Question
From:(redacted)
Sent: Friday, October 14, 2005 12:00 PM
To:Verne, B. Michael
Subject: Question re: 801.90
Hi Mike.
I am writing to seek your guidance as to whether the followingtransaction could be construed as a device for avoidance under 16 C.F.R.801.90.
Funds affiliated with A and B are planning to acquire 100% of thevoting securities of C. The value of 100% of the voting securities of C isgreater than $53.1 million but less than $212.3 million, so the size-of-personthreshold test would apply. If Newco is its own ultimate parent entity("UPE"), it would not satisfy the $10.7 million portion of thesize-of-person threshold test and the acquisition of C would not be reportable.
Initially, A and B envisioned the transaction as follows.
1. A and B form Newco as a "C"corporation, capitalize it with approximately $45 million, and are issuedPreferred A and common stock.
2. Newco forms a wholly owned subsidiary,Newco I, and contributes the $45 million into Newco I, along with shares ofNewco Preferred B and common stock together representing 19.9% of Newco'sequity.
3. Newco I buys 100% of the stock of Cfrom the C shareholders under a stock purchase agreement. The purchase price is$62.5 million plus 19.9% of Newco stock.
4. Under this structure, all shareholderswould be shareholders of a single company, Newco, which would own 100% of NewcoI, which in turn would own 100% of C.
Initially, A and B assumed that the common and preferred stock of Newco wouldhave rights to vote for Newco directors, but that the parties would enter intoa voting agreement under which everyone would agree to vote their shares toelect to the Newco board two directors designated by the funds affiliated withA, one director designated by the funds affiliated with B, one directordesignated by the former C stockholders who will become Newco stockholders, andthree independent directors.
Under these original plans, Newco would be its own UPE once it acquires C andthe stockholders of C acquire shares of Newco stock in exchange for theirshares of C stock. However, one of the A funds ("A Fund I"), notunder common control with the other A funds under HSR "control" tests, would be the UPE of Newco just beforethe acquisition of C because it would hold just over 50% of the votingsecurities of Newco after step #1 described above. If A Fund I is the UPE ofNewco before Newco acquires the stock of C, the size-of-person test would besatisfied and the acquisition of C would be HSRreportable.
Cognizant of this outcome, the parties realized that they could accomplishtheir objectives with respect to the acquisition of C and the composition ofthe Newco board through other means which would not result in A Fund I beingthe UPE of Newco before the acquisition of C. Specifically, the fundsaffiliated with A and B are considering the following (hereafter, the"Alternative Structure").
1. Funds affiliated with A and B form Newco and collectively contribute $45million to Newco. The A funds would receive 100% of Newco Class A Preferredshares and 66 shares of Class A Common. The holders of the A Preferred shareswould have the right to vote as a class for two of Newco's seven directors. Theholders of the Class A Common shares would have 1/z vote per share. The B fundswould receive 100% of Newco Class B Preferred shares and 33 shares of Class BCommon. The holders of the B Preferred shares would have the right to vote as aclass for one of Newco's seven directors. The holders of the Class B Commonshares would have one vote per share. The Class A Preferred and Class BPreferred shares would be convertible into Class B Common shares at the optionof the holders at any time. The Class A Common shares would convert into ClassB Common Shares upon the conversion of any of the Preferred.
2. Newco forms a wholly owned subsidiary, Newco I, and contributes the $45million into Newco I, along with shares of Newco Class C Preferred and Class BCommon representing 19.9% of Newco's equity.
3. Newco I buys 100% of the stock of C from the C shareholders under a stock purchaseagreement. The purchase price is $62.5 million plus 100% of the Newco Class CPreferred shares and shares of Class B Common representing 19.9% of the totalCommon Stock. The holders of the Class C shares voting as a class would havethe right to elect one of Newco's seven directors. (At the time of theacquisition of C, only three of Newco's seven authorized director seats wouldbe filled.) Like the Class A and B Preferred shares, the Class C Preferredshares would be convertible into Class B Common Stock at the option of theholders.
4. After the acquisition of C, the holders of Class A and B Common Stock votingtogether as one class would elect three independent directors of Newco to fillthe remaining vacancies.
Mike, I have two questions for you. First, assuming that A Fund I will holdless than 50% of the voting securities of Newco under the AlternativeStructure, please confirm that under the Alternative Structure described above,Newco would be considered its own UPE at the time it acquires C even though theA funds collectively will have elected two of Newco's seated three directors,because seven directors will have been authorized.
Second, please advise whether the Alternative Structure could be considered adevice for avoidance under 16 C.F.R. 801.90. Under the AlternativeStructure, the A funds collectively would hold 50% of the voting securities ofNewco under the 16 C.F.R 801.12 formula and before Newco's acquisitionof C, but A Fund I itself would hold less than 50% of the voting securities ofNewco under the 801.12 formula and before Newco's acquisition of C. Althoughthe impetus for the Alternative Structure may be to avoid an HSR filing, the parties would not "undo" the structurepost-closing. A Fund I would not hold 50% of the voting securities of Newcopre- or post-acquisition of C, nor would it have the power to elect 50% or moreof the authorized directors of Newco pre- or post-acquisition of C.
In short, assuming for the sake of argument, that A and B decide to follow theAlternative Structure in order to avoid an HSRfiling, would the parties not be deemed to have engaged in a device foravoidance under the principles of Interpretations ##194 and 195 of the ABASection of Antitrust Law, Premerger Notification Practice Manual (3d ed. 2003)because the Alternative Structure accomplishes the parties' original plans,including plans related to the structure of the Newco board, and the partieswould not undo the structure after the closing with C?