Question
From: (redacted)
Sent: Thursday, July 27, 2006 3:57 PM
To: Verne,B. Michael
Cc: (redacted)
Subject: RE: HSR Advice -Formation of Joint Venture Corporation and
Acquisition of Voting Securities and Assets
Thankyou. I will advise if we or counsel for the owner of ABC have any follow-upquestions about the initial inquiry.
Pleaseadvise as to whether you agree with the conclusion stated in the follow-upinquiry noted in my email dated July 25, 2006. For convenience, I have includedthe text of same below.
TheFunds and the owner of ABC will enter into a Stockholders' Agreement in whichthey and ABC I will agree, inter alia, not to take or approve certain actionswithout the consent of the owners of a majority of a class of preferred stockto be issued to the Funds. As of the time of closing, one Fund will hold amajority of such shares.
Theserestrictions include such matters as amending bylaws, issuing additional stockor options of ABC I or any subsidiary, redeeming stock of ABC I, declaringdividends, authorizing a change of control, approving a merger or sale ofsubstantially all of ABC I's assets, changing ABC I's business, increasing thenumber of directors, approving material changes in annual budgets, andincurring debt other than normal trade debt.
Asdescribed in my previous email on this matter, dated July 20, 2006, the Fund inquestion will not own 50 percent or more of ABC I's voting securities and willnot have the contractual power presently to designate 50 percent or more of thedirectors of ABC I. Accordingly, that Fund will not be deemed to control ABC Iwithin the terms of Rule 801.1(b) of the FTC Premerger Notification Rules,notwithstanding the approval rights in the Stockholders' Agreement that aredescribed above.
>>>"Verne, B. Michael" <MVERNE@ftc.gov> 7/27/2006 2:47 PM>>> Sorry, I thought I'd sent this to you.
Nancyand I talked this through and agree that this probably isn't reportable, butusing a different analysis. We believe that the two transactions you describe(formation of Newco and subsequent acquisition
ofABC) are really all part of the 801.40 formation of Newco.
So Idon't think your valuations of the voting securities of Newco being
acquiredby the three funds reflects the fact that Newco holds cash (including theinitial $22.6 MM from the bank, but not the future potential funds from thebank) and the assets of ABC. The current owner of ABC would be exempt under802.4 for its acquisition of voting securities of Newco because all that isbeing contributed to the formation, other than ABC, is cash.
Evenif the value of Newco voting securities for one or more of the
fundsexceeds $56.7 MM, they might also be exempt under 802.4, because the onlynon-exempt assets Newco would hold are those of ABC. If the book value of thoseassets is $15 MM, I'd be surprised if the fair market value is almost fourtimes that.
Giveme a call if you want to discuss this further.
----- OriginalMessage----
From: (redacted)
Sent: Thursday, July 20, 2006 11:55 AM
To: Verne,B. Michael
Cc: (redacted)
Subject:HSR Advice - Formation of Joint Venture Corporation and
Acquisition of Voting Securities and Assets
Setforth below is the description of transaction, analysis, and conclusion withrespect to a proposed transaction to form a joint venture corporation and forthe new corporation to acquire two related service businesses, which Ireferenced in a voice mail message this morning.
Pleaseconfirm that, based on the facts described, you agree with the conclusions setforth below, or clarify how the proposed transaction should be analyzed forpurposes of determining whether some or all of the parties must observe the HSRnotification and waiting period requirements.
1.Description of Transaction. Three separate investment funds (individually"Fund" and collectively "Funds"), and an individual who is thesole owner of two related services businesses (collectively
"ABC"),have entered in to a letter of intent ("LOI") that provides that theywill incorporate a new C-corp. ("ABC I"), that will acquire 100 percentof the ownership interests of ABC for a total purchase price of $67.5M to$100M. (All dollar amounts are rounded to the first decimal place forconvenience.)
Thethree Funds will contribute a total of $24.2M in cash and will acquireapproximately 35.5 percent, 11 percent, and 4 percent, respectively, or a totalof 50.5 percent of the voting securities of ABC I, valued at $24.2M. The ownerof ABC will contribute 100 percent of the voting securities or membershipinterests of ABC, and will receive 49.5 percent of the voting securities of ABCI, valued at $23.7M, and an initial cash payment of $43.8M (subject to anescrow of 5 percent of that amount). The two entities that comprise ABC are anLLC and an s-corp.; the latter may contribute all of its assets to awholly-owned LLC, which ABC I will acquire. The total assets of ABC have a bookvalue of approximately $15M.
Theowner of ABC also may receive an additional contingent payment in early 2007 ofup to $30M in cash and $2.5M in voting securities of ABC I, that depends on ABCI's 2006 EBITDA. Depending on the amount, if any, of the contingent payment tothe owner of ABC, the Funds may contribute additional cash in the maximumaggregate amount of $2.6M, and will receive additional voting securities of ABCI in proportion to their respective ownership interests in ABC I as describedabove. Thus, the parties' acquisition of additional voting securities of ABC Iin early 2007, to the extent this occurs, will not change the proportion of votingsecurities owned by each of the Funds and the owner of ABC, as described above.
