Securities Exchange Act of 1934 - Sections 12(g) and 12(h)
January 11, 2005
Response of the Office of Chief Counsel
McKinsey & Company, Inc.
This responds to your letter relating to McKinsey's plan to permit the use of the trust structures described in your letter to hold shares of McKinsey Stock. We note that McKinsey is exempt from the registration requirements under Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act') with respect to its Stock pursuant to the Application and Order referenced in your letter. Capitalized terms used in this letter shall have the same meanings defined in your letter.
Based on the facts presented, subject to the terms and conditions set forth in your letter and in reliance on your opinion that the use of the trust structures under the circumstances described in your letter would be consistent with the Application and Order, the Division will not recommend enforcement action to the Commission if McKinsey permits the use of the trust structures described in your letter to hold shares of Stock without complying with the registration requirements of Section 12(g) of the Exchange Act with respect to the McKinsey Stock until such time as McKinsey otherwise becomes a reporting company under the Exchange Act with respect to any class of its equity securities.
This position is based upon the representations made to the Division in your letter. Any different facts or conditions might require the Division to reach a different conclusion. Further, this response represents the Division's position on enforcement action only and does not purport to express any legal conclusion on the question presented.
Carol M. McGee
Deputy Chief Counsel
October 20, 2004
Via Electronic Transmission
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 4-2
Washington, D.C. 20549
Dear Mr. Lynn:
This letter relates to the Application for an Exemption from Registration under Section 12(g) pursuant to Section 12(h) of the Securities Exchange Act of 1934, as amended, and filed by McKinsey & Company, Inc. ("McKinsey") on May 25, 1994 (the "Application"), and to the Order of the Commission dated June 28, 1994, file number 81-919, granting McKinsey's Application (the "Order"). The purpose of this letter is to request advice from the Division that it will not recommend any action to the Commission if McKinsey permits the use of certain trust structures as described below to hold shares of Stock. Capitalized terms have the meanings defined in the Application. It is our opinion that such use of the trust structures under the circumstances described in this letter would be consistent with the Application and Order.
As described in the Application that the Commission granted pursuant to the Order, and as required by McKinsey's Restated Certificate, shares of Stock may be issued only to: (i) employees of McKinsey and of its subsidiaries and affiliates (including certain employees who are on an approved leave of absence or sabbatical) who, based on their leadership, performance and tenure, have been selected to become Management Group Members, or "MGMs," and (ii) direct or indirect wholly-owned subsidiaries of McKinsey. The Stock furthermore is subject to transfer restrictions that preclude the transfer of any shares except to McKinsey or, with McKinsey's consent, to a direct or indirect wholly-owned subsidiary, to another MGM, or to a trust for the benefit of McKinsey employees.
Neither the Order nor the Application addressed the circumstances in which McKinsey could directly issue shares of Stock (or a permitted holder would have the ability to transfer shares of Stock) to a trust in a manner consistent with the Order and the representations made in the Application. McKinsey seeks clarification on that point, because McKinsey contemplates using trust structures to address tax and foreign exchange control requirements. In some jurisdictions, the use of the trust would serve as the basis for more favorable treatment for tax or exchange control purposes. Because it is a separate legal entity, and the legal owner of the assets held in it, the trust becomes in certain jurisdictions the focus of taxation, or of laws imposing restrictions on the acquisition, ownership, transfer and sale of the legal ownership of assets. McKinsey intends to use such trust structures in jurisdictions where it is appropriate, and advantageous to an MGM or McKinsey.
The type of trust that McKinsey intends to use is a settlor trust, which is a trust in which the settlor (in our case, McKinsey) establishes and provides initial funds for a trust into which either the settlor or the beneficiary (in our case, the MGM) may subsequently transfer or convey property. The trusts may be established under the laws of a U.S. jurisdiction, or under the laws of a non-U.S. jurisdiction, depending on the circumstances. In each case, the trust structure will have the following common elements:
The shares of Stock held by the trust accordingly will be subject to the same restrictions and other conditions imposed by the Order as such shares held directly by an MGM. Thus, while a wholly-owned subsidiary of McKinsey in its capacity as trustee may have investment power over the Stock held in the trust, any such investment power would be limited by the same transfer and other restrictions that would apply to an MGM, which the Staff reviewed in connection with the Order.
It is a commonplace feature that the trusts may hold other assets, such as cash, that would be held in separate accounts. This feature has been included for the convenience of the MGM/beneficiary to provide for some flexibility by permitting the trust to hold other assets if the beneficiary elects to deposit other assets. The beneficiary in those circumstances would otherwise have to create a second trust to hold other assets, unnecessarily duplicating the costs of creating and administering the trust. Any other assets so deposited would be maintained in a segregated account, and the trust would not be able to enter into any loan agreements in connection with any assets, including any additional assets deposited by the beneficiary. We do not believe that this feature implicates any of the policies underlying the Order.
