See Comments in body of letter. I called (redacted) on 5/7/85 and informed him the letter was OK subject to our concern regarding the legitimacy of the alleged business reasons. (redacted) stated he would inquire further into the specific reasons and call me back. I did not hear from him by 5/22/85 and I called him back and reached him 5/28/85. He stated transaction had been abandoned and thus he did not follow up on my inquiry.
April 29, 1985
VIA CERTIFIED MAIL
Wayne Kaplan, Esq.
Federal Trade Commission
6th Street and Pennsylvania Ave., N.W.
Washington, D.C. 20580
Dear Mr. Kaplan:
I am writing to confirm the preliminary views you express in our phone conversations of April 26 and 29, 1985.
A client of our firm (Seller) intends to sell certain of its assets to buyer in a transaction which would not be considered in the ordinary course within the meaning of Section 7A(c)(1) of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (Act). Given the size of the part6ies and other features of the transaction, it appears that the transaction will be reportable under the Act if, but only if, the value of the assets being acquired will exceed $15 million. The assets consist principally of plant, property and equipment used by Seller to manufacture certain of its products; raw materials, work-in-progress and completed inventory; and certain intangibles.
First Issue: Treatment of Receivables
Buyer will not acquire Sellers accounts receivable. The acquisition price plainly reflects that fact. However, following the closing, Buyer will serve as a collection agent for Seller it will attempt to collect Sellers receivables associated with the business being sold and will remit the proceeds of that collection effort to Seller. Seller and Buyers agreement will provide that if Buyer fails to collect and remit the amount of Sellers receivables shown on Sellers closing balance sheet within a specified period after the closing (probably eight months), Buyer will pay Seller an amount in cash equal to a portion (probably one-third) of this shortfall.* If Buyer later collects those slow-paying accounts, it will be entitled to retain that one-third for itself and will only remit the other two-thirds to Seller. These arrangements were negotiated solely for business reasons without regard to (indeed, without knowledge of) their possible implications under the Act.**
Under the circumstances, we believe that when the Board of Directors of Buyer determines the fair market value of the assets being acquired under Section 801.10(c)(3), it need not take into account the value of Sellers receivables, except to the extent the Board anticipates that Buyer will ultimately acquire slow-paying receivables represented by the one-third payment. In our judgment, Buyer will be functioning as a collection agent for Seller (save to the extent of one-third of any shortfall) and will not be assuming any of the benefits or risks normally associated with a change in ownership of receivables. this conclusion is support by the fact that the acquisition price would be substantially greater if Buyer were acquiring Sellers receivables.
Second Issue: Treatment of Note Interest
The consideration Buyer will pay Seller for the assets will include a one-year promissory note bearing interest at a market rate. Assuming that it will be necessary to determine the acquisition price for Sellers assets under Section 801.10(b), it is our understanding that the interest payments under this note would not constitute part of the acquisition price and that only the principal amount of the note need be included. We draw this conclusion in part from the Commissions response to Comment 115" which appears at 43 Fed. Reg. 33471.
* * *
In our phone conversations of the 26th and 29th, I believe you concurred with these conclusions, albeit on a preliminary basis. In accordance with those phone conversations, Seller and Buyer intend to act on the basis of those conclusions unless you or one of your colleagues advises us, by the close of business on Wednesday, may 8, 1985, that you disagree with those conclusions or need more time to consider them.
I again thank you for your courtesy and assistance in this matter.
Very truly yours,
Staff Comments: * Is the buyer being paid a fee as the collection agent? w/this provision the treatment of accounts receivable seems more like a sale. It looks as if buyer has agreed to pay 1/3 the face value of the accounts receivables as a minimum. Under the arrangement, it has the risk of loss but no benefit of gain if it collects all the outstanding accounts. How does this arrangement compare with the way things are normally done? ** What bus. reasons?