Federal Election Commission Main Page
June 6, 1994
CERTIFIED MAIL
RETURN RECEIPT REQUESTED
ADVISORY OPINION 1994-9
Grant S. Cowan
Frost & Jacobs
201 East Fifth Street
P.O. Box 5715
Cincinnati, OH 45201-5715
Dear Mr. Cowan:
This responds to your letter dated March 18, 1994,
requesting an advisory opinion on behalf of Armco Steel
Company, L.P. ("ArmLP") concerning application of the Federal
Election Campaign Act of 1971, as amended ("the Act") and
Commission regulations to the effect of a business
reorganization on the affiliated status of various entities.
ArmLP is a Delaware limited partnership formed in May
1989 as a joint venture between Armco, Inc. ("Armco") and
Kawasaki Steel Corporation, a Japanese corporation
("Kawasaki"). (Kawasaki operates through Kawasaki Steel
Investments, an indirect wholly owned U.S. subsidiary.)
Armco and Kawasaki each own a 49.5 percent limited
partnership interest in ArmLP. AK Management is the general
partner in ArmLP and owns a one percent interest in it. AK
Management is jointly owned (50/50) by AJV Investments, Inc.
and KSCA Inc., both Delaware corporations. AJV is a wholly
owned subsidiary of Armco, and KSCA is an indirect wholly
owned subsidiary of Kawasaki.
ArmLP intends to undergo a reorganization under which it
will become AK Steel Corporation ("AK Steel"), a Delaware
corporation and a wholly-owned subsidiary of another Delaware
corporation, AK Steel Holding Corporation ("AK Holding").
The reorganization will occur as follows: (1) Armco and
Kawasaki will contribute their limited partnership interests
in ArmLP to AK Holding. (2) AJV Investments and KSCA Inc.
will each give their stock in AK Management to AK Holding.
(3) AK Holding will transfer its limited partnership interest
in ArmLP to AK Steel. (4) AK Holding will transfer its stock
in AK Management to AK Steel.
As a result, AK Steel will be the sole partner of ArmLP,
and as such, the partnership will dissolve by law. AK Steel
will own all the assets of the former ArmLP and all of
ArmLP's employees will become the employees of AK Steel.
Thus, through a transfer of stock and partnership interests
to AK Steel, ArmLP will become a corporation, AK Steel.
Immediately after the reorganization, AK Holding will
engage in a recapitalization of the company. This entails
the issuance of 19,504,310 shares of AK Holding common stock
to the public through an initial public offering ("IPO"). It
also entails the issuance of over one million shares to Armco
and over five million shares to Kawasaki. Over 70,000 shares
are being issued to Thomas Graham, the Chairman and CEO of AK
Holding as part of his bonus. As a result, Kawasaki and
Armco will hold approximately 20 percent and four percent of
the common stock respectively.
Armco has maintained a non-Federal political action
committee named the Armco Better Citizenship Committee
("ABC-PAC") to which ArmLP employees have contributed in the
past through a payroll deduction plan. ArmLP has a Kentucky
non-Federal PAC named the Kentucky Armco Steel Company L.P.
Better Citizenship Voluntary PAC ("ArmLP Kentucky PAC").
Prior to the reorganization, ArmLP intends to establish a
Federal PAC with the name "Armco L.P. Federal PAC" ("ArmLP
Federal PAC"). ABC-PAC and ArmLP Kentucky PAC will then act
as collecting agents and will each transfer their funds to
ArmLP Federal PAC after first obtaining the written
authorization of the employee contributors. Immediately
after the corporate reorganization, AK Steel will file an
amended Statement of Organization reflecting the change in
the name of the connected organization of the new Federal
PAC.
ArmLP requests an advisory opinion as to whether the
transfer of funds may be made from the two non-Federal PACs
to ArmLP Federal PAC and whether the use of the non-Federal
PACs as collecting agents will obligate them to register as
political committees. You also request an opinion regarding
the change in the name of the "connected organization" and
the name of the PAC. You wish to ascertain that the ArmLP
Federal PAC "will be treated as the PAC of AK Steel after the
reorganization."
