[Federal Register Volume 63, Number 197 (Tuesday, October 13, 1998)]
[Notices]
[Pages 54713-54716]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-27355]
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FEDERAL TRADE COMMISSION
Premerger Notification: Reporting and Waiting Period Requirements
AGENCY: Federal Trade Commission.
ACTION: Notice of adoption of formal interpretation and request for
comments.
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SUMMARY: The Premerger Notification Office (``PNO'') of the Federal
Trade Commission (``FTC''), with the concurrence of the Assistant
Attorney General in charge of the Antitrust Division of the Department
of Justice (``DOJ''), is adopting a Formal Interpretation of the Hart-
Scott-Rodino Act, which requires certain persons planning certain
mergers, consolidations, or other acquisitions to report information
about the proposed transactions to the FTC and DOJ. The Interpretation
concerns the reportability of certain transactions involving a Limited
Liability Company (``LLC''), a relatively new form of entity authorized
by state statutes. Under the Interpretation, the formation of an LLC
will be reportable if it will unite two or more pre-existing businesses
under common control. Similarly, acquisitions of existing LLC
membership interests will be reportable if they would have the effect
of uniting two or more pre-existing businesses under common control.
DATES: The effective date is December 14, 1998. Comments must be
submitted on or before November 12, 1998.
ADDRESSES: Send written comments to Joseph G. Krauss, Assistant
Director for the Premerger Notification Office, Bureau of Competition,
Room 301, Federal Trade Commission, Washington, DC 20580.
FOR FURTHER INFORMATION CONTACT: Joseph G. Krauss, Assistant Director
for the Premerger Notification Office, Bureau of Competition, Room 301,
Federal Trade Commission, Washington, DC 20580. Telephone: (202) 326-
2713. Thomas F. Hancock, Attorney, Premerger Notification Office,
Bureau of Competition, Room 301, Federal Trade Commission, Washington,
DC 20580. Telephone: (202) 326-2946.
SUPPLEMENTARY INFORMATION: The text of Formal Interpretation Number 15
is set out below:
Formal Interpretation Number 15
Formal Interpretation Pursuant to Sec. 803.30 of the Premerger
Notification Rules, 16 CFR 803.30, Concerning the Reporting
Requirements for the Formation of Certain Limited Liability Companies
(``LLCs'') and for Acquisitions of Membership Interests in Certain
Existing LLCs.
This is a Formal Interpretation pursuant to Sec. 803.30 of the
Premerger Notification Rules (``the rules''), 16 CFR 803.30, and
801.2(d) of the rules, 16 CFR 801.2(d). The rules implement Section 7A
of the Clayton Act, 15 U.S.C. 18a, which was added by sections 201 and
202 of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (``the
act'').
The act requires the parties to certain mergers, acquisitions, and
other business combinations to file reports with the FTC and the DOJ
and to wait a specified period of time before consummating the
transaction. The purpose of the act and the rules is to ensure that
such transactions receive meaningful scrutiny under the antitrust laws,
with the possibility of an effective remedy for violations, prior to
consummation.
The LLC 1 is a relatively new form of business
organization which is neither a partnership nor a corporation but a
hybrid legal entity which combines certain desirable features of both
partnerships and corporations. Specifically, an LLC is taxed as a
partnership but shields its members from liability as a corporation
shields its shareholders. The first LLC statute was passed in 1977 by
Wyoming 2 and a trickle of other states followed. The use of
LLCs expanded significantly after 1988 when the Internal Revenue
Service (``IRS'') concluded that an LLC organized under the Wyoming
statute was taxable as a partnership.3 By 1993 all 51
jurisdictions had LLC laws of one form or another.
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\1\ This Formal Interpretation applies only to the reportability
of the formation of certain LLCs and of acquisitions of interests in
certain existing LLCs. The position of the FTC staff on the status
and treatment under the act of other non-corporate entities such as
partnerships remains unchanged.
