Question
September 26, 2006
VIA EMAIL
Mr.B. Michael Verne
PremergerNotification Office
Bureauof Competition
FederalTrade Commission
7th& Pennsylvania Avenue, NW
Washington,DC 20580
Dear Mike:
I am writing to confirm my understanding of atelephone conversation we had on Monday, September 18, 2006 and a communicationwe had on Wednesday, September 20, 2006 concerning the non-reportability underthe Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSRAct") of proposed transactions discussed below.
Proposedtransactions
Pursuant to a transaction that will be notified underthe HSR Act (the "Merger"), a buyer intends to acquire all of thevoting securities of Company A, a publicly traded company. Our inquiry relatesto a warrant held by Warrant Holder for shares of Company A. If Warrant Holderfully exercised the warrant at one time, the Warrant Holder would holdapproximately 25% of the voting securities of Company A. Those shares wouldhave a value of approximately $200 million. The warrant has been in existencefor some time, and has a very low exercise price. The voting securities thatwill be transferred to Warrant Holder upon the exercise are currently held byan individual shareholder of Company A. Warrant Holder also holds a negligiblenumber of shares of Company A voting securities.
Warrant Holder has expressed an intent to exercisethe warrant through a series of partial exercises. Two or more partialexercises are expected to occur in a period a month or two in advance of theclosing of the Merger. As a result of these partial exercises done a month ortwo before the Merger closes, Warrant Holder would not at any one point hold inexcess of $56.7 million in voting securities of Company A. For example, WarrantHolder may partially exercise the warrant to obtain approximately $50 millionin voting securities of Company A and then sell those shares in advance of asecond exercise for a similar amount. The series of partial exercises, asopposed to a larger single exercise, would be undertaken so that the WarrantHolder does not hold a reportable amount of voting securities at any point inorder not to have a filing obligation under the HSR Act.
The final exercise for the rest of the Warrant (the "ClosingExercise") would occur approximately five days before the anticipatedclosing of the Merger. The Closing Exercise would be intended to be assimultaneous as reasonably possible with the closing of the Merger. The ClosingExercise must be undertaken in order for the Warrant Holder to receive the cashmerger consideration for the securities subject to the warrant. If WarrantHolder does not exercise the remainder of the warrant a number of days inadvance of the Merger closing, Warrant Holder will not be able to receive thecash merger consideration. The multiple day time period for the exercise isrequired for logistical reasons as the shares must be physically transferredbetween countries in advance of Warrant Holder transferring the shares to theexchange agent in connection with the Merger. The shares received from theClosing Exercise may exceed $56.7 million in value and may represent in excessof 10% of the voting securities of Company A.
In conjunction with the definitive agreement related to the proposedMerger, the agreement granting the warrant to Warrant Holder recently wasamended to grant Warrant Holder an "irrevocable proxy" to vote forall purposes the voting securities that are subject to the warrant. Prior tothis recent amendment, the Warrant Holder had no voting rights with regard tothe voting securities that are subject to the warrant. However, while the proxyis described as "irrevocable," the proxy is revoked prospectivelyupon the earlier of the closing of the Merger or the termination of thedefinitive agreement related to the proposed Merger. During the period in whichthe proxy is in place, there will not be an election for members of the boardof directors of Company A. As Company A shareholder approval is one of theconditions to closing of the Merger, Warrant Holder will have by virtue of theproxy the opportunity and power to vote the shares subject to the Warrant inany shareholder vote on the proposed Merger.
Conclusions
You agreedthat there is no HSR reportable event arising from the warrant held by WarrantHolder for Company A voting securities. Specifically, you confirmed thefollowing:
(1)A series of partial exercises of the warrantwill create no HSR obligation assuming that the Warrant Holder does not holdvoting securities of Company A valued in excess of $56.7 million at any point.You agreed that even though a series of partial exercises, as opposed to alarger exercise, are being done solely for the purpose of not having to fileunder the HSR Act, this does not create a transaction or device for avoidanceunder 16 C.F.R. 801.90. Rather, 16 C.F.R. 801.90 is not applicable as the structure is not being donein order for Warrant Holder to hold a reportable amount of voting securities atany time.
(2) The Closing Exercise described above is not HSRreportable even if the value of the voting securities resulting from the exerciseexceeds $56.7 million and/or more than 10% of the voting securities of CompanyA. You confirmed that this exercise in conjunction with the closing of theMerger, as described above, would qualify for the "continuum" theory.Under the continuum theory, Warrant Holder would not be deemed for HSR purposesto ever hold these voting securities which would be acquired during the Merger.
(3) The granting to the Warrant Holder of an irrevocable proxy to votethe voting securities subject to the warrant does not trigger a reportableevent under the HSR Act. Although Informal Interpretation Number 70 in thePremerger Notification Practice Manual (3D ED. 2003) provides that theacquisition of convertible nonvoting securities coupled with irrevocableproxies to vote those shares may trigger a reporting obligation, you agreedthat the proxy assignment to the Warrant Holder fell outside the scope of areportable transaction under that interpretation. As we discussed, the proxyassignment in this instance does not result in the acquisition of votingsecurities for HSR purposes as (i) the warrant pre-dates the recent assignmentof the proxy done in the context of the potential Merger; and (ii) although theproxy assigns to Warrant Holder all of the voting rights for the shares subjectto the warrant while the proxy is in place, there will not be any election ofdirectors before the proxy is revoked which is the earlier of the closing ofthe Merger or the termination of the definitive agreement for the Merger.
Please let me know as soon as possible if you disagree with any of theconclusions discussed above, or if I have misunderstood any aspect of youradvice. Thank you for your assistance in this matter.