FR Doc 04-7537

[Federal Register: April 8, 2004 (Volume 69, Number 68)]
[Proposed Rules]
[Page 18685-18721]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08ap04-19]

[[Page 18685]]

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Part II

Federal Trade Commission

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16 CFR Parts 801, 802 and 803

Premerger Notification; Reporting and Waiting Period Requirements;
Proposed Rule

[[Page 18686]]

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FEDERAL TRADE COMMISSION

16 CFR Parts 801, 802 and 803

Premerger Notification; Reporting and Waiting Period Requirements

AGENCY: Federal Trade Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commission is proposing amendments to the premerger
notification rules (``the rules'') that attempt to reconcile, as far as
is practical, the current disparate treatment of corporations,
partnerships, limited liability companies and other types of non-
corporate entities under the rules. The rules require the parties to
certain mergers and acquisitions to file reports with the Federal Trade
Commission (``the Commission'') and the Assistant Attorney General in
charge of the Antitrust Division of the Department of Justice (``the
Assistant Attorney General'') and to wait a specified period of time
before consummating such transactions. The reporting and waiting period
requirements are intended to enable these enforcement agencies to
determine whether a proposed merger or acquisition may violate the
antitrust laws if consummated and, when appropriate, to seek a
preliminary injunction in federal court to prevent consummation. This
proposed rulemaking introduces a number of changes that attempt to
reconcile, as far as is practical, the current disparate treatment of
corporations, partnerships, limited liability companies and other types
of non-corporate entities under the rules, particularly in the areas of
acquisitions of interests in these entities; formations of the
entities; and the application of certain exemptions, including the
intraperson exemption.

DATES: Comments must be received on or before June 4, 2004.

ADDRESSES: Interested parties are invited to submit written comments.
Comments should refer to ``HSR Proposed Rulemaking, Project No.
P989316,'' to facilitate the organization of comments. A comment filed
in paper form should include this reference both in the text and on the
envelope, and should be mailed or delivered to the following address:
Federal Trade Commission/Office of the Secretary, Room H-159 (Annex E),
600 Pennsylvania Avenue, NW., Washington, DC 20580. Comments containing
confidential material must be filed in paper form. The FTC is
requesting that any comment filed in paper form be sent by courier or
overnight service, if possible, because U.S. postal mail in the
Washington area and at the Commission is subject to delay due to
heightened security precautions.
An electronic comment can be filed by (1) clicking on http://www.regulations.gov
; (2) selecting ``Federal Trade Commission'' at

``Search for Open Regulations;'' (3) locating the summary of this
Notice of Proposed Rulemaking (``NPR''); (4) clicking on ``Submit a
Comment on this Regulation;'' and (5) completing the form. For a given
electronic comment, any information placed in the following fields--
``Title,'' ``First Name,'' ``Last Name,'' ``Organization Name,''
``State,'' ``Comment,'' and ``Attachment''--will be publicly available
on the FTC Web site. The fields marked with an asterisk on the form are
required in order for the FTC to fully consider a particular comment.
Commenters may choose not to fill in one or more of these fields, but
if they do so, their comments may not be considered.
Comments on any proposed filing, recordkeeping, or disclosure
requirements that are subject to paperwork burden review under the
Paperwork Reduction Act should additionally be submitted to: Office of
Information and Regulatory Affairs, Office of Management and Budget,
New Executive Office Building, Room 10102, Washington, DC 20503,
Attention: Carolyn Lovett, Desk Officer for Federal Trade Commission.
Such comments should also be mailed to the following address: Federal
Trade Commission/Office of the Secretary, Room H-159 (Annex E), 600
Pennsylvania Avenue, NW., Washington, DC 20580.
The FTC Act and other laws the Commission administers permit the
collection of public comments to consider and use in this proceeding as
appropriate. All timely and responsive public comments, whether filed
in paper or electronic form, will be considered by the Commission, and
will be available to the public on the FTC Web site, to the extent
practicable, at http://www.ftc.gov. As a matter of discretion, the FTC

makes every effort to remove home contact information for individuals
from the public comments it receives before placing those comments on
the FTC Web site. More information, including routine uses permitted by
the Privacy Act, may be found in the FTC's privacy policy, at http://www.ftc.gov/ftc/privacy.htm
.

FOR FURTHER INFORMATION CONTACT: Marian R. Bruno, Assistant Director,
Karen E. Berg, Attorney, B. Michael Verne, Compliance Specialist, or
Nancy M. Ovuka, Compliance Specialist, Premerger Notification Office,
Bureau of Competition, Room 303, Federal Trade Commission, Washington,
DC 20580. Telephone: (202) 326-3100.

SUPPLEMENTARY INFORMATION: Section 7A of the Clayton Act, 15 U.S.C.
18a, as added by the Hart-Scott-Rodino Antitrust Improvements Act of
1976, Public Law 94-435, 90 Stat. 1390 (``the Act''), requires all
persons contemplating certain mergers or acquisitions to file
notification with the Commission and the Assistant Attorney General and
to wait a designated period of time before consummating such
transactions. Congress empowered the Commission, with the concurrence
of the Assistant Attorney General, to require ``that the notification *
* * be in such form and contain such documentary material and
information * * * as is necessary and appropriate'' to enable the
agencies ``to determine whether such acquisitions may, if consummated,
violate the antitrust laws.'' Congress similarly granted rulemaking
authority to, inter alia, ``prescribe such other rules as may be
necessary and appropriate to carry out the purposes of this section.''
15 U.S.C. 18a(d).
Pursuant to that section, the Commission, with the concurrence of
the Assistant Attorney General, developed the Antitrust Improvements
Act Rules (``the HSR rules'') and Notification and Report Form for
Certain Mergers and Acquisitions (``the Form''), and has amended or
revised the HSR rules and the Form on numerous occasions, and now
proposes these further changes to the HSR rules.
The Commission invites interested members of the public to submit
written data, views, facts, and arguments addressing the issues raised
by this NPR. Written comments must be submitted on or before June 4,
2004. Comments should refer to ``HSR Proposed Rulemaking, Project No.
P989316,'' to facilitate the organization of comments. A comment filed
in paper form should include this reference both in the text and on the
envelope, and should be mailed or delivered to the following address:
Federal Trade Commission/Office of the Secretary, Room H-159 (Annex E),
600 Pennsylvania Avenue, NW., Washington, DC 20580. If the comment
contains any material for which confidential treatment is requested, it
must be filed in paper (rather than electronic) form, and the first
page of the document must be clearly labeled ``Confidential.'' \1\ The
FTC is requesting

[[Page 18687]]

that any comment filed in paper form be sent by courier or overnight
service, if possible, because U.S. postal mail in the Washington area
and at the Commission is subject to delay due to heightened security
precautions.
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\1\ Commission Rule 4.2(d), 16 CFR 4.2(d). The comment must be
accompanied by an explicit request for confidential treatment,
including the factual and legal basis for the request, and must
identify the specific portions of the comment to be withheld from
the public record. The request will be granted or denied by the
Commission's General Counsel, consistent with applicable law and the
public interest. See Commission Rule 4.9(c), 16 CFR 4.9(c).
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Comments on any proposed filing, recordkeeping, or disclosure
requirements that are subject to paperwork burden review under the
Paperwork Reduction Act should additionally be submitted to: Office of
Information and Regulatory Affairs, Office of Management and Budget,
New Executive Office Building, Room 10102, Washington, DC 20503,
Attention: Carolyn Lovett, Desk Officer for Federal Trade Commission.
Such comments should also be mailed to the following address: Federal
Trade Commission/Office of the Secretary, Room H-159 (Annex E), 600
Pennsylvania Avenue, NW., Washington, DC 20580.
An electronic comment can be filed by (1) clicking on http://www.regulations.gov
; (2) selecting ``Federal Trade Commission'' at

``Search for Open Regulations;'' (3) locating the summary of this
Notice of Proposed Rulemaking; (4) clicking on ``Submit a Comment on
this Regulation;'' and (5) completing the form. For a given electronic
comment, any information placed in the following fields--``Title,''
``First Name,'' ``Last Name,'' ``Organization Name,'' ``State,''
``Comment,'' and ``Attachment''--will be publicly available on the FTC
Web site. The fields marked with an asterisk on the form are required
in order for the FTC to fully consider a particular comment. Commenters
may choose not to fill in one or more of these fields, but if they do
so, their comments may not be considered.
The FTC Act and other laws the Commission administers permit the
collection of public comments to consider and use in this proceeding as
appropriate. All timely and responsive public comments, whether filed
in paper or electronic form, will be considered by the Commission, and
will be available to the public on the FTC Web site, to the extent
practicable, at http://www.ftc.gov. As a matter of discretion, the FTC

Background

The Act applies to acquisitions of voting securities or assets.
Whether a transaction must be reported is determined by applying the
statute, supporting regulations, and formal and informal staff
interpretations. Neither the Act nor the HSR rules specifically address
whether interests in unincorporated entities are deemed to be voting
securities or assets. The Premerger Notification Office, by informal
interpretation, has long taken the position that partnership interests,
and, by extension, interests in other types of unincorporated entities,
are neither assets nor voting securities. Thus, any acquisition of such
interests has not been deemed a reportable event unless 100 percent of
the interests are acquired, in which case the acquisition is deemed to
be that of all of the underlying assets of the partnership or other
unincorporated entity.
When promulgating the original HSR rules, the Commission recognized
the possible applicability of the Act to acquisitions of less than 100
percent of the interests in such entities. Although the Commission did
not extend the coverage of Sec. 801.40 regarding formations of
corporations to unincorporated entities, the Statement of Basis and
Purpose to Section 801.40 reads:

``There is evidence that Congress intended coverage of
acquisitions by or of noncorporate entities. Section 7A(b)(3)(A)
states:
The term ``voting securities'' means any securities which * * *
entitle the owner or holders thereof to vote for the election of
directors of the issuer, or, with respect to unincorporated issuers,
persons exercising similar functions. (Emphasis supplied).
However, the Commission has instructed its staff to monitor the
formation of joint business arrangements of all types and forms and
to determine, after a year of operation, whether the rules provide
appropriate coverage. The fact that persons contributing to the
formation of a noncorporate joint venture are not required to report
and wait prior to the transaction should not, of course, be
construed as a Commission statement that such transactions are free
from antitrust concerns.'' \2\
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\2\ 43 FR 33487 (July 31, 1978).
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At the end of the one year period, further modifications to the
rules were not made.
The language of the Act cited above suggests that unincorporated
entities can have voting securities. Voting securities, under the Act,
must entitle the holder to vote either for the election of directors or
to vote for the election of individuals exercising similar functions
with respect to unincorporated entities.\3\ The Commission did not
apply this approach to unincorporated entities in 1978 and does not
propose to do so in these proposed amendments. In the 1987 rulemaking
that redefined control of partnerships, which is discussed in more
detail below, the Commission stated:

\3\ Section 7A(b)(3)(A).
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``* * * [t]he Commission staff concluded that partnerships do
not possess `individuals exercising similar functions' to directors;
* * *'' \4\

\4\ 52 FR 20062 (May 29, 1987).
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Because the Commission concluded that partnerships do not have
directors or individuals exercising similar functions, partnerships
cannot have voting securities as defined in the Act.
In 1987, the Commission revised a longstanding staff position that
a partnership was never controlled by its partners and thus was always
its own ultimate parent entity. The rules were amended to incorporate
the current control tests for partnerships.\5\ In the Statement of
Basis and Purpose accompanying that rulemaking, the Commission
addressed the possibility of making the acquisition of control of a
partnership a reportable event.

