Question
From:(Redacted)
Thursday, April 25, 2013 11:16 AM
Verne, B. Michael
Subject: Possible Two-Step Transaction and HSR Timing
Mike,
Company A currently owns a 50% interest in an LLC and is planning to enter into an agreement with Company B that involves: (1) a sale by A to B of a 49.5% interest in the LLC, and (2) a put/call arrangement relating to the remaining 0.5% interest in the LLC. The sale of the 49.5% interest will occur as soon as certain regulatory approvals and other closing conditions are met, hopefully within the next few months ("First Closing"). The "Call" will give Company B the right to require Company A to sell it the remaining 0.5% LLC interest at a certain price in the future, and the "Put" will give Company A the right to require Company B to purchase the remaining 0.5% LLC interest at a certain price in the future. Company B will be permitted to exercise its Call only during the first 10 days following the one year anniversary of the First Closing. Company A will be permitted to exercise its Put only during days 11 through 20 following the one year anniversary of the First Closing. If neither the Put nor the Call is exercised, Company B will continue to hold a 49.5% interest in the LLC but will not acquire the remaining 0.5% LLC interest and will not have acquired HSR control of the LLC. If, on the other hand, either the Put or the Call is exercised, Company B will hold a 50% LLC interest and will be deemed to control the LLC for HSR purposes. The parties meet the size-of-person test and the value of the LLC interests exceeds the size-of-transaction thresholds.
It is expected that B will acquire the remaining 0.5% LLC interest sometime after the end of the one year anniversary of the First Closing, though it is not absolutely certain. In other words, there is a possibility that Company B will never hold a 50% LLC interest and thus will never need to file an HSR filing for this transaction. Nevertheless, because it is expected that Company B will end up acquiring the entire 50% LLC interest, the parties may want to file a Premerger Notification for Company B's acquisition of a 50% interest as soon as the agreement is signed.
This approach does not seem at odds with the obligations of the parties to be able to assert a good faith intention to complete the transaction as required in rule 803.5(b). There are several examples of situations where the PNO has permitted notifications where the completion of a transaction is contingent on another event. See, for example, interpretations 238 and 239 of the Premerger Notification Practice Manual (4th ed. 2007) (a conditional tender offer may be the basis of a notification "provided the offer or attests to its good faith intention to proceed with a reportable acquisition if those conditions are subsequently satisfied or waived."), (parties may file on contingent option agreement so long as they can attest that they intend, subject to certain conditions, to exercise the option). Some uncertainty about closing a deal should not be a barrier to an HSR filing as there is uncertainty in every transaction; deals can fall apart after the HSR filings are made for a variety of reasons. I would suggest that a statement that the parties believe that the Put or Call is expected to be exercised resulting in Company B acquiring the 0.5% LLC interest should be sufficient to meet the requirements of 803.5(b).
I would also suggest that rule 803.7, which provides that notifications expire 1 year following the expiration of the waiting period, should not pose a timing problem in this case, even though if the acquisition of the remaining 0.5% LLC interest occurs, it will close more than a year after the First Closing. The substance of the agreement, and the expected result is that Company B will acquire 50% of the LLC interests. Even though there are two separate closings that occur more than a year apart, this is all part of one agreement. The approach of looking at the entire transaction rather than separate steps is similar to situations involving aggregation issues in asset acquisitions. As noted in interpretation 146, id., as long as there is one agreement (even if there are separate contracts and separate closings) the parties must file based on the entire transaction, even if the closing occur more than six months apart.
Please let me know if the PNO agrees that in this situation the parties could file notifications as soon as the agreement is signed and that the notification would cover an acquisition of control of an LLC by Company B that (1) is contingent on one of the parties exercising a Put or a Call, and (2) that will occur in two steps with the second step taking place more than a year after the First Closing.