Question
(redacted)
March 22, 1999
VIA FACSIMILE
Mr. Richard B. Smith
Compliance Specialist [sic]
Federal Trade CommissioN
Premerger Notification Office
6th and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: Reportability of Multi-Step Transaction as Single HSR Filing Under Continuum Approach
Dear Dick:
This letter will confirm our telephone conversation, in which we discussed the filing of the following multi-step transaction as a single transaction pursuant to the "continuum approach" under the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act"), as codified at 15 U.S.C. 18a, and the rules promulgated thereunder:
Pre-transaction structure: See Attachment for the current structure of the companies involved in the transaction. As Attachment 1 shows, Company A is the Ultimate Parent Entity ("UPE") of all entities(1) involved in the transaction except an unrelated Third Party.
Proposed transaction. The proposed transaction involves the combination by two UPE's - Company A and Third party -- of their presently separately controlled businesses in a newly formed corporation, Newco.(2) Company A will contribute several businesses of its controlled entities, and obtain control of Newco, whereas Third party will contribute its entire business, and survive as a Newco subsidiary. The transaction entails the following steps.
Step 1: Company A will contribute stock of Company C an indirect (through company B) non-wholly-owned subsidiary of Company a, to LLC.(3) Company A holds a controlling (approximately 50.1 %) interest in LLC. In exchange for contributing the stock of company C to LLC In exchange for contributing the stock of Company C to LLC Company A will receive and increased ownership interest (going to approximately 65%) in LLC(4)
Step 2: Merger Sub 1, recently created as a wholly-owned subsidiary of Newco (again, with only nominal assets), will be merged into Third Party, with Third Party's public shareholders receiving, in the aggregate, a minority holding (approximately 30%) of Newco common (voting) stock in exchange for their Third party shares. Based on presently available information, none of these Third party shareholder acquisitions is expected to be reportable under 801.2(e).(5)
Step3: Merger Sub 2, also recently created as a wholly-owned Newco subsidiary (and thus within Company a), will be merged into Company C (also within Company A, although not by reason of holdings of voting securities, following the transfer to LLC. in the first-described transaction). LLC will receive approximately 11% and the public shareholders of Company C will receive less than 10%, in the aggregate, of Newco common stock in exchange for their company c shares. As with Third party's shareholders, based on presently available information, none of the Company C public shareholder acquisitions of Newco stock is expected to be reportable under 801.2(e).(6)
Step 4: LLC (Within Company Q) will transfer certain assets (the "LLC Assets") to Newco in exchange for additional shares which, when combined with the shares received in Step 3, will give LLC a post-transaction holding of approximately 61.5% of Newco common stock.
Post-transaction structure. See attachment 2 for an illustration of the post-transaction structure.
Although the four steps described above may, if viewed individually and out of their larger context, technically represent several reportable events they are in fact simply constituent elements of one reportable transaction - - the contribution by company A (through LLC) And Third Party of their Combined Businesses to a newly formed company jointly owned by their shareholders - under the "continuum" approach. The first step is non-reportable in any event, Company a and Third party are the only two reporting persons involved in the remaining steps (with step 3 being essentially intra-person, ut for not meet [note-1] the "by reason of holdings of voting securities" aspect of 802.30); the remaining steps are all conditioned upon each other under the transaction agreements, the businesses contributed by Company A and Third party are consideration for each other's resulting interest in Newco; [emphasis added by R. Smith] [note 2] and the entire transaction will occur at one closing. Under such a continuum approach, given that each element is an inseparable part of one continuous transaction, the Premerger Notification office should look at the result of the transaction when the parties "get up from the table," which is two reporting persons' formation of a new company combining their previously separately owned businesses. As a result, Company a and Third Party would be the sole parties filing as acquiring persons, and Newco as the single acquired person, pursuant to 16 C.F.R.801.40.
Please let me know as soon as possible, and in any event by March 23, 1999, your thoughts on the applicability of the continuum approach. I request confidential treatment of this letter and the enclosed pursuant to the FTC Rules of Procedure and 15 U.S.C. 18a(b) As always, I appreciate your very valuable assistance in these matters.
Best regards,
(redacted)
[Attachments see PDF]
[note 3]
1. Although certain public shareholders are also involved in the transaction, these shareholders requisitions will not be reportable, because of either (i) failure to meet the size of person and/or size of transaction tests, or (ii) as to certain shareholders meeting the size of person and size of transaction tests, the ability to rely on the passive investment exemption. 116 C.R.F. 802.9.. 2. Newco is presently termed as a wholly-owned subsidiary of Company A, but has only nominal assets. 3. The formation of LLC (pre-Formal Interpretation #15) was eaxempt from reporting given its member-managed structure. 4. I previously discussed this aspect of the transaction with Patrick Sharpe, who agreed that this step, viewed alone is not reportable. Formal interpretation #15 provides that "[p]ost-formation acquisitions of membership interests in LLC's will not be reportable except in two situations: (1) when the acquisition of the membership interest results in the acquiring person .. Holding 100% of the membership interests in the LLC Which is not the present case, and (2) when the acquiring person contributes a business to the LLC in exchange for the membership interest. In this second case, [t]he PNO will treat [the] contribution of an additional business to the business(es) already in the LLC as a formation of a new LLC and approach which, in the present case, results in this step remaining non-reportable. Because Company A, through Company B, presently controls LLC and will control the newly formed LLC the new formation does not entail a combination of two or more pre-existing separately controlled businesses being brought under common control - a pre-requisite for reportability of any LLC Formation under Formal Interpretation #15. For this same reason, we assumed that if Company B contributes Company C's business to LLC as well, as may occur, in exchange for a further increased interest in LLC by approximately [5%] (to approximately [65%]), the transaction would remain non-reportable. 5. See footnote1, supra. Certain officers of Third Party will also receive options to purchase Newco common stock. The acquisitions of these options is,, of course, non-reportable. 6. See footnote 1 supra.