Question
MEMORANDUM
To: mverne@ftc.gov
From: (redacted)
Date: July 24, 2007
Re: Hart-Scott-Rodino Filing in Context of Michigan Non-Profit Corporations
This memo addresses whether theacquisition of membership interest in a Michigan non-profit corporation by anotherMichigan non-profit corporation should betreated as an acquisition of securities rather than an acquisition of assetsfor purposes of applying the size of transaction test under theHart-Scott-Rodino pre-merger filing rules, and whether a filing would benecessary under the following circumstances.
My client, "P", a Michigan non-profit corporation, is considering a transactionwhereby it would acquire all of the membership interest of a currentlyunaffiliated Michigan non-profit corporation, Both Pand T are members of different "reorganized" health-care systems,with P the parent of its system, and T the main operating entity and parent ofits system. It is contemplated that P, in exchange for a $8,000,000contribution to the capital of T, would become the sole member of T, while Twould own continue to own and operate its businesses out of its pre-existingcorporate shell.
T's system has aggregate grossassets of approximately $120,000,000, but these assets are subject to verysubstantial debt, and the T system is in a difficult financial position. Theaggregate book value of the T system is approximately $37,000,000.
Non-ProfitCorporation Law. Michigan'snon-profit corporation act may be unusual in allowing for non-profitcorporations to be organized on a non-stock directorship basis, a non-stockmembership basis, or a stock basis:
"A corporation shall beorganized upon a stock or nonstock basis. A corporation organized upon anonstock basis shall be organized upon a membership basis or a directorshipbasis." MCL 450.2302.*
While directorship corporationsdiffer significantly from membership and stock corporations, since the board ofdirectors in a directorship corporation is self-perpetuating, membership andstock corporations are for all meaningful purposes, concerning the rights andpowers of members and shareholders, identical. For example, MCL 450.2303,concerning stock corporations, provides as follows:
"(1) A corporation organized upon a stock basis mayissue the number of shares authorized in its articles of incorporation. Exceptas otherwise provided in this act, the articles of incorporation or bylaws mayprescribe the qualifications, liquidation rights, preferences, and limitations,and other rights, preferences, and limitations of or upon the shareholders ofthe corporation.
(2)Thearticles of incorporation may provide that the shares of a corporation shall beall of 1 class or shall be divided into 2 or more classes. If the shares aredivided into 2 or more classes, the shares of each class shall be designated todistinguish them from the shares of the other classes. Except as otherwiseprovided in this act, each class shall consist of shares of the designation andnumber stated in the articles of incorporation, and having relativequalifications, liquidation rights, preferences, and limitations, and otherrights, preferences, and limitations as may be stated in the articles ofincorporation or the bylaws. Each share shall be equal to every other share ofthe same class.
(3)Eachshareholder shall have 1 vote for each share of stock held by that shareholderon each matter submitted to a vote of shareholders, unless the articles orbylaws provide that each shareholder shall have 1 vote regardless of sharesheld by that shareholder or unless the articles or bylaws deny, limit, orotherwise prescribe the voting rights of shares of any class. The shareholdersand each affected class of shareholders, if any, shall adopt, amend, or repealany bylaw denying, limiting, or otherwise prescribing the voting rights ofshareholders or any class of shareholders."
MCL 450.2304, delineating powers andrights for a membership corporation, is materially identical:
"(1) Except as otherwiseprovided in this act, the articles of incorporation or bylaws of a corporationorganized upon a membership basis may prescribe the number, qualifications,liquidation rights, preferences, and limitations, and other rights,preferences, and limitations of or upon the members of the corporation.
(2)Acorporation organized upon a membership basis may have 1 or more classes ofmembers. Except as otherwise provided in this act, any provision for classes ofmembers and the relative number, qualifications, liquidation rights,preferences, and limitations, and other rights, preferences, and limitations ofor upon each class shall be set forth in the articles of incorporation or thebylaws. Each member of any class of members shall have equal rights with allmembers of that class.
