Question
(redacted)
February 24, 1986
Patrick Sharpe, Esq.
Premerger Notification Office
Bureau of Competition
Room 303
Federal Trade Commission
6th Street and Pennsylvania Ave., N.W.
Washington, D.C. 20580
Dear Pat:
This letter will confirm the substance of our conversations of last Friday and today regarding the applicability of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. 18a (HSR) to newly formed entities.
We hypothesized a situation where a natural person (NP) holding investment assets worth less than $10 million becomes one of two contributors to a newly formed corporate entity (NFE) which holds less than $10 million in assets pursuant to 16 C.F.R. 801.40(c). NP controls the NFE through a contractual power presently to designate a majority of its directors.
STAFF NOTE: ?
Both contributors to the NFE agree at the time of its formation that the NFE eventually will be used to make a particular acquisition; however, while the proposed acquisition cannot be made until the NFE receives substantial additional capital infusions, neither the identity of any other contributors nor the amounts to be contributed have been determined.
STAFF NOTE: Missing info however, you do not have at least two $10 MM persons - 801.40 cannot apply, it does not meet size of person test.
STAFF NOTE: If the agreement indicates future contributions they must be included in determining the size of the JV and are applicable to 801.40.
STAFF NOTE: Wrong I disagree
We agreed that because the sources and amounts of the eventual post-formation contributions to the NFE were not agreed upon at the time the NFE was formed, 16 C.F.R. 801.40 has no applicability to such subsequent contributions. Rather, the general HSR jurisdictional standards (e.g., 16 C.F.R. 801.11, 801.1(h), and 802.20) apply to capital contributions agreed upon and made subsequent to capital contributions agreed upon and made subsequent to initial formation of the NFE. You expressed the view that such transactions and the described reporting treatment are quite common.
STAFF NOTE: I agree.
STAFF NOTE: I disagree. You look at the UPEs financials for size
of person.
We then discussed whether the NFEs total assets are to be included in the determination of NPs size of person (see 16 C.F.R. 801.1(a) and (b), 801.11) for purposes of establishing whether NP has an obligation to report the NFEs proposed acquisition of another person. We agreed that the staffs informal new entity rule, that the assets of a newly formed entity contributed for purposes of making an acquisition should be netted out of that entitys size of person, does not apply when the newly formed entity is controlled by another entity. See 50 Fed.Reg. 338742 at 38744, 48749-50 (1985). Therefore, all of the NFEs assets are to be included in determining NPs size of person under the situation hypothesized.
STAFF NOTE: Your [sic] getting onto a different subject, any transaction can be subject to 801.90.
A different result would obtain; however, if the NFE were formed and then made its acquisition in a single instance (i.e., at one time in one room); such an occurrence would be treated as a single transaction analogous to a step transaction (cf. 16 C.F.R. 801.90, Ex. 1) and the determination of NPs size of person prior to the transaction accordingly would not include the assets to be contributed to the NFE.
I believe that this correctly states the substance of our conversations. I would, of course, appreciate hearing from you as soon as possible if you disagree with any part of the analysis as I have described it.
Best regards,
(redacted)
(redacted)
STAFF COMMENTS: Im quite confused by your letter.
I cannot give a specific answer to a vague question. Please send another letter giving specific details such as dollar amounts, specifics about the structure of the deal. Perhaps your letter is premature, If so, please write to us when you have more facts.
Called (redacted) 2-25-86, (the day letter recd). He was out of town.