1102008 Informal Interpretation

Date:
Rule:
801.1
Staff:
Michael Verne
Response/Comments:

  –Agree.

Question

From: (Redacted)

Sent: Tuesday, February22, 2011 8:54 PM

To:Verne, B. Michael

Subject: Confidential: Request for Informal Interpretation

CONFIDENTIAL

Michael-

I hope you had a chance to enjoy the holiday weekend.

I am writing to confirm whether the Premerger Notification Office would agreethat the following transaction is not subject to notification under theHart-Scot-Rodino Antitrust Improvements Act of 1976, as amended, and theregulations adopted thereunder. In brief, the issue presented is whether anacquisition of membership interests with a stated purchase price in excess ofthe size of transaction threshold is nevertheless not reportable becausesubstantial portions of the purchase price or cash on hand at the target willbe used to payoff the target's debt and transaction expenses for the deal, suchthat the acquisition price pursuant to 801.10 will be below the value of theHSR size of transaction threshold of $66 million when the deal closes afterFebruary 24, 2011.

Individual X holds approximately 65% and individual Y holds approximately 35%of the membership interests of A, an LLC. X and Y also own membership interestsin comparable percentages, either directly or indirectly, of service-relatedbusiness B. B functions on a closely integrated basis with the business of A.The percentage ownerships of membership interests stated in this paragraphcorrespond to each entity's (including each individual's) percentage interestin the profits of the entities in which each holds membership interests and thepercentage of the assets of each LLC to which the holding entity (individual)is entitled upon dissolution. Therefore, X is the ultimate parent entity("UPE") of A and B.

C has agreed to buy all of the outstanding membership interests of A and Bpursuant to a Membership Interest Purchase Agreement among A, B, X, Y, Z and Cfor $73 million. While the parties have not allocated the purchase pricebetween the membership interests of A and B to date, as demonstrated below theaggregated value of the transaction will be below $66 million as of the closingdate after February 24, 2011 and therefore the transaction is not reportableunder the HSR. Prior to or commensurate with the closing, substantial portionsof the purchase price either directly by payment from acquiring firm C or indirectlyby distribution using the proceeds held by Z -will be used to payoff debt andother expenses of Z. In Informal Interpretation 805010 (May 15, 2008), the PNOagreed with the writer's statement that "the PNO views it as a generalrule that the seller's transaction expenses are not included in thesize-of-transaction test, regardless of whether the buyer reimburses the sellerfor these expenses, or the seller pays these expenses from the dealproceeds," and that this view applies in acquisitions (such as here) ofnon-corporate (membership) interests that result in a change of control. Inessence, these expenses may be excluded from the calculation of the value ofthe transaction under 16 C.F.R 801.10. They are viewed as costs of getting thedeal done rather than payments to the holders of membership interests. Id. The same interpretation --confirms that amounts of proceeds paid by thebuyer for the pay-off of debt owed by the target or by the seller from dealproceeds should be subtracted from the value of the transaction as well under801.10. Id.

Based on the foregoing, the following categories of debt and expenses should bedeductable from the $73,000,000 purchase price to determine the value of thetransaction under 16 C.F.R 801.10:

Debt directly related to A or B'sbusiness $25,800,000
Early termination fee for$ 640,000
Banker fees$ 1,900,000
Employee Bonuses$ 2,500,000

Subtracting these selling expenses and the debt pay-off amount would leave thevalue of the transaction at approximately $42,160,000. The parties have furtheragreed, however, that C will pay a positive working capital adjustmentcurrently reasonably estimated, in good faith, to be valued at closing at $16.5million. Since there is a reasonable basis for the value of this workingcapital adjustment, it is our understanding that the PNO expects such a workingcapital adjustment to be added back into the value of the transaction whichwould mean the acquisition price would be determined at $58,660,000 under801.10, still well below the $66 million reporting threshold. See InformalInterpretation 0601011 (January 12, 2006). Indeed, even if there were noselling expense deductions above in connection with the proposed transactionother than the debt to be paid off, the acquisition price would still fall wellbelow $ 66 million.

Finally, I note that Z is an corporation whose voting securities are held inthe same percentages by X and Y pre-closing as they hold membership interestsin A and B. Z holds certain assets relating to A's business which assets willbe assigned to A before the closing in an exempt, intraperson transaction. Z'sonly remaining assets at closing will be its interest in escrow funds held backrelating to the transaction. Z will be dissolved after the closing, and anyremaining economic value will be distributed to its shareholders X and Y.Therefore, Z has no HSR relevance for this transaction.

Based on the forgoing, please advise whether the PNO agrees that there is noHSR filing obligation attached to the transaction described above.

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