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Date
Rule
802.50
Staff
Michael Verne
Response/Comments
Agree.

Question

Points for HSR Review with PNO

Staff December 28, 2010

Facts of transaction

1In January 2009, Seller and Purchaser entered into an Asset Purchase Agreement("APA"). Closing under the APA has not yet occurred.

2The transaction is structured as an asset sale for a purchase price of $300M,subject to certain adjustments.

3Seller is a company organized under the laws of Bermuda, with its sole officein Bermuda. Its sole shareholder, sole employee and ultimate parent entity("UPE") is a Bermuda resident and citizen of Sweden ("Shareholder"), who recently died. The Shareholder's executor is a Bermuda citizen.

4Seller's total revenue in its most recent fiscal year, ended March 31, 2010,was approximately $45.4 million.

5Purchaser is a Massachusetts LLC based in the US, and is its own UPE. Purchaseris engaged in the business of providing investment management and advisory servicesto various clients in the US.

6Seller has been engaged exclusively from without the United States in thebusiness of providing investment management and advisory services to variousclients located in the US (the "Business"). Seller is selling toPurchaser substantially all of the assets of the Business.

7The AP A provides that at the closing, Seller will transfer the followingassets to Purchaser: (a) all files, documents, instruments, papers, books andrecords related to the Business, including marketing lists, shareholder files,reports, securities holding information and general business records; (b) allrights to the name of Seller; (c) all investment performance "trackrecord" information belonging to Seller and its Affiliates; and (d) allgoodwill of Seller associated with the Business.

8The assets to be transferred pursuant to the APA do not include Seller's rightsunder its investment advisory and other contracts with its clients. The AP Aprovides, however, that Seller must use its reasonable best efforts to obtainall approvals necessary for each of Seller's clients to enter into a newadvisory agreement with Purchaser no later than the closing pursuant to whichPurchaser will provide the services to the client that Seller was previouslyproviding.

9Since the parties entered into the APA, Seller's client relationships haveevolved into three categories:

Seller's contractual relationships withsome clients have remained unchanged. Under these relationships, Seller hasremained solely contractually responsible to the client and has received 100%of the fees paid by the clients. Seller engaged Purchaser, as an independentcontractor and not as an agent, pursuant to a consulting agreement, to providevarious services in support of Seller's servicing of these clients, and forthese services Seller paid Purchaser 50% of the fees paid by the client (andthus Seller retained the remaining 50% of these fees -we refer to these belowas the "Seller Retained Fees").

Clients of Seller representing asubstantial majority of Seller's revenues from the Business elected to enterinto new, separate, co-advisory agreements with each of Seller and Purchaser. Underthose co-advisory agreements, each of Seller and Purchaser has its own,separate contractual responsibilities to the applicable client and each ofSeller and Purchaser is paid fees directly by the client. We refer to the feesreceived by Seller under these arrangements as the "Seller Co-AdvisoryFees".

The remaining clients of Seller electedto terminate their advisory agreements with Seller and enter into new advisoryagreements with Purchaser (we refer to these clients as the "Turned-OverClients"). In connection with the execution of its new agreements with theTurned-Over Clients, as required by the AP A, Purchaser executed and deliveredto Seller a promissory note (the "Interim Note") in the amount of$10,518,424, payable in quarterly installments. Under the terms of the InterimNote, each installment is approximately equal to 50% of the net after-tax cashflow derived by Purchaser during the previous quarter from the Turned-OverClients and from certain other business activities of Purchaser. We refer tothe payments made by Purchaser to Seller under the Interim Note as the"Interim Note Payments."

10The amount of the Interim Note was calculated by reference to the ratio ofaggregate assets under management of the Turned-Over Clients as of January 1,2009 to the aggregate assets under management of all clients of the Business asof that day.

11At the closing, pursuant to the APA Purchaser will deliver to Seller apromissory note in the amount of $300,000,000, less the aggregate of the SellerRetained Fees, Seller Co-Advisory Fees and the Interim Note Payments.

12The Seller Retained Fees and the Seller Co-Advisory Fees were paid to Seller byits clients for services rendered. The funds received by Seller from thosesources do not, therefore, represent purchase consideration. The aggregateamount of Interim Note Payments paid to Seller through October 15, 2010, is$3,797,756. We estimate that the next Interim Note Payment to be paid onJanuary 15, 2011, will be approximately $540,378.

13For tax purposes, the parties stipulated in the APA that the goodwill of Sellerassociated with the Business was located outside the US.

14.The books and records of Seller are located in Bermuda (principally in Shareholder'shome and the Bermuda offices of its accountants), but certain ministerial andclerical records (relating to securities trading records for clients' accounts)are located in the US with an independent service provider.

