Question
From: (Redacted)
Sent: Monday, August 24, 2009 1:12 PM
To: Verne, B. Michael
Cc: (Redacted)
Subject: HSRQuestion
Mike, hope you hada great vacation. Sorry to add to the re-entry pain, but (redacted) and I are workingon a transaction and would appreciate your help with respect to an HSRquestion, the nature of which is outlined below.
We representCompany A, which owns the general partner of Company B, a master limitedpartnership with publicly traded common units representing limited partnerinterests. Company A is transferring certain assets to Company B in return forCompany B's issuance of additional common units representing limited partnerinterests in Company B and Company B's assumption of certain debt from CompanyA (the "Transfer") and a question is presented as to whether an HSRfiling is required.
I. FactualCircumstances The factual circumstances are as described below.
PartnershipInterests Outstanding
Company B has thefollowing outstanding partnership interests:
8,365,545 common units held by public-representing a 43% limited partner interest
4,428,067 common units held by Company A-representing a 23% limited partner interest
6,325,000 subordinated units all ofwhich are held by Company A -representing a 32% limited partner interest
389,642 general partner units all ofwhich are held indirectly by Company A through its ownership of the generalpartner -representing a 2% general partner interest
incentive Distribution Rights (lDR's) all of whichare held indirectly by Company A through its ownership of the general partner-which entitle the holder to increasing percentages (up to 48%) of Company B'sdistributions if the per unit distributions exceed the minimum quarterlydistribution ($0.35 per unit)
ProfitDistributions
The provisions ofCompany B's partnership agreement relating to cash distributions provide thatall cash on hand is to be distributed at the end of each quarter, less reservesestablished by the general partner.
Distributionsduring the current subordination period are made according to the followingformula:
a. First,98% to the holders of the common units and 2% to the general partner until eachcommon unit has received a minimum quarterly distribution of $0.35.
b.Second, 98% to holders of common units and 2% to the general partner until anyarrearages in payment to common unitholders from prior quarters are made up(subordinated units do not accrue arrearages).
c. Third,98% to holders of subordinated units and 2% to general partner until eachsubordinated unit has received a minimum quarterly distribution of $0.35.
d. Thenaccording to a schedule where all common and subordinated unitholders are paidpro rata, 2% is paid to the general partner, and an increasing percentage ofthe distributions (up to 48%) is paid to the holder of the IncentiveDistribution Rights.
Thus,under this formula, the profit payouts are variable: if enough cash has beengenerated in a quarter to make the minimum quarterly distribution to allunitholders ($0.35 per unit), then in such circumstances Company A wouldreceive greater than 50% of the cash distributions for that quarter sinceCompany A owns 57% of the total common, subordinated and general partner unitsand all of the Incentive Distribution Rights. To the extent that there is notenough cash to make the minimum quarterly distribution to all unitholders thenthe holders of common units are entitled to receive the full minimum quarterlydistribution prior to any amounts being distributed on the subordinated units.Accordingly, in this situation, Company A could receive less than 50% of thetotal cash distributions for that quarter since Company A owns only 35% of theoutstanding common units.
Ineach of the quarters since Company B's initial public offering, it has paid atleast the minimum quarterly distribution and Company A has received at least 51% of cash distributions. Company B received 58% of the cash distributions paidin respect of the second quarter of 2009. The same general profit return isexpected in the future but, of course, is dependent upon the actual performanceof the business.
Distribution ofAssets on Dissolution After Payment of Debts
Thedistribution of assets on dissolution is made in accordance with the capitalaccounts. After assets are sold and creditors paid off, a calculation is madeof net termination gains or losses which are then attributed to the specificcapital accounts. At this point investors are paid under a formula similar tothat described above for profits. Certain mechanics of the calculation aredesigned to increase the likelihood of the common unitholders receiving backtheir initial unit price but in some factual circumstances this would not occurand the holders of subordinated units would receive payments even if the commonunitholders did not receive back their initial unit price.
Forpurposes of this inquiry, it should be assumed that Company A would not receive50% or more of the assets on dissolution. (The actual full calculation has notyet been made.)
II. QuestionPresented
Underthese factual circumstances and assumptions, is Company A deemed currently tocontrol Company B such that it can rely on 16 C.F.R. 802.30 in making thetransfer or would a filing be required because Company A is not deemed tocontrol?