[Federal Register Volume 66, Number 57 (Friday, March 23, 2001)]
[Notices]
[Pages 16241-16245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-7253]


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

FEDERAL TRADE COMMISSION


Premerger Notification: Reporting and Waiting Period Requirements

AGENCY: Federal Trade Commission.

ACTION: Notice of Amendment of Formal Interpretation 15.

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

SUMMARY: The Premerger Notification Office (``PNO'') of the Federal 
Trade Commission (``FTC''), with the concurrence of the Acting 
Assistant Attorney General in charge of the Antitrust Division of the 
Department of Justice (``DOJ''), is amending a Formal Interpretation of 
the Hart-Scott-Rodino Act, which requires persons planning certain 
mergers, consolidations, or other acquisitions to report information 
about the proposed transactions to the FTC and DOJ. The Interpretation 
concerns the reportability of certain transactions involving the 
formation of a Limited Liability Company (``LLC''), a relatively new 
form of entity authorized by state statutes, resulting in the 
combination of businesses into the new LLC.
    This Formal Interpretation was first published on October 13, 1998, 
63 Fed. Reg. 54713. It was subsequently modified and republished on 
February 5, 1999, 64 Fed. Reg. 5808; and on June 29, 1999, 64 FR 34804.
    On December 21, 2000, the President signed into law certain 
amendments to Section 7A(a) of the Clayton Act, 15 U.S.C. 18a(a). See 
Public Law 106-553, 114 Stat. 2762, effective on February 1, 2001. The 
current amendments to Formal Interpretation 15 merely reflect the 
changes in the statutory size-of-transaction test and size-of-person 
test, and the resultant repeal of 16 CFR. 802.20.
    The reference to Sec. 802.20 at 64 FR 34806 is removed. Example 2 
to Formal Interpretation 15 is amended to reflect the new $50 million 
threshold. Minor typographical errors were corrected in two footnotes, 
and footnote 7 was revised to reflect the elimination of the size-of-
person test for transactions which are valued in excess of $200 
million.

DATES: The Amended Formal Interpretation 15 will become effective on 
March 23, 2001.

FOR FURTHER INFORMATION CONTACT: B. Michael Verne, Compliance 
Specialist, Premerger Notification Office, Bureau of Competition, Room 
301, Federal Trade Commission, Washington, DC 20580. Telephone: (202) 
326-3167.

SUPPLEMENTARY INFORMATION: The text of Formal Interpretation 15, as 
amended, is set out below. The revision is bolded and italicized. The 
removed language is bracketed and underlined.

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'').
    This is a Formal Interpretation pursuant to Sec. 803.30 of the 
Premerger Notification Rules (``the rules''). 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'').
    This Formal Interpretation was first published on October 13, 1998, 
together with a request for comments, to become effective on December 
14, 1998. 63 FR 54713 (October 13, 1998). The PNO received six comments 
which were placed on the public record. On

[[Page 16242]]

