1210016 Informal Interpretation

Michael Verne

– We
are fine with 1 and 3, but we have problems with 2. We don't think we can
ignore the fact that at the time of the acquisition of the two LLCs, Co-investor
will control Newco. By definition it will be diluted to a non-controlling
interest after it acquires the LLCs. Also, the continuum principle cannot be
used when the ultimate step is not reportable.


Sent: Thursday, October 25, 2012 12:39 PM
To: Verne, B. Michael; Walsh, Kathryn
Subject: Question re: 80l.11(e) / "Continuum Principle"

Mikeand Kate,

Iwanted to run a couple of scenarios by you concerning the application of 801.11(e) and the so-called "continuum principle."

NewFund, a new private equity fund, will form a Newco LLC (Newco"), whichwill acquire LLC1 and LLC2 as a result of one transaction. LLC1 and LLC2 areaffiliates and are under common control of the same two ultimate parententities_ The size-of-transaction is less than $263.8 million. The transactionmay be structured in any of the ways outlined below (for legitimate businesspurposes related to consummating the investment, and not to avoid HSR). NewFund is exploring possible co-investors, and under two possible scenarios, noone will control Newco, while under another scenario, a co-investor may have acontrolling interest in Newco at closing (but immediately after closing, wouldhave a non-controlling interest in Newco).

(1)Newco, LLC may be its own ultimate parent entity at the time of theacquisitions because no one individual or entity will have the rights to 50% ormore of the profits or 50% or more of the assets upon dissolution. Newco willnot have a regularly prepared balance sheet. Per 801.11(e), Newco will not meetthe size-of-person threshold because it will not have revenue, nor will it haveat least $13.6 million in net assets once you eliminate the cash on hand tomake the acquisition. Although it is acquiring two entities from the sameAcquired Person, both acquisitions will occur at the same closing in theproverbial blink-of-an-eye_ In theory, Newco may meet the size-of-personthreshold after the first acquisition is consummated, but prior informal interpretationssuggest that this would all be looked at as one acquisition to which 801.11(e)would apply (and Newco will not meet size-of-person in the moment between thefirst acquisition closing and the second acquisition occurring). See http://ftc.gov/bc/hsr/informal/opinions/8705005.htm(applying 801.11(e) to multiple acquisitions from the same Acquired Person).

(2)Alternatively, another private equity investor (Co-lnvestor") mayalso invest in Newco and take a controlling interest in Newco immediately priorto Newco making its acquisition, i.e., at the same closing as Newco'sacquisition of LLC1 and LLC2. The following events will happen nearlysimultaneously at the same closing: (a) Co-Investor will take a controllinginterest in Newco; (b) Newco will acquire LLC1 and LLC2; (c) and the AcquiredPersons will roll their equity in LLC1 and LLCZ into equity in Newco such thatonce the transaction(s) are consummated, Co-Investor will not have acontrolling stake in Newco, and Newco will be its own ultimate parent entity.If you apply the "continuum principle" to look through all theintermediate steps, Newco will be its own ultimate parent entity with noregularly prepared balance sheet, no revenues, insufficient assets to meet thesize-of-person threshold, and will hold the interests of LLC1 and LLC2 as aresult of the transaction. In substance, it is similar to the scenario outlinedin #1 above, although the form may be different, and thus the analysis shouldhave the same outcome.

(3)Alternatively, instead of Co-Investor taking its stake in Newco first, theAcquired Persons may take their interests in Newco, then Co-Investor takes itsstake in Newco, then Newco acquires LLC1 and LLC2. In this scenario, before,during, and after the consummation of the transaction, Newco is its ownultimate parent entity with no regularly prepared balance sheet, no revenues,and insufficient assets to meet the size-of person threshold. Under thisscenario, the analysis would be no different than in the scenario outlined in #1above.

Pleaseadvise if you agree with the analysis above, or if you need additional detail.As always, thank you in advance.

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