Question
March 2, 2005
Mr. B. Michael Verne
Premerger Notification Office
Bureau of Competition, Room 303
Federal Trade Commission
6th Street and Pennsylvania Avenue, N.W.
Washington, DC 20580
Re: HSR Treatment of Newco Formation andAcquisition
Dear Mike:
Thisis to confirm my understanding of the position of the Premerger NotificationOffice ("PNO") as to the application of theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "Act"),to a transaction being contemplated by our client ("Buyer"). I haveset forth below the facts I provided during our initial February 23, 2005 telephone call with (redacted), counselfor the target company ("Target") and its shareholders.
A newly formed entity("Newco III") will be merged with and intoTarget and, as a result, the separate corporate existence of Newco III will cease and Target will continue as the surviving corporation(the "Merger"). Prior to the Merger, Newco III will acquire all of the equity of Target (other than theContributed Equity (as defined below)).
The Merger is valuedat more than $50 million, but not more than $200 million.
Newco III will be wholly owned by another newly formed entity ("NewcoII"), and Newco II will in turn be wholly owned by another newly formedentity ("Newco I").
As of the time of theMerger, Newco I will not have a regularly prepared balance sheet, and will nothave any assets other than those to be used in connection with the Merger.
Several individualsand entities will hold the voting securities of Newco I.
The individuals whowill hold voting securities of Newco I are unaffiliated with Buyer and includecurrent management and two of the current shareholders of Target (such twoshareholders being the "Contributing Shareholders").
Prior to the Merger,the Contributing Shareholders will contribute certain voting securities held inTarget (the "Contributed Equity") to Newco I in exchange for votingsecurities of Newco I.
The entities thatwill hold voting securities of Newco I are five limited partnerships affiliatedwith Buyer (the "Investment Funds") and a sixth entity not affiliatedwith Buyer.
No person or entitywill hold 50 percent or more of the voting securities of Newco I, nor will anyperson or entity have the contractual power to designate 50 percent or more ofthe directors of Newco I. However, the Investment Funds, if taken together,would hold more than 50 percent of Newco I's voting securities.
Each of theInvestment Funds is its own ultimate parent entity under the Act because, foreach of the Investment Funds, no person or entity is entitled to 50 percent ormore of its profits, or 50 percent or more of its assets in the case ofdissolution.
Each of theInvestment Funds has a general partner that directs its investment decisions.
Several of theInvestment Funds may have common general partners, or have general partnersthat are ultimately controlled by a common entity.
Basedon these facts, we concluded that Newco I will be its own ultimate parententity under the Act and will not satisfy the size-of-person test set forth inSection (a)(2)(B)(III) because Rule 801.11(e) excludes cash tobe used by the acquiring person as consideration in the acquisition of votingsecurities and any securities of the acquired person from the acquiringperson's total assets. Thus, we concluded that the Merger is not subject to theAct as it does not satisfy section (a)(2)(B), and you expressed yourconcurrence with our conclusion.
Messrs.(redacted) inquired as to whether the result would be different if,hypothetically, the Investment Funds were managed by a common person or entityother than the general partner of any of the Investment Funds but that isnevertheless under common control or otherwise affiliated with all of thegeneral partners of the Investment Funds, and whether such an arrangement wouldvest in the manager the contractual power to designate 50 percent or more ofthe directors of Newco I under Rule 801.1(b)(2), and you advised that the PNO would not view such an arrangement as conferring control of NewcoI.
Messrs.(redacted) further inquired as to whether a shareholders agreement, if enteredinto between the shareholders of Newco I, could confer control of Newco I underRule 801.1(b)(2), and you advised that it could if the shareholders agreementvested in any person or entity the contractual power to designate 50 percent ormore of the directors of Newco I.
Ina follow up call on March 1, we further discussed the shareholders agreementand its terms. We explained that under the shareholders agreement to beexecuted at closing, all of the parties to the shareholders agreement,including the Contributing Shareholders and the Investment Funds, will agree tovote their shares in favor of board representatives selected by the InvestmentFunds. However, because no one Investment Fund acting independently would havethe contractual power to designate 50 percent or more of the directors, youadvised that Newco I would remain its own ultimate parent. You further advisedthat your position would not be different even if the Investment Funds would inall likelihood be acting together.
Thankyou for taking the time to discuss this transaction with us. Please let me knowif you do not agree with any of the conclusions I have set forth above, or ifyour understanding of the facts differs in any way from those I have providedin this letter.