Question
July 31, 2006
Mr. B. Michael Verne
Premerger Notification Office
Bureau of Competition, Room 303
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Washington, DC 20580
Dear Mr. Verne:
We are writing to follow up on the discussion thatyou and (redacted) had on Wednesday, July 12th concerning the proposedtransaction involving our respective clients and to confirm that you concurthat no filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,as amended (the "HSR Act"), would be required to be made by any ofthe parties to the proposed transaction.
Description of theTransaction
As discussed, the proposed transaction (the"Transaction") effectively involves the formation of an unincorporatedentity (the "Newco" described below) by a group of opportunity funds(the "Investors"), one or more equity partners of the Investors(each, a "Co-Investor"), and the Seller (as defined below), throughcontributions by the Investors and each Co-Investor of cash to Newco and thedirect and indirect contribution' by the Seller of the votingsecurities of several U.S., Canadian and United Kingdom corporations andunincorporated entities (collectively, the "Acquired Companies") thatare currently owned by a group of stockholders, members and/or partners(collectively, the "Seller Owners"). For a number of reasons,including reasons relating to international tax planning, the proposedtransaction will be accomplished through a series of steps, as discussed below.
Prior to the consummation of the Transaction, it isexpected that (A) the Seller Owners will form a new foreign limited partnership(the "Seller") and will transfer or cause to be transferred to theSeller all of the issued and outstanding equity interests of the AcquiredCompanies and (B) the Investors and the Co-Investor(s) will form and own a newlimited partnership ("Newco") which will (i) form and own (x) a U.S.corporation ("U.S. Acquiror"), which at closing will acquire all ofthe issued and outstanding equity interests of the Acquired Companies that areU.S. entities (collectively, the "U.S. Acquired Companies") and (y) aCanadian corporation ("Canadian Acquiror" and, together with the"U.S. Acquiror," the "Acquirors"), which at closing willacquire all of the issued and outstanding equity interests of the AcquiredCompanies that are Canadian entities (collectively, the "Canadian AcquiredCompanies"). The Acquirors will acquire the U.S. Acquired Companies andthe Canadian Acquired Companies from the Seller in exchange for a combinationof cash and non-voting shares in the capital stock of one or more of the Acquirors.
Immediatelyfollowing the completion of the steps described above, the Seller willcontribute to Newco all of the shares in the Acquiror(s) received by it inconnection with such steps and all of the issued and outstanding equityinterests of the Acquired Companies that are United Kingdom entities(collectively, the "U.K. Acquired Companies") in exchange for a ClassB limited partner interests in Newco and additional cash. The Class B limitedpartner interest will entitle the Seller to 50% of the voting power of Newco'slimited partners and to 50% of the ordinary course distributions to Newco'slimited partners. However, the Class B limited partner interest will be subjectto certain preferential returns in favor of the Class A limited partnerinterests held by the Investors and the Co-Investors such that the Seller couldreceive less than 50% of distributions to the limited partners upon aliquidation of Newco or other extraordinary event.
Analysis
Forthe reasons discussed below, we believe no filings are required under the HSRAct in connection with the Transaction.
Asdiscussed above, we believe the Transaction is essentially the formation of anunincorporated entity ("Newco") through the contribution by theInvestors and the Co-Investor(s) of cash and the contribution by the Seller ofthe shares of the Acquiror(s) received by it in the initial step of theTransaction in exchange for the contribution by the Seller of all of the votingsecurities of the U.S. Acquired Companies and the Canadian Acquired Companiesto the Acquirors and all of the equity interests in the U.K. AcquiredCompanies. If viewed as a separate transaction, the contribution of the U.S.Acquired Companies and the Canadian Acquired Companies to the Acquirors inwhich the Seller receives non-voting shares should also be viewed as theformation of a corporate joint venture through the contribution by Newco to theAcquirors of the cash received by Newco from the Investors and theCo-Investor(s) (as well as the proceeds from borrowings under an acquisitionloan that will be funded at closing) and the contribution by the Seller to suchAcquiror(s) of the voting securities of such Acquired Companies. We believethat no filing under the HSR Act should be required in connection with theformation of Newco, or in connection with the formation of such Acquirors ifsuch formation were to be viewed as a separate transaction.
Filing Requirements forthe Investors or the Co-Investors
Under Rule 801.50(b), aparty to the formation of an unincorporated joint venture entity is required tofile under the HSR Act if it acquires control of the newly-formed entity andthe other requirements of the Rule are satisfied. In this case, after completionof the Transaction, none of the Investors or the Co-Investors will own fiftypercent (50%) or more of the interests in Newco. Because none of the Investorsor Co-Investors will control" Newco within the meaning of the Rules underthe HSR Act, no filing by any of them will be required in connection with theformation of Newco.
If the contribution of the U.S. Acquired Companies and the CanadianAcquired Companies to the Acquirors in which the Seller received shares wereviewed for purposes of Rule 801.40 as a separate formation transaction in whicheach of Newco and the Seller acquired shares of the Acquirors, Newco would notbe required to make a filing under the HSR Act because it will not have netsales or total assets of $11.3 million or more. As noted above, Newco (whichwill be its own "ultimate parent entity") will be a newly-formedentity that will have no regularly prepared balance sheet, and it is expectedthat at the time of the Transaction its only asset will be the cash that will bedelivered to the Seller in connection with the contribution of the AcquiredEntities to the Acquirors. Under Rule 801.11(e)(1), such cash would bedisregarded for purposes of determining the amount of its assets. Consequently,Newco would not be required to make a filing by operation of Rule 801.40(c)because it would not have the required amount of assets.
