1106001 Informal Interpretation

Michael Verne

– Agree.





Saturday, June 04, 2011 9:49 PM


Verne, B. Michael



Subject:Confirmation-Exemption 802.4/802.50


Thankyou for taking the time Friday, May 27, 2011, to discuss whether aHart-Scott-Rodino ("HSR") Act filing will be required in connection witha proposed transaction, an acquisition of the voting securities of a companywith substantial foreign assets. As we discussed, we believe, and youconfirmed, that an HSR filing will not be required under the facts describedbelow.

CompanyA proposes to acquire all of the voting securities of Company B forconsideration of approximately $320 million in stock and cash. The partiesbelieve that the proposed acquisition is exempt under Rule 802.4 becauseCompany B and its subsidiaries do not have non-exempt assets with a fair marketvalue over $66 million. Company A has determined that Company B and itssubsidiaries have (1) cash and cash equivalents of approximately $25 million(exempt under Rule 802.21), (2) assets located outside the U.S. that did not generatesales in or into the U.S. over $66 million in the most recent fiscal year(exempt under Rule 802.50) and (3) remaining assets located in the U.S. with afair market value of approximately $14 million, consisting of: approximately $8million of tangible assets and $6 million of intangible assets.

Descriptionof Company Bs Business and Assets

CompanyB is a corporation incorporated in the U.S. Company B has a subsidiary (Sub A) thatis incorporated outside the U.S. and contracts with foreign third partymanufacturers located outside the U.S. for the manufacture of certain productsoutside the U.S. Once manufactured, pursuant to a distribution agreementbetween Sub A and a distributor, Sub A sells the product to a distributoroverseas who then distributes the products to other foreign third partymanufacturers that incorporate Company B's product into other products to beresold to customers. The distributor does not control Sub A and is not anaffiliate of Sub A.

Thetitle to and risk of loss on these products passes from Sub A to thedistributor outside the U.S. A small portion of the products are sold by Sub Ato Company B who then sells to U.S. distributors who then distribute to othermanufacturers who incorporate the product into other products and/or directlyto U.S. customers.

CompanyB has an agreement with a technology product company (Company Z), anunaffiliated third party, pursuant to which Company B, through Sub A, ispermitted to sell products that foreign manufacturers that work for Company Zultimately incorporate into its products. Neither Company B nor Sub A areparties to the agreements between Company Z and its manufacturers. Theagreement between Company B and Company Z permits, but does not require, theproducts to be sold into the U.S. However, Company B knows that some of itsproducts, including the products sold initially outside the U.S., willeventually be incorporated into other products that are sold into the U.S. Theproducts manufactured in Company B's business are not designed in a way thatthey can only be sold into the U.S.

Thetangible consolidated assets of Company B consist of approximately $8 millionof inventory, property and equipment located in the U.S., approximately $31million of inventory, property and equipment located outside the U.S. andapproximately $25 million of cash and cash equivalents (foreign and domestic).The majority of the value of Company B's consolidated assets are intangibleassets consisting of intellectual property, including patents, registeredmostly in the U.S. with some registered abroad, and contract rights. Company Bowns the intellectual property but has transferred the foreign rights to Sub A.


Theparties believe that all sales of Company B's subsidiaries that are completedoutside the U.S. do not constitute "sales in or into the U.S." andonly the sales directly to U.S. distributors/customers by Company's B and/orits subsidiaries constitute sales in or into the U.S. In accordance withinformal interpretation 216 in the Premerger Notification Manual, beneficialownership in the non-U.S. customer sales passes outside the U.S., and eventhough Company B knows that some of its products are eventually incorporatedinto other products that are sold in the U.S., Company B cannot require itsproducts to be incorporated and sold into the U.S. by the third parties andCompany B's products are not designed in a way that they can only be sold inthe U.S. Approximately 97.3% of Company B's consolidated revenues for the lastfiscal year ($78 million) were generated from sales outside the U.S. andapproximately 2.7% were to U.S. customers ($3 million).

CompanyA is in the process of determining the fair market value of the intangibleproperty, including the goodwill associated with the intangible property.Company A is conducting its fair market valuation following informalinterpretations of the Premerger Notification Office, including interpretation0411005, that allocate the value of intangible assets as foreign or domesticaccording to the source of Company B's revenues, foreign or domestic.Accordingly, Company A will determine the fair market value of all Company B'sintangible property and goodwill associated therewith and then allocated thevalue between the U.S. and abroad based on the source of Company B's revenues,97.3% to foreign ($78 million) and 2.7% to U.S ($3 million). Assuming that thefair market value of the intangible assets is the purchase price ($320 million)less the tangible assets and cash ($64 million), the total value of theintangible assets would be approximately $256 million, and 3% of that would beapproximately $6 million.

Inconclusion, Company B and its subsidiaries do not have non-exempt assets with afair market value over $66 million because:

(1)approximately $25 million of its assets are exempt under Rule 802.21 as cashand cash equivalents,

(2)approximately $281 million of its assets-consisting of $31 million ininventory, property and equipment and $250 million in intangible assets valuedas described above-are exempt under Rule 802.50 because they are locatedoutside the U.S. and did not generate sales in or into the U.S. over $66million in the most recent fiscal year and

(3)the fair market value of the remaining assets located in the U.S. isapproximately $14 million, and includes $8 million in inventory, property andequipment and $6 million in intangible assets valued as described above.

Youagreed with our analysis that this transaction was exempt under 802.4.

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.

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