\5\ 16 CFR 801.1(b)(1)(ii) (``In the case of an entity that has
no outstanding voting securities, having the right to 50 percent or
more of the profits of the entity, or having the right in the event
of dissolution to 50 percent or more of the assets of the entity * *
*'').
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``* * * the Commission is considering whether, in light of its
adoption of the `partnership control' rule, it should also revise
its rules to require reporting the acquisition of control of a
partnership. Currently, the staff interpretation makes acquisition
of less than a 100 percent interest in a partnership not reportable,
because a partnership interest is deemed to be neither a voting
security nor an asset.''\6\

\6\ 52 FR 20061 (May 29, 1987).
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The Commission also raised the possibility of applying the
intraperson exemption to partnerships should the acquisition of control
be made a reportable event. Responding to a comment from the ABA
Section of Antitrust Law asking whether an acquisition of assets from a
partnership by a person who controlled that partnership would be an
exempt transaction, the Commission replied:

``As a general matter, the Commission agrees it would be logical
to exempt such transactions if acquisition of control of the
partnership were a reportable event. However, as is noted above,
under current staff interpretations, acquisition of control is

[[Page 18688]]

not normally a reportable event. Consequently, the Commission is not
prepared now to exempt the asset acquisition. It will consider such
an exemption as it considers making the acquisition of control of a
partnership a reportable event.''\7\

\7\ Ibid.
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In developing these proposed rule amendments, the Commission
considered changing the control test for unincorporated entities from
an equity test (having the right to 50 percent or more of the profits
of the entity, or having the right in the event of dissolution to 50
percent or more of the assets of the entity) \8\ to a governance test
(the general partner(s) of a partnership, the person(s) who designate
the general partner, the managing member(s) of a limited liability
company (``LLC''), or the person(s) who designate the management
committee of an LLC, etc.). Such a change would conform the control
test for unincorporated entities more closely to the control test for
corporations (either holding 50 percent more of the outstanding voting
securities of the issuer or having the contractual power presently to
designate 50 percent or more of the directors of a corporation) \9\.
However, the application of a governance test of control to an
unincorporated entity would be difficult to apply consistently. The
Commission has decided that changing the control rule in such a manner
would create confusion and make the control test more ambiguous than
the current rule. Therefore, these proposed amendments do not include
such a change to the control test, and the current rule will remain
unchanged with one exception. The proposed amendment to Sec.
801.1(b)(2) would remove the alternate test of control for
unincorporated entities which provides for control through having the
contractual power presently to designate individuals exercising similar
functions to those of directors of a corporation. This is discussed
further in the narrative accompanying the proposed amendments to Sec.
801.1.
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\8\ 16 CFR 801.1(b)(1)(ii).
\9\ 16 CFR 801.1(b).
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Finally, in February, 1999 the Commission issued Formal
Interpretation 15, which defined circumstances under which the
formation of LLCs would be reportable. At that time, the Commission
recognized that the use of LLCs had evolved, and while LLCs were still
used to some extent as vehicles for start-up enterprises, they were
also often being used to combine competing businesses under common
control. To address the combination of businesses, Formal
Interpretation 15 construed the Act and rules to require reporting when
two or more ongoing businesses were combined under common control.
Formal Interpretation 15 covers only LLCs, leaving other non-corporate
ventures unaddressed, and has been complicated to apply.
In its commentary in Formal Interpretation 15, the Commission again
indicated the possibility of making formations of partnerships
reportable under the same reasoning that it used for LLCs.

``Some of the reasons for concluding that the formation of
certain LLCs should be treated as reportable may apply equally well
to partnerships * * *. [t]he [PreMerger Notification Office] has
decided not to change its treatment of partnerships at this time,
but may re-visit this issue in the future as developments require.''
\10\
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\10\ 64 FR 5808 (February 5, 1999).

The use of unincorporated entities is expanding, and such entities
are increasingly engaging in acquiring interests in other corporate and
unincorporated entities. For example, the number of corporate income
tax filings increased from 4,630,000 to 5,711,000 (23%) between 1994
and 2002, while the number of partnership returns \11\, including LLCs
taxed as partnerships, increased from 1,550,000 to 2,236,000 (44%)
during the same period.\12\ In addition, a number of states have
amended their statutes in recent years to allow limited liability
companies to merge with other types of legal entities.
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\11\ Partnership return of income forms (Form 1065) are not
strictly income tax returns because partnerships are not taxed
directly.
\12\ Internal Revenue Service, FY 1994 and FY 2002 Data Books,
Summary of Number of Returns by Type of Return.
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Delaware has traditionally led the nation in incorporations and has
now achieved the same position with unincorporated entities. According
to the Delaware Secretary of State, 1,499 statutory trusts, 5,717
limited partnerships (``LPs'') and more than 47,000 LLCs were formed in
2002.\13\
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\13\ BNA's Corporate Counsel Weekly Newsletter Analysis,
``Delaware Law: 2003 Amendments to Delaware's Alternative Entity
Statutes'', Turthill and Hering (October 8, 2003).
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Professor Susan Pace Hamill comments in the Michigan Law Review
``[r]egardless of whether the motivation is tax or business related,
the use and acceptance of LLCs as a serious alternative to the
partnership and the corporation [has] exponentially increased * * * and
will probably grow more each year. Indeed, some commentators believe
the LLC will largely replace the partnership and the closely held
corporation and emerge as the dominant form of business for non-
publicly traded entities.'' She further observes that ``[c]ommentators
are just starting to speculate on the future popularity of the LLP
(limited liability partnership). Some believe that LLPs will evolve as
the business form of choice for many transactions and may even surpass
the LLC.''\14\
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\14\ Hamill, The Limited Liability Company: A Catalyst Exposing
the Corporate Integration Question, 95 Mich. L. Rev. 393 (November,
1996).
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Consequently, as a result of the increased usage of non-corporate
entities in transaction structures, the Commission believes that this
is the appropriate time to review its application of the Act and the
HSR rules to non-corporate entities and to propose amendments that will
revise the Commission's historic treatment of these entities.

Current Interpretations

Staff informal interpretations of the current rules with respect to
unincorporated entities lead to several anomalies which do not occur
with corporations. These inconsistencies relate primarily to three
areas: changes of control, intraperson transfers of assets, and
formations.

(a) Changes of Control

Section 801.2(a) states ``[a]ny person which, as a result of an
acquisition, will hold voting securities or assets * * * is an
acquiring person.'' Section 801.1(c)(8) further states ``* * * in
addition to its own holding, an entity holds all assets and voting
securities held by the entities which it controls * * *''. Despite this
language, under current application of the rules, if a minority
interest holder or a person who holds no interests at all acquires a
controlling, but less than 100 percent interest in an existing
unincorporated entity, the transaction is never reportable because the
person who will control the unincorporated entity is not deemed to be
acquiring the assets of the entity and no reportable acquisition
occurs. However, under the rules, the person is immediately deemed to
hold those same assets for purposes of determining the size-of-person
test by virtue of having the right to 50% of the profits and assets
upon dissolution of the entity. Further, if the person who now controls
the unincorporated entity, who is deemed to hold all of the assets of
the entity under Sec. 801.1(c)(8), were to acquire the remaining
interests, it would be required to file notification to acquire the
same assets it is deemed to currently

[[Page 18689]]

hold, assuming the jurisdictional thresholds are met. The intraperson
exemption provided in Sec. 802.30 prevents this result in the context
of a corporation but is not available to unincorporated entities
because the exemption requires that the acquiring and acquired person
be the same by reason of holdings of voting securities.
Under this approach, if a person who currently holds no interests
or a minority position in a non-corporate entity acquires 100 percent
of the interests, the person is required to file, but if the person
acquires 99 percent it does not. A person who controls a non-corporate
entity and acquires the remainder of the interests must also file. Both
situations are anomalous: a filing is required after control is
obtained, yet no filing is required to gain control.
Consistent with the treatment of corporate entities, meaningful
antitrust review should occur at the time that control of an
unincorporated entity changes and not after control is already
acquired. Currently, if a person who controls a partnership or other
unincorporated entity is acquiring the remaining interests, that
interest holder is deemed both the acquiring and acquired person and
files notification to acquire the assets which, according to a literal
reading of the rules, it already holds.\15\ For example, a 90 percent
partner acquiring the remaining 10 percent of the interest in a
partnership must file. An HSR filing for this type of transaction
appears to be of little antitrust significance. The Commission receives
a significant number of such filings each year and believes that other
such transactions are not reported as required due to the
counterintuitive nature of the current application of the rules.\16\
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\15\ 16 CFR 801.1(c)(8) (A person holds all assets and voting
securities held by the entities included within it; in addition to
its own holding, an entity holds all assets and voting securities
held by the entities which it controls directly or indirectly).
(emphasis supplied).
\16\ Between 1997 and 2002, the Commission received 248 filings
in which the acquiring person and the acquired person were the same.
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(b) Intraperson Transfers

