Question
(redacted)
March 24, 1999
VIA FACSIMILE (202-326-2624) AND VIA FEDERAL EXPRESS
Richard B. Smith, Esquire
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
6th and Pennsylvania Avenue, N.W.
Washington, DC 20580
Re: Joint Operating Arrangement
Dear Dick:
This letter is to confirm our telephone conversation of march 23, 1999, in which you and I discussed whether the filing of a Notification and Report Form under the Hart-Scott Rodino Antitrust Improvements Act of 1976 ("HSR") is required in connection with a joint operating arrangement between two non-profit corporations with respect to hospitals owned by each. The relevant facts, as we discussed in our telephone conversation, are set forth below.
A is a non-profit, non-stock, non-member corporation that owns and operates a single hospital. B is a non-profit, non-stock, member corporation that owns and operates a single hospital. A and B propose to organize a non-profit (pursuant to Section 501(c)(3) of the Internal Revenue Code), non-stock, non-member corporation ("NEWCO"). Pursuant to an Integration Agreement, NEWCO would operate A and B as a unified healthcare delivery system (the "System") within a defined service area. Pursuant to a separate Management Agreement, the parent of B would act as manager f the System.
No assets will be contributed to NEWCO, other than cash necessary for start-up expenses (which is estimated to be less than $!,000,000 in the aggregate). The ownership of A and B would not change as a result of the transaction. Each of A and B would retain ownership of their respective assets, and each would maintain its separate name and identity.
The NEWCO board of directors would serve as the primary governing body for the System. The board would consists of thirteen voting members, with six appointed by A and three appointed by B. The remaining four board members would be elected by the nine A and B appointees. NEWCO's board would be elected by the nine A and B appointees. Newco's board would meet on a regular basis and exeracise ongoing authority oaver the activities and operations of the System, subject to the day-to-day managerial authority delegated to B's parent under the Management Agreement. Among the powers of the NEWCO board would be the following:
approve capital and operating budgets for the System; To approve strategic partnership and affiliations; and To recommend fundamental changes in A or B (e.g., amendment of charter documents, sale of substantially all assets, dissolution, merger, liquidation or consolidation).
The existing boards of A and B would remain in place and would exercise authority over specific matters related to their respective organizations and assets that are not delegated in either NEWCO or B's parent, including the right to approve any fundamental changes recommended by the NEWCO board.
A "Contribution Percentage" would be calculated for each of A and B based on the relative historical earnings of the hospital owned by each. It is expected that the contribution Percentages will be approximately 65% for A and 35% for B. A and B will fund the annual capital needs of NEWCO and the system in accordance with the Contribution Percentages. In addition, the annual earnings of NEWCO and the System will be shared by A and B in accordance with their contribution Percentages.
Th parties would agree to refrain from any affirmative action to terminate the Integration Agreement or dissolve the System during the first three years after implementation provided that A or B may terminate the Agreement unilaterally during the first 18 months if, among other reasons, continue participation in the System is not in the best interests of the terminating party. Following such three-year period, the occurrence of certain events will be deemed to constitute constructive withdrawal by A or B from the system, following which the non-withdrawing party y (i) purchase the withdrawing party based on fair market value; (ii) require the withdrawing party to purchase the non-withdrawing party based on fair market value or (iii) cause the System to be dissolved, In the event of dissolution, the parties would be restored to their pre-affiliation positions, to the extent reasonably possible.
It is my understanding, based on our telephone conversation, that the formation of NEWCO and the implementation of the joint operating arrangement described above are not reportable events under the HSR Act.
After you have reviewed this letter, please confirm by telephone that my understanding is correct. Your assistance in this matter is greatly appreciated.
Very truly yours,
(redacted)
cc:(redacted)