Question
(redacted)
March 14, 1988
Wayne Kaplan
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
6th & Pennsylvania Avenue, NW
Room 303
Washington, D.C. 20580
Dear Mr. Kaplan:
After our telephone conversation Friday morning, I reviewed each of the partnership agreements of the entities outlined below, and determined that I had been in error in stating that an individual would have the right to vote stock in (redacted) to be held by two different partnerships, as the nominee of a third partnership. After review, I have determined that the nominator is essentially just a referee which has the right to select one of several general partners of each entity to manage the entity. It has no power to appoint itself as the managing partner. Moreover, the managing partner which is so appointed acts for the particular partnership and not for the entity which appointed him.
The following is a restated description of the facts, from which I conclude that the transaction would not be subject to the 30-day waiting period or premerger notification reporting requirements of the Hart-Scott-Rodino Act. For convenience, a diagram showing the ownership rights of the pertinent persons and entities, is telecopied herewith.
A. The Parties.
X is a corporation with sales substantially in excess of $100 million. A and B are investment limited partnerships. No person or entity has the right to receive 50% or more of the profits (or in the event of dissolution, the assets) of either of them. Accordingly, A & B are their own ultimate parent entities within the meaning of Rule 801.1(a)(3). A and B each control sales or assets of more than $10 million but less than $100 million.
C, a partnership, is the general partner of A and has the contractual right to vote stock held by A. Several natural persons are Cs general partners. D, also a partnership, is the general partner of B and has the contractual right to vote stock held by B. Several natural persons are Ds general partners. No person or entity controls C or D.
E is another general partnership. Y is a natural person who is a general partner of each of C, D and E. The partnership agreements of C and D each designate E (which is not a general partner of either C or D) to select one of the natural persons who is a general partner of C or D, respectively, to act on behalf of the entity in which such general partner holds and interest, as the entitys managing partner. The person so designated, acting on behalf of the partnership in which he owns an interest, has the right and authority to act for such partnership in voting stock held by the partnership of which such partnership is general partner (i.e., A or B, respectively). E has designated Y to act as the managing partner of each of C and D.
B. The Transaction.
E has agreed to make a leveraged buy-out of certain assets of X, utilizing A and B as indirect acquisition vehicles, on the following terms. A new corporation (redacted) will be formed. Approximately 41% (redacteds) stock will be issued to A in exchange for a capital contribution of approximately $4 million. Approximately 10% of (redacted) stock will be issued to B in exchange for a capital contribution of approximately $1 million. (Redacted) will obtain a loan from a third party for approximately $60 million, to be secured by (redacted) assets. Neither A nor B will guarantee that loan. X will sell the target assets to (redacted) in exchange for (a) approximately $60 million in cash (depending on the net book value of the assets at the time of transfer, (b) a note for $22 million, and (c) 49% of the stock of (redacted) The parties have agreed that X will be deemed to make a capital contribution of $4.804 million to (redacted) We understand that the Board of Directors of X will determine in good faith that $4.804 million is the fair market value of the stock X will receive in (redacted) given the substantial debt of that entity. Stock in (redacted) will be split between A and B for good business reasons, and not as a means of avoiding jurisdiction under the Hart-Scott-Rodino Act.
C. Analysis
The shared which A and B will hod in A (redacted) will not be aggregated for Hart-Scott-Rodino Act purposes because A and B are not under common control within the meaning of Rule 801.1(b). Moreover, even though Y will have the contractual power to designate 50% or more of (redacted) directors, under Rule 801.1(b), (redacted) will not be deemed to be controlled by Y because Y holds the contractual voting rights on behalf of two separate ultimate parent entities and not beneficially. Accordingly, (redacted) is its own ultimate parent entity. Under Rule 801.11, (redacted) will not be deemed to be a $10 million person because monies loaned and contributed to it will be used to make the acquisition. Therefore, even though X is a $100 million person and will receive in excess of $15 million for the sale of certain assets, the sale of assets will not be reportable because the buyer will not meet the $10 million size of person test.
The formation of (redacted) is exempted by Rule 802.20 from the reporting requirements of Rule 801.40, even though a $100 million person and two $10 million persons will contribute to its formation, because no contributor will contribute $15 million or more, and because no person will receive 50% or more of (redacted) stock.
Please call me to confirm that you have received this letter and to advise whether after seeing the above facts in print, you concur with my belief that the transaction is not reportable.
Yours truly,
(redacted)
(redacted)
Enclosure [note 1]