In the context of corporations, any transfer of assets from a
corporation to a controlling shareholder, or a transfer of assets from
one corporate subsidiary of a parent to another corporate subsidiary of
the same parent is exempt.\17\ However, because partnerships and other
unincorporated entities are not controlled through the holding of
voting securities, similar transfers involving such entities are
reportable. This results, for example, in a reportable transaction when
assets are transferred from a partnership to a partner that holds a 90
percent interest in the partnership, irrespective of the fact that the
controlling partner is already deemed to hold those assets. Similarly,
if a person controls two different partnerships and transfers assets
from one to the other, that person would have a filing requirement
despite the fact that it holds the assets under the rules both before
and after the transfer. This result conflicts with the definition in
Sec. 801.2 which defines an acquiring person as ``Any person which, as
a result of an acquisition will hold voting securities or assets * *
*'' (emphasis supplied).
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\17\ ``An acquisition (other than the formation of a joint
venture or other corporation the voting securities of which will be
held by two or more persons) in which, by reason of holdings of
voting securities, the acquiring and acquired persons are (or as a
result of formation of a wholly owned entity will be) the same
person, shall be exempt from the requirements of the Act.'' 16 CFR
802.30.
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With the exception of certain limited liability company formations,
as noted above,\18\ formations of non-corporate entities are not
reportable events. This leads to a number of transactions where de
facto change of control of assets can occur without notification. For
example, A and B form a non-corporate entity to which B will contribute
a business in exchange for a 40 percent interest and A will contribute
cash in exchange for a 60 percent interest. Although A now holds assets
which were previously held by B, current application of the rules does
not require notification because A will not hold 100 percent of the
interests in the non-corporate entity nor are two pre-existing
businesses being combined in an LLC. This would not be reportable in an
LLC or partnership formation but would be reportable in the formation
of a corporation. While Formal Interpretation 15 was an attempt to
address this inconsistency in the context of limited liability company
formations, its application still results in non-reportable
transactions which could have significant antitrust implications.
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\18\ Formal Interpretation (64 FR 5808 (February 5, 1999))
treats as reportable the formation of an LLC if (1) two or more pre-
existing, separately controlled businesses will be contributed, and
(2) at least one of the members will control the LLC. The formation
of all other LLCs is treated similar to the formation of a
partnership which is not reportable.
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Proposed Amendments

These proposed rules attempt to apply the Act as consistently as
possible to all forms of legal entities, requiring filings for
transactions which are likely to present antitrust concerns and
exempting transactions which are not. The Commission particularly seeks
information on the number and types of transactions that would become
reportable and whether changes in the proposal, including additional
exemptions, could limit any undesirable effects.
Proposed changes to the coverage rules include a revision to Sec.
801.1(b) to remove the alternate control test for unincorporated
entities; an amendment to Sec. 801.1(f) to define a ``non-corporate
interest''; revising Sec. 801.2(d) to clarify the consolidation rule;
amending Sec. 801.2(f) to define when acquiring interests in
unincorporated entities may constitute an acquisition; adding a new
subsection to Sec. 801.10 to define how to value such an acquisition;
adding a new subsection to Sec. 801.13 to address aggregation of non-
corporate interests; and adding a new Sec. 801.50 which makes certain
formations of unincorporated entities a reportable event. There are
also ministerial changes to Sec. Sec. 801.4, 802.40 and 802.41 to
adapt their application to both corporations and unincorporated
entities. Additionally, there are minor changes to the Notification and
Report Form to require that Item 5(d) be completed in connection with
the formation of an unincorporated entity and to reflect the
applicability of Items 7 and 8 to unincorporated entities and to change
the reporting requirement in Item 7 with regard to the formation of new
entities.
Proposed changes to the exemption rules include modifying Sec.
802.4 to eliminate the dissimilar treatment of asset and voting
securities acquisitions which are substantively the same; codifying in
Sec. 802.10 a longstanding informal interpretation that pro-rata
reformations (i.e. reincorporation in a new jurisdiction) are exempt
transactions; changing Sec. 802.30 to apply the intraperson exemption
to entities which are held other than through holdings of voting
securities; and adding a new Sec. 802.65 to exempt acquisitions of
non-corporate interests in entities which are formed in connection with
financing transactions.
If the Commission adopts the proposed rules, it will revoke Formal
Interpretation 15 and issue a new Formal Interpretation 18 because LLCs
will then be treated like any other unincorporated entity under the
rules.\19\
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\19\ Text of proposed Formal Interpretation 18:
1. This formal interpretation of the Premerger Notification
Rules concerning limited liability companies is issued by the
Federal Trade Commission pursuant to 16 CFR 803.30. It supersedes a
formal interpretation issued by the staff of the Federal Trade
Commission on February 5, 1999.
2. The formal interpretation issued on February 5, 1999, will no
longer be used to analyze the reportability of transactions
involving limited liability companies. Such transactions will now be
analyzed under parts 801-803 of the Premerger Notification Rules in
the same manner as any other non-corporate entities.

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[[Page 18690]]

In addition to amendments concerning unincorporated entities, there
are technical corrections to Sec. Sec. 801.13, 801.15 and 802.2.

Part 801--Coverage Rules

Section 801.1 Definitions

The proposed amendment to Sec. 801.1(b)(2) would remove the
alternate test of control for unincorporated entities, which provides
for control through having the contractual power presently to designate
individuals exercising similar functions to those of directors of a
corporation. This deletion simplifies the test of control for
unincorporated entities, which is defined as having the right to 50
percent or more of the profits of the entity, or having the right in
the event of dissolution to 50 percent or more of the assets of the
entity. The elimination of the alternate control test insures that an
acquisition involving an unincorporated entity is reportable only when
control is acquired through an acquisition of non-corporate interests
which confer the right to profits or assets upon dissolution of the
entity, not when obtaining the right to designate individuals
exercising functions similar to those of directors of a corporation,
such as the management committee of an LLC. The proposed amendment also
clarifies that the only test for control of a not-for-profit
corporation which does not issue voting securities is the right to
designate 50 percent or more of the board of directors.
Proposed new Sec. 801.1(f)(1)(ii) would define the term ``non-
corporate interest'' as an interest in any unincorporated entity which
gives the holder the right to any profits of the entity or the right to
any assets of the entity in the event of dissolution of that entity.
This term is used throughout the proposed rule changes.

Section 801.2 Acquiring and Acquired Persons

The proposed amendment to Sec. 801.2(d) would codify a
longstanding informal staff position that the combination of any two
entities into a new holding company is the functional equivalent of a
consolidation and should be treated in the same manner regardless of
whether the entities are corporations or non-corporate entities. It
also clarifies that even if the two entities are retaining their
separate legal identities, either by becoming subsidiaries of the new
holding company or through arrangements such as dual-listing
agreements, the transactions would be treated the same.
Proposed new Sec. 801.2(f)(1) provides that an acquisition occurs
at the time non-corporate interests which confer control of an
unincorporated entity are acquired. At this point the person who
controls the entity is deemed to hold all of the assets of the entity.
Thus the proposed rules would shift reporting from when 100% of the
interest in an unincorporated entity is received to the more
significant point when control is obtained.\20\ This change would be
consistent with Section 801.2(a) which defines an acquiring person as
``[a]ny person which, as a result of an acquisition, will hold voting
securities or assets, either directly or indirectly * * * is an
acquiring person.''
---------------------------------------------------------------------------

\20\ See Sec. 801.1(c)(8), which provides that a ``person holds
all assets and voting securities held by the entities included
within it; in addition to its own holdings, an entity holds all
assets and voting securities held by the entities which it controls
directly or indirectly.''
---------------------------------------------------------------------------

Proposed new Sec. 801.2(f)(2) would clarify that a contribution of
assets or voting securities to an existing unincorporated entity is an
acquisition by that entity and that such a transaction would not be
governed by new Sec. 801.50, even if all or part of the consideration
is interests in the entity. This differs from Formal Interpretation 15
which views the contribution of a business to an existing LLC in
exchange for membership interests as a new formation of that LLC. Note
that when a person acquires control of an existing non-corporate entity
as a result of a contribution made to that non-corporate entity, the
acquisition by the non-corporate entity from the contributing person is
not separately reportable. If the rule is amended as proposed, Formal
Interpretation 15 will be repealed.
Proposed Sec. 801.2(f)(3) would also codify a longstanding
informal position that acquiring the right to designate 50 percent or
more of the board of directors of a not-for-profit corporation is an
acquisition of all of the underlying assets of such an entity. This is
generally accomplished by becoming a member with the right to designate
50 percent or more of the board of directors.

Section 801.4 Secondary Acquisitions

The proposed amendment to Sec. 801.4 would clarify that any
indirect acquisition of voting securities of an issuer that is not
controlled by the acquired entity in the primary acquisition is deemed
a secondary acquisition and is separately subject to the reporting
requirements of the Act. This is true whether the primary acquisition
confers control of a corporation or an unincorporated entity. Again,
the Commission intends to elevate substance over form in the
application of this rule to different types of legal entities. A
separately reportable acquisition of an unincorporated entity may also
occur through an indirect acquisition of minority non-corporate
interests if the acquiring person already holds non-corporate interests
in that entity that in aggregate would result in control.

Section 801.10 Value of Voting Securities, Assets and Non-Corporate
Interests To Be Acquired

Proposed Sec. 801.10(d) would specify the method of valuing a
transaction in which non-corporate interests which confer control of an
existing unincorporated entity are acquired. Under the proposed rules,
an acquisition of non-corporate interests is potentially reportable
where a change of control results in the acquiring person being deemed
to hold all of the assets of the unincorporated entity. That said, it
appears inequitable to require the acquiring person in such a
transaction to value all of the underlying assets of the unincorporated
entity if less than 100 percent of the interests are being acquired.
Under the current rules, in an acquisition of voting securities of a
non-publicly traded corporation, where a person acquires 50 percent or
more of the corporation's voting securities, that person is deemed to
hold all of the assets of the corporation. However, the value of the
transaction is the value of the percentage interest held in the
corporation, not the value of 100 percent of the underlying assets. The
Commission believes that it is appropriate to similarly value an
acquisition of non-corporate interests. Rather than treating such a
transaction as a stand-alone acquisition of assets, which would be
valued in accordance with Sec. 801.10(b), the new rule establishes the
value of the transaction by using the same methodology employed in
valuing voting securities of a non-publicly traded corporation.
Therefore, the value of any non-corporate interests which are being
acquired is the acquisition price if determined or if undetermined, the
fair market value of those interests. The value of any non-corporate
interests in the same unincorporated entity which are already held
prior to the instant

[[Page 18691]]

acquisition is the fair market value of those interests.

