[Federal Register Volume 64, Number 24 (Friday, February 5, 1999)]
[Notices]
[Pages 5808-5811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2640]
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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.
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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 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 the formation of a
Limited Liability Company (``LLC''), a relatively new form of entity
authorized by state statutes, resulting in the combination of business
into the new LLC.
This Formal Interpretation was first published on October 13, 1998,
together with a request for comments, to become effective on December
14, 1998. 63 FR 54713 (October 13, 1998). The PNO received six comments
which were placed on the public record. On December 2, 1998, the
effective date of this Interpretation was postponed until February 1,
1999, to give the PNO staff more time to analyze and respond to the
comments. 63 FR 66546 (December 2, 1998).
Formal Interpretation 15 as republished here has been modified in
response to the comments. Under the revised Interpretation, the
formation of an LLC which combines under common control in the LLC two
or more pre-existing businesses will be treated as subject to the
requirements of the HSR act under Sec. 801.2(d) of the HSR rules, 16
CFR Sec. 801.2(d), which governs mergers and consolidations. Because
Formal Interpretation 15 has been modified substantially, the effective
date of the Interpretation is postponed until March 1, 1999.
DATES: The effective date is March 1, 1999.
FOR FURTHER INFORMATION CONTACT: Richard B. Smith, Deputy Assistant
Director, Premerger Notification Office, Bureau of Competition, Room
301, Federal Trade Commission, Washington, DC 20580. Telephone: (202)
326-2850. 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 Sec. 803.30, Concerning the Reporting
Requirements for the Formation of Certain Limited Liability Companies
(``LLCs'').
This is a Formal Interpretation pursuant Sec. 803.30 of the
Premerger Notification Rules (``the rules''), 16 CFR Sec. 803.30. The
rules implement Section 7A of the Clayton Act, 15 U.S.C. Sec. 18a,
which was added by sections 201 and 202 of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (``the act''). This Formal
Interpretation and a request for comments were originally published on
October 13, 1998, to become effective on December 14, 1998. See 63 FR
54713 (October 13, 1998). The PNO staff received six comments. The
staff postponed the effective date until February 1, 1999, in order to
have more time to analyze these comments. 63 FR 66546 (December 2,
1998). Formal Interpretation 15, published here, has been modified
substantially in response to the comments received and postpones the
effective date until March 1, 1999.
The act requires the parties to certain acquisitions of voting
securities or assets to notify 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. Under the rules, certain types of transactions, such as
mergers, consolidations, and the formation of corporate joint ventures,
are treated as acquisitions of voting securities potentially subject to
the act, while other transactions, such as the formation of
partnerships, are deemed non-reportable. See Secs. 801.2(d) and 801.40
of the rules, 16 CFR Secs. 801.2(d) and 801.40.
The LLC \1\ is a relatively new form of business organization that
is neither a partnership nor a corporation but a hybrid legal entity
that 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
[[Page 5809]]
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. 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 Sec. 801.1(a)(2), and that,
until it had more experience with them, the PNO would treat LLCs like
corporations. Initially, therefore, Sec. 801.40 of the rules, 16 CFR
Sec. 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 too inclusive. LLCs at the time were primarily used as vehicles 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 believed
that in most LLCs the interest held by the members of the LLC was more
like a partnership interest than 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 that functioned
like a board of directors and the LLC ownership interest resulted in
the holders appointing person(s) other than their employees,
officers, or directors (or those of entities controlled by such
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 treatment of LLCs has not been completely satisfactory. The
use of LLCs has evolved, and while LLCs continue to be used as vehicles
for start-up enterprises, they are now often used 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 businesses were combined under common control when
they were both contributed to a single, newly-formed LLC. Nevertheless,
the creation of the LLC to combine competing businesses under common
control was typically not treated as reportable under the PNO's then-
current treatment. However, the union of competing businesses under
common control is of obvious potential antitrust concern. Since the
past treatments of LLCs have not been satisfactory at singling out
those transactions that were the most likely to have anticompetitive
effects, the PNO staff has decided to revise its approach to LLCs in
order to better carry out the purposes of the act.
The formation of an LLC into which two or more businesses are
contributed, like other unions of businesses under common control, is a
kind of merger or consolidation.\5\ Section 801.2(d)(1)(i) of the
rules, 16 CFR Sec. 801.2(d)(1)(i), states that ``[m]ergers and
consolidations are transactions subject to the act * * *.'' \6\ A
filing requirement for those LLC formations that involve the
combination of businesses is appropriate and advances the purposes of
the act and the rules, namely, to ensure that the antitrust enforcement
agencies have advance notice of, and a timely opportunity to challenge,
transactions which may violate the antitrust laws.
