Question
From: (redacted)
Sent: Wednesday, April 11, 2007 9:24 AM
To: Verne, B. Michael
Subject: HSR Analysis of JointVenture Formation
DearMike,
We have been asked to assess thereportability of a joint venture formation and would like to run the structureby you to confirm that our analysis under the HSR rules is correct. For thepurposes of this hypothetical, we can assume that the size of transaction andsize of person tests are met and that the transactions are not otherwiseexempt.
Facts
The proposed structure would fallunder a multistage formation scenario:
A, a non-US corporation, forms awholly-owned subsidiary JV Sub Corp (a non-US corporation) and contributes onlycash of approximately $20,000 to JV Sub Corp (1). Virtually simultaneously withthe formation, B, a UScorporation, acquires 60% of the voting securities of JV Sub Corp from A inexchange for less than $59.8 million in cash. At this time, B has the right toappoint the sole director of JV Sub Corp (2). At a later date (which could bebetween 3 months to one year later), several events will occur virtuallysimultaneously upon closing of the joint venture (3). A third party, C, a US corporation will acquire newly issued shares of JVSub Corp (11% of all outstanding shares) for an amount in excess of $59.8million. A will contribute to JV Sub Corp assets valued in excess of $59.8million and B will contribute to JV Sub Corp assets valued in excess of $59.8million. In exchange for their contributions, A will receive cash and 40% ofthe voting securities of JV Sub Corp, and B will receive cash and will now hold49% of the voting securities of JV Sub Corp. None of A, B or C will have theright to appoint 50% or more of the directors of JV Sub Corp.
From its creation,JV Sub Corp will be a shell corporation that is being formed solely for thepurpose of holding the assets that will later be contributed by A and B. JV SubCorp will not hold any assets or undertake any business prior to the assetcontributions of A and B, other than to be a party to the transactionagreements.
Analysis
We have received prior advice fromyou to the effect that if JV Sub Corp is being formed solely for the purpose ofholding the assets contributed by A and B, and if the contributions of theassets by both parties and the acquisition of interests in JV Sub Corp occurcontemporaneously, the acquisition would be analyzed as a formation of a jointventure under 801.40.
If this transaction is analyzedunder 801.40, B will be required to file for its acquisition of 49% of thevoting securities of JV Sub Corp for in excess of $59.8 million. C would alsobe required to file for its
acquisition of 11% of the votingsecurities of JV Sub Corp for in excess of $59.8 million. However, A would notbe required to file, because its acquisition of 40% the voting securities of JVSub Corp would be exempt under 802.51(b)(1) because A is not acquiring controlof JV Sub Corp. JV Sub Corp would be exempt from filing under 802.41.
Our analysis assumes that thecontinuum theory would apply to the transaction such that all parts of the transactionwould be considered together as part of the same transaction, and that thefinal transaction that would be analyzed would be the formation of a jointventure corporation and thus analyzed under 801.40. Although these steps willnot happen contemporaneously, the JV Sub Corp is being formed solely for thepurpose of holding the assets to be contributed by the parties A and B, thereis no competitive significance to the first two steps in the transaction, thesubsequent steps are a virtual certainty given that the JV Sub Corp will be aparty to the transaction documents, and the only purpose of JV Sub Corp is toreceive the contributed assets.
Because we believethat the continuum theory should apply to this transaction as described, wewould propose to analyze the transaction as laid out above, with B and Csubmitting HSR filings in connection with the proposed transaction.
If the continuumtheory should not apply (which we do not believe to be the case), thetransaction would be analyzed in separate steps. Step (1) would be a formationof a wholly-owned entity by A and non-reportable under 802.30(b). Step (2)would be a non-reportable acquisition of voting securities by B valued at lessthan $59.8 million. Alternately, should steps (1) and (2) be analyzed as onetransaction because of their proximity in time, the transaction would still benon-reportable because the transaction value would be below $59.8 million. Withregard to Step (3), B would be the UPE of JV Sub Corp with its 60% holding. Bwould file as an acquiring person for the acquisition of the assets contributedby A (valued in excess of $59.8 million), and A would file as an acquiredperson. B's contribution to JV Sub Corp would be exempt under the intrapersonexemption 802.30(a). C's acquisition of voting securities of JV Sub Corp valuedin excess of $59.8 million would also be reportable, where C would file as anacquiring person and JV Sub Corp would file as an acquired person.
Thank you, asalways, for your help. Best regards,