Question
John M. Sipple, Esq.,
Premerger Notification Office,
Bureau of Competition
Federal Trade Commission
Washington, D.C. 20580
USA.
Re: (redacted)
Dear Mr. Sipple:
We represent two foreign banking and finance companies (redacted) and (redacted), both incorporated in (redacted), in connection with aspects of (redacted) intention to increase its own ownership in (redacted) from approximately 49.17 percent to approximately 51.09 percent of (redacted) voting securities. The transaction is to be completed on or about December 16, 1996. We write in regard to our conclusion that the transaction is not subject to notification pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR” or the “Act”).
(redacted are affiliated companies operating primarily in (redacted) and elsewhere in (redacted) and elsewhere in Europe. The transaction has no competitive significance for the United States, as neither (redacted) is a significant participant in any relevant market in the U.S.
We believe that no HSR notification is required in relation to the transaction because it appears that Rule §802.51(d), the foreign person exemption, applies. (redacted) are both “foreign person” and “foreign issuers” under the Act. The aggregate annual sales of the acquiring and acquired persons in or into the United States are less than $110 million, and the aggregate total assets of the acquiring and acquiring person located in the U.S. are less than $110 million. 1
Because the proper method of calculating the sales of foreign financial institutions like (redacted) is not set forth by the Act, rules, or Statement of Basis and Purpose (“S.B.P.”) with ideal clarity, we wish to confirm our analysis of this issue with you. (redacted) U.S. operations generated $3 million in income in 1995. (redacted) U.S. operations 2 had $111.1 in income in 1995. Of this, $38.5 million was derived from income from securities. $38.1 million of the $111.1 million total was generated from outside the U.S. thus, if either investment income or income from outside the U.S. are not included as the relevant “sales . . . in or into the United States” for the purposes of 801.51(d), the transaction is exempt from HSR obligations.
Loan and Deposit Income are Sales
(redacted) U.S. operations are in banking. While banking operations encompass a variety of revenue-generating activities, such as the investment of assets for profit, only the businesses of lending and taking deposits appear to generate “net sales” for the purposes of the Act, and thus we wish to confirm that only income fro lending and deposits should be included as the sales of (redacted).
The S.B.P. defines “net sales” as “sales less (or exclusive of) returns, discounts, excise taxes and the like” and goes on to discuss the situation of persons that do not have sales. S.B.P., Background Information §801.10(c)(3), reprinted in Axinn, Fogg et al., Acquisition Under the Hart-Scott-Rodino Antitrust Improvements Acts at B-45 (hereinafter “Axinn”). Nowhere in the Act, Rules or S.B.P. are “sales” defined. 3 Black’s Law Dictionary defines a “sale” as follows:
A contract between two parties, called, respectively, the ‘seller’ (or vendor) the ‘buyer’ (or purchase), by the which the former, in consideration of the payment or promise of payment of a certain price in money, transfers to the latter the title and the possession of property.
Id. (citations omitted). A loan meets this description – the lender transfers title and possession to property (i.e, money) to the borrower in exchange for the promise of future repayment of a certain amount of money. A deposit similarly fits within the definition, with the depositor transferring title and possession of money in exchange for the bank’s promise to repay the money (with or without interest) [not sure I agree] in the future. Other bank activity – for example, deriving income from securities or similar investments – are not “sales” by any natural understanding of the word. It follows from this that, for HSR purposes, (redacted) should consider income from deposits and loans to be its “sales, but not income from securities and other investments.
This interpretation fits the language of the Act, but more importantly its purpose – lending and deposits are among the core functions by which the competitive activity of banks and similar financial institutions is typically measured. See, e.g., Irving Bank Corp. v. Board of Governors, 845 F.2d 1035, 1041 (D.C. Cir. 1988).
In the context of foreign banks, this interpretation also avoids the potentially absurd result that would follow from other possible interpretations of net sales, such as gross income. Gross income includes investment income as well as interest from governmental securities and the like. However, the assets providing the source of this income are specifically exempted from the HSR asset calculation for foreign firms in recognition of their competitive irrelevance in 802.51(d). See S.B.P., Sections 802.50 and 802.51: Acquisitions of and by Foreign Persons, reprinted in Axinn to B-76 (“the purpose of disparaging theses assets is to exclude assets that do not reflect a substantial business presence in the United States and generally have little competitive significance”) (citation omitted). Thus, any net sales calculation for foreign banking persons that includes investment income takes a linguistically tortured route to reach a result rejected by the Rules.
Income from Non-US Investments are not US Sales
Only sales “in or into” the United States are included in the 802.51(d) calculation. $31.4 million of the income of the New York bank of a (redacted) issuer within (redacted) is derived from investments overseas. As explained under 802.51(d). However, even if investment income is included as ‘sales” for foreign financial institutions under 802.51(d) as a general matter, the Act simply cannot be read to the include investment income from overseas investment as “sales in or into the U.S.”
The crux of any inquiry of whether a sale is “in or into the U.S.” bust be its potential for impact on competition within the U.S. Investments abroad, and income derived therefrom, do no have such effect. See S.B.P. Sections 802.50 and 802.51, supra.
It would be appreciated if you might confirm your agreement with our conclusions as soon as possible in order to prevent the unnecessary burden and expense involved in an HSR notification by our clients in respect to a transaction that has no meaningful U.S. connection.
Please do not hesitate to call me in our (redacted) office at (redacted). My fax number is (redacted). In my absence, please speak to my colleagues (redacted).
We are grateful for your assistance.
Sincerely,
(redacted)
VIA FACSIMILE AND EXPRESS MAIL
The aggregate value of (redacted) U.S. assets for HSR purposes in 1995 was $57million. The aggregate value of (redacted) U.S. assets for HSR purposes in 1995 wasapproximately $11.5 million.
(redacted) controls a (redacted) bank and a (redacted) bank that maintains a branch inNew York.
Although 802.51(d) refers to “aggregate” sales rather than “net” sales, the S.B.P. makeclear that this variation was not intended to have any substantive effect. See S.B.P.,Background Information to §802.51, reprinted in Axinn, infra, at B-78 (“The $110million threshold was adopted to approximate the criteria of section 7A(a)(2) whichprovide various combinations of total assets or annal net sales requirrequirements, eachtotaling $110 million.”)