2102001 Informal Interpretation

Date:

Tags:

Rule:
801.1
Staff:
Kathryn Walsh
Response/Comments:

We agree that Step 2 is a consolidation – X acquiring Y from B and B (via Y) acquiring X.

As for potential backsides, because this is a consolidation, you must look at Newco after the contributions of X and Y for SOP, so Funds A, B and C may in fact have to make shareholder backside filings.

Question

From: Walsh, Kathryn E.


Sent: Thursday, February 4, 2021 2:22:34 PM (UTC-05:00) Eastern Time (US & Canada)


To: [Redacted]


Cc: [Redacted]


Subject: FW: HSR Question re Consolidations

We agree that Step 2 is a consolidation – X acquiring Y from B and B (via Y) acquiring X.

As for potential backsides, because this is a consolidation, you must look at Newco after the contributions of X and Y for SOP, so Funds A, B and C may in fact have to make shareholder backside filings.

From: [Redacted]


Sent: Wednesday, February 3, 2021 4:09:27 PM (UTC-05:00) Eastern Time (US & Canada)


To: [Redacted]


Cc: [Redacted]


Subject: HSR Question re Consolidations

Dear All:

We are looking at a proposed, fileable transaction and would very much appreciate your guidance on whether you agree that it should be treated as a consolidation.

Relevant Entities

Fund A, Fund B and Fund C (the “Funds”) are three funds in the same family and are each their own UPE.

Company X, a corporation, is its own UPE. Its voting stock is owned by the three Funds as follows: Fund A 27.87%, Fund B 27.87%, and Fund C 44.25%.

Company Y is also a corporation. Its voting stock is owned 60% by Fund B and 40% by non-family shareholders.

Transaction Structure

Step 1: The Funds form Newco, a corporation.

Step 2: The Funds contribute all of their shares in Company X and Company Y to Newco in exchange for Newco voting stock. The Funds will then hold the following percentages of Newco: Fund A 21.1%, Fund B 45.4%, and Fund C 33.5%.

Step 3: Newco contributes all of its shares of Company Y to Newco’s newly formed wholly-owned subsidiary, Holdco LLC (“Holdco”), in exchange for 100% of the membership interests in Holdco.

Step 4: Holdco purchases for cash shares in Company Y from the non-family shareholders sufficient to effectuate a short-form merger under Delaware law.

Step 5: Holdco enters into a short-form merger with and into Company Y.

Post-closing, both Company X and Company Y are wholly-owned subsidiaries of Newco. Fund A owns 21.1% of Newco, Fund B 45.4%, and Fund C 33.5%.

HSR Analysis – A Side

Interpretation 211 in the Premerger Notification Practice Manual (5th ed.) (“PNPM”) (attached) states that a consolidation occurs when a transaction will result in all of the persons party to a transaction becoming wholly-owned subsidiaries of a newly formed entity. The entry further notes that the PNO treats a mixed-transaction, in which the UPE of one of the combining entities retains its pre-acquisition identity, as a consolidation.

Here, the transaction appears to be just such a mixed consolidation, because:

Post-closing, Company X and Company Y will be wholly-owned subsidiaries of newly-formed Newco.

Company X was its own UPE prior to the transaction and, as a result of the transaction, will lose its pre-acquisition identity.

Company Y was controlled by Fund B prior to the transaction. Fund B will not lose its pre-transaction identity.

Steps 3-5, discussed above, would be exempt as an intra-person transaction, since Holdco and Company Y, the two entities involved, are both controlled by Newco. 16 C.F.R. 802.30.

HSR Analysis – B Side

We also wanted to confirm that there are no B-side filing obligations here.

As part of Step 2 above, the Funds will each be acquiring voting stock in Newco with a fair market value of more than $94 million but less than $376 million. As a result, the size of person test must be satisfied for there to be any B-side filing.

We assume that the each of the Funds meets the higher size of person threshold of $188.8 million. However, at the time the Funds acquire voting stock in Newco, Newco will not have a regularly prepared balance sheet and a pro forma balance sheet for Newco would show assets equal to $0. As a result, Newco will not meet or exceed the lower size of person threshold and, therefore, the size of person test for the B-side acquisitions will not be satisfied.

 

Questions

Do you agree that:

The A-side transaction should be treated as a consolidation?

For the A-side consolidation the filing parties, as both acquiring and acquired persons, are Company X and Fund B (with Company Y as the acquiring/acquired entity)?the B-side acquisitions by the Funds of voting stock in Newco do not satisfy the size of person test and that no B-side filings are required?There is a potential alternative structure under which Fund 2, which is Company Y’s UPE pre-transaction, will hold at least 50% of Newco’s voting stock post-closing and will therefore be Company Y’s UPE post transaction as well. Informal interpretation 2007003 (attached) suggests that the PNO would view this as an acquisition with a backside. If that is the case, the fact that Fund 2 would still be the UPE of Company Y post-closing would not have any impact on the HSR filings required here. Do you agree?

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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