Question
September 9, 2008
VIA E-MAIL
B. Michael Verne
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Washington, DC 20580
Re: Hart-Scott-Rodino InformalInterpretation
Dear Mike:
Thank you fortaking the time to speak with (redacted) and me last Wednesday, and having afollow-up call with me last Thursday, regarding our Hart-Scott interpretationquestion. I am writing to memorialize my understanding of our conversations. Asyou may recall, (redacted) and I presented you with the following scenario:
Company A andCompany B intend to form a new (unincorporated) limited liability company("Newco"). Company A and Company B both meet the applicablesize-of-person test and are engaged in interstate commerce.
In connection withthe formation of Newco: (i) Company A will transfer to Newco certain customercontracts, tangible equipment and other assets at Company A's book value which,in the aggregate, is approximately $40 million; and (ii) Company B willtransfer to Newco certain customer contracts and tangible assets at Company B'sbook value and transfer all of its right, title and interest to certaintrademarks at a value determined by a third party appraiser, with theaggregated book value of the tangible assets and the appraised value of thetrademarks being approximately $40 million. In exchange for the transfer andassignment of the foregoing assets, Company A and Company B will each acquire a50% equity interest in Newco during its formation. Each party's capital accountin Newco will be $40 million.
In addition, thefollowing will occur in connection with the formation of Newco, at the momentimmediately following the initial formation:
1. Newco will lease from Company A ("Leases")certain real estate (land and buildings) associated with the tangible equipmentand assets conveyed by A to Newco in the formation transaction. The Leases willbe for a fixed term with consecutive options to renew at a rental rate believedto be fair market value. The real estate reverts to Company A upon expirationor termination of the Leases.
2. Newco will enter into an exclusive trademark licenseagreement ("License Agreement") with Company B under which Newco willbe granted an exclusive license to use certain trademarks (LicensedMarks") in a particular segment of an industry. Company B will retain theright to use the Licensed Mark in all other segments of the industry. TheLicense Agreement terminates at the same time the Leases terminate and have aroyalty rate that is believed to be fair market value. The trademarks subjectto the License Agreement revert to Company B upon expiration or termination ofthe License Agreement.
3. Company A and Company B will each make loans of approximately$100 million to Newco. The two loans shall bear the same market interest rateand will require repayment of principal and interest over a term of years.
4. Newco will enter into agreements with Companies A andB respectively to act as a sales agent to sell the finished goods inventorythat Company A and Company B possess at the time of formation. Newco will bepaid a sales commission on all sales of Company A's or Company B's finishedgoods inventory, but the profit or loss on such sales remains with Company Aand Company B. After the finished goods inventory of Company A and Company Bhas been sold, the agent agreements terminate.
5. Company B will enter into a tolling agreement tomanufacture finished goods for Newco for a limited period of time after theformation of Newco. Newco will pay Company B a market rate for the goodssupplied. The agreement terminates at the time Newco's production facilitiesbecome capable of producing all of Newco's products.
Presented withthese facts, you agreed with the following conclusions:
The initialformation transaction is governed by 16 C.F.R. 801.50. Each of Company A andCompany B is deemed to be acquiring a potentially reportable controllinginterest in Newco. For purposes of the size-of-transaction test, the value ofeach party's 50% interest in Newco is the fair market value, as determined ingood faith by each of Company A and Company B, respectively. You indicated thatacquisition price was not relevant in the context of a 801.50 formationtransaction.
In our follow-upconversation, you indicated that for the fair market value determination, itwould be appropriate for each party to calculate the fair market value of theassets it contributed to the joint venture and use that number as the fairmarket value of its 50% interest in the joint venture, since the value of whatit gets back (the 50% membership interest) would equal the value of what it putin (the contributed assets). You said that the parties would not need to assigna "going concern" or similar value to the entity being created. Thiswas true notwithstanding the fact that the parties were contributing existingcustomer contracts to Newco.
You also indicatedthat steps 1-5 above would not be considered contributions of assets to thejoint venture or acquisitions of assets by the joint venture. Accordingly, theywould not need to be considered when the parties value their respective 50%membership interests in the initial formation transaction. Neither would theybe considered potentially reportable assets acquisitions by the joint venture.
Please let me knowif I have misstated our conversation in any way or if you disagree with any ofthe conclusions above. As always, thank you for your time and assistance.
Sincerely,