Question
(redacted)
March 2, 1999
Richard B. Smith, Esq.
Premerger Notification Office
Federal Trade Commission
601 Pennsylvania Avenue, NW
Washington, D.C. 20004
Dear Mr. Smith:
This will confirm our telephone conversation of February 22, 1999, during which you advised me that no Hart-Scott-Rodino Pre-Merger Notification is required under the circumstances described below:
A U.S. partnership ('U.S. PS"), which is its own ultimate parent entity, owns approximately $6 million /6% of X Corp. An off-shore corporation ("OS Co."), which is its own ultimate parent entity owns $5 million/5% of the same issuer. US PS and OS Co. are separate entities except that OS Co.'s investment manager, this individual receives a fee based on the performance of OS Co.'s porrifolia, but holds no beneficial interest in the shares of X Corp. other than his role as investment manager.
US PS and OS Co. are making coordinated purchases of X Corp. Each entity will acquire up to $15 million os X Corp. (which, separately, will not exceed 49% of X Corp.) on the assumption that the holdings of US PS and OS Co. need not be aggregated. If aggregated, the size of persons test and size-of-transaction test would be met.
Eventually, it may be decided that 100% ownership of the shares of X Corp. will be attempted. This transaction would be accomplished by forming a partnership acquisition vehicle of which 49% of the partnership interest would be held by US PS. 49% would be held by OS Co. and 2% would be held by an unrelated general partner.
The reason the new partnership vehicle would be employed would be to allow outside investors to participate in the acquisition. Neither US PS's no OS Co's structure allows for such outside participation. The newly formed partnership structure has been used by US PS and OS Co. in the past in connection with other acquisitions to allow outside investor participation. The newly formed partnership would not meet the size-of-person test under Rule 801.11(e).
The issues we discussed are:
1. Is the assumption that the acquisitions by US PS and OS Co. are separate for HSR purposes correct given that neither is controlled by and other entity or person, and neither entity is included within the other, even though a non-controlling partner with US PS is investment manager for OS Co.?
2. Would the FTC staff view the formation of the partnership acquisition vehicle to be a transaction in avoidance under 801.90 given that there are legitimate business justifications for the structure and that the entities have utilized this structure in the past?
Based on our discussion, it is my understanding that regarding the first issue, US PS and OS Co. should be considered separate entities with the result that both entities may acquire up to $15 million of X Corp. before a filing would be required under HSR.
As to the second issue, it is my understanding that the utilization of the partnership acquisition vehicle under the circumstances described above would not be viewed as a transaction in avoidance based on the presence of legitimate business justifications for the structure.
Please let me know if this letter does not satisfactorily set forth the substance of our discussion. Thank you for your attendance to the above.
Very truly yours,
(redacted)