Question
September 19, 2007
VIAE-MAIL MVERNE@FTC.GOV
B.Michael Verne, Esq.
FederalTrade Commission
600 Pennsylvania Avenue, N.W. Washington, D.C. 20580
Re: Interpretation of 16 C.F.R. 801.10
DearMike:
I writeto confirm our telephone conversation of September 13, 2007 and your advicewith respect to when an acquisition pricefor the exchange of voting securities is "determined" for purposes of16 CFR 801.10.
Inthe transaction in question, COMPANY A is privately held and COMPANY B ispublicly traded. The parties have structured the transaction as astock-for-stock exchange, whereby COMPANY A merges with a subsidiary of COMPANYB, and COMPANY A survives as a wholly-owned subsidiary of COMPANY B. COMPANY B acquires 100 percent of the shares of COMPANY Aand COMPANY A's shareholders are issued shares of COMPANY B. As wediscussed, the Agreement does not contemplate a single fixed ratio for theexchange. There are currently three (3) different classes of COMPANY A shares(Preferred Class A, Preferred Class B, and common). COMPANY A shareholders willbe issued preferred and common shares of COMPANY B consistent with thefollowing provisions:
Conversion of Company A Stock. At the Effective Time, by virtue of the Merger and without any action on the part of Merger Sub,COMPANY B, Company A or the holder of any of the following securities:
Subject to Article II, each share of Series Apreferred stock, par value $0.001, of CompanyA (the "Series A Preferred Stock") issued and outstanding immediatelyprior to the Effective Time except for shares of the Series A PreferredStock owned by Company A as treasury stock or owned, directly or indirectly, byCompany A or any of its wholly-owned Subsidiaries, shall be converted into theright to receive:
that number of shares of the Series A preferredstock, par value $0.001 per share of COMPANY B (the "COMPANY B Series APreferred Stock") equal to the quotient of (A) the sum of (1) the $1.00 liquidation preference on such share of Series APreferred Stock plus (2) all accrued but unpaid dividends on such share ofSeries A Preferred Stock (collectively, the "Series APreference"), divided by (B) $55.70; provided that the aggregate number ofshares of COMPANY B Series A Preferred Stockissuable pursuant to this Section 1.4(a)(i) shall not exceed 448,833(the "COMPANY B Preferred Limit"); and
to the extent that the aggregate number of shares ofCOMPANY B Series A Preferred Stock issuable pursuant to Section 1.4(a)(i) wouldexceed the COMPANY B Preferred Limit, then, in lieu thereof, any share ofSeries A Preferred Stock (or portion thereof) that otherwise would haveconverted into shares of COMPANY B Series A Preferred Stock shall insteadconvert into that number of shares of the common stock, par value $0.001 pershare, of COMPANY B (the "COMPANY B Common Stock") equal to thequotient of (A) the Series A Preference, divided by (B) $4.07.
For the avoidance of doubt, to the extent that theaggregate Series A Preference exceeds $25,000,000, the holders of Series APreferred Stock shall be allocated shares of COMPANY B Series A Preferred Stock and COMPANY B Common Stock to be issuedpursuant to this Section 1.4(a) on a pro rata basis.
Subject to Article II, each share of Series Bpreferred stock, par value $0.001, of Company A issued and outstandingimmediately prior to the Effective Time (the "Series B Preferred Stock"), except for shares of theSeries B Preferred Stock owned by Company A as treasury stock or owned,directly or indirectly, by Company A or any of its wholly-owned Subsidiaries,shall be converted into the right to receive:
that number of shares of COMPANYB Series A Preferred Stock equal to the quotient of (A) the $1.00 liquidation preference on such shareof Series B Preferred Stock (the "Series B Preference"), divided by(B) $55.70; provided that the aggregate number of shares of COMPANY B Series APreferred Stock issuable pursuant to this Section 1.4(b)(i) shall not exceed an amount equal to (a) 448,833 minus(b) the number of shares of COMPANY B Series A Preferred Stock issuablepursuant to Section 1.4(a)(i) (the "Junior COMPANY B PreferredLimit"); and
to the extent that the aggregate number of shares ofCOMPANY B Series A Preferred Stock issuable pursuant to Section 1.4(b)(i) wouldexceed the Junior COMPANY B Preferred Limit, then, in lieu thereof, any shareof Series B Preferred Stock (or portion thereof) that otherwise would haveconverted into shares of COMPANY B Series A Preferred Stock shall instead convert into that number of shares ofCOMPANY B Common Stock equal to the quotient of (A) the Series BPreference, divided by (B) $4.07.
