Question
From: (redacted)
Sent: Thursday, April 08, 2004 9:28 AM
To: Verne, B. Michael
Subject: LLC Formation Under Fl 15 and Proposed Rules
Mike - it was nice to see you lastweek at the ABA. I wanted to confirm the treatment of a proposed"going private" transaction under both the current LLC rules andproposed LLC rules (as this transaction may not close until late summer orfall). If you agree with this analysis, it would be great if you could confirmwith a note back or a voice mail (I am out of the office this week -- if youthink it requires further discussion, I can call you at your convenience earlynext week). Thanks for your help on this.
Scenario. Assume TargetCorporation is public, but has 2 major shareholders, A and B (both natural persons).Assume that A holds in excess of 50% of Target's voting securities, calculatedin accordance with the rule for determining "percent of voting securitiesheld." A, B, and possibly other Target shareholders intend to form aHoldCo LLC. A will obtain a 50% + interest in HoldCo LLC, and therefore willcontrol HoldCo LLC. HoldCo LLC will form a wholly owned acquisition subsidiary,Merger Sub. Then, A, B, and possibly other Target shareholders will eachcontribute their respective holdings in Target to HoldCo LLC, and Merger Subwill effect a merger with Target.
Current Rules.
Anticipated scenario. I think thistransaction would not be reportable. This is an LLC formation with thecontribution of shares of Target by each of A and B, who will take backinterests in the LLC. Since only one business is being contributed to the LLC(Target, by virtue of A's controlling interest in Target), the LLC formation isnot reportable under Formal Interpretation 15. The back end merger of Targetinto Merger Sub would be exempt under Section (c)(3) of the Act, as anacquisition (by A, as UPE of HoldCo LLC) of voting securities of an issuer(Target) at least 50% of the voting securities of which are already controlledby A.
Alternative scenario. A'sownership of Target is complex, because he holds some shares directly, and heprobably holds some shares through revocable and irrevocable trusts, withrespect to which we are verifying control. In working through the trusts, it ispossible we could conclude that A does not control Target today, and Target isits own UPE. I believe under that alternative scenario, the transaction stillis not reportable under Formal Interpretation 15. The formation of the HoldCoLLC still does not involve a combination of two businesses. The back end mergerstill would be exempt under the (c)(3) exemption, as HoldCo LLC (whethercontrolled by A, or perhaps as its own UPE in this scenario, depending on theresolution of the control of the trust holdings and depending on whether Targetshareholders other than A and B participate in the LLC formation ) would haveits wholly owned subsidiary (Merger! Sub) merge with an entity (Target) inwhich it already holds 50% or more of the stock.
Proposed Rules.
Anticipated scenario. Under theproposed rules, I also think the proposed transaction is exempt. A will acquirea controlling interest in HoldCo LLC. Since the "two business"requirement for LLC formation would no longer apply, A would need to report forthe acquisition of its HoldCo LLC interest if that interest exceeded $50million in value, unless some other exemption applies. However, proposed802.30(c) states "Assets contributed to a new entity upon its formationare not subject to the requirements of the Act with respect to the person contributingthe assets to the formation." Here, the only thing HoldCo LLC will holdwill be shares of Target (contributed by A and B, and potentially others), butTarget was controlled by A prior to the transaction anyway. I think this meansthat since the only things contributed to HoldCo LLC are shares of an issuerthat A already c! ontrolled, A's acquisition of an interest in HoldCo LLC isexempt under the proposed 802.30. Again, the back end merger would be exemptunder (c)(3), as it is already controlled by HoldCo LLC from the initial sharecontributions on the LLC formation.
Alternative scenario. If weultimately determine that A does not control Target by holding 50% or more ofits voting securities, then I think we might have a reporting obligation underthe proposed rule. If A obtains control over HoldCo LLC on its formation, hewould have a reporting obligation if that interest was worth $50 million,unless some exemption applied. I believe A's interest will be worth $50million, and no exemption comes to mind, since two or more people are eachcontributing shares of a corporation (Target) than none of them control, but inthe aggregate their shares will confer control of Target to HoldCo LLC. Thus,in this scenario I believe I have a filing for A as an acquiring person for theformation of HoldCo LLC. As in the other scenarios, as long as the HoldCo LLChas 50% or more of the shares of Target, the back end merger would be exemptfor the reasons described above. &! nbsp;