1104008 Informal Interpretation

Michael Verne

As I advised earlier, the formation of a new fund to make an acquisition is
not in and of itself a device for avoidance, unless the new fund has the same
members, pro-rata, as the existing fund that originally was going to make the
acquisition, and the new fund was formed for no purpose other that avoiding a
HSR filing. Beyond that, we have no way of knowing what will happen post
consummation, so cannot advise on that aspect of avoidance.
2) agree
3) agree
see 1 


Sent: Tuesday, April 19, 2011 7:49PM
To: Verne, B.Michael
Cc: (Redacted)

Subject: RE: HSR hypothetical


Thank you for the quick feed back inyour email below on the HSR issues we have raised. Based on that input, here isa more detailed hypothetical to help us confirm that the proposed transactionis not HSR reportable and would not be viewed as a transaction or device foravoidance under 16 C.F.R. 801.90.

Proposed Transaction

There are a series of related funds (the"Funds"), all of which are limited liability companies, that haveinvested in a corporation ("Corporation"). Each fund is its ownultimate parent for HSR purposes -there is no person with the right to half ormore of the profits or half or more of the assets upon dissolution of any ofthe funds. Several of the Funds have been formed with the sole purpose ofinvesting in the Corporation and all of these Funds have a common managingmember (there also are a couple of related Funds that would intend to invest inother opportunities as well). These Funds serve to pool the investments of anumber of small investors that on their own generally would not be large enoughto invest directly in the Corporation.

One of the Funds that solely exists toinvest in the Corporation, Fund A, would trigger an HSR filing obligation ifFund A made any further investments in the Corporation. There is another roundof financing coming up for the Corporation in which a newly issued class ofpreferred voting securities in the Corporation will be offered. In order not totrigger an HSR filing, consideration is being given to not making any furtherinvestment through Fund A in the Corporation. In that scenario, to allow theinvestors in Fund A that are interested in the next round of financing for theCorporation to make further indirect investments in the Corporation,consideration is being given to the two following options.

Option 1: In this scenario a new Fund,Fund E, would be created to make further investments in the Corporation andFund E would only be open to investors from Fund A. Under this option, Fund Ewould be the only Fund through which Fund A investors would be permitted tomake further investments in the Corporation. Fund A has over a 100 investors,and it is very unlikely that all would chose to invest in this next round offinancing (whether permitted through Fund A or Fund E). Further, you can assumethat the individual investors' respective ownership percentages of Fund E wouldnot all mirror the ownership percentages in Fund A since each of the manyindividual investors will need to make a decision on the amount of money to putin.

Option 2: Unrelated to HSR, there hasbeen consideration by the company that gets paid a fee to manage the Funds to createa new Fund for new investors to invest in the Corporation. It is unclear atthis stage whether this new Fund will be created because permission is neededfrom the Corporation, If this new Fund is created, in lieu of creating Fund Efor the investors from Fund A, consideration is being given to letting theinvestors in Fund A make further investments in the Corporation through thisnew Fund, While new investors (those who do not already have any investment inthe Corporation through any of the affiliated Funds) would have to invest acertain minimum amount to participate, such a minimum would not apply to theinvestors who had already put money into Fund A during prior financing roundsfor the Corporation, In Option 2, while the existence of some type of new Fundwould not be solely for HSR purposes, the using of this new Fund for furtherinvestments by Fund A investors would be done in order not to trigger an HSRobligation that would arise if Fund A made further investments in theCorporation,

Under either option 1 or 2, you canassume that the new Fund would not subsequently be transferring or sellingshares of the Corporation to Fund A such that Fund A would not end up holdingthe shares of the Corporation acquired by the new Fund,

The new Fund would not have the same HSRultimate parent as Fund A The Funds would have the same managing member butwould not be commonly controlled for HSR Act purposes, While as a practicalmatter the managing member would generally vote a" shares in the managedfunds the same way, this would not necessarily always be the case. Because FundA would own different series of the Corporation's preferred stock than the newFund with different rights, preferences and privileges (also, different pershare purchase prices), the managing member's fiduciary duty to each fund couldresult in different votes on certain shareholder matters under certaincircumstances.


Can you please confirm that ourfollowing understanding is correct:

(1) Whether option 1 or 2 is pursued,based on the above facts, the acquisition of shares in the Corporation by thenew Fund would not be a transaction or device for avoidance under 16 C.F.R.801,90.

(2) The acquisition by the new Fundof shares of the Corporation would not be HSR reportable assuming that thisFund is its own ultimate parent and would not hold in excess of $66 million invoting securities of the Corporation.

(3) The new Fund would be consideredindependent of Fund A assuming that the two funds are not commonly controlledfor HSR Act purposes and assuming that (1) there is no agreement for the newFund to transfer the shares of the Corporation that it acquires to Fund A and(2) the new Fund does not, in fact, subsequently transfer shares of theCorporation to Fund A

(4) The acquisition by the new Fundwould not be considered a sham even if the members of Fund A and the new Fund are the same where a" ofthe investors in each Fund do not a" hold the same ownership percentage ineach fund.

From: Verne, B. Michael [mailto:MVERNE@ftc.gov]
Sent: Friday, April 15, 20l1 12:27PM
To: (Redacted)
Cc: ' (Redacted)

Subject: RE: HSR hypothetical

Here's Compliance's take on it.

In our view, it is ok to create a newentity to make the acquisition even if the reason for doing so is to avoid HSRso long as it is truly a new, independent entity. Although it would be createdfor the purpose of avoiding the filing obligation, you still have to look atthe substance of the transaction and if the substance is a separate entity,then it is ok.

However, if the members of Fund A allparticipate in the same propositions of the new entity, it would probably beviewed as a sham and an acquisition by A. If the new entity is designed just tohold the shares until after A files and the waiting period expires, after whichA will acquire the shares from the new entity, then this could be viewed as anacquisition by an agent of A (see SCI) or a step transaction (see Beazer). Thesame analysis would hold if existing entities are used to hold the shares untilA files and observes the waiting period. If the going-in plan is for A toacquire the shares after the waiting period, then this is an acquisition by Anow whether it uses already existing entities or newly formed entities toacquire the shares.

Bottom line: This looks like it is beingdone for the purpose of avoiding, but without know many more details(essentially seeing how it plays out in the future) we can't determine whetherthe substance of the transaction is a violation or not.

So if you are bringing in new investorsit looks like you're OK

From: (Redacted)
Sent: Thursday, April 14, 20l1 3:47PM
To: Verne, B,Michael
Cc: (Redacted)

Subject: RE: HSR hypothetical


We will plan on calling you at 10 a.m.tomorrow if that works. We are generally flexible tomorrow morning such that ifthere is a better time for you we also are happy to talk at a different time.


About Informal Interpretations

Informal interpretations provide guidance from previous staff interpretations on the applicability of the HSR rules to specific fact situations. You should not rely on them as a substitute for reading the Act and the Rules themselves. These materials do not, and are not intended to, constitute legal advice.

Learn more about Informal Interpretations.