Question
From:(redacted)
Sent:Thursday, February 01, 2007 4:23 PM
To:Verne, B. Michael
Subject:Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act")Questions
Mike:
Thank you for takingthe time to speak with me last week. I am writing to confirm the advice youprovided. The factual background that I provided you has changed a little, but Ido not believe that the changes affect the analysis. The facts and the analysisare set forth below. I also raised as Issue 3 below a point that we did notdiscuss at length, but on which I would appreciate your advice.
Background
A newly formedcorporation ("Company A"), which is wholly owned by another newlyformed corporation ("Company B"), which itself is wholly-owned by anewly formed limited liability company ("LLC C"), intends to acquireall of the voting securities of an unrelated corporation ("Target").The purchase price for Target's voting securities will be greater than $239.2million. LLC C has two classes of membership interests: (i) a class issued toprivate equity fund investors (the "Funds"), that are limitedpartnerships or limited liability companies, and issued to certain members ofTarget's management ("Class I"), and (ii) a class issued to amanagement incentive plan (the "MIP") that will be created at theclosing for the benefit of certain members of Target's management and that willbe owned by another limited liability company in which the participatingmembers of management will have an ownership interest ("Class II").
Class I interests willentitle the holders to (i) a return of their equity investment plus a preferredpercentage return (anticipated to be around 8% per annum), before anydistributions of profits or assets upon dissolution are made to Class II, and(ii) after the MIP receives any amounts that may be due on account of the ClassII interests, share on a pro rata basis in any profits or assets then remainingavailable for distribution.
Class II interestsentitle the MIP to the right to share in up to 15% of the future appreciationof the business whether realized through a recapitalization or the sale of thebusiness. The actual percentage represented by Class II will be determinedbased on certain performance standards being satisfied in the future (e.g., theinternal rate of return on the Class I interests). It is possible that if theholders of the Class I interests do not receive their preferred return in full,or if the performance standards are not satisfied, that the MIP will notreceive any distributions in respect of its Class II interests.
The current ownershipof the membership interests of LLC C (excluding the MIP's interest of up to15%) is as follows:
Fund149.8325%
Fund245.0115%
Fund32.5854%
Fund40.2076%
Management2.3631%
None of the Fundsholds interests in LLC C entitling it to 50% or more of the profits or assetsupon dissolution of LLC C. Some of the Funds may have common general partners.The capital contributions to LLC C will be made in the same percentages.
Analysis
Issue 1: Is LLC C its ownultimate parent entity?
Rule 801.1(a)(3) providesthat "[t]he term ultimate parent entity means an entity which is notcontrolled by any other entity." Rule 801.1(b) further provides that"[t]he term control...means:... (ii) In the case of an unincorporatedentity, having the right to 50 percent or more of the profits of the entity, orhaving the right in the event of dissolution to 50 percent or more of theassets of the entity".
You confirmed thatsince none of the members of LLC C would have the right to 50 percent or moreof the profits or assets upon dissolution and therefore none acquired"control" under the HSR Act, LLC C was its own ultimate parententity. You also confirmed that the fact that the Funds may have common generalpartners did not affect the determination of the ultimate parent entity.
Issue 2: Is the formation ofLLC C a reportable event under the HSR Act?
Rule 801.50 providesin relevant part that "upon the formation of an unincorporated entity, ina transaction meeting the criteria of Section 7A(a)(1) and 7A(a)(2)(A) (other thanin connection with a consolidation), a person is subject to the requirements ofthe Act if it acquires control of the newly-formed entity." As discussedabove, no member is acquiring "control" of LLC C under the HSR Act.Moreover, LLC C's only asset prior to Company A's acquisition of the votingsecurities of Target will be cash, which is an exempt asset pursuant to Rules801.21 and 802.4. Therefore, the formation of LLC C is not a reportable event.
With respect toCompanies A and B, because each is wholly owned by LLC C, either directly orindirectly, its formation is not reportable pursuant to Rule 802.30(b).
Issue 3: If any memberof LLC C (before accounting for the MIP's interest of up to 15%) held interestsin LLC C entitling it to 50% or more of the profits or assets upon dissolution,would LLC C still be its own UPE?
I do not believe thatwe discussed this issue at length, but I wanted to confirm whether yourinterpretation was the same as mine. Assuming that the Class II interest wouldpotentially share in both profits and assets upon dissolution, while no amountwould be payable on account of the Class
II interestsimmediately after the consummation of the transaction and it is unknown whetherall or any portion of the performance benchmarks associated with the Class IIinterests would be met, I believe that a fair interpretation of Rule 801.1(b)would require the parties to include the Class II interests in the calculationof the percentage interests in the profits and assets upon dissolution of LLCC, because the economic rights associated with the Class II interests need tobe given effect. Assuming that my interpretation is correct, in the abovesituation, the relative Class I percentages would be diluted by the 15%interest associated with the Class II interest and the fully dilutedpercentages would then be used to determine whether any member held interestsentitling it to 50% or more of the profits or assets upon dissolution.
Thank you again foryour consideration and assistance in this matter. If you do not believe thisnote reflects the facts discussed on our telephone conversation, or if I havemisstated the advice you gave, or in the case of Issue 3 if you disagree withmy interpretation, please contact me as soon as possible.