Section 801.13 Aggregation of Voting Securities, Assets and Non-
Corporate Interests

The proposed amendment to Sec. 801.13(b) would correct a drafting
oversight that has existed since the original rulemaking in 1978.\21\
Because this section only requires aggregation of a current acquisition
of assets with an earlier acquisition of assets from the same acquired
person if the earlier transaction has been consummated, incongruous
unintended results are produced in many instances.
---------------------------------------------------------------------------

\21\ 43 FR 33487 (July 31, 1978).
---------------------------------------------------------------------------

Under the current rule, the value of a past and current asset
acquisition must be aggregated if the acquiring person has signed a
letter of intent or entered into a contract or agreement in principle
to acquire assets from the acquired person, and if the acquiring person
has acquired assets from the acquired person within 180 calendar days
preceding the signing of such agreement. This requirement applies if
the prior acquisition was not previously subject to the requirements of
the Act.
A problem arises when the acquiring person has not consummated the
prior acquisition of assets at the time the subsequent acquisition
letter of intent or agreement has been entered into. In that situation,
aggregation is not required yet the combination of assets may exceed
the reporting thresholds. As a result, an earlier planned non-
reportable acquisition which is the subject of a letter of intent or
agreement that is still valid, but has not closed would not be
aggregated with assets to be acquired from the same acquired person
pursuant to a new letter of intent or agreement executed within 180
days of the original transaction. For example, if A enters into an
agreement with B to acquire $30 million in assets on day one, and
enters into a second agreement with B to acquire $30 million in
additional assets on day 60, aggregation of the two sets of assets
would not be required if the first acquisition has not closed, but
would be required if it has closed.
To correct this anomaly, amended Sec. 801.13(b) would require
aggregation if within the 180 days preceding the execution of a letter
of intent or agreement, either (1) a still valid letter of intent or
agreement which has not been consummated was entered into with the same
acquired person; or (2) assets were acquired from the same acquired
person and are still held by the acquiring person. No aggregation is
required if the earlier contemplated or consummated acquisition was
subject to the requirements of the Act. The reference to Sec.
801.1(h)(1) would also be removed because that part of the rule is no
longer applicable to asset acquisitions.
Proposed new Sec. 801.13(c) would require that any new acquisition
of non-corporate interests be aggregated with any previously acquired
non-corporate interests in the same unincorporated entity for purposes
of determining the value of the transaction in accordance with new
Sec. 801.10(d). An acquisition of non-corporate interests that does
not confer control of the unincorporated entity is not aggregated with
any other assets or voting securities which have been or are currently
being acquired from the same acquired person.

Section 801.15 Aggregation of Voting Securities and Assets the
Acquisition of Which Was Exempt

The proposed amendment to Sec. 801.15 would correct a drafting
oversight in the rulemaking promulgated in March, 2002 \22\, which,
among other things, reorganized the foreign exemptions found in Sec.
Sec. 802.50 and 802.51. The foreign exemptions were originally
organized by nationality of the acquiring person such that Sec. 802.50
covered acquisitions of both assets located outside of the U.S. and
voting securities of foreign issuers by U.S. persons. Section 802.51
likewise covered both types of acquisitions by foreign persons. The
2002 rulemaking reorganized the two rules by type of transaction.
Section 802.50 now covers acquisitions of assets located outside of the
U.S. by any person and Sec. 802.51 covers acquisitions of voting
securities of foreign issuers by any person.
---------------------------------------------------------------------------

\22\ 67 FR 11898 (March 18, 2002).
---------------------------------------------------------------------------

Both rules proscribe the use of the exemption if the foreign assets
or foreign issuer generated sales in or into the U.S. in excess of $50
million in the most recent year or if the foreign issuer has assets
located in the U.S. valued in excess of $50 million. Section 801.15(b)
states that any assets or voting securities exempted under Sec. 802.50
or Sec. 802.51 are not held as a result of an acquisition unless the
$50 million limitation in the relevant section is exceeded.
The original rules each referenced both assets and voting
securities and thus covered aggregation of the U.S. sales attributable
to foreign assets and voting securities that are acquired from the same
acquired person in the same transaction. However, the rules as amended
present a problem when applied without change to Sec. 801.15. Because
Sec. 801.15(b) is applied separately to each exemption to determine
whether the limitation in that exemption has been exceeded, under the
current aggregation rule, Sec. Sec. 802.50 and 802.51 are each
analyzed separately to determine if the limitation in each has been
exceeded independent of the other. This produced the unintended result
that an acquisition can be made of voting securities of foreign issuers
and assets located outside of the U.S. from the same acquired person,
which in aggregate have sales in or into the U.S. in excess of $50
million, which will not be reportable if both the assets and the
issuers do not individually exceed the limitation. For example, an
acquisition of assets located outside of the U.S. with $30 million in
sales into the U.S. coupled with an acquisition of voting securities of
a subsidiary of the same acquired person with $30 million of sales into
the U.S. would not currently be reportable. This is obviously not the
intended result because the requisite nexus with U.S. commerce has been
satisfied.
To correct this earlier drafting omission, the proposed amendment
to Sec. 801.15 would remove Sec. Sec. 802.50 and 802.51 from
paragraph (b) and move them to new paragraph (d) which requires that
sales in or into the U.S. be aggregated under both foreign exemptions
to determine if the $50 million limitation is exceeded. This proposed
revision would insure consistent application of the foreign exemptions
to transactions which are substantively the same but different in form.

Section 801.50 Formation of Unincorporated Entities

Because the formation of an entity presents the same potential
antitrust concerns regardless of whether its legal form is that of a
corporation or a non-corporate entity, the Commission believes that all
such formations should be treated as similarly as possible under the
rules. Thus, proposed new Sec. 801.50 would mirror Sec. 801.40, which
governs the formation of corporations, with two exceptions. Most
importantly, like any potentially reportable acquisition of an existing
unincorporated entity, acquisitions of non-corporate interests which
confer control must be reported. Because acquiring control is the
triggering event in such a formation, the special size of person test
in Sec. 801.40 that requires that two acquiring persons and the newly
formed corporation have sufficient size to satisfy the jurisdictional
requirements, appears to be unnecessary. It might be inconsistent with
the structure of the proposed rule, because there may well be only one

[[Page 18692]]

acquiring person (i.e., only one person who will control the entity) in
a formation of an unincorporated entity even though there are other
minority interest holders. Therefore, this test is omitted in proposed
new Sec. 801.50 and the standard size of person test specified in
section 7A(a)(2) of the Act is used.
Outside parties have raised questions concerning the determination
of the right of profits or assets upon dissolution in a new
unincorporated entity that has a formulaic distribution of profits
based upon variables that cannot be determined at the time of the
formation of the entity. If a formation agreement designates a fixed
percentage of profits and assets upon dissolution for each person
contributing to the formation of the entity, the analysis is
straightforward. If however, the profit distribution depends on the
level of profit, for instance, the analysis is more complex.
Thus far, staff in the Premerger Notification Office has learned of
two profit sharing arrangements that raise complications when the
control test is applied. In the first instance, the profit distribution
is based on the level of cumulative profits. For example, the first $10
million in profits is distributed 80% to A and 20% to B. The second $10
million is distributed 50% to each. Any profits above $20 million are
distributed 20% to A and 80% to B. Thus, the eventual distribution of
profit cannot be determined in advance. At different points the right
to 50% or more of the profits shifts from A to B and at one point they
each have that right. Given the uncertainty that any of the profit
targets will be achieved, the analysis of rights to profits becomes
extremely difficult. Does A control because it has the right to more
than 50% in the first 10 million, does B control because it has the
same right to profits above $20 million, or do both control because
they each have the right to 50% or more at different times? Does only A
control because the only certainty is that the entity will have less
than $10 million in profits, if indeed it ever generates any profits,
at some point in its life cycle? Or does neither control?
A second arrangement is even more problematic. In this scenario,
the percentage of profits distributed to each of the persons
contributing to the formation is recalculated based on the level of
profits achieved since the last distribution. Thus, each time there is
a new distribution, a different person may have the right to more than
50% of that distribution.
To address these problems, the Commission proposes that any profit
distribution arrangement that cannot be determined at the time of the
formation of the entity will result in the right to profits of the
entity being deemed undetermined. The control test in such a scenario
will be the right to residual assets of the entity. Under the formation
agreement, if any person contributing to the formation receives the
right to 50% or more of the assets of the entity once all its debt has
been repaid, then that person is deemed to have acquired control of the
entity at the time of its formation. If no such right is conferred, the
entity is deemed to be its own ultimate parent entity and its formation
will not be reportable.
Proposed Sec. 801.50 is intended to cover only the formation of
unincorporated entities, not other contractual arrangements that may
confer rights to profits of a joint enterprise that does not involve
the formation of an entity, nor any existing contractual arrangement
deemed by a court to be a partnership under rule of law.

PART 802--EXEMPTION RULES

Section 802.2 Certain Acquisitions of Real Property Assets

Section 802.2 of the rules was promulgated in 1996 to exempt eight
categories of real property acquisitions, including office and
residential property, unproductive real property, hotels and motels,
and agricultural property, that the agencies concluded were unlikely to
violate the antitrust laws.\23\
---------------------------------------------------------------------------

\23\ 61 FR 13666 (March 28, 1996).
---------------------------------------------------------------------------

Section 802.2(g) of the 1996 version of the rule exempted
acquisitions of agricultural property and stated:

``Agricultural property is real property and assets that
primarily generate revenues from the production of crops, fruits,
vegetables, livestock, poultry, milk, and eggs (activities within
SIC \24\ Major Groups 01 and 02).''

\24\ Standard Industrial Classification.
---------------------------------------------------------------------------

SIC major groups 01 and 02 did not include timber tracts (08) or
logging (24).
At the time Sec. 802.2 was originally adopted, the agencies
explained that three comments had proposed ``an exemption for
acquisitions of timberland, noting that the raw material supply and
manufacturing resources in the forestry industry are abundant, and
ownership of timberland is fragmented.'' The agencies expressly
rejected creating such an exemption:

``However, because there has been enforcement interest in a
number of transactions involving timberland in the western United
States, the Commission declined to include an exemption for
acquisitions of timberland to insure that the enforcement agencies
continue to receive notification of those acquisitions of timberland
that may present competitive concerns.'' \25\
---------------------------------------------------------------------------

\25\ 61 FR 13679 (March 28, 1996).

