Question
November 13, 2007
ViaE-mail
Mr.B. Michael Verne
PremergerNotification Office
Bureauof Competition - Room 303
FederalTrade Commission
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
DearMike:
I write to confirm your interpretation relating tothe proposed transaction briefly described below and described in greaterdetail in Appendix A to this letter.
Company A and Company B intendto establish a 50/50 jointly-ownedentity ("Newco") to acquire 100% of Company C ("target")through a cash tender offer (the "Offer"). The Offer is atransitional step. As soon as possible after the Offer closes, the target'sbusinesses will be divided between Company A and Company B, with Company Ataking control of certain target businesses ("Company A AcquiredBusinesses") and Company B taking control of the remainder of the targetbusinesses ("Company B Acquired Businesses").
With respect to the Company A Acquired Businesses, wehave confirmed that if separately analyzed, the acquisition (whether in a stockor asset transaction) would be exempt from reporting under the HSR Act becausethese businesses did not in the aggregate generate sales in or into the U.S.exceeding $59.8 million in 2006, and the aggregate total value of their assetsin the U.S. does not exceed $59.8 million. The Company A Acquired Businessesare in Europe and Asia and include the remaining 50% interest in a jointventure active in Eastern Europe in which Company A currently owns a 50% interest.Company B's acquisition would remain subject to reporting under the HSR Act.
Based on the structure of the transaction, with Newcoacquiring target, both Company A and Company B might technically be obligatedto make HSR filings if both would be deemed to control Newco at the time oftarget's acquisition, and the filing thresholds would be met. However, becausethe acquisition by Newco is a transitional step solely for the purposes ofdividing target's businesses between Company A and Company B, and the onlyparty making an acquisition that would not otherwise be exempt (Company B) isindeed filing, we believe that it would be consistent with the"continuum" theory for the transitional step to be ignored. Thestructure described in Appendix A will be legally binding and the division oftarget's business is certain to occur. Each side will take de facto controlover its portion of the target businesses being acquired immediately followingclosing by taking over all decisions concerning production, distribution,marketing, sales, personnel matters, business plans, financial plans, IP,brands, and material capital expenditures. Given the circumstances, it seemslogical to disregard the transitional step and analyze the acquisitions as twoseparate transactions under the HSR Act. Again, looking past the transitionalacquisition by Newco, Company A would not have a reporting obligation becausethe target businesses it would acquire are exempt as noted above, and CompanyB, as the party making a non-exempt acquisition, is intending to file.
Exempting Company A's acquisition would also beconsistent with principles of international comity, as applied by the PNO toexempt what would otherwise be reportable secondary acquisitions of US issuersin a foreign-foreign transaction. Indeed, we believe that this situationpresents an even more compelling case for application of comity, given that theexempted secondary acquisitions might involve US issuers with sales well above$59.8 million, whereas Company A is clearly not acquiring any such business.
I understand that when you recently spoke to(redacted) (Company B's counsel), and as confirmed by our discussion onNovember 5, 2007, you advised that for the reasons described above, the Offercan be disregarded as a transitory step and therefore, Company A's acquisitionof its portion of the target's businesses will be exempt from the reportingrequirements of the HSR Act.
Because the proposed transaction has not yet been announced,we request that this letter and Appendix A be given confidential treatment.
Pleaseconfirm by email or by calling me at the above-referenced number that the aboveaccurately reflects your advice.
Appendix A -- DetailedDescription of the Proposed Transaction:
1.The parties
1.1 Company A
Company A is a publicly traded company incorporated in Europe and having its principal officesin Europe.
1.2 Company B
Company B is a publicly traded company incorporated in Europe and having its principal officesin Europe.
1.3 Target
Target is a publicly traded company incorporated in Europe and having its principal officesin Europe.
2.The proposedtransaction
2.1 Company A and Company B will establisha 50-50 jointly-owned company ("Newco") which will make an offer for100% of the voting securities of the target (the "Offer"). Theintention is that, as soon as possible after the Offer closes (the"Closing"), Newco will transfer part of the acquired businesses toCompany A (the "Company A Acquired Businesses") and Company B willacquire control over the remainder of the businesses (the "Company BAcquired Businesses").
