Question
November 23, 2005
Michael Verne
PremergerNotification Office
Bureau ofCompetition
Federal TradeCommission
7th & Pennsylvania .venue, N
Washington, DC 20580
Dear Mike:
Iam writing to confirm my understanding of a telephone conversation we had on Friday, November 18, 2005 concerning the potential reportabilityunder the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended("'HSR Act"), of proposed transactionsdiscussed below.
PROPOSED TRANSACTIONS
Aprivate limited company ("Newco") is being formed under the laws ofthe United Kingdom to acquire and operate two businesses: (1) a U.S. issuer("U.S. Target") valued at in excess of $53.1 million but less than$212.3 million; and (2) a foreign issuer ("Non-U.S. Target") with noU.S. assets and sales in or into the United States of less than $53.1 millionin its most recently completed fiscal year.
Share Capital
The share capital of Newco will be made up of four differentclasses of shares:
A Shares - held by aventure capital firm ("Company A");
B Shares - held byindividuals who will be brought in to manage Newco and its subsidiaries;
C Shares - held bythe sellers of the U.S. Target; and
D Shares - held bythe sellers of the Non-U.S. Target.1
Voting Rights
The voting rights of the shares at shareholders' meetings will beas follows:
A Shares - 49.9%;
B Shares - 35.110;and
C Shares and D Sharestogether - 15%.
Theconsent of the holders of the A Shares will be required for certain keydecisions (including the appointment of any director to the board). Theconsent of the holders of the C Shares and D Shares will be required forcertain key decisions.
Economic Rite
IfNewco is sold or liquidated, the percentage of the proceeds of a sale orliquidation which will be received by the holders of each class of shares willvary depending on the sale price or liquidation value. It is likely that theholders of the A Shares will receive more than 50% of the economic value on asale or liquidation.
Structure of the Board
Oncompletion of the proposed transaction, it is anticipated that the board ofdirectors of Newco will either be made up of 5 individuals or 3 individuals.
Ifthere are 5 Newco directors, the initial composition of the board of directorsof Newco will be as follows:
3 of these directorswill be the individual owner managers holding B Shares; and
2 of these directorswill be appointed by the holders of the A Shares (the "Company ADirectors)").
Ifthere are 3 Newco directors, the initial composition of the board of directorsof Newco will be as follows:
2 of these directorswill be the individual owner managers holding B Shares; and
1 of these directorswill be a Company A Director, that is appointed by the holders of the AShares.
Atthe board of directors level, each director will have one vote on eachdecision. The consent of the holders of the A Shares will be required forcertain key decisions. The appointment of a Company A Director will not requirethe approval of the shareholders or the board of directors. The appointment ofa director, who is not a Company A Director, will either be made (i) by amajority of the shareholders, or (ii) by the board of directors as a whole andwill be subsequently approved by the shareholders (voting in the proportionsset out above) at the next annual general meeting which is called. The holdersof the A Shares will be able to block the appointment of a director but willnot be able to force the other shareholders to accept the appointment of anydirector (save in the case of the appointment of a Company A Director).
Increased voting rights
In very specificcircumstances, the holders of the A Shares will have the ability to triggerincreased voting rights at the shareholder level (perhaps up to 85% of thevotes). These circumstances are likely to include serious financialunderperformance by Newco and its subsidiaries. In these circumstances, CompanyA would transfer some of its shares to an independent appointee so as to keepits voting rights at the shareholder level at less than 50%.
Funding Arrangements
Immediatelyprior to the purchase of the two targets, Newco will be funded as follows:
- Company A and the management of Newco will subscribe for shares in Newco;
- Company A will lend money to Newco (which will issue loan stock, a type of nonvoting stock, in return); and
- A bank will make various loan facilities available to Newco, some to support the acquisition of the targets and others to finance ongoing working capital.
Immediatelyprior to the purchase of the two targets, Newco will have no assets other thancash. The value of the cash held by Newco will be less than $106.2 millionexcluding cash to be paid to the sellers of U.S. Target and expenses related tothe purchase of U.S. Target. The ultimate parent of U.S. Target has more than$10.7 million in total assets but does not have total assets or annual netsales equal to or greater than $106.2 million.
ANALYSIS AND CONCLUSIONS
Youconfirmed our understanding that the proposed transactions described above willbe exempt under the HSR Act. Specifically, based on ourconversation, you agreed as follows:
1.The formation of Newco is exempt under the HSR Act.I understand that the formation of Newco will be HSR Act exempt regardless of the value of the voting securities to beacquired in Newco by any shareholder at the time of formation since Newco willonly hold cash which is an HSR exempt asset. See 16 C.F.R. 802.4.
2.Newco will be deemed its own ultimate parent entity for HSR purposes, that is it will not be deemed controlled by Company Aor any other entity for HSR purposes. We discussed that the testsfor control applicable to Newco are the holding of 50% or more of the votingsecurities, and the contractual right to appoint half or more of the board ofdirectors. See 16 C.F.R. 80 I.1(b).
Youconfirmed that the percentage rights to profits in Newco or assets upondissolution was not relevant to the control of Newco for HSR purposes since Newco is a corporate entity with votingsecurities.
3.The acquisition of the Non-U.S. Target is HSR exemptregardless of its value as it does not hold assets in the U.S. and did not have sales in or into the United States exceeding $53.1 million in its mostrecent fiscal year. See 16 C.F.R. 802.51.
4.As the value of the acquisition of U.S. Target is less than $212.3 million, theacquisition is not reportable unless the size of the parties test is met. See15 U.S.C. 18a.
5.As Newco is a newly foamed entity with no regularly prepared financials, iredetermining the total assets of Newco, cash that will be used as considerationin the acquisition of U.S. Target and cash that will be used for expensesincidental to the acquisition of U.S. Target should be excluded. See 16C.F.R. 801.11(e). As neither Newco or the ultimate parent entity of U.S.Target is at least a $106.2 million person for HSR purposes, the size of the parties test isnot met, and accordingly the acquisition of U.S. Target is HSR Act exempt. See 15 U.S.C. 18a.
Footnote
1 I did not reference the D shares duringour conversation but understand that the existence of these shares will have noimpact on the analysis.