Question
November 11, 2003
Mr. Michael Verne
Federal Trade Commission
Premerger Notification Office
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re:Non-Reportability Of Certain Transactions
Dear Mr. Verne:The purpose of thisletter is to confirm our telephone conversation of several weeks ago in which youindicated that the two transactions described below relating to the direct andindirect transfer of limited partnership interests would not be reportableunder the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (as amended, the"Act") and the applicable regulations (the "Regulations).Because the transactions are complicated, I thought it best to give you theopportunity to review in writing the two transactions we discussed. This letterincludes more detail than we discussed by telephone, because I now have moreinformation.
For purposes of yourreview of this letter, please assume that the size-of-the-parties test is met.
Background
Four corporations (the"Sellers"), each of which is a wholly owned subsidiary of itsultimate parent entity, own collectively (with no corporation owning 50% ormore) 100% of the limited partnership interests in Limited Partnership No. 1("LP 1 ") and 100% of the membership interests in a limited liabilitycompany ("LLC") that is the sole general partner of LP 1. Each of thefour ultimate parent entities are unaffiliated, publicly traded corporations.
Except as provided below,the only asset of LLC is its sole general partner interest in LP 1. LP 1 has nobusiness activity other than serving as the sole general partner of a publiclytraded Master Limited Partnership ("MLP"). Except as provided below,the only assets of LP 1 are: (i) 100% of the stock of Corporation C, (ii) anapproximate 1% interest (as sole general partner) in MLP, (iii) an approximate1% interest (as a limited partner) in MLP and (iv) an approximate 1 % interest(as the sole general partner) in the operating limited partnership of MLP("OLP). Except as provided below, the only assets of Corporation Care:(i) an approximate 24.5% interest (as a limited partner) in MLP and (ii) anapproximately $11.5 million promissory note from- LP 1 payable to Corporation C(the "Note"). Although cash in LLC, LP 1 and
Corporation C isperiodically distributed to their respective owners, ultimately the Sellers, atvarying times each entity may have cash or receivables from an entity in whichit owns an interest.
MLP is engaged in theretail and wholesale propane distribution business and is its own ultimateparent entity. MLP's business is operated by OLP. As noted above, LP 1 ownsdirectly an approximate 1% interest as sole general partner of OLP and anapproximate 26.5% interest in MLP: (i) directly an approximate 1% interest asthe sole general partner, (ii) directly an approximate 1% interest as a limitedpartner and (iii) indirectly a 24.5% interest as a limited partner through itsownership of Corporation C. The remaining approximate 73.5% of the interests inMLP are owned by public investors as limited partners. MLP owns all of theremaining interest in OLP (an approximate 99% limited partner interest).
Transactions
The Sellers wish to sellvirtually all their interests in MLP. As a preliminary step, Sellers, the currentowners of LP 1 and LLC, will form New LLC and then Sellers and New LLC willform New LP. New LLC and New LP will be owned by Sellers in the same identicalproportions as their ownership of LLC and LP 1. Sellers will then contribute toNew LP 100% of the interests in LP 1 as limited partners and 100% of themembership interests in LLC (which holds the sole general partner interest inLP 1), thereby making LP 1 a wholly owned subsidiary of New LP. LP 1 will thendistribute its approximate 1% interest in MLP as a limited partner and thestock of Corporation C to New LP, with New LP assuming the Note and LP 1 beingreleased from its obligations under the Note. At this point, the remainingassets of LP 1 will be the approximate 1% interest in MLP as the sole generalpartner and the approximate 1% interest in OLP as the sole general partner, andperhaps cash or a receivable from MLP or OLP.
To accomplish the resultof selling virtually all their interests in MLP, the Sellers propose to engagein two transactions with two different buyers. In one transaction, New LP willsell 100% of the limited partnership interests in LP 1 (which holds the solegeneral partner interest in MLP and the sole general partner interest in OLP)and 100% of their membership interests in LLC (which holds the sole generalpartner interest in LP 1) to an unrelated buyer ("Buyer") forapproximately $30 million. Buyer is not engaged in the propane distributionbusiness. In the second transaction, Corporation C will distribute the Note toNew LP as a dividend (effectively canceling the Note), and New LP will sell100% of the stock of Corporation C to MLP for approximately $100 million. As aconsequence, MLP will have acquired an approximate 24.5% limited partnershipinterest in itself.
Concurrently with theclosing of these transactions, Buyer will contribute to MLP Buyer's ownershipinterests in certain partnerships and limited liability companies holdingvarious midstream energy assets (gas gathering lines, gas transportation linesand gas processing plant assets) in exchange for consideration in excess of $50million, consisting of limited partnership interests in MLP, cash and paymentof Buyer's existing debt. Because the value exceeds $50 million, MLP and Buyerwill be reporting the transaction under the Act. At the close of thisconcurrent transaction, Buyer will own less than a 50 % interest in MLP.
Analysis
The preliminary step ofthe formation of New LLC and New LP are intro-person transactions which wouldbe exempt in the corporate context under 16 C.F.R. 802.30, and whichunder the informal position of the Premerger Notification Office are notreportable transactions.
The first transaction isthe direct acquisition of 100% of a limited partnership interests of LP 1 and100% of the membership interests in LLC (which holds the sole general partnerinterest in LP 1) for $30 million, which is the direct acquisition of 100% ofLP 1 and in turn is the indirect acquisition of the sole general partnerinterest in MLP and the sole general partner interest in OLP. Althoughacquisition of 100% of a partnership or a limited liability company ispotentially a reportable transaction, and is deemed to be the acquisition ofall of the assets of the partnership or the limited liability company, thistransaction is not reportable because the value of this transaction does notmeet the $50 million filing threshold. However, had the threshold been met, the"look through" rationale discussed below would apply to make thetransaction not reportable.
The second transaction isthe acquisition of all the stock of Corporation C. As a general rule, theacquisition of 100% of the stock of a corporation for $100 million would be areportable event. 1n this instance, however, all that MLP is actually acquiringis an approximate 24.5% limited partnership interest in a publicly-tradedlimited partnership (itself). The direct acquisition of less than 100% of apartnership is not a reportable event under the Act and the Regulations,regardless of the dollar value of the transaction. In this case, theacquisition of less than 100% of a partnership occurs indirectly, and althoughthe "look through" provisions of 16 C.F.R. 802.4 do notspecifically apply, you indicated that the Premerger Notification Office wouldapply the rationale of the "look through" provisions here for MLP'sacquisition of less than 50% of the partnership interests. Therefore, thedirect acquisition by MLP of 100% of Corporation C, which is the indirectacquisition of an approximate 24.5% limited partnership interest in MLP, wouldnot be reportable. The reasoning is that a non-reportable acquisition of lessthan 100% of a partnership does not become a reportable transaction justbecause the acquisition occurred in the form of the acquisition of 100% of thestock of a corporation, here Corporation C, as long as control of thepartnership (for purposes of the Act and the Regulations) does not change. Inaddition, although the repurchase of equity provisions of C.F.R. 802.30do not specifically apply, if control does not change (for purposes of the Actand the Regulations), the repurchase of equity by a partnership should betreated the same as the repurchase of equity by a corporation, and thereforenot reportable.
The concurrent transactionis reportable because it is an acquisition by MLP of assets of Buyer for morethan $50 million.
After you have had an opportunity to review this letter,please confirm that my analysis of the transactions is correct. My directtelephone number is (redacted).
Thank youas always for your valuable assistance.