Question
From: (redacted)
Sent: Tuesday, March 09, 2004 1:45 PM
To: Verne,B. Michael
Subject: HSR Issues with respectto acquisition of foreign entity
DearMike:
I amwriting to confirm our discussions yesterday regarding an acquisition ofinterests in a foreign entity. For ease of further discussion, I have numberedthe following paragraphs:
1. Aswe discussed, although the target entity is denominated a "corporation"and has equity shareholders that vote for many matters other than directors,the equity certificates being acquired do not allow the holder to vote fordirectors. Rather, the company's directors are appointed by the existingdirectors. Accordingly, this entity currently does not have "votingsecurities" for HSR purposes.
2.Following the acquisition presently under consideration, the target's boardsize will be increased from four to five directors, two of the present fourdirectors will resign, and the acquiring person will have a right to nominatethe remaining three directors. However, this "nomination right" doesnot carry with it an obligation on the part of the non-resigning directors toaccept the nominations of the acquiring person. Moreover, even if there wassuch a legal obligation on behalf of the remaining directors to appoint theacquiring person's nominees, this would not convert the certificates of theentity into "voting securities" for HSR purposes. Therefore, these rights of nomination do notaffect the conclusion that the certificates being acquired are not "votingsecurities".
3. Asa result, the interests being acquired as described above are considered to be"partnership interests" for HSR purposes. Acquisition of these "partnershipinterests" would not be reportable for HSR purposes, unless and until, at the earliest (i) 100% ofsuch interests will be held following an acquisition (subject to the potentialapplicability of 16 C.F.R. 802.50, discussed further below), or (ii) theproposed changes for acquisitions of non-corporate interests (the"Proposed Changes") are implemented (which I understand is expectedto occur toward the end of this summer, soonest). If the acquisition isconsummated even one day prior to implementation of the Proposed Changes, itwill be judged under the current rules, and not subject to any second guessingunder the Proposed Changes.
4.The current expectation is that the acquisition of these "partnershipinterests" will be effected through a tender offer. Although the acquiringperson hopes to acquire 100% of the partnership interests, and "minoritysqueeze out rights" may become available once a certain level of partnershipinterests are tendered (the "minimum condition"), it is not assuredthat (i) the acquiring person will reach the minimum condition, or (ii) even ifthe minimum condition is reached, that the acquiring person will choose toimplement those "squeeze out" rights to actually reach a holding of100% of the partnership interests (except perhaps via a subsequent merger,discussed below). Accordingly, although we did not discuss this issue in ourcall yesterday, I believe it would not be a "gun jumping" or"avoidance" problem (under 16 C.F.R. 801.90) for the partiesto proceed to acquire all partnership interests that are tendered short of100%, subject to the need to evaluate and file HSR as needed before a holding of 100% is reached.
5. Inthe event 100% of the partnership interests will be held prior to the ProposedChanges coming into effect, the transaction is analyzed as an acquisition of100% of the partnership's assets, consistent with long-standing interpretationsof the PNO.In this situation, however, 16 C.F.R. 802.50 would exempt theacquisition of any partnership assets held outside the U.S., if those non-U.S.assets resulted in sales in or into the U.S. in the partnership's last fiscal yearof $50 million or less. If the fair market value of the remaining (U.S.) assets, aggregatedwith the fair market value of any 50% or greater shareholdings in U.S. issuers held by thepartnership, is $50 million or less, the transaction would then fail the "sizeof transaction" test and be non-reportable. In this regard:
a)Minority shareholdings in foreign issuers would be disregarded entirely(neither being assets nor reportable secondary acquisitions, if the acquiringperson is a foreign person), and minority shareholdings in US issuers would beconsidered only to the extent qualifying as a potentially reportable secondaryacquisition (the value of any such secondary acquisitions not counting toward"size of transaction" on the principal acquisition of 100% of thepartnership interests), and
b) Iunderstand that although fair market value is the requisite test for size oftransaction in this scenario rather than book value, the acquiring person isallowed to conclude that book value constitutes fair market value, assumingthat conclusion is reached in good faith.
6.The acquiring entity (the "Purchaser") may itself have both majority andminority stakeholders, but I expect that such ownership has no impact on theforegoing analysis (i.e., if the Purchaser's UPE is a 70% owner of the Purchaser,that does not mean that when the Purchaser acquires 100% of the partnershipinterests, the acquiring person holds only 70% - rather, the acquiring personis deemed to hold the entire 100% on behalf of the Purchaser).
7. Atsome point following acquisition of 100%, or nearly 100%, of the partnershipinterests, the "partnership" may be merged into the Purchaser (the"Merger"). Although at the time we spoke, I thought that followingany such Merger, the "partnership" might be the surviving entity andarguably could have "voting securities" (in the sense of the combinedentity's structure allowing shareholders to elect supervisory directors), infact when and if this occurs, the Purchaser will be the surviving entity, andthe partnership will cease to exist as a separate company. The Purchaser's shareholders,which will then include any remaining minority shareholders of the partnership,will have the right to elect directors of the Purchaser, which will then own100% of the assets and liabilities of the partnership by operation of law.However, I expect you will agree that this post-Merger voting right in thesurviving corporation's shares has no impact on the conclusion that theacquisition of the underlying partnership interests by either the Purchaseroriginally or in the Merger is not a reportable "voting securities"acquisition for HSR purposes. One of several scenarios will result:
a) Ifthe merger occurs before implementation of the Proposed Changes:
i) and100% of the partnership's assets have already been acquired (by virtue ofPurchaser acquiring 100% of the partnership interests), there is nothing moreto acquire via the Merger,
ii) andsomething short of 100% of partnership interests have been acquired via thetender offer - such that Purchaser is first going to 100% as a result of theMerger - the analysis would proceed as above (potentially constituting areportable asset acquisition, unless size of transaction tests are not metfollowing application of the exemption in 16 C.F.R. 802.50).
b) Ifthe merger occurs following implementation of the Proposed Changes, Iunderstand that it may entail an acquisition of non-corporate interests, butprovided that at least 50% of the partnership interests have been acquiredbefore the Merger, would expect this to qualify for the revised"intra-person exemption" (as currently proposed). I would also like todiscuss the possible application of the exemption in 16 C.F.R. 802.50 tothe post-Proposed Changes scenario.
Pleaseadvise if you disagree with any of the foregoing. As always, thank you for yourtime.