15Since 1993, Seller has retained Boston Investor Services, Inc.("Administrator"), a company located in the United States, to provide administrative services including trade settlement,recordkeeping, research and regulatory compliance services for which Sellerpays Administrator monthly and hourly fees. The Administrator is an independentcontractor not under common control with, nor an agent of, either the Seller orthe Purchaser.

16The only physical assets of the Seller located in the United States are records (as described above) in the offices of the unaffiliatedAdministrator. The fair market value of those records is nominal.

17Prior to the formation of the Purchaser in 2003, the principals of Purchaserprovided certain services to Seller on a non-exclusive basis as unrelatedindependent contractors.

18In 2006, Seller entered into a Consulting Services Agreement with each of thecorporate Principals of the Purchaser, as independent contractors, and not as agents,pursuant to which each of these entities provided certain consulting andresearch services as designated by Seller regarding potential investments, forwhich services Seller paid each of these entities a commission equal to 4%percent of Seller's adjusted gross revenues. None of the contracts were betweenPurchaser and Seller.

19For two clients, Seller and Purchaser served as co-sub advisors. For Company H,which was originally a client of Seller only, Purchaser and Seller wereappointed co-sub advisors in Feb. 2009. For Company C, the same arrangement wasentered into in 2010. See the second bullet point under paragraph 9 above.

HSR analysis andrequest for opinion

20We would like to confirm that: (a) the upcoming closing on a transaction isexempt under HSR Rule 802.50(a) as an acquisition of foreign assets thatgenerated less than $63.4 million in sales in or into the United States in theSeller's last fiscal year; and (b) an "interim closing" in May 2010was not subject to reporting requirements because, to the extent any assettransferred its acquisition price and fair market value were well below $63.4million, and for other reasons as well.

21We understand that contracts for services rendered outside the United States are foreign assets. Informal Opinion # 1003008. Similarly, the goodwillgenerated from such services should be treated as a foreign asset. By way ofcomparison, Informal Opinion # 9605014 confirms that where reinsurance serviceswere provided outside the US, the fact that some premium is came from USinsurers even on underlying reinsured policies with US insureds, the sales ofthe reinsurance were not sales in or into the US.

22We are aware of interpretations regarding intellectual property and goodwillconfirming that with respect to such intangible assets, it is acceptable toallocate the "location" of such assets for HSR purposes in a mannerinconsistent with tax allocations, and that one acceptable method of allocationis an allocation based on the percentage of goods sold pursuant to theintangible assets either inside or outside the United States (Informal Opinions# 0411004, 0411005). However, for a foreign issuer in a service businessselling substantially all its assets, we believe that a tax allocation ofgoodwill as generated outside the United States, as confirmed by the parties inthe APA, is a reasonable method of establishing the location of intangibleassets generated from services rendered outside the United States.

23Informal Opinion # 0709003 is instructive on treatment of foreign investmentadvisers, even when some of their clients are in the US, and is consistent withthe general principle that revenues earned from providing a service areattributed to the location where the services are performed (see InformalOpinion # 9605014 discussed above). Informal Opinion # 0709003 involved whetherrevenue of a foreign subsidiary of a foreign acquired person were sales in orinto the US for purposes of the 802.51 exemption relating to acquisition of thevoting securities of a foreign issuer. Subsidiary B3 was incorporated outsidethe US and its headquarters address and only offices were outside the US, though it was registered with the SEC as an investment adviser. It primarily providedinvestment advisory services to foreign clients, with some US clients which invest in offshore pooled investment vehicles advised by it acquiredeither directly or by US feeder funds not within the acquired person. Allinvestment decisions with respect to such pooled investment vehicles were madeoutside the US, no funds flowed through a controlled US establishment of theacquired person, and the offshore pooled investment vehicles invested primarilyin non-US securities. PNO staff agreed that its revenue did not comprise salesin or into the US for purposes of the 802.51 exemption. Similarly, where Selleris a Bermuda investment adviser, its assets, including the track record andgoodwill developed rendering investment advice from Bermuda for internationalinvestments to US clients, should be deemed foreign assets.

24The Interim Closing was not reportable because Purchaser merely assumed serviceobligations under new contracts with third parties which is not a transfer ofassets under HSR law. Even if Purchaser's new agreements with former customersof Seller could somehow be characterized as a transfer of assets, any such"assets" held by Purchaser as a result of the Interim Closing werevalued well below $63.4 million. Alternatively, any transfer is subject toexemption as a transfer in the ordinary course, as Seller continued itsinvestment advisory business outside the United States after the InterimClosing.

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