Question
(redacted)
March 2, 1998
VIA FACSIMILE
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Avenue, NW, Room 303
Washington, D.C. 20580
Re:
Dear Mr. Smith:
This will confirm our conversation on February 17, relative to the control provisions of the Hart-Scott-Rodino Antitrust Improvements Act (the HSR Act) and the regulations promulgated thereunder (the HSR Regulations).
We discussed the following hypothetical situation. Company A, a foreign issuer has several million dollars of sales and assets in the United States. Company A owns 30% of the issued and outstanding voting securities of Company B, another foreign issuer. Company B has no assets in or sales in or into the United States. However, Company B owns 40% of company C, another foreign issuer, which has approximately 5500 million dollars of non-manufacturing sales in or into the United States. Company A proposes to acquire the remaining voting securities of Company B which it does not certainly own.
Under the laws of the country in which Company A, Company B and Company C are organized, Company B is deemed to have de fact control of Company C by reason of the fact that the votes cast by Company B at recent meetings of Company Cs shareholders have constituted over 50% of the total votes cast by Company C shareholders present and voting at the shareholders meeting. This de facto control results from the fact that many of Company Cs shareholders have not attended and voted at Company Cs meetings of its shareholders.
We discussed the question whether the HSR Act and the HSR Regulations would require Company A to file a premerger notification filing in connection with its acquisition of the outstanding voting securities of Company B that Company A does not currently own. As we discussed, the answer to this question would turn, in part, on the answer to another question, i.e., whether Company B controls Company C.
As I understood your response, you stated that the Federal Trade Commission Premerger Notification Office interprets 16 C.F.R. 801.1(b) as establishing a bright line rule of United States law for resolution of questions of control under the HSR Act and HSR Regulations. Under this rule, control by one entity over another entity will be conferred in one of the following three ways: (1)direct ownership by one entity of 50% or more of the issued and outstanding voting securities of the other entity: (2) possession by the first entity of the contractual right to designate 50% or more of the members of the board of directors of the second entity; or (3) a combination of sufficient voting rights and contractual power to vote the shares owned by third parties to give the first entity the right to elect 50% or more of the board of directors of the other entity.
In terms of contractual rights to vote, you stated that an irrevocable proxy would be the most obvious form of such a contractual right and that such contractual rights could not be inferred from patterns of conduct or relationships existing between the parties. You emphasized that there must be a very clear-cut agreement reflecting the power to vote the shares in question. The fact that the laws of the country where the issues were organized deemed the first entity to have de facto control of the other entity was not relevant for purposes of the HSR Act and the HSR Regulations.
Thus, as Company B owned only 40% of the voting securities of Company C and did not have any contractual rights to vote the other shares of Company C, you concluded that Company B did not control Company C. As such you concluded further, for purposes of Company As acquisition of Company B, that the sales of Company C in or into the United States would not be imputed to company B in determining Company Bs total sales in or into the United States. [Note: But sales of foreign issuers is not the test] If Company B does not have the requisite sales or assets in or into the United States, the acquisition of its voting securities by Company A would not be reportable under the HSR Act. Please call me at (redacted), if I have misstated your interpretation of the HSR Act and HSR Regulations to this possible acquisition of Company B by Company a.
Sincerely yours,
(redacted)
cc: (redacted)