Question
February 3, 1994
VIA HAND DELIVERY
Richard B. Smith, Esq.
Senior Staff Attorney
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
Room 321
6th Street & Pennsylvania Ave., N.W.
Washington, D.C. 20580
Re: The Definition of Realty for Purposes of
15 U.S.C. 18A(c)(1) and 16 C.F.R. 802.1
Dear Dick:
I am writing on behalf of (redacted) to confirm the applicability of the ordinary course of business exemption to (redacted)s proposed acquisition of an unfinished (redacted) building (the Building).
I. The Building
About ten years ago, the current owner of the Building (B) commenced construction of the two-wing, 320,000 square foot Building. The first wing consists of about 50,000 square feet of office and warehouse space. It was completed in 1984; and the office space has been partially occupied by some B employees from time to time. However, this wing has never generated any revenues. The second wing, a 270,000 square foot building to house (redacted) equipment, was constructed in 1986. This wing has never been used or generated any revenues. Indeed, it contains no productive equipment.
While the Building was designed to be a class one, (redacted) facility (e.g., its columns are positioned to minimize vibration), it was never completed, much less had the other capabilities and capacity to (redacted). The building has utilities, water and air conditioning; but many additional steps would have to be taken to qualify it as a class one, (redacted) facility. For example, (redacted) would have to install a deionized water system, special utilities, special pipes to supply gases and speciality chemicals, et alia.
For these and other reasons, we do not believe that the Building could be fairly characterized as unique. As an inchoate clean room, it could be utilized for a variety of applications ranging from (redacted) to (redacted). Moreover, given the dynamic technology and production process for (redacted), the limited internal partitions currently in the Building will have to be removed and repositioned to produce current generation (redacted) efficiently. Finally, there are a number of other (redacted) buildings around the country.
II. The Proposed Transaction
(Redacted) is presently negotiating with B to acquire the Building for a price in the $40-$50 million range. (Redacted) would likely invest another $40 million to restore the Building and bring it up to specifications. This includes removing and repositioning partitions, replacing and adding filtration systems, and installing special pipes for the requisite gases. In addition to the fact that the Building was originally designed for production processes and products which are now obsolete, (redacted) will also reconfigure the Building to produce a different size/type of (redacted) than the ones B had planned to manufacture.
In addition to this restoration and redesign, (redacted) will need to purchase all of the requisite equipment to (redacted). In doing so, (redacted) will order all of its own equipment, rather than taking an assignment of any of Bs purchase orders (assuming B ever had, much less still has, any such contracts). (Redacted) estimates that this equipment will cost an additional $50-100 million.
III. Applicability of the Realty Exemption
I understand from our recent conversations, not to mention our on-going dialogue over the years, that we all agree that the Building is a nonproductive asset and thus realty for purposes of 15 U.S.C. 18A(c)(1) and 16 C.F.R. 802.1. In reaching this conclusion, I further understand that you and John have relied on one or more of the following factors, although I do not concede that they are all apropos much less dispositive. First and most importantly, the Building does not currently generate any revenues, nor to the best of my knowledge has it ever done so. Second, the Building is not merely a turnkey facility. Rather, it will require more than a de minimus amount of additional capital investment; and the acquiring person will not merely assume the acquired persons contracts to complete the facility. Finally, the whole Building was not uniquely designed for specific equipment, which a buyer would merely need to procure and install. Rather, the Building would have to be restored and redesigned to fulfill the acquiring persons proposed use, or even the originally intended use, not to mention the fact that the Building could alternatively be used to produce a variety of unrelated products.
IV. Conclusion
For the aforementioned sufficient reasons, the Building is a nonproductive asset and thus realty for purposes of the exemptions contained in 15 U.S.C. 18A(c)(1) and 16 C.F.R. 802.1. As a result, (redacted) and B need not comply with the reporting and waiting requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, even if: (1) they satisfy the jurisdictional elements set forth in Sections (a)(1)-(3) of that Act; and (2) the proposed transaction is not in the ordinary course of their business.
Kindly contact me at your convenience to confirm that you and John still concur in this analysis and conclusion.
Very truly yours,
(redacted)