\2\ Wyo. Stat. Secs. 17-15-101 to -135 (Supp. 1989).
\3\ Rev. Rul. 88-76, 1988-2 C.B. 360, 361.
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When it first encountered these types of organizational structures,
the PNO concluded that as ``companies'' LLCs are ``entities'' within
the meaning of Sec. 801.1(a)(2), 16 CFR 801.1(a)(2), and that, until it
had more experience with them, the PNO would deem LLCs to be
corporations. Initially, therefore, Sec. 801.40 of the rules, 16 CFR
801.40, ``Formation of joint venture or other corporations,'' governed
the formation of LLCs and an interest in an LLC was treated as a voting
security for HSR purposes.
On further analysis, the PNO concluded that this initial approach
was inadequate. LLCs at the time were primarily used as a vehicle for
the creation of start-up businesses. The PNO's treatment of LLCs
resulted in requiring HSR filings in a large number of transactions
that did not raise antitrust concerns. Furthermore, the PNO determined
that in most LLCs the interest held by the members of the LLC was more
like a partnership interest than that of a voting security interest.
Consequently, in 1994, the PNO began to informally advise parties that
the treatment of LLCs' for reporting purposes would depend on a
determination of whether the interest acquired in the LLC was more like
a voting security interest or more like a partnership
interest.4
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\4\ Specifically, the formation of an LLC was treated as
potentially reportable only if the LLC had a group which functioned
like a board of directors and the LLC ownership interest resulted in
the holder appointing person(s) other than its employees, officers,
or directors (or those of entities controlled by the holder or its
ultimate parent entity) to that group. In such cases, the LLC
interest was treated as a voting security interest. In all other
instances, LLC interests were treated as partnership interests and
the acquisition of these interests was not reportable (unless the
acquiring person would hold 100 percent of the interests as a result
of the acquisition).
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This subsequent treatment of LLCs has not been completely
satisfactory. The use of LLCs has changed from primarily being a
vehicle for start-up enterprises to being used now more frequently to
combine competing businesses under common control. Indeed, the
Commission's litigation staff has investigated several transactions
raising potential antitrust concerns involving the formation of LLCs.
In these transactions, previously separate
[[Page 54714]]
businesses were combined under common control when they were
contributed to a single, newly-formed LLC. Nevertheless, the creation
of the LLC to combine competing businesses under common control was not
reportable under the PNO's current treatment. The union of competing
businesses under common control is of obvious potential antitrust
concern. Since the current approach to LLCs has not been useful in
requiring filings for those transactions that are the most likely to
have anticompetitive effects, the PNO staff has decided to revise its
approach to LLCs to be more consistent with the intent of the act.
This Formal Interpretation, therefore, changes the PNO's treatment
of LLCs as follows: The formation of an LLC which brings two or more
pre-existing separately controlled businesses under common control
(i.e. an interest entitling one party to 50 percent of the profits of
the LLC or 50 percent of the assets of the LLC upon dissolution) is now
reportable if the HSR size-of-person and size-of-transaction
requirements are met. The formation of all other LLCs will be treated
like the formation of a partnership and their reportability will be
determined according to the partnership rule. The current analysis used
to determine whether an LLC interest acquired is more like a voting
security or a partnership interest will no longer be used.
The combination of businesses into a new LLC under common control
is the functional equivalent of a merger or consolidation. Such
combinations, like other unions of businesses under common control, are
subject to the act. Sec. 801.2(d)(1)(i) of the rules, 16 CFR
801.2(d)(1)(i), states that ``[m]ergers and consolidations are
transactions subject to the act * * *'' Although combinations of
businesses in LLCs are not mergers or consolidations in the strictest
sense because they do not involve corporations,5 they are
substantively similar. As it was originally promulgated in 1978,
Sec. 801.2(d)(1)(i), 16 CFR 801.2(d)(1)(i), stated that ``[a] merger,
consolidation, or other transaction combining all or any part of the
business of two or more persons shall be an acquisition subject to the
act * * *'' (emphasis added).6 A similar rationale has long
been used to require filings for acquisitions of non-profit
corporations which, like LLCs, do not issue voting
securities.7 Imposing a filing requirement on the parties to
such transactions promotes the basic purpose of the act and the rules,
namely, to give the antitrust enforcement agencies advance notice of,
and an opportunity to oppose, transactions which may violate the
antitrust laws.
