Question
June 7, 2004
Via Federal Express
B. Michael Verne, Esq.
Premerger Notification Office
Federal Trade Commission
600 Pennsylvania Avenue
Washington, DC 20580
Re: Confirmation of Telephone Conversation
Dear Mr. Verne:
This will summarize the conversation we had on June 2, 2004.
Facts
1. X is a general partnership with two partners, A and B. Thebusiness of X is to market the products of A and B. The respective interests ofA and B in X vary from time to time depending on the sales of their respectiveproducts, but each of A and B owns roughly half of the assets and profits of X.
2. A and B have agreed to end the distribution of their productsthrough X and to carry on their respective businesses independently.
3. Pursuant to this agreement, the assets of X related to thedistribution of A's products will be distributed to A and the assets of Xrelated to the distribution of B's products will be distributed to B. X'sassets that are not specifically related to either A's or B's products will bedistributed among A and B as they agree.
4. After these distributions occur, X will remain in existence,with A and B as its sole partners, to continue to fund and administer a pensionplan for X's employees and to deal with any continuing liabilities of Xrelating to its distribution of A's and B's products.
5. These distributions by X to A and B and the continuation of Xwill be reflected in an implementation agreement (the "ImplementationAgreement") that will be signed prior to the time that either A or Bacquire assets from X as described below.
6. The Implementation Agreement will provide that X willdistribute to A all of X's inventory of A products and all of X's accountsreceivable from sales of A products. The Implementation Agreement will alsoprovide that X will distribute to B all of X's inventory of B products and allof X's accounts receivable from sales of B products. It is estimated that thevalue of the inventory and receivables to be received by each of A and B from Xwill exceed $50 million.
7. The remaining assets of X that will be distributed to A and Bpursuant to the Implementation Agreement will consist solely of (i) cash and(ii) other assets valued at less than $50 million.
8. Both A and B need licenses to sell their products in all 50states. A already has the necessary licenses in place and plans to enddistribution of its products through X when the Implementation Agreementbecomes effective, which will occur on or about July 1, 2004.
9. While B would prefer to end distribution of it products throughX on the effective date of the Implementation Agreement, it cannot do sobecause it does not have all of the necessary licenses to distribute itsproducts in all 50 states.
10. Accordingly, B will be required to continue distributing itsproducts through X until B obtains the necessary licenses. It is estimated thatthe licensing process will take between 4 and 7 months to accomplish.
Conclusions
If both A and B were to receive their respective inventory andreceivables on the effective date of the Implementation Agreement, theiracquisitions would appear to be exempt under 802.1 (c) as acquisitions ofcurrent supplies in the ordinary course of business. See also ABA Section ofAntitrust Law Premerger Notification Practice Manual (3d Ed. 2003)Interpretations 7 and 162. It seems clear in this case that neither A nor Bwould be receiving all or substantially all of the assets of an operating unitwhich would otherwise render the current supplies exemption unavailable under802.1(a).
I believe that the distribution of inventory and receivables to Aon the effective date of the Implementation Agreement followed by thedistribution of inventory and receivables to B promptly after it has obtainedits state licenses should also be exempt under 802.1 (c) if done pursuant to asingle plan of integrated steps contained in the Implementation Agreement. Inour conversation on June 2, 2004, you indicated thatyou would view the transfer of inventory and receivables to A and B in thiscircumstance as part of a single transaction and that
the acquisitionby A and B of their respective inventory and receivables would therefore beexempt under 802.1.
Excluding inventory, receivables and cash, the assets of X thatwill be acquired by A and B as part of this transaction have an aggregate valueof less than $50 million. As a result I believe that the transaction should notbe reportable under HSR by either A or B.
After reviewing this letter, I would greatly appreciate it if youwould confirm that, as stated in our telephone conversation on June 2, 2004, you agree with the above analysis. My direct number is (redacted).Thank you.