Question
From:
Redacted
Sent:
Wednesday, August 04, 2010 11 :08 AM
To:
Verne, B. Michael
Cc:
Redacted
Subject: Whether Proposed Asset TransferSatisfies the Size-of-Transaction Test
Dear Mr. Verne:
We have a question concerning whether our client's proposed joint venture witha non-profit corporation (the "Non-Profit") will result in areportable acquisition under the Hart-Scott-Rodino Antitrust Improvements Actof 1976 (the "HSR Act"). In connection with the proposed transaction,which is described in more detail below, our client Company A will acquirecertain real estate assets owned by the Non-Profit that we believe are exemptfrom the HSR Act reporting requirements pursuant to HSR Rule 802.2(d). If weare correct in that conclusion, the value of the non-exempt assets transferredas a result of the acquisition would not exceed the current $63.4 millionnotification threshold and, thus, the acquisition of such non-exempt assetswould also be exempt from the reporting requirements of the HSR Act.
TheProposed Transaction
Company A seeks to enter into a joint venture with the Non-Profit. The parties'agreement contemplates the following series of concurrent steps:
(1)The Non-Profit and Company A would create a joint venture in the form of a newlimited liability company to be known as Services Company, LLC("ServiceCo"), which would be a for-profit entity. Both theNon-Profit and Company A would have an equity interest in ServiceCo, but thegovernance of ServiceCo would be controlled by the Non-Profit. Company A'sequity interest in ServiceCo would entitle it to receive more than 50 percentof Service Co's profits.
(2)The Non-Profit and ServiceCo would enter into agreements under which ServiceCowould provide a range of administrative and operational support services to theNon-Profit, while the Non-Profit would continue to fulfill its mission whilemaintaining its non-profit status.
(3)In exchange for its equity interest in ServiceCo, the Non-Profit would contributeand/or license to ServiceCo certain operational assets, including tangiblepersonal property, contracts, business arrangements and certain proprietarydata necessary for conducting the administrative and operational supportservices contemplated by the services agreements.
(4)In exchange for its equity interest in ServiceCo, Company A would contribute toServiceCo approximately $25 million.
(5)ServiceCo would immediately distribute the $25 million to the N on-Profit.
(6)For an aggregate purchase price of approximately $40 million, the Non-Profitwould sell to Company A certain real estate assets and other propertyassociated with the Non-Profit, including housing facilities used in connectionwith the Non-Profit's mission, office space used by the Non-Profit, buildingsused in fulfillment of the Non-Profits mission and retail space.
(7) The $40 millionpurchase price would be paid to the Non-Profit, and Company A would lease thereal estate assets to ServiceCo under a long-term lease on standard commercialreal estate market terms. ServiceCo would then sublease the real estate to theNon-Profit, as needed, under a long-term sublease on standard commercial realestate market terms.
The foregoing transaction steps wouldresult in an aggregate payment to the Non-Profit of $65 million.
Applicationof the HSR ActViewed in the aggregate, the proposed transaction could be considered anacquisition by Company A of certain assets of the Non-Profit for $65 million.Assuming that the size-of-person test has been met, the parties would have areporting obligation under the HSR Act. We believe, however, that some of theassets being acquired are exempt from the requirements of the HSR Act. Inparticular, Section 802.2(d)(1) of the FTC's HSR rules relating to theacquisition of office and residential property states that:
Inan acquisition that includes office or residential property, the transfer ofany assets that are not office or residential property shall be subject to therequirements of the act and these rules as if such assets were beingtransferred in a separate acquisition.
The parties commissioned anindependent third party to determine the fair market value of the real estateto be transferred from the Non-Profit to Company A. The transferred real estateincludes the following:
Housing Facilities -properties that areused as residences in connection with the fulfillment of the Non-Profit'smission (approximate value of $3.4 million); and
Non-Profit Offices -buildings usedprimarily as office space by the Non-Profit (approximate value of $22.2million).
Given that these properties are usedexclusively as either residential or office purposes and would represent anaggregate value of$25.6 million if treated as being transferred in a separateacquisition, we believe their acquisition is exempt under I-ISR Rule 802.2( d).
With the exclusion of these exempt properties from the calculation of thesize-of-transaction, the value of the non-exempt assets transferred as a resultof the proposed transaction would be approximately $39.4 million, well belowthe current $63.4 million notification threshold. Consequently, the partieswould not have a reporting obligation under the HSR Act.