Question
July 25, 2006
Mr.B. Michael Verne
PremergerNotification Office
FederalTrade Commission
Sixth & Pennsylvania Avenue, NW
Washington, DC 20580
Re: Application of 801.10(d)
Dear Mr. Verne:
Iam writing to confirm the conversation you had with me, (redacted) thisafternoon regarding the application of 16 C.F.R. 801.10(d) to the fact pattern set forth below.
Wedescribed to you a transaction that originally was envisaged as an acquisitionby Buyer of 80% of the membership interests of Sub LLC from Seller Corp. Buyerintended to put up roughly $30 million in cash and finance the remaining $50million of the purchase price. In order to accomplish the financing, Buyer wasto acquire roughly 91% of the membership interests of Sub LLC from Seller Corp.and then have 11% of the membership interests redeemed in a transaction thatmoved the debt from Buyer to Sub LLC. Since Buyer and Seller meet thesize-of-the parties test, the transaction, as originally structured, would besubject to the prior notification and waiting requirements of the HSR Act. Butthis structure was regarded as too complicated for the lenders and the partieshad to come up with another transaction structure.
Inorder to accommodate the lenders' interests, the parties devised an alternativestructure in which three things will happen essentially contemporaneously: (1)Sub LLC will borrow $50 million with the loan being backed by a pledge ofBuyer's to-be-acquired interest in Sub LLC and possibly a guarantee of the debtby Buyer (the lenders will certainly require the pledge as a condition tomaking the loan and, subject to further negotiation, may also require theguarantee); (2) Sub LLC will make a distribution of $50 million to its solemember, Seller Corp.; and (3) Buyer will acquire 80% of the membershipinterests in Sub LLC in exchange for $30 million cash (the agreement willprovide that the cash consideration is to be $80 million less the distributionto Seller Corp. from the proceeds of the borrowing).
Our analysis, which youconfirmed, is that the value of the non-corporate interests being acquired byBuyer is governed by 16 C.F.R. 801.10(d). Because the consideration paid by Buyer is a combination of cash andthe pledge/guarantee, the acquisition price is not determined and, therefore,the value of the non-corporate interests being acquired is their fair marketvalue. By analogy to other informal interpretations from your office the properway to determine the value of the non-corporate interest to be acquired is totake the sum of the cash consideration (here $30 million) plus the fair marketvalue of the pledge/guarantee.
Inour conversation, you also noted that you had no idea how to determine the fairmarket value of the pledge and we recognize that we will have to come up with areasonable method for making that determination. But in the meantime, we wouldappreciate it if you could confirm that this letter accurately summarizes ourconversation by calling me at the number above.