2.2 On October 7, 2007, Company A andCompany B signed a letter of intent (the "LOI") which sets out theparties' intention to shortly enter into a legally binding consortium agreement(the "Consortium Agreement") which will regulate the conduct of theOffer and provide for the assets and liabilities of the target to be dividedbetween the parties and the terms on which this will be done. The LOI sets outthe principal agreed terms and conditions to be included in the ConsortiumAgreement and, while the LOI is not legally binding, it is intended by theparties that the Consortium Agreement will be broadly consistent with the LOI.
2.3Newco will be established prior to the announcement of the Offer and owned andgoverned by Company A and Company B as to 50%each. The board of Newco will initially consist of four directors, twoappointed by Company A and two by Company B. All decisions will be reserved tothe board and require the consent of the majority of the board including atleast one Company A and one Company B director. Company A and Company B willhave joint conduct of the Offer.
2.4The joint ownership structure referred to above will continue until the CompanyA Acquired Businesses located in France andthe remaining 50% interest in a 50-50 Eastern European joint venture betweenCompany A and target have been transferred to Company A at which point CompanyB will acquire a majority interest in Newco. Following such transfers Company Awill continue to have control of all Company A Acquired Businesses thatcontinue to be held within target.
2.5As soon as legally possible after closing of the Offer, Company B will assumecontrol of the Company B Acquired Businessesand Company A will assume control of the Company A Acquired Businesses. Theboard of Newco will delegate control of target accordingly. Control for thesepurposes means that so far as is practically possible Company A and CompanyB, as the case may be, will be responsible for all decisions concerningproduction, distribution, marketing, sales,the appointment or dismissal of employees, business plans, financial plans, IP,brands and material capital expenditure, with respect to their respectiveportions of the target businesses.
2.6 It is the parties' currentintention that the Consortium Agreement will first be initialed and will besigned immediately before the announcement of the Offer. The reason for theperiod between initialing and signing is to ensure that if discussions withtarget disclose facts that may require changes to the detail of the ConsortiumAgreement such changes can be reflected in the final version of the agreement.However, there is no intention of changing the overriding purpose of theConsortium Agreement which is to bring about the break-up of target and thedivision of its businesses between Company A and Company B.
2.7The agreed division of target between Company A and Company B will mean thatCompany A acquires roughly 53% of the targetbusiness by enterprise value and Company B acquires the remainder.
2.8 The arrangement between Company Aand Company B will terminate in certain defined circumstances including ifeither party notifies the other prior to announcement that it does not wish toproceed, or there is no announcement of the Offer by January 31, 2008. The arrangement between CompanyA and Company B is exclusive for a period of 6 months from October 7, 2007. This means, inter alia, thateach party may not make an alternative offer for target or acquire any part ofthe target's business other than in accordance with the agreed arrangementsduring this period.
3.Separation
3.1The LOI allocates the target's businesses to each party based on the countrywhere the businesses are located. The CompanyB Acquired Businesses include the target's businesses in the United States.
3.2 Subject to certain exceptions notrelevant to the United States, where a brand allocated to one party is sold ina country allocated to the other party then all rights in the brand belong tothe party allocated the brand (unless the parties agree otherwise) and allassets and employees in the country are allocated to the party allocated thecountry; all liabilities relating to intellectual property in the brand areallocated to the party allocated the brand. Where a brand allocated to oneparty is licensed in a country allocated to the other then unless agreedotherwise the license will terminate as soon as possible, and in any event bynot later than the later of August 31, 2008 or six months after Closing,without compensation being payable.
3.3 The Consortium Agreement will contain legally bindingprovisions requiring the transfer of the Company A Acquired Businesses toCompany A. It is intended that the consideration will be offset by Company Bacquiring Newco shares. Company A's ownership interest in Newco will becommensurately reduced on each transfer by repayment or transfer of shares inNewco to Company B. However, at all times Company A will, under the terms ofthe Consortium Agreement, have control of the Company A Acquired Businesses.
3.4 TheCompany A Acquired Businesses will be acquired by Company A as soon as possiblefollowing Closing. The Company B Acquired Businesses will be acquired byCompany B (to the extent desirable) from target as soon as possible afterClosing. The slightly different treatment of Company A and Company B reflectsthe fact that Company A's interest in Newco will diminish as Company A AcquiredBusinesses are transferred out of Newco leaving Company B with control over theCompany B Acquired Businesses that remain in Newco (Company B will at no pointhave control of the Company A Acquired Businesses).
3.5Where necessary target businesses will be internally reorganized to facilitatethe transfer of the appropriate businesses to Company A and Company B.
3.6Company A will undertake limited due diligence in respect of the Company AAcquired Businesses and Company B will undertake limited due diligence inrespect of the Company B Acquired Businesses.
