Question
From:
(Redacted)
Sent:
Monday, July 09, 2012 11:03 AM
To:
Verne, B. Michael
Subject:
HSR Question--Joint Venture Formation
Mike,hope all is well with you and you survived the heat wave. We would appreciateyour thoughts on the factual situation below in which we represent theacquiring person.
A.Factual Circumstances
1.Thistransaction involves the establishment of a joint venture limited liabilitycompany("LLC") to which one group of entities will contribute cashand the other will contribute an operating business.
2.Morespecifically, A, B, C, and D are related private equity fund partnerships.Joining with them may be an as yet to be determined additional co-investor, E.The entities A, B, C, D, and E are providing cash to the new joint venture. F,an unrelated corporation, is contributing an operating business owned byvarious of its subsidiaries.
3.Asan interim measure, entities A , Band F have set up a new LLC, which we willrefer to as LLC 1. A holds an 8 percent interest in LLC 1, which B holds a 43percent interest and F holds a 49 percent interest.
4.A,B, C and D have also set up an additional new LLC which we will refer to as LLCX.
5.Priorto the closing, the ownership of LLC X is currently anticipated to be roughlyas follows: A will hold 6.4 percent, B will hold 33.6 percent, C and D togetherwill hold 31.4 percent in the aggregate, and E will hold 28.6 percent. Thiscould change but for purposes of the analysis below it should be assumed thatin no event will anyone investor hold a 50 percent or greater interest in LLCX.
6.Prior to the closing, LLC X will set up a new LLC and LLC 1 will be placedunder it. This intermediate LLC between LLC X and LLC 1 will be referred to asLLC Y. LLC Y will serve as the vehicle for the joint venture. LLC Y will be thesole member of LLC 1.
7.Pursuantto a Contribution Agreement among LLC X, F and LLC 1 and LLC's whollyowned-subsidiary ("LLC 2", also a shell vehicle), at the closing Fwill contribute an operating business to LLC 2 and in return will receive a onethird interest in LLC Y. A, B, C, D, and E will, through LLC X, contribute anaggregate $175 million to LLC Y and LLC X will thereafter hold a two thirdsinterest in LLC Y. (This could involve both membership interests and debt butin any event LLC X will have a right to 50 percent or more of the profits and50 percent or more of the assets of LLC Y on liquidation after payment ofdebts.)
8.Looking through all of these steps, the net result if that LLC X and F are thetwo owners of the joint venture, LLC Y, and LLC X will hold the controllinginterest in LLC Y.
B.HSR ANALYSIS
2. With respect to Step 7, LLC X is itsown ultimate parent because there is no one person having a right to fiftypercent or more of its profits or 50 percent or more of its assets ondissolution after payment of debts. As a new entity, it will have no regularlyprepared balance sheet and the only asset it will have at closing will be cashwhich will be down streamed to the new joint venture, LLC Y. Therefore, we seekto confirm that it may rely on 16 C.F.R.801.11(e) in determining whether, as anacquiring person, it meets the size of person test set forth in 16 C.F.R.801.50(b)(1)(i) or 16 C.F.R. 801.50(b)(2)(i)?If that is correct, then LLC X would not meet the size of person test forpurposes of this joint venture transaction.
3. This leaves us then with the questionof whether the size of the transaction is such that the HSR size of person testapplies; that is ,does LLC X's acquisition of interests in LLC Y have a valueof less than $272.8 million? In that regard, 16 C.F.R. 801.50(d) indicates thevalue of the transaction is to be determined in accordance with 16C.F.R.801.10(d) which, in turn, provides that with respect to the acquisitionof non-corporate interests, the value of the interests to be acquired is theacquisition price, or if not determined, the fair market value of the interestsacquired (the acquisition price including all consideration being paid for thenon-corporate interests). Would we be correct that the cash contribution by LLCX to LLC Y would be considered the equivalent of the "acquisition price?If so, then the value of the transaction would be only $175 million and nofiling would be required.
4. Please note that various loans may bemade by A B, C, D, E and F to the joint venture, LLC Y. While these wouldcertainly be taken into consideration for purposes of 801.50(b)(1 )(ii) and801.50(b)(2)(ii), it is our understanding that they would not be considered forpurposes of the size of transaction calculation in paragraph B. 3 above of thisemail. Could you please advise if you agree with that conclusion?
5. lf you agree with all of ourconclusions, then no HSR filing would be made with respect to this jointventure transaction.