Question
February 17, 2005
Mr. Michael Verne
Federal Trade Commission
Premerger Notification Office
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: Request For Informal Interpretation of HSR Rules
Dear Mr. Verne:
The subject matter of this request for informal interpretation of theHart-Scott-Rodino ("HSR") Antitrust Improvements Act of1976 and the regulations thereunder is the exchange of one wireless broadbandlicense for another such license. The exchange is being structured s as toqualify for favorable tax treatment. As a general preview of this letter, itreflects our understanding that the Premerger Notification Office ("PNO") will look through to the economic substance of a series ofrelated transactions in order to identify the substantive transaction ofpotential competitive significance, and thereby to minimize the number of HSR filings needed to provide adequate notice to the Federal TradeCommission ("FTC") and to the Department of Justice("DOJ"). Please note that, in this case, the series of relatedtransactions to accomplish the legitimate business objective of favorable taxtreatment will occur virtually simultaneously, except for an initialacquisition (some time earlier) which is pursuant to DOJ approval of the buyerunder a divestiture process required by DOJ and ordered by a federal districtcourt.
I thank you in advance for your patience and attention in addressing thusrequest.
Transaction Description
Corporation A is a privately-held corporation engaged in the business ofwireless telecommunications and is one in a chain of wholly owned subsidiariesof another privately-held corporation which is the ultimate parent entity ofCorporation A (and also engaged in the business of wirelesstelecommunications). LLC B is a joint venture between two publicly-tradedcorporations unaffiliated with any of the foregoing entities, and is engaged inthe business of wireless telecommunications. One of the two publicly-tradedmembers of LLC B is the ultimate parent entity of LLC B. LLC B is subject to adivestiture requirement resulting from DOJ review of an HSR filing byLLC B.
Partnership C is a joint venture between two publicly-traded corporationsunaffiliated with any of the foregoing entities and is engaged in the businessof wireless telecommunications. One of the two publicly-traded partners ofPartnership C is the ultimate parent entity of Partnership C.
Corporation A holds as part of its inventory a 30 MHz wireless license('`License") from the Federal Communications Commission ("FCC")for a given geographic market. Partnership C desires to acquire a 10 MHzportion of License ("sub-License") from Corporation A. Corporation Ais amenable to selling sub-License to Partnership C so long as the transactionwill qualify for like-kind exchange treatment under Federal income tax law. Inorder to effectuate the like-kind exchange, Corporation A will need to exchangesub-License for another wireless license ("Replacement License")rather than sell the sub-License outright. Partnership C does not have aReplacement License acceptable to Corporation A that Partnership C is willingto exchange. Corporation A has identified a Replacement License for thelike-kind exchange which is being sold by LLC B pursuant to a court-ordereddivestiture and approval by DOJ.
Federal income tax law permits Corporation A to effect the like-kind exchange(of sub-License for Replacement License) via a qualified intermediary ("Ql")which brokers the exchange. A Ql is typically a single purpose entityestablished solely to effectuate the like-kind exchange, and may not beaffiliated with either the actual purchaser or seller. Under the tax laws, a Qlgenerally is not required to take actual title to the exchanged properties(with an exception described below); it is sufficient that the QI merely obtaina contractual right to acquire the exchange properties. As described below,there are two Qls involved in this exchange - Ql-1 and QI-2. The Qls aresubsidiaries of a privately-held limited liability company engaged in thebusiness of acting as a qualified intermediary for like-kind exchanges. Neitherthe privately-held limited liability company nor its Ql subsidiaries areaffiliated with any of the foregoing entities.
To effectuate a like-kind exchange where the acquisition of the replacementproperty (i.e., the Replacement License) occurs prior to the sale of therelinquished property (i.e., the sub-License), the tax laws require theinvolvement of two Qls. With respect to this proposed exchange. the acquisitionof the Replacement License from LLC B will occur pursuant to a DOJ approveddivestiture by LLC B, and will have to be scheduled prior to the sale of thesub-License to Partnership C. Therefore, Ql-1 must take actual title to theReplacement License from LLC B and hold it until closing of the sale of thesub-License to Partnership C.
Corporation A intends to accomplish the like-kind exchange in the followingway. First, Corporation A will assign its rights in the Purchase Agreementbetween Corporation A and LLC B to QI-1, who will then acquire title to theReplacement License from LLC B. Corporation A and QI-I will also enter into anAccommodation Agreement whereby Corporation A has the right to acquire theReplacement License. DOJ has approved the purchase of the Replacement Licenseby Corporation A, and approved the intermediate step of the acquisition byQI-1.