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\5\ See, e.g., 19 W. Fletcher, Cyclopedia of the Law of Private
Corporations Sec. 3:141 (perm. ed.1994). Mergers and consolidations
are defined as transactions in which all constituent corporations
(in the case of consolidations) or all but one (in the case of
mergers) lose their separate legal identities as part of the
transaction. When two or more businesses are united in an LLC, they
do not lose their legal identities in this sense, but they do cease
to be separate and independent.
\6\ 43 FR 33539, July 31, 1978. This language does not appear in
the current version of Sec. 801.2(d). In 1983, this provision was
changed to clarify and change the treatment of mergers and
consolidations under the rules and this particular wording was
eliminated. There is no indication that this change was intended to
narrow the scope of Sec. 801.2(d), however. According to the
Statement of Basis and Purpose to the 1983 changes, 48 FR 34430,
July 29, 1983, the Commission sought to make clear that mergers and
consolidations are treated as acquisitions of voting securities and
to change Sec. 801.2(d) to enable the parties to a merger to
determine which is the acquiring person and which is the acquired
person.
\7\ See, The Premerger Notification Practice Manual, ABA, 1991
ed., Interp. #109.
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Furthermore, when a person contributes a business to an LLC to be
controlled by another, such transfer is the functional equivalent of an
acquisition of the assets of that business and should be so treated for
HSR purposes. Reportable acquisitions of non-profit corporations are
also reported as asset acquisitions for the same reason. Consequently,
assuming the size-of-person and size-of-transaction tests are met,
contributors to combinations of businesses in LLCs should report as if
they were acquiring the assets to be contributed to the LLC by the
other contributor(s).
Although Sec. 801.40 of the rules, 16 CFR 801.40, which governs the
reporting of the formation of corporate joint ventures and other new
corporations, is not directly applicable to combinations of businesses
in LLCs because LLCs are not corporations and do not issue voting
securities, the principles embodied in Sec. 801.40--especially in
Sec. 801.40(c)--are applicable here. The value of the assets of the new
LLC for size-of-person test purposes should be determined in accordance
with Sec. 801.40(c). Parties required to file should complete Item 5(d)
of the Notification and Report Form for Certain Mergers and
Acquisitions. Like a new corporation under Sec. 802.41 of the rules, 16
CFR 802.41, the new LLC need not file notification (but each
contributor who meets the size-of-person test may need to do so).
Typically, there would be no acquired person filing, as in the case of
the formation of corporate joint ventures. The waiting period will not
begin until all parties required to file have filed and are in
compliance (cf. Sec. 803.10(a)(2) of the rules, 16 CFR 803.10(a)(2)).
A ``business'' is defined for purposes of this Interpretation the
same as an ``operating unit'' for purposes of Sec. 802.1(a) of the
rules, 16 CFR 802.1(a), namely, ``* * * assets that are operated * * *
as a business undertaking in a particular location or for particular
products or services, even though those assets may not be organized as
a separate legal entity.'' For purposes of this Formal Interpretation,
the contribution to an LLC of an interest in intellectual property,
such as a patent, a patent license, know-how, and so forth, which is
exclusive against all parties including the grantor, is the
contribution of a business, whether or not the intellectual property
has generated any revenues.