December 2, 1998, the effective date of this Interpretation was 
postponed until February 1, 1999, to give the PNO staff more time to 
analyze and respond to the comments. 63 Fed Reg 66546 (December 2, 
1998).
    Formal Interpretation 15 was modified in response to the comments 
and republished on February 5, 1999. 64 FR 5808 (February 5, 1999). 
Under the revised Interpretation, the formation of an LLC which 
combines under common control in the LLC two or more pre-existing 
businesses will be treated as subject to the requirements of the HSR 
act under Sec. 801.2(d) of the HSR rules, 16 CFR 801.2(d), which 
governs mergers and consolidations. Because Formal Interpretation 15 
had been modified substantially, the effective date of the 
Interpretation was postponed until March 1, 1999. Id.
    Shortly after the Interpretation became effective, it became 
apparent that the Interpretation as it applies to transactions 
involving existing LLCs did not give clear guidance. The section of the 
Interpretation dealing with acquisitions of and by existing LLCs was 
therefore amended in a number of respects to explain how such 
transactions are to be analyzed. First, the first full paragraph in the 
third column at 64 FR 5809 (February 5, 1999) was deleted. Second, the 
four paragraphs in the notice which begin with the phrase ``The 
acquisition of a membership interest in an existing LLC will be 
potentially reportable event * * *.'' and end with the phrase ``* * * 
whether there is a change in any member's membership interest.'' was 
inserted between the carryover paragraph and the first full paragraph 
in the second column at 64 FR 5810. Third, Example 2, at 64 FR 5811, 
was revised in a number of respects. Fourth, a new Example 3 was added, 
and current Examples 3 and 4 at 64 FR 5811 were renumbered as Examples 
4 and 5. Fifth, a new Example 6 was added, and current Examples 6-8 at 
64 FR 5811 were renumbered as Examples 8-10. Finally, current Example 8 
(now Example 10) was revised in a number of respects.
    The most recent amendments to Formal Interpretation 15 merely 
reflect the changes in the statutory size-of-transaction test and size-
of-person test, and the resultant repeal of 16 CFR 802.20
    The act requires the parties to certain acquisitions of voting 
securities or assets to notify the FTC and DOJ and to wait a specified 
period of time before consummating the transaction. The purpose of the 
act and the rules is to ensure that such transactions receive 
meaningful scrutiny under the antitrust laws, with the possibility of 
an effective remedy for violations, prior to consummation. Under the 
rules, certain types of transactions, such as mergers, consolidations, 
and the formation of corporate joint ventures, are treated as 
acquisitions of voting securities potentially subject to the act, while 
other transactions, such as the formation of partnerships, are deemed 
non-reportable. See Secs. 801.2(d) and 801.40 of the rules, 16 CFR 
801.2(d) and 801.40.
    The LLC \(1)\ is a relatively new form of business organization 
that is neither a partnership nor a corporation but a hybrid legal 
entity that combines certain desirable features of both partnerships 
and corporations. Specifically, an LLC is taxed as a partnership but 
shields its members from liability as a corporation shields its 
shareholders. The first LLC statute was passed in 1977 by Wyoming \(2)\ 
and a trickle of other states followed. The use of LLCs expanded 
significantly after 1988 when the Internal Revenue Service (``IRS'') 
concluded that an LLC organized under the Wyoming statute was taxable 
as a partnership.\(3)\ By 1993 all 51 jurisdictions had LLC laws of one 
form or another.
---------------------------------------------------------------------------

    \1\ This Formal Interpretation applies only to the reportability 
of the formation of certain LLCs. The position of the FTC staff on 
the status and treatment under the act of other non-corporate 
entities such as partnerships remains unchanged.
    \2\ Wyo. Stat. section 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 treat LLCs like 
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 too inclusive. LLCs at the time were primarily used as vehicles for 
the creation of start-up businesses. The PNO's treatment of LLCs 
resulted in requiring HSR filings in a large number of transactions 
that did not raise antitrust concerns. Furthermore, the PNO believed 
that in most LLCs the interest held by the members of the LLC was more 
like a partnership interest than a voting security interest. 
Consequently, in 1994, the PNO began to informally advise parties that 
the treatment of LLCs for reporting purposes would depend on a 
determination of whether the interest acquired in the LLC was more like 
a voting security interest or more like a partnership interest.\4\
---------------------------------------------------------------------------

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

    This treatment of LLCs has not been completely satisfactory. The 
use of LLCs has evolved, and while LLCs continue to be used as vehicles 
for start-up enterprises, they are now often used to combine competing 
businesses under common control. Indeed, the Commission's litigation 
staff has investigated several transactions raising potential antitrust 
concerns involving the formation of LLCs. In these transactions, 
previously separate businesses were combined under common control when 
they were both contributed to a single, newly-formed LLC. Nevertheless, 
the creation of the LLC to combine competing businesses under common 
control was typically not treated as reportable under the PNO's then-
current treatment. However, the union of competing businesses under 
common control is of obvious potential antitrust concern. Since the 
past treatments of LLCs have not been satisfactory at singling out 
those transactions that were the most likely to have anticompetitive 
effects, the PNO staff has decided to revise its approach to LLCs in 
order to better carry out the purposes of the act.
    The formation of an LLC into which two or more businesses are 
contributed, like other unions of businesses under common control, is a 
kind of merger or consolidation.\5\ Section 801.2(d)(1)(i) of the 
rules, 16 CFR 801.2(d)(1)(i), states that ``[m]ergers and 
consolidations are transactions subject to the act * * * '' \6\

