July 9, 1985
Wayne Kaplan, Esq.
Premerger Notification Office
Federal Trade Commission
Sixth and Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re:Confirmation Of Exemption From The Premerger Notification Reporting
Requirements Under The Hart-Scott-Rodino Antitrust Improvements Act
Of 1976, As Amended
Dear Mr. Kaplan:
We are writing to you to confirm the substance of the telephone discussion which we had with you today in which we concluded with you that the proposed transaction described below would be exempt from the Hart-Scott-Rodino premerger notification reporting requirements provided for in section 7A of the Clayton Act (the Act), 15 U.S.C. 18a, as added by section 201 of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the rules promulgated thereunder by the Federal Trade Commission (the Premerger Rules). The facts of the proposed transaction are as follows:
1. ABC Corporation (ABC) is a person engaged in manufacturing and other commercial activities with annual net sales and total assets in excess of $100 million for purposes of section 7A of the Act and Rules 801.1(a) and 801.11 of the Premerger Rules. Q Corporation (Q) is an entity included within the person ABC within the meaning of section 7A of the Act and Rule 801.1(a) of the Premerger Rules.
2.XYZ Corporation (XYZ) is a person engaged in manufacturing and other commercial activities with annual net sales and total assets in excess of $10 million for purposes of section 7A of the Act and Rules 801.1(a) and 801.11 of the Premerger Rules. According to XYZs last regularly prepared balance sheet, XYZ has annual net sales of less than $25 million under Rule 801.11 of the Premerger Rules.
3.All of the issued and outstanding voting securities of XYZ are owned in the aggregate by 12 natural persons (the Selling Shareholders), none of whom control XYZ within the meaning of Rule 801.1(b) of the Premerger Rules.
4.In the ordinary course of its business, XYZ obtained a term loan from Bank A in order to fund its operations. The original principal amount of the loan was $7.15 million, and as of the date hereof, approximately $6.8 million in principal and accrued interest remains outstanding. The term loan is secured by all of the assets of XYZ, and XYZs obligation to pay the term loan has been guaranteed by three of the Selling Shareholders.
5.Q has entered into a stock purchase agreement with the Selling Shareholders pursuant to which Q has agreed to acquire all of the issued and outstanding voting securities of XYZ from the Selling Shareholders in a transaction affecting interstate commerce within the meaning of section 7A(a)(1) of the Act. In consideration of the transfer of XYZs voting securities, Q has agreed to pay the Selling Shareholders $8.425 million in cash in the aggregate and to restructure XYZs financing arrangements in such a way as to obtain the cancellation of the guarantees given by three of the Selling Shareholders with respect to XYZs obligations under the term loan.
6. As a result of an agreement negotiated with Bank A in an arms length transaction, Bank A has agreed to cancel the Selling Shareholders guarantees of the term loan upon its receipt of a $2 million partial prepayment of the outstanding balance of the term loan. Accordingly, simultaneously with the closing of the purchase and ales by and among Q and the Selling Shareholders, Q will make partial prepayment on the outstanding balance of the term loan to Bank A for the account of XYZ. Qs partial prepayment of the term loan will be documented and accounted for as an intercompany advance from Q to XYZ.
7.The terms of XYZs existing financing arrangements are less favorable than the terms of the financing arrangements which Q can obtain for or provide to XYZ because of Qs superior credit facilities. Therefore, at some point following the closing of the purchase and sale transaction, the timing of which will depend upon then prevailing economic factors and business judgements to be made, Q will cause XYZ to prepay its then outstanding obligations under the term loan and provide XYZ with alternative financing to fund its operations.
In the telephone discussion which we had with you today, we concluded with you that the purchase and sale transaction described above would be exempt from the premerger notification reporting requirements provided for in section 7A of the Act and the Premerger Rules because it does not satisfy the so-called size of the transaction test under section 7A(a)(3) of the Act based upon the following analyses:
1.Although Qs acquisition of all of XYZs issued and outstanding voting securities from the Selling Shareholders would seem to satisfy the jurisdictional requirement provided for in section 7A(a)(3)(A) of the Act, the transaction falls within the so-called minimum dollar value exemption to said section provided for in Rule 802.20 of the Premerger Rules because the transaction would not result in ABCs holding voting securities of an issuer (i.e., XYZ) which , together will all entities which it controls, has annual net sales or total assets of $25 million or more.
2.Qs acquisition of all of XYZs issued and outstanding voting securities does not satisfy the alternative jurisdictional requirements provided for in section 7A(a)(3)(B) of the Act because, as a result of the acquisition, ABC will not hold an aggregate total amount of XYZs voting securities and assets valued in excess of $15 million. Because XYZs voting securities are not traded on a national securities exchange or quoted on an interdealer quotation system of a national securities association, and because the acquisition price of XYZs voting securities has been fixed in that it is not subject to determination following the closing of the acquisition, the value of XYZs voting securities which will be held by ABC as a result of the acquisition is determined by reference to the actual acquisition price under Rule 801.10(a)(2). In addition, under Rule 801.10(c)(2), the acquisition price is defined to include the value of all consideration given in exchange for the voting securities.
The acquisition price of XYZs voting securities under the Premerger Rules would be the sum of the cash purchase price to be paid for then [sic] securities ($8.425 million) plus the value of the benefit aforded the Selling Shareholders with respect to the cancellation of the guarantees of XYZs term loan. Therefore, if the value of the benefit afforded to the Selling Shareholders is the entire amount of the partial prepayment required by Bank A to be paid as the condition to the cancellation of the guarantees ($2 million), the value of XYZs voting securities which will be held by ABC as a result of the acquisition would be $10.425 million, which falls far below the $15 million transactional threshold level provided for in section 7A(a)(3)(B) of the Act.
3.The foregoing legal analyses and conclusions would not be affected by any further prepayment of XYZs obligations under the term loan subsequent to the conclusion of the purchase and sale transaction.
If the foregoing comports with your understanding of the substance of our conversation, and if you are in agreement with the substantive analyses and legal conclusions set forth herin with respect to the transaction described above, please provide the undersigned with oral confirmation to that effect at your earliest convenience. The closing of the purchase and sale transaction described herein is schedule to commence Monday morning, July 15, 1985, and we would greatly appreciate all your efforts on our behalf to expedite the oral confirmation.
Kindly acknowledge your receipt of this letter by signing the enclosed copy and returning it to the undersigned. A self-addressed, stamped envelope has been provided for your convenience.
We greatly appreciate you cooperation and continuing assistance in this matter.
Very truly yours,
STAFF COMMENTS: John Sipple and Andy Scanlon were consulted by me and agree that the foregoing is not a reportable transaction for the reasons set forth in the letter. (redacted) was so notified.
Wayne Kaplan 7/10/85