In addition, Armco LP requests an advisory opinion as to
whether AK Steel PAC will be deemed as affiliated with the
Federal committees of Armco, Inc.1/ You also ask whether AK
Steel PAC would be affiliated with the separate segregated
fund of any domestic subsidiary of Kawasaki, if such a fund
were established.
In connection with this question, you note that none of
the officers or employees of AK Holding or AK Steel will be
officers or employees of Armco or the Kawasaki companies.
You state that it is anticipated that neither the Articles of
Incorporation nor the By-Laws of AK Steel and AK Holding will
enable either Armco or Kawasaki to participate in the
governance of AK Steel or AK Holding, and that the governance
and management of AK Steel and AK Holding will be separate
and independent from Armco and Kawasaki. Certain contracts
and agreements with the two former parents will continue for
AK Steel and Holding after recapitalization such as ArmLP's
obligation to indemnify them for losses and liabilities
relating to ArmLP's management, ownership and operation.
Other arrangements, such as Armco's obligation to indemnify
ArmLP for unemployment benefits up to $20 million, and
certain other costs, will terminate. The companies owning
the partnership have signed a Joint Venture Termination
Agreement, terminating obligations among the partners and
stating what obligations still exist.
It is anticipated that the shares of AK Holding will be
traded vigorously on the open market, leading to large
numbers of different shareholders, and that no single group
of shareholders will hold a controlling interest in AK
Holding.
The directors of ArmLP include Thomas C. Graham, who is
the President and CEO of ArmLP, James F. Will, who is the
Chairman of ArmLP and President, CEO, and Director of Armco,
and Kaiji Emoto, a Managing Director of Kawasaki. The other
four directors of ArmLP include an Assistant to the President
of Armco, a Corporate Vice President and Chief Financial
Officer of Armco, a Managing Director of Kawasaki, and a
Senior Managing Director of Kawasaki. This also will be the
first board of AK Steel. (Mr. Graham will become Chairman,
as well as CEO.) Messrs. Graham, Will, and Emoto will
constitute the board of AK Holding. Prior to the completion
of the recapitalization, the other four directors named above
will resign from AK Steel's board, and the three remaining
directors will choose four "additional independent members"
to be added to the boards of AK Holding and AK Steel by
Messrs. Graham, Will, and Emoto. In addition, AK Holding and
Kawasaki are negotiating an agreement under which, for so
long as Kawasaki owns an agreed upon minimum percentage (15
percent) of the outstanding shares of common stock, AK
Holding will take all action necessary to nominate and
support the nomination of one person designated by Kawasaki
for election as Director of AK Holding (presently Mr. Emoto)
and to solicit proxies in favor of the election of that
person.2/ Finally, according to the prospectus, three of the
seven executive officers of both AK Holding and AK Steel, all
of whom are holdovers from ArmLP, had been employees of Armco
before working for the partnership.
Responses to Questions Posed
To a large extent, responses to your questions depend
upon an analysis of the affiliated relationship or lack
thereof among the business entities. The Act and Commission
regulations provide that committees, including separate
segregated funds, that are established, financed, maintained
or controlled by the same corporation, person, or group of
persons, including any parent, subsidiary, branch, division,
department, or local unit thereof, are affiliated.
Contributions made to or by such committees shall be
considered to have been made to or by a single committee.
2 U.S.C. §441a(a)(5); 11 CFR 100.5(g)(2), 110.3(a)(1), and
110.3(a)(1)(ii). In addition, a corporation may make
partisan communications to and solicit the restricted class
(i.e., executive and administrative personnel and
stockholders, and the families thereof) of its subsidiaries
for contributions to the corporation's separate segregated
fund. 2 U.S.C. §441b(b)(2)(A) and (4)(A)(i); 11 CFR
114.3(a)(1) and 114.5(g)(1). See Advisory Opinion 1993-18.
