Question
BY FAX AND BY MAIL
Richard B. Smith, Esquire
Federal Trade Commission
Premerger Notification Office, Rm. 398
6th Street and Pennsylvania Avenue, NW
Washington, D.C. 20580
Dear Mr. Smith:
I would like to discuss with you whether we are correct in concluding that the transaction described below is not reportable under Hart-Scott-Rodino Antitrust Improvements Act of 1976.
The transaction is essentially a spin-off, through a public offering, of two corporate subsidiaries into a new entity, with a corresponding reduction of the pre-transaction ultimate parent’s interest in the entity controlling those subsidiaries from 60% to 49%. The proceeds of the public offering will be used largely to repay certain obligations of the subsidiaries and its pre-transaction parent company. The transaction will consist of a series of steps outlined in the enclosed Description of Transaction. However, all of these steps are necessary parts of a single, indivisible transaction, and none of these steps can or will occur independently of any of the others. We therefore think it proper to view the transaction as a single, indivisible transaction, rather than analyze each intermediate step separately. See ABA Premerger Notification Practice Manual, 1991 Edition, #70.
The two subsidiaries in question (S1 and S2) are currently wholly owned by a parent company (P), which is in turn wholly owned by a holding company (HC). The voting securities
of HC are held by an institutional investor (II) and two individuals (M1 and M2), in the following proportions: II = 60%, M1 = 20%, M2 = 20%. The structure can be visualized as follows:
Present Structure
The spin-off of S1 and S2 will be accomplished by forming a new company (N), whose shares will be held by II (@ 49%), certain managers of S1 and S2 (not M1 or M2) (<1%) and public shareholders (@ 51%), giving rise to the following structure:
Post-Acquisition Structure
We think the resulting change in structure should not be reportable under the following analysis:
1. The acquisition of N shares by management shareholders (Mx), none of whom will at any time hold 50% or more of N’s outstanding voting shares, and all of whom in the aggregate will have paid only $150,200 for their shares, will be exempt under 16 C.F.R. 802.20.
2. The acquisition of shares of N by the underwriters in the public offering will be exempt under 16 C.F.R. 802.60.
3. The reduction of II’s percentage of indirect ownership in S1 and S2 from 60% to 49% should be exempt under 15 U.S.C. 18A(c)(10), since as a result of the transaction “the voting securities acquired do not increase directly or indirectly, the acquiring person’s per centum share of outstanding voting securities of the issuer.” Id. 1 Note that S1 and S2 are the same issuers both before and after the transaction, as they are the surviving companies in their respective mergers so that II’s percentage of indirect ownership in the same issuers is being reduced.
I would appreciate your calling me after you have had a chance to review this analysis, so that we can discuss it.
Sincerely,
(redacted)
Enclosure
The acquisition by II of 49% of N’s voting securities, even if considered separatelyrather than as one step in a single transaction, would not be reportable. Such anacquisition is properly viewed as a step in the formation of N prior to the publicoffering, in which case the requirements of 801.40 will not be satisfied becausenone of the other acquiring-person managers will meet the $10 million size-of-person requirement. See 16 C.F.R. 801.40 (1)(iii). However, this would still leavethe mergers of NS1 and NS2 into S1 and S2. Should the staff not agree with theanalysis of paragraph 3 above, this merger would appear to be the only reportableevent in the transaction.