For the avoidance of doubt, solely for purposes ofcalculating the total number of sharesof Series B Preferred Stock issued and outstanding immediately prior to theEffective Time, all Deferred B Shares shall be deemed to be issued andoutstanding; provided, however, that any sharesof COMPANY B Series A Preferred Stock and COMPANY B Common Stock that wouldotherwise be issuable at the Effective Time pursuant to this Section 1.4 inconsideration of such Deferred B Shares shall not be issued and instead, shall bereserved for issuance pursuant to Section 6.21. For the further avoidance ofdoubt, to the extent that the aggregate Series B Preference (including theSeries B Preference on any Deferred B. Shares) exceeds the Series B Remainder,the holders of Series B Preferred Stock shall be allocated shares of COMPANY B Series A Preferred Stock and COMPANY B CommonStock to be issued pursuant to this Section 1.4(b) on a pro rata basis.As used herein, "Series B Remainder" means an amount equal to theproduct of (i) the Junior COMPANY B Preferred Limit and (ii) $55.70. As usedherein, "Deferred B Shares" means any shares of Series B PreferredStock that either (x) have been issuedpursuant to the terms of the Deferred Stock Awards but are still held byCompany A or (y) are issuable (but not actually issued) pursuant to theDeferred Stock Awards.Subject to Article II, each share of common stock, parvalue $0.001, of Company A issued and outstanding immediately prior to theEffective Time the ("Common Stock"), except for shares of the CommonStock owned by Company A as treasury stock or owned, directly or indirectly, byCompany A or any of its wholly-owned Subsidiaries, shall be converted into the right to receive that number of shares of COMPANYB Common Stock equal to the product of (i) the Common Stock Ratio, times(ii) the Remaining COMPANY B Common Stock.
In no event shall COMPANY B be obligated to issuemore than 9,064,941 shares of COMPANY B Common Stock pursuant to this Agreementor the Deferred Stock Awards. For purposes of this Agreement, the "CommonStock Ratio" shall mean the quotient of (x) one, divided by (y) the totalnumber of shares of Common Stock (including shares of common stock issuableupon conversion of Series A and Series B Preferred Stock (including anyDeferred B Shares)). For purposes of this Agreement, the "RemainingCOMPANY B Common Stock" shall mean the difference of (1) 9,064,941 and (2)the number of shares of COMPANY B Common Stock issuable pursuant to Sections1.4(a) and (b).
All of the shares of Company A Capital Stockconverted into the right to receive COMPANY B Capital Stock pursuant to thisArticle I shall no longer be outstanding and shall automatically be cancelledand shall cease to exist as of the Effective Time, and each certificate (each a"Certificate") previously representing any such shares of Company ACapital Stock shall thereafter represent only the right to receive (i) acertificate representing the number of whole shares of COMPANY B Capital Stockand (ii) cash in lieu of fractional shares into which the shares of Company ACapital Stock represented by such Certificates have been converted pursuant tothis Section 1.4 and Article II. Certificates previously representing shares ofCompany A Capital Stock shall be exchanged for certificates representing wholeshares of COMPANY B Capital Stock and cash in lieu of fractional shares issuedin consideration therefor upon the surrenderof such Certificates in accordance with Article II, without any interestthereon. If, prior to the Effective Time, the outstanding shares ofCOMPANY B Capital Stock or Company A Capital Stock shall have been increased,decreased, changed into or exchanged for a different number or kind of sharesor securities as a result of a reorganization, recapitalization,reclassification, stock dividend, stock split, reverse stock split, or othersimilar change in capitalization, or there shall be any extraordinary dividendor distribution, an appropriate and proportionate adjustment shall be made to theexchange ratios set forth in Section 1.4(a), Section 1.4(b) and/or Section1.4(c), as applicable.
Notwithstanding anything in the Agreement to thecontrary, at the Effective Time, all shares of Company A Capital Stock that areowned, directly or indirectly, by Company A or any of its wholly-ownedSubsidiaries shall be cancelled and shall cease to exist and no stock ofCOMPANY B or other consideration shall be delivered in exchange therefor.
In discussing these provisions with you, I explained thatI had reviewed prior advice letters which stated that an acquisition price will only be considered "determined"for purposes of Section 801.10 if the share exchange is based on a fixed ratio.You confirmed the position of the Premerger Notification Office on this issue remains the same today. Iconcluded based on the foregoing provisions that the ratio was not fixedand the acquisition price was therefore not "determined" underSection 801.10. Based on my description of these provisions (but without yourhaving read the provisions quoted above), you agreedthat the acquisition price is not "determined" for purposes ofSection 801.10 and that the proper valuation method is therefore the"fair market value" of the share exchange. The "fair marketvalue" is to be determined in goodfaith by the board of directors of the ultimate parent entity included withinthe acquiring person. You advised that COMPANY B, the publicly tradedentity, would be considered the acquiring person. Such determination must bemade as of any day within 60 calendar days prior to the filing of the notification required by the act, or, if such notificationhas not been filed, within 60 calendar days prior to the consummation of theacquisition.
As always, Mike, your guidance on these issues is muchappreciated. If I have in any way misstated your conclusions from ourconversation, please contact me as soon as possible.