K Walsh concurs.
Sent: Thursday,January 10, 2013 9:22 AM
To:Verne, B. Michael
Subject: HSR Analysis for a Transaction Involving an MLPand the
Transfer of an LLCs Preferred Interests
Alimited liability company, ("Parent") currently owns certaininterests in a publicly-traded master limited partnership ("MLP") andall of the interests in a limited liability company (Sub-A").
Withrespect to the MLP, Parent (1) indirectly holds the general partner of the MLP,(2) holds various limited partner interests in the MLP, and (3) holds all ofthe MLP's incentive distribution rights ("IDRs"). The public owns theremaining limited partner interests in the MLP. Because the distribution ofprofits from the MLP will vary due to the IDRs and the subordination of certainof the limited partner interests held by Parent and because Parent is notentitled to 50% or more of the MLP's book assets on dissolution, we believethat the MLP is not "controlled" for HSR purposes by Parent but is itsown UPE. On the other hand, because Parent currently holds all of the interestsin Sub-A, Parent does control Sub-A.
Parent,Sub-A, and the MLP are considering a transaction involving several steps. Sub-Acurrently has one class of membership interest outstanding, but as a first stepParent will amend and restate Sub-A's limited liability company agreement tocreate two classes of membership interests: Sub-A Common Units and Sub-APreferred Units. Sub-A will issue all of the Common Units and a portion of/t11e Preferred Units to Parent. We believe that this step is exempt under theintraperson transactions exemption (802.30).
Inthe next step, Parent will contribute to the MLP the Sub-A Preferred Units itjust received from Sub-A) in exchange for additional MLP limited partnerinterests. The additional MLP interests acquired by ,the Parent in this step(combined with the interests in the MLP already held by the Parent), will notgive the Parent "control" of the MLP under the HSR rules. Thereforethis part of the transaction would not trigger an HSR filing obligation. Wealso believe that the MLP's acquisition of the Sub-A Preferred Units does nottrigger an HSR filing obligation as explained below.
In thefinal step the MLP will purchase the remaining Sub-A Preferred Units directlyfrom Sub-A in exchange for cash. Assume for purposes of this analysis that thevalue of the Sub-A Preferred Units held by the MLP is in excess of $68.2million. Following these transaction steps, the Parent will own all of theoutstanding Common Units (comprising 80% of the total equity of Sub-A), and theMLP will own all of the outstanding Preferred Units (comprising 20% of thetotal equity of Sub-A).
TheSub-A Preferred Units entitle the holder to preferential distribution rights ofprofits from Sub-A of $3.75 million each quarter plus any preferreddistribution arrearages from prior quarters for a period of approximately fiveyears. After approximately five years the Sub-A Preferred Units will beconverted to Sub-A Common Units if all of the preferred distributions have beenmade and the Sub-A Preferred Units would have received, on an as convertedbasis, $5 million in distributions on average in the previous two calendar quarters.Any Sub-A profits in excess of $3.75 million each quarter will be distributedto the holder of the Common Units (in this case the Parent). Because thedistribution of Sub-A's profits will vary from quarter to quarter, we believethat the HSR profits test would not be used for determining control of Sub-A,but instead we would look to the assets on dissolution for determining controlof Sub-A after the transaction.
Aliquidation of Sub-A would result in Parent receiving 80% of the distributionproceeds and the MLP receiving 20% of the distribution proceeds. (The PreferredUnits held by the MLP are not entitled to any liquidation preference in theevent of a dissolution.) For this reason Parent would be deemed to controlSub-A after the transaction is completed. Because control of Sub-A does notchange as a result of the acquisition of the MLP of the Sub-A Preferred Units,we believe that no HSR filing is required for this transaction.