Question
VIA HAND DELIVERY
Mr. Patrick Sharpe
Compliance Specialist
Federal Trade Commission
Pre-Merger Notification Office
6th and Pennsylvania Avenues, N.W.
Room 301
Washington, DC 20580
Dear Patrick:
This is to confirm our conversations on Friday April 29, 1994 and earlier today in which you agreed that the following transaction would be exempt from filing notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“H-S-R Act”), as amended:
A is a Maryland business trust which will become, either prior to the transaction or as soon as possible following the transaction, a publicly held company subject to the requirements of the Real Estate Investment Trust Act of 1960, as amended (“REIT”) 1 . B, C, and D are Subchapter S corporations with common shareholders, but with each being its own ultimate parent entity. B, C, and D each own as its principal asset a hotel.
STAFF COMMENT: These three factors [see footnote 1 below] agree with those presented in a letter to Richard Smith on 4-8-93 in which the advice given was the deal is exempt under 18a(c)(1) ordinary course.
A proposes acquiring all three hotels for a total consideration of $29 million. This acquisition will be accomplished either (1) through a merger of the three Subchapter S corporations into the Maryland business trust in exchange for restricted shares in the REIT to the shareholders of B, C and D 2 or cash in the amount of $29 million less the outstanding balances on any mortgages assumed by A or (2) a purchase of the assets from the Subchapter S corporations for cash plus the assumption of mortgage indebtedness.
It is my understanding that this transaction will be exempt from reporting under 15 U.S.C. § 18a(c)(1) since it is an acquisition of realty in the ordinary course of business 3 . This exemption applies to REITs even though the property they are purchasing is income producing. Moreover, given the complexity of obtaining REIT approval, the FTC staff has applied the exemption to entities in the process of becoming a REIT so long as that entity is already conducting its business affairs consistent with those activities typically undertaken by the REIT. 4
Furthermore, you confirmed that the exemption applies even if the transfer is accomplished through the merger of the corporations owning the hotels into the Maryland business trust prior to the actual conversion of the trust into a REIT. Under 16 C.F.R. § 802.1, and acquisition of the voting securities of an entity whose assets consist or will consist solely of real property and assets incidental to the ownership of real property is considered an acquisition of realty. It is my understanding that the FTC staff would considered [sic] the merger of the corporations owning the hotels as being tantamount to the purchase of securities of an entity whose assets consist solely of real property, and , therefore, exempt the transaction from reporting under 16 C.F.R. § 802.1 so long as the purchaser is a REIT.
Please let me know immediately if I have in any way misunderstood the FTC’s position on this issue.
Sincerely,
(redacted)
STAFF COMMENTS:This transaction is exempt. Informed (redacted) 5-3-94. PS
See letter to Dick Smith April 8, 1993, that confirms the PMN Office position on REITS.
RS - concurs
Prior to the consummation of this transaction and as a condition precedent to closing willbe the following: (1) an IRS tax opinion will have been obtained indicating that A is operating in amanner which is in compliance with taxation as a REIT; (2) the articles of incorporation for A willbe deemed to comply with the requirements for a REIT; and (3) the Form S11 prospectus willhave been filed with the SEC indicating that A will comply with all REIT requirements and willelect to be taxed as a REIT. It is not clear whether the timing of the acquisition is such that theshareholder dilution requirements of a REIT will have been satisfied or whether this threshold willbe met soon thereafter; we understand, however, that this requirement need not be met prior tothe consummation of this acquisition in order for the transaction to be exempted from thereporting requirements of the H-S-R Act.
The receipt of the REIT shares by the four shareholders of B, C, and D will be below thereporting thresholds of the H-S-R Act, and, therefore, will not trigger a separate reportingrequirement.
In addition, based upon the allocation of the consideration among B, C, and D and thefinancial statements of B, C, and D, it is possible that one or more of these transfers would beexempt from reporting under the H-S-R Act under 16 C.F.R. § 802.20 or the size of the partiestest prescribed in 15 U.S.C. § 18a. For purposes of this letter alone, however, we will assumethat the size of the parties and minimum dollar value exemptions do not apply.
If for some reason the REIT does not receive the requisite approvals, then there may bea reporting requirement for the purchase of the income producing property by the non-REIT entity.