Question
April 29, 2004
VIAMESSENGER
Michael Verne
Premerger Notification Office
Bureau of Competition, Room 303
Federal Trade Commission
600 Pennsylvania Avenue, N. W
Washington, DC 20580
Re: Hart-Scott-Rodino Informal Interpretation
DearMike:
As you may recall, we spoke on Tuesday regarding certainHart-Scott issues surrounding a proposed transaction. I relayed to you thefollowing facts:
Company A has two wholly-owned subsidiaries: Sub 1 and Sub 2. Company A holds 100% of the outstanding voting securitiesof both Sub I and Sub 2.
Sub 1 leases an electric power plant from Bank B. The leasehas a five-year term and will end later this year. Sub 1 is being acquired by athird party in a transaction for which the parties have already filedHart-Scott. At the end of the lease, Sub 1 must either purchase the power plantor sell it on behalf of the bank to a third party. The acquisition price wouldbe approximately $80 million, which wasagreed upon at the time the lease was entered into in 1999. The present fair market value of the plant is less than that,approximately $70 million. The lease document recites that for financialaccounting purposes the lease is to be treated as an operating lease, but forall other purposes it constitutes a financing arrangement that preservesbeneficial ownership of the plant in Sub 1, with Bank B retaining only asecurity interest. For example, Sub 1 receives all tax benefits ordinarilyavailable to owners of power plants. Moreover, Sub l bears the risk of loss andis required to pay $80 million to the bank atthe end of the lease term, even if, for example, the plant was seriouslydamaged or destroyed, or Sub 1 was unable to locate a thud-party purchaserwilling to pay $80 million for the plant.Sub 1's lease payments will be treated by the parties as interest payments -not principal payments - on a loan.
Sub I subleases the plant to Sub 2 under the same terms asthe lease with Bank B, but Sub 1 remains primarily liable to the bank on thelease.
In light of the impending expiration of the lease agreementfor the plant, Sub 1 will terminate the lease agreement and surrender all ofits rights under the lease agreement to Bank B. Immediately after thetermination, Bank B will sell the plant to Sub 2 for the $80 million amount.
Based on theabove facts, you advised that Company A already had beneficial ownership of theplant, and therefore the acquisition of the plant by Company A (through Sub 2)from Bank B would not necessitate a Hart-Scott filing. You indicated that yourview was based on the totality of the facts, including the mandatory nature ofCompany A's acquisition or third-party sale requirement, the fact that CompanyA bears the risk of loss for the plant, and the fact that Company A can sellthe plant to a third party at the end of the lease.
Pleasecall if you have any questions or if you disagree with the conclusion, based onthe facts I relayed in our discussion, that a Halt-Scott fling is not requiredin connection with the described transaction. As always, I greatly appreciateyour time and assistance.