In 2001, the FTC amended the HSR Form and Instructions to require
reporting of revenue data by NAICS \26\ rather than by SIC code.\27\ At
the same time, the two HSR Rules that had referenced SIC codes were
amended so as to replace those references with ``the applicable NAICS
sector.'' Accordingly, the parenthetical in the agricultural property
exemption was amended to read:
---------------------------------------------------------------------------

\26\ North American Industry Classification System.
\27\ 66 FR 23561 (May 9, 2001) (interim rules); 66 FR 35541
(July 6, 2001) (finalizing interim rules).

---------------------------------------------------------------------------
``(activities within NAICS sector 11).''

The Statement of Basis and Purpose simply stated: ``This amendment
is necessary to update the definition to the applicable NAICS sector
rather than the SIC industry code.'' \28\
---------------------------------------------------------------------------

\28\ Ibid.
---------------------------------------------------------------------------

The agencies have since discovered that timberland, which was in
SIC major group 08 and thus not originally referenced in the
parenthetical at issue, is in NAICS sector 11, which is captioned
``Agriculture, Forestry, Fishing and Hunting.'' Within sector 11 are
``timber tract operations'', ``forest nurseries and gathering of forest
products'', and ``logging.'' Thus, the change to NAICS sector 11
inadvertently expanded the exemption beyond the agricultural property
originally intended.
To clarify that timberland acquisitions are not exempted by Sec.
802.2(g), the proposed amendment to this rule would make two changes.
First, the parenthetical at issue would be revised to make it clear
that only real property and assets that primarily generate revenues
from ``certain'' activities within NAICS sector 11, i.e., activities
named in the text of the rule (the production of crops, fruits,
vegetables, livestock, poultry, milk and eggs), are exempted. Second,
the amendment would add a new subsection under the exceptions to the
rule providing that timberland or other real property that generate
revenues from activities within NAICS subsector 113 (Forestry and
logging) and NAICS industry group 1153 (Support activities for forestry
and logging) do not qualify for the agricultural property exemption.

[[Page 18693]]

Section 802.4 Acquisitions of Voting Securities of Issuers or Non-
Corporate Interests in Unincorporated Entities Holding Certain Assets
the Acquisition of Which Is Exempt

Section 802.4 in its current form was promulgated in connection
with the 1996 rulemaking that exempted the acquisition of certain real
property and goods acquired in the ordinary course of business.
Consequently, its scope is limited to such acquisitions. This
limitation of the exemption requires filings even for transactions of a
type that the Commission has now deemed unlikely to create antitrust
concerns.
For example, the current rule does not exempt the acquisition of
voting securities of a U.S. issuer whose only assets are foreign with
no nexus to the U.S., while the direct acquisition of those foreign
assets would be exempt under Sec. 802.50. Another example would be the
acquisition of an issuer whose only assets consisted of cash and cash
equivalents. While the direct acquisition of the assets would not be
reportable under Sec. 801.21, the acquisition of the voting securities
is not exempted by the current version of the rule. It seems unlikely
that a filing in such acquisitions of voting securities would prove
useful if the direct acquisition of the same assets of the issuer would
be exempt.
The exemption in Sec. 802.4 applies to acquisitions of voting
securities of issuers that hold certain assets that are exempt from the
notification requirements if acquired directly. The exemption is only
available if the acquired issuer or issuers do not in the aggregate
hold non-exempt assets exceeding the $50 million notification
threshold. The Commission now believes that this exemption should be
expanded in two ways. First, consistent with the other proposed
amendments to the rules, the proposed amendments to this exemption
would apply to both acquisitions of voting securities and to
acquisitions of non-corporate interests in an unincorporated entity.
Second, the proposed exemption would be broadened to include
acquisitions of voting securities of an issuer or of non-corporate
interests which confer control of a non-corporate entity whose assets
are exempt under any section of part 802 of the rules or section 7A(c)
of the Act or are specified under Sec. 802.21 of the rules. The
Commission has concluded that if the direct acquisition of an asset is
already exempt, it appears logical to extend that exemption to an
acquisition of voting securities of an issuer or of non-corporate
interests in a unincorporated entity whose only holding is that same
asset.
The proposed rule would also codify another informal staff position
that the value of any minority interests in either corporations or
unincorporated entities does not count toward the $50 million
limitation for non-exempt assets. However, the indirect acquisitions of
such minority interests could be separately reportable as a secondary
acquisition in the case of voting securities or if the acquiring person
already has a minority interest in an unincorporated entity that, when
combined with the interest being indirectly acquired, would result in
control of that entity. The Commission believes that expanding coverage
of Sec. 802.4 would ensure that all of the exemptions are applied
consistently to the substance of a transaction regardless of whether it
is structured as an asset or a voting securities acquisition.

Section 802.10 Stock Dividends and Splits; Reorganizations

Proposed new Sec. 802.10(b) would expand the existing exemption to
codify another longstanding informal position that exempts the
reincorporation or formation of an upstream holding company by an
existing corporation, as long as two conditions are met: (1) no new
assets will be introduced as a result of the conversion, and (2) the
interests that will be held by an acquiring person in the new entity
will be pro-rata to or less than the holdings in the original entity or
the acquiring person was a controlling shareholder or interest holder
prior to the conversion. The reorganization will be exempt for a person
that controlled the original entity regardless of its holdings in the
new entity as long as the first condition is met.

Section 802.30 Intraperson Transactions

Section 802.30 in its present form exempts acquisitions in which,
by reason of holdings of voting securities, the acquiring and acquired
person are the same person. Current Sec. 802.30 produces another
inconsistent application of an exemption dependent on whether a
corporation or an unincorporated entity is involved in the transaction.
Because of the qualifying phrase ``by reason of holdings of voting
securities'', entities that do not issue voting securities are excluded
from the exemption. For example, if a corporate subsidiary transfers
assets to its controlling shareholder, no filing is required. If an
unincorporated subsidiary made the same transfer to a person who
controlled it, the exemption would not apply. Similarly, if a parent
controlled two corporations and transferred assets from one to the
other, no filing is required. If a parent controlled two partnerships
and made the same transfer between them, the exemption is inapplicable
and a filing would be required. These scenarios seem at odds with the
HSR rules' definition of ``control'' and ``hold'' because the parent
holds the assets of the controlled entities both before and after each
transaction.
Proposed Sec. 802.30(a) would eliminate the requirement that
control be through the holding of voting securities, and instead
applies the appropriate control test in Sec. 801.1(b)(1) to any type
of entity. This proposed section also adds the provision that the
exemption would apply if ``at least one of the acquired persons'' is
the same person. This insures that the proposed exemption would be
available in an acquisition where there are two acquired ultimate
parent entities as in proposed Example 1. These proposed changes would
ensure that this prong of the intraperson exemption is applied
consistently to all types of entities.
The proposed amendment to Sec. 802.30(b) would restate the
existing exemption for formation of wholly owned subsidiaries, but
would change the language slightly to exempt the formation of any type
of wholly-owned entity.
Proposed new Sec. 802.30(c) would provide that assets which will
be contributed to a new entity upon its formation would not be subject
to the requirements of the Act with respect to the person contributing
the assets to the formation. This is intended to eliminate a filing
requirement where the assets contributed to the formation by other
persons would not on their own be subject to the Act, such as when the
controlling person contributes assets and the non-controlling person
contributes only cash. This proposed exemption would be applicable to
the formations of both unincorporated entities and corporations.

Section 802.40 Exempt Formation of Corporations or Unincorporated
Entities

Section 802.40 is intended to exempt the formation of not-for-
profit corporations, but its requirement that the acquisition be of
voting securities of the not-for-profit is anomalous in that the vast
majority of not-for-profit corporations do not issue voting securities.
The proposed amendment to Sec. 802.40 would correct this by removing
the reference to voting securities, thereby extending the exemption to
the formation of any not-for-profit entity

[[Page 18694]]

within the meaning of the cited sections of the Internal Revenue Code.

Section 802.41 Corporations or Unincorporated Entities at the Time of
Formation

Section 802.41 states that in a formation of a joint venture or
other corporation under Sec. 801.40, only the acquiring persons need
file notification and not the new entity being formed. The new
corporation being formed is not required to file as an acquired person.
The proposed amendment to Sec. 802.41 would extend the same treatment
to new unincorporated entities being formed under proposed new Sec.
801.50.

Section 802.65 Exempt Acquisition in Formation of Unincorporated Entity

Proposed new Sec. 802.65 would exempt certain acquisitions in
financing transactions involving the formation of unincorporated
entities. In some financing transactions, a new unincorporated entity
is formed into which one party contributes assets and another
contributes only cash. Initially, the cash investor will have a
preferred return in order to recover its investment. As a result, that
person may have the right to 50 percent or more of the profits of the
entity for some period of time following the formation. Although this
right to profits constitutes control of the entity under Sec.
801.1(b), the investor has no operational control of the entity. This
type of transaction is analogous to a creditor acquiring secured debt
in the entity, an event which is not subject to the Act. Rather than
taking back secured debt, however, the investor acquires an equity
interest in the entity to obtain its return on investment. For these
reasons, the Commission believes that such a financing arrangement is
unlikely to raise antitrust concerns.
The proposed new exemption would be applicable if four conditions
are met: (1) The acquiring person is contributing only cash to the
formation of the entity; (2) the formation transaction is in the
ordinary course of the acquiring person's business; (3) the terms of
the formation agreement are such that the acquiring person will no
longer control the entity after it realizes its preferred return; and
(4) the acquiring person will not be a competitor of the new entity.
While the investor's acquisition of control of the new entity at its
formation would be exempt, the investor would be deemed to control the
new entity for all other purposes following the formation.

Part 803--Transmittal Rules

Appendix: Premerger Notification and Report Form

Item 5(d) Corporations and Unincorporated Entities at the Time of
Formation
Current Item 5(d) requires that certain additional information be
provided when the Notification and Report Form is being submitted in
connection with the formation of a new corporation. The proposed
amendment to the Item 5(d) instructions would require that the same
information be provided in connection with the formation of a new
unincorporated entity pursuant to new Sec. 801.50. Item 5(d) on the
Notification and Report Form would be amended to include reference to
unincorporated entities as well as corporations.
Item 7 NAICS Code Overlaps
The instructions to Item 7 currently require the reporting of any
NAICS codes in which the person filing notification and any other
person that is a party to the transaction also derived revenues in the
most recent year. This language implies that in the formation of a new
entity, overlaps among the acquiring persons contributing to the
formation must be reported. The Commission believes that is overly
burdensome and provides little helpful information because the only
relevant overlap is between the person filing notification as an
acquiring person and the newly formed entity. The proposed new language
would also clarify that this information is provided in connection with
the formation of new corporations and new unincorporated entities.
Item 8 Previous Acquisitions
The instructions to Item 8 would also be amended to include
reference to newly formed unincorporated entities as well as
corporations.

