1109015 Informal Interpretation

Date:
Rule:
801.1(b), 801.2, 802.30
Staff:
Michael Verne
Response/Comments:

 8/31/2011 I have looked at everything possible to make this non-reportable and have run into a dead end. The bottom line is that A is going from not being able to unilaterally designate any of B's board members to being able to designate all of them. That clearly falls under §801.2(f)(3). I have also run this by my boss, Marian Bruno, who has come to the same conclusion. We also don't want to interpret §802.30 to exempt this. In fact, when we expanded §802.30 to cover control by means of holdings of non-corporate interests, we specifically excluded control by contractual right to designate directors. This is a very unusual scenario. In most of the combinations of not-for-profit corporations I have seen, involving two equal members, each gets to designate 50% of the directors. If that had been the case 15 years ago, the current acquisition would still not be exempt under §802.30, but it would be non-reportable because §801.2(f)(3) would not apply since A would not "acquire control of an existing not-for-profit corporation" because it would already control B under §801.1 (b)(2).

Question

From: (Redacted)
Sent:Wednesday, August 31, 2011 8:32 AM
To:Verne, B. Michael
Subject: RE: Interpretation of"other person"; Application of Intraperson Exemption

Differentfirm represented our client back then; not sure who had represented UPE-B.Fifteen years ago, I likely would have recommended a visit with FTC staff or anHSR filing due to the unique nature of the transaction and the parties'compliance expectations. The parties are a single entity from a Copperweld perspectiveso I assume they viewed the transaction as bi-Lateral acquisitions that shouldbe reported even if the governance model did not fit nicely under theregulations. If the answer is that an HSR should not have been filed 15 yearsago but needs to be filed for the proposed transaction, can we get a credit forthe amount of the filing fee paid back then on this filing? Of course, I jest;we believe the proposed transaction does not involve the acquisition of"another person" under 15 U.S.C. 15a(a) and is therefore notreportable in the first instance, making moot the question of whether anexemption applies.

From: Verne,B. Michael [mailto:MVERNE@ftc.gov]
Sent:Wednesday, August 31, 2011 7:57 AM
To: (Redacted)
Subject: RE: Interpretation of"other person"; Application of Intraperson Exemption

Iguess my next question is - why did they file 15 years ago if neither UPE-A orUPE-B received the unilateral right to designate the board of any of theentities involved?

From: (Redacted)
Sent:Tuesday, August 30, 2011 3:40 PM
To:Verne,B. Michael
Subject: RE: Interpretation of"other person"; Application of Intraperson Exemption

Correct,post-transaction A or UPE-A will have the power to designate 100% of B's board.If relevant, a very strong argument can be made that the parties are a singleentity for Copperweld purposes. No problem with the delay. I had assumedyou were drying out home and office possessions. We appreciate your guidance.

From: Verne,B. Michael [mailto:MVERNE@ftc.gov]
Sent:Tuesday, August 30, 2011 3:30 PM
To:(Redacted)
Subject: RE: Interpretation of"other person"; Application of Intraperson Exemption

Sorrynot to have gotten back to you sooner -things have been pretty crazy aroundhere. Just to make sure I completely understand what is going on. The right to profitsand assets upon dissolution is irrelevant in determining control of a NFPcorporation. Currently A and UPE-B appoint all of B's board by consensus, soneither has the right to designate 50% of the board unilaterally. I assume thatpost-transaction A or UPE-A will have the right to designate 100% of B's board?

From: (Redacted)
Sent:Monday, August 29, 2011 6:55 PM
To:Verne, B. Michael
Subject: FW: Interpretation of"other person"; Application of Intraperson Exemption

Mike,

Theeighth sentence in the third paragraph should read: "The governing boardsof A-Hospital and each of B-Hospitals, although technically appointed by A andUPE-B respectively to comply with certain bond covenants, must mirror B'sgoverning board."

Asoriginally written, my explanation suggested that the mirror boards wererequired by bond covenants which is not the case. The bond covenants requirethat A and UPE-B formally appoint the members of the governing boards of A-Hospitaland each of B-Hospitals, respectively. The original integration agreementrequired the boards to mirror the board of B.

From: (Redacted)
Sent:Monday, August 29, 20111:55 PM
To:'mverne@ftc.gov'
Subject: Interpretation of"other person"; Application of Intraperson Exemption

DearMr. Verne,

Wesolicit your concurrence that the proposed transaction described belowconstitutes an intra-person transaction under 15 U.S.C. 18a(a) despite perhapsnot technically fitting within the precise confines of 802.30(a). The proposedtransaction otherwise exceeds the HSR filing thresholds.

Twohealth care systems, UPE-A and UPE-B, consolidated the operations of certainhospitals under collective governance and control over 15 years ago (afterfiling the requisite HSRs) and have operated as a single, integrated systemever since. The attached diagram describes the corporate structure of theresulting system. UPE-B now intends to divest its 50% interest in the system toa subsidiary of UPE-A.

Inthe origin transaction, A acquired a 50% membership interest in non-profitcorporation B and indirectly a 50% control interest in each of the non-profitB-Hospitals. Simultaneously, B acquired control of nonprofit A-Hospital. A andUPE-B are each entitled to 50% of the profits of B and indirectly to 50% of thesum of the profits of A-Hospital and B-Hospitals. A and UPE-B are also eachentitled to 50% of the assets in the event of dissolution. However, unlike many50/50 governance models, the governing board of non-profit corporation B isappointed by consensus. Neither A nor UPE-B has the individual right to appointanyone to B's governing board. Both A and UPE-B must agree to any individualappointed to B's board. The governing boards of A-Hospital and each ofB-Hospitals, although technically appointed by A and UPE-B respectively, mustmirror B's governing board to comply with certain bond covenants and state lawrequirements. Each of UPE-A and UPE-B filed their HSR Report Form as both anacquiring person and as an acquired person. The transaction was consummatedafter expiration of the statutory waiting period.

Now,over 15 years later, UPE-B intends to divest, and A intends to acquire, UPE-B's50% membership interest in B, and its indirect control in B-Hospitals. Theproposed transaction would be exempt pursuant to 802.30(a) if B was anunincorporated entity. A and UPE-B each control B as contemplated in 801.1(b)(1 )(ii). However, because B is a non-profit corporation and because neitherA nor UPE-B has the contractual power to designate 50% of the directors of Bwithout the consensus of the other party, the transaction does not fit neatlywithin 801.1 (b)(2) as an exact reading of 802.30(a) would seem to require. Nonetheless,we contend that UPE-B is not an "other person" as contemplated in 15U.S.C. 18a(a) for purposes A's acquisition of UPE-B's 50% membership interestin B, and that the transaction would not therefore be reportable.

Werequest your concurrence that the proposed transaction as described is notreportable under the HSR Act. Thank you for your consideration. Please contactme if you have any questions or require additional information.

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