Question
December 26, 1991
VIA FAX
Mr. John Sipple
Mr. Richard Smith
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
Washington, D.C. 20580
Re:Premerger Notification Filing
Gentlemen:
I am writing to you at the suggestion of (redacted) of the Department of Justice. On December 23, 1991 I spoke with Mr. Patrick Sharp of your office concerning whether a particular transactional scenario would require the filing of a premerger notification. This transactional scenario is set forth as scenario A below. In my discussions with Mr. Sharp, he indicated that a premerger notification would need to be filed if, under scenario A below, the purchase price or the fair market value of 100% of the assets of the partnership, whichever is greater, exceeded the $15,000,000 threshold set forth in Section 7A(a)(3)(B) of the Act. After further consideration of my discussions with Mr. Sharp I attempted to talk with him again but was unable to do so on December 24. I then spoke with Mr. Jack Sidorov at the Department of Justice on December 24 and he suggested that I contact you directly. In addition to scenario A set forth below, I have set forth two alternative transactional scenarios.
The factual background on this particular issue is that in 1988 Person A and Person B formed a general partnership under the laws of (redacted). Person A contributed the assets of an ongoing business valued at approximately $6,000,000 to the new Partnership C and Person B contributed $3,000,000 in cash to the Partnership C. Person A received a two-third percentage interest in Partnership C and Person B received a one-third percentage interest in Partnership C. At that time, the fair market value of the assets of Partnership C was estimated to be in the neighborhood of $10,000,000. The following three transactional scenarios are proposed at this time:
Scenario A
Person B proposes to purchase Person As partnership interest in Partnership C for approximately $14,000,000. It is estimated that the fair market value of the assets of Partnership C is now approximately $20,000,000. My initial view before talking to Mr. Sharp was that a filing would not be required for this transaction in that the purchase price for the partnership interest acquired from Person A by Person B did not exceed $15,000,000 and, in addition, the two-third interest of Person A in the fair market value of the assets of Partnership C did not exceed $15,000,000. However, in my telephone conversation with Mr. Sharp he indicated that the test imposed by the FTC was the greater of the acquisition price (in this case $14,000,000) or 100% of the fair market value of the assets of the Partnership.
Scenario B
Partnership C is liquidated with the assets distributed in kind to the respective partners. Accordingly, Person A becomes a two-third tenant in common with Person B in the assets formerly held by Partnership C. Person B then acquires from Person A the two-third interest in the assets owned by Person A for $14,000,000. The fair market value of the assets acquired is approximately $13,333,333 (2/3 of $20,000,000). Accordingly, because neither the purchase price of the assets purchased from Person A nor the fair market value of such assets exceeds $15,000,000, no premerger notification filing is required.
Scenario C
Person B either loans $14,000,000 to Partnership C or makes an additional contribution to the capital of Partnership C in the amount of $14,000,000. Partnership C then redeems the partnership interest of Person A for $14,000,000. It is also my understanding that this particular transaction would not require the filing of a premerger notification.
The difficulty I have with Mr. Sharps position under scenario A is that in substance the three alternative transactions reach the same result. I believe the flaw in Mr. Sharps position is that he views the fair market value test under scenario A to be a 100% test rather than a two-thirds test. In other words, the test under scenario A should be rather the greater of the acquisition price for the partnership interest or two-thirds of the fair market of the assets of the
partnership (sic) exceeds $15,000,000. This test would logically flow from the fact that Person B is already a one-third partner in Partnership C and therefore already owns a one-third interest in the assets of Partnership C. I believe this result is also supported by Reg. 801.13(b). Assume that instead of forming a general partnership in 1988 Person A conveyed a one-third interest in the subject assets to Person B for $3,000,000. This transaction would not have required the filing of a premerger notification. Also assume that today Person A conveyed to person B the remaining two-thirds interest in the subject assets for $14,000,000 and the fair market value of such interest is approximately $13,333,333. Under Reg. 801.13(b), the 1988 and 1991 transactions would not be aggregated. Accordingly, a premerger notification filing would not be required with respect to the 1991 transaction.
As always with matters of this nature, we are under a very tight time frame in terms of structuring this transaction. I would appreciate if someone from your office could contact me with respect to the above sometime today. If I am unavailable, please ask for (redacted) of our office. Your assistance on this matter is greatly appreciated.
Sincerely yours,
(redacted)