[Federal Register Volume 63, Number 197 (Tuesday, October 13, 1998)]
[Notices]
[Pages 54713-54716]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-27355]


=======================================================================
-----------------------------------------------------------------------

FEDERAL TRADE COMMISSION


Premerger Notification: Reporting and Waiting Period Requirements

AGENCY: Federal Trade Commission.

ACTION: Notice of adoption of formal interpretation and request for 
comments.

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

SUMMARY: The Premerger Notification Office (``PNO'') of the Federal 
Trade Commission (``FTC''), with the concurrence of the Assistant 
Attorney General in charge of the Antitrust Division of the Department 
of Justice (``DOJ''), is adopting a Formal Interpretation of the Hart-
Scott-Rodino Act, which requires certain persons planning certain 
mergers, consolidations, or other acquisitions to report information 
about the proposed transactions to the FTC and DOJ. The Interpretation 
concerns the reportability of certain transactions involving a Limited 
Liability Company (``LLC''), a relatively new form of entity authorized 
by state statutes. Under the Interpretation, the formation of an LLC 
will be reportable if it will unite two or more pre-existing businesses 
under common control. Similarly, acquisitions of existing LLC 
membership interests will be reportable if they would have the effect 
of uniting two or more pre-existing businesses under common control.

DATES: The effective date is December 14, 1998. Comments must be 
submitted on or before November 12, 1998.

ADDRESSES: Send written comments to Joseph G. Krauss, Assistant 
Director for the Premerger Notification Office, Bureau of Competition, 
Room 301, Federal Trade Commission, Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: Joseph G. Krauss, Assistant Director 
for the Premerger Notification Office, Bureau of Competition, Room 301, 
Federal Trade Commission, Washington, DC 20580. Telephone: (202) 326-
2713. Thomas F. Hancock, Attorney, Premerger Notification Office, 
Bureau of Competition, Room 301, Federal Trade Commission, Washington, 
DC 20580. Telephone: (202) 326-2946.

SUPPLEMENTARY INFORMATION: The text of Formal Interpretation Number 15 
is set out below:

Formal Interpretation Number 15

    Formal Interpretation Pursuant to Sec. 803.30 of the Premerger 
Notification Rules, 16 CFR 803.30, Concerning the Reporting 
Requirements for the Formation of Certain Limited Liability Companies 
(``LLCs'') and for Acquisitions of Membership Interests in Certain 
Existing LLCs.
    This is a Formal Interpretation pursuant to Sec. 803.30 of the 
Premerger Notification Rules (``the rules''), 16 CFR 803.30, and 
801.2(d) of the rules, 16 CFR 801.2(d). The rules implement Section 7A 
of the Clayton Act, 15 U.S.C. 18a, which was added by sections 201 and 
202 of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (``the 
act'').
    The act requires the parties to certain mergers, acquisitions, and 
other business combinations to file reports with the FTC and the DOJ 
and to wait a specified period of time before consummating the 
transaction. The purpose of the act and the rules is to ensure that 
such transactions receive meaningful scrutiny under the antitrust laws, 
with the possibility of an effective remedy for violations, prior to 
consummation.
    The LLC 1 is a relatively new form of business 
organization which is neither a partnership nor a corporation but a 
hybrid legal entity which combines certain desirable features of both 
partnerships and corporations. Specifically, an LLC is taxed as a 
partnership but shields its members from liability as a corporation 
shields its shareholders. The first LLC statute was passed in 1977 by 
Wyoming 2 and a trickle of other states followed. The use of 
LLCs expanded significantly after 1988 when the Internal Revenue 
Service (``IRS'') concluded that an LLC organized under the Wyoming 
statute was taxable as a partnership.3 By 1993 all 51 
jurisdictions had LLC laws of one form or another.
---------------------------------------------------------------------------

    \1\ This Formal Interpretation applies only to the reportability 
of the formation of certain LLCs and of acquisitions of interests in 
certain existing LLCs. The position of the FTC staff on the status 
and treatment under the act of other non-corporate entities such as 
partnerships remains unchanged.
    \2\ Wyo. Stat. Secs. 17-15-101 to -135 (Supp. 1989).
    \3\ Rev. Rul. 88-76, 1988-2 C.B. 360, 361.
---------------------------------------------------------------------------

