Question
March 2, 2005
VIA FEDEX
Private & Confidential
Mr. Michael Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Washington, DC 20580
Re: Corporate Reorganization and Hart-Scott-Rodino Act Compliance
Dear Mr. Verne:
Pursuant to my telephoneconversation of Wednesday, February 23, 2005, with James Ferkingstad at the FederalTrade Commission's Premerger Notification Office (the "PNO"), I am writing to request an informal interpretationregarding whether the Hart-Scott-Rodino Antitrust Improvement Act of 1976, 15U.S.C. 18a ( 7A of the Clayton Act or the "Act"), andthe regulations promulgated thereunder by the Federal Trade Commission (the"FTC"), 16 C.F.R. 801, et seq., require the filing of apremerger report (the "HSR Premerger Report") prior toeffecting a proposed corporate reorganization involving several clientsrepresented by our law firm.
Based on perceived ambiguity inthe Act and in the regulations found in 16 C.F.R. 801.2(d),801.11(e), 801.40 and 803.30, as well as the apparent lack of a definitivestatement in the Formal Interpretations provided by the PNO in relation to the particular fact pattern at issue, I amrespectfully requesting confirmation of the correctness of my analysis of thePremerger Notification Rules (the "Rules") as they relate to theproposed corporate reorganization discussed below.
The Rules
According to the Rules, thefiling of the HSR Premerger Report is required when,alternatively, (1) the commerce test is met and both the size of person andsize of transaction tests are met; or (2) the commerce test is met and, as aresult of the transaction, the "acquiring person" will hold anaggregate amount of stock and assets of the "acquired person" valuedin excess of $200 million. Sections 7A(a)(1) and (2) of the Act.
The Facts
Four individual corporatepersons represented by our law firm (collectively, the "Subsidiaries"and each individually a "Subsidiary"), each of which is a wholesaleinstaller of digital satellite equipment, intend on effecting a corporatereorganization (the "Reorganization") whereby shares in theSubsidiaries will be exchanged for shares in a holding company (the"Holding Company"). Following the Reorganization, the Holding Companyshares will be held by the pre-Reorganization shareholders of the Subsidiaries,based on (1) their pre-Reorganization ratable interest in the individualSubsidiary at issue in relation to (2) the post-Reorganization aggregate assetvalue of the Holding Company.
For purposes of analysis thefollowing facts should be assumed:
"HoldingCompany" is a newly-formed person, who has not yet prepared financialstatements and has an asset value and market value of approximately $0;
"Company A"has an asset value and market value of approximately $56 million;
"Company B"has an asset value and market value of approximately $29 million;
"Company C"has an asset value and market value of approximately $24 million;
"Company D"has an asset value and market value of approximately $21 million; and
The Reorganizationwill effect a simultaneous share exchange as described above. See n.1, infra.
MyAnalysis
As stated above, prior tothe Reorganization, Holding Company has an asset value and market value ofapproximately $0. In addition, Holding Company has not prepared financialstatements. It is my understanding, pursuant to my telephone call with Mr.Ferkingstad of February 23, 2005, that the PNO will treat the share exchange transactions effectedpursuant to the Reorganization as successive rather than simultaneous;if this is the case, it appears as if ordering the "successive"acquisitions in a particular manner will obviate the requirement of the Rulesto file the HSR Premerger Report - a requirement which wouldotherwise be imposed.' To wit, Holding Company (as the "acquiringperson"), could acquire Company A, then Company B, then Company C andfinally Company D, each an "acquired person", without being requiredto file the HSR Premerger Report.
This scenario can be depicted asfollows:
1. Holding Company acquires Company A, a $56 millioncompany. Because Holding Company has a pre-transaction asset value of $0, no HSR Premerger Report would be required by the Rules as the size ofperson test is not met (i.e., no "$100 million person").
2. Subsequently, Holding Company (withSubsidiary Company A in tow) acquires company B, a $29 million company. Because Holding Company has a pretransaction asset value of $56 million(aggregate value of Holding Company and Subsidiary Company A), no HSR Premerger Report is required as the size of person test is notmet (i.e., no "$100 million person").
3. Subsequently,Holding Company (with Subsidiary Company A and Subsidiary Company B in tow)acquires Company C, a $24 millioncompany. Because Holding Company has a pre-transaction asset value of $85 million (aggregate value of HoldingCompany, Subsidiary Company A and Subsidiary Company B), no HSR Premerger Report is required as the size of person test is notmet (i.e., no "$100 million person").
4. Finally,Holding Company (with Subsidiary Company A, Subsidiary Company B and SubsidiaryCompany C in tow) acquires Company D, a $21 million company. Because theHolding Company has a pre-transaction asset value of $109 million (aggregatevalue of Holding Company, Subsidiary Company A, Subsidiary Company B andSubsidiary Company C) and, therefore, the "acquiring person" (i.e.,Holding Company) is a "$100 million person", the question becomeswhether the "acquired person" has assets of $10 million or more; ifso, the size of person test is met. Because Company D has assets of $10 millionof more (i.e., Company D has an asset value of $21 million), the questionbecomes whether the size of transaction test is met. Here, the size oftransaction test is not met because the "aggregate total amount of votingsecurities and assets of the acquired person" (i.e., Company D) is not inexcess of $50 million (it is $21 million). For this reason, the HSR Premerger Report is not required under the Rules.
Our Request
Please confirm that we do nothave to file the HSR Premerger Report based on the facts ofthe Reorganization as presented above.
Footnotes
1. Alternatively, in the event that the PNO treats the Reorganization as simultaneous rather than successiveshare exchange transactions, we believe the HSRPremerger Report would not be required by the Rules because the size of persontest is not met where Holding Company's pre-Reorganization asset value isapproximately $0. Please note that, for both corporate and income tax purposes,the Reorganization will be structured as a tax-free reorganizationpursuant to Section 368 of the Internal Revenue Code of 1986, as amended (the"Code"), and will be effected as a simultaneous acquisition of theSubsidiaries, irregardless of whether this leads to the conclusion that theRules require the filing of the HSR PremergerReport.
2. In the event that the actual asset value and/ormarket value of Company B, Company C and Company D, exceeds, in the aggregate,$100 million, acquisition of Company A after the acquisitions of Company B,Company C and Company D by the Holding Company may lead to the required filingof the HSR Premerger Report.
3. Because the Reorganization transaction as a wholeinvolves assets of less than $200 million, both the size of person and size oftransaction tests must be met before the HSR PremergerReport is required by the Rules. See a/so, n.2, supra.