1303006 Informal Interpretation

Date:
Rule:
801.2
Staff:
Michael Verne
Response/Comments:

  We take the position that in a single agreement with multiple closings you must file up front for the entire acquisition even if some of the steps are outside of the one year period. See the interpretation below: http://www.ftc.gov/bc/hsr/informal opinions/0911009.htm

Question

From: (Redacted)

Sent: Tuesday,March 19, 2013 6:57 PM

To: Verne, B. Michael

Subject: HSR Question

Mike--

I am hoping that you can help me with the HSR analysis for the followingproposed transaction:

Company A intendsto acquire all of the membership interests in Company B, a limitedliability company, pursuant to asingle agreement in increments over a three-year period for a total purchaseprice of $107.5MM(subject to certain adjustments that do not affectthe analysis). The acquisition would occur as follows:

At the initial closing,Company A will purchase 25% of the membershipinterests held by the current membersof Company B for $26.9 million.

On the first anniversary of the initial closing,Company A will purchase an additional 8.33% of the membershipinterests for an additional $8.95 million.

On the date that is 18 months following the initial closing,Company A will purchase an additional16.67% of the membership interests for an additional $17.95million.

Onthe third anniversary of the closing,Company A will purchase the remaining50% of the membership interests for the remaining $53.7 million of the PurchasePrice, less any amount outstanding on the Buyer Loan (as defined below) at that time.

At the initial closing, CompanyA will be contractuallyobligated to buy all of the remaining membership interestsat the times described above, subject only to customary closingconditions. The purchases of the subsequentinstallments are not optional for either buyer or sellers. There is a put option on the part of the selling membersof Company B that, ifexercised, would accelerate Company A's obligationto complete the purchase of the final installment of the remaining 50% of the membership interests.

At the initial closing, it is intendedthat Company A will refinanceup to approximately $38.3MM of debt of Company Bby making the replacement loans itself (in the aggregate, the "Buyer Loan"), which will be secured by substantiallyall of the assets of Company B.The Buyer Loan is expectedto be repaid from the selling members' share of the cash flow of Company B over the three-year buy-inperiod. In effect, this structure allows the sellingmembers of CompanyB to obtain the full $107.5MMpurchase price, withoutreduction for the $38.3MM of debt, over the three-year buy-in period, assuming the share of CompanyB's cash flow allocable to their remaining ownershipinterests is sufficient to pay off the debt overthat period.

As you will note, unlessthe selling membersexercise their put option, CompanyA will not own 50% of the non-corporateinterests of Company B until18 months after the initialclosing and will not have paid more than $53.8MM (much less thecurrent $70.9MM size of transaction (" SOT") threshold) until 18 months after it has reached50% ownership. I believethat the HSR analysis wouldbe as follows (we are confirming that the SOP test is also satisfied):

1. No filingis required for the initialacquisition, because CompanyA will not gain "control" of Company B (and the SOT test is not satisfied).

2. No filing will be required for the first anniversary acquisition, because, again, CompanyA will not gain "control" of Company B (and the SOT test is not satisfied).

3.No filing will be requiredfor the 18th month acquisition, if the fair market valueof the non-corporate interests acquired by Company A in the prior two acquisitions (determined in accordance with 801.10(c)(3)),plus $17.95 million,does not exceed the $70.9 million SOT threshold (as the same may have been adjustedand effective at that time).

4.No filing will be requiredfor the third anniversaryacquisition, because CompanyA will have already acquired"control" of Company B and can rely on 802.30 as an intraperson transaction.

This analysis assumes, of course, that the put option is not exercised. Although not relevant for this analysis,I included the facts above regarding the Buyer Loan as evidencethat the structure is not a "device for the avoidance" of an HSR filing.

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