We agree that Step 2 is a consolidation – X acquiring Y from B and B (via Y) acquiring X.
As for potential backsides, because this is a consolidation, you must look at Newco after the contributions of X and Y for SOP, so Funds A, B and C may in fact have to make shareholder backside filings.
Question
From: Walsh, Kathryn E.
Sent: Thursday, February 4, 2021 2:22:34 PM (UTC-05:00) Eastern Time (US & Canada)
To: [Redacted]
Cc: [Redacted]
Subject: FW: HSR Question re Consolidations
We agree that Step 2 is a consolidation – X acquiring Y from B and B (via Y) acquiring X.
As for potential backsides, because this is a consolidation, you must look at Newco after the contributions of X and Y for SOP, so Funds A, B and C may in fact have to make shareholder backside filings.
From: [Redacted]
Sent: Wednesday, February 3, 2021 4:09:27 PM (UTC-05:00) Eastern Time (US & Canada)
To: [Redacted]
Cc: [Redacted]
Subject: HSR Question re Consolidations
Dear All:
We are looking at a proposed, fileable transaction and would very much appreciate your guidance on whether you agree that it should be treated as a consolidation.
Relevant Entities
Fund A, Fund B and Fund C (the “Funds”) are three funds in the same family and are each their own UPE.
Company X, a corporation, is its own UPE. Its voting stock is owned by the three Funds as follows: Fund A 27.87%, Fund B 27.87%, and Fund C 44.25%.
Company Y is also a corporation. Its voting stock is owned 60% by Fund B and 40% by non-family shareholders.
Transaction Structure
Step 1: The Funds form Newco, a corporation.
Step 2: The Funds contribute all of their shares in Company X and Company Y to Newco in exchange for Newco voting stock. The Funds will then hold the following percentages of Newco: Fund A 21.1%, Fund B 45.4%, and Fund C 33.5%.
Step 3: Newco contributes all of its shares of Company Y to Newco’s newly formed wholly-owned subsidiary, Holdco LLC (“Holdco”), in exchange for 100% of the membership interests in Holdco.
Step 4: Holdco purchases for cash shares in Company Y from the non-family shareholders sufficient to effectuate a short-form merger under Delaware law.
Step 5: Holdco enters into a short-form merger with and into Company Y.
Post-closing, both Company X and Company Y are wholly-owned subsidiaries of Newco. Fund A owns 21.1% of Newco, Fund B 45.4%, and Fund C 33.5%.
HSR Analysis – A Side
Interpretation 211 in the Premerger Notification Practice Manual (5th ed.) (“PNPM”) (attached) states that a consolidation occurs when a transaction will result in all of the persons party to a transaction becoming wholly-owned subsidiaries of a newly formed entity. The entry further notes that the PNO treats a mixed-transaction, in which the UPE of one of the combining entities retains its pre-acquisition identity, as a consolidation.
Here, the transaction appears to be just such a mixed consolidation, because:
Post-closing, Company X and Company Y will be wholly-owned subsidiaries of newly-formed Newco.
Company X was its own UPE prior to the transaction and, as a result of the transaction, will lose its pre-acquisition identity.
Company Y was controlled by Fund B prior to the transaction. Fund B will not lose its pre-transaction identity.
Steps 3-5, discussed above, would be exempt as an intra-person transaction, since Holdco and Company Y, the two entities involved, are both controlled by Newco. 16 C.F.R. 802.30.
HSR Analysis – B Side
We also wanted to confirm that there are no B-side filing obligations here.
As part of Step 2 above, the Funds will each be acquiring voting stock in Newco with a fair market value of more than $94 million but less than $376 million. As a result, the size of person test must be satisfied for there to be any B-side filing.
We assume that the each of the Funds meets the higher size of person threshold of $188.8 million. However, at the time the Funds acquire voting stock in Newco, Newco will not have a regularly prepared balance sheet and a pro forma balance sheet for Newco would show assets equal to $0. As a result, Newco will not meet or exceed the lower size of person threshold and, therefore, the size of person test for the B-side acquisitions will not be satisfied.
Questions
Do you agree that:
The A-side transaction should be treated as a consolidation?
For the A-side consolidation the filing parties, as both acquiring and acquired persons, are Company X and Fund B (with Company Y as the acquiring/acquired entity)?the B-side acquisitions by the Funds of voting stock in Newco do not satisfy the size of person test and that no B-side filings are required?There is a potential alternative structure under which Fund 2, which is Company Y’s UPE pre-transaction, will hold at least 50% of Newco’s voting stock post-closing and will therefore be Company Y’s UPE post transaction as well. Informal interpretation 2007003 (attached) suggests that the PNO would view this as an acquisition with a backside. If that is the case, the fact that Fund 2 would still be the UPE of Company Y post-closing would not have any impact on the HSR filings required here. Do you agree?