Question
October 10, 2006
VIAFAX (202/326-2624)
AND FEDERAL EXPRESS
Mr.Michael B. Verne
PremergerNotification Office Bureau of Competition
FederalTrade Commission Room 303
600 Pennsylvania Avenue, N.W. Washington, D.C. 20580
DearMike:
The purpose of this letter is to confirmour telephone conference today in which you concluded that, under the factsdescribed below, the entities described below do not control the Company. Inparticular, our inquiry related to the interpretation of the staff of theFederal Trade Commission of Rule 801.1(b) relating to whether the entitiesdescribed below control the Company. The relevant facts, as we discussed them,are as follows:
Facts
Our client (the "Company")is contemplating entering into a transaction to acquire all of the outstandingshares of capital stock of the target company ("Target"). Both thesize-of-person and size-of-transaction tests are met and a filing under theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the"Act"), is required with respect to the proposed transaction. TheCompany is a publicly-traded company. Target is a privately held company.
LLC ("LLC") is the directrecord owner of fifty-one percent (51%) of the outstanding shares of capitalstock of the Company. LLC has no power to vote or dispose of shares of theCompany's capital stock. LLC is not deemed to be the beneficial owner of thoseshares under the Securities Exchange Act of 1934, as amended, by virtue of theterms of the Amended and Restated Limited Liability Company Agreement of LLC(the "LLC Agreement"), and as reported in the joint Schedule13D filing of LLC, A and B discussed below.
A and B are the two members of LLC, eachholding a 50% ownership interest in LLC. A and B are unaffiliated entities,each having its own separate ultimate parent entity. The LLC Agreementprovides, among other things, that 50% of the capital stock of the Company heldof record by LLC is deemed to be owned by each of A and B.
Voting_The LLC Agreement provides for pass-through voting of the shares of capitalstock of the Company held by LLC based on A's and B's respective membershipinterests in LLC. Each of A and B will direct the voting of the shares ofCompany capital stock beneficially owned by it as it sees fit, without anyagreement, arrangement or understanding between them regarding the voting ofthe shares. In furtherance thereof, LLC granted to each of A and B anirrevocable proxy, coupled with an interest, to vote the shares of Companycapital stock it beneficially owns in connection with any matter submitted to avote of shareholders of the Company. Neither A nor B has the power to directthe voting of the shares held by the other party.
Board of Directors. The board of directors of the Company consists of ten members. Underthe terms of the LLC Agreement, LLC will use commercially reasonable efforts tocause the Company's board of directors to include at least six designees ofLLC, initially to be comprised of an equal number of designees of A and B. Eachof A and B will select such designees as it deems appropriate, without anyagreement, arrangement or understanding between them to work collectively to achievethe appointment of the parties' designees to the Company's board of directors.There is no agreement between A and B to effectuate their respective directorselections outside of each party's individual voting power and there is noagreement between A and B to vote for each other's designees.
Disposition.Each of A and B has full dispositive power over the shares of Company capitalstock it beneficially owns, but does not have similar power over the sharesbeneficially owned by the other party. The LLC Agreement provides that the LLCmay not transfer shares that are beneficially owned by A and B for a period oftwo years after the date of the LLC Agreement, unless A and B consent inwriting. The terms of the LLC Agreement do not allow either A or B to directthe disposition of the shares beneficially owned by the other party. Once thetwo-year restricted period has elapsed, each party may transfer the shares itbeneficially owns provided it complies with the volume limitations and otherprovisions of the LLC Agreement for an additional two-year period. After theexpiration of this two-year period (four years after the date of the LLCAgreement), each of A and B is free to transfer the shares it beneficially ownsprovided the requirements of the LLC Agreement are met. In no event can eitherA or B dispose of, or direct the disposition of, the shares beneficially ownedby the other party.
Proceeds from the Disposition of Shares. The LLC Agreement provides that to the extent anyshares of the Company's capital stock deemed to be owned by A or B aretransferred in accordance with the LLC Agreement, the net proceeds of thetransfer are distributed to the party on whose behalf the shares aretransferred. A and B each have the right to obtain the benefit of any increasein the value of, and the risk of any loss in the value of, the sharesbeneficially owned by them.
Dividends. Pursuant to the LLC Agreement, all cash dividendsreceived by the LLC in respect of the shares of the Company's capital stock areto be distributed to A and B in accordance with their respective ownershipinterests in LLC.
Schedule 13D. A and B jointly filed a Schedule 13D with theSecurities and Exchange Commission relating to the above arrangement. In thatfiling, both A and B disclaimed beneficial ownership of the shares of theCompany's capital stock reported therein as beneficially owned by the otherparty. LLC disclaimed beneficial ownership of any shares of the Company'scapital stock.
Conclusion
Based on these facts, you concluded that neither Anor B controls the Company within the meaning of Rule 801.1(b) and that theCompany is its own ultimate parent entity.
Please call me immediately at (redacted) should theposition of the Federal Trade Commission staff with regard to this matter bedifferent from that set forth above. In addition, please retain this letter inyour files. I appreciate very much your assistance and helpful advice on thismatter.