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\5\ While combining businesses in an LLC may not be a ``merger''
or ``consolidation'' in the strictest sense because they do not
involve corporations, the rationale of this interpretation is
similar to that used by the PNO under Sec. 801.2(d) to require
filing for acquisitions of non-profit corporations which, like LLCs,
typically do not issue voting securities. (See ABA, The Premerger
Notification Practice Manual, 1991 ed., Interp. #109.)
\6\ In fact, as it was originally promulgated in 1978,
Sec. 801.2(d)(1)(i), 16 CFR Sec. 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) 43 Fed Reg 33539, July
31, 1978. In 1983, this section was changed to clarify the treatment
of mergers and consolidations under the rules, and the italicized
wording was eliminated. However, there is no indication that this
change was intended to narrow the scope of Sec. 801.2(d). Rather,
according to the Statement of Basis and Purpose to the 1983 changes,
48 Fed Reg 34430, July 29, 1983, the Commission simply sought to
make clear that mergers and consolidations are treated as
acquisitions of voting securities and to aid the parties to a merger
in determining which is the acquiring person and which is the
acquired person.
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This Formal Interpretation, therefore, changes the PNO's treatment
of LLC's as follows: The PNO will henceforth treat as reportable the
formation of an LLC if (1) two or more preexisting, separately
controlled businesses will be contributed, and (2) at least one of the
members will control the LLC (i.e., have an interest entitling it to 50
percent of the profits of the LLC or 50 percent of the assets of the
LLC upon dissolution).\7\ The formation of all other LLCs will be
treated similar to the formation of a partnership which, under the
PNO's longstanding position on partnership formations, will not be
reportable.
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\7\ Of course, as with all transactions, the HSR size of person
and size of transaction requirements need to be met as well, and
exemptions may apply.
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Post-formation acquisitions of membership interests in LLCs will
not be reportable except in two situations: (1) when the acquisition of
the membership interest results in the acquiring person, who had not
previously filed for and consummated the acquisition of control of that
LLC, holding 100 percent of the membership interests of the LLC
(similar to the PNO's treatment of the acquisition of a partnership
interest), and (2) when the acquiring person contributes a business to
the LLC in exchange for the LLC membership interest. The PNO will treat
this contribution of an additional business to the business(es) already
in the LLC as a formation of a new LLC under this Interpretation.
In determining what is a ``business'' for purposes of this
Interpretation, the PNO will look to the definition of ``operating
unit'' for purposes of Sec. 802.1(a) of the rules, 16 CFR
Sec. 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.'' In addition, 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.
Under this Interpretation, the approach of Sec. 801.2(d) will be
used to determine the acquiring person(s) and acquired person(s) for
potentially reportable LLC formations.\8\ Section 801.2(d)(2)(i) states
that ``[a]ny person party to a merger or consolidation is an acquiring
person if as a result of the transaction such person will hold any
assets or voting securities which it did not hold prior to the
transaction'' (emphasis added). In the context of the formation of a
new LLC, this means that any person that will control an LLC in which
two or more previously separate businesses will be combined will be an
acquiring person. Thus, if ``A'' and ``B''
[[Page 5810]]
form a 60-40 LLC, the 60 percent member, ``A'' will be an acquiring
person with respect to the contributions of ``B.'' Section
801.2(d)(2)(ii) states that ``[a]ny person party to a merger or
consolidation is an acquired person if as a result of the transaction
the assets or voting securities of any entity included within such
person will be held by any other person'' (emphasis added). In the
above example of the formation of a 60-40 LLC, ``B'' would therefore be
an acquired person.
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\8\ The Formal Interpretation as published in October described
a method to determine reportability that was based on concepts found
in Sec. 801.40 of the HSR rules, 16 CFR Sec. 801.40. Certain
comments suggested that such an approach was confusing and would
increase the likelihood that parties would make erroneous
conclusions on their reporting obligations. In light of those
comments, and the change in approach this Formal Interpretation
adopts, there will no longer be any need to look to Sec. 801.40 to
determine reporting obligations.
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If ``A'' and ``B'' were to form a 50-50 LLC to which both were to
contribute businesses, both would be both acquiring and acquired
persons because both would control the LLC and thus hold assets or
voting securities it did not hold prior to the transaction. ``A'' and
``B'' would file in both capacities, assuming the relevant size
criteria were met. Thus, both the acquiring and acquired persons will
be required to file notification and, in accordance with Sec. 803.10 of
the rules, the 30-day waiting period will begin when both persons have
substantially complied with the notification requirements.
