Question
December 5, 2005
B. Michael Verne
PremergerNotification Office
Bureau ofCompetition
Federal TradeCommission
7th & Pennsylvania Avenue, NW
Washington, DC 20580
Dear Mike:
OnNovember 23, 2005, I sent you a letter confirming myunderstanding of a telephone conversation we had on November 18, 2005 concerning the potential reportability under theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act") of proposed transactions. You agreed that thetransactions as described would be HSR exempt. Ispoke with you again on November 30, 2005 regarding an additional factualpossibility, outlined below, which you confirmed also would not trigger an HSR reporting obligation.
Aspreviously described, a private limited company, Newco, is being formed underthe laws of the United Kingdom to acquire andoperate two businesses, U.S. Target and Non-U.S. Target. You had confirmed thatNewco would be its own ultimate parent for HSRpurposes at the point of closing on the acquisition of these two companies asthere was no shareholder holding 50% or more of the voting securities of Newcoand no entity with the contractual right to appoint half or more of the boardof directors of Newco. The largest shareholder of Newco, Company A, will onlyhold 49.9% of the voting securities of Newco at closing through its holding ofthe A shares of Newco. In addition, Company A, through its holding of the Ashares would have the right to appoint without any other shareholder approval aminority of the directors of Newco.
Thefollow-up inquiry relates to the potential increased voting rights for the Ashares of Newco. As previously described, in very specific circumstances, theholders of the A Shares will have the ability to trigger increased votingrights at the shareholder level (perhaps up to 85% of the votes. Thesecircumstances are likely to include serious financial underperformance by Newcoand its subsidiaries. When we first spoke, I indicated that in thesecircumstances, Company A would transfer some of its shares to an independentappointee so as to keep its voting rights at the shareholder level at less than50%. While it is still the most likely outcome that Company A would talemeasures to keep its voting rights at less than 50%, it is possible thatCompany A would continue to hold all of the A shares after the increased votingrights are triggered.
Youconfirmed during our conversation on November 30, 2005 that the possible increase in votingrights for the shares of Newco after the closing on the proposed acquisitionsof U.S. Target and Non-U.S. Target would have no impact on the conclusion thatthese proposed acquisitions by Newco are not HSRreportable. You agreed that the determination that Newco is its own ultimateparent, i.e., not controlled by Company A or any other entity, and the size ofthe parties test analysis would be based on the conditions that would be trueat closing, and would not be influenced in any way by post-closing changes thatmay effect, for example, the control of Newco.
Youalso confirmed that the possible increase in voting rights for the A sharesunder certain contingent circumstances would not trigger any other HSR reporting obligation, even if Company A continued to hold all ofthese shares. In other words, Company A will not be deemed to have made apotentially reportable acquisition from Newco if at some point in the futureevents occurred, such as a decline in the financial position of Newco,resulting in Company A obtaining increased voting rights through its holding ofthe A shares. You agreed that the obtaining of the increased voting rightswould not be deemed a potentially HSR reportable"conversion" under 16 C.F.R. 801.1(f)(3). The Statement ofBasis and Purpose to the HSR rules distinguishes a conversion (whichinvolves an exercise of a right inherent to the ownership of voting securitiesto exchange those securities for other voting securities that currently allowthe holder to vote for directors) from an "automatic maturation of aninchoate right" such as rights accruing to holders of preferred stock upona failure to pay dividends. See 48 F.R. 34429 (July 29, 1983); 43 F.R. 33463 (July 31, 1978). You agreed that the increased votingrights in the Company A shares would be viewed as an automatic maturation of aninchoate right, and accordingly not a potentially reportable HSR event. Mechanically, if a trigger event were to occur, Company Awould need to serve a written notice on Newco before the increased rights wentinto effect. This would, among other things, allow Company A the ability toassign away some of the Company A shares if it so chose to avoid having controlof Newco for purposes such as corporate consolidation. My understanding is thatthe fact that Company A would need to give notice before the increased rightswent into effect would not change the conclusion that the increased votingrights are still treated as a non-reportable automatic maturation of aninchoate right.
Pleaselet me know as soon as possible if you disagree with any of the conclusionsdiscussed above, or if I have misunderstood any aspect of your advice. Thankyou for your assistance in this matter.