Sent: Thursday, June 30, 201112:18 PM
To: Verne,B. Michael
Subject: Question re Formation of LLC
Iwould be grateful if you could confirm my analysis concerning the reportabilityof certain agreements to form an LLC.
CompaniesA and B propose to form an LLC under a series of agreements. The LLC willconstruct and operate a substantial manufacturing plant. Each of A and B haveassets and sales greater than $100 million (as adjusted). A will contribute $30million in cash and B will contribute to $20 million in cash, plus nonexempt realestate which will provide the site of the plant. Assume the real estate has afair market value of $10 million. In exchange for their contributions, each ofA and B will obtain a 50% equity interest in the LLC, with rights to 50% ofprofits and 50% of assets upon dissolution of the LLC. In order to constructthe manufacturing plant, the agreements require the LLC to independently obtaina loan for $100 million, without any guarantee from either A or B.
Basedon my understanding of 16 C.F.R. 801.21, 801.40, 801.50, and802.4, I believe this transaction to be exempt from any reportingobligation under the HSR Act, based on the following analysis:
- First, the transaction is principally governed under 801.50, which addresses the formation of unincorporated entities, which includes limited liability companies (LLCs).
- Second, because each will obtain a 50% stake in the LLC, under 801.50(a) A and B are each "acquiring persons" and the LLC is the "acquired person." Under 802.30(c), for purposes of valuing the LLC interests that A and B are each acquiring, A excludes the value of its contribution to the LLC and in turn B excludes the value of its contribution.
- Third, while the LLC will acquire a loan for $100 million, that loan (or "credit" or "obligation") that the LLC shall obtain pursuant to A and B's agreement, will not be considered an "asset" of the LLC, as 801.40(d)(2) only requires that valuation of the LLC interests include the "credit or ... obligation[s]" of the LLC when extended or guaranteed by one of the acquiring persons (here, A or B). Otherwise, the loan itself is a liability of the LLC and not an "asset" affecting the fair market value of the LLC.
- Fourth, under 802.4, A will be deemed to only acquire LLC interests containing $10 million in reportable assets (the real property), as the remaining $20 million in cash contributed by B is considered an exempt asset pursuant to 801.21. And for the reasons explained above, the $100 million loan secured from a third party need not be counted as an asset of the LLC For all these reasons, B will be deemed to acquire LLC interests containing no reportable assets.