Question
From:(redacted)
Sent: Monday, November 14, 2005 4:18 PM
To:Verne, B. Michael
Cc:(redacted)
Subject: Treatment of Swap Agreement
Dear Mike --Following up on my voicemail, here is some additional information regarding theswap transaction, which, in my view, should not trigger any reportingobligation for "A," assuming that all other filing requirements aremet.
A holds $40million of C's voting securities. A now enters into a swap contract withinvestment bank B valued at $30 million, pursuant to which A realizes a gain ora loss derived from the gain or loss of the underlying voting securities of C.C's stock is traded publicly. The daily closing price is the benchmark for theswap. If C's stock price rises, A receives cash from B. If C's stock pricefalls, B receives cash from A. In any case, B receives a fee for its servicesfrom A. There is no obligation for either A or B to purchase any of C's stockas a result of the swap agreement, even though B is likely to buy stock in C asa hedge. A has no title to or the power to vote or dispose of B's shares in C,and A has no power to instruct B to do any of these things.
In my view, thetransaction is not reportable, because A has no beneficial ownership of C's votingsecurities beyond the $40 million that it owns outright. The swap agreementdoes not confer beneficial ownership over those voting securities of C that Bmay hold to A, because A does not have title to, or the power to vote ordispose of C's shares. The swap agreement is a financial derivative, and A, asthe "holder" of the derivative, has only one indicium of beneficialownership (the upside/downside from the investment) and will not receive anyother indicia of beneficial ownership. The situation should be identical tothat discussed in Interpretation 55 to Rule 801.1(c)(1) (Premerger NotificationPractice Manual, 3rd Ed., p.71).