Question
From:(redacted)
Sent: Friday, March 14, 2008 3:31 PM
To: Verne, B. Michael
Subject: Indebtedness to be Repaid
HiMike,
Ihave a scenario I would like to run past you:
CompanyA is planning to acquire all of the outstanding voting securities of Company Bfor $72 million, less the amount of any outstanding indebtedness. Before theshareholders of Company B are paid, any outstanding indebtedness will be repaid.The outstanding indebtedness totals $17 million. Of that amount: (1) about $9million is owed to a minority shareholder of Company B; (2) $6 million toCompany B's parent in the form of a subordinated note issued by Company B'sparent directly, and (3) the remainder to a minority shareholder of the entitythat directly controls Company B (the entity just below Company B's UPE), alsoin the form of a subordinated note issued directly by this shareholder.
Itis my understanding that:
1)The value of the debt to be repaid byCompany A to the minority shareholder of Company B would not be included in thevalue of the transaction. This is based on the fact that this shareholder is anon-controlling shareholder that is otherwise unrelated to Company B. See PNO Manual, Interpretation No. 88(noting that if the buyer pays off debt of a controlling shareholder that isnot related to the acquired entity, the PNO would consider such repayment to bepart of the consideration for the acquisition). Thus, I would consider thisminority shareholder to be a third-party, and the repayment of debt to thisthird party to be excluded from the value of the transaction.
2)I believe that the value of the debtthat will be repaid by Company A to Company B's parent would further not beincluded in the value of the transaction. I base this conclusion on PNO Manual, Interpretation 91, which indicates thatwhere a buyer arranges for a third-party loan to a seller's subsidiary,to retire debt owed by the target to its parent, this value is not included in the HSR valuation of the transaction. Here,Company A will be directly repaying the loan made by Company B's parentto Company B. I believe that the value would not be included in the HSR valueof the deal.
3)As with 1) above, the value of the debtto be repaid to the minority shareholder of the entity that controls Company B would not be included in the value of thetransaction, since this entity is not included within Company B'sultimate parent entity.
Pleaselet me know if you agree with my conclusions. Thank you very much for your assistance with this matter.