[[Page 16243]]

A filing requirement for those LLC formations that involve the 
combination of businesses is appropriate and advances the purposes of 
the act and the rules, namely, to ensure that the antitrust enforcement 
agencies have advance notice of, and a timely opportunity to challenge, 
transactions which may violate the antitrust laws.
---------------------------------------------------------------------------

    \5\ While combining businesses in an LLC may not be a ``merger'' 
or ``consolidation'' in the strictest sense because they do not 
involve corporations, the rationale of this interpretation is 
similar to that used by the PNO under Sec. 801.2(d) to require 
filing for acquisitions of non-profit corporations which, like LLCs, 
typically do not issue voting securities. (See ABA, The Premerger 
Notification Practice Manual, 1991 ed., Interp. #109.)
    \6\ In fact, as it was originally promulgated in 1978, 
Sec. 801.2(d)(1)(i), 16 CFR 801.2(d)(1)(i), stated that ``[a] 
merger, consolidation, or other transaction combining all or any 
part of the business of two or more persons shall be an acquisition 
subject to the act * * * '' (emphasis added) 43 FR 33539, July 31, 
1978. In 1983, this section was changed to clarify the treatment of 
mergers and consolidations under the rules, and the italicized 
wording was eliminated. However, there is no indication that this 
change was intended to narrow the scope of Sec. 801.2(d). Rather, 
according to the Statement of Basis and Purpose to the 1983 changes, 
48 FR 34430, July 29, 1983, the Commission simply sought to make 
clear that mergers and consolidations are treated as acquisitions of 
voting securities and to aid the parties to a merger in determining 
which is the acquiring person and which is the acquired person.
---------------------------------------------------------------------------

    This Formal Interpretation, therefore, changes the PNO's treatment 
of LLC's as follows: The PNO will henceforth treat as reportable the 
formation of an LLC if (1) two or more pre-existing, separately 
controlled businesses will be contributed, and (2) at least one of the 
members will control the LLC (i.e., have an interest entitling it to 50 
percent of the profits of the LLC or 50 percent of the assets of the 
LLC upon dissolution).\7\ The formation of all other LLCs will be 
treated similar to the formation of a partnership which, under the 
PNO's longstanding position on partnership formations, will not be 
reportable.
---------------------------------------------------------------------------

    \7\ Of course, as with all transactions, the HSR size 
requirements (size of transaction and, if size of transaction is 
$200 million or less, size of person) need to be met as well, and 
exemptions may apply.
---------------------------------------------------------------------------

    In determining what is a ``business'' for purposes of this 
Interpretation, the PNO will look to the definition of ``operating 
unit'' for purposes of Sec. 802.1(a) of the rules, 16 CFR 802.1(a), 
namely, `` * * * assets that are operated * * * as a business 
undertaking in a particular location or for particular products or 
services, even though those assets may not be organized as a separate 
legal entity.'' In addition, for purposes of this Formal 
Interpretation, the contribution to an LLC of an interest in 
intellectual property, such as a patent, a patent license, know-how, 
and so forth, which is exclusive against all parties including the 
grantor, is the contribution of a business, whether or not the 
intellectual property has generated any revenues.
    Under this Interpretation, the approach of Sec. 801.2(d) will be 
used to determine the acquiring person(s) and acquired person(s) for 
potentially reportable LLC formations.\8\ Section 801.2(d)(2)(i) states 
that ``[a]ny person party to a merger or consolidation is an acquiring 
person if as a result of the transaction such person will hold any 
assets or voting securities which it did not hold prior to the 
transaction'' (emphasis added). In the context of the formation of a 
new LLC, this means that any person that will control an LLC in which 
two or more previously separate businesses will be combined will be an 
acquiring person. Thus, if ``A'' and ``B'' form a 60-40 LLC, the 60 
percent member, ``A,'' will be an acquiring person with respect to the 
contributions of ``B.'' Section 801.2(d)(2)(ii) states that ``[a]ny 
person party to a merger or consolidation is an acquired person if as a 
result of the transaction the assets or voting securities of any entity 
included within such person will be held by any other person'' 
(emphasis added). In the above example of the formation of a 60-40 LLC, 
``B'' would therefore be an acquired person. If ``A'' and ``B'' were to 
form a 50-50 LLC to which both were to contribute businesses, both 
would be both acquiring and acquired persons because both would control 
the LLC and thus hold assets or voting securities it did not hold prior 
to the transaction. ``A'' and ``B'' would file in both capacities, 
assuming the relevant size criteria were met. Thus, both the acquiring 
and acquired persons will be required to file notification and, in 
accordance with Sec. 803.10 of the rules, the 30-day waiting period 
will begin when both persons have substantially complied with the 
notification requirements.
---------------------------------------------------------------------------

