Question
April 2, 1993
VIA TELECOPIER AND FEDERAL EXPRESS
Patrick Sharpe, Esquire (Note from PS: Note: I am not an attorney)
Premerger Notification Office
H-303
Federal Trade Commission
Washington, D.C. 20580
Re: Formation of [redacted]
Dear Patrick:
This letter is a follow-up to our telephone conversation of March 26, 1992 wherein I requested the Federal Trade Commissions (PNO staff note: staff [not Commission]) concurrence in the analysis of the above-referenced formation of [redacted] and acquisition of [redacted] under the Hart-Scott-Rodino Antitrust Improvements Act of 19766 (HSR) and further requested that [redacted] be permitted to make only one filing with respect to the formation of [redacted] and acquisition of [redacted]. You requested that I reduce my request to writing and the Federal Trade Commission (the FTC) (PNO staff note: staff [not Commission]) would respond in 48 hours or so, as its work-load permits. References herein to sections refer to the corresponding section of the rules promulgated by the FTC under the HSR (the HSR Rules).
[Redacted] is engaged in interstate commerce and provides mental health and substance abuse utilization review and care management services. It was formed in 1990 as a wholly-owned subsidiary of [redacted] and has total assets in excess of $10 million as shown on its last regularly prepared balance sheet date February 28, 1993 (total assets of approximately [redacted] million) and annual net sales in excess of $25 million for its fiscal year ended. December 31, 1992. [Redacteds] voting securities consist entirely of one class of common stock (PNO staff note: voting stock) (par value, $.01 per share) with 10,000 shares presently issues and outstanding (each such share is herein referred to as a Share). 8,000 Shares are issued in the name of [redacted] and 2,000 Shares are issued in the name of [redacted]. The Shares are neither listed on a national securities exchange nor authorized to be quoted in any interdealer quotation system. [Redacted] purchased its Shares in 1992 for [redacted] million in cash in a transaction not subject to reporting under HSR as [redacted] did not at that time have $10 million in total assets and the value of the Shares acquired did not then exceed $15 million. Of course, that purchase also qualified for the small transaction exemption set forth in Sec. 802.20.
[Redacted] has agreed to sell its 8,000 Shares to [redacted], a corporation organized by [redacted] and [redacted] pursuant to that certain Stock Purchase Agreement dated as of [redacted]. [Redacted] is being formed for the sole purpose of acquiring the [redacted]. [Redacted] is proposed to be capitalized by [redacteds] cash equity contribution and possible loan aggregating approximately [redacted] million or less and [redacteds] cash equity contribution and possible loan aggregating approximately [redacted] million or less. [Redacted] will control [redacted] and be its ultimate parent entity. (PNO staff note: what % of voting stock to each shareholder) [Redacted] immediately subsequent to its capitalization, will purchase all of [redacteds] 8,000 Shares for cash of [redacted] million and [redacteds] non-interest bearing promissory note in the amount of [redacted] million, guaranteed severally in equal shares by each of [redacted] and [redacted]. This results in a value of the acquisition of [redacteds] 8,000 Shares, calculated in accordance with Sec. 801.10(a)(2)(i) of [redacted] million (the sum or the [redacted] million in cash and [redacted] million promissory note) or $4,900 per Share. Accordingly, the value of the acquisition by [redacted] as the ultimate parent entity of [redacted] of all the Shares, calculated pursuant to Secs. 801.10(a)(2)(i) and 801.10(c)(3), will be [redacted] million (the sum of [redacted] million and [redacted] million calculated as stated in the next paragraph) and the value of the total assets held by [redacted], calculated pursuant to Sec. 801.40(c), will be [redacted] million (the combined value of the cash to be contributed by each [redacted] and [redacted], [redacted] million , and the face value of the [redacted] promissory note guaranteed by [redacted] and [redacted] [redacted] million).
[Redacted] intends to contribute its 2,000 Shares in [redacted] to [redacted] after the closing of the acquisition of the 8,000 Shares. [Redacted] anticipates that the fair market value of that proposed contribution to be [redacted] million (2,000 Shares at [redacted] per Share). If such Shares are included in the value of the total assets of [redacted] at closing on the acquisition of the Shares, its total assets, calculated in accordance with Sec. 801.40(c), will be [redacted] million (the combined value of the 2,000 Shares contributed by [redacted] [redacted] million, the value of the 8,000 Shares purchased by [redacted] from [redacted] [redacted] million, and the face value of [redacted] promissory note guaranteed by [redacted] and [redacted] [redacted] million). Of course, the value of [redacteds] voting securities will still be only [redacted] million after subtracting from its total assets the [redacted] million liability to [redacted]. [Redacted] will issue 7,000 shares of its common stock, 5,000 to [redacted] and 2,000 to [redacted] which will constitute all of [redacteds] issued and outstanding voting securities.
Each of [redacted] and [redacted] is a non-stock, non-profit corporation, and [redacted] is a [redacted] incorporated under the [redacted]. Each of [redacted] [redacted] and [redacted] has total assets and annual net sales in excess of $100 million in the business of providing health insurance and related services.
Our analysis of the application of the HSR Rules to [redacted] and [redacted] is as follows:
1.Pursuant to Section 801.41 (PNO staff note: 801.40?) [redacted] is required to file in connection with the formation of [redacted] as each of [redacted] and [redacted] has total assets and annual net sales in excess of $100 million and [redacted] will have total assets in excess of $10 million.
2.[Redacted] is exempt from filing as an acquired person with respect to its own formation by reason of Section 802.41.
3.[Redacted] is required to file as the ultimate parent entity of [redacted] in connection with [redacteds] acquisition of the 8,000 shares from [redacted] as [redacted] will be deemed pursuant to Sec. 801.13 to hold all 10,000 of [redacteds] Shares (with a value of [redacted] as a result of the acquisition. Of course, [redacted] will have not filing obligation in connection with that acquisition as it will not control [redacted].
The purpose of this letter is to request (i) the FTCs (PNO staff note: staffs [not FTCs]) concurrence in the above analysis and (ii) that [redacted] be permitted to may only one filing in connection with these transactions. We submit that there is little reason to require [redacted] to make twoseparate filings. The formation of [redacted] is merely one step in a single unitary transaction having no independent economic effect at all apart from the underlying acquisition of Shares.
[Redacted] has informed us that they will not be filing in connection with either the formation of [redacted] or its acquisition of the 8,000 [redacted] Shares from [redacted] on the basis that its involvement in both transactions qualifies for the Sec. 802.20 small transaction exemption. (PNO staff note: correct)
Accordingly, we hereby request that [redacted] be required to make only one filing in connection with the within described transactions, as [redacted] ultimate parent entity in its acquisition of the 8,000 Shares from [redacted]. (PNO staff note: one filing is OK but two fees)
Should you have any questions or desire any further information, please do not hesitate to call me at the above-referenced number.
Very truly yours,
[redacted]