Question
March 23, 2004
HAND DELIVERY
Mr. Michael Verne
Compliance Specialist
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
Washington, DC 20580
Re: HSR Exemptions forUnproductive Real Property & Sublease of Land Owned
by State Agency
Dear Mr. Verne:
This is to confirm our telephoneconversation with you on March 8 and 23, 2004, in which you agreed thatunproductive property and the sublease of land owned by a State agency areexempt from the Hart-Scott-Rodino reporting requirements.
FACTS
Company Aintends to lease three parcels of land to Company B.
Tract 1is presently lying fallow: there are no mining or any other commercialactivities presently being performed on it nor have there been during the pastthree years. Thus, no revenue has been or is being derived from Tract 1. Tract1 is not adjacent to or used in conjunction with either Tract 2 or Tract 3.
Company Aowns Tract 2 and a portion of Tract 3 which are adjacent to each other. CompanyA conducts mining operations on Tract 2; however, it does not conduct anyoperations on the portion of Tract 3 which it owns and which is adjacent toTract 3. Company A leases a portion of Tract 3 from a trust fund owned andcontrolled by a State agency, who leases it to the trust fund. Company A alsoowns an asphalt plant facility on a portion of Tract 2 which will be retainedand will not be leased to Company B.
Company A intends to grant to Company B an exclusive leaseor sublease to extract natural resources from all three Tracts for a period oftwenty-five years or until the minerals are excavated, which ever comes first.The lease can be extended for a total of ten additional years. The partiesintend that all of the mineral reserves located on the Tracts will be minedduring the initial lease or during the extended lease period. Company A willalso sell to Company B existing inventories located at Tracts 2 and 3 andCompany A will perform extracting and other production services for a one yearperiod as a subcontractor of Company B.
Even though the proposed lease is an exclusive, life-of-themine lease, Company A, who retains legal title, at any time can sell Tract 1 orTract 2 at anytime during the term of the lease, subject to Company B's rightof first refusal. Company B has the right to purchase Tract 1 and Tract 2 for astated purchase price at the end of the mine's useful life and any reclamationwork to be performed by Company B.
Company B will guarantee Company A a minimum dollar amountfor the lease of all three Tracts; however the actual payment may exceed theminimum dollar amount depending on the quantity of minerals extracted and theirmarket price.
ANALYSISAND CONCLUSIONS
Since there are three separate Tracts it is possible thatan exemption from HSR reporting requirements may attach to any one Tract andtherefore, each Tract may be analyzed separately to determine if an HSR exemption applies toa Tract of a portion thereof.
TRACT 1. Section 802.2(c) of the HSR rules and regulationsexcludes from the HSR reporting requirements "Unproductive realproperty", which is defined, in part, to include real property, includingnatural resources, that have not generated total revenues in excess of $5 millionduring the thirty-six month period preceding its acquisition. Unproductive realproperty does not include any real property that is either "adjacentto" or "used in conjunction" with real property that is notunproductive real property and is included in an acquisition. 16 C.F.R.802.2(c)(2)(iii). Example 3 to section 802.2 notes that an acquisition ofa tract of raw land with copper and timber reserves that generated minimalrevenues is exempt from HSR reporting requirements because of the limited revenuesgenerated and because the "reserves are by definition unproductive realproperty and, thus, are not separately subject to the notificationrequirements."
Assuming arguendo that the proposed lease constitutes anasset acquisition under HSR, the proposed lease of Tract 1 from Company A meets therequirements of section 802.2(c) because it has not generated revenues inexcess of $5 million during the past thirty-six months prior to the proposedlease and is not adjacent to or used in conjunction with any other assets.Based on this exemption, the value of Tract 1 would not be aggregated with anyother assets acquired by Company B pursuant to section 801.15(a) of the HSR rules.
Tract 2. As noted above, Company A conducts miningoperations on Tract 2 and thus, if the lease to this realty constitutes anacquisition, it would not be exempt under section 802.2 of the HSR rules since it is anon-going operation and would not meet the requirements of this section or anyother exemption section of the HSR rules. Thus, the acquisition price or fair market value ofTract 2 would need to be aggregated with any other non-exempt assets to determinewhether the price or fair market value of the assets to be conveyed exceeds $50million in value.
Tract 3. Tract 3 is owned in part by Company A and in partby a State, which leases it to Company A. The portion which Company A owns liesfallow and no operations are being conducting on this portion; however, thisportion of Tract 3 is adjacent to Tract 2 which is owned and being mined byCompany A. Therefore, this portion of Tract 3 is not exempt under the HSR rules and its valuemust be aggregated with the value of Tract 2 in determining the total value ofthe proposed transaction.
In regard to the portion of Tract 3 which is owned by theState and leased to Company A, the lease of this portion is not subject to HSR reportingrequirements because the land is owned by an agency of the State which leasesit to a trust fund also owned and controlled by the same agency. An acquisitionfrom a State or an agency thereof, other than a corporation engaged incommerce, is exempt from the HSR reporting requirements pursuant to section 7(c)(4) of the HSR Act and section801.1(a)(2) of the HSR rules. Entering into a sublease is not regarded as anasset acquisition and is considered to be the creation of an asset (the"leasehold interest") similar to entering into the original lease. PNPM,opinion 104 (2003 edition). Because the parties are entering into a sublease,there is no asset acquisition and therefore, no value from the sublease need beaggregated with non-exempt assets.
Based on the above, it may be fairly stated that Tract 2,which Company A owns and conducts mining operations thereon, and the portion ofTract 3 which it owns and is adjacent to Tract 2, along with any existinginventory must be aggregated to determine the value of the proposedtransaction.
The HSR Act, 15 U.S.C. 18a provides that an HSR filing only need bemade for transactions which exceed $50 million in value. The value of assetsfor HSRpurposes is the stated purchase price or the fair market value, whichever isthe greater. 16 C.F.R. 801.10(b). Whether there is a statedpurchase price depends on whether the acquiring party has a reasonable basisfor determining the contingent portion of the acquisition price. PNPM, opinion101 (2003 edition). If the board of directors of Company B (or its delegate)concludes that it cannot fairly estimate the value of the contingency than theacquisition price is not determinable and the fair market value, made in goodfaith, must be relied upon to determine if the value of the proposedtransaction exceeds $50 million. If the fair market value does not exceed $50million, an HSRpremerger notification cannot be made since the transaction is exempt due tofailure to meet the size-of-transaction test under the HSR Act.