Communications by Outside Parties to Commissioners and Their Advisors

Written communications and summaries or transcripts of oral
communications respecting the merits of this proceeding from any
outside party to any Commissioner or Commissioner's advisor will be
placed on the public record. 16 CFR 1.26(b)(5).

Regulatory Flexibility Act

The Regulatory Flexibility Act, 5 U.S.C. 601-612, requires that the
agency conduct an initial and final regulatory analysis of the
anticipated economic impact of the proposed amendments on small
businesses, except where the Commission certifies that the regulatory
action will not have a significant economic impact on a substantial
number of small entities. 5 U.S.C. 605.
Because of the size of the transactions necessary to invoke a Hart-
Scott-Rodino filing, the premerger notification rules rarely, if ever,
affect small businesses. Indeed, the 2000 amendments to the Act were
intended to reduce the burden of the premerger notification program by
exempting all transactions valued at $50 million or less. Further, none
of the proposed rule amendments expands the coverage of the premerger
notification rules in a way that would affect small business.
Accordingly, the Commission certifies that these proposed rules will
not have a significant economic impact on a substantial number of small
entities. This document serves as the required notice of this
certification to the Small Business Administration.

Paperwork Reduction Act

The Paperwork Reduction Act, 44 U.S.C. 3501-3518, requires agencies
to submit ``collections of information'' to the Office of Management
and Budget (``OMB'') and obtain clearance before instituting them. Such
collections of information include reporting, recordkeeping, or
disclosure requirements contained in regulations. The information
collection requirements in the HSR rules and Form have been reviewed
and approved by OMB under OMB Control No. 3084-0005. The current
clearance expires on May 31, 2004, and the FTC is seeking a renewal
clearance from OMB.\29\ Because the rule amendments proposed in this
NPR would change existing reporting requirements, the Commission has
submitted a Supporting Statement for Information Collection Provisions
to OMB.
---------------------------------------------------------------------------

\29\ 69 FR 7225 (February 13, 2004).
---------------------------------------------------------------------------

Increase in Filings Due to Proposed Change in Filing Requirements for
Non-Corporate Entities

The proposed amendments make certain acquisitions of controlling
interests in existing and newly-formed non-corporate entities a
reportable event. Currently, a filing is only required if 100 percent
of the interests in a non-corporate entity are acquired.
Staff has estimated the increase in reportable transactions due to
this aspect of the proposed rule by making reasonable deductions using
publicly available statistics, from the State of Delaware, which is a
leading domicile for U.S. and international corporations. More than
half a million business entities have made Delaware their legal home
including 280,000 corporations

[[Page 18695]]

and 250,000 limited liability companies and partnerships. More than 50%
of all publicly-traded companies in the United States including 58% of
the Fortune 500 have chosen Delaware as their legal home.\30\ Based on
the above estimates, unincorporated entities in Delaware represent a
figure that is 47% of the total entities registered in Delaware. In the
absence of other relevant available data, staff believes that this is
approximately the same proportion nationwide.
---------------------------------------------------------------------------

\30\ Delaware Division of Corporations (http://www.state.de.us/corp/aboutagency.shtml
).

---------------------------------------------------------------------------

The total number of transactions requiring HSR filings in FY 2003
in which a controlling interest in a corporation was acquired is 495.
Applying the 47% figure from above, staff estimates a total of 233
transactions requiring HSR filings for acquisitions of a controlling
interest in an unincorporated entity under the proposed rules (495 x
.47 = 233).\31\ This estimate is extremely conservative because HSR
filings are already required for acquisitions of 100 percent of the
interests in an unincorporated entity and for certain formations of
LLCs. Using a conservative estimate that 50% of acquisitions of
controlling interests in unincorporated entities are already reported
at a different point than they will be under the proposed rules results
in a projected increase of 117 transactions requiring HSR filings (233
x .50 = 117).
---------------------------------------------------------------------------

\31\ All calculations in this section are rounded to the nearest
whole number.
---------------------------------------------------------------------------

Decrease Due to Proposed Broadening of the Exemptions

The broadening of the exemptions in the proposed rules would
eliminate the filing requirement for a number of the projected filings
for unincorporated entities. The intraperson exemption in Sec. 802.30
currently only applies to corporations. The proposed amendments would
expand this exemption to cover non-corporate entities as well.
Additionally, proposed new Sec. 802.65 exempts the acquisition of a
controlling interest in a non-corporate entity which is being formed in
connection with a financing transaction. Applying an extremely
conservative estimate of 50% of these transactions qualifying for
exemption, the total projected decrease is 59 (117 x .50 = 59).
This estimate is conservative, because a number of filings for
corporate transactions would also be exempted under the proposed rules
which would require a filing under the current rules. In particular,
Sec. 802.4, which exempts acquisitions of voting securities of an
issuer which holds exempt assets, is currently limited to a narrow
range of real property and ordinary course of business related assets.
The proposed amendment to this exemption would expand coverage to all
assets exempted in any section of the HSR rules or the Act. Again,
applying a conservative estimate that 10% of the total transactions
involving acquiring a controlling interest in a corporation would now
be exempted, a total of 50 transactions which currently require HSR
filings would be exempted under the proposed rule (495 x .10 = 50).

Net Effect

Staff estimates that there will be an increase of 9 transactions
requiring HSR filings due to the proposed rule change. This represents
a less than 1% increase as a result of the proposed rules over the 968
total transactions that required HSR non-index filings in FY 2003 (9/
968 = .009 or 0.9%).\32\ Therefore, staff estimates that the total
burden hours under the HSR rules as revised will be 87,530 hours, which
is an increase of 702 hours from the staff's estimate of 86,828 hours
for the current rules.\33\ Similarly, staff estimate the labor costs
under the proposed rules to be $37,200,000 (rounded to the nearest
thousand), an increase of $300,000 from the estimate of $36,902,000.
---------------------------------------------------------------------------

\32\ Clayton Act sections 7A(c)(6) and (c)(8) exempt from the
requirements of the premerger notification program certain
transactions that are subject to the approval of other agencies, but
only if copies of the information submitted to these other agencies
are also submitted to the FTC and the Assistant Attorney General.
Thus, parties must submit copies of these ``index'' filings, but
completing the task requires significantly less time than non-exempt
transactions which require ``non-index'' filings.
\33\ As explained in the Notice that solicits comment on the
renewal clearance for the rules, the staff estimated the hours
burden under the current rules as 86,828 hours [(21 index filings x
2 hours) + (2,174 non-index filings x 39 hours) + (50 transactions
requiring more precise valuation x 40 hours)]. See 69 FR 7225
(February 13, 2004). Staff estimates that the proposed rules will
increase by 9 the number of transactions that require non-index
filings, thereby increasing the number of non-index filings by 18 to
2,192 [2,174 + (9 transactions x 2 filings per transaction)].
Accordingly, staff estimates the hours burden for the proposed rule
as 87,530 hours [(21 index filings x 2 hours) + (2,192 non-index
filings x 39 hours) + (50 transactions x 40 hours)]. [(87,530 hours
x $425/hour for executives and attorneys' wages) = $37,200,250].
---------------------------------------------------------------------------

The Commission invites comments that will enable it to: (1)
Evaluate whether the proposed collections of information are necessary
for the proper performance of the functions of the Commission,
including whether the information will have practical utility; (2)
evaluate the accuracy of the Commission's estimate of the burden of the
proposed collections of information, including the validity of the
methodology and assumptions used; (3) enhance the quality, utility, and
clarity of the information to be collected; and (4) minimize the burden
of the collections of information on those who must comply, including
through the use of appropriate automated, electronic, mechanical, or
other technological techniques or other forms of information
technology.

List of Subjects in 16 CFR Parts 801, 802 and 803

Antitrust.

For the reasons stated in the preamble, the Federal Trade
Commission proposes to amend 16 CFR parts 801, 802 and 803 as set forth
below:

PART 801--COVERAGE RULES

1. The authority citation for part 801 continues to read as
follows:

Authority: 15 U.S.C. 18a(d).

2. Amend Sec. 801.1 by revising paragraphs (b)(1)(ii) and (b)(2),
redesignating paragraph (f)(1) as (f)(1)(i) and adding paragraph
(f)(1)(ii) to read as follows:

Sec. 801.1 Definitions.

* * * * *
(b) * * *
(1) Either. (i) * * *
(ii) In the case of an unincorporated entity, having the right to
50 percent or more of the profits of the entity, or having the right in
the event of dissolution to 50 percent or more of the assets of the
entity; or
(2) Having the contractual power presently to designate 50 percent
or more of the directors of a for-profit or not-for-profit corporation.
* * * * *
(f)(1)(i) Voting securities. * * *
(ii) Non-corporate interest. The term ``non-corporate interest''
means an interest in any unincorporated entity which gives the holder
the right to any profits of the entity or the right to any assets of
the entity in the event of dissolution of that entity. These
unincorporated entities include, but are not limited to, general
partnerships, limited partnerships, limited liability partnerships,
limited liability companies, cooperatives and business trusts; but
these unincorporated entities do not include trusts described in
paragraphs (c)(3) through (5) of this section and any interest in such
a trust is not a non-corporate interest as defined by this rule.
* * * * *
3. Amend Sec. 801.2 by revising paragraph (d)(2)(iii), adding an
Example

[[Page 18696]]

6 and designating the Examples as Examples 1 through 6 to paragraph
(d)(2)(iii), and by adding paragraph (f) to read as follows:

Sec. 801.2 Acquiring and acquired persons.

* * * * *
(d) * * *
(2) * * *
(iii) All persons party to a transaction as a result of which all
parties will lose their separate pre-acquisition identities or will
become wholly owned subsidiaries of a newly formed entity shall be both
acquiring and acquired persons. This includes any combination of
corporations and unincorporated entities consolidating into any newly
formed entity. In such transactions, each consolidating entity is
deemed to be acquiring all of the voting securities (in the case of a
corporation) or interests (in the case of an unincorporated entity) of
each of the others. Dual-listed company arrangements under which two
entities effectively combine their assets and operations by agreement
are governed by this rule.

