Question
VIA US MAIL AND FAX NUMBER (202.326.2624)
March 16, 2009
Michael B. Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
6th Street and Pennsylvania Avenue NW
Washington, DC 20580
Re:"Size-of-the-Person" Jurisdictional Test and Payment of ExtraordinaryDividend Dear Michael:
Thisletter is written to summarize and to confirm the guidance and informalopinions that you have shared with us during a phone conversation on February20, 2009 regarding the "Size-of-the-Person" jurisdictional test underthe Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended (the"HSR Act"), and the Commission's implementing regulations thereunder,and in particular, how the Premerger Office would analyze the consequences of11,e distribution of a premerger extraordinary dividend on the parties'Premerger Notification obligations.
FACTS
AsI described in our conversation, Company A intends to acquire 100% of 11,evoting capital stock of Target through either a merger or " stockpurchase" in " transaction that the" parties have preliminaryvalued at approximately $100 million. Target is its own ultimate parent entityand is not engaged in manufacturing. Company A has assets in excess of $200million. Target regularly prepares month-end balance sheets. Target's mostrecent February 2009 month end balance sheet reflects approximately $145million in total assets. Of its assets, Target holds several million dollars in"excess" cash -in the sense that the "excess" cash is notcurrently necessary to support the day-to-day operational working capital needsof Target. Target may declare and pay an extraordinary dividend of at least aportion of its excess cash to its shareholders sometime in March resulting inTarget having less than $13.0 million in assets as reflected on its nextregularly prepared balance sheet as of March 31, 2009.
ANALYSIS
Fora proposed transaction valued in excess of $65.2 million and up to andincluding $260.7 million to be reportable under the HSR Act, the partiesto the transaction must meet the "Size-of-the-Person" jurisdictionaltest. In this regard, if an acquiring person with over $130.3 million in totalassets or annual sales intends to acquire the voting securities or assets of aperson not engaged in manufacturing, the acquired person must have at least$13.0 million in total assets as reflected on its last regularly preparedbalance sheet. Furlhem10re, Section 801.90 of the COlfU11ission's implementingregulations provides that "[a]ny transaction(s) or other device(s) enteredinto or employed for the purpose of avoiding the obligation to comply with therequirements of the [HSR Act] shall be disregarded, and the obligation (0comply shall be determined by applying the [HSR Act] and these rules to thesubstance oft be transaction."
OpinionNo. 195 of the Premerger Notification and Practice Manual (Third Edition 2003)responds to a question submitted to the Premerger Notification Office inquiringwhether a Section 801.90 problem arises where shortly before the closing of atransaction an acquired person "declares an extraordinary (andaccelerated) dividend that reduces its size below $10 million [($13 million ascurrently inflation adjusted)] on its next regularly prepared balance sheetwhich is prepared by the time of closing." In response to the question.Opinion No. 195 states that it does not view the extraordinary dividend as adevice for avoidance in that the HSR Rules of Practice instructs that the sizeof the person is to be determined by referring to its financial statementsprepared in accordance with the accounting principles normally used. If thestatements had been prepared on a regular basis in accordance with the person'snormal accounting practices and show that the person does not satisfy therelevant "Size-of-the-Person" jurisdictional test, the proposedtransaction would not be reportable.
DISCUSSIONBased on the factsof the proposed transaction, if the parties were to close the transaction priorto the preparation of the regularly prepared balance sheet that reflects thereduction in assets fo]]owing the payment of the dividend described above, theHSR Act and its implementing rules would mandate that the parties make theappropriate premerger notification filings with the Federal Trade Commissionand Department of Justice (The Other jurisdictional elements of the HSR Act aresatisfied). However. based on Opinion No. 195. and prior informalinterpretations rendered by the Federal Trade Commission staff, you confirmedthat if the acquired person would issue an extraordinary dividend such that itstotal assets as reflected on its regularly prepared balance sheet would be lessthan $13.0 million, the parties to the proposed transaction would fail tosatisfy the "Size-of-the-Person" jurisdictional test under the HSRAct.
Aswe discussed during our phone conversation on February 20, while the cash thatwould be subject to the extraordinary dividend is excess in the sense that itis not necessary for Target's day-to-day working capital needs, Target wouldlikely not be issuing the dividend in the absence of the proposed transactionwith Company A. That said, in light of the proposed transaction, Target will bemaking the extraordinary dividend regardless of any HSR implications. Thetiming of the issuance of that dividend, however, may be, at least in part,motivated by the consequences of the dividend on the parties obligations underthe HSR Act. In this regard, Opinion No. 194 of the Premerger Notification andPractice Manual is instructive in opining that the parties' decision to delay aclosing until a target's next balance sheet reflecting a reduction in totalassets would not be viewed as a potential transaction or device for avoidance.According to Opinion No. 194, the Size-of-the-Person jurisdictional test is abright line test applied at the time of closing, and [p]ostponing the closingdate until a new regularly prepared balance sheet is available that wouldcause the transaction to fail the Size-of-the-Person test would not result inviolation of Section 801.90."
CONCLUSIONWeunderstand that the issuance of the extraordinary dividend does not raiseavoidance issues under Section 801.90 of the HSR Act and implementing ruleseven though the issuance of the dividend occurs shortly before a proposedtransaction and results in the failure of the acquired person meeting the"Size-of-the-Person" jurisdictional test. So long as theextraordinary dividend is actually distributed, a regularly prepared balancesheet prepared in the ordinary course of business and consistent with Target'spast practice reflects the issuance of the dividend prior to closing, and thebalance sheet accurately reflects Target's size, the "Size-of-the-Person"threshold will not be exceeded and there is no reason to implicate Section801.90 on these facts.
Weunderstand that the Premerger Notification Office staff concurs with thisinterpretation of the HSR Act and its implementing rules and regulations.
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