Question
From: (redacted)
Sent: Wednesday, February 20, 2008 4:17 PM
To: Verne, B. Michael
Subject: Request for Informal Advice
DearMike,
Described herein is a fact pattern that our clientseeks advice on in order to determine whether an HSR filing must be made inconnection with this transaction.
COMPANY A will purchase all of the voting securitiesof COMPANY B (a non-publicly traded company) on a "debt-free" basisfor a purchase price of approximately $8 million with contingent futurepayments (similar to an earn-out or milestones) of a maximum of approximately$12 million. In a separate transaction, Company A will acquire the loan agreementbetween COMPANY B and BANK from BANK for approximately $64.7 million. COMPANY Bis not a party to the second transaction. The purpose of structuring the twotransactions in this manner is for COMPANY A, who is believed to be in a betternegotiating position than COMPANY B, to negotiate with BANK to forgiveapproximately $13 million in debt before accepting $64.7 million as a payofffor the current loan agreement, where the actual outstanding value ifapproximately $77 million. Thus, there is a valid business reason for thestructure of this transaction. As we have discussed in another matter recently,ordinarily the assumption of liabilities is required to be included in theacquisition price only in asset acquisitions and not in stock transactions. Whilethe fact pattern in this case is akin to
Interpretation 91 in the 4th Edition ofthe Premerger Practice Manual, there are at least two differences that may beimportant to the analysis; thus we seek informal advice on whether the moneypaid by COMPANY A to acquire the loan agreement from BANK must be aggregatedinto the transaction.
(1) COMPANY A itself is acquiring the loan agreement,whereas in Informal Interpretation 91 a third party lender took over the debt;and (2) Cash payments made by COMPANY A to COMPANY B are capped at a maximum of$20 million, including the maximum value of all potential future contingentpayments. However, since there are contingent payments involved in thistransaction and the stock is not publicly traded, must COMPANY A do a fairmarket valuation because the acquisition price is "not determined?"If COMPANY must do a fair market valuation, should the valuation be done on thesame basis as the two transactions described above such that COMPANY A shoulddo a fair market valuation of the shares of COMPANY B on a debt free basis, ormust we do the fair market valuation in some other way that must also takeaccount of the separate payment made to acquire the loan agreement from BANK?
Please let me know your thoughts on the above andwhether you have any additional questions regarding facts that may be relevantto the analysis. In advance, we greatly appreciate your assistance in thismatter.