Examples to paragraph (d)(2)(iii): * * *
6. Partnership A and Corporation B form a new LLC in which they
combine their businesses. A and B cease to exist and partners of A
and shareholders of B receive membership interests in the new LLC.
For purposes of determining reportability, A is deemed to be
acquiring 100 percent of the voting securities of B and B is deemed
to be acquiring 100 percent of the interests of A. Pursuant to Sec.
803.9(b) of this chapter, even if such a transaction consists of two
reportable acquisitions, only one filing fee is required.
* * * * *
(f)(1)(i) In an acquisition of non-corporate interests which
results in a person controlling the entity, that person is deemed to
hold all of the assets of the entity as a result of the acquisition.
The acquiring person is the person acquiring control of the entity and
the acquired person is the pre-acquisition ultimate parent entity of
the entity.
(ii) The value of an acquisition described in paragraph (f)(1)(i)
of this section is determined in accordance with Sec. 801.10(d).
(2) Any contribution of assets or voting securities to an existing
unincorporated entity is deemed an acquisition of such voting
securities or assets by the ultimate parent entity of that entity. If
the only consideration for such contribution or acquisition is
interests in the entity, neither the contribution nor the receipt of
interests is subject to Sec. 801.50.

Examples to paragraph (f)(2): 1. A, B and C each hold 33\1/3\
percent of the interests in Partnership X. D contributes assets
valued in excess of $50 million to X and as a result D receives 40
percent of the interests in X and A, B and C are each reduced to 20
percent. Partnership X is deemed to be acquiring the assets from D,
in a transaction which may be reportable. This is not treated as a
formation of a new partnership. Because no person will control
Partnership X, no additional filing is required by any of the four
partners.
2. LLC X is its own ultimate parent entity. A contributes a
manufacturing plant valued in excess of $200 million to X which
issues new interests to A resulting in A having a 50% interest in X.
A is acquiring non-corporate interests which confer control of X and
therefore will file as an acquiring person. LLC X is not an
acquiring person with respect to the contribution of the plant by A,
because A held the plant prior to the transaction and continues to
hold it through its acquisition of control of LLC X after the
transaction is completed.

(3) Any person who acquires control of an existing not-for-profit
corporation which has no outstanding voting securities is deemed to be
acquiring all of the assets of that corporation.

Example to paragraph (f)(3): A becomes the sole corporate
member of not-for-profit corporation B and accordingly has the right
to designate all of the directors of B. A is deemed to be acquiring
all of the assets of B as a result.
4. Amend Sec. 801.4 by revising paragraph (a) to read as follows:

Sec. 801.4 Secondary acquisitions.

(a) Whenever as the result of an acquisition (the ``primary
acquisition'') an acquiring person controls an entity which holds
voting securities of an issuer that entity does not control, then the
acquiring person's acquisition of the issuer's voting securities is a
secondary acquisition and is separately subject to the act and these
rules.
* * * * *
5. Amend Sec. 801.10 by revising the heading and by adding
paragraph (d) to read as follows:

Sec. 801.10 Value of voting securities, non-corporate interests and
assets to be acquired.

* * * * *
(d) Value of interests in an unincorporated entity. In an
acquisition of non-corporate interests that confers control of either
an existing or a newly-formed unincorporated entity, the value of the
non-corporate interests held as a result of the acquisition is the sum
of the acquisition price of the interests to be acquired (provided the
acquisition price has been determined), and the fair market value of
any of the interests in the same unincorporated entity held by the
acquiring person prior to the acquisition; or, if the acquisition price
has not been determined, the fair market value of interests held as a
result of the acquisition.
6. Amend Sec. 801.13 by revising the heading, by revising
paragraph (b)(2), by removing the Example following paragraph (b)(2)
and adding four Examples in its place, and adding paragraph (c) and two
examples to read as follows:

Sec. 801.13 Aggregation of voting securities, assets and non-
corporate interests.

* * * * *
(b) Assets. * * *
(2) If the acquiring person signs a letter of intent or agreement
in principle to acquire assets from an acquired person, and within the
previous 180 days the acquiring person has:
(i) Signed a letter of intent or agreement in principle to acquire
assets from the same acquired person, which is still in effect but has
not been consummated, or has acquired assets from the same acquired
person which it still holds; and
(ii) The contemplated or consummated previous acquisition was not
subject to the requirements of the Act; then for purposes of the size-
of-transaction test of Section 7A(a)(2), both the acquiring and the
acquired persons shall treat the assets that were the subject of the
earlier letter of intent or agreement in principal as though they are
being acquired as part of the present acquisition. The value of any
assets which are subject to this paragraph is determined in accordance
with Sec. 801.10(b).

Examples to paragraph (b)(2): 1. On day 1, A enters into an
agreement with B to acquire assets valued at $40 million. On day 90,
A and B sign a letter of intent pursuant to which A will acquire
additional assets from B, valued at $20 million. The original
transaction has not closed, however, the agreement is still in
effect. For purposes of the size-of-transaction test in Section
7A(a)(2), A must aggregate the value of both of its acquisitions.
2. On March 30, A enters into a letter of intent to acquire
assets of B valued at $45 million. On January 31, earlier the same
year, A closed on an acquisition of assets of B valued at $10
million. For purposes of the size-of-transaction test in Section
7A(a)(2), A must aggregate the value of both of its acquisitions.
3. On day 1, A enters into an agreement with B to acquire assets
valued at $60 million. A and B file notification and observe the
waiting period. On day 60, A signs a letter of intent to acquire an
additional $40 million of assets from B. Because the earlier
acquisition was subject to the requirements of the Act, A does not
aggregate the two acquisitions of assets.
4. On day 1, A consummates an acquisition of assets of B valued
at $30 million. On day 60, A consummates a sale of the same assets
to an unrelated third party. On day 120, A

[[Page 18697]]

enters into an agreement to acquire additional assets of B valued at
$30 million. Because A no longer holds the assets from the previous
acquisition, no aggregation of the two asset acquisitions is
required.

(c) (1) Non-corporate interests. In an acquisition of non-corporate
interests, any previously acquired non-corporate interests in the same
unincorporated entity is aggregated with the newly acquired interests.
The value of such an acquisition is determined in accordance with Sec.
801.10(d) of these rules.
(2) Other assets or voting securities of the same acquired person.
An acquisition of non-corporate interests which does not confer control
of the unincorporated entity is not aggregated with any other assets or
voting securities which have been or are currently being acquired from
the same acquired person.

Examples to paragraph (c)(2): 1. A currently has the right to
30 percent of the profits in LLC. B has the right to the remaining
70 percent. A acquires an additional 30 percent interest in LLC from
B for $60 million in cash. As a result of the acquisition, A is
deemed to now have a 60 percent interest in LLC. The current
acquisition is valued at $60 million, the acquisition price. The
value of the 30 percent interest that A already holds is the fair
market value of that interest. The value for size-of-transaction
purposes is the sum of the two.
2. A acquires the following from B: (1) all of the assets of a
subsidiary of B; (2) all of the voting securities of another
subsidiary of B; and (3) a 30 percent interest in an LLC which is
currently wholly-owned by B. In determining the size-of-transaction,
A aggregates the value of the voting securities and assets of the
subsidiaries that it is acquiring from B, but does not include the
value of the 30 percent interest in the LLC, pursuant to Sec.
801.13(c)(2).

7. Amend Sec. 801.15 by revising paragraphs (b) and (c), adding
paragraph (d), designating the Examples as Examples to the entire
section, and adding example 9 to read as follows:

Sec. 801.15 Aggregation of voting securities and assets the
acquisition of which was exempt.

* * * * *
(b) Assets or voting securities the acquisition of which was exempt
at the time of acquisition (or would have been exempt, had the Act and
these rules been in effect), or the present acquisition of which is
exempt, under Section 7A(c)(9) and Sec. Sec. 802.3, 802.4, and 802.64
of this chapter unless the limitations contained in Section 7A(c)(9) or
those sections do not apply or as a result of the acquisition would be
exceeded, in which case the assets or voting securities so acquired
will be held; and
(c) Voting securities the acquisition of which was exempt at the
time of acquisition (or would have been exempt, had the Act and these
rules been in effect), or the present acquisition of which is exempt,
under section 7A(c)(11)(A) unless additional voting securities of the
same issuer have been or are being acquired; and
(d) Assets or voting securities the acquisition of which was exempt
at the time of acquisition (or would have been exempt, had the Act and
these rules been in effect), or the present acquisition of which is
exempt, under Sec. Sec. 802.50(a), 802.51(a), 802.51(b) of this
chapter unless the limitations, in aggregate for Sec. Sec. 802.50(a),
802.51(a), 802.51(b), do not apply or as a result of the acquisition
would be exceeded, in which case the assets or voting securities so
acquired will be held.

Examples to this section: * * *

9. A acquires assets of B located outside of the U.S. with sales
into the U.S. of $20 million. It also acquires voting securities of
B's foreign subsidiary X which has sales into the U.S. of $40
million. Both the assets and the voting securities of X are exempt
under Sec. Sec. 802.50 and 802.51 respectively when analyzed
separately. However, because Sec. 801.15(d) requires that the sales
into the U.S. for both the assets and the voting securities be
aggregated to determine whether the $50 million limitation has been
exceeded, both are held as a result of the acquisition because the
aggregate sales into the U.S. total $60 million.

8. Add new Sec. 801.50 to read as follows:

Sec. 801.50 Formation of unincorporated entities.

