Question
April 5, 1994
BY FAX and MAIL
Richard B. Smith, Esq.
Senior Attorney
Premerger Notification Office
Federal Trade Commission
6th and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Dear Dick:
Further to our telephone conversation last Thursday, I am writing to confirm your opinion that the transaction described below is not reportable under the Hart-Scott-Rodino Antitrust Improvements Act.
In consideration of the transaction, please assume that the size-of-person test is satisfied.
1. Description of Proposed Acquisition The proposed transaction would involve the acquisition of machinery, equipment, spare parts, customer list, business records, trademarks and other intangible assets. The transaction would not include any buildings or leasehold interests; rather, the machinery would be dismantled and physically moved to the Buyers premises. Accounts receivable would not be transferred.
2. Transition Period In order to maintain the customer base during the period when machinery would be moved from the Sellers premises to the Buyers premises, machines would be shut down sequentially, so that not all machines would be out of operation at one time. During this Transition Period from the time of Closing until the machines have been moved to the Buyers plant and started up, it shall be necessary for the Seller to continue to operate the machines which have not yet been moved in order to supply the market with its products and prevent the erosion of its customer base until the Buyer has the capability of supplying the customers itself. Therefore, at the Closing, the parties will enter into a Sales Agency Agreement under which the Seller will continue to supply the market with its products, and the Buyer will become the Sellers sales agent for such products with responsibility for sales and related customer service functions. The Sales Agency Agreement will specify the types, quantities, and prices of products to be manufactured by Seller and made available for the Buyer to sell during the Transition Period. As sales agent, the Buyer will be responsible for the solicitation of orders, for billing and collection of customer accounts, for the credit-worthiness of customers, and for any rebates offered to customers, in exchange for which the Buyer will earn a sales commission.
Under the Sales Agency Agreement the Seller will produce the quantities set forth in a mutually agreed-upon market forecast. Sellers ability to supply product after Closing will be hampered by the fact that its employees will know that their jobs within the Seller will be ending within a few months. Despite this environment, Seller will have to increase the production on each machine in service (since some of the machines will be out of service) in order to fulfill the market forecast. If the Seller fails to deliver the quantity of product required in the forecast, there shall be liquidated damages which shall be deducted from the escrow account (as well as from the purchase price for the business).
The Buyer shall use its best efforts to sell all of the product set forth in the forecast, including giving preference to sales of product manufactured by Seller over product manufactured by Buyer with regard to Sellers existing business. It is extremely unlikely that Buyer will not be able to sell all of the product in the forecast. However, if during the Transition Period the Buyer displaces any of Sellers existing business with Buyers own product and fails to sell all of the Sellers product in the forecast, then the Buyer shall owe Seller, as liquidated damages, the amount which the Seller would have received if there had been no such shortfall.
3. Acquisition Price The proposed purchase price is $13,000,000 for all of the assets described above except for a nominal amount of raw materials inventory at the end of the Sales Agency Agreement (estimated to be less than $750,000). $2,000,000 (of the $13,000,000) would be paid at Closing. Because of the uncertainties in Sellers ability to fulfill all of its obligations under the Sales Agency Agreement, the balance of $11,000,000 would go into an escrow account. A portion of the amount in escrow would be payable as each of the machines is transferred to Buyer. If during the Transition Period sales achieve certain milestones, Seller can receive a $500,000 bonus.
4. Terms of Sales Agency Agreement Buyer will be paid a sales commission at or above market rates. If the Seller fulfills 100% of its obligations under the Sales Agency Agreement, the Seller can earn a bonus of $500,000. Seller may also be paid liquidated damages by Buyer if Buyer displaces any of Sellers existing business with Buyers own product during the Transition Period and fails to sell all of the product in the forecast; and conversely, Seller may pay liquidated damages to Buyer if Seller fails to produce product in accordance with the forecast. The precise terms of the Sales Agency Agreement have not yet been negotiated, but the potential liquidated damages could be several million dollars.
5. Conclusion It is our conclusion that the transaction is not reportable because the value of the assets purchased under Section 801.10 is less than $15 million. the actual amount paid by the Buyer to the Seller for the assets will be less than $15 million (under paragraph 3 above), and the Buyer has concluded under Section 801.10(c) of the Regulations that the fair market value of the assets is less than $15 million. The only issue of significance, therefore, is the treatment of the sales agency agreement. We believe it is a bona fide sales agency agreement with the Seller having title to the goods and the buyer earning a sales commission for its effort, which will be at or above market rates and therefore the sales agency agreement should not be deemed an acquisition of assets and thereby somehow aggregated with purchase of the machines and intangible assets.
I understood from our conversation on Thursday that you agreed with this conclusion. Because my client would like to move forward quickly with this transaction, I would appreciate hearing from you as soon as practicable as to whether you continue to agree that the transaction is not reportable.
Sincerely,
(redacted)
(redacted)
STAFF COMMENTS: 4/6/94
PMN Staff-
In the attached letter, the Buyer is to purchase assets from seller, including machinery used to produce certain products. There are several machines, which will be shut down, one at a time, an moved to Buyers plant. Seller will continue to operate the remaining machines during this Transition Period and, for this time, will have Buyer operate as its sales agent for products produced on the still operating equipment. The Buyer will solicit orders, bill and collect customer accounts, determine the credit-worthiness of customers and implement rebates to customers, in exchange for which the Buyer will earn a sales commission at or above market rates (so that his services will not be consideration for the assets).
The Sales Agency Agreement provides for liquidated damages if the Seller fails to meet the quantities set forth in an agreed upon market forecast and the Buyer will be subject to liquidated damages if it fails to sell all of Sellers product estimated in the market forecast.
In my view, the Sales Agency Agreement need not be taken into consideration in determining the acquisition price for the Buyers assets (which is less than $15 MM) or their fair market value (which is less than $15 MM). While the liquidated damages could be several million dollars, it seems this payment (which could be made to either Buyer or Seller) is a term of the Sales Agency Agreement and not consideration for the assets. The Seller will retain title to the goods subject to the Sales Agency Agreement and the Buyer will earn a sales commission for its activities under such Agreement, which seems the usual case.
Any thoughts or ideas will be appreciated.
CC: John Sipple Thanks,
Dick
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4/13/94
Advised writer that PMN Office agreed with his conclusion and that the sales agency agreement need not be considered in determining the acquisition price.
R.B. Smith