A.
The second shareholder uponclosing is Trust C, identified above, the newly formed trust that at closing isacquiring from Trust A the outstanding Class A Preferred Stock. While Idiscussed several alternatives with you regarding the set up of Trust C, youshould assume that Trust C will be set up as follows: Trust C is being set upfor the benefit of Person A and family members of Person A, and Person A willbe one of three trustees of Trust C. Trust C is an irrevocable trust. Thesettlor of Trust C, the spouse of Person A, will not retain a reversionaryinterest in Trust C. Person A will have the power to remove any of the othertrustees (although he will not be able to remove both of the two other trusteesat the same time). If Person A removes a trustee, he cannot personally andsolely replace the removed trustee. The remaining trustees (of which therewould then be two with him as one) would have the power to appoint areplacement based on a unanimous vote of the two trustees. Accordingly, PersonA will have the power to block or veto a replacement choice being made by thetwo trustees. While not a fact we discussed, Trust C also may be set up suchthat if Person A and the other remaining trustee cannot agree on a replacement,the replacement trustee will be selected by a majority decision of Person A andhis adult issue who also are beneficiaries of Trust C. If Person A resigns as atrustee, he can designate a successor for himself. You should assume that TrustC has a provision whereby a majority vote of the trustees can cause Trust C todistribute out the Class A Preferred Stock to Person A (or someone else), andchange the mechanism for designating trustees, such that, for example, Person Acould be given the power to remove and replace all of the trustees.
The third shareholder is HoldingCorporation, an entity that as described above will upon closing be a majorityowned subsidiary of the Company. Trust B, as mentioned above, will continue tohold a minority interest in Holding Corporation. Person A is one of the threetrustees of Trust B. The settlor of Trust B, the mother of Person A, does notretain a reversionary interest in Trust B. There is no person or entity withthe power to remove or replace 50% or more of the trustees of Trust B. Person Ais only a remote, contingent beneficiary of Trust B.
You should assume that if Person Acontrolled Trust C for HSR Act purposes that the sale by Trust A to Trust C ofits remaining Class A Preferred Stock would be reportable under the HSR Act asyou should assume that combining the acquisition price for these shares in theCompany ($100,000 or less) with the fair market value of the common stock inthe Company that Person A already holds and will continue to hold upon closingwould exceed $63.4 million.
Conclusions
You confirmed that the proposedtransactions described above would not trigger any reporting obligation underthe HSR Act. Specifically you confirmed:
(1) The Companyrepurchasing its own voting securities cannot be an HSR reportable event unlessthere is a person that is instrumental in the repurchase and that personcrosses an
(2) Underthe proposed transactions described above, there would be no person that wouldbe both instrumental in the repurchase and cross an HSR notification thresholdas a result of the proposed transactions.
(3) Tothe extent that Trust A's percentage interest in the voting securities of theCompany would increase at closing from its current approximately 90% level(immediately before it sells those interests to Trust C) by virtue of thetransactions, the transactions would not trigger any HSR reporting event (evenassuming Trust A is instrumental in the repurchase). Any increase in holdingsby this shareholder in the Company would be exempt as an intraperson transactionunder 16 C.F .R. 802.30( a).
(4) TrustA's sale in conjunction with the closing of all of its interests in theCompany, the outstanding Class A Preferred Stock, to Trust C would not be HSRreportable. There is a determined acquisition price ($100,000 or less) forthese voting securities, an amount well below the HSR $63.4 million size of thetransaction test. See 16 C.F.R. 801.10. You agreed that the determinedacquisition price controls for HSR valuation purposes even if one were to arguethat the fair market valuation of the voting securities may be substantiallyhigher and above $63.4 million.
(5) TheCompany's acquisition of voting securities in Holding Corporation is notreportable under the HSR Act, regardless of the dollar value, as Holding Corporationonly holds voting securities in the Company, and perhaps cash, cash equivalentsand small, non-HSR reportable holdings of minority interests in third partysecurities.
(6) PersonA would not be instrumental in the repurchase of the Company's votingsecurities for HSR purposes or otherwise be subject to any HSR obligation fromthe transactions regardless of the dollar value of the voting securities hewill hold in the Company. You agreed that he would not be subject to any HSRreporting obligation even though his percentage interest in the votingsecurities of the Company will increase somewhat from the repurchasetransaction and even if the fair market value of his shares increases as aresult of the proposed transactions and would be worth more than the $63.4million size of the transaction test under the HSR Act. You confirmed thatalthough Person A is important to the transaction process that he would not beinstrumental for HSR purposes given his lack of power to compel thetransactions to occur and that the repurchase transaction was not undertaken toavoid a need to file under the HSR Act.
(7) Apossibility of inheritance is not a reversionary interest for HSR purposes, asettlor of a trust would not be deemed to hold the corpus of a trust orotherwise control a trust for HSR purposes based on being a remote andcontingent beneficiary of a trust, and a person (other than a settlor of trust)would not control a trust based on being a beneficiary of the trust, even ifthat person is a present beneficiary of the trust. Person A's wife, the settlorof Trust C, would not be deemed to have a reversionary interest in Trust Cbased on Person A being a beneficiary of Trust
(8) PersonA would not control Trust C for HSR purposes. The power to remove trustees doesnot confer control over a trust in the absence of the ability to replace 50% ormore of the trustees of a trust. The fact that Person A can designate his ownsuccessor as trustee, and the fact that he has veto power over the replacementof any other trustees does not count as the ability to replace trustees for HSRpurposes and would not result in him controlling Trust C. The fact that PersonA's wife is the settlor of Trust C also does not change the conclusion thatneither Person A nor his wife controls Trust C for HSR purposes. You confirmedthat, even assuming arguendo that Trust C was structured in such a way as toavoid triggering an HSR filing obligation, this would not be a transaction ordevice for avoidance under 16 C.F .R. 801.90. Parties are not under anobligation to structure a transaction in a manner that necessarily triggersnotification obligations.
(9) Theconclusion that no HSR filing is required to consummate the proposedtransactions is not impacted by the fact that Trust C has a provision whereby amajority vote of the trustees can cause Trust C to distribute out the Class APreferred Stock to Person A (or someone else), and change the mechanism fordesignating trustees, such that, for example, Person A could be given the powerto remove and replace all of the trustees. Such a provision would only berelevant to an HSR analysis at the point, if any, it is used to authorize aproposed distribution by Trust C of Class A Preferred Stock or a change incontrol of Trust C.
As I noted above, Trust C may beset up such that if Person A and the other remaining trustee of Trust C cannotagree on a replacement trustee to fill an open trustee position, the replacementtrustee will be selected by a majority decision of Person A and his adult issuewho also are beneficiaries of Trust C. While we did not discuss this specificscenario, my understanding is that this would not change the conclusion thatneither Person A nor any other person or entity controls Trust C for HSRpurposes, and that no HSR filing obligation is triggered.