    When it first encountered these types of organizational structures, 
the PNO concluded that as ``companies'' LLCs are ``entities'' within 
the meaning of Sec. 801.1(a)(2), 16 CFR 801.1(a)(2), and that, until it 
had more experience with them, the PNO would deem LLCs to be 
corporations. Initially, therefore, Sec. 801.40 of the rules, 16 CFR 
801.40, ``Formation of joint venture or other corporations,'' governed 
the formation of LLCs and an interest in an LLC was treated as a voting 
security for HSR purposes.
    On further analysis, the PNO concluded that this initial approach 
was inadequate. LLCs at the time were primarily used as a vehicle for 
the creation of start-up businesses. The PNO's treatment of LLCs 
resulted in requiring HSR filings in a large number of transactions 
that did not raise antitrust concerns. Furthermore, the PNO determined 
that in most LLCs the interest held by the members of the LLC was more 
like a partnership interest than that of a voting security interest. 
Consequently, in 1994, the PNO began to informally advise parties that 
the treatment of LLCs' for reporting purposes would depend on a 
determination of whether the interest acquired in the LLC was more like 
a voting security interest or more like a partnership 
interest.4
---------------------------------------------------------------------------

    \4\ Specifically, the formation of an LLC was treated as 
potentially reportable only if the LLC had a group which functioned 
like a board of directors and the LLC ownership interest resulted in 
the holder appointing person(s) other than its employees, officers, 
or directors (or those of entities controlled by the holder or its 
ultimate parent entity) to that group. In such cases, the LLC 
interest was treated as a voting security interest. In all other 
instances, LLC interests were treated as partnership interests and 
the acquisition of these interests was not reportable (unless the 
acquiring person would hold 100 percent of the interests as a result 
of the acquisition).
---------------------------------------------------------------------------

    This subsequent treatment of LLCs has not been completely 
satisfactory. The use of LLCs has changed from primarily being a 
vehicle for start-up enterprises to being used now more frequently to 
combine competing businesses under common control. Indeed, the 
Commission's litigation staff has investigated several transactions 
raising potential antitrust concerns involving the formation of LLCs. 
In these transactions, previously separate

[[Page 54714]]

businesses were combined under common control when they were 
contributed to a single, newly-formed LLC. Nevertheless, the creation 
of the LLC to combine competing businesses under common control was not 
reportable under the PNO's current treatment. The union of competing 
businesses under common control is of obvious potential antitrust 
concern. Since the current approach to LLCs has not been useful in 
requiring filings for those transactions that are the most likely to 
have anticompetitive effects, the PNO staff has decided to revise its 
approach to LLCs to be more consistent with the intent of the act.
    This Formal Interpretation, therefore, changes the PNO's treatment 
of LLCs as follows: The formation of an LLC which brings two or more 
pre-existing separately controlled businesses under common control 
(i.e. an interest entitling one party to 50 percent of the profits of 
the LLC or 50 percent of the assets of the LLC upon dissolution) is now 
reportable if the HSR size-of-person and size-of-transaction 
requirements are met. The formation of all other LLCs will be treated 
like the formation of a partnership and their reportability will be 
determined according to the partnership rule. The current analysis used 
to determine whether an LLC interest acquired is more like a voting 
security or a partnership interest will no longer be used.
    The combination of businesses into a new LLC under common control 
is the functional equivalent of a merger or consolidation. Such 
combinations, like other unions of businesses under common control, are 
subject to the act. Sec. 801.2(d)(1)(i) of the rules, 16 CFR 
801.2(d)(1)(i), states that ``[m]ergers and consolidations are 
transactions subject to the act * * *'' Although combinations of 
businesses in LLCs are not mergers or consolidations in the strictest 
sense because they do not involve corporations,5 they are 
substantively similar. As it was originally promulgated in 1978, 
Sec. 801.2(d)(1)(i), 16 CFR 801.2(d)(1)(i), stated that ``[a] merger, 
consolidation, or other transaction combining all or any part of the 
business of two or more persons shall be an acquisition subject to the 
act * * *'' (emphasis added).6 A similar rationale has long 
been used to require filings for acquisitions of non-profit 
corporations which, like LLCs, do not issue voting 
securities.7 Imposing a filing requirement on the parties to 
such transactions promotes the basic purpose of the act and the rules, 
namely, to give the antitrust enforcement agencies advance notice of, 
and an opportunity to oppose, transactions which may violate the 
antitrust laws.
---------------------------------------------------------------------------

