1111002 Informal Interpretation

Michael Verne

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From: (Redacted)
Sent: Thursday, November 03, 2011 12:17 AM
To: Verne, B. Michael
Subject: LLC HSR Question
Attachments: Holdings LLC Final Structure.pdf; Holdings LLC DetailedDescription of Steps. pdf


Thank you for your timethis morning to discuss my questions regarding the proposed transactioninvolving Holdings, Company A and Company B. Below is a description of the dealand the two questions presented. I also have attached a depiction of what theownership will look like after closing and a more detailed step-by-stepdescription of the transaction.

A holding company LLC("Holdings") owns, either directly or through other wholly-ownedsubsidiaries, 100% of four subsidiaries (Subs 1-4):

(1) Sub 1, a UK company indirectly owned throughLLC UK, owns the EU manufacturing operations:

(2)Sub 2, an LLC, owns the U.S. manufacturing operations;

(3)Sub 3, an LLC, owns U.S. manufacturing operations for a different/separateproduct line; and

(4)Sub 4, an LLC, owns the research facilities for Subs 1, 2 and 3.

Company B is currently aminority investor in Holdings, holding a 20% interest. Certain of the existingmanagement members of Holdings desire to sell their ownership interests inHoldings and Company B is contractually obligated to buy or arrange for a thirdparty purchase of those management ownership interests. Company B does not wishto own more than a 49% interest in Holdings. Company B has agreed with CompanyA, an existing business entity entirely unrelated in ownership and managementto Company B, for the two firms collectively and indirectly to acquire themanagement's ownership interests. In order to optimize the tax implications ofthe transactions, they will be accomplished through a complex restructuring ofHoldings and its subsidiaries, all as described in greater detail in theattached Fact Appendix.

Under the contemplatedtransaction, the shareholders of Company A will transfer all of their stock inCompany A to a new holding company, immediately after which the new holdingcompany of Company A will convert Company A into a limited liability company(LLC Z) and then transfer a 100% interest in LLC Z to a newly created limitedliability company (Investor LLC). Investor LLC will transfer a majorityinterest in LLC Z to Holdings and a minority interest in LLC Z to LLC UK (theparent of Sub 1). (As described below, Holdings will distribute its ownershipof LLC UK as part of this transaction.) In exchange for the LLC Z interests,Investor LLC will receive a majority of the LLC interests of each of Holdingsand LLC UK. Company B will purchase additional ownership interests in Holdingsfor cash from the management members. Each of Holdings and LLC UK will thenredeem the balance of the management's ownership interests for cash coming froma combination of third party bank loans and a junior subordinated loan fromCompany B. Neither Company A nor Investor LLC will make any loan to Holdings orLLC UK.

As referenced above, theownership of the LLC UK will be distributed by Holdings to Company Band to theother current owners of Holdings in proportion to their current ownership ofHoldings. As a result, Company B will hold a 20% interest in LLC UK. After allthe steps in the transaction, Investor LLC will hold an 80% interest in LLC UK.Holdings also will distribute 49% of the ownership interests in Sub 3 (also anLLC) with 9.8% to Company Band 39.2% transferring to the other owners(reflecting the 20/80 split in ownership of Holdings). Company B will thenpurchase the 39.2% share of Sub 3 from the other current owners forapproximately $4.75 million, with the result that Company B will then directlyown 49% of Sub 3.

At the completion of thetransaction, Investor LLC will own 51 % of Holdings and 80% of LLC UK, CompanyB will hold 49% of Holdings, 49% of Sub 3 and 20% of LLC UK, and Holdings willown 100% of Sub 2 and Sub 4 and 51 % of Sub 3. In addition, Holdings will oweadditional debt, part to a bank and part to Company B. In total, the sellingowners will receive approximately $144 million, financed in large part by theamounts that Holdings will borrow from the third party bank and from Company B.The loan from Company B will be in two parts: one a mezzanine term loan in theamount of approximately $65 million and the other a mezzanine term loan in theamount of approximately $38 million. The $65 million mezzanine loan replaces anexisting loan from Company B to Holdings, bears interest at a market rate, andis secured by all of the assets of Sub 1, Sub 2, Sub 3, Sub 4 and each of theirsubsidiaries. The $38 million mezzanine term loan, which is also secured by allof the assets of Sub 1, Sub 2, Sub 3, Sub 4 and each of their subsidiaries,will bear an interest rate of 12% starting 7 years after the loan is made orafter a refinancing of more senior debt (whichever occurs first), and willprovide that, in the event of insufficient funds to pay the term loan, Holdingsmay defer payment for some period of time. During any deferment, any applicableinterest would continue to accrue on the remaining unpaid principal and theloan would include a condition that no profit distributions could be made tothe LLC owners in any year that Holdings was not current on the term loanprincipal and interest payments (although certain tax distributions to the LLCowners may still be made). In addition, Company B can demand payment in full onthe $38 million loan at any time after 10 years.