(a) Unless exempted by the Act or any of these rules, upon the
formation of an unincorporated entity, in a transaction meeting the
criteria of section 7A(a)(1) and 7A(a)(2)(A), an acquiring person is
subject to the requirements of the Act if it acquires control of the
newly-formed entity.
(b) Unless exempted by the Act or any of these rules, upon the
formation of an unincorporated entity, in a transaction meeting the
criteria of section 7A(a)(1), the criteria of section 7A(a)(2)(B)(i),
and the criteria of paragraph (a) of this section (other than in
connection with a consolidation), an acquiring person is subject to the
requirements of the Act if:
(1)(i) The acquiring person has annual net sales or total assets of
$100 million or more;
(ii) The newly-formed entity has total assets of $10 million or
more; and
(iii) The acquiring person acquires control of the newly-formed
entity; or
(2)(i) The acquiring person has annual net sales or total assets of
$10 million or more;
(ii) The newly-formed entity has total assets of $100 million or
more; and
(iii) The acquiring person acquires control of the newly-formed
entity.
(c) For purposes of paragraph (b) of this section, the total assets
of the newly-formed entity is determined in accordance with Sec.
801.40(d).
(d) Any person acquiring control of the newly-formed entity
determines the value of its acquisition in accordance with Sec.
801.10(d).
(e) The commerce criterion of section 7A(a)(1) is satisfied if
either the Activities of any acquiring person are in or affect
commerce, or the person filing notification should reasonably believe
that the Activities of the newly-formed entity will be in or will
affect commerce.

PART 802--EXEMPTION RULES

9. The authority citation for part 802 continues to read as
follows:

Authority: 15 U.S.C. 18a(d).

10. Amend Sec. 802.2 by revising the introductory language in
paragraph (g), by revising (g)(1)(ii), and by adding paragraph
(g)(1)(iii) to read as follows:

Sec. 802.2 Certain acquisitions of real property assets.

* * * * *
(g) Agricultural property. An acquisition of agricultural property
and assets incidental to the ownership of such property shall be exempt
from the requirements of the Act. Agricultural property is real
property that primarily generates revenues from the production of
crops, fruits, vegetables, livestock, poultry, milk and eggs (certain
activities within NAICS sector 11).
(1) * * *
(ii) Any real property and assets either adjacent to or used in
conjunction with processing facilities that are included in the
acquisition; or
(iii) Timberland or other real property that generates revenues
from activities within NAICS subsector 113 (Forestry and logging) or
NAICS industry group 1153 (Support activities for forestry and
logging).
* * * * *
11. Amend Sec. 802.4 by revising the heading and revising
paragraph (a) and adding an example thereunder to read as follows:

Sec. 802.4 Acquisitions of voting securities of issuers or non-
corporate interests in unincorporated entities holding certain assets
the acquisition of which is exempt.

(a) An acquisition of voting securities of an issuer or non-
corporate interests in an unincorporated entity whose assets together
with those of all entities it

[[Page 18698]]

controls consist or will consist of assets whose acquisition is exempt
from the requirements of the Act pursuant to section 7A(c) of the Act,
this part 802, or pursuant to Sec. 801.21 of this chapter, is exempt
from the reporting requirements if the acquired issuer or
unincorporated entity and all entities it controls do not hold non-
exempt assets with an aggregate fair market value of more than $50
million. The value of voting or non-voting securities of any other
issuer or interests in any non-corporate entity not included within the
acquired issuer does not count toward the $50 million limitation for
non-exempt assets.

Example to paragraph (a): A and B form a new corporation as an
acquisition vehicle to acquire all of the voting securities of C.
Each contributes $250 million in cash. Because all of the cash is
considered to be exempt assets pursuant to Sec. 801.21, the new
corporation does not have non-exempt assets valued in excess of $50
million, and the acquisition of its voting securities by A and B is
exempt under Sec. 802.4. Note that the result is the same if the
acquisition vehicle is formed as an unincorporated entity. Also see
the examples to Sec. 802.30(c) for additional applications of Sec.
802.4.
* * * * *
12. Revise Sec. 802.10 to read as follows:

Sec. 802.10 Stock dividends and splits; reorganizations.

(a) The acquisition of voting securities pursuant to a stock split
or pro rata stock dividend is exempt from the requirements of the Act
under section 7A(c)(10).
(b) An acquisition of non-corporate interests or voting securities
as a result of the conversion of a corporation or unincorporated entity
into a new entity is exempt from the requirements of the Act if:
(1) No new assets will be contributed to the new entity as a result
of the conversion; and
(2) Either:
(i) As a result of the transaction the acquiring person does not
increase its per centum holdings in the new entity relative to its per
centum holdings in the original entity; or
(ii) The acquiring person controlled the original entity.

Examples to paragraph (b): 1. Partners A and B hold 60 percent
and 40 percent respectively of the partnership interests in C. C is
converted to a corporation in which A and B hold 60 percent and 40
percent respectively of the voting securities. No new assets are
contributed. The conversion to a corporation is exempt from
notification for both A and B.
2. Shareholder A holds 55% and B holds 45% of the voting
securities of corporation C. C is converted to a limited liability
company in which A holds 60% and B holds 40% of the membership
interests. No new assets are contributed. The conversion to a
limited liability company is exempt from notification because A
controlled the corporation. If however, B holds 55% and A holds 45%
in the new limited liability company, the conversion is not exempt
for B and may require notification because control changes.
3. Shareholders A, B and C each hold one third of the voting
securities of corporation X. Pursuant to a reorganization agreement,
A and B each contribute new assets to X and C contributes cash. X is
then being reincorporated in a new state. Each of A, B and C receive
one third of the voting securities of newly reincorporated C. The
reincorporation is not exempt from notification and may be
reportable for A, B and C because of the contribution of new assets.

13. Revise Sec. 802.30 to read as follows:

Sec. 802.30 Intraperson transactions.

(a) An acquisition (other than the formation of a corporation or
unincorporated entity under Sec. 801.40 or Sec. 801.50 of this
chapter) in which the acquiring and at least one of the acquired
persons are, the same person by reason of Sec. 801.1(b)(1) of this
chapter, or in the case of a not-for-profit corporation which has no
outstanding voting securities, by reason of Sec. 801.1(b)(2) of this
chapter, is exempt from the requirements of the Act.

Examples: Examples to paragraph (a):
1. A and B each have the right to 50% of the profits of
partnership X. A also holds 100% of the voting securities of
corporation Y. A pays B $100 million in cash and transfers certain
assets of X to Y. Because A is the acquiring person through its
control of Y, pursuant to Sec. 801.1(b)(1)(i), and one of the
acquired persons through its control of X pursuant to Sec.
801.1(b)(1)(ii) , the acquisition of assets is exempt under Sec.
802.30(a).
2. A and B each have the right to 50% of the profits of
partnership X. A contributes assets to X valued in excess of $50
million. B contributes cash to X. Because B is an acquiring person
but not an acquired person, its acquisition of the assets
contributed to X by A is not exempt under Sec. 802.30(a). However,
A is both an acquiring and acquired person, and its acquisition of
the assets it is contributing to X is exempt under Sec. 802.30(a).

(b) The formation of any wholly owned entity is exempt from the
requirements of the Act.
(c) Assets contributed to a new entity upon its formation are not
subject to the requirements of the Act with respect to the person
contributing the assets to the formation.

Examples to paragraph (c): 1. A and B form a new partnership to
which A contributes a manufacturing plant valued at $51 million and
acquires a 51% interest in the partnership. B contributes $49
million in cash and acquires a 49% interest. B is not acquiring non-
corporate interests which confer control of the partnership and
therefore is not making a reportable acquisition. A is acquiring
non-corporate interests which confer control of the partnership,
however, the manufacturing plant it is contributing to the formation
is exempt under Sec. 802.30(c) and the cash contributed by B is
excluded under Sec. 801.21, therefore, the acquisition of non-
corporate interests by A is exempt under Sec. 802.4.
2. A and B form a new corporation to which A contributes a plant
valued at $120 million and acquires 60% of the voting securities of
the new corporation. B contributes a plant valued at $80 million and
acquires 40% of the voting securities of the new corporation. While
the assets contributed to the formation are exempted by Sec.
802.30(c) for each of A and B, the new corporation holds more than
$50 million in non-exempt assets (the plant contributed by the other
person) with respect to both acquisitions. A is now acquiring voting
securities of an issuer which holds $80 million in non-exempt assets
(the plant contributed by B), and B is acquiring voting securities
of an issuer which holds $120 million in non-exempt assets (the
plant contributed by A). Therefore neither acquisition of voting
securities is exempt under Sec. 802.4. Note that in contrast to the
formation of the partnership in Example 1, B is not required to
acquire a controlling interest in the corporation in order to have a
reportable transaction.
3. A and B form a 50/50 partnership. A contributes a plant
valued at $60 million and B contributes a plant valued at $40
million and $20 million in cash. Because with respect to A, the new
partnership has non-exempt assets of $40 million (the plant
contributed by B), A's acquisition of non-corporate interests is
exempt under Sec. 802.4. With respect to B, the new partnership
holds $60 million in non-exempt assets (the plant contributed by A),
therefore B's acquisition of non-corporate interests would not be
exempt under Sec. 802.4.

14. Revise Sec. 802.40 to read as follows:

Sec. 802.40 Exempt formation of corporations or unincorporated
entities.

The formation of an entity is exempt from the requirements of the
Act if the entity will be not-for-profit within the meaning of sections
501(c)(1)-(4), (6)-(15), (17)-(20) or (d) of the Internal Revenue Code.
15. Amend Sec. 802.41 by revising the heading and the introductory
text to read as follows:

Sec. 802.41 Corporations or unincorporated entities at time of
formation.

Whenever any person(s) contributing to the formation of an entity
are subject to the requirements of the Act by reason of Sec. 801.40 or
Sec. 801.50 of this chapter, the new entity need not file the
notification required by the Act and Sec. 803.1 of this chapter.

Examples:
* * * * *

[[Page 18699]]

16. Add new Sec. 802.65 to read as follows:

Sec. 802.65 Exempt acquisition in formation of unincorporated entity.

In a transaction to which Sec. 801.50 of this chapter applies, an
acquisition of non-corporate interests that confers control of the
newly-formed unincorporated entity is exempt from the notification
requirements of the Act if:
(a) The acquiring person is contributing only cash to the
formation;
(b) The formation transaction is in the ordinary course of the
acquiring person's business;
(c) The terms of the formation agreement are such that the
acquiring person will no longer control the entity after it realizes
its preferred return; and
(d) The acquiring person will not be a competitor to the new
entity.

PART 803--TRANSMITTAL RULES

17. The authority citation for part 803 continues to read as
follows:

Authority: 15 U.S.C. 18a(d).

18. Revise the Appendix to part 803 to read as follows:
BILLING CODE 6750-01-P

Appendix to Part 803

[[Page 18700]]

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By direction of the Commission.
Donald S. Clark,
Secretary.

[FR Doc. 04-7537 Filed 4-7-04; 8:45 am]

BILLING CODE 6750-01-C