    \5\ See, e.g., 19 W. Fletcher, Cyclopedia of the Law of Private 
Corporations Sec. 3:141 (perm. ed.1994). Mergers and consolidations 
are defined as transactions in which all constituent corporations 
(in the case of consolidations) or all but one (in the case of 
mergers) lose their separate legal identities as part of the 
transaction. When two or more businesses are united in an LLC, they 
do not lose their legal identities in this sense, but they do cease 
to be separate and independent.
    \6\ 43 FR 33539, July 31, 1978. This language does not appear in 
the current version of Sec. 801.2(d). In 1983, this provision was 
changed to clarify and change the treatment of mergers and 
consolidations under the rules and this particular wording was 
eliminated. There is no indication that this change was intended to 
narrow the scope of Sec. 801.2(d), however. According to the 
Statement of Basis and Purpose to the 1983 changes, 48 FR 34430, 
July 29, 1983, the Commission sought to make clear that mergers and 
consolidations are treated as acquisitions of voting securities and 
to change Sec. 801.2(d) to enable the parties to a merger to 
determine which is the acquiring person and which is the acquired 
person.
    \7\ See, The Premerger Notification Practice Manual, ABA, 1991 
ed., Interp. #109.
---------------------------------------------------------------------------

    Furthermore, when a person contributes a business to an LLC to be 
controlled by another, such transfer is the functional equivalent of an 
acquisition of the assets of that business and should be so treated for 
HSR purposes. Reportable acquisitions of non-profit corporations are 
also reported as asset acquisitions for the same reason. Consequently, 
assuming the size-of-person and size-of-transaction tests are met, 
contributors to combinations of businesses in LLCs should report as if 
they were acquiring the assets to be contributed to the LLC by the 
other contributor(s).
    Although Sec. 801.40 of the rules, 16 CFR 801.40, which governs the 
reporting of the formation of corporate joint ventures and other new 
corporations, is not directly applicable to combinations of businesses 
in LLCs because LLCs are not corporations and do not issue voting 
securities, the principles embodied in Sec. 801.40--especially in 
Sec. 801.40(c)--are applicable here. The value of the assets of the new 
LLC for size-of-person test purposes should be determined in accordance 
with Sec. 801.40(c). Parties required to file should complete Item 5(d) 
of the Notification and Report Form for Certain Mergers and 
Acquisitions. Like a new corporation under Sec. 802.41 of the rules, 16 
CFR 802.41, the new LLC need not file notification (but each 
contributor who meets the size-of-person test may need to do so). 
Typically, there would be no acquired person filing, as in the case of 
the formation of corporate joint ventures. The waiting period will not 
begin until all parties required to file have filed and are in 
compliance (cf. Sec. 803.10(a)(2) of the rules, 16 CFR 803.10(a)(2)).
    A ``business'' is defined for purposes of this Interpretation the 
same as an ``operating unit'' for purposes of Sec. 802.1(a) of the 
rules, 16 CFR 802.1(a), namely, ``* * * assets that are operated * * * 
as a business undertaking in a particular location or for particular 
products or services, even though those assets may not be organized as 
a separate legal entity.'' For purposes of this Formal Interpretation, 
the contribution to an LLC of an interest in intellectual property, 
such as a patent, a patent license, know-how, and so forth, which is 
exclusive against all parties including the grantor, is the 
contribution of a business, whether or not the intellectual property 
has generated any revenues.
    This new treatment of LLCs also affects the reportability of the 
acquisition of membership interests in existing LLCs. The acquisition 
of existing membership interests will be potentially reportable in two 
situations. Any person which acquires (or, as a result of an 
acquisition, will hold) a controlling interest in an existing LLC (i.e. 
an interest entitling it to 50 percent of the profits or 50 percent of 
the assets upon dissolution) may be required to file because such a 
transaction may bring two or more separate businesses under common 
control. Whether a filing is necessary when a person acquires a 
controlling interest in an existing LLC would depend on whether the 
acquiring person also has a business and whether the size of person and 
size of transaction criteria of the act are met. In situations where 
the acquisition of a membership interest in an LLC does not result in 
the combination of existing businesses under common control, the 
acquisition of such membership interest will be treated like the 
acquisition of a partnership interest. If any person subsequently 
acquires (or, as a result of an acquisition, will hold) 100 percent of 
the interests in that LLC, and has not previously filed for and 
consummated the acquisition of control of that LLC, that person will 
then be deemed to be acquiring the assets of that LLC and so may be 
required to file at that time.
    Some of the considerations for why the formation of certain LLCs 
(and the acquisition of certain LLC interests) should be reportable may 
apply equally well to partnerships. The formation of a partnership is 
not reportable; 8 the position of the PNO is that 
acquisitions of partnership interests which do not result in one 
person's holding 100

