Question
March 18, 2005
VIA EMAIL
Michael Verne
Premerger Notification Office
Federal Trade Commission
Room 303
600 Pennsylvania Avenue, N. W.
Washington, DC 20580
Re: HSR Analysis
Dear Mike:
Thisletter confirms our telephone conversation on March 17, 2005 with my colleague (redacted) regarding a proposed transactionwhich may be reportable under HSR.
Aswe discussed, a newly formed Ontario trust ("Trust"') willform a wholly-owned Canadian subsidiary ("Acquire Co.") withproceeds from an initial public. offering of the Trust's units. Acquire Co.will acquire, by way of direct investment (the "Investment'''),newly issued voting securities and notes of a U. S.corporation (`'Tams"). Target will use the proceeds received fromAcquire Co. and proceeds of a third party bank financing to (i) redeem its ownvoting securities from Target's existing shareholders (other than Acquire Co.)and (ii) pay off existing third party debt financing. The existing shareholdersof Target prior to the Investment (the "Existing Shareholders")will retain a minority interest in Target immediately after the redemption.
Ifthe acquisition price (or fair market price (MV correction to Value),if applicable) of Target's voting securities acquired by Acquire Co. is $50million and the notes are issued for $150 million, we understand, and youconfirmed that there would be no HSR filingbecause (i) the notes are not voting securities under HSR, (ii) Acquire Co.'s acquisition of $50 million in votingsecurities would not meet the size-of-transaction threshold, (iii) amounts usedto pay off third party lenders (liabilities) are not included in thesize-of-transaction analysis (Interpretation 93 in the PNO Manual) and (iv) the redemption of the Existing Shareholders'voting securities is exempt under 16 C.F.R. 802.30 (Example 4).
Wealso asked and you confirmed that the above conclusion would not change (i) ifthe value of the voting securities held by the Existing Shareholders andredeemed by Target is in excess of $53.1 million or (ii) whether or not AcquireCo.'s initial investment in Target for $50 million is for more or less than 50%of the outstanding voting securities of Target or the redemption is for more orless than 50% of the outstanding voting securities of Target (i.e., if the redemptionis for more than 50% of the outstanding voting securities, there would be achange of control of Target as a result of the redemption). We understand thataccording to Interpretation 190 in the PNO manualredemptions can be considered transactions or devices for avoidance undercircumstances where there are no legitimate business reasons for the structure.As we discussed, under the proposed transaction described in this letter, thereare legitimate business reasons for the contemplated structure (including taxreasons) and, accordingly, you confirmed that this fact pattern does not raiseany issues of avoidance under 16 C.F.R. 801.90.
Youalso confirmed that the PNO's policy in respect of 16 C.F.R.801.11(e)(1)(ii) is that "all funds exhausted as a result of atransaction" can be deducted from the assets of an entity without aregularly prepared balance sheet and that this would specifically include debtrepaid to third party lenders (i.e., that the 801.11 (e)(1)(ii) deductionis not strictly limited to "cash ...used...as consideration" andtransaction expenses).
Finally,with respect to a question regarding the PNO's positionon acquisitions which are conditioned upon each other and structured to beconsummated simultaneously, you confirmed that Interpretation 230 in the PNO Manual accurately describes the PNO'scurrent position. Interpretation 230 states that the PNO will not view multi-step transactions as simultaneous, but willanalyze all possible transaction sequences and allow parties to choose asequence that minimizes the number of filings required as long as at least onefiling is made.
Pleaseconfirm that this letter accurately reflects our discussions. As always, thankyou very much for your help.