Question
(redacted)
April 30, 1999
Mike Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
6th & Pennsylvania Avenue, NW, Room 303
Washington, D.C. 20580
Re:Pre-Merger Notification (Reporting and Waiting Period Requirements in Connection with Transaction Described Below)
Our File No. (Redacted)
Dear Mr. Vern:
The purpose of this letter is to confirm in writing my understanding of the conclusions we reached during our various telephone conferences on April 29, 1999, regarding (redacted) limited liability company (buyer). Pursuant to those conversations you concluded that, based on the facts and analysis set forth below, there would be no pre-merger notification requirement in connection with the below described transaction either prior to the proposed acquisition or prior to or after any distributions from Buyer to is equity holders. If the following is not consistent with our discussions it is my understanding that you will contact me (redacted)
FACTS
Buyer is in the process of acquiring $47,000,000 of assets, (including closing costs), from (redacted) illegible ("Seller") (such acquisition sometimes referred to herein as the Transaction).
Seller has in excess of $100,000,000 of assets and net sales as determined pursuant to the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976 (the "Act").
Buyer is a limited liability company organized on January 8, 1999. The ownership percentages, type of ownership interests, and capital contributions are set forth on Schedule 1 attached hereto. Attached as Schedule 2 are the provisions in the limited liability company documents (the operative Documents) setting forth the priority of distributions for profits and distributions at liquidation. The Operative Documents, in conjunction with certain loan and franchisor documents, prohibit any distributions in respect of equity ownership for at least on year [note 1] following the closing of the Transaction (the "Closing"). There has not been and will not be any distributions in respect of equity ownership made prior to or within one year of the Closing. After the one year anniversary of the Closing, distributions shall be made on a quarterly basis, provided that there is sufficient distributable cash.
Upon receipt of certain third party approvals, (redacted) will transfer (i) 10% preferred interest to (redacted) (ii) 7% to (redacted), and (iii) 5% to (redacted) None of (redacted) or (redacted) have individually $10,000,000 in assets or net sales as determined under the Act. However, (redacted) may have in excess of $10,000,000 of total assets and net sales.
LAW
Under the Act, parties to certain transactions must comply with certain reporting and waiting period requirements prior to completing a transaction involving acquisition of voting securities or assets if (i) the parties meet the size-of-the-person test, (ii) the transaction satisfies the size-of-the-transaction test, and (iii) the transaction is not covered by a specific exemption.
In general, the size-of-the-person test is satisfied if either the buyer or seller has $10,000,000 net sales or total assets and the other party has $100,000,000 net sales or total assets. Annual net sales and total assets are measured at the level of Ultimate Parent Entity (i.e., an entity that is not controlled by any other entity). Based on our telephone conversations yesterday, that the only factors relevant in determining whether a control person exists in the case of a limited liability company are whether any equity holder has a contractual right in respect of its equity ownership to receive 50% or more of the profits of the entity or has the right in the event of a dissolution to 50% or more of the assets of the entity.
ANALYSIS
Based on our discussion yesterday, and although there is not legal authority directly on point regarding the method of determining whether a person has a right to receive 50% or more of the profits or has the right in the event of a dissolution to 50% or more of the assets, the Federal Trade Commissions [note 2] (FTC) position is that such determination is made by reviewing the operative company documents to determine if there is an explicit requirement that (i) 50% or more of the profits of the entity are to be distributed to any person or (ii) any person has an explicit right in the event of a dissolution to 50% or more of the assets of the entity. In the absence of such distribution requirements, the determination is made by reviewing distributions, if any, to see if any person received [note 3] more than 50% of the profits of the entity. Such test is repeated after each distribution.
In the Transaction, if the Ultimate Parent Entity is the Buyer, regardless of whether 50% or more of any distribution are ultimately received by any equity holder, there will not be any premerger notification requirement in the future, in connection with the Buyers assets acquired in the Transaction.
Based on our conversations, we may rely on the telephone conversations and this letter in our determination as to the lack of the necessity to submit a pre-notification filing. In the Event that a determination is subsequently made that a filing was required, this letter [will (note 4) prevent] the Buyer [from being subject to] [note 5] any penalties for failure to comply with the Acts notification requirements.
CONCLUSION
Buyer does not satisfy the $10,000,000 person requirement as defined in the Act, unless the Ultimate Parent Entity is determined to be (redacted) and he satisfied the $10,000,000 person requirement. No equity holder (including [redacted]) has a right to receive 50% or more of the profits of the entity or has the right in the event of a dissolution to 50% or more of the assets of the Buyer and there has not been and will not be any distributions prior to Closing. Therefore, no equity holder of the Buyer satisfies the FTCs current test for control and the Ultimate Parent Entity will be the Buyer. The Buyer does not satisfy the Size of the person test. Therefore, there is no pre-merger notification and filing requirement for the above described transaction. Additionally, there is no subsequent filing required regardless of whether any person ultimately receives more than 50% of any regular distribution and this letter can be relied on by the Buyer.
Very truly yours,
(redacted)
cc: (redacted)
[note 6]