Question
CONFIDENTIAL
VIAELECTRONIC MAIL
May 17, 2007
Mr.B. Michael Verne
PremergerNotification Office
Bureauof Competition
FederalTrade Commission
7th& Pennsylvania Avenue, NW
Washington, DC 20580
Dear Mike:
I am writing to confirm my understanding of atelephone conversation we had on May 3, 2007 concerning the basis fornon-reportability under the Hart-Scott-Rodino Antitrust Improvements Act of1976, as amended ("HSR Act") for a proposed transaction.
Proposed Transaction
I have set forth below the general transaction wediscussed, although I have added additional details to help further explain theproposed transaction. There is a proposed affiliation agreement whereby anon-stock, non-profit corporation ("Non-profit A") will become acorporate member of another non-stock, non-profit corporation ("Non-profitB") that operates a hospital. In exchange for Non-profit A becoming acorporate member of Non-profit B, Non-profit A will contribute to Non-profit Ban amount equal to 30% of the net book value of Non-profit B. After thetransaction closes, the other corporate member of Non-profit B will be areligious congregation ("Congregation") that currentlysponsors Non-profit B. Non-profit A will have a 30% membership interest inNon-profit B and the Congregation will have a 70% membership interest inNon-profit B. Non-profit A and Congregation are jointly referred to as theCorporate Members. Each of the two Corporate Members will have equal rights,powers and responsibilities post-close with regard to the operation ofNon-profit B except that upon a dissolution of Non-profit B, Non-profit A wouldhave the right to 30% of the assets and Congregation would have the right to70% of the assets.' Further, to ensure compliance with the
Ethicaland Religious Directives for (redacted) and to veto any program or service thatadversely impacts or violates such Directives, any disagreement between theCorporate Members regarding such veto shall be resolved by the (redacted), withultimate determination by the (redacted) as interpreted by the (redacted).
As a part of the transaction, amended and restatedbylaws will be adopted for Non-profit B. Under the amended and restated bylaws,the Corporate Members will delegate operating responsibility to a jointcommittee and a board of trustees except for responsibilities reserved solelyfor the Corporate Members which will be subject to a unanimous vote of the twoCorporate Members. There are a substantial number of such reserved responsibilitiesfor the Corporate Members of Non-profit B including, but not limited to,amending the bylaws or articles of incorporation, approving expenditures andcommitments above certain dollar thresholds, changing or reducing servicesoffered, appointing the executive director -- the administrator in charge ofthe hospital (in consultation with or on recommendation by the board oftrustees), approving the annual budgets, approving the annual strategic planand any updates, approving or disapproving a merger or dissolution, revisingthe reserved powers, and reserving such additional powers as the two CorporateMembers jointly determine.
With regard to the joint committee, each of the twoCorporate Members will appoint two representatives to the joint committee.Although the Corporate Members can jointly decide to delegate additional powersto the joint committee, the responsibilities of the joint committee outlined inthe amended and restated bylaws include conducting an annual evaluation of andsetting the compensation of the executive director, and appointing and removingthe members of the board of trustees of Non-profit B other than threeindividuals appointed by Non-profit A, three individuals appointed by theCongregation and the president of the medical staff of the hospital who servesas a member of the board of trustees. The joint committee can only act upon aunanimous vote of the four representatives to the joint committee.
The board of trustees will consist of the threetrustees appointed by Non-profit A, the three trustees appointed byCongregation, a number of community trustees appointed by the joint committee,physicians appointed by the joint committee and the president of the medicalstaff of the hospital. The responsibilities of the board of trustees set forthin the amended and restated bylaws include, but are not limited to, conductingthe affairs of Non-profit B and holding powers not otherwise reserved to thejoint committee or the Corporate Members, electing officers other than theexecutive director, appointing and reappointing physicians to the hospitalmedical staff, developing long range strategic plans for approval by theCorporate Members, assessing the quality of patient care, education, andresearch being conducted in the hospital, and reviewing and recommending forapproval by the Corporate Members the annual budgets and assuring the hospitalis managed within the approved budgets. However, no action of the board oftrustees shall be a condition precedent to an action of the Corporate Members.
Conclusions
You agreed that the proposed transaction is notreportable under the HSR Act. Specifically, you confirmed the following:
The only HSR control test applicable tonon-stock, non-profit corporations is having the contractual right presently todesignate 50% or more of the directors of the not-for-profit corporation. 16 C.F.R. 801.1(b)(2).
The board of trustees discussed above isthe same as a board of directors under 16 C.F.R. 801.1(b)(2).
Non-profit A will not control Non-profitB for HSR purposes as Non-profit A will not have the right to designate 50% ormore of the members of the board of trustees of Non-profit B.
Non-profit A will not be deemed to havethe power to designate the directors selected by the joint committee.
The conclusion that Non-profit A doesnot control Non-profit B for HSR purposes is not impacted by the fact thatNon-profit A will equally control Non-profit B with regard to any powers reservedby the Corporate Members for themselves or designated to the joint committee.
Theacquisition of a non-controlling interest in a non-profit corporation, such asthe acquisition that will be made by Non-profit A in Non-profit B, is HSRexempt regardless of dollar value, and the applicable rule to support thisconclusion in the case of a non-stock, non-profit corporation is 16 C.F.R. 801.2(0(3). That rule provides that "[a]ny person who acquires control of anexisting not-for-profit corporation which has no
Please let me know as soon as possible if youdisagree with any of the conclusions discussed above, or if I havemisunderstood any aspect of your advice. Thank you for your assistance in thismatter.
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I There also are options I did not raise on our callwhereby Non-profit A could increase its membership ownership interest inNon-profit B from 30% to 45% by making increased contributions to Non-profit B.This increased ownership would only impact the percentage of assets thatNon-profit A would be entitled to upon the dissolution of Non-profit B. Itwould not change other rights including those related to the designation ofmembers of the board of trustees. Accordingly, my understanding is that theexercise of these options would not result in any HSR reporting obligation. Ifyou believe this understanding is incorrect, please let me know.