To accomplish the second step,Corporation A will negotiate a Sale Agreement for the sale of the sub-Licenseto Partnership C. Corporation A then will assign its sales obligation as to thesub-License to QI2, and also assign its right to the Replacement License (underthe Accommodation Agreement) to QI-2. Subsequently, at the closing of thelike-kind exchange, QI-2 will use its right under the Accommodation Agreementto direct QI-1 to transfer title to the Replacement License to Corporation A.At that same closing, and in exchange for Corporation A receiving theReplacement License at the direction of QI-2, Corporation A will be directed byQI-2 to transfer title to the sub-License directly to Partnership C.
A schematic diagram of the transactions is as follows:
I. Corporation A (right to Replacement License) -----> QI-l
2. Accommodation Agreement
3. LLC B (title to Replacement License) -----> Ql-1
4. Corporation A (Accommodation Agreement) -----> QI-2
5. QI-I (title to Replacement License) -----> Corporation A
5.1 QI-I (title to Replacement License) -----> deemed transfer toQI-2
[via Accommodation Agreement]
5.2 QI-2 (title to Replacement License) -----> deemed transfer to CorporationA
Sub-License:
6. Corp. A (obligation under Sale Agreement) ----- Qt-2
7. Corp. A (title to sub-License) -----> Partnership C
7.1 Corp. A (title to sub-License) -----> deemed transfer to QI-2
7.2 Q1-2 (title to sub-License) -----> deemed transfer to PartnershipC
Steps 5.1 and 5.2 are the deemedsteps included u1 Step 5, and Steps 7.1 and 7.2 are the deemed steps includedin Step 7. The deemed transfer by Corporation A of the sub-License to QI-2 (Step7.1) in exchange for the Replacement License (Step 5.2) constitutes thelike-kind exchange which provides the favorable tax treatment for CorporationA.
In the context of obtaining DOJ's approval of the divestiture by LLC B of theReplacement License to Corporation A, Corporation A has informed DOJ of theneed for the QI1 step in order to permit the like-kind exchange format for thetransactions. Specifically. DOJ has been informed, among other things, thatQl-1 will initially acquire title to the Replacement license, but that no partyother than Corporation A will be the ultimate holder of the ReplacementLicense. The transfer to QI-1 and subsequently to Corporation A of LLC B'sReplacement License has been approved by DOJ and is therefore exempt from HSR reporting pursuant to HSR regulationat 16 C.F.R. Section 802.70(a), as you confirmed in a telephone call of February 9, 2005.
It is assumed that the value ofthe sub-License and the value of the Replacement License each is in excess of $50million, and in excess of $53.1 million (when 2005 indexing becomes effective).
Question
Is any filing required under the Act in connection with thetransactions described above?
Our Understanding
Our understanding is that the only reportable transaction is the step in whichPartnership C acquires the sub-License. We believe that the other transactionsare not reportable because: (1) the QI-2 involvement in the transfer of theReplacement License is part of a DOJ-approved divestiture required of LLC B, issolely for the legitimate business purpose of obtaining like-kind exchange taxtreatment, does not have competitive significance, and will be simultaneouswith the reportable transaction; and (2) the QI-2 involvement in the transfer ofthe sub-License occurs because it is necessary to receiving favorable incometax treatment, is solely for the legitimate business purpose of obtaininglike-kind exchange treatment, does not have competitive significance, and willbe simultaneous with the reportable transaction. Moreover, and perhaps mostimportantly, the QI-2 steps should not be "acquisitions" because QI-2does not take actual title to either license but only hold rights in thelicenses - for a few moments on the day of closing the acquisitions byCorporation A and Partnership C.
The transactions involving QI-2 and the transfer rights to the sub-License andReplacement License are entered into for the legitimate purpose of obtainingfavorable tax treatment. Specifically, these steps are necessary in order toalign the parties such that like-kind exchanges can occur between theappropriate entities. Our view that these transactions are not reportable isbased on the reasons set forth above and on our understanding that the PNO's informal position is to look through to the economic substanceof a string of related transactions in order to identify the substantivetransaction and minimize the number of HSR filingsneeded to provide adequate notice to the FTC and to the DOJ. Applying thusreasoning, the economic substance is (i) an acquisition of the sub-License byPartnership C, and (ii) an acquisition of the Replacement License byCorporation A. Because the acquisition of the Replacement License will beaccomplished pursuant to a DOJ-approved divestiture, our understanding is thatthe only reportable transaction would occur when Partnership C obtains thesub-License from Corporation A. For HSR reportingpurposes, Corporation A would be the acquired person and QI-2 involvement couldbe explained in the HSR filing.
Please confirm our understandings or otherwise convey your views of the HSR reporting requirements for the transactions described above. Ican be reached at (redacted), and my colleague (redacted) can be reached at(redacted).