Question
(redacted)
January 19, 1988
Wayne Kaplan, Esq.
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
Washington, D.C. 20580
Dear Mr. Kaplan:
I am writing to confirm our telephone conversation on January 14, 1988, concerning a question involving the Premerger Notification Rules described below. You indicated that this was an issue of first impression for your office.
Our firm represents the buyer in a contemplated transaction in which our client will purchase certain assets and contemporaneously enter into a manufacturing agreement with the seller of the assets. The assets to be acquired include all or substantially all of the assets used in a particular line of business conducted by the seller except for the plant building. The assets to be acquired include land, equipment, inventories of the finished product and work in process, raw material supplies, customer lists, customer contracts, patents, trademarks and copyrights, know-how and research.
Since the buyer is not acquiring the sellers plant, the equipment to be acquired, which is currently located in the plant, will need to be moved to the buyers plant. In addition, in order to accommodate the acquired business, the buyer will need to expand its existing facilities or construct new facilities. To provide for continued production of the product during the approximately 12 to 15 month transitional period after the closing of the sale during which the buyers facilities will be expanded and the equipment will be moved (in phases), the seller and buyer contemplate entering into a manufacturing agreement whereby the seller will use its plant and the equipment being transferred to manufacture the product for the buyer during the transitional period. The manner in which the seller will be compensated under the manufacturing agreement has not as yet been determined, but it is contemplated that either the seller will be reimbursed for its costs of production and receive a negotiated fee for its services or the seller will be paid on the basis of the quantity of the product produced. In either case, it is contemplated that the seller will earn a profit under the manufacturing agreement over and above its costs of production.
The purchase price of the assets would be between #14 and $15 million. However, if the amount to be received by the seller under the manufacturing agreement were added to the purchase price, the total would exceed $15 million. Further, even if one looked only at the fee or profit to be earned by the seller under the manufacturing agreement, amount added to the purchase price of the assets also might exceed $15 million.
The question I raised with you was whether any amount to be received by the seller under the manufacturing agreement (solely to compensate the seller for manufacturing the product in the 12 to 15 month transitional period) must be aggregated with the purchase price for the assets in determining whether the $15 million size of transaction threshold will be exceeded for Hart-Scott-Rodino Act reporting purposes.
You indicated that no such aggregation was necessary, and that thus no Hart-Scott-Rodino Act filing would be required.. Your cautioned, however, that if a complaint were received or a question were raised under 801.90 of the rules concerning transactions for purposes of avoidance, the buyer must be prepared to show that the acquisition price for the assets represented the actual, bona fide value of the assets and
that no part of the consideration to be paid to the seller under the manufacturing agreement represented additional consideration for the assets being acquired.
I would appreciate you notifying me with 10 days if the above does not accurately reflect the views of your office on the issue presented.
Very truly yours,
cc: (redacted)