Question
July 1, 1985
VIA FEDERAL EXPRESS
Premerger Notification Office
Bureau of Competition
Room 303
Federal Trade Commission
Sixth Street and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Attention: Mr. Patrick Sharpe, Compliance Specialist
Dear Mr. Sharpe:
This will confirm our telephone conversation on Friday, June 28, 1985, when we called to obtain an informal interpretation from your office, on an anonymous basis, regarding whether a proposed transaction was reportable under the premerger notification and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and implementing regulations.
The following is a summary of the relevant facts that we furnished to you during our conversation:
1. Our client, "Company A," is a foreign (that is , alien) corporation that would be an acquiring person. Company A has both net sales and assets within a range of about $50 million to $60 million. However, Company A is part of a conglomerate, the "ultimate parent entity" [16 C.F.R. 801.1(a)] of which has net sales and assets in excess of $100 million. 2. "Company B," a domestic corporation "engaged in manufacturing" [16 C.F.R. 801.1(j)] is, and has been since 1982, in a chapter XI reorganization proceeding. Company B, at its last regularly prepared annual statement of income and expense, had net sales of approximately $14 million, and as of the last regularly prepared balance sheet, had assets with a net book value of approximately $6 million. 3. "Company C" is a new domestic corporation to be formed. Company A will acquire 40% of the outstanding common stock in the new corporation, another 50% of the outstanding stock will be issued to natural persons formerly affiliated as owners or officers of Company B, and the 10% balance will be issued to a natural person whose loyalties may fairly be said to reside with Company A. The new shareholders who are natural persons formerly affiliated with Company B will together contribute capital in the amount of approximately $30,000, together with their technical knowledge and certain proprietary materials relating to the business involved; the 10% shareholder who is a natural person will contribute capital of $100,000 in cash or its equivalent; and Company A, the 40% shareholder, will contribute approximately $70,000 in cash or its equivalent, together with all of its interest in a note representing a loan by Company A to Company B in the amount of approximately $500,000, for use as working capital to enable Company B to continue its operations pending consummation of the transaction to be hereinafter described. 4. The proposed transaction, subsequent to the incorporation and capitalization of Company C, is for Company C to acquire substantially all of the assets of Company B for an acquisition price of approximately $3.5 million. The bank loans required to fund that acquisition will be guaranteed by Company A. Thus the value of the assets of the acquired person(s) will not exceed approximately $4.2 million, no matter whether some elements of that value need not be counted for these purposes.
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Our analysis, based on the foregoing facts, was that the proposed transaction would satisfy all three of the statutory jurisdictional tests, as follows:
1. At least Company B, and acquired person, would be engaged in commerce or in an activity affecting commerce [15 U.S.C.A. 18a(a)(1) (Supp. 1985)], so that the transaction would meet the "Commerce Test." 2. A "person" with annual net sales or total asset of $100 million or more is proposing to acquire voting securities or assets of a person engaged in manufacturing with annual net sales or total assets of $10 million or more [15 U.S.C.A. 18a(a)(2)(A)], so that the proposed transaction meets the "Size-of-the-Parties Test." [Note: Wrong, C is the acquiring person and does not have $10 MM in sales or assets] 3. As a result of the proposed acquisition an acquiring person will hold 15% or more of the voting securities or assets of an acquired person [15 U.S.C.A. 18a(a)(3)(A)], so that the proposed transaction meets the "Size-of-the-Transaction Test."
Notwithstanding our conclusion that the proposed acquisition meets all three of the statutory jurisdictional tests, we believe that the transaction(s) is exempt from the requirements of the statute on at least on and perhaps more bases, as follows: [NOTE TO ITEMS 1 and 2 BELOW: Need not go as far as exemptions.]
1. The propose acquisition, which otherwise would be subject to the requirements of the act, satisfies Section 7A(a)(3)(A) [15 U.S.C.A. 18a(a)(3)(A)], but does not satisfy Section A(a)(3)(B) [15 U.S.C.A. 18a(a)(3)(b)], so that the acquisition is exempt pursuant to 16 C.F.R. 802.20 (1985) because, as a result of the proposed acquisition, the acquiring person would not hold: (a) assets of an acquired person valued at more than $15 million; or (b) voting securities which confer control of an issuer which, together with all entities which it controls, has annual net sales or total assets of $25 million or more. You advised that you concurred in our analysis and conclusion that the transaction is exempt from the notification requirements of the statute on the basis of the regulation an 16 C.F.R. 802.20 (1985). 2. We suggested that the proposed transaction might also fall within the exemption relating to acquisitions by "foreign persons" set forth in 16 C.F.R. 802.51(c) (1985), as follows: "An acquisition by a foreign person shall be exempt from the requirements of the act if:...(c) the acquisition is of less than $15 million of assets located in the United States (other than investment assets)..." Although we did not discuss that suggested exemption at length, you advised that the proposed transaction would probably fall within that exemption as well. 3. You advised that the proposed transaction, as I had described it, might also be analyzed by reference to 16 C.F.R. 801.40, which relates to the formation of joint ventures or other corporations on a joint basis. I believe that your observation was that the proposed transaction would not be subject to the reporting requirements of the act because the value thresholds set forth in 801.40(b), even after consideration of the provisions of 801.40(c), would not be reached. [NOTE: Correct]
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We understand that the policy of your Office is that you will not covey or confirm the above informal interpretations in writing, but that, upon receipt of this letter setting forth the relevant facts related to you and our understanding of the advice received, you will respond orally to this letter to confirm the interpretations or to clarify any points of misunderstanding. We shall appreciate receiving the permitted oral response at your early convenience, by calling the undesigned collect at the number appearing in the above letterhead.
Thank you for your courtesy and cooperation when we spoke on June 28 and for your early response.
Sincerely yours,