Question
From: (redacted)
Sent: Wednesday, March 17, 2004 12:41 PM
To: Verne,B. Michael
Subject: HSR Issue ConcerningFormation of New Foreign Entity
>Dear Mike:
>I am writing to confirm our recent discussions regarding the formation of a newforeign entity. This is a different transaction from the one we discussed lastweek (which involved acquisition of an existing entity), but I believe the keyissue is the same (a foreign entity being treated as a partnership for HSR purposes).
>As we have discussed, two existing foreign persons (the "Parents")will be forming a new joint venture. I mentioned the Parents having labelledthe new entity a "corporation" -- more precisely, at present a"Memorandum of Understanding" (MOU) actually refers toformation of a joint venture "vehicle", a country of"incorporation" and "shareholders". However, the MOU alsoprovides that "[t]he precise form of the Transaction will be determined oncompletion of due diligence," and that "[c]ompletion of theTransaction is subject to definitive binding documentation". My understandingis that the parties are also considering forming the "vehicle" as apartnership.
>Most importantly, I believe our discussions concluded that even if technicallydenominated a "corporation" under foreign law, for HSR purposes the entitywould be treated as a partnership for either or both of two reasons: (i) itsownership interests will not carry an inherent right to elect directors, thisinstead being reflected in a contractual right of appointment agreed among theParents, and (ii) the Parents' current intention is for the JV to be"member managed" -- the Parents will be appointing solely"insiders" (persons who are current officers, directors, or employeesof the Parents) to the board (or board equivalent) of the new entity.
>Because this would thus qualify as a "partnership formation" for HSR purposes, theParents' contributions to the partnership as part of that formation would notconstitute reportable acquisitions, even if such contributions involve assetsor issuers that might otherwise meet the HSR "size of transaction" test, and fall outside theexemptions in 16 C.F.R. 802.50 and 802.51. Moreover (and althoughwe have not discussed this recently), I believe from past discussions that thetransaction would remain nonreportable even if the partnership were created ashort time prior to the Parents completing their contributions, so long as the partnershipformation and contributions were contemplated by the Parents to be part of asingle overall transaction.
Ishould add my recognition that the transaction might be reportable once theproposed changes on non-corporate interests are implemented. However, againconsistent with our other discussions last week, I understand that if thetransaction is consummated even one day prior to implementation of the ProposedChanges, it will be judged under the current rules, and not subject to anysecond guessing under the Proposed Changes.
>Please advise if you disagree with any of the foregoing, and thanks again foryour help.