Question
James H.Ferkingstad
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, DC 20580
Dear Mr.Ferkingstad:
This letter is toconfirm my conversation with you today in which you indicated that thefollowing transaction is exempt under 16 C.F.R. 802.40 from the reportingrequirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, asamended, 15 U.S.C. 18a.
In the proposedtransaction, two nonprofit hospital systems ("System A" and"System B") have agreed to affiliate through the creation of ato-be-formed nonprofit corporation qualified under Section 501(c)(3) of theInternal Revenue Code (''Newco''). System A and System B are integratedhealthcare delivery systems, each including a nonprofit parent corporationqualified under Section 501(c)(3), and numerous subsidiary corporations,including Section 501(c)(3) hospitals and clinics. System A and System Bprovide health related services in Territory A and Territory B, respectively,which are separate and distinct. Newco will become the sole member of theexisting parent corporations of both System A and System B and will govern theoperation of the combined health system, subject to certain limited reservedpowers of Newco's nonprofit corporate members, as discussed more fully below.
Two new nonprofit corporationsqualified under Section 501(c)(3) will be formed to act as the corporatemembers of New co (the "System A Member," the "System BMember," and together, the "System Members"). The boards ofdirectors of the System Members shall be comprised of the current board membersof the System A parent corporation and the System B parent corporation,respectively. The governing boards of the System Members shall beself-perpetuating except as provided below.
The initial NewcoBoard of Directors shall consist of 15 members, seven of whom shall beappointed by System A from among the current directors of the System A parentcorporation ("System A Directors''), seven of whom shall be appointed bySystem B from among the current directors of the System B parent corporation("System B Directors") and the CEO of Newco. All System A Directorsmust be residents of Territory A, and all System B Directors must be residentsof Territory B.
Except for the CEO,the initial directors of Newco shall serve initial terms of two, three or fouryears. Their successors each shall serve three year terms. The current CEO ofSystem
A will serve as theinitial CEO of Newco. During the first year, the System A Member may remove anySystem A Director without cause upon not less than a two-thirds vote of thegoverning board of the System A Member, and may designate any successor to anySystem A Director who has died, resigned or been removed. The System B Membershall have the same rights with respect to the System B Directors.
For appointments tothe Newco Board of Directors after the first year, the Newco Board of Directorswill appoint a Nominating Committee, consisting of two System A Directors andtwo System B Directors, who shall nominate successors to the Newco Board ofDirectors. The governing board of the System A Member will have the option toreject any nominee as a successor System A Director. In the event that thenominee is rejected by the System A Member, the Nominating Committee shallnominate another nominee. If the System A Member rejects the second nominee,the System A Member shall have the right to appoint the successor System ADirector. The System B Member will have the same rights with respect tosuccessor System B Directors. Following the first year of the affiliation, theSystem A Member may remove System A Directors only for cause and the System BMember may remove System B Directors only for cause.
At least once eachcalendar year in connection with the annual adoption of Newco's five yearstrategic plan, the System Members shall consider whether to terminate theirstatus as System Members of New co. If not terminated earlier, upon adoption ofthe 2012 five year strategic plan by the affirmative vote of 10 members of theNewco Board of Directors (unless the plan is rejected by a two-thirds vote ofthe governing board of either the System Member A or the System Member B), bothSystem Member A and System Member B will cease to have any rights with respectto Newco. Upon sunset of the rights of the System Members, the Newco Board ofDirectors shall elect three additional System A Directors and three additionalSystem B Directors by a vote of at least 10 Newco directors, so that as of thattime, the Newco Board of Directors would consist of 20 directors plus the CEOof Newco.
Newco shall governthe operation of the combined health system subject to the following limitedreserved powers of approval retained by the System Member A and the SystemMember B:
(I)
Amendment of articles of incorporation and bylaws of Newco.
(2)
If Newco is not the surviving party, merger of Newco with an entity that is
not a wholly controlled subsidiary of Newco.
(3)
Consolidation or dissolution of New o.
(4)
Sale of all or substantially all of the assets of Newco.
(5)
Change of name of Newco.
(6)
Any of the foregoing with respect to a "material subsidiary" of Newco.
(7)
Approval of the initial President of System B.
Upon termination ofthe rights of the System Members with respect to Newco, and the expansion ofthe Newco Board to 21 members, the above actions formerly subject to theapproval of the Newco Members will be added to the following actions whichrequire a supermajority vote of the Newco directors (the vote of 10 directorsprior to the expansion of the Newco Board of Directors, and 14 directorsthereafter):
(1)
Election and removal of the Newco CEO.
(2)
Approval of consolidated annual operating and capital budgets of Newco.
(3)
Approval of the initial strategic plan of Newco.
(4)
Approval of capital expenditures in excess of $20 million.
(5)
Approval of incurrence of debt or pledges of assets in excess of $20 million
(6)
Approval of entering into a joint venture with a financial commitment in excess of $20 million.
(7)
Approval of acquisition or disposition of a "material subsidiary" of Newco
(8)
Removal with or without cause of a System A Director or a System B Director
Newco will not payto any party a purchase price, and no voting securities will be issued inconnection with the proposed integration of System A and System B into Newco,and neither party shall be able to trigger a unilateral withdrawal, sale,merger, change of sponsorship or other disposition of assets or dissolution ofassets of or from Newco.
Please confirm thatneither Newco nor System A nor System B is required to file HSR PremergerNotification with respect to the above transaction.
Thank you for yourreview of this transaction.