Question
From: (redacted)
Sent: Monday, December 26, 2005 5:57 PM
To: Verne,B. Michael
Subject: ReorganizationQuestion
Mike-
Another questionin the reorganization area.
XYZ is a debtor inbankruptcy. Under the reorganization plan, the secured noteholders of XYZ willform New XYZ.
Uponconsummation of the plan, the secured noteholders will-
1. Surrendertheir old notes.
2. Purchase inthe aggregate $50 million in voting preferred stock.
New XYZ will-
1. Borrow $10million from a bank.
2. Issue commonstock and $100 million in new notes to the XYZ secured noteholders in exchangefor the old notes (which have a substantially greater principal amount).
3. Acquire allof the assets (but none of the liabilities) of old XYZ, in exchange for thecash that it receives from the preferred stock issuance and the bank borrowingand the extinguishment of the old notes.
XYZ will-
1. Use the cashfrom New XYZ to pay off unsecured creditors.
2. Arrange forcertain other of its liabilities to be assumed by its former control persons(unrelated to the secured noteholders).
All of thesetransactions will occur simultaneously, as is typical upon consummation of aplan of reorganization.
No single holderwill receive voting securities of New XYZ valued in excess of $53.1 million,and no person will control XYZ for HSR purposesupon consummation of the plan. However, the assets acquired by New XYZ willhave a fair market value in excess of $212.4.
Q1. Is theacquisition of assets by New XYZ from XYZ reportable? Ordinarily, one might sayyes, because the size of the person test is inapplicable. Here, however, whatis really happening is a bankruptcy reorganization of XYZ, as all the transactionsare occurring pursuant to the plans with the secured noteholders becoming theequity holders of the reorganized company.
Q2. Assumingyour answer to Q1 would otherwise be yes, does the following change theanalysis?
Approximately20% of the old notes were acquired by the secured noteholders prior to thecommencement of the XYZ bankruptcy. If one backs out the cash (received uponissuance of the preferred stock and from the bank borrowings) from the assetvaluation, the remaining value is necessarily being given to New XYZ on accountof the old XYZ notes. If one then deducts from the total asset value 20% of theremaining value (viewed as eligible for treatment under 802.63), the assetvalue is below $212.4 million. Under this analysis, the size of the transactionis below the $212.4 million, so that the size of the person test again becomesrelevant. But since New XYZ is a newly formed entity with no balance sheet andno assets other than those required to consummate the reorganization plan, thesize of the person test is not satisfied.
It wouldtherefore seem that on either theory, a filing should not be required here.