Question
(redacted)
June 30, 1988
Victor Cohen, Esq.
Federal Trade Commission
Premerger Notification Office
Sixth and 6th & Pennsylvania Avenue
Washington, D.C. 20580
Re: Informal Interpretation Pursuant
to 16 C.F.R. 803.30
Dear Mr. Cohen:
Further to our conversations this week, attached is a copy of a letter to Wayne Kaplan describing the original structure of a leveraged buy-out in which the owner of an operating division was to sell assets of that division to a newly-formed corporation which would be jointly owned by the seller and two investment partnerships. For reasons described in that letter, we concluded that the transaction was not subject to Hart-Scott-Rodino Act reporting and waiting requirements.
Subsequently, the transaction was restructured so that (redacted) would be created and funded by the two investment partnerships described in that letter in advance of the leveraged buy-out. This was done to ensure that (redacted) would have assets available to compensate the seller in the event (redacted) breaches its obligation under the agreement to use best efforts to consummate the buy-out. As a result of this advance funding (in the amount of $5 million), one of the investment partnerships (Partnership A) presently owns more than 50% of (redacted) stock and is accordingly deemed to be (redacted)s ultimate parent entity. Partnership A is a $10 million person, the seller is a $100 million person, and the purchase price for the assets will exceed $15 million. Accordingly, it might seem that all of the jurisdictional elements under the Hart-Scott-Rodino Act are present.
However, when we look at the substance of the transaction, it is clear that (redacted) (and not Partnership A) is the acquiring person under the presently contemplated structure, just as it was in the structure cleared last March. Rule 801.2(a) states that an acquiring person is a any person which, as a result of an acquisition, will hold . . . assets, either directly or directly . . . . (sic)
Under the revised transaction structure, the seller will receive from (redacted) newly-issued stock representing approximately 40% of the then total outstanding voting stock of (redacted) in exchange for the assets. This will instantaneously dilute the ownership interests held by each of the two partnerships, with the result that as of the time the exchange is effected, no person or entity will own 50% or more of the stock of (redacted) and (redacted) will be its own ultimate parent entity. Thus, Partnership A will never hold (within the meaning of Rules 801.1(b) and (c)) the assets which (redacted) will acquire from the Seller, and will therefore never be an acquiring person within the meaning of the Rules.
Because only (redacted) will be an acquiring person under the Rules, we may disregard the happenstance that early funding of (redacted) caused it to have an ultimate parent entity immediately before, but not at the moment it becomes an acquiring person. Partnership As holdings need not be aggregated with (redacted) to determine (redacted)s size of person for jurisdictional purposes. Whether (redacted) has a balance sheet at the time of the acquisition showing that it has approximately $5 million in demand accounts, or its size is determined in accordance with the Rule 801.1(1) (sic), it is not a $10 million person. Accordingly the transaction does not fall within the jurisdiction of the Hart-Scott-Rodino Act.
The Sellers acquisition of stock in (redacted) would be non-reportable for the same reason: the acquired person is (redacted) which entity is its own ultimate parent entity and is not a $10 million person. Moreover, the seller (sic) acquisition of stock in (redacted) is exempt pursuant to Rule 802.20.
I would appreciate a telephone call at your earliest convenience confirming that under these facts the described transaction is not reportable. Thank you for your time and thoughtful consideration of this matter.
Very truly yours,
(Redacted)
Enclosure
(redacted)