1103001 Informal Interpretation

Michael Verne

– Agree.


March 1, 2011


B. Michael Verne,Esq.
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Ave, NW
Washington, D.C. 20580

Re: Confirmationof Advice Regarding Determining Whether Trusts Are "Controlled"

Dear Mr. Verne:

Thank you fortaking the time to speak with us last week about whether certain trusts areconsidered "controlled" entities under 16 CFR 801.1(b)(2) andconsequently whether they must be aggregated for purposes of determining thereportability of a proposed acquisition of voting securities. I amwriting to confirm our discussion.

The ProposedTransaction

Certain trustshold voting securities of Company A. Company A proposes a transaction inwhich some of its shares held by the trusts will be exchanged for shares ofCompany A's subsidiary, Company B. When the transaction is complete, Company Bwill be its own UPE.

The Trustsand Trustees

Each trust isirrevocable, and the settlor has no reversionary interest. Consequently, theissue is whether there is any person that has the present contractual right to removeand replace 50% or more of the trustees.

Each trust has acorporate trustee and two individual trustees. (Some other trusts have threeor more individual trustees, but they do not present any "control"questions.) The individual trustees acting together can remove and replace thecorporate trustee, but as long as there are two individual trustees, neither ofthem acting alone has the ability to remove the corporate trustee. No otherperson has the right to remove the corporate trustee.

One of theindividual trustees ("Trustee 1 ") is a person named in the trustdocuments. The other individual trustee (,'Trustee 2") is a partner of LawFirm. Trustee 2 remains a trustee until he resigns, or (under some of thetrusts) achieves a certain maximum age, or ceases to be a partner of Law Firm.

The CorporateTrustee

Our first concernwas whether, for purposes of this transaction, the trust should be deemed to havetwo trustees, rather than three. The reason for our concern is that thetrust agreements place certain restrictions on the corporate trustee's rolewith respect to the shares of Company A and Company S.

The corporatetrustee is not permitted to vote shares of Company A or participate inany decision regarding the voting or disposition of the shares. For at leastsome amount of time following completion of the transaction, these samerestrictions will apply to the shares that each trust will hold in Company S.In other words, the corporate trustee is effectively excluded from making anydecisions with respect to the voting securities of Company S. One could argue,therefore, that with respect to the voting securities of Company S, thecorporate trustee should not be counted, and so with respect to those shares,the trust would be deemed to have only two trustees (and thus a personwith the present contractual right to remove and replace one of those trusteeswould be deemed to control the trust, but only as to any voting securities towhich the restrictions apply). You confirmed that the trust would still beconsidered to have three trustees, and thus a person with the presentcontractual right to remove and replace one (but only one) individual trusteewould not be considered to "control' the trust.

This responsedisposed of the question, but for additional certainty we presented the otherissues that had occurred to us.

Role of LawFirm

As noted above,Trustee 2 is a partner in Law Firm. Law Firm does not have the right to removeTrustee 2, but it does have the right to terminate his membership in the firm(with no requirement for cause and no right to any form of process). One effectof terminating his membership in the firm would be to remove him as trustee.

Each trustprovides that any two partners of Law Firm may appoint Trustee 2's successor.There is no contractual arrangement among its partners as to who may exercisethe appointment right, although the Law Firm does prohibit any partner fromaccepting a trustee position without Law Firm approval. Thus, in theory, anytwo partners could exercise that right, and Law Firm's only remedy would be toterminate the successor Trustee 2 as a partner or sue the appointed partner forbreach of the partnership agreement.

You confirmed thateven if the trust was deemed to have only two trustees, Law Firm would not bedeemed to control the trust. Although Law Firm arguably has the power to removeTrustee 2, Law Firm itself (as opposed to any two of its partners) does nothave the present contractual right to remove and replace Trustee 2.

Role of EachIndividual Trustee

The two individualtrustees have the collective right (but not the obligation) to appointadditional individual trustees, but they have not appointed any. The individualtrustees have the right to remove an individual trustee upon first determiningthat the trustee is incapacitated or incompetent to perform his duties. (Inmaking this determination, the individual trustees are not required to obtain acourt order or the opinion of a doctor or psychiatrist, but a baselessdetermination of incompetence or incapacity would expose the individualtrustees to claims for breach of fiduciary duty.) With only two individualtrustees, theoretically either trustee could determine that the other trustee isincapacitated or incompetent (and thus remove that other trustee). The soleremaining trustee would then have the right to appoint one or more additionaltrustees, although technically the new trustee would serve not as a successorto the removed trustee but in a newly created trusteeship. You confirmed thatthis does not constitute a present contractual right to remove and replacebecause the first individual trustee must have cause before he can remove thesecond individual trustee.

Role ofIndividual Trustee 1

The individualtrustees have the power to remove Trustee 2 and to terminate Law Firm's rightto appoint a successor for Trustee 2. (If the individual trustees wish, theymay appoint another trustee, but are not required to do so.)

The trust agreementdoes not say whether Trustee 2 (who is an individual trustee but whose removalis at issue) is permitted to vote on his own removal and on termination of LawFirm's successor-appointment rights, but Trustee 2 and/or Law Firm could takethe position that Trustee 2 has the right to participate in this decision. IfTrustee 1 or one or more beneficiaries took a different position, a court wouldhave to resolve the matter. You confirmed that because interpretation of thetrust documents was uncertain, Trustee 1 would not be deemed to have a presentcontractual right to remove and replace Trustee 2.


Notwithstandingthe restrictions on corporate trustee's right to participate in decisions tovote or dispose of the voting securities of Company A or Company S, each trustis considered to have three trustees. Thus, even if a person has the presentcontractual right to remove and replace one of the two individual trustees (butnot the corporate trustee), that person would not be deemed to control the trust.Consequently, each trust is deemed to hold its trust corpus, each trust is itsown ultimate parent entity, and the trusts do not need to be aggregated as asingle person for purposes of determining reportability of the acquisition ofCompany S voting securities.

If the foregoingconclusion were not correct, and the trust were deemed to have only twotrustees, it would remain true that no person has the present contractual rightto appoint 50% or more of the trustees:

Law Firm's right to terminate a partner (and thus terminate his eligibility as trustee) and the right of any two partners in Law Firm to appoint a successor would not give any single person the present contractual right to remove and replace Trustee 2.

Each individual trustee's right to remove the other individual trustee is not a "present" contractual right to remove and replace because the removing trustee would first need to make a determination of incapacity, incompetence, or other basis provided by the trust agreement before he could remove the other trustee.

Trustee 1 does not have a clear right to remove Trustee 2 and terminate Law Firm's right to appoint a successor and thus would not have a present contractual right to remove and replace Trustee 2.

Thank you againfor helping us sort through these issues. If I have not correctly stated yourviews or if you have further thoughts after reviewing this summary, I wouldappreciate a telephone call.

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