1210008 Informal Interpretation

Date:
Rule:
801.1(f)
Staff:
Michael Verne
Response/Comments:

  – Agree. K Walsh concurs.

Question

From:

(Redacted)

Sent:

Friday, October 12, 2012 2:13 PM

To:

Verne, B. Michael

Subject:

CONFIDENTIAL -Non-Stock Non-Profit Corporation Question

CONFIDENTIAL

Mike

Hopeall is well.

Wehave a question relating to the acquisition of membership interests of aMichigan non-profit membership corporation. As the PNO has reviewed in priorinformal interpretations, the Michigan statute pertaining to governance ofnon-profit, membership (i.e., non-stock) corporations MCL 450.2505, set outbelow, allows for such a corporation's organizing documents to provide foreither the election or appointment of directors by the members. Further, MCL 450.2506, also set out below, allows for multiple classes of membership, andspecifies that the corporation's organizing documents may provide for eitherthe election or appointment of directors within each member class separately.

MCL 450.2505 (2) provides that, "[t]he articles of incorporation or a bylawadopted by the shareholders, members, or incorporators of a corporationorganized on a stock or membership basis may specify the term of office and themanner of election or appointment of directors. If the articles ofincorporation or bylaws do not so specify the term of office or manner ofelection or appointment of directors, the first board of directors shall holdoffice until the first annual meeting of shareholders or members. At the firstannual meeting of shareholders or members and at each subsequent annual meetingthe shareholders or members shall elect directors to hold office until thesucceeding annual meeting, except in case of the classification of directorspermitted under this act."

MCL 450.2506 provides that "(1) The articles of incorporation or a bylawadopted by the shareholders or members of a corporation organized upon a stockor membership basis may provide that in lieu of annual election of alldirectors the directors be divided into 2 or more classes, to be elected orappointed for such terms and in such manner as therein specified. If thearticles of incorporation or the bylaws do not so specify the term of officefor the classes of directors, the term of office of directors in the firstclass shall expire at the first annual meeting of shareholders or members aftertheir election, and that of each succeeding class shall expire at the nextannual meeting after their election corresponding with the number of theirclass. At each annual meeting after such classification, a number of directorsequal to the number of the class whose term expires at the time of the meetingshall be elected to hold office until the next annual meeting correspondingwith the number of their class. (2) A corporation having more than 1 class ofshares or membership may provide in its articles of incorporation or a bylawadopted by each class of shareholders or members for the election of 1 or moredirectors by shareholders or members of a class, to the exclusion of othershareholders or members."

ThePNO has taken the position in prior informal interpretations that where,pursuant to Section 450.2505, the membership interests in a Michigan non-profitmembership corporation entitle the members to vote for the election ofdirectors, the acquisition of such membership interests is treated as theacquisition of voting securities. (See, e.g., FTC Informal lnterp. #0707021,available at http://www.ftc.gov/bc/hsr/informal/opinions/0707021.htm; FTC Informal lnterp. #0609014, available at http://www.fic.gov/bc/hsr/informal/opinions/0609014.htm; FTC Informal Interp. #0111012, available at http://www.ftc.gov/bc/hsr/informal/opinions/0111012.htm.)

Itwould be consistent with these interpretations to conclude that, where acorporation's articles of incorporation or bylaws specify that membershipinterests do not entitle the holder to vote for the election of directors, butrather provide for the appointment of directors, an acquisition of suchmembership interests is not considered to be the acquisition of voting securities.

Ourquestion pertains to the following hypothetical facts:

NPCorp currently is organized as a Michigan non-profit membership corporationwith a single class of members. NPCorp's articles of incorporation and bylawsentitle the holders of its membership interests to vote for the directors withone vote per member.

NPCorp will be reorganized as a non-profit membership corporation with twoclasses of members.

NPCorp's current members collectively will hold all of the ClassA membershipunits, which will be substantially identical to the pre-transaction membershipunits. That is, each ClassA member will be entitled to one vote per member forthe ClassA directors, which always will constitute a majority of the NPCorpboard of directors.

Member, which is a non-profit corporation with no previous relationship toNPCorp, will become the sole ClassB member, holding all of the ClassBmembership units. Pursuant to the articles of incorporation and bylaws ofNPCorp, as amended, Member will appoint the ClassB directors, which willconstitute under all circumstances less than half of the NPCorp Board ofDirectors. Member's initial appointees would be as identified in the definitiveagreement implementing the acquisition. Thereafter, Member's appointees wouldrequire ratification by the NPCorp Board pursuant to a sequential process thatwould include up to three slates of different nominees presented by Member,with the NPCorp Board of Directors approving one of the three.

Webelieve that, consistent with the informal interpretations cited above, theClassB membership interests are not voting securities within the meaning of 16C.F.R. 801.1, and that Member's acquisition of the ClassB membership unitsshould be treated as the acquisition of non-voting securities, the acquisitionof which is not subject to the reporting requirements of the HSR Act. Pleaselet us know if you agree.

Thanksvery much for your thoughts. If you have any questions or if you need anyadditional information, please let me know.

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