AO 2007-12: Disaffiliation of SSFs after corporate spin-off
Tyco US PAC, the separate segregated fund (SSF) of Tyco International Management Company (Tyco), is disaffiliated from the SSFs of Covidien U.S. and Tyco Electronics Corporation, which are subsidiaries of parent corporations spun-off from Tyco International Ltd. as of the close of business on June 29, 2007.
Background
Tyco US is a wholly owned U.S. subsidiary of Tyco International Ltd. (Tyco International). On June 29, 2007, Tyco International separated into three publicly traded corporations: Covidien Ltd. (Covidien), Tyco Electronics Ltd. (Tyco Electronics) and Tyco International Ltd. At the time of the spin-off, Covidien and Tyco Electronics each had wholly owned U.S. subsidiaries, now identified as Covidien (U.S.) and Tyco Electronics Corporation, respectively.
In the spin-off, Tyco International distributed all of its shares of common stock in Covidien and Tyco Electronics to the shareholders of Tyco International’s common stock. Upon completion of the spin-off, the shareholders of Tyco International owned almost 100 percent of Covidien and Tyco Electronics, and none of the three companies owned any shares in either of the other companies. The three companies also executed a Separation and Distribution Agreement to effect the separation and provide a framework for the relationship among the companies after the spin-off.
Tyco US PAC has been registered as a political committee since 1979. Covidien US PAC and TELPAC are, respectively, the SSFs of Covidien (U.S.) and Tyco Electronics Corporation. Both SSFs were created in anticipation of the spin-off and filed their Statements of Organization with the Commission when Tyco US was still the connected organization for all three SSFs.¹ Tyco US PAC asked the Commission whether Tyco International, Covidien and Tyco Electronics are disaffiliated from each other under the Federal Election Campaign Act (the Act) and Commission regulations as of June 29, 2007, so that the SSFs of their respective U.S. subsidiaries are no longer affiliated with each other as of that date.
Legal analysis and conclusions
The Act and Commission regulations provide that political committees, including SSFs, that are established, financed, maintained or controlled by the same corporation, labor organization, person or group of persons, including any parent, subsidiary, branch, division, department or local unit thereof, are affiliated. See 11 CFR 100.5(g)(2); 110.3(a)(1)(ii). Contributions made to or by such political committees are considered to have been made to or by a single political committee. 2 U.S.C. §441a(a)(5); 11 CFR 100.5(g)(2) and 110.3(a)(1).
In the absence of per se affiliation, Commission regulations provide for an examination of various factors in the context of the overall relationship to determine whether one sponsoring organization has established, financed, maintained or controlled the other sponsoring organization or committee and, hence, whether, the respective SSFs are affiliated with each other. 11 CFR 100.5(g)(4)(i) and (ii)(A)-(J), and 110.3(a)(3)(i) and (ii)(A)-(J).
The Commission considered eight of these circumstantial factors, plus the issue of common shareholders after the spin-offs, in determining that Tyco US PAC, Covidien US PAC and TELPAC are not affiliated.
Organization owns a controlling interest in voting stock or securities
One affiliation factor considers whether a sponsoring organization owns a controlling interest in the voting stock or securities of the sponsoring organization of another committee. 11 CFR 100.5(g)(4)(ii) (A) and 110.3(a)(3)(ii)(A). None of the three companies owns any stock in the other two companies. Before the spin-off, Tyco US PAC, Covidien US PAC and TELPAC were per se affiliated because Covidien and Tyco Electronics were wholly owned by Tyco International, and hence the SSFs’ respective connected organizations were also wholly owned by Tyco International. Immediately after the spin-off, Covidien and Tyco Electronics, and their wholly owned U.S. subsidiaries, were owned by Tyco International’s shareholders, not by Tyco International. This lack of ownership interest by one company in another points toward disaffiliation.
