Question
April 14, 1992
VIA MESSENGER
Mr. William J. Schechter
Premerger Notification Office
Bureau of Competition
Room 303
Federal Trade Commission
Washington, D.C. 20580
Dear Mr. Schechter:
Our client, an individual, has entered into a letter of intent to sell two companies that he controls in a transaction that is described in detail below. We believe that no Hart-Scott-Rodino Premerger filing should be required and would appreciate your consideration of our conclusion.
Description of Transaction
A.The Parties Involved
The buyer (A) is a newly formed United States subsidiary of a foreign corporation. The foreign corporation is the ultimate parent entity (UPE) of A. A currently has no assets and will have no assets at the time of closing aside from the money it will pay out in connection with the transaction. The UPE has annual net sales and total assets in excess of $100 million.
Our client, an individual (B), owns a majority of the voting securities of two companies, (C) and (D). There are four other shareholders holding the remaining shares of C and D. C has annual net sales in excess of $100 million.
An escrow agent, a bank (E), will be used to hold some of the shares involved in this transaction, however, an individual (T), will be granted the voting rights for such shares. T is now a trustee for a trust that currently holds about 8 percent of the shares of C and D. When T becomes the proxy agent he will continue in his capacity as trustee for the trust. T has no connection or relationship with UPE, A or any of As affiliates. T and the entities T controls do not have annual net sales or total assets in excess of $10 million.
F is a former shareholder of C and D and is the person who developed and organized this transaction. T is a former employee of F, and the grantor and beneficiary of the trust in which T is the trustee is Fs sister.
The following chart shows the participants prior to the transaction:
Graphic
B. The Transaction
UPE and A will pay a total of $16.995 million to B and the other shareholders of C and D, and at the same time, A will place 60 percent of its shares (issued in the names of the former shareholders of C and D) in escrow to be held by the escrow agent, E and voted by the proxy agent, T. T will have the voting rights of the shares of A while they remain in escrow. T will exercise completely independent judgment in the exercise of the voting rights of the A shares held in escrow.
In return, A will receive and hold 100 percent of the shares of C and D. UPE will receive the right (for two years) to purchase the shares of A held in escrow for a payment of $5 milion (or such lesser amount if any of the shares have been surrendered or applied in payment for any damages to which A is entitled under the Agreement) plus interest. B and the other former shareholders of C and D will be entitled to these funds two years after closing. These steps will occur simultaneously.
UPE will pay to Sellers $2 million of the $16,995,000 purchase price for UPEs right to purchase the escrowed shares for $5 million, because the escrowed shares represent 60% of the total voting shares of A.
A few other payments will be made in connection with the transaction. The letter of intent provides that A will agree that B will provide consulting services to C and D for a two-year period following the closing. The annual fee for these consulting services, which is to be paid by C and D, is expected to be about $50,000 per year. A will also pay F $1.55 million for Fs costs, fees and expenses, associated with developing and organizing this transaction and will issue F approximately 4% of As shares, to be held in escrow on the same terms as the shares issued to B and the other sellers.
If UPE does not exercise its right to purchase the shares of A from the escrow within the two year period, the share and the associated voting rights go to B and the other former shareholders of C and D. B and the other former shareholders of C and D then have the right (exercisable within thirty days after expiration of the two year period) to sell all of As shares back to A for $5 million (the First Put) (reduced pro rata for any such Shares which have been previously surrendered or applied in payment for any damages to which A is entitled under the Agreement). As obligation to purchase the shares pursuant to the Put will be guaranteed by a financial institution mutually acceptable to A and B.
If B does not exercise the First Put, B and the former shareholders of C and D have the right (the Second Put) which can be exercised within thirty days after the fifth anniversary of the closing date, to sell all of As shares back to A for $9 million (reduced pro rate for any of such shares surrendered or applied in payment for damages to which A is entitled under the Agreement) plus interest. The Second Put is not guaranteed by any financial institution.
Despite all of the contingencies described above, it is expected that UPE will elect to exercise its option to purchase its shares within the first two years.
The purpose of the escrow of As shares is two-fold: it creates a fund to satisfy the claims of A against B and the other sellers for damages, and it allows UPE to defer the point at which it must pay the final $5 million in cash for the remaining indirect interest in C and D. If UPE exercises its option to purchase its shares from escrow within the two year period, however, the $5 million in proceeds will remain in the escrow to be available for the payment of any damages to which A is entitled under the Agreement.
The result of this arrangement is that the UPE will hold only 40 percent of the voting securities of A after the closing of the agreement and will not have control of C and D. T, as proxy agent, will hold 60 percent of the voting securities of A and will control C and D. T will vote his 60 percent share of A independent of both UPE and B. B and the other sellers will not control any of the shares of A, but will have the right, at the end of two years, to $5 million when the shares are sold to UPE or A. If UPE does not elect to exercise its option, B and the other former shareholders of C and D will control and vote the A shares.
The following chart shows the structure after the transaction:
Graphic
Hart-Scott-Rodino Analysis
As a result of this transaction A will pay to B and the other sellers $14.995 million, and UPE will pay $2 million for the option. UPE will have an indirect 40 percent interest in C and D. (UPE will hold 40 percent of the shares of A which in turn will hold 100 percent of the shares of C and D.) T will have an indirect 60 percent interest in C and D. Because all of the events involved in the transaction (with the exception of the exercise of the option or puts) occur simultaneously, UPE will never have beneficial ownership of a majority of the voting securities of C and D (prior to the exercise of UPEs option or prior to exercise of the First Put, which ever occurs first).
Because T does not meet the size-of-persons test, no HSR filing is required for its acquisition of a 60 percent interest in A. UPE is not required to file because of Rule 802.20(b): UPE is acquiring a 40 percent interest in C and D (less than control) for less than $15 million.
* * *
Given the facts as outlined above, we would appreciate your advice on whether a HSR filing is required. We recognize that if the transaction is set out in a step fashion there are scenarios in which a HSR filing would be required. Our argument for non-filing hinges on the fact that all of the steps in the transaction occur simultaneously and that UPE will not have beneficial ownership of a majority of the voting shares of C and D until UPE exercises its option for the remaining 60% of its shares. We recognize that it is likely that UPE will have to make a HSR filing before UPE exercises its option to purchase 60 percent of its shares.
Please call me when you have had an opportunity to review the facts and consider the HSR issues. My phone number is (redacted). Thank you for your assistance in this matter.
Very truly yours,
(redacted)