Where an entity is not an acknowledged subsidiary of
another entity, as in 11 CFR 110.3(a)(2)(i), Commission
regulations provide for an examination of various factors in
the context of an overall relationship to determine whether
one company is an affiliate of another and, hence, whether
their 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 relevant factors in the situation you have
presented are as follows: (A) the ownership by one sponsoring
organization of a controlling interest in the voting stock or
securities of another sponsoring organization; (B) the
authority or ability of one sponsoring organization to
participate in the governance of another sponsoring
organization through provisions of constitutions, by-laws,
contracts or other rules, or through formal or informal
practices or procedures; (C) the authority or ability to
hire, demote or otherwise control the decisionmakers of
another sponsoring organization; (E) common or overlapping
officers or employees, indicating a formal or ongoing
relationship between the sponsoring organizations; (F)
members, officers, or employees of one sponsoring
organization who were members, officers, or employees of
another organization which indicates a formal or ongoing
relationship or the creation of a successor entity; and (I)
an active or significant role by one sponsoring organization
in the formation of another. 11 CFR 110.3(a)(3)(ii)(A), (B),
(C), (E), (F), and (I).
A. Transfer of Funds from the Non-Federal PACs to ArmLP PAC
You have inquired as to ArmLP PAC's ability to receive
funds transferred from two non-Federal PACs without the
consequence of those PACs becoming political committees. In
Advisory Opinion 1984-31, the Commission considered a request
pertaining to the transfer of funds from a corporation's
state committee to its Federal SSF. The Commission noted
that, because the Federal PAC was already in existence, the
state PAC could act as a collecting agent under 11 CFR
102.6(b) and (c) and make the transfer without having to
register and report. In order to make such a transfer,
however, the state PAC was required to obtain written
authorization from the contributors whose contributions
comprised the funds transferred stating their intent to make
a contribution to the Federal SSF under the regulations at
11 CFR 102.6(b) and (c) and 114.5. The contributions of any
contributors who did not state this were to be retained by
the state PAC. Each contribution included in the transfer
was to be reported by the Federal SSF as a contribution from
the original contributor. 11 CFR 102.6(c)(7). In reaching
this conclusion, the Commission assumed that the funds
transferred were permissible under the Act.
The differences between the situation presented in
Advisory Opinion 1984-31 and the situation presented by you
is that one of the state PACs (ABC-PAC) is not the state PAC
of the business entity itself and that the Federal PAC of
ArmLP is not, strictly speaking, the SSF of a corporation.
Commission regulations provide, however, that a collecting
agent may be a committee, whether or not it is a political
committee as defined in 11 CFR 100.5, that is affiliated with
the separate segregated fund. 11 CFR 102.6(b)(1)(i). In
analyzing the affiliated status of ArmLP with Armco and
Kawasaki, as well as the control of the joint venture
partnership by two corporations, the Commission concludes
that the situation in Advisory Opinion 1984-31 is analogous.
See Advisory Opinion 1992-17.
From the information presented by you, it appears that
ArmLP is affiliated with each of its parents. Although
neither Armco nor Kawasaki appears to have a controlling
interest that overrides the other, they each own half of the
limited partnership interest and half of the general partner,
AK Management.3/ See 11 CFR 110.3(a)(3)(ii)(A). See
Advisory Opinions 1992-17 and 1987-34. Compare Advisory
Opinion 1984-36. As fifty percent owners of the general
partner, they share equally the power to participate in the
governance of ArmLP. This is indicated by the presence on
ArmLP's Board of Directors of Armco's President and CEO and
two other Armco officers and of three managing directors of
Kawasaki (with the seventh director, Mr. Graham, presumably
chosen by Armco and Kawasaki or their representatives on the
Board). See 11 CFR 110.3(a)(3)(ii)(B), (C), and (E). See
Advisory Opinions 1992-17 and 1987-34. In addition, the
prospectus material sent by you indicates that the
partnership is the successor to the Eastern Steel Division of
Armco. 11 CFR 110.3(a)(3)(ii)(I). Thus, ABC-PAC, Armco's
state PAC, would be affiliated with Armco L.P. PAC.4/
The Commission notes that the standard for collecting
agent at 11 CFR 102.6(b)(1)(i) refers to affiliation with the
separate segregated fund. The Act does not extend to a
partnership the ability granted to a corporation at 2 U.S.C.
§441b(b)(2)(C) to conduct itself as a connected organization
and benefit from the exemption for establishment,
administration, and solicitation costs. Advisory Opinions
1990-20 and 1982-63, See California Medical Association v.
Federal Election Commission, 453 U.S. 182 (1981).