Authority or ability to direct or participate in governance or to control officers
The law also considers the authority or ability of one corporate sponsor to participate in the governance of another corporate sponsor or to hire, appoint, demote or otherwise control the officers, or other decision-making employees, of another sponsoring organization . 11 CFR 100.5(g)(4)(ii)(B); 110.3(a)(3) (ii)(B); 100.5(g)(4)(ii)(C); 110.3(a) (3)(ii)(C).
The bylaws of Covidien and Tyco Electronics do not contain provisions granting authority to Tyco International over operations of Covidien and Tyco Electronics. Before the spin-off, Tyco International, as the lone shareholder, selected the current boards of directors of Covidien and Tyco Electronics. The governing documents of Covidien and Tyco Electronics contain certain anti-takeover provisions that would tend to preserve these board members’ positions, but also lack other significant provisions of this type. The Commission concluded that the effect on Covidien and Tyco Electronics of the pre-spin-off selection of the boards was outweighed by the minimal nature of director, officer and employee overlap, the background of the board members selected and vigorous trading of the shares in the companies resulting in a diversification in the groups of persons holding shares in the three companies. The Commission also considered the provisions of the spin-off agreement that make Tyco International the managing party for all legal matters related to Tyco International, contingent on other corporate liabilities assumed by Covidien and Tyco Electronics, and the companies may decide on an annual basis to change the managing party. The Commission noted that this arrangement would be a natural part of a separation arrangement in view of the fact that the involvement of Covidien and Tyco Electronics in such legal affairs would stem from activities before the spin-off or from the separation itself.
Common or overlapping officers or employees indicating a formal or ongoing relationship or the creation of a successor entity
The affiliation factors also address whether a sponsoring organization has common or overlapping officers or employees with another sponsoring organization indicating a formal or ongoing relationship between the organizations. 11 CFR 100.5(g)(4)(ii)(E); 110.3(a)(3)(ii)(E). An additional factor asks whether a sponsoring organization has any members, officers or employees who were members, officers or employees of another sponsoring organization indicating a formal or ongoing relationship or the creation of a successor entity. 11 CFR 100.5(g)(4)(ii)(F); 110.3(a)(3) (ii)(F). The eleven-member boards of each of the companies have been independent of each other since the spin-off. In addition, since the spinoff, there has been only a minimal personnel overlap between the parent companies. One individual serves on both Tyco Electronics’ and Tyco International’s boards of directors, and Tyco International’s Chief Financial Officer serves on Covidien’s board of directors. Since the spin-off, these two individuals represent the only overlap between the group of directors, officers and employees of one company and its subsidiaries and the corresponding group of either of the other two companies and their subsidiaries.
In addition, only two of the eleven Covidien directors in place since the spin-off and only three of the eleven Tyco Electronics directors in place since the spin-off previously served as directors or officers of any pre-spin-off Tyco International entities. Moreover, there are no plans for any future transfer of officers or employees from one company or its subsidiaries to another company or its subsidiaries. The Commission also noted that, after the spin-off occurred, amended statements of organization were filed indicating no overlap among Tyco US PAC, Covidien US PAC and TELPAC with respect to officers or to other SSF personnel.
Providing funds or goods in a significant amount or on an ongoing basis
The affiliation factors also address whether a sponsoring organization provides funds or goods in a significant amount or on an ongoing basis to another sponsoring organization, and whether a sponsoring organization causes or arranges for funds in a significant amount or on an ongoing basis to be provided to another sponsoring organization. 11 CFR 100.5(g)(4)(ii)(G) and (H) and 110.3(a)(3)(ii)(G) and (H).
Tyco International ceased providing either Covidien or Tyco Electronics with funds to finance their working capital or other cash requirements once the spin-off occurred. After the spin-off, the three parent corporations will, in accordance with percentages agreed to in the Separation Agreement, share responsibility for Tyco International’s contingent liabilities regarding securities litigation and actions brought by third parties as to the separation or stock distribution, but not with regard to any liabilities related to any one of the three companies. However, if any one of the companies defaults on its payments, each of the other companies will be required to pay equally the amounts in default.