Under this Interpretation, the nature of the acquisition(s) taking
place when an LLC is formed, that is, whether it is an acquisition of
assets or of voting securities, depends on what is being contributed by
the other member(s) of the LLC.\9\ In the 50-50 LLC described above,
suppose that ``A'' contributes a group of assets constituting a
business and ``B'' contributes 50 or more percent of the voting
securities of a corporate subsidiary, S. Under this Interpretation,
``B'' will have made an acquisition of assets and ``A'' will have made
an acquisition of voting securities.
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\9\ In this respect, the Interpretation necessarily departs from
the text of Sec. 801.2(d)(1)(i), which provides that all mergers and
consolidations shall be treated as acquisitions of voting
securities.
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In addition, any exemption in the act or rules that would make any
other acquisition non-reportable may make the acquisition by one or
more of the contributors to an LLC non-reportable. If, for example,
``A's'' asset contribution consists of hotel properties the acquisition
of which would be exempt under Sec. 802.2(e), ``B's'' acquisition in
the formation of this LLC would not be reportable. Similarly, if S has
sales and assets of less than $25 million and the value of the S stock
that will be held by ``A'' as a result of the acquisition is $15
million or less, then ``A's'' acquisition in the formation would be
exempted by Sec. 802.20(b).
To determine whether a filing is required, the parties to
potentially reportable formation transactions also must determine the
size-of-person and size-of-transaction, which should be done just as in
any other asset or voting securities acquisition in accordance with
Secs. 801.10 and 801.11 of the HSR rules. Since these transactions are
similar to asset exchanges, for most such transactions there will not
be a determined acquisition price for the acquired assets or voting
securities to use in applying the size-of-transaction test. For such
transactions, parties should use the market price or fair market value
where another contributor contributes 50 or more percent of the voting
securities of an issuer (see Sec. 801.10(a)), or the fair market value
where another contributor puts assets constituting a business into the
LLC (see Sec. 801.10(b)).
This Formal Interpretation will not require reporting regarding
some LLC formations and some acquisitions of existing LLC interests
that would have required reporting under the Interpretation announced
by the PNO in October of 1998. Unlike the October version, this Formal
Interpretation requires reporting of the formation of an LLC only if
the formation brings together within the LLC two formerly separately
controlled businesses. Comments received suggested that the treatment
announced in the October version would have covered a substantial
number of LLCs that are not likely to raise competitive concerns. For
example, the October Formal Interpretation would have viewed LLCs that
are created solely as financing vehicles as reportable. In these
transactions, a financial institution (or other party providing
financing) in the ordinary course of its business contributes only cash
or other financial assets and one other party contributes one or more
operating units to a new LLC that the financial institution may control
for HSR purposes, at least for a period of time. Under this revised
Interpretation, so long as such financing transactions do not result in
the contribution of a business to the LLC by two or more members, it
will not be treated as reportable.\10\
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\10\ There is no evidence to suggest now that LLC formations
where only one business is contributed are being used to accomplish
a merger or consolidation of two businesses. However, the PNO will
look carefully at these transactions in the future and, if they
begin to be used to accomplish a merger or consolidation, will re-
visit this issue.
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As described above, except for situations where a new business is
contributed in exchange for an interest in existing LLC or where, as a
result of an acquisition, the acquiring person would hold 100 percent
of the interests in an existing LLC, no acquisition of an interest in
an existing LLC is reportable under this Interpretation. Several
comments indicated that LLC agreements are sometimes entered into in
which the right to receive more than 50 percent of the LLC's profits
shifts from one member to another upon the happening of some event
outside the control--or even the knowledge--of the members. Under the
definition of control applicable to LLCs (i.e. Sec. 801.1(b)(ii)),
under the October Interpretation, such a shift in the right to receive
profits might have created a reporting obligation. The commenters
argued that it would be unduly burdensome to require the beneficiaries
of such shifts to file and that no substantive law enforcement interest
would be served. The PNO does not intend that such shifts be reportable
under this Formal Interpretation. Since such a shift would be the post-
formation acquisition of an interest in an existing LLC without the
contribution of another business, it will not be treated as subject to
the reporting requirements of the act.