This new treatment of LLCs also affects the reportability of the
acquisition of membership interests in existing LLCs. The acquisition
of existing membership interests will be potentially reportable in two
situations. Any person which acquires (or, as a result of an
acquisition, will hold) a controlling interest in an existing LLC (i.e.
an interest entitling it to 50 percent of the profits or 50 percent of
the assets upon dissolution) may be required to file because such a
transaction may bring two or more separate businesses under common
control. Whether a filing is necessary when a person acquires a
controlling interest in an existing LLC would depend on whether the
acquiring person also has a business and whether the size of person and
size of transaction criteria of the act are met. In situations where
the acquisition of a membership interest in an LLC does not result in
the combination of existing businesses under common control, the
acquisition of such membership interest will be treated like the
acquisition of a partnership interest. If any person subsequently
acquires (or, as a result of an acquisition, will hold) 100 percent of
the interests in that LLC, and has not previously filed for and
consummated the acquisition of control of that LLC, that person will
then be deemed to be acquiring the assets of that LLC and so may be
required to file at that time.
Some of the considerations for why the formation of certain LLCs
(and the acquisition of certain LLC interests) should be reportable may
apply equally well to partnerships. The formation of a partnership is
not reportable; 8 the position of the PNO is that
acquisitions of partnership interests which do not result in one
person's holding 100
[[Page 54715]]
percent of the interests in a partnership is non-reportable. The PNO
believes that the current treatment of partnerships should remain
unchanged for the time being. The treatment of partnerships was
originally adopted, in part, because of the difficulty of monitoring
compliance with HSR reporting obligations since many partnerships can
be formed informally or through implication in many typical business
arrangements. Furthermore, there has been no suggestion that
partnerships are being used in any greater frequency now to combine
competing businesses. In addition, a change in treatment of
partnerships would likely require filings in a large number of
transactions that do not raise any antitrust concern. Consequently, any
change in the treatment of partnerships at this time appears premature.
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\8\ Sec. 801.40, 16 CFR 801.40.
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In 1987, when the Commission promulgated Sec. 801.1(b)(1)(ii) of
the rules which allows a partnership to be controlled by another
entity, the Commission reiterated this position on the reportability of
acquisitions of partnership interests. It stated, however, that it
would reconsider this issue from time to time to see whether any
revision in this position is appropriate. See 52 FR 20058, 20061 (May
29, 1987). Accordingly, in connection with the adoption of this Formal
Interpretation, the PNO is asking for comments on whether partnerships
should be treated the same as LLCs with regard to formation,
acquisition, or both. The PNO may in the future change its treatment of
partnerships based on the comments received.
The following examples are an integral part of this Formal
Interpretation:
1. ``A'' and ``B'' both plan to contribute their widget businesses
to a new LLC in which each will acquire a 50 percent interest. This
acquisition would be reportable if the size-of-person and size-of-
transaction tests are met using the analysis in Sec. 801.40(c) of the
rules.
2. In Example 1, above, the result would be the same if ``A'' and
``B'' each intended to transfer its widget business into its own LLC,
LA and LB, and ``A'' planned to take a 50 percent interest in LB and
``B'' a 50 percent interest in LA. In each case, two businesses would
be coming under common control. Note, however, that the result may be
different if ``A'' and ``B'' each get a 49 percent interest in the
other's LLC. There, two businesses are not being united under common
control. However, if the Commission concluded that this technical lack
of common control was being used as an avoidance device it would apply
the act and rules to the substance of the transaction pursuant to
Sec. 801.90 of the rules, 16 CFR 801.90.
3. Suppose ``A'' will contribute its widget business and ``B'' will
contribute cash for operating capital to a new LLC. This would not be
reportable if ``A'' will be the only controlling person because it does
not unite two or more businesses. If ``B'' is also to be a controlling
person and is engaged in a business, it will be reportable by ``B.''
4. Suppose that ``A'' proposes to consolidate its widget business,
which it has conducted in two subsidiaries and a division, into a
newly-formed LLC in which it will hold a 60 percent membership
interest. This would not be reportable because, although separate
businesses are being combined, they were not under separate control
prior to the transaction.