With this transactionbackground, we wanted to address the following HSR filing issues:

1. We understand that under 801.1(f)(1)(ii) loans to an LLC, including loans made by entities that own an interest inthe LLC, do not constitute a non-corporate interest for purposes of the HSRregulations. Therefore, the loans by Company B would not be considered indetermining control of Holdings after the transaction and Investor LLC, withthe right to 51 % of the profits and 51% of the assets upon dissolution (afterpayment of all debts including those owed to Company B) would be deemed to havecontrol of Holdings under 801.1(b)(1 )(ii) as a result of the acquisition andCompany B would not have control. Please confirm that this understanding iscorrect.

2. As a result of the transaction,Company B will hold a 49% interest in Holdings and a 49% interest in Sub 3. Theremaining 51 % interest in Sub 3 would be held by Holdings. We understand thatunder 801.1(b)(1 )(ii) we look at each of these LLCs separately and do notcount Company B's share of Sub 3's profits as the sum of (1) any profits received directly fromSub 3 plus (2) some indirect allocation reflecting Company B's 49% share ofHolding's share of Sub 3's profit distributions. Thus Company B would notcontrol Holdings or Sub 3 as a result of the transaction. Please confirm.

(refer to image filefor diagram)

Detailed Fact Appendix

Holdings is currentlyowned as follows: 80% of the membership interests are held (either directly orthrough separate single-member limited liability companies) by individualmembers who comprise the Holdings management group (Management Group) and the remaining20% membership interest is held by Company B, a corporation that also is amajor customer of Holdings.

In the proposedtransaction, the following steps will occur: Company B will own a 49%membership interest in Holdings.

Holdings will distribute a 49% interest in Sub 3, a limited liability company subsidiary of Holdings, to Company B and the Management Group pro rata

Company B will purchase the interests in Sub 3 distributed to the Management Group for approximately $4.75 million, giving Company B a 49% interest in Sub 3 with the remaining 5 I % interest in Sub 3 still held by Holdings

Holdings will distribute ownership of LLC UK, a new limited liability company holding company for Holdings's European operating subsidiary, pro rata to the current members of Holdings (Company B and the Management Group)

The shareholders of Company A, an existing corporation unrelated to Holdings and Company B, will transfer all of the stock of Company A to a newly formed holding company, and then convert Company A into a limited liability company (LLC Z)

Certain (but not all) members of the Management Group will contribute to a new holding company (Investor LLC) certain ownership interests in Holdings and the holding company of LLC Z will contribute its entire interest in LLC Z to Investor LLC

Investor LLC will contribute a 65% membership interest in LLC Z to Holdings in exchange for a 34% interest in Holdings and will contribute a 35% membership interest in LLC Z to LLC UK in exchange for a 45% interest in LLC UK

Holdings and its subsidiaries and LLC UK and its subsidiaries will borrow funds from banks and from Company B to pay off existing debt owed to banks and Company B, make certain other payments to Company B and fund redemptions of interests of the Management Group

Company B will purchase interests in Holdings from members of the Management Group for $29.7 million, increasing Company B's percentage interest in Holdings to 31%

Holdings will redeem interests of the Management Group for $59.3 million, having the effect of increasing the ownership of lnvestor LLC to 51 % of Holdings and of Company B to 49% of holdings

LLC UK will redeem interests of the Management Group for $50.5 million increasing the ownership of Investor LLC to 80% and of Company B to 20%

As a result of the overall transaction, the Management Group will collectively receive total payments of approximately $144 million

Post closing:

1. Investor LLC will own a 51% membershipinterest in Holdings and Company B will own a 49% membership interest inHoldings.

2. Investor LLC will own an 80%membership interest in LLC UK and Company B will own a 20% ownership interestin LLC UK.

3. Holdings will own a 51% membershipinterest in Sub 3 and Company B will own a 49% membership interest in Sub 3.

4. Holdings will own a 65% membershipinterest in LLC Z and LLC UK will own a 35% membership interest in LLC Z.

The resulting structurewill be as shown on the attached chart.

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