Nevertheless, the Commission has treated a joint venture
partnership of corporations differently as a result of its
relationship with corporations that could pay the exempt
costs for the partnership PAC. The Commission has permitted
a partnership consisting of two corporate partners with which
it was affiliated to pay the establishment, administration,
and solicitation costs of the partnership PAC without a
partnership contribution resulting. (The general rule, as
stated in that opinion, applies to a partnership owned
entirely by corporations and affiliated with at least one of
those corporations.) Thus, the partnership PAC could
function as a separate segregated fund. Advisory Opinion
1992-17. See also Advisory Opinion 1987-34. Similarly,
ArmLP PAC may function, in effect, as a separate segregated
fund.5/
Based on the foregoing, ABC-PAC, as well as Armco L.P.
Kentucky PAC, may act as collecting agents and transfer funds
from each PAC to ArmLP PAC. This must be done in accordance
with the requirements set in Advisory Opinion 1984-31. In
addition to the notice requirements, particular attention
must be paid to the requirements of 11 CFR 104.12, i.e., the
assumption that the cash-on-hand balance is composed of the
contributions most recently received by the transferring
state PACs and the exclusion of funds not permissible under
the limitations and prohibitions of the Act. See Advisory
Opinion 1990-16.6/
B. Affiliation After Recapitalization
The presence or absence of affiliation between AK
Holding and Armco and between AK Holding and Kawasaki after
the IPO depends upon application of the factors described
above.
After the IPO, neither Armco nor Kawasaki will come
close to owning a controlling interest in the outstanding
common shares. In addition, you anticipate that AK Holding
shares will be vigorously traded on the open market and no
single group of shareholders will hold a controlling
interest. See 11 CFR 110.3(a)(3)(ii)(A).
In assessing the next five factors cited above as
relevant, the disaffiliation of Kawasaki and Armco becomes
problematic. You state that you anticipate that the
governing documents will enable neither Armco, Inc. nor
Kawasaki to engage in the governance of AK Steel and AK
Holding and that the governance and management of AK Steel
and AK Holding will be independent and separate from the
former joint venturers. There is also a Joint Venture
Termination Agreement terminating obligations and continuing
others. See 11 CFR 110.3(a)(3)(ii)(B), (C), and (E).
Significantly, however, the boards of both AK Holding
and AK Steel each contain a high-ranking director or
executive from Armco and from Kawasaki. Sitting on both
boards will be the President and CEO of Armco (Mr. Will) and
a Managing Director of Kawasaki (Mr. Emoto). In addition,
Kawasaki's position on the board is, in effect, an obligation
of AK Holding for the near future. It is also significant
that the directors from Armco and Kawasaki are two of the
three persons choosing the new members of both boards.
Relevant to factor (F), which pertains to former
officers and employees of one sponsoring organization who
were officers or employees with another, is the presence of
three former Armco employees among the seven executive
officers, all of whom are also holdovers from ArmLP. See
11 CFR 110.3(a)(3)(ii)(F). The Commission also notes that
Armco and Kawasaki were instrumental in the formation of the
Armco LP joint venture partnership, the predecessor
organization. See 11 CFR 110.3(a)(3)(ii)(I).
The Commission has addressed possible disaffiliation
situations in prior opinions. Most recently, in Advisory
Opinion 1993-23, the Commission addressed a situation where
the parent spun off its remaining shares in its subsidiary to
the parent's shareholders, after offering one-eighth of its
shares in the subsidiary to the public. The Commission
concluded that the former parent and former subsidiary would
be disaffiliated. The Commission relied partially on the
Separation Agreement between the parent and subsidiary and
considered it to prevail over the presence of some of the
factors set out at 11 CFR 110.3(a)(3)(ii). The Commission,
in distinguishing the situation in Advisory Opinion 1993-23
from similar previous corporate spin-offs where the
Commission declined to disaffiliate, noted, however, that, in
Advisory Opinion 1993-23, there would be a complete
separation of the former subsidiary's group of directors,
officers, and employees from that of the former parent. See
Advisory Opinions 1987-21 and 1986-42.
In view of the background presented as to the
relationships of the companies, the continued presence on the
boards of AK Holding and AK Steel of the high-ranking
officials of Armco and Kawasaki leads the Commission to
conclude that the disaffiliation of AK Steel and AK Holding
from those two companies would be premature at this time.