Some of the reasons for concluding that the formation of certain
LLCs should be treated as reportable may apply equally well to
partnerships. The position of the PNO, however, is that the formation
of a partnership is not reportable and acquisitions of partnership
interests that do not result in one person's holding 100 percent of the
interests in a partnership are non-reportable. Several comments
received on the Formal Interpretation published in October suggested
that no change to the treatment of partnerships was necessary at this
time. 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 by
implication in many typical business arrangements. Furthermore, there
has been no suggestion in any of the comments that partnerships are
being used with any greater frequency now to combine competing
businesses. Consequently, the PNO has decided not to change its
treatment of partnerships at this time, but it may re-visit this issue
in the future as developments require.
The following examples are an integral part of this Formal
Interpretation:
1. ``A'' and ``B'' both plan to contribute businesses to a new LLC
in which each will acquire a 50 percent interest. This LLC formation
would involve both ``A'' and ``B'' making reportable acquisitions if
the size-of-person and size-of-transaction tests are met. Each
acquisition would be reportable unless exempted by Section
[[Page 5811]]
7A(c) of the act or Part 802 of the HSR rules. ``A'' would file as an
acquiring person and ``B'' as an acquired person for ``A's''
acquisition of the assets being contributed by ``B,'' and ``B'' would
file as an acquiring person and ``A'' as an acquired person for ``B's''
acquisition of the assets contributed by ``A.'' If ``A'' or ``B'' (or
both) contributed 50 percent or more of the voting securities of a
corporation, the acquisition(s) would be treated as an acquisition of
voting securities of the issuer whose shares are contributed.
2. ``A,'' ``B,'' and ``C'' form an LLC in year 1 in which each
receives a one-third interest and to which each contributes a business
valued at approximately $20 million. ``A,'' ``B,'' and ``C'' are $100
million persons. This formation would not be reportable because no
member controls the LLC. In year 2, ``X,'' also a $100 million person,
acquires the membership interests of ``A'' and ``B'' for cash. This
would not be reportable because two or more separate businesses are not
being united in the LLC even though ``X'' is gaining control of it.
Note, however, that the result would be different if ``X'' also
contributed a business to the LLC in exchange for the LLC membership
interests it receives. In the latter case, the transaction will be
treated as the formation of a new LLC. Note also that in the example
where ``X'' contributed only cash and did not file under HSR, if ``X''
were subsequently also to acquire ``C's'' membership interest it would
then hold 100 percent of the interests in this LLC and would therefore
have to file for the acquisition of all of the assets of the LLC.
3. ``A'' and ``B'' form a new LLC, to which ``A'' will contribute
its widget business and ``B'' will contribute cash for operating
capital. This formation would not be reportable because two previously
separate businesses are not being contributed to the LLC.
4. ``A,'' ``B,'' and ``C'' form a 60-20-20 LLC to which ``A''
contributes cash and receives a 60 percent membership interest and
``B'' and ``C'' each contribute an operating unit for a 20 percent
interest. This is a kind of consolidation of ``B's'' and ``C's''
operating units into the new LLC and ``A'' will control the LLC. There
are two reportable transactions (assuming the size criteria are met and
no exemption applies): ``A'' acquiring the operating unit contributed
by ``B,'' and ``A''' acquiring the operating unit contributed by ``C''.
5. ``A'' proposes to consolidate its weighted 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.
6. ``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 and the assets of a pharmaceutical
product which is currently on the market. This pharmaceutical product
lines constitutes a business. ``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. With a 60 percent interest, ``A'' will
control the LLC. Since the licenses ``B'' will contribute are not
exclusive as against it, they do not constitute a business. However,
the licenses being contributed by ``C'' do constitute a business, even
though they have not generated any revenue. ``A'' has a potential
reporting obligation for the formation of this LLC for acquiring assets
from ``C.'' This formation combines two pre-existing, separately
controlled businesses in an LLC which ``A'' will control.
7. ``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
Sec. 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''
and ``B'' had used their equipment to provide any data processing
services to others prior to contributing it to the new LLC, for then
each would be contributing an existing business.
8. In year 1, ``A,'' ``B,'' and ``C'' form a new LLC to which each
contributes a business in exchange for a one-third interest. This
formation is not reportable because no member controls the LLC. Suppose
that in year 2 ``A'' sells additional assets to the LLC for cash. This
transaction is not covered by this Formal Interpretation. However, the
LLC has a potential filing obligation as the acquiring person of those
assets and ``A'' as the acquired person. Note that it is irrelevant
whether the assets sold by ``A'' in year 2 constitute a business.
Donald S. Clark,
Secretary.
[FR Doc. 99-2640 Filed 2-4-99; 8:45 am]
BILLING CODE 6750-01-M