    \8\ The Formal Interpretation as published in October, 1998 
described a method to determine reportability that was based on 
concepts found in Sec. 801.40 of the HSR rules, 16 CFR 801.40. 
Certain comments suggested that such an approach was confusing and 
would increase the likelihood that parties would make erroneous 
conclusions on their reporting obligations. In light of those 
comments, and the change in approach this Formal Interpretation 
adopts, there will no longer be any need to look to Sec. 801.40 to 
determine reporting obligations.
---------------------------------------------------------------------------

    Under this Interpretation, the nature of the acquisition(s) taking 
place when an LLC is formed, that is, whether it is an acquisition of 
assets or of voting securities, depends on what is being contributed by 
the other member(s) of the LLC.\9\ In the 50-50 LLC described above, 
suppose that ``A'' contributes a group of assets constituting a 
business and ``B'' contributes 50 or more percent of the voting 
securities of a corporate subsidiary, S. In this example, ``B'' will be 
deemed to have made an acquisition of assets and ``A,'' an acquisition 
of voting securities.
---------------------------------------------------------------------------

    \9\ In this respect, the Interpretation necessarily departs from 
the text of Sec. 801.2(d)(1)(i), which provides that all mergers and 
consolidations shall be treated as acquisitions of voting 
securities.
---------------------------------------------------------------------------

    In addition, any exemption in the act or rules that would make any 
other acquisition non-reportable may make the acquisition by one or 
more of the contributors to an LLC non-reportable. If, for example, 
``A's'' asset contribution consists of hotel properties the acquisition 
of which would be exempt under Sec. 802.2(e), ``B's'' acquisition in 
the formation of this LLC would not be reportable. [Similarly, if S has 
sales and assets of less than $25 million and the value of the S stock 
that will be held by ``A'' as a result of the acquisition is $15 
million or less then ``A's'' acquisition in the formation would be 
exempted by Sec. 802.20(b).]
    To determine whether a filing is required, the parties to 
potentially reportable formation transactions also must determine the 
size-of-person and size-of-transaction, which should be done just as in 
any other asset or voting securities acquisition in accordance with 
Secs. 801.10 and 801.11 of the HSR rules. Since these transactions are 
similar to asset exchanges, for most such transactions there will not 
be a determined acquisition price for the acquired assets or voting 
securities to use in applying the size-of-transaction test. For such 
transactions, parties should use the market price or fair market value 
where another contributor contributes 50 or more percent of the voting 
securities of an issuer (see Sec. 801.10(a)), or the fair market value 
where another contributor puts assets constituting a business into the 
LLC (see Sec. 801.10(b)).
    The acquisition of a membership interest in an existing LLC will be 
a potentially reportable event (1) if it results in the acquiring 
person holding 100 percent of the membership interests in that LLC, and 
(20 that person had not previously filed for and consummated the 
acquisition of control of that LLC. Such an acquisition is reportable 
as the acquisition of all the assets of the LLC. This is similar to the 
PNO's treatment of acquisitions of partnership interests.
    Acquisitions of additional businesses by existing LLCs fall into 
one of two categories. First, those that result in a change in the 
percentage membership interest of any member will be treated by the PNO 
as the formation of new LLC under this Interpretation. In such a new 
formation, the acquisition by any person that will control the new LLC 
of the assets or voting securities of the business(es) being 
contributed that it did not previously control is potentially 
reportable. Both additional businesses and the business(es) already in 
the existing LLC are regarded as being contributed to the new LLC. 
These transactions should be analyzed using the criteria for 
formations. Accordingly, persons will be regarded as acquiring

