Question
From:(redacted)
Sent: Wednesday,May 31, 2006 8:59 PM
To:Verne, B. Michael; Ovuka, Nancy M.
Subject: HSR question re UPE
Dear Mr Verne and Ms. Ovuka-
I have aquestion about whether the control test in 801.1(b) to determine the UPE isapplied at the time the purchase agreement is signed or at the time of theclosing of the deal when options are exercisable which would take the presentUPE below the 50% threshold. Attached below is a July, 1999 informal adviceletter from the PNO which deals with this issue in a slightly differentcontext. If possible, I'd like to get a reaction by email from at least one ofyou tomorrow. I initially thought the answer was simple but now am not so sure.If there is a more on point PNO informal letter, I'd also appreciate beingdirected to it as I have not found alot on this subject. Here are the facts onmy deal.
Company A isacquiring 100% of the voting securities of B, my client. C, a natural person,owns more than 50% of the voting securities of B. C is thus currently the UPEof B. Other shareholders of B, however, have options to purchase some, but notall, the voting securities currently held by C. Such options are presentlyexercisable and, if exercised, would take C below the 50% and make B its ownUPE. The other shareholders are not legally obligated to exercise the optionsprior to closing. I am told, however, that exercise of the options prior toclosing is extremely likely for financial reasons and the obvious fact theoptions and shares of B will be gone when the deal closes.
My questionis simply whether the control test in 801.1(b) to determine UPE is appliedbefore or after the exercise of the options. If the former, then C is the UPE.If the latter, then B is the UPE. The attached July, 1999 letter indicates thelatter since the options there were, as here, exercisable prior to the closingand the advice seems to be you determine the UPE at time of consummation. Ihave also seen a couple of other informal PNO letters which suggest thatconsummation is the proper time to determine the UPE. I do want to point out,however, that in my transaction, unlike the one in the attached letter, thismay result in the transaction being nonreportable due to failure to meet thesize of person test.