Question
From: (redacted)
Sent: Friday, June 15, 2007 4:25 PM
To: Verne, B. Michael
Subject: Request for Informal Interpretation - sec.801.11 and Interpretation 76
DearMr. Verne,
Thank you fortaking the time to discuss this transaction with me over the phone yesterday. Iam sending this email to confirm in writing our discussion and the conclusionthat the described transaction is not reportable under the HSR Act and itsrules. While our discussion focused on the reportability of the twoacquisitions, I have included the details regarding the other steps of thetransaction which we covered briefly on the phone.
We would appreciateyour confirmation of the analysis described below regarding the application of Secs.801.11(e), 801.11(b) and Interpretation 76 (Premerger Notification PracticeManual, Fourth Edition).
The proposed transaction involvesseveral steps each of which requires an HSR determination. The transactionagreements set forth the sequence of three steps, however, the third and finalstep is the simultaneous occurrence of three financing transactions and twoacquisitions. We have concluded that there is no reportable transaction. Belowis the step by step analysis.
1)ShareExchange: Founding shareholders of Investment Company will exchange theirshares in Investment Company for shares of Shell Corporation making InvestmentCompany a wholly-owned subsidiary of Shell Corporation. The value of the ShellCorp. shares is approximately $8 million valued at the IPO Price (describedbelow).
HSRAnalysis: This is not a reportable transaction because the value does not meetthe $59.8 million HSR reporting threshold.
2)Assignment:Investment Company will assign certain rights and obligations to engage in theacquisitions described below to Shell Corp.
HSRAnalysis: This is not a reportable transaction because the assignment at issueis not an acquisition of voting securities or assets.
3) Financing & Acquisitions (allset to occur simultaneously on the same closing date).
a) PrivateInvestment: A single investor will pay $50 million cash for Shell Corp.preferred stock (approx. 81%) and common stock (12%). In addition, PrivateInvestor will purchase certain warrants at set exercise rates, however, thesewill not be exercised until a future date not set. The terms of the preferredstock provide that while the Private Investor holds more than 50% of thepreferred, the Private Investor will be able to appoint less than the majorityof the Board of Directors until regulatory approval is achieved. Onceregulatory approval is granted, if Private Investor holds more than 50% of thepreferred stock, it will be able to appoint a majority of Shell Corp'sdirectors.
HSR Analysis: Thistransaction is not reportable because it is under the $59.8 million thresholdfor HSR. The acquisition of warrants is not reportable because warrants are notvoting securities for HSR purposes. Exercise of the warrants may be reportableat the time they are exercised. In addition, for HSR purposes, Private Investoris not acquiring 50% of Shell Corp.'s voting securities nor does PrivateInvestor acquire "control" under sec. 801.1(b)(1). Private Investorwill not have the power to appoint 50% or more of the directors until afterregulatory approval is achieved. Once regulatory approval is granted, thenPrivate Investor may, depending on its holdings at that time, obtain"control" and become the UPE of Shell Corp.
b)OtherPrivate Investors: Other private investors will pay $30 million cash for ShellCorp. preferred stock (approx. 19%) and common stock (16.6%). In addition,Other Private Investors will purchase certain warrants at set exercise rates,however, these will not be exercised until a future date not set.
HSRAnalysis: This is not a reportable transaction because it is under the $59.8million threshold for HSR. The acquisition of warrants is not reportablebecause warrants are not voting securities for HSR purposes.
c)IPO:Shell Corp. will sell on a public exchange approximately 2,000,000 shares ofcommon stock valued at $5.00/share (the "IPO Price") raising$10,000,000. The total stock acquisition is for approximately 7.4% of thecommon stock.
HSRAnalysis: This is not a reportable transaction because it is under the $59.8million threshold for HSR.
d) Acquisition #1: Shell Corp. willacquire 100% of the voting securities/interests of LLC in exchange forapproximately $125 million in cash and Shell Corp. stock. The cash portion is$60.1 million and includes cash to be used to pay off certain debts of LLC. Thestock portion is $65 million. Shell Corp. does not have a regularly preparedbalance sheet, therefore, under sec. 801.11(e)(1), the size of Shell Corp. isits assets less cash used to fund the acquisition (all funds exhausted as aresult of the transaction), including debt repaid to lenders (March 18, 2005Informal Staff Opinion 0503014, available atwvvw.ftc.gov/bc/hasr/informal/opinons/0503014.htm4ile:llwww.ftc.gov/bc/hasr/informal/opinons/0503014.htm> ). Therefore, ShellCorp.'s assets are $90 million (the cash raised from all the investmentsdescribed above) less $60.1 million (the cash used to fund this acquisition andthe debt payment), or $29.9 million. LLC has assets of $33 million and revenuesof $72 million. Parent 1 holds 51% of LLC's interests and Parent 2 holds 84% ofthe interests of Parent 1. Parent 2 has consolidated assets of less than $119.6million.
HSRAnalysis: This is not a reportable transaction because the size of the partiestest is not satisfied. There is no $119.6 million person.
e)Acquisition#2: Shell Corp. will acquire 100% of the voting securities of X Corp. inexchange for approximately $23 million in cash and Shell Corp. stock. The cashportion is $10.1 million. The stock portion is $12.9 million.
HSRAnalysis: This is not a reportable transaction because the size of thetransaction is below the $59.8 million threshold.
Analysis of Other Possible Sequence
InformalInterpretation 76 (Premerger Notification Practice Manual, Fourth Edition)states that if the parties do not spell out the sequence of the transactions,the PNO advises that the parties analyze transactions in all possiblesequences. Here, the parties have spelled out the sequence only as to the orderbetween the Share Exchange, the Assignment, and the Financing/Acquisitions. The
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financing andacquisitions described above are scheduled to occur simultaneously, thereforewe must look at the issue of reportability under all possible sequences.However, as we discussed on the telephone, logically, it doesn't make sense toconduct the analysis with the financing occurring after the acquisitions, sothe only other sequence involves the acquisition of X Corp. prior to the acquisitionof LLC, the reverse of the order described above.
Acquisitionof X Corp. The analysis for the acquisition of X Corp. does not change withreversal of the order of the acquisitions. It is not a reportable transactionbecause it is below the $59.8 million reporting threshold.
Acquisition of LLC.The analysis for the acquisition of LLC does change, however the conclusionremains the same. The transaction is above the $59.8 million threshold,however, the size of the parties test is not met. Shell Corp. has acquired XCorp. which has a regularly prepared balance sheet, therefore, its size iscalculated under sec. 801.11(b) to include the assets of X Corp. and the assetsof Shell Corp. X Corp. has assets of $4.4 million. Shell Corp.'s only other assetsare the cash raised during financing ($90 million) less that used to acquire XCorp. ($10.1 million), or $79.9 million. Shell Corp.'s total size, therefore,is $84.3 million. As stated above, LLC is not a $119.6 million person. Theacquisition of LLC, therefore, is not reportable because without a $119.6million person, the size of the parties test is not met.
Please let us knowif you concur with this analysis. Thank you.
(redacted)