Question
From:(redacted)
Sent:Monday, April 30, 2007 3:07 PM
To:Verne, B. Michael
Cc:(redacted)
Subject:Question about "investment only" exemption
Mike
Wehad a question whether the following situation qualifies for an exemption fromfiling. It deals with the "investment only" exemption.
Thereis a corporate reorganization of a Bermuda company. As a result, one U.S.shareholder will obtain more than 10% of the shares that carry voting rights.However, under the by-laws of the Bermuda company, a U.S. shareholder can NEVER exercise voting rights thatamount to more than 9.8% of the company's total voting rights. This by-law is,apparently, triggered by the tax-free status of Bermuda reinsurers and for thatreason is unlikely ever to change.
Theresult is that this shareholder will never be able to vote more than 9.8% ofthe outstanding voting shares. He simply will never be able trigger thecorporate control or influence concerns that were behind the 10%+ provision. Heis not involved in management and therefore qualifies for the investmentexemption on every other ground.
Since,as a matter of fact and law, he is a shareholder with a maximum of 9.8% invoting rights, it seems that he should be exempt from an HSR filingrequirement.
Wespoke with James who thought this sounded right but asked us to verify withyou. We would appreciate your guidance.
M Verne Comments -04/30/2007 -The restricted voting rights are not the result of a contractual arrangement,they are contained in the bylaws of the corporation. This would potentially bean argument that as a practical matter the stock only represents 9.8% of theoutstanding voting securities. However, Section 801.12(b) states "Wheneverthe act or these rules require calculation of the percentage of votingsecurities of an issuer to be held or acquired, the percentage shall be the sumof the separate ratios for each class of voting securities, expressed as apercentage." This leads me to the conclusion that if the percentagecalculated under 801.12 exceeds 10% (which appears to be the case here), thesolely for purpose of investment exemption would not be available. I have runthis by Marian Bruno who agrees. This e-mail,including attachments, contains information that is confidential and may beprotected by the attorney/client or other privileges. This e-mail,
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From:(redacted)
Sent:Tuesday, May 01, 2007 9:57 AM
To:Verne, B. Michael
Subject:RE: Question about "investment only" exemption
Thanks Mike.
Butdoesn't the logic of 801.1 (f)(l )(i) support our argument. The test there isstock that "at present" entitles the owner to vote. This stock hasnot, does not now, and presumably will never entitle the shareholder to votemore than 9.8%. Using that definition, "at present," isn't that stocknon-voting?
Votingsecurities. The term voting securities means any securities which at present orupon conversion entitle the owner or holder thereof to vote for the election ofdirectors of the issuer, or of an entity
includedwithin the same person as the issuer.
M Verne Comments -05/01/2007 -I'm not sure it does, because it is the bylaws that limit the number of votingsecurities (the percentage of the total ) that can be voted. Presumably thestock instrument itself for each individual voting security carries the sameright of one vote per share for the election of directors. If any of the votingsecurities of that shareholder were sold to a third person, wouldn't they havethe "present right to vote" regardless of which voting securitiesthey received?
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From:(redacted)
Sent:Tuesday, May 01, 2007 2:04 PM
To:Verne, B. Michael
Cc:Bruno, Marian; Berg, Karen E.; Walsh, Kathryn
Subject:RE: Question about "investment only" exemption
Mike
Sorryto continue this. I agree with you that there is no incapacity on the sharesthemselves, just on the holder. But the rule on investment focuses specificallyon the holder, not the shares: the exemption is personal and is triggered byhis/her individual present intention. In other words, it's not the objectivenature of the shares that determines the exemption, it's the context betweenthe holder and the shares.
Applyingthat criteria, doesn't that suggest that the by-law restriction, that creates anon-voting incapacity for that shareholder above 9.8%, should result in theseshares being considered non-voting.
Idon't see how any of the HSR controls are lost here. If he would transfer theshares to someone else who isn't subject to the restriction, then a filingmight be necessary. But otherwise, you're requiring a filing based on the 10%voting rule for someone who can NEVER achieve that voting level. The purpose ofthe Act is never triggered and can't be unless he transfers the shares to anon-American holder.
Ijust thought I would ask you to re-consider one last time. Thank you for yourpatience.
(i)(1)Solely for the purpose of investment. Voting securities are held or acquired"solely for the purpose of investment" if the person holding oracquiring such voting securities has no intention of participating in theformulation, determination, or direction of the basic business decisions of theissuer.
M Verne comment 05/02/2007- The argument is not whether the holder of the voting securities satisfies thepassive intent prong of the definition of "solely for purpose" ofinvestment in Section 801.1(i), it is whether he satisfies the "as aresult of the acquisition, the acquiring person would hold ten percent or lessof the outstanding voting securities of the issuer" requirement in Section802.9.
We agree that the individual'svoting rights are restricted by the bylaws as opposed to a shareholderagreement, which is an arguably stronger restriction, however, the fact remainsthat the individual holds more than 10% of the outstanding voting securities ofthe issuer, as calculated under Section 801.12.
If this was a shareholder's agreement that took away the rightof an individual to vote some percentage of his voting securities (even ifirrevocable) we would still say that all of the shares he holds are votingsecurities and should be included in the 801.12 calculation. We can't justifycoming out differently in this scenario.
C