Question
Richard B. Smith
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
6th & Pennsylvania Avenue, NW, Room 303
Washington, D.C. 20580
Dear Dick:
I have a question concerning the reportability of a transaction intended to achieve a relatively simple result but which nevertheless presents some interesting questions. The transaction involves a three-member, owner-managed LLC which intends to redeem the interests of its largest member and then sell its assets to a third party.
Our client, ABC LLC (the “LLC”), has three members. Member A, a corporation, owns 55 percent of the LLC. Member B, an S corporation, owns 25 percent of the LLC; 70 percent of the shares of Member B are owned by an individual (“I-1"), and the remaining 30 percent of the shares are owned by another individual (“1-2"), who is unrelated to I-1. Member C, a newly-created1 LLC (the “I-1/2 LLC”), owns 20 percent of ABC LLC; the ownership of Member C is identical to the ownership of Member B. The LLC holds assets valued at approximately $18 million.
We have been asked for advice concerning the reportability of the proposed transaction. We believe that the redemption is not reportable, but that the sale of the LLC’s assets to a third part is reportable. However, in view of the changing landscape with respect to the treatment of LLC-related transactions, we thought we would ask you to confirm our analysis.
Our reasoning is as follows. The Premerger Notification Office traditionally has treated owner-managed LLC’s (like ABC) as more like partnerships that corporations. Partnership interests generally have been viewed as neither assets nor securities by the PNO, and therefore transfers of partnership interests are non-reportable even where, as here, a change in control results. However, the PNO has taken a different position where the transfer results in 100 percent of the interests of a partnership being held by a single entity; such transactions have been viewed as the acquisition of the underlying assets previously held by the partnership.
Here, after the redemption of Member A’s interests, the membership interests in the LLC will continue to be held by more than one entity: Member B (the S corporation owned by I-1 and I-2) will hold approximately 45 percent.2 As a result, the redemption should not be reportable, but Member B’s and Member Cs’s subsequent sale to a third party of the LLC’s assets will be reportable.3
I would appreciate your confirming that our analysis is correct. Thank you for your assistance.
Very truly yours,
(redacted)
Endnotes:
1. Member C was recently created to ensure that after the redemption of Member A’s interests the LLC will continue to have at least two members, as required by state statute.
2. Even if the structures of Members B and C were disregarded, the membership interests in the LLC still would be held by two unrelated entities - I-1 and I-2.
3. For purposes of presenting the questions above, we assume that the size of persons and size of transaction tests are met. However, some complicated questions (not presented above) may still cause the transaction to fall below the size tests.