[[Page 16244]]

only those businesses that they come to control as a result of the 
transaction.
    Second, those acquisitions of businesses by existing LLCs that do 
not result in a change in the percentage membership interest of any 
member are not treated as new formations but, rather, as the 
acquisition of the assets or voting securities of the business by the 
LLC or, if it is controlled, by its ultimate parent entity, or 
entities, and, as such, are potentially reportable.
    The acquisition by an existing LLC of assets or voting securities 
not constituting a business will be treated as the acquisition of 
assets or voting securities by the LLC or, if it is controlled, by its 
post-acquisition ultimate parent entity, or entities, and, as such, is 
potentially reportable. This treatment will pertain without regard to 
whether there is a change in any member's membership interest.
    This Formal Interpretation will not require reporting of some LLC 
formations and some acquisitions of existing LLC interests that would 
have required reporting under the Interpretation announced by the PNO 
in October of 1998. Unlike the October version, this Formal 
Interpretation requires reporting of the formation of an LLC only if 
the formation brings together within the LLC two formerly separately 
controlled businesses. Comments received suggested that the treatment 
announced in the October version would have covered a substantial 
number of LLCs that are not likely to raise competitive concerns. For 
example, the October Formal Interpretation would have viewed LLCs that 
are created solely as financing vehicles as reportable. In these 
transactions, a financial institution (or other party providing 
financing) in the ordinary course of its business contributes only cash 
or other financial assets and one other party contributes one or more 
operating units to a new LLC that the financial institution may control 
for HSR purposes, at least for a period of time. Under this revised 
interpretation, so long as such financing transactions do not result in 
the contribution of a business to the LLC by two or more members, it 
will not be treated as reportable.\10\
---------------------------------------------------------------------------

    \10\ There is no evidence to suggest now that LLC formations 
where only one business is contributed are being used to accomplish 
a merger or consolidation of two businesses. However, the PNO will 
look carefully at these transactions in the future and, if they 
begin to be used to accomplish a merger or consolidation, will re-
visit this issue.
---------------------------------------------------------------------------