Separation agreements after corporate spin-offs often entail restrictions on the activities of the companies involved and provide for some continuing transactions between the companies. The Commission concluded in past advisory opinions that such continuing transactions were outweighed by other facts or were merely aimed at sorting out the companies’ post-spin-off obligations that existed as an outgrowth of the previous relationship and were not aimed at continuing one company’s control over another. AOs 1996-42 and 1993-23. Similarly, any transfers between the companies provided for in the Separation and other agreements would be part of the normal separation process and the contingent liabilities would relate to activities occurring before the spin-off or to the separation itself.
Having an active or significant role in the formation of another sponsoring organization or committee
The factors also address whether a sponsoring organization had an active or significant role in the formation of another sponsoring organization. 11 CFR 100.5(g)(4) (ii)(I); 110.3(a)(3)(ii)(I). Although Covidien and Tyco Electronics were once part of Tyco International, they are now subject to agreements separating them into separate publicly traded corporations. The previous relationship between sponsoring organizations is part of the context for assessing the overall relationship between such organizations. 11 CFR 100.5(g)(4)(ii); 110.3(a) (3)(ii); see also AO 1996-23. The Commission noted that a sponsoring organization’s involvement in the formation of a spun-off sponsoring organization does not require a finding of continued affiliation when significant changes in the relevant relationships have occurred, such as arrangements separating the operations of the companies and apportioning their assets and obligations, and the nearly complete separation of corporate leadership and personnel.
Common shareholder base
Commission regulations provide for per se affiliation between committees established by “the same person or group of persons.” 11 CFR 100.5(g) (3)(v); 110.3(a)(2)(v). In past advisory opinions, the Commission has recognized that a sizeable break in the common identity of persons owning shares in two companies supported a conclusion that two companies were no longer affiliated after a spin-off, when vigorous public trading was anticipated. AOs 1996-42 and 1993-23; see also AO 1997-25.
Upon completion of the spin-off, Tyco International shareholders owned almost all of the shares of Covidien and Tyco Electronics, and there was almost a complete overlap among the shareholders of the three companies. However, this situation involves a spin-off by a large publicly traded company of subsidiaries, resulting in three large, separately listed, publicly traded companies with very specific plans for operations that are separate from each other and that involve differing business sectors. Given that, in general, each of the shareholders of these companies will buy and sell shares in accordance with such shareholder’s own financial interests, it would be very difficult for one group of shareholders to maintain purposefully a large common ownership in more than one publicly traded company. The usual consequence of such spinoffs is vigorous public trading by shareholders attempting to maximize their own profit, resulting in a sizeable diversification between the identity of the shareholders of the former parent and each of the spun off companies.
The Commission determined that, in this case, there is ample evidence to show that significant shareholder diversification will result from the spin-off. The post-spin-off active trading indicates that the large, but ever diminishing, overlap still existing in the first few weeks after the spin-off date should not delay disaffiliation past that date. It confirms that a large common identity of shareholders in two large publicly traded corporations does not, by itself, indicate common control of the corporations. This common identity does not reflect any effort by such a large group of shareholders to control the stocks of the corporations and dissipates rapidly because of the shareholders’ independent interests.
Conclusion
The Commission noted that, in some important respects, the case for the current disaffiliation of the three companies compares favorably with past advisory opinions where the Commission found organizations to be disaffiliated. AOs 2003- 21, 2002-12 and 1996-23. In this case, based on the application of the affiliation factors described above, the Commission concluded that Tyco US PAC, Covidien US PAC and TELPAC are disaffiliated as of the completion of the spin-off at the close of business on June 29, 2007.
Date Issued: September 12, 2007; Length: 11 pages.
¹ Tyco US PAC, Covidien US PAC and TELPAC will comply with the prohibitions placed on foreign national participation in the funding and the decision-making processes of the SSFs by the Federal Election Campaign Act, Commission regulations and advisory opinions. 2 U.S.C. §441e; 11 CFR 110.20. AOs 2006-15, 2004-42 and 2000-17.