Tuesday, June 14, 2011 2:48 PM
Verne, B. Michael
Subject:Size-of-Transaction Test and Debt Obligations
Mr.B. Michael Verne
Premerger Notification Office
601 Pennsylvania Avenue, N.W.
Washington. D.C. 20580
RE:Size-of-Transaction Test and Debt Obligations
Thisemail will confirm our conversation concerning the effect of debt repayment onthe size-of-transaction test under the Hart-Scott-Rodino Antitrust ImprovementsAct (the "HSR Act").
InInformal Staff Opinion 0805010 (the "Informal Opinion"), the FederalTrade Commission Premerger Notification Office ("PNO") concluded thatthe pay-off of debt owed to third parties by the seller or the parent companyof the seller (rather than the entity being acquired) should be excluded fromthe "acquisition price" in computing the value of the transaction forpurposes of Section 801.10 in an acquisition of noncorporate interests thatconfers control of an unincorporated entity. According to the Informal Opinion,this is true regardless of whether the debt is paid off by the buyer or theseller, regardless of whether the debt of the seller is owed to third partiesor owed by the target to its parent company, and regardless of whether the debtis guaranteed by the seller's parent or the shareholders of the seller'sparent.
Inthe proposed transaction we described, the buyer (Company B) intends to acquireall of the equity interests in the target (Company T), a limited liabilitycompany. Company T is a direct, wholly-owned subsidiary of its parent company(Company P), a corporation. Company P is the seller in the transaction.
Thepurchase price to be paid to Company P by Company B exceeds $66 million. At theclosing of the transaction, however, Company P will use a certain amount of theproceeds from the sale to pay down a portion of the debt that is owed byCompany P's direct, wholly-owned subsidiary (Company S), a limited liabilitycompany and sister company to Company T. We discussed that the debt beingrepaid is part of a revolving facility, and although repaid, may again be reborrowed,subject to the conditions to advance set forth therein. The debt to be repaidat Closing is guaranteed by both Company T (which will be released from suchguaranty at closing) and Company P. The repayment of the debt will be by way ofa direct wire from the proceeds of the sale to the third party lender atclosing.
Afterdeducting the amount of the debt repayment from the purchase price, theremaining amount will be less than $66 million.
Becausethe purchase price for Company T, minus the repayment of debt owed by Company S(which is guaranteed by Company P and Company T), is less than $66 million, theproposed transaction does not meet the size-of-transaction test under the HSRAct and is therefore not reportable.