Question
November 19, 1999
Mr. Michael Verne
Federal Trade Commission
600 Pennsylvania Avenue, N. W.
Washington, D.C. 20580
Re: Treatment of Borrowed Funds
Dear Mike:
This letter is intended to summarize previous telephone calls you and I have had regarding the treatment of borrowed funds in determining the size-of-person for an acquiring entity. In particular, you and I have discussed a situation in which a person with a regularly prepared balance sheet creates a new entity for purposes of acquiring assets (or stock) from a seller. I will describe this scenario in a hypothetical.
Assume Acquiring Person controls a corporation, called Corporation A. Corporation A prepares an ordinary course balance sheet. Its most recent balance sheet is dated October 31, 1999 and shows total assets of $8 million. Acquiring Person has a contract to acquire assets from Seller for $20 million on November 25, 1999. Acquiring Person desires to acquired the assets not through Corporation A, but instead through a newly created LLC B, which is majority controlled by Corporation A. LLC B was not formed until November 1, 1999. According to Premerger Notification Office guidance, Acquiring Person must create a pro forma balance sheet for LLC B because Corporation A’s existing October 31, 1999 balance sheet does not consolidate the assets of all entities included within the Acquiring Person. Namely, the assets of LLC B are not consolidated on that balance sheet because LLC B did not exist prior to October 31, 1999.
In preparing his pro forma balance sheet, Acquiring Person would use the following steps. Acquiring Person would take the sum of 1) the total assets on Corporation A’s October 31, 1999 balance sheet, 2) his personally held non-duplicative, income producing assets (assume this is $1 million) and 3) all of the assets that will be held by LLC B immediately prior to its acquisition of assets from Seller. If LLC B has arranged for a loan and acquires the loan proceeds of $20 million the day before closing, LLC B will be deemed to hold $20 million in assets prior to closing. Adding that $20 million in LLC B’s assets to Acquiring Person’s other assets results in Acquiring Person having a pro forma balance sheet with $29 million in total assets, and a filing would be required unless another exemption applied.1
You and I discussed an alternative scenario whereby the financing arrangements agreed to by the Acquiring Person and LLC B differ in one material respect. Namely, for business purposes unrelated to the H-S-R reportability of the transaction, LLC B’s commercial lender will not pay any of the $20 million loan to LLC B, but will instead pay $20 million directly to Seller at the closing of the asset transaction. This is the ordinary method that the lender uses for funding transactions of this type. You and I concluded, that under these circumstances the lean proceeds would not be held at any time by LLC B, and therefore could not appear on Acquiring Person’s pro forma, preacquisition balance sheet. Under those circumstances, Acquiring Person’s pro forma balance sheet wuold reflect total assets of less than $10 million and it could complete the proposed asset acquisition without filing under the H-S-R Act.
Please advise me if you have any questions about this letter, or disagree with the analysis contained in this letter. I will call you to confirm you have or received and reviewed this letter. Thank you again for your kind assistance in helping me resolve several questions in the course of the past week.
Very truly yours,
(redacted)
1 I do not necessarily agree with the analysis, but I understand it to be the PremergerNotification Office’s position.