Question
From:(redacted)
Sent: Thursday, December 02, 2004 2:55 PM
To:Verne, B. Michael
Cc:(redacted)
Subject: HSR Analysis of Transaction Discussed in 12-1-04 Telephone Call
Hi Mike.
(Redacted) and I appreciate your guidance on the hypothetical we discussed onthe telephone yesterday. We are sending you this e-mail now to confirm ourunderstanding of the appropriate HSR analysis of this rather complextransaction. Specifically, we discussed the following hypothetical.
Fund is a foreign trust, the units of which are held by the public and listedfor trading on a foreign exchange. The unit holders of Fund have the right toelect trustees (akin to directors) of Fund. We understand that the Fund wouldbe considered a corporation under HSR rules.
Fund is planning to acquire the voting securities of a U.S. corporation, I.Fund will acquire these shares through a merger in which is currentstockholders will exchange their current shares in I for a new class ofpost-merger I shares. The transaction will be structured as follows.
(1) Fund directlyor indirectly will form a wholly-owned foreign subsidiary ("ForeignSub") and a wholly owned U.S. subsidiary ("US Sub").
(2) Fund will create a new Class A Unit (described below) which itwill contribute to US Sub.
(3) US Sub will merge with and into I, with I surviving. I willthen hold the Class A Unit. Fund will contribute the surviving entity, I, toForeign Sub.
(4) In the merger, each share of I capital stock outstandingimmediately before the merger will be converted into a number of participatingpreferred shares of I and Foreign Sub will grant the holders of participatingpreferred shares exchange rights entitling the holders to exchange theirparticipating preferred shares for ordinary units of the Fund or for cash. Theholders of the participating preferred shares of I will have the right pursuantto I's Amended Certificate of Incorporation to elect one of I's threedirectors, so long as the holder of the Class A Unit is entitled to appoint atleast one trustee of Fund as described below. This director will enforce theClass A Unit rights described below.
(5) The holders of certain classes of I stock are planning toconvert their shares of such stock into shares of I common stock contingentupon and concurrent with the merger.
(6) The Class A Unit will have certain governance rights under theFund's Declaration of Trust with respect to the Fund so long as X (certaincurrent stockholders of I who are venture funds affiliated with each other butnot under common control) holds a majority of the "RetainedInterests" the interests that the current I stockholders will hold in I asa result of the merger (and the Fund pursuant to an exercise of exchangerights). These governance rights will permit the holder of the Class A Unit toappoint two of the Fund's seven trustees (directors) so long as the RetainedInterests represent a certain percentage of the Fund's fully diluted equity interests.(If the Retained Interests represent a specified smaller percentage of theFund's fully diluted equity interests, the holder of the Class A Unit will beable to appoint one of the Fund's seven trustees.) In addition, under theFund's Declaration of Trust, the holder of the Class A Unit will vote for theFund trustees nominated by the governance and nominating committee of Fund.Also, under I's amended certificate of incorporation, all powers and rights ofI and its board with respect to the Class A Unit will be exclusively vested inthe holders of a majority of the shares of Participating Preferred Stock (X).The Class A Unit does not have any economic rights with respect to the Fund,except for redemption at nominal value upon the termination of its governancerights. X, as the majority holders of I participating preferred stock, willeffectively determine which two trustees to appoint to the Fund's board.
We understand that the transaction would be analyzed as a merger. We alsounderstand that the conversion of the current I stockholders' shares intoshares of I participating preferred stock would be reportable if thresholdtests are satisfied and no exemption applies. If the c(10) exemption applies toone or more of I's current stockholders, however, such stockholder(s) would nothave to report its or their acquisition of participating preferred shares inthe merger. We understand that when applying the analysis under c(10), we donot give effect to the conversion of certain I stockholders' shares into commonstock which is contingent and concurrent with the merger (as described above)in calculating the current percentage of voting securities held.
We also understand that the Class A Unit would be deemed a voting security. However,if I is deemed to beneficially hold the Class A Unit, and if the Fund is theultimate parent entity of I as a result of the merger, then I's acquisition ofthe Class A Unit would be exempt from reporting requirements under theintraperson exemption. Under the facts we have described, we understand that Iwould be deemed to beneficially hold the Class A Unit.
Finally, we understand that any I stockholder who wants to exchange itsparticipating preferred shares for units of the Fund could have a filingobligation if threshold tests are met and no exemption applies.
Mike, please let us know if you agree with our analysis or if we havemischaracterized in any way the proper HSR analysis of this transaction. Asalways, thanks for your help.