    As described above, except for a situation where, as a result of an 
acquisition, the acquiring person would hold 100 percent of the 
interests in an existing LLC, no acquisition of an interest in an 
existing LLC is reportable under this Interpretation. Several comments 
indicated that LLC agreements are sometimes entered into in which the 
right to receive more than 50 percent of the LLC's profits shifts from 
one member to another upon the happening of some event outside the 
control--or even the knowledge--of the members. Under the definition of 
control applicable to LLCs (i.e., Sec. 801.1(b)(ii)), under the October 
Interpretation, such a shift in the right to receive profits might have 
created a reporting obligation. The commenters argued that it would be 
unduly burdensome to require the beneficiaries of such shifts to file 
and that no substantive law enforcement interest would be served. The 
PNO does not intend that such shifts be reportable under this Formal 
Interpretation. Since such a shift would be the post-formation 
acquisition of an interest in an existing LLC without the contribution 
of another business, it will not be treated as subject to the reporting 
requirements of the act.
    Some of the reasons for concluding that the formation of certain 
LLCs should be treated as reportable may apply equally well to 
partnerships. The position of the PNO, however, is that the formation 
of a partnership is not reportable and acquisitions of partnership 
interests that do not result in one person's holding 100 percent of the 
interests in a partnership are non-reportable. Several comments 
received on the Formal Interpretation published in October suggested 
that no change to the treatment of partnerships was necessary at this 
time. The treatment of partnerships was originally adopted, in part, 
because of the difficulty of monitoring compliance with HSR reporting 
obligations since many partnerships can be formed informally or by 
implication in many typical business arrangements. Furthermore, there 
has been no suggestion in any of the comments that partnerships are 
being used with any greater frequency now to combine competing 
businesses. Consequently, the PNO has decided not to change its 
treatment of partnerships at this time, but it may re-visit this issue 
in the future as developments require.
    The following examples are an integral part of this Formal 
Interpretation:
    1. ``A'' and ``B'' both plan to contribute businesses to a new LLC 
in which each will acquire a 50 percent interest. This LLC formation 
would involve both ``A'' and ``B'' making reportable acquisitions if 
the size-of-person and size-of-transaction tests are met. Each 
acquisition would be reportable unless exempted by Section 7A(c) of the 
act or Part 802 of the HSR rules. ``A'' would file as an acquiring 
person and ``B'' as an acquired person for ``A's'' acquisition of the 
assets being contributed by ``B,'' and ``B'' would file as an acquiring 
person and ``A'' as an acquired person for ``B's'' acquisition of the 
assets contributed by ``A.'' If ``A'' or ``B'' (or both) contributed 50 
percent or more of the voting securities of a corporation, the 
acquisition(s) would be treated as an acquisition of voting securities 
of the issuer whose shares are contributed.
    2. ``A,'' ``B,'' and ``C'' form an LLC in year 1 in which each 
receives a one-third interest and to which each contributes a business 
valued at approximately $60 million. ``A,'' ``B,'' and ``C'' are $100 
million persons. This formation would not be reportable because no 
member controls the LLC. In year 2, ``X,'' also a $100 million person, 
acquires the membership interests of ``A'' and ``B'' for cash. This 
would not be reportable because acquisitions of membership interests in 
existing LLCs are potentially reportable only if they result in one 
person holding 100 percent of the interests in the LLC. Note that if 
``X'' also contributes a business to the LLC in exchange for the LLC 
membership interest it receives, the transaction will be treated as the 
formation of a new LLC. The acquisition of the new business will not be 
reportable because ``X'' already controls it. ``X'' may, however, have 
a filing obligation as an acquiring person with respect to the 
businesses already in the LLC if the size tests are met and no 
exemption applies. The existing LLC would be the acquired person 
because no member controls it. Note also that in the example where 
``X'' contributed only cash and did not file under HSR, if ``X'' were 
subsequently also to acquire ``C's'' membership interest it would then 
hold 100 percent of the interests in this LLC and would therefore have 
to file for the acquisition of all of the assets of the LLC.
    3. In year 1, ``A'' and ``B'' form an LLC to which ``A'' 
contributes a business and takes back a 60 percent interest and ``B'' 
contributes cash and takes back a 40 percent interest. This transaction 
is not reportable. Suppose, however, that in year 4:
    a. ``B'' contributes a new business, ``A'' contributes cash, and 
there is no change in percentage membership interests. This would not 
be analyzed as a new formation but would be treated as an acquisition 
by the LLC. ``A,'' as the ultimate parent entity of the LLC, would file 
as acquiring and ``B'' as acquired for the acquisition of the business.

[[Page 16245]]

