Question
(redacted)
1 October 1996
Via Hand Delivery
Richard B. Smith, Esquire
Senior Staff Attorney
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
Room 323
6th Street and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re:Valuing a Partnerships Assets Pursuant to Rule 801.10(b)
Dear Dick:
On behalf of my client (redacted), I am writing to confirm my traditional understanding, as well as the advice you graciously provided in our recent discussion, that for purposes of applying 15 U.S.C. 18A(a)(3) and 16 CFR 801.1(h)(1), 801.10(b) and 802.20(a) to a transaction whereby a person buys out its remaining partner in a joint venture partnership, the size of the transaction is always the current gross fair market value of the partnerships assets regardless of the acquisition price for the partnership interest or any value which could be imputed therefrom.
I.SUMMARY OF THE RELEVANT FACTS
The Parties: (Redacted) the ultimate parent entity of the acquiring person and has annual net sales and total assets each exceeding $100 million. (Redacted) is an ultimate parent entity of the acquired entity, which is engaged in manufacturing cable assemblies and subsystem harnesses. The acquired person has annual net sales exceeding $10 million, although its most recent balance sheet states that its total assets have a book value below $10 million.
Formation of the Joint Venture Partnership: In July 1994, (redacted) wholly-owned subsidiary (redacted) acquired fifty percent of (redacted) assets for approximately $7 million plus the assumption of certain liabilities. This transaction was exempted by Rule 802.20(a) because neither the purchase price nor the fair market value exceeded $15 million, and there were no other assets or voting securities the value of which needed to be aggregated. (Redacted) then immediately contributed these assets to a newly formed partnership (redacted) in exchange for a fifty percent partnership interest. (Redacted) then contributed the remainder of its assets and liabilities to (redacted) in exchange for the remaining fifty percent interest in (redacted) Partners profits and its assets in the event of dissolution. The formation of (redacted) was also not reportable. See, 52 Fed. Reg. 20061 (May 29, 1987). In connection with the formation of the Partnership, (redacted) entered into one or more option agreements whereby AMP could buy (or be forced to buy) GCAs interest in (redacted) for a purchase price which was established at that time, and based upon the then expected growth of (redacted) Partners.
The Proposed Partnership Buyout: (Redacted) now desires to exercise its call option and has notified (redacted) of its intent to do so. Accordingly, (redacted) plans to indirectly acquire (redacted) fifty percent partnership interest for approximately $9.8 million plus the assumption of certain liabilities. This purchase price is consistent with the terms of the 1994 option agreements, but does not reflect the current fair market value of the fifty percent partnership interest or fifty percent of the partnerships assets, because (redacted) has not performed anywhere near as well as expected when the option agreements were executed in 1994. Indeed, (redacted) has just completed an analysis which determined that the gross fair market value of the partnerships assets is between $5,391,000 and $9,231,000. Finally, the aggregation rules would not require (redacted) to aggregate the value of any other assets or voting securities in determining whether it will cross the $15 million notification threshold.
II.SUMMARY OF THE RELEVANT LEGAL PRINCIPLES
Rule 801.10(b) states that [t]he value of assets to be acquired shall be the fair market value of the assets, or, if determined and greater than the fair market value, the acquisition price. The acquisition of a 100 percent interest in a partnership is for H-S-R purposes deemed to be an acquisition of 100 percent of that partnerships assets. See 52 Fed, Reg, 20061 (May 19, 1987). Although Interpretation 132 states that the FTC staff has not formed a definitive position, I understand based on our recent and prior conversations, as well as a number of letters I have seen in my H-S-R FOIA files over the years, that such a transaction is necessarily valued at the gross fair market value of the partnerships assets, regardless of any value which could be imputed from the acquisition price(s) for the partnership interest(s). In other words the acquisition price is for the partnership interests, not for the partnerships assets; but the latter is all that is deemed to be acquired and held for H-S-R purposes. Thus, in a partnership buyout the acquisition price of the assets is necessarily undetermined (notwithstanding any value which could be imputed or extrapolated from the price of the partnership interests) and the fair market value of the assets is therefore controlling even where the fair market value is less than the purchase price for the partnership interests.
III. APPLICATION OF THE RELEVANT LEGAL PRINCIPLES TO THE PROPOSED TRANSACTION
Here (redacted) originally paid approximately $7 million for fifty percent of the assets or the initial fifty percent partnership interest, and now plans to pay about an additional $9.8 million for the remaining partnership interests. (Redacted) also has assumed certain liabilities in connection with each of these transactions. Nevertheless, for H-S-R purposes the purchase price of the assets is deemed undetermined and thus the only relevant value of the assets is their current gross fair market value, notwithstanding the higher acquisition price for the partnership interests. Moreover, the disparity in the values is largely explained (and the logic of this valuation rule is further supported) by the fact that the initial $7 million payment and the formula which is the basis for the proposed $9.8 million payment were based on the value over two years ago when (redacted) had significantly higher expectations for the business. However, given the businesss unfortunate performance, these payments substantially overstate the current fair market value of the partnership interests and the partnerships assets.
IV.CONCLUSION
In short, when a person acquires 100 percent of a partnerships interests, the size-of-transaction test is determined solely by the current gross fair market value of the partnerships assets, regardless of the aggregate purchase price paid for all the partnership interests or any value which could be imputed from the current acquisition of the remaining interests. Accordingly, (redacted) proposed acquisition of the remaining fifty percent interest in (redacted) will be exempted by the Minimum Dollar Value Rule so long as the current gross fair market value of (redacted) assets does not exceed $15 million.
I appreciate your good counsel on this issue, and would be grateful if you could call me at your convenience to confirm whether we have accurately stated the current positions of the Premerger Notification Office.
With highest regards, I am
Very sincerely,
(redacted)
cc: (redacted)