Question
April 1, 2004
VIAFACSIMILE
Mr.Patrick Sharp
Premerger Notification Office
Bureau of Competition, Room 303
Federal Trade Commission
600 Pennsylvania '1 Ave., N.W.
Washington, D.C. 20580
I amwriting to confirm our understanding of the telephone conversation we had on Thursday,April 1, 2004, concerning the potential reportability under theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSRAct"), of a proposed transition ;discussed below.
ProposedTransaction
Our client] is a minoritystake holder (49%) in a joint venture involving three companies("Companies"), all of which are commonly controlled by the samenatural person. The voting securities arc not publicly traded. Our clientintends to acquire the remaining interests (51%) in the Companies by purchasingthe remaining outstanding voting securities of the Companies for a cash paymentat closing of approximately $20 million, and a payout under an earn outprovision, which is capped at $5 million and conditioned upon the occurrence ofcertain events. Moreover, our client will pay a $2 million bonus to theultimate parent of the Companies which is conditioned on the occurrence ofcertain events, and which is for future services to, be performed by theultimate parent of the Companies related to a separate transaction.
Our client ,acquired itscurrent 49% interest in the Companies in two separate, non-HSR reportable,transactions. It first acquired a 40% interest for approximately $24.1 million,and then, in a subsequent transaction, acquired an additional 9% interest forapproximately $5,4 million. Since the purchase of these shares, the value ofthe Companies has declined such that the Company shares held by our client haveless value today than when acquired.
Our clientbelieves that based on a good faith fair market valuation, the value of theCompanies' share it currently holds is sufficiently small (below $25 million)such that the value for all the Companies is below $50 million, including thecash payment at closing, arid assuming arguendo the maximum $5million earn out payable for the additional shares (Our client believes thatthe earn out's actual fair market value is well below the $5 million maximum).
Conclusions
You confirmed (StaffComment: if LLC or partnership interests are being acquired the underlyingassets (100%) should be the fair market value) that the appropriate way tovalue this transaction is to combine the fair market value of the sharespreviously purchased with the purchase price for the remaining shares. See 16C.F.R. 801.10, 801.13. The purchase price for the additional shareswould include, the, cash payment at closing, as well as the fair marketvaluation of the earn out- You agreed that the $2 million bonus to the ultimateparent of the Companies which is conditioned on the occurrence of certainevents, and which is for future services to be performed, should not beincluded in the value of the Companies. You also confirmed that the correct wayto value the shares of the Companies already held is based on the current fairmarket value of those shares, not the price previously paid. Thus, you agreedthat since the value of the Companies has declined since the initial purchases,it is appropriate to I consider that decline in conducting a fair marketvaluation of those shares.
Assuming that the maximumpurchase price for the remaining securities of the Companies is at most $:25million, and that the current value of the shares already held is below $25million, you concluded that the proposed acquisition of the voting securitiesof the Companies would not be reportable under the HSR Act since the $50million Size of the Transaction Test would not be met. See 15 U.S.C. 18a(a).
Please let me know as soon as possible if youdisagree with any of the conclusions discussed above, or if I havemisunderstood any aspect of your advice. Thank you for your assistance in thismatter.