Question
From:
(redacted)
Sent:
Wednesday, May 07, 200812:23 PM
To:
Verne, B. Michael
Subject: Questionabout 802.52 assessment
Mike,
I am working on atransaction which I believe is exempt under HSR Rule 802.52, but I would liketo confirm my analysis.
Target is a foreignissuer, organized under the laws of and with principal offices in Country X.Buyer, likely a US person, is purchasing approximately 25% of the votingsecurities of Target. A foundation (Foundation) owns 100% of the votingsecurities of Target. As detailed below, Foundation is controlled by thefederal government of Country X and two of the states thereof. A simplisticbackground of how Foundation came to hold Target is as follows. Foundation wascreated as part of a comprehensive project for the smooth termination ofcertain mining activities which is heavily influenced by the federal governmentand the relevant states. Foundation purchased Target as part of a buyout of theshares of a company (Company) for nominal consideration. Company had significantenvironmental problems and other liabilities, and its net value was close tozero at time of purchase by Foundation. Foundation was established with thefollowing mandate: divide Company into "green" and "red"business, and then sell off the profitable green businesses and use the profitsfrom those sales to address the environmental problems and liabilities of thered businesses. Target holds the green business.
As noted above,Foundation holds 100% of Target outstanding voting securities. In addition,Target has a supervisory board and an executive board. The supervisory board issimilar in function to the board of directors of a US issuer, and Foundationhas the right to appoint 50% of the supervisory board, with the other 50% madeup of employee representatives as required by Country X law. Among otherduties, the supervisory board appoints the executive board, which is thenresponsible for day to day operations similar to officers of a US issuer. On this basis, it seems clear that Foundation controls Target.
Based on thefollowing facts, I am of the view that Country X and two of the states thereofcontrol Foundation, and therefore 802.52 applies. A foundation structure inCountry X is often used as a means of holding a charitable trust, but this Foundationhas a business purpose. Foundation also has a supervisory board (or an entityvery similar in function) and an executive board. The Foundation Charterdictates the constitution of the supervisory board. Based on the terms of theCharter, certain members of the board are nominated based on their officewithin the federal government or states thereof, and the federal government andstates thereof have the right to appoint certain additional board members. Onthis basis, the supervisory board consists of more than two-thirdsrepresentatives from or appointed by the federal government of Country X andstates thereof. The supervisory board appoints the executive board members whomanage the business on a day to day basis, and also approves business plans,budgets and other significant decisions, and otherwise supervises the overallmanagement of Foundation. With respect to the economic interests in Foundation,although it is not a charitable trust there are no membership units. Anyprofits are retained by Foundation to fund the clean up and deal with theliabilities of the red businesses. In addition, upon dissolution of Foundation,one-third of the assets would go to the federal government of Country X andtwo-thirds to states thereof, to be used either to address the burdens of thered business or for other charitable purposes.
I believe thatFoundation is most similar to a US non-corporate entity. If so, the federalgovernment of Country X and states thereof would be deemed to control becausethey receive 100% of the assets of the Foundation upon dissolution.Alternatively, if you analyze Foundation as a trust, it would also be deemed tobe controlled by the federal government and states thereof because theseentities retain a reversionary interest and because they have the right toappoint more than 50% of the supervisory board (akin to trustees). Finally, Idon't think that Foundation should be viewed as a corporate entity, but even ifit was, the federal government and states thereof would be deemed to controlbecause they have the right by Charter to appoint more than half thesupervisory board of the foundation.
On these facts,please let me know if you agree that Foundation is controlled by a foreigngovernment, and because Foundation controls Target the proposed acquisition ofTarget shares is exempt under 802.52.
Many thanks,