January 4, 1983
Premerger Notification Office
Federal Trade Commission
6th Street & Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: January 4th 1983 Telephone Conversation
In a conversation this morning, I requested an
informal opinion with respect to two different factual
Factual Situation No. 1
Company A will acquire 50% of the outstanding voting
securities of Company b. this transaction will be
valued at less than $15 million. Company Bs last
10Q filing, dated July 3, 1982, indicates that
Company B has $31 million in assets. However,
Company B has prepared an estimated balance sheet,
in connection with this transaction, which reflects
only $22 million in assets. Moreover, Company B is
currently preparing its 10K form which will also
reflect assets of $22 million.
You have advised that the total assets of Company B
shall be as stated on the last regularly prepared balance sheet
of Company B (Rule 801.11(c)(2)). The determination of whether
ir nit a balance sheet is regularly prepared is a question of
fact. A balance sheet does not have to be public nor must it be
filed in order to be regularly prepared. However, it must be
a document upon which the board of directors regularly relies.
A balance sheet prepared for purposes of a transaction usually
is not a regularly prepared balance sheet. In the factual
scenario described above, if, prior to consummation of the
transaction, a regularly prepared balance sheet, such as the
balance sheet contained in a 10K filing, were to indicate that
Company B had less than $25 million in assets, A hart-Scott-
Rodino filing would not be required.
Factual Situation No. 2
(a) Individual A will acquire 40% and Individual B
will acquire 10% of a company with more than $25 million
in net annual sales or total assets. However, the
transaction will be valued below $15 million.
Individuals A and B will enter into a voting trust.
Individual a will be the trustee and will have the
power to vote the shares of Individual B.
(b) In the same facts as (a), Individuals A and B
will enter into a shareholders agreement pursuant
to which Individual A will have the power to direct
how the shares of Individual B will be voted and
the power to prevent Individual B from selling his
stock without Individual As approval. Individual B
will bear the risk of loss of value and have the
benefit of any increase in value in the stock.
(a) A Hart-Scott-Rodino filing is not required
because the voting trust agreement will not give Individual A
beneficial ownership of Individual Bs stock.
(b) It is a close factual question as to whether this
type of agreement would give Individual A beneficial ownership
of Individual Bs stock. Relevant factors to this determination
include whether consideration exists for the agreement and whether
Individual A will have the risk of loss or the benefit of gain
with regard to the shares of Individual B. If beneficial owner-
ship were imputed to Individual A, a Hart-Scott filing would be
required as Individual A would then control the acquired company
(i.e., hold 50% of its outstanding voting securities).*
* Individual As ability to elect one-half of the
board of directors is insufficient to give control,
as defined in the Hart-Scott rules, because it
does not five Individual A the power to elect a
majority of the board.
I believe this accurately describes our conversation
and the informal opinion which you rendered today. If it does
not, please contact me as soon as possible.