Thursday, September 22, 2011 7:05 PM
Verne, B. Michael
HSR -"Associate" scope question
I havea question relating to the staff's perspective on the scope of the definitionof "associate" in 16 C.F.R. 801.1(d)(2) in the context of a series ofinvestment funds, and would appreciate your thoughts on the analysis below (inwhich I conclude that an investment fund's only associate is its generalpartner).
FactsAn investment fund ("Fund A") is making an acquisition of Target thatrequires a Hart-Scott-Rodino filing. Fund A is organized as a limitedpartnership and is its own ultimate parent entity. The general partner of FundA ("GP A") is organized as a manager-managed limited liabilitycompany and has two managing members, both natural persons. Investmentdecisions for Fund A are made by an investment committee that is comprised of asubset of the members of GP A, all of whom are natural persons. The managingmembers are authorized to make all non-investment related decisions on behalfof GP A with respect to its management of Fund A.
Corporationhas taken a preferred membership interest in GP A which entitles Corporation toreceive all management fees paid by Fund A to GP A. Pursuant to a ServicesAgreement between GP A and Corporation, Corporation employs each of the membersof GP A, including both managing members. The members of GP A are designated bythe president of Corporation and the president of Corporation sets theircompensation. Corporation A also provides certain support services to Fund A(as well as to Fund B and Fund C, which are described below) which are similarin nature to the services provided by "CORP" in Example 12 of 16C.F.R. 801.1(d)(2).
FundB and Fund C, also both limited partnerships, each has its own general partner(GP Band GP C, respectively), and both are organized as manager-managed limitedliability companies. Investment decisions for Fund B are made by an investmentcommittee of GP B. The investment committee of GP B with respect to Fund B iscomposed of the same natural persons as the investment committee of GP A withrespect to Fund A, and this committee has been granted essentially identicalinvestment authority as the investment committee for Fund A.
Investmentdecisions relating to Fund C are made by the managing member of Fund C andcertain other members of Fund C, each of whom is employed by Corporation (asall members of GP Band GP C, as with GP A, are employed by Corporation on anat-will basis). Corporation has taken a preferred interest in both GP Band GPC, which entitles Corporation to receive all management fees paid by Fund B toGP B and by Fund C to GP C.
Noperson controls either of GP A or GP B. Mr. Z controls GP C and is its managingmember, and also is a managing member of each of GP A and GP B.
GP Ais an associate of Fund A, GP B is an associate of Fund Band GP C is anassociate of Fund C, in each case as a "managing entity" under 16C.F.R. 801.1(d)(2)(A).
Thesupport services provided by Corporation do not make Corporation an associateof GP A, GP B or GP C because they are similar in nature to the servicesprovided by "CORP" in Example 12 of 16 C.F.R. 801.1(d)(2), and inthat example CORP is deemed not to be an associate. The contractual arrangementbetween Corporation and each GP does not give Corporation any investment oroperational decision-management authority, except to the extent thatCorporation is empowered to determine the members of each GP. Corporation'scontractual ability to select the employees of each GP is tenuous enough that,while it may have been picked up by the definition of an associate under theoriginally proposed definition of '''associate'' (in the September 17, 2010proposed rule), Corporation would not be deemed an associate under the narrowerdefinition of that term as codified by the final rule adopting 16 C.F.R.801.1(d)(2).
Noneof GP A, GP B or GP C has any employees. The members of the investmentcommittees for Fund A and Fund Band the investment decision-makers of Fund Care similar to Mr. Y in Example 11 of 16 C.F.R. SOl.1(d)(2) in that theyactually make the investment decisions for each of the Funds, and do so withouta management contract with any of the GPs. Similarly, the managing members ofeach of the GPs are analogous to Mr. Y (or in the alternative, to the directorsof Corporation A in Example 7) and therefore should not be considered associatesof any of the Funds.
As aresult, none of GP A, GP B or GP C is an associate of any other GP, of anymanaging member or investment committee member of such GPs, or of theCorporation, and as a result, Fund A, in its acquisition of Target, would notneed to include in its Hart-Scott-Rodino filing information about any otherentity (in such entity's capacity as an associate) other than GP A.