3.7Subject to the result of any due diligence exercise, the parties intend that ifan Acquired Business (A) uses assets or rights (other than brands, as to whichsee above) belonging to the other Acquired Business (B) or uses servicesprovided by the other Acquired Business then the other Acquired Business willprocure that the other party may continue to use the assets, rights or servicesat cost until 31 December 2008.
4. Two separateacquisitions
4.1 Newco, which at the time of the acquisition of targetwill be jointly owned and controlled byCompany A and Company B, will acquire target solely for the purpose of dividingthe target businesses between Company A and Company B in accordance with thearrangements set out in the Consortium Agreement. Following such division ofthe businesses Newco, and any target businesses remaining in Newco, will comeunder the sole control of Company B.
Immediately after Closing, pursuant to the terms of theConsortium Agreement, Company B will have responsibility for, and control over,the target businesses that it will ultimately own and Company A will have thesame responsibility and control over the businesses it will own. This will meanthat, so far as is practical, the current management structure of target willbe replaced by a structure under which target employees in the Company AAcquired Businesses will report to Company A group management and targetemployees in the Company B Acquired Businesses will report to Company B groupmanagement.
4.2 We consider that the Offer can be disregardedas a transactional step under "continuum" analysis under the HSR Act because:
(a) The Consortium Agreement willset out legally binding obligations concerning the break up of the targetbusiness. There will be detailed requirements concerning the allocation oftarget's assets to each of the parties on a country by country and brand bybrand basis.
(b) The first transaction (theacquisition of target by Newco) is only intended as a transitional step and theOffer will only be made if the parties are certain that they can proceed with the completion of the furthertransactions (the transfers to Company A andCompany B) after Closing. The parties will endeavor to achieve full separationof the Company A Acquired Businesses and the Company B Acquired Businesseswithin 12 months of Closing and presently believe that such separation is verylikely to be achieved within this timescale (although even before formalseparation Company A and Company B will separately be responsible for thebusinesses they will acquire and control the conduct of those businessesaccordingly).
(c) Company B, as the only partymaking an acquisition that would not otherwise be exempt, is indeed filing.
This treatment would also be consistent with the EuropeanCommission's approach to these issues. The Commission's ConsolidatedJurisdictional Notice ("the Notice") considers the situations inwhich several operations occur in succession, where the first transaction isonly transitional in nature. In particular, paragraphs 30-31 of the Noticestate:
"30...severalundertakings come together solely for the purpose of acquiring another company on the basis of an agreement to divide upthe acquired assets according to a pre-existing plan immediately uponcompletion of the truncation. In such circumstances, in a first step, theacquisition of the entire target company is carried out by one or severalundertakings. The question is then whether the first transaction is to beconsidered as a separate concentration, involving an acquisition of solecontrol On the case of a single purchaser) or of joint control (in the case of ajoint purchase) of the entire targetundertaking, or whether only the acquisitions in the second step constituteconcentrations, whereby each of theacquiring undertakings acquires its relevant part of the target undertaking.
31. The Commission considers that the first transactiondoes not constitute a concentration, and examines the acquisitions of control by theultimate acquirers, provided a number of conditions are met: First, thesubsequent break-up must be agreed between the different purchasers in alegally binding way. Second, there must not be any uncertainty that the secondstep, the division of the acquired assets, will take place within a short timeperiod after the first acquisition. The Commission considers thatnormally the maximum time frame for the division of the assets should be oneyear.
For the reasons described at the outsetof this section, the parties believe that the two criteria set out in paragraph31 are satisfied.
4.3The establishment of Newco andthe acquisition by Newco of the issued share capital of target will not resultin co-ordination of other activities between Company A and Company B, and willnot have an effect on their competitive behavior outside Newco. Furthermore,Company A and Company B will implement appropriate safeguards and set up aconfidentiality framework to restrict disclosure of commercially sensitiveinformation within Newco. Company A will not be permitted to receiveconfidential or commercially sensitive information relating to the Company BAcquired Businesses, and Company B will not be permitted to receiveconfidential or commercially sensitive information relating to the Company AAcquired Businesses. Similarly Company A directors of Newco will not be givenaccess to confidential information concerning Company B Acquired Businesses andvice versa unless such disclosure is legally required. The parties will seek toestablish firewalls within target's systems to ensure that confidentialinformation concerning each party's businesses is not disclosed to the otherparty.