5. Suppose that in year 1 ``A'' and ``B'' each contributes its
widget business to a newly-created LLC, that the transaction was deemed
to be reportable, that filings were made and the waiting period
observed. Then, in year 5, ``C'' proposes to acquire ``B's'' interest
which constitutes a controlling interest in the LLC. Assume that ``C''
is engaged in a business or businesses. The acquisition by ``C'' is
potentially reportable because it unites under common control the
business of the LLC and ``C's'' businesses, which were separate.
6. Suppose ``A,'' ``B,'' and ``C'' form a new LLC in which ``A''
will have a 60 percent interest and ``B'' and ``C'' each will have 20
percent interests. ``A,'' a large, international pharmaceutical
company, contributes $100 million in cash. ``B'' contributes licenses
to several patents which it will also continue to use to manufacture
various drugs. ``C'' will contribute licenses which are exclusive even
against itself for several drugs which are still at the testing stage
and which have never been marketed. ``A'' has a potential reporting
obligation for the formation of this LLC. With a 60 percent interest,
``A'' will control the LLC and it has its own business. Since the
licenses ``B'' will contribute are not exclusive as against it, they do
not constitute a business. The licenses being contributed by ``C'' do
constitute a business, however, even though they have not generated any
revenue, and this business is being brought under the control of ``A''
with ``A'''s own business when the new LLC is formed.
7. Suppose ``A'' and ``B'' are both regional grocery store chains
which do their data processing in-house. ``A's'' data processing unit
does work only for ``A'' and ``B's'' only for ``B.'' ``A'' and ``B''
decide to contribute the assets used in their data processing
operations to a new jointly-controlled LLC which will provide data
processing services to ``A'' and ``B.'' Assume the size tests are met.
This would not be reportable because the assets used to provide such
management and administrative support services do not constitute
businesses. Cf Sec. 802.1(d)(4) of the rules and Examples 10 and 11, 16
CFR 802.1(d)(4). This would be the case even if the new LLC intends to
begin offering data processing services to third parties, since this
would be beginning a new business rather than uniting existing
businesses. Note however, that the result would be different if ``A''
or ``B'' had used its equipment to provide data processing services to
others prior to contributing it to the new LLC for then it would be an
existing business. The result would also be different if ``A'' and
``B'' were engaged in manufacturing and the assets to be contributed to
the new LLC were used in part of a manufacturing process.
* * * * *
Request for Comments
The Federal Trade Commission staff asks for comments on this Formal
Interpretation and may further modify its approach to LLCs based on the
comments it receives. The staff would particularly like Commenters to
address the following two issues:
A. Burden
The staff has assumed that compliance with this Formal
Interpretation would not be unduly burdensome on any party or class of
parties. The staff requests comments on the issue of the burden of
compliance. Commenters who believe that the Formal Interpretation does
create a special burden by, for example, significantly increasing the
number of filings should describe the burden in detail.
B. Partnerships
At the time of the promulgation of the so-called partnership
control rule, 16 CFR 801.1(b)(1)(ii), in 1987, the Commission stated
that it might at some time in the future re-visit the subject of
partnerships to see if it might be appropriate to revise the staff
position that acquisitions which do not confer on the acquiring person
100 percent of the interests in a partnership are not reportable. The
Commission suggested that, instead, it might make the acquisition of
control of a partnership reportable. See 52 FR 20058, 20061 (May 29,
1987). Is this an appropriate time to do this? More specifically, is
there a reason why partnerships and LLCs should be treated the same?
Are
[[Page 54716]]
partnerships, for example, also being used increasingly to combine
existing businesses? What factors influence the choice of creating a
partnership versus an LLC?
Donald S. Clark,
Secretary.
[FR Doc. 98-27355 Filed 10-9-98; 8:45 am]
BILLING CODE 6750-01-P