(3)Eachmember of a corporation, regardless of class, shall be entitled to 1 vote oneach matter submitted to a vote of members, unless the articles or bylaws deny,limit, or otherwise prescribe the voting rights of any class of members. Themembers and each affected class of members, if any, shall adopt, amend, orrepeal any bylaw denying, limiting, or otherwise prescribing the voting rightsof any class of members."
More to the point, MCL 450.2505(2)treats members and shareholders identically for purposes of electing directors:
"The articles or a bylaw adopted by the shareholders ormembers of a corporation organized upon a stock or membership basis may specifythe team of office and the manner of election or appointment of directors. Ifthe articles of incorporation or bylaws do not so specify the term of office ormanner of election or appointment of directors, the first board of directorsshall hold office until the first annual meeting of shareholders or members,and at the first annual meeting of shareholders or members and at eachannual meeting thereafter the shareholders or members shall electdirectors to hold office until the succeeding annual meeting, except incase of the classification of directors as permitted by this act."
Accordingly, P, as sole member of T (or as the soleshareholder of T, if T's articles of incorporation were amended to classify Tas a stock corporation) would have the right to elect all of T's directors.
FTC Rule 801.1(f)(1)(i) provides that "The term votingsecurities means any securities which at present or upon conversion entitlethe owner or holder thereof to vote for the election of directors of theissuer." As discussed above, under Michigan non-profit corporation law, membership interest andstock possess identical rights which entitle a member or shareholder to electdirectors. As such, the acquisition of T's membership interest by P ought to beconsidered an acquisition of voting securities, and the value of the membershipinterest, for purposes of determining the user fee for filing a pre-mergernotification, should be the fair market value of the membership interest,rather than the gross value of T's assets.
Valuation ofMembership Interest. The membership interests in T are not publicly traded. FTC's Worksheetfor Valuation of Transactions Reportable under The Hart-Scott-Rodino Act**states that:
"If the stock [i.e., the votingsecurity] is not publicly traded and the Acquisition Price is determined, thevalue of the transaction is the Acquisition Price. If the Acquisition Price isnot determined, the value of the transaction is the Fair Market Value of thestock, determined by the board of directors of the Acquiring Person or itsdelegee, as described above."
FTC Rule 801.1(c) explains thevaluation process in more depth, and provides the following definitions:
"(2) Acquisition price. The acquisition price shall include thevalue of all consideration for such voting securities or assets to be acquired.
(3) Fair marketvalue. Thefair market value shall be determined in good faith by the board of directorsof the ultimate parent entity included within the acquiring person, or, ifunincorporated, by officials exercising similar functions; or by an entitydelegated that function by such board or officials. Such determination must bemade as of any day within 60 calendar days prior to the filing of thenotification required by the act, or, if such notification has not been filed,within 60 calendar days prior to the consummation of the acquisition."
Here, P would pay to T $8,000,000 in order for P to becomethe sole member of T. This would appear to be the "acquisitionprice."
If the $8,000,000 payment were notconsidered indicative of value for some reason - for example, becausenon-profit entities may undertake transactions for non-monetary reasons such asthe promotion of an organization's charitable purpose - the appropriate valuewould be the "fair market value", which "shall be determined ingood faith by the board of directors of the ultimate parent entity ... or by anentity delegated that function by such board or officials." Here, theboard of P has delegated the valuation function to an independent certifiedpublic accounting firm which has determined in good faith that the "fairmarket value" of the T system is not more than $40,000,000.
Size of TransactionThreshold. Here,the size of person tests established by the Hart-Scott-Rodino Act would be met.As discussed above, the transaction should be considered an acquisition ofvoting securities, rather than an acquisition of assets. Accordingly, the sizeof transaction test would be met if P, as a result of the acquisition, were tohold voting securities with a value in excess of $50,000,000, as adjusted(currently, $59,800,000). Here, the value of T voting securities held by P as aresult of the acquisition would be no more than $40,000,000, which is below thefiling threshold. Therefore, P need not file a pre-merger notification.
If you have any questions, please contact me at (redacted)
* Michigan Compiled Laws areavailable without charge at http://www.legislature.mi.gov/(cgrl lzaaxuounp45sts2euj 1)/mileg.aspx?page=home