A bank unrelated to the parties ("Bank")will provide senior debt to ABC I in an initial amount of $22.6M, which may beincreased to $50M to fund the earn-out described above. The Bank will notacquire any voting securities (including convertible voting securities) of ABCI, and the senior debt will be non-recourse to the Funds and the owner of ABC (ie,none of these parties will guarantee repayment of the debt).
Theparties expect to fund ABC I and consummate ABC I's acquisition of ABC in asingle closing. As such, ABC I will not have a regularly prepared balance sheetat the time of closing.
TheL01 provides that the owner of ABC and the Fund that acquires 35.5 percent ofABC I's voting securities each will have the right to appoint two of the fivedirectors of ABC I, and that these two parties must jointly agree on theappointment of the fifth director.
2.Size of Persons for Formation ofABC I. One or more of the Funds has total assets and/or annual net sales inexcess of $113.4M, and the owner of ABC has total assets and annual net salesin excess of $11.3M.
ABC Iwill be its own ultimate parent entity because no person will own 50 percent ormore of its voting securities or have the contractual power presently todesignate 50 percent or more of its directors. ABC I's total assets will exceed$11.3M for purposes of Rule 801.40, based solely on the initial cashcontributions by the Funds. ABC I's total assets for purposes of Rule 801.40also will include the book value of the total assets of ABC (approximately$15M), but not the $22.6M to $50M of senior debt, because the Bank will notacquire any voting securities, including convertible voting securities, of ABCI.
Accordingly,the parties will satisfy the size of person test in Rule 801.40 with respect tothe formation of ABC I.
3.Size of Transaction For Formationof ABC I. Each of the Funds and the owner of ABC will acquire voting securitiesof ABC I. Under Rule 801.40, each will be deemed an acquiring person and ABC Iwill be deemed
anacquired person.
TheL01 provides a capitalization table for ABC I that specifies the sources anduse of funds by ABC I, as follows: $26.8M maximum aggregate capitalcontribution by the Funds; $22.6M in senior debt (and
theadditional senior debt of up to $27.4M if needed to fund the contingentpayment) that ABC I will (or may) borrow; and $26.2M as the maximum aggregatevalue of voting securities of ABC I that the owner of ABC may receive. Theparties are preparing a definitive agreement that will contain substantiallythe same terms, which are sufficient to determine the acquisition price for theinitial acquisition of voting securities of ABC I under Rule 801.10(a)(2)(i).
Basedon the purchase prices specified in the L01, none of the parties' separateinitial acquisitions of voting securities of ABC I will exceed $56.7M, thecurrent minimum size of transaction threshold under the HSR Act and FTCPremerger Notification Rules.
Dependingon ABC I's 2006 EBITDA, the Funds and the owner of ABC also may acquireadditional voting securities of ABC I in early 2007. Pursuant to Rule 801.13(a)(2)(ii),the Funds and the owner of ABC each must determine the fair market value of thevoting securities of ABC I that they already hold to determine whether each oftheir separate 2007 acquisitions, when aggregated with the voting securitiesthat each of them already owns, exceeds the $56.7M size of transactionthreshold.
4.ABC I's Size of Person for itsAcquisition of ABC. The formation of ABC I as a joint venture corporation, andABC I's acquisition of voting securities and assets of ABC, are analyzed asseparate transactions. ABC I will not have a regularly prepared balance sheetat the time that it acquires ABC. Pursuant to Rule 801.11(e), the total assetsof ABC as an acquiring person with respect to its acquisition of ABC willconsist of all assets held by ABC I at the time of the acquisition, less allcash that will be used for the acquisition, including expenses incidentalthereto. The only assets that ABC I will hold at the time of its acquisition ofABC will be cash to fund that acquisition or for acquisition-related expenses.Thus, ABC I will not satisfy the $11.3M size of person test with respect to itsacquisition of ABC.
5.Conclusion. Based on theforegoing description of transaction and analysis, the separate initialacquisitions of voting securities of ABC I by the Funds and the owner of ABCwill not satisfy the $56.7M size of transaction test, and ABC I will notsatisfy the size of person test with respect to its acquisition of votingsecurities and assets of ABC.
Accordingly,none of the parties to the transaction are required to observe the notificationand waiting period requirements of the HSR Act prior to consummating theinitial acquisition of voting securities of ABC I or ABC I's acquisition ofABC.
Withrespect to the possible acquisition of additional voting securities of ABC inearly 2007, the Funds and the owner of ABC each must determine the fair marketvalue of the voting securities of ABC I that they already hold to determinewhether each such acquisition, when aggregated with the fair market value ofthe voting securities of ABC that each of them already holds, will exceed the$56.7M size of transaction threshold. If so, each such acquiring person alsomust determine whether the size of person tests are satisfied with respectthereto, using the most recent regularly prepared balance sheet of ABC as ofthat time.