[[Page 54715]]

percent of the interests in a partnership is non-reportable. The PNO 
believes that the current treatment of partnerships should remain 
unchanged for the time being. The treatment of partnerships was 
originally adopted, in part, because of the difficulty of monitoring 
compliance with HSR reporting obligations since many partnerships can 
be formed informally or through implication in many typical business 
arrangements. Furthermore, there has been no suggestion that 
partnerships are being used in any greater frequency now to combine 
competing businesses. In addition, a change in treatment of 
partnerships would likely require filings in a large number of 
transactions that do not raise any antitrust concern. Consequently, any 
change in the treatment of partnerships at this time appears premature.
---------------------------------------------------------------------------

    \8\ Sec. 801.40, 16 CFR 801.40.
---------------------------------------------------------------------------

    In 1987, when the Commission promulgated Sec. 801.1(b)(1)(ii) of 
the rules which allows a partnership to be controlled by another 
entity, the Commission reiterated this position on the reportability of 
acquisitions of partnership interests. It stated, however, that it 
would reconsider this issue from time to time to see whether any 
revision in this position is appropriate. See 52 FR 20058, 20061 (May 
29, 1987). Accordingly, in connection with the adoption of this Formal 
Interpretation, the PNO is asking for comments on whether partnerships 
should be treated the same as LLCs with regard to formation, 
acquisition, or both. The PNO may in the future change its treatment of 
partnerships based on the comments received.
    The following examples are an integral part of this Formal 
Interpretation:
    1. ``A'' and ``B'' both plan to contribute their widget businesses 
to a new LLC in which each will acquire a 50 percent interest. This 
acquisition would be reportable if the size-of-person and size-of-
transaction tests are met using the analysis in Sec. 801.40(c) of the 
rules.
    2. In Example 1, above, the result would be the same if ``A'' and 
``B'' each intended to transfer its widget business into its own LLC, 
LA and LB, and ``A'' planned to take a 50 percent interest in LB and 
``B'' a 50 percent interest in LA. In each case, two businesses would 
be coming under common control. Note, however, that the result may be 
different if ``A'' and ``B'' each get a 49 percent interest in the 
other's LLC. There, two businesses are not being united under common 
control. However, if the Commission concluded that this technical lack 
of common control was being used as an avoidance device it would apply 
the act and rules to the substance of the transaction pursuant to 
Sec. 801.90 of the rules, 16 CFR 801.90.
    3. Suppose ``A'' will contribute its widget business and ``B'' will 
contribute cash for operating capital to a new LLC. This would not be 
reportable if ``A'' will be the only controlling person because it does 
not unite two or more businesses. If ``B'' is also to be a controlling 
person and is engaged in a business, it will be reportable by ``B.''
    4. Suppose that ``A'' proposes to consolidate its widget business, 
which it has conducted in two subsidiaries and a division, into a 
newly-formed LLC in which it will hold a 60 percent membership 
interest. This would not be reportable because, although separate 
businesses are being combined, they were not under separate control 
prior to the transaction.
    5. Suppose that in year 1 ``A'' and ``B'' each contributes its 
widget business to a newly-created LLC, that the transaction was deemed 
to be reportable, that filings were made and the waiting period 
observed. Then, in year 5, ``C'' proposes to acquire ``B's'' interest 
which constitutes a controlling interest in the LLC. Assume that ``C'' 
is engaged in a business or businesses. The acquisition by ``C'' is 
potentially reportable because it unites under common control the 
