Question
[redacted]
October 4, 2000
VIA FACSIMILE
Thomas F. Hancock, Esquire
Premerger Notification Office
Bureau of Competition
Room 303
6th Street and Pennsylvania Avenue, N.W.
Washing ton, D.C. 20580
Dear Mr. Hancock:
As we recently discussed, please let me know whether the transaction describe herein would qualify as the formation of a non-reportable, non-profit joint venture.
The Parties
Health System X (a non-profit health system1) is the sole corporate member of Hospital System A (also an non-profit entity). A, in turn, is the sole corporate member of hospitals B and C (both non-profit hospitals).
Health System Y (a non-profit health system) is the sole corporate member of hospital D (a non-profit hospital).
Both Health Systems X and Y own significant other assets, including hospitals, which are not part of this proposed transaction and will remain separate. Furthermore, both X and Y will retain their separate corporate identities after this transaction.
The Proposed Transaction
X and Y wish to unite the operations of hospitals B, C and D. To do so, the parties propose to amend the articles and bylaws of A to make it the sole corporate member of hospital D. At the same time, Y will obtain a special corporate membership interest in A. This special corporate membership interest will, among other things, be non-transferable by Y to any entity other than X, entitle y to a fixed yearly fee while it remains a member of A (Y will not share in either the profits or losses of A), and can be transferred to X for any reason after three years for a fixed fee.
At the inception of the arrangement both X and Y will appoint 50% of A's Board. However, through the use of certain reserved powers, Y's role in the governance and management of A will be all but eliminated. (The Bylaws and Articles of D will also be amended to comport with both A's and X's governance structure.) Furthermore, Y's Board representation will decline to less than 50% after approximately three years.
Please call me at your earliest possible convenience with your conclusion regarding the reportability of this transaction. If you conclude that this transaction is not reportable, I would also like to know whether the reduction of Y's representation on A's Board below 50% or the transfer of the membership interest from Y to X after three years would trigger the need to report.
If you need any additional information, or have any questions, please let me know.
As always, I thank you for your assistance.
Sincerely yours,
[redacted]
1 Entities referred to herein as non-profit within the meaning of one or more of the following sections of the Internal Revenue Code: sections 601(c)(1)-(4), (6)-(15), (17)-(20) or (d).