Question
From: (redacted)
Sent: Thursday, October 18, 2007 1:01 PM
To: Verne, B. Michael
Subject: LLC Option Question
DearMike,
I hope all is well. I have a question relating to a put-calloption for non-corporate interests. I assume that the treatment of such anoption is similar to that of a put-call option for voting securities, butwanted to confirm that you agree with my analysis, which is set out below:
Company A plans to acquire all of the commonnon-corporate interests of LLC for approximately $20M through a PurchaseAgreement, which represent about 10% of the interests in the LLC. As a resultof this acquisition, under the terms of an LLC Agreement, Company A will nothave the right to 50% or more of the profits, or to 50% or more of the assetsupon dissolution of LLC. Company A and LLC meet the size-of-person test.
Atthe same time that the Purchase Agreement is executed, Company A will alsoreceive through the LLC Agreement a "put-call option" to acquire allof the preferred interests of LLC for up to an additional $70M. No additionalconsideration will be paid by Company A to acquire this option. This"put-call option" is exercisable for a 2-year period. However, CompanyA has the option to pre-purchase preferred interests under the terms of theoption. Under the terms of the LLC Agreement, until Company A holds $90M worthof the non-corporate interests of LLC, Company A will not acquire control ofthe LLC by having the right to 50% or more of the profits, or assets upondissolution.
Ihave concluded that until Company A has either: (1) exercised the put-calloption, or (2) has pre-purchased preferred interests pursuant to the optionsuch that the total value of its non-corporate interests is valued at $90M(thus conferring "control" of LLC as defined by 801.1(b)(1)(ii)),Company A has not made a reportable acquisition of non-corporate interests.
I base this conclusion upon the fact that, as with votingsecurities, acquisition of an option to acquire non-corporate interests is notreportable, but exercise of that option may be reportable. See ABA Section ofAntitrust Law, Premerger Notification Manual, Interpretation 29 (4th Ed. 2007)("[t]he granting of an option to purchase voting securities at some futuretime is, by itself, generally not reportable, although the exercise of thatoption may give rise to reporting and waiting period obligations."). Thisis so provided that there is no agreement or present intention for Company A toexercise the option, and that its exercise is subject to legitimatecontingencies.
httpl/www.ftc.govAc/hsr/informallopinions/0402013.htm
I further base thisconclusion on the fact that the "put-call option" does not transferbeneficial ownership to Company A. PNO Manual, Interpretation 46, ("[t]hePNO recognizes that there are some situations involving the use of put-callagreements that may not require reporting under HSR, there are other situationsinvolving the use of put-call arrangements that may transfer sufficient indiciaof beneficial ownership to require an HSR filing."). This is because theLLC will continue to hold title to the LLC interests as well as bear the riskof loss or gain until the option is exercised in whole or in part. Therefore,Company A will not gain beneficial ownership of the LLC interests that wouldconfer control until the option to acquire all of the preferred non-corporateinterests of LLC is exercised, or until sufficient non-corporate interests areacquired by Company A to confer control under the LLC Agreement.