    b. ``A'' contributes a business, ``B'' contributes cash, and their 
interests change so that ``A'' has 61 percent and ``B'' has 39 percent. 
This is a new formation because of the changes in the membership 
interests but it is not reportable because two or more separately 
controlled businesses are not being contributed, as ``A'' controlled 
both businesses before the transaction.
    c. ``B'' contributes a business, ``A'' contributes cash, and their 
interests change so that ``A'' has 59 percent and ``B'' has 41 percent. 
This is also a new formation. ``A'' will file to acquire the business 
being contributed by ``B.''
    d. ``B'' contributes a business and the membership interests change 
so that ``B'' has 60 percent and ``A'' has 40 percent. This is a new 
formation, and ``B'' would file to acquire the business contributed by 
the LLC. ``A,'' as the ultimate parent entity of the existing LLC, 
would file as the acquired person.
    e. ``C'' contributes assets not constituting a business and the 
percentage interests are adjusted so that ``A'' has 50 percent, ``B'' 
has 30 percent, and ``C'' has 20 percent. This is not a new formation 
because the assets being contributed are not a business. ``A,'' as 
ultimate parent entity of the LLC, will file to acquire these assets 
from ``C.''
    4. ``A'' and ``B'' form a new LLC, to which ``A'' will contribute 
its widget business and ``B'' will contribute cash for operating 
capital. This formation would not be reportable because two previously 
separate businesses are not being contributed to the LLC.
    5. ``A,'' ``B,'' and ``C'' form a 60-20-20 LLC to which ``A'' 
contributes cash and receives a 60 percent membership interest and 
``B'' and ``C'' each contribute an operating unit for a 20 percent 
interest. This is a kind of a consolidation of ``B's'' and ``C's'' 
operating units into the new LLC and ``A'' will control the LLC. There 
are two reportable transactions (assuming the size criteria are met and 
no exemption applies): ``A'' acquiring the operating unit contributed 
by ``B,'' and ``A'' acquiring the operating unit contributed by ``C.''
    6. In year 1, ``A,'' ``B,'' and ``C'' form a new LLC to which each 
contributes a business and takes back a one-third membership interest. 
In year 4, the LLC acquires all the voting securities of another 
business from ``D'' in exchange for certain assets not constituting a 
business. This acquisition would not be analyzed as the formation of a 
new LLC because no member's percentage interest changes as a result of 
the transaction. Rather, the LLC would be viewed as acquiring the 
voting securities of the new business from ``D.'' This transaction will 
be reportable if the size criteria are met and no exemption applies. 
``D'' will, of course, have to analyze its acquisition of assets from 
the LLC to determine if it is also reportable.
    7.``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.
    8. ``A,'' ``B,'' and ``C'' form a new LLC in which ``A'' will have 
a 60 percent interest and ``B'' and ``C'' each will have 20 percent 
interests. ``A,'' a large, international pharmaceutical company, 
contributes $100 million in cash and the assets of a pharmaceutical 
product which is currently on the market. This pharmaceutical product 
line constitutes a business. ``B'' contributes licenses to several 
patents which it will also continue to use to manufacture various 
drugs. ``C'' will contribute licenses which are exclusive even against 
itself for several drugs which are still at the testing stage and which 
have never been marketed. With a 60 percent interest, ``A'' will 
control the LLC. Since the licenses ``B'' will contribute are not 
exclusive as against it, they do not constitute a business. However, 
the licenses being contributed by ``C'' do constitute a business, even 
though they have not generated any revenue. ``A'' has a potential 
reporting obligation for the formation of this LLC for acquiring assets 
from ``C.'' This formation combines two pre-existing, separately 
controlled businesses in an LLC which ``A'' will control.
    9. ``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'' 
and ``B'' had used their equipment to provide any data processing 
services to others prior to contributing it to the new LLC, for then 
each would be contributing an existing business.
    10. In year 1, ``A,'' ``B,'' and ``C'' form a new LLC to which each 
contributes a business in exchange for a one-third interest. This 
formation is not reportable because no member controls the LLC. Suppose 
that in year 2 ``A'' sells additional assets to the LLC for cash. This 
transaction is not analyzed as a new formation under this Formal 
Interpretation. However, the LLC has a potential filing obligation as 
the acquiring person of those assets and ``A'' as the acquired person. 
Note that it is irrelevant whether the assets sold by ``A'' in year 2 
constitute a business. Note also that if assets not constituting a 
business are acquired by an LLC, even if the percentage membership 
interests change in the transaction, this is not analyzed as the 
formation of a new LLC, either, but as an acquisition by the LLC (or 
its post-acquisition ultimate parent entity).

Donald S. Clark,
Secretary.
[FR Doc. 01-7253 Filed 3-22-01; 8:45 am]
BILLING CODE 6750-01-M