business of the LLC and ``C's'' businesses, which were separate.
    6. Suppose ``A,'' ``B,'' and ``C'' form a new LLC in which ``A'' 
will have a 60 percent interest and ``B'' and ``C'' each will have 20 
percent interests. ``A,'' a large, international pharmaceutical 
company, contributes $100 million in cash. ``B'' contributes licenses 
to several patents which it will also continue to use to manufacture 
various drugs. ``C'' will contribute licenses which are exclusive even 
against itself for several drugs which are still at the testing stage 
and which have never been marketed. ``A'' has a potential reporting 
obligation for the formation of this LLC. With a 60 percent interest, 
``A'' will control the LLC and it has its own business. Since the 
licenses ``B'' will contribute are not exclusive as against it, they do 
not constitute a business. The licenses being contributed by ``C'' do 
constitute a business, however, even though they have not generated any 
revenue, and this business is being brought under the control of ``A'' 
with ``A'''s own business when the new LLC is formed.
    7. Suppose ``A'' and ``B'' are both regional grocery store chains 
which do their data processing in-house. ``A's'' data processing unit 
does work only for ``A'' and ``B's'' only for ``B.'' ``A'' and ``B'' 
decide to contribute the assets used in their data processing 
operations to a new jointly-controlled LLC which will provide data 
processing services to ``A'' and ``B.'' Assume the size tests are met. 
This would not be reportable because the assets used to provide such 
management and administrative support services do not constitute 
businesses. Cf Sec. 802.1(d)(4) of the rules and Examples 10 and 11, 16 
CFR 802.1(d)(4). This would be the case even if the new LLC intends to 
begin offering data processing services to third parties, since this 
would be beginning a new business rather than uniting existing 
businesses. Note however, that the result would be different if ``A'' 
or ``B'' had used its equipment to provide data processing services to 
others prior to contributing it to the new LLC for then it would be an 
existing business. The result would also be different if ``A'' and 
``B'' were engaged in manufacturing and the assets to be contributed to 
the new LLC were used in part of a manufacturing process.
* * * * *

Request for Comments

    The Federal Trade Commission staff asks for comments on this Formal 
Interpretation and may further modify its approach to LLCs based on the 
comments it receives. The staff would particularly like Commenters to 
address the following two issues:

A. Burden

    The staff has assumed that compliance with this Formal 
Interpretation would not be unduly burdensome on any party or class of 
parties. The staff requests comments on the issue of the burden of 
compliance. Commenters who believe that the Formal Interpretation does 
create a special burden by, for example, significantly increasing the 
number of filings should describe the burden in detail.

B. Partnerships

    At the time of the promulgation of the so-called partnership 
control rule, 16 CFR 801.1(b)(1)(ii), in 1987, the Commission stated 
that it might at some time in the future re-visit the subject of 
partnerships to see if it might be appropriate to revise the staff 
position that acquisitions which do not confer on the acquiring person 
100 percent of the interests in a partnership are not reportable. The 
Commission suggested that, instead, it might make the acquisition of 
control of a partnership reportable. See 52 FR 20058, 20061 (May 29, 
1987). Is this an appropriate time to do this? More specifically, is 
there a reason why partnerships and LLCs should be treated the same? 
Are

[[Page 54716]]

partnerships, for example, also being used increasingly to combine 
existing businesses? What factors influence the choice of creating a 
partnership versus an LLC?
Donald S. Clark,
Secretary.
[FR Doc. 98-27355 Filed 10-9-98; 8:45 am]
BILLING CODE 6750-01-P