Question
May 15, 2006
Nancy M. Ovuka
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
7th & Pennsylvania Avenue, NW
Washington, DC 20580
Dear Nancy:
I am writing toconfirm my understanding of telephone conversations we had on May 11, 2006 and May 12, 2006 concerning the potentialreportability under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,as amended ("HSR Act") of a proposed transaction discussed below.
Proposed Transaction
Our client, CompanyA, has been presented with an opportunity to purchase approximately 66% of theoutstanding shares of Company B, a privately held corporation, in a relatedseries of four purchases. The total purchase price for all four purchases isapproximately $43 million. Each of the four purchases will be with a differentshareholder and will be accomplished via a separate purchase agreement. It isanticipated that the four transactions will be closed simultaneously.
We understand thatat the point of closing on the initial 66% interest, the following facts willbe true:
CompanyA will not already hold any voting securities of Company B when it acquires the66% interest;
CompanyA will not have any agreements in place with any of the shareholders holdingthe combined remaining 44% interest ("Remaining Shareholders");
CompanyA will not have approached the Remaining Shareholders regarding a purchase oftheir shares, and the Remaining Shareholders will not be aware of the purchaseby
Company A of the 66% interest inCompany B until after the purchase of the 66% interest closes;
Thepurchase of the 66% interest in Company B is not contingent upon the purchaseby Company A of any additional shares. Company A intends to purchase the 66%interest in Company B regardless of its ability to obtain additional shares inCompany B;
Thepurchase agreements for the acquisition of the 66% interest in Company B mayrequire that Company A make an offer on similar terms to the RemainingShareholders as soon as possible after closing on the 66% interest. However, weunderstand that there is no obligation for the Remaining Shareholders to acceptsuch an offer, Company A does not know if such an offer is likely to beaccepted, and this offer could be rejected by some or all of the RemainingShareholders. Company A understands from one of the shareholders from which itintends to acquire part of the 66% interest that the largest of the RemainingShareholders may be willing to sell its shares to Company A if Company A isable to acquire the 66% interest. However, that Remaining Shareholder currentlyis trying to acquire all the shares of Company B for itself, will not be awareof Company A's purchase of the 66% interest until after it occurs, and may infact not be willing to sell its shares to Company A, even though Company Awould be willing to purchase those shares on acceptable terms. If theacquisition of the shares held by the largest of the Remaining Shareholdersoccurred and shares were not acquired from any of the other RemainingShareholders, Company A's ownership percentage of Company B would beapproximately 81%. Based on the purchase price for the 66% interest, theoverall value of this approximately 81% interest would be closer to but stillunder the $56.7 million size of the transaction test; and
WhileCompany A would be interested in acquiring additional shares in Company B, upto 100%, under appropriate terms and conditions, and would prefer to hold 100%rather than 66%, under appropriate teuns and conditions, it does not have anycurrent plan or intent to force an acquisition of the remaining shares. Theonly way in which Company A could try to force the Remaining Shareholders tosell their shares is that under general corporate law mechanisms exist by whicha majority holder can "squeeze" out the minority interest holders.Such an effort is subject to fiduciary obligations to the minorityshareholders, may require an appraisal, and could be contested by the minorityshareholders including through litigation. Company A does not have a currentplan or intent to force a "squeeze" out of the Remaining Shareholdersafter acquiring the 66% interest. However, this is an option Company A likelywill evaluate post-closing as to its risks and benefits, and it is possiblethat at some point after closing Company A could decide to "squeeze"out the Remaining Shareholders.
Analysis andConclusions
Myunderstanding from our conversations is that the transactions as describedabove will be exempt under the HSR Act. Specifically, the acquisition byCompany A of the anticipated 66% interest in Company B will be HSR exempt asbelow the $56.7 million HSR size of the transaction test. Under the factsabove, you confirmed that the potential acquisition of additional shares ofCompany B by Company A post-closing on the 66% interest was sufficientlyspeculative such that the value of any of those additional shares did not needto be aggregated with the value of the 66% interest to determine if the initialacquisition of the 66% interest is HSR reportable. You also agreed thatsubsequent acquisitions by Company A of shares of Company B after closing onthe 66% interest would not be reportable, regardless of value, since at thatpoint Company A would already control Company B through the holding of voting securities.
Please let me knowas soon as possible if you disagree with any of the conclusions discussedabove, or if I have misunderstood any aspect of your advice. Thank you for yourassistance in this matter.