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Date
Rule
801.1(f)
Staff
Michael Verne
Response/Comments
I think that A is probably acquiring the notes with the expectation that they will attain voting rights. Given that and the fact that he has time to anticipate this event and file if necessary, Im inclined to say that when the notes attain voting rights, a potentially reportable conversion has occurred. A could put the notes in escrow until the vote occurs and if the notes attain voting rights, it could file and observe the waiting period prior to taking them out of escrow.

Question

From: (redacted)
Sent: Wednesday, May 18, 2005 11:31 AM
To: Verne, B. Michael
Cc: : (redacted)
Subject: Question

Hi, Mike - Iwas hoping to get your input on the following. Please feel free to call me at :(redacted) to discuss (I just thought it would be easier to lay the factsout in writing)...

Company A, ourclient, is acquiring notes of Company B. The notes do not presently entitle theholder to vote for directors of the issuer but, upon amendment of Company B'scharter, the noteholders will have the same voting rights for director ascommon stock holders of Company B. Company B has agreed, via a PurchaseAgreement, to hold a stockholder's meeting and use its reasonable best effortsto obtain a stockholders vote approving the charter amendment as soon aspracticable but in no event earlier than a certain date which is a few monthsaway. If the amendment is approved, there is a 5% limitation on voting (e.g.,even if the notes would represent 10% of Company B's common stock on anas-converted basis, the charter will limit voting to 5%). Although it is likelythat shareholders will approve the amendment, there is no guarantee. By theirterms the notes of Company B will become convertible into common stock ofCompany B on or after a date certain next year. Additionally, Company Acurrently has a contractual right to appoint one director to the board ofCompany B.

My Thoughts:


Company Adoes not hold voting securities until the charter is amended to give Company Athe right to vote for directors of the issuer. At such time, however, an acquisitionis not deemed to have occurred and no notification is necessary because therehas not been a "conversion" in accordance with 801.1(f)(3) (e.g., anexercise of a right inherent in the ownership or holding of particular votingsecurities to exchange such securities for securities which presently entitlethe owner to vote for director of the issuer). In the event of a conversioninto common stock, the conversion may be reportable if the jurisdictionalthresholds are met (and if they are Company A will need to file and observe awaiting period before receiving common stock).

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