Question
From:(redacted)
Sent: Thursday, October 13, 2005 10:08 AM
To:Verne, B. Michael
Subject: HSR Questions - Rules 801.2 and 801.40
We would appreciate your comments about whether the following proposedtransaction is subject to the notification and waiting period requirements ofthe HSR Act, and, if so, how to report same. Wedescribe below our preliminary analysis with respect thereto.
1. Company A is a privately held C-core withapproximately 15 shareholders, none of which controls A. Some of A's votingsecurities are owned by two private equity funds (PEF1 and PEF2, or PEFs) whichare noncorporate entities whose general managers are controlled by the sameperson. A has total assets of approximately $50M and 2004 sales ofapproximately $80M.
2. Companies B and C are privately heldC-corps with five or six shareholders each, and each is controlled by the sameindividual shareholder. B has total assets of approximately $25M and 2004 salesof $70M, and C has total assets of $10M and 2004 sales of approximately $45M.The individual shareholder who controls B and C may have other investmentassets, but the amount thereof is not yet known (although the amount of suchassets does not appear relevant for reasons discussed below).
3. A, the controlling shareholder of Band C, and one or both of PEF1 and PEF2 have entered into a letter of intent(LOI) to form company D as a C-core to serve as a holding company that will owncompanies A, B, and C as wholly-owned subsidiaries.
4. One or both of PEF1 and PEF2 (or otherPEFs whose general managers or general partners are controlled by the sameperson as PEF1 and PEF2), will contribute their voting stock in A andapproximately $20M in cash to D, and will receive voting stock in D.
5. A's other shareholders will contributetheir voting stock in A and will receive up to 25 percent of the value thereofin cash and the balance of 75 percent in voting stock of D. No singleshareholder (treating PEF1 and PEF2 as a single person for this purpose) willreceive stock in D (and/or cash and stock in D) with a value in excess of $53.1M, although collectively the shareholders of A will receive in excess of $53.,1M in cash and stock in D.
6. The LOI provides that the shareholdersof B and C will contribute their stock in B and C, and will receiveapproximately $80M in cash, and that the controlling shareholder of B and Calso will receive stock in D with an approximate value of $10M. The controllingshareholder in B and C will receive cash and stock in D with an approximatetotal value in excess of $53.1 M: No other shareholder of B or C will receivecash in excess of that amount.
7. The PEFs will arrange for D to borrowapproximately $100M in senior debt, but we assume at this point that there willbe no guarantees for this debt by D's shareholders, any of the PEFs, theirgeneral managers/partners, or the person who controls same.
8. The PEFs may (and we assume forpresent purposes will) have the right to designate 4 of 7 directors for D'sboard. No single person (treating all PEFs as a single person for this purpose)will own 50 percent or more of D's voting securities, or will have the right toreceive 50 percent or more of D's profits or its assets upon dissolution.
9. None of A, B, or C engage in anymanufacturing.
10. Based on our review and analysis ofthe HSR Act and the FTC Premerger NotificationRules, it appears that, pursuant to Rule 801.2(d)(2)(iii), (i) the transactionshould be treated as a consolidation, (ii) that A, and B and C together(because they have the same UPE), are to be treated as both acquiring andacquired persons, and (iii) that each is deemed to be acquiring all of thevoting securities of the other.
11. We also have reviewed Rule 801.40 butpresume that it does not apply given the statement in Rule 801.40(a) exceptingfrom that rule the formation of a joint venture or other corporation inconnection with a merger or consolidation.
12. Considering first A's deemedacquisition of B and C, it appears that the transaction will be reportable if(i) the purchase price is determined in the parties' agreement or A's boardestimates in good faith that the fair market value of the voting securities ofB and C exceeds $53.1 M, (ii) the size of person tests are satisfied, and (iii)no exemption applies.
It appears from the facts described above that the purchase price for the Stockof B and C is determined in the parties' LOI ($90M), and that the size of persontest of 15 USC 18a(a)(2)(B)(ii)(II) would be satisfied,in that A has total assets and annual net in excess of $10.7M, and B and Ccollectively have annual net sales in excess of $106.2M.
13. Considering B and C's deemedacquisition of A, it appears that the transaction will be reportable if (i) thepurchase price is determined in an agreement of the parties or the controllingshareholder of B and C, or the boards of B and C, estimate in good faith thatthe fair market value of the voting securities of A exceeds $53.1 M, (ii) thesize of person tests are satisfied, and (iii) no exemption applies.
The LOI does not address the terms for the contribution of A's stock, so the pricefor same is not yet determined. It appears from the facts described above thatthe size of person test of 15 USC 18a (a)(2)(B)(ii)(III) would be satisfied, in that B and C collectively have annual netsales in excess of $106.2M, and A has total assets and annual net sales inexcess of $10.7M.
14. Based on the above statement of factsand analysis, we conclude that A, and the controlling shareholder of B and C,must file for A's deemed acquisition of the voting securities of B and C, andthat these parties also may need to file as to the deemed acquisition of A bythe controlling shareholder of B and C if the size of that deemed transactionexceeds $53.1 M.
15. We also conclude that neither D northe PEFs need file, in that the PEFs do not control A and thus are not A's UPE,and, pursuant to Rule 801.2(d)(2)(iii), neither D nor any UPE of D is deemed tobe the acquiring or acquired person with respect to the consolidation.Additionally, although the PEFs will contribute cash and receive voting stock ofD (in addition to the voting stock of D that they will receive for contributingtheir voting stock in A), the size of this transaction is below $53.1 M.
16. We understand that A, and thecontrolling shareholder of B and C, need only file one Form each, and that onlyone filing fee will be paid, even if both deemed acquisitions of the otherexceed the size of transaction threshold. Please confirm same. Also, weunderstand that, pursuant to Rule 803.9(b), a single filing fee would be paidbased on the greater of the two sizes of transaction.
Please advise if you agree with ourunderstanding that (i) the transaction described above is to be treated as aconsolidation in accordance with Rule 801.2, (ii) that A, and the controllingshareholder of B and C, will be subject to the notification and waiting periodrequirements of the HSR Act with respect to A's deemedacquisition of B and B, (iii) that these parties may have to file with respectto the controlling shareholder's deemed acquisition of A if the size oftransaction test is satisfied, in which case both parties will file as bothacquiring and acquired persons, and (iv) that D and the PEFs do not have anyfiling obligation. Also, please confirm that any party filing in bothcapacities may file a single form, and that a single filing fee would be paidbased on the greater of the two sizes of transaction.