Because the trust structures may be used in a variety of situations and in a variety of different countries, their formats and terms may differ in some respects, although each trust structure will share the common features described in this letter. We have furthermore attached as Exhibit B a model trust agreement (to date, and pending a response from the Staff, McKinsey has not established any trust structures as described herein). Any trust agreements used by McKinsey in connection with the trust structures will not differ in substance from the attached model, except for differences that are immaterial for these purposes.
The Staff has in the past provided no-action relief under Sections 12(g) and 12(h) with respect to the establishment of trusts where the permitted holder (in this case, the MGM) is the sole economic beneficiary. See Montgomery Watson (Nov. 2, 1995) and Parsons Brinckeroff, Inc. (June 21, 1995). In each of these letters, the companies indicated that shares would be held not only by the employee, but also by trusts created for the benefit of the employee. In Montgomery Watson, the shares could be transferred to a trust in which the shares would be automatically offered to the company on the employee's death, and which would be revocable by the employee and his or her spouse. Similarly, in Parsons Brinckeroff, the shares deposited into a revocable trust would be subject to the same transfer restrictions that applied to the employee.1
The trust arrangements outlined in Montgomery Watson and Parsons Brinckeroff apparently permitted a third party to serve as trustee. In the case of McKinsey's proposed trust structures, only an MGM other than the beneficiary, McKinsey, or a wholly-owned subsidiary of McKinsey, all permitted holders under the Restated Certificate, may serve as trustee. While the trusts described in Montgomery Watson and Parsons Brinckeroff were evidently revocable, the trust in MWH Global, Inc. (May 9, 2002) (discussed below) was irrevocable. We do not believe that the revocability or irrevocability of a trust is material to this analysis, since each of the trustee and the MGM/beneficiary would be a permitted holder of the Stock and, as discussed above, and would be authorized to exercise investment or voting power within the restrictions described in the Application and the Order.
In MWH Global, Inc., employees were permitted to deposit shares into an irrevocable private annuity trust or charitable remainder trust shortly before an anticipated event that would trigger a required sale of the shares back to the company or another employee. The proceeds of the sale would then be distributed by the trust. In MWH Global, like Montgomery Watson and Parsons Brinckeroff, the trustee could be a third party unaffiliated with the employee or the company. Unlike the arrangement described in MWH Global, the trustee in our case will be an MGM other than the beneficiary, McKinsey, or a wholly-owned subsidiary of McKinsey, already permitted holders of the shares. But like MWH Global, the shares of Stock here cannot under any circumstances be distributed by the trust to any third parties. The types of trusts described in the MWH Global letter do apparently contemplate a transfer of a contingent interest in the trust assets to third parties, such as to a charitable organization in the case of a charitable remainder trust. Under those circumstances, such third-party beneficiaries likely acquired a beneficial interest in the shares held by the trust for the period of its existence. Under the trust structures that McKinsey proposes to establish, no third parties will have a direct or contingent interest in the trust assets. In all events, upon the beneficiary's death the shares would have to be sold to McKinsey or another MGM, and the proceeds distributed in accordance with law.
The trust arrangements in MWH Global are evidently structured so that the trust could not under any circumstances hold company shares for more than 30 days. The trust structures that McKinsey proposes to establish would have no such time restriction, and indeed could in some cases hold shares of Stock for several years. We do not believe that, here, such a limited duration is necessary when the trustees and beneficiaries are permitted holders in their own right. In any event, no such time restriction was evidently incorporated into the trust arrangements in Montgomery Watson and Parsons Brinckeroff.
If the relief requested by this letter is granted, it is McKinsey's intention to amend the Restated Certificate to provide for the direct issuance of shares of Stock to settlor trusts meeting the conditions described in this letter, and to clarify that transfer restrictions would apply to shares held by a trust for the benefit of an MGM just as they apply to shares held directly by an MGM. The current Restated Certificate already permits transfers of shares of Stock to trusts established primarily for the benefit of employees, and we would simply clarify that the trust may benefit a single employee, consistent with the trust structures contemplated here. Article 9 of the Restated Certificate, reflecting all of these proposed amendments, is attached as Exhibit A.
In these circumstances, we request the advice of the Division that it will not recommend any action to the Commission if it permits the use of the types of trust structures described above. Please do not hesitate to contact me if you need further information.
/s/ Frank G. Zarb, Jr.
Frank G. Zarb, Jr.
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