Question
(redacted)
March 20, 1996
Patrick Sharpe
Compliance Specialist
Federal Trade Commission
6th St. and Pennsylvania Avenue N.W.
Washington, D.C.
BY FAX
Dear Mr. Sharpe:
As I mentioned over the telephone, I have been asked by a client to give advice concerning its responsibilities under the pre-merger notification provisions of the Hart-Scott-Rodino Act in connection with a transaction that my client is contemplating.
I have reviewed the Act and its regulations, as well as Axinn, et al., and have several remaining questions as to the application of the size-of-transaction threshold regulations in the circumstances of this case. I suspect that your office has ready answers to these from its previous experience in handling similar questions.
Because the transaction is slightly complicated, I have prepared the attached description of it. The questions that I may need to answer are at the end of the description.
I appreciate any assistance you can give me in this matter.
Very truly yours,
(redacted)
[Diagram of transaction with notes]
Before Transaction:
Assume ultimate parent entities, F Corp and A Corp. have sales in excess of, respectively, $100 million and $10 million annually.
A Corp owns 100% of the stock of N Corp. N Corp. is an operating company (not a corporation newly created for purposes of the transaction). N Corps going concern value** is no more than $8 million.
[** Staff comment: What does this mean? Fair market value.]
F Corp. controls M Corp, which engages in several lines of business.
F Corp has several facilities, one of which has a fair market value of $20 million.
Summary of Transaction:
F Corp will joint venture with A Corp to establish a new operating plant, using N Corp as the vehicle for the joint venture.
For F Corps transfer of one of its subsidiary Ms lines of business to N Corp, F Corp will receive from A Corp 20% of N Corps stock. A Corp will continue to hold the remaining 80% of N Corps stock. The stock of N Corp is not publicly traded.
F Corp will lease 40% of its $20 million facility to N Corp. F Corp will purchase N Corps old facility for $3 million.
Details of the Transaction:
1. Asset Transfer for Stock. F Corp will cause M Corp to transfer one of its existing lines of business to N Corp, including goodwill, equipment and a covenant not to compete against N Corp in that line of business. For these transfers, F Corp will receive 20% of the stock of N Corp from A Corp. A Corp will also covenant not to compete against N Corp.
2. Lease of Facility for New Plant. F Corp will lease 40% of the space at its $20 million facility to N Corp, which will be converted to a new operating plant. The lease is for 30 years, [Staff comment: Is this the useful life of the plant? No.] with a (sic) two 10 year renewal options. The rental payments are at fair market value. The nominal value of the rental payments over the 30 year lease term will amount to $27 million. [ Staff comment: Is a premium being paid? No.]
3. Service Contracts. M Corp will supply support services to N Corp at the new plant, receiving compensation at the regular fair market value for such services. A Corp will supply management services to N Corp at the new operating plant, receiving compensation at fair market value for such services. [Staff comment: Not reportable.]
4. Disposition of Old Facility. N Corp will sell its old facility to F Corp for $3 million. F Corp will use the facility for unrelated lines of business. [Staff comment: Aggregate with v/s purchase.]
Questions:
In considering whether A Corp (as the ultimate parent entity of N Corp) will, as a result of an acquisition, hold more than $15 million of the assets of F Corp,
1. Will A Corp hold the leased portion of the facility from F Corp as a result of an acquisition? If so, how is the asset to be valued if the leased portion of the facility has a current fair market value of $8 million, but the lease payments over the 30 year term nominally amount to $27 million?
2 .Given that N Corp prior to the transaction has a going concern value of $8 million, and that the parties have reached an arms-length agreement that 20% of N Corps stock represents the fair value of M Corps business and covenant not to compete [Staff comment: What is the value?] that will be conveyed to N Corp, can the business of M Corp (including the covenant not to compete) acquired by A Corp in the transaction be valued at 20% of $8 million?
3. Assuming that A Corps subsidiary N Corp is paying fair market value for the support services to be rendered to it by F Corp, can the services under the contract be excluded from the valuation of what assets or stock A corp will hold as a result of the acquisition? [Staff comment: Yes, if legitimate contract.]
Given that N Corp is an existing and operating company prior to the transaction, and not created as a new entity for purposes of a joint venture,
1. Are the provisions of 16 C.F.R. 801.40 relating to joint ventures inapplicable? [Staff comment: Yes.] If the joint venture regulations are applicable, is Fs lease of its facility to N to be valued as the difference, if any, between the fair market value of the leasehold interest conveyed, and the present value of the income stream of lease payments? [Assuming that the lease is at fair market value, there is no difference].