Filing Requirements forthe Seller Owners and Seller
Wealso believe that no filing under the HSR Act is required to be made by theSeller Owners or the Seller.
No filing would be required in connection withtransfer by the Seller Owners of all of the equity interests of the AcquiredCompanies to the Seller (which constitutes a formation transaction under Rule801.50) because, among other things, none of the Seller Owners will control theSeller after giving effect to that transaction.
Thecontribution by the Seller to Newco of the equity interests in the Acquiror(s)received by it in connection with the acquisitions by the Acquirors describedabove and all of the equity interests in the U.K. Acquired Companies inexchange for 50% of the limited partnership interests of Newco would be exemptfrom the reporting requirements by operation of Rule 802.4(a) and Rule802.30(c). Under Rule 802.4(a), the acquisition of interests of an issuer,whose assets consist or will consist of assets whose acquisition is exempt fromthe requirements of the Act pursuant to Section 7(A)(c) of the HSR Act, part802 of the HSR Rules or Section 801.21 of the HSR Rules, is exempt from thereporting requirement if the acquired issuer does not hold non-exempt assetswith an aggregate fair market value of more than $56.7 million. Rule 802.30(c)provides that, for purposes of applying Section 802.4(a) to an acquisition thatmay be reportable under Rule 801.50, assets or voting securities contributed bythe acquiring person to a new entity upon its formation are assets or votingsecurities whose acquisition by that acquiring person is exempt from therequirements of the HSR Act. Upon consummation of the Transaction, the onlyassets of Newco will be shares of the Acquirors, whose only assets will be thevoting securities of the Acquired Companies, which were sold and contributed bythe Seller to the Acquirors and the shares of the U.K. Acquired Companiescontributed to Newco by the Seller. Therefore, with respect to the Seller andthe Seller Owners, Newco will not hold non-exempt assets of more than $56.7million, and the Seller and the Seller Owners would not be subject to thereporting requirements.
Similarly,if the sale and contribution of the voting securities of the U.S. AcquiredCompanies and the Canadian Acquired Companies to the U.S. Acquiror and theCanadian Acquiror, respectively, were viewed as separate formations ofcorporate joint ventures under Rule 801.40, no filing by the Seller or theSeller Owners would be required because any shares received by the Seller inany acquiror to which Acquired Companies are contributed will be non-votingshares.
Filing Requirement forNewco
Forthe reasons outlined above, we believe the Transaction is properlycharacterized as a formation transaction under Rule 801.50, and perhaps aseparate formation transaction under Rule 801.40. If, however, the Staff wereto view the transaction as the indirect acquisition by the Investors andCo-Investor(s), through Newco, of fifty percent (50%) of the voting securitiesof the Acquired Companies, which, as discussed, is also a way of viewing theTransaction from an economic perspective, no filings under the HSR Act shouldbe required.
Newco will be a newly-formed partnership formed undera jurisdiction other than the United States and it is expected either that noperson will be entitled to 50% or more of the profits of Newco, or of itsassets upon dissolution, or that any person that is entitled to 50% or more ofthe profits of Newco or of its assets upon dissolution would be anothernewly-formed entity. Therefore, Newco or any such controlling person would beits own "ultimate parent entity" for purposes of the HSR Rules. As anewly-formed entity, Newco (or any such controlling person) will not have aregularly prepared balance sheet and at the time of the closing of theTransaction, and, as noted, it is expected that Newco (or any such controllingperson) will hold no assets other than the cash contributed to, or borrowed by,it that will be used to acquire the interests in the Acquired Companies.Pursuant to HSR Rule 801.1 l(e)(l), in calculating the total assets of anacquiring person that does not have a regularly prepared balance sheet, suchacquiring person's total assets are equal to all assets held by the acquiringperson at the time of the acquisition less all cash that will be used by theacquiring person in an acquisition of the voting securities or non-corporateinterests of an acquired person. Therefore, by operation of Rule 801.11(e)(1),Newco (or any such controlling person) would not satisfy the size-ofpersontest. While the size-of-person test does not apply to transactions subject toSection 7a(a)(2)(A) of the HSR Act, we believe the size of the Transactionshould be calculated by reference to the value of the 50% of the AcquiredCompanies that the Investors and Co-Investor(s) will indirectly own afterconsummation of the Transaction, which will be approximately $175 million,rather than by reference to the entire value of the Acquired Companies. Inaddition, we note that approximately fifty percent (50%) of the value of theAcquired Companies will be attributable to the Acquired Companies that areCanadian or U.K. entities, the acquisition of which would be exemptunder Rule 802.51. Therefore we believe the Transaction does not meet thesize-of-transaction test of Section 7a(a)(2)(A) of the HSR Act. Accordingly, webelieve that, if the transaction were viewed as an acquisition by Newco (or anycontrolling person of Newco), no filing by Newco (or any such controllingperson) would be required because Newco (and any such controlling person) wouldnot satisfy the "size-of-person" test.
Forthe reasons outlined above, we believe that no filings will be required underthe HSR Act in connection with the Transaction, and, as discussed, we wouldappreciate your confirming your concurrence with that view. Please do nothesitate to call (redacted), or (redacted), if you have any questions or wouldlike any additional information.
Footnote
1 Inreturn for equity interest and an equalization payment.