This does not preclude a different conclusion at a later
point in the operations of AK Steel and AK Holding.7/
C. Change in the Name of the Connected Organization and the
PAC
The Act and regulations require that the name of any
separate segregated fund established by a corporation
includes the full name of the connected organization.
2 U.S.C. §432(e)(5); 11 CFR 102.14(c). The facts presented
by you indicate that AK Steel is the successor organization
to ArmLP. In addition, ArmLP PAC was not only acting as a
PAC "sponsored" by a partnership, but could act as a separate
segregated fund. (See analysis above.) After the
reorganization, what will then be the former Armco L.P. PAC
may be treated as the PAC of AK Steel. If this is done, the
PAC name must include the name of AK Steel in its PAC name,
assuming that AK Steel is acting as its connected
organization. See Advisory Opinions 1993-7, 1986-42, and
1980-98.8/
This response constitutes an advisory opinion concerning
application of the Act, or regulations prescribed by the
Commission, to the specific transaction or activity set forth
in your request. See 2 U.S.C. §437f.
For the Commission,
(signed)
Trevor Potter
Chairman
Enclosures (AOs 1993-23, 1993-18, 1993-7, 1992-17, 1992-16,
1990-20, 1990-16, 1989-8, 1987-34, 1987-21,
1986-42, 1984-36, 1984-31, 1983-48, 1982-63,
and 1980-98)
ENDNOTES
1/ Since April 13, 1978, Armco Employees' PAC has been
registered with the Commission as the separate segregated
fund of Armco, Inc.
2/ According to the Prospectus for the IPO, Kawasaki (with
respect to some of its shares), Armco, Inc., and Mr. Graham
have agreed not to sell any of their shares for a period of
180 days after the offering without the prior written consent
of a representative of the U.S. Underwriters and a
representative of the Managers. With respect to most of its
shares, Kawasaki has made a similar promise to those
representatives covering a year-long period.
3/ In a limited partnership, the general partners are the
managers of the business, as well as liable for partnership
debts beyond their contribution. Black's Law Dictionary 928,
1121 (6th ed. 1990).
4/ The Commission has long held that affiliates may include
entities other than corporations. Advisory Opinions 1992-17,
1989-8, 1987-34, and 1983-48.
5/ In the event that ArmLP PAC functions as a separate
segregated fund, it will have to identify a connected
organization on its statement of organization. 2 U.S.C.
§433(b)(2). Commission regulations provide that a connected
organization may be a corporation which directly or
indirectly establishes, administers, or financially supports
a political committee but makes no provision for a
partnership in that role. 11 CFR 100.6(a). Therefore, if
support is provided directly by the affiliated corporations,
Armco and Kawasaki Steel Investments along with KSCA
(Kawasaki's domestic subsidiaries), or indirectly by the
corporations by virtue of support from ArmLP, ArmLP PAC must
amend its statement of organization by identifying the two
corporations as its connected organizations. Advisory
Opinion 1992-17.
6/ You should note that in Advisory Opinion 1984-31, the
Commission requires compliance with the solicitation
provisions of 11 CFR 114.5 and the opinion addresses
contributions from members of the restricted class of
solicitees. See 11 CFR 114.5(g)(1) and 114.1(c) and (h).
Furthermore, to solicit outside the restricted class requires
additional safeguards not presented in your request. See 11
CFR 114.6(c) and (d). Your requests for authorization from
(i.e., solicitation of) each contributor, therefore, should
not extend to those contributors not in the restricted class,
e.g., non-executive and non-administrative employees, and
employees of a company not affiliated with Armco L.P. You
should note that the determination of which contributions are
represented in the cash on hand must include all of the
recent contributions, not just those from contributors in the
restricted class.
7/ The Commission notes that Kawasaki's interest in AK
Holding raises the question of foreign national involvement
in the solicitation and making of contributions with respect
to Federal and non-Federal elections. See 2 U.S.C. §441e; 11
CFR 110.4(a). Because you did not raise this issue, the
Commission will not analyze it. The Commission, however,
refers you to Advisory Opinion 1992-16 and opinions cited
therein.
8/ The Commission notes that AK Holding is the parent of AK
Steel. There is nothing in the Act precluding a connected
organization from including the parent's name in the name of
the SSF. Advisory Opinion 1989-8.