Question
From:
(redacted)
Sent:
Monday, June 23, 2008 1:17 PM
To:
Verne, B. Michael
Subject:Transaction! Bankruptcy Related Expenses
Mike,
Ourclient, Company A, has entered into an agreement to purchase substantially allof the assets and assume certain liabilities of Company B and its subsidiary(together the "Sellers"). Sellers filed in U.S. bankruptcy courtearlier this year and maintain debtor-in-possession status at this time. Thisasset acquisition will be made pursuant to a Sale Order under Chapter 11 of theBankruptcy Code. The aggregate consideration for the acquired assets (the"Purchase Price") is the sum of: (1) $45,109,379 in cash at theClosing, plus assumed liabilities of approximately $9.2 million, plusapproximately $6.3 million in payment of outstanding revolving loans and curepayments.
Inaddition Company A will pay certain expenses of the Sellers related to thetransaction and/or bankruptcy related expenses. Specifically, Seller will pay:approximately $1.2 million directly to bankers for services rendered;$656,000.00 into a segregated escrow account for the benefit of participantsunder a management incentive program (i.e. incentivizing certain employees toremain during bankruptcy proceedings); $830,000.00 to be held in the Sellers'general funds to satisfy in part the costs of administration and winding downthe Chapter 11 cases for fees and costs incurred by professionals retained bySellers; and approximately $250,000 to Sellers in additional expensereimbursement. As is typical in other bankruptcy proceedings, these paymentswere required to be made by the successful bidder.
Basedupon informal interpretations issued by the PNO in other matters we understandthat as a general rule it is the PNO's view that the seller's transactionexpenses in an asset transaction are not included in the"size-of-transaction test," regardless of whether the buyerreimburses the seller for these expenses, or the seller pays these expensesfrom the deal proceeds (e.g., see http://www.ftc.gov/bc/har/informal/opinions/0805010.htm).We are of the view that the payments described in paragraph 2 above aretransaction expenses that need not be included in the acquisition price.Accordingly, the acquisition price is the sum of the items included inparagraph 1 above, which equals approximately $60.6 million Company A also hasconducted a fair market valuation and determined that the fair market value doesnot exceed the purchase price such that the "size-of-transaction"test is not met by either the purchase price or the fair market value.
Ourclient seeks informal guidance regarding the fact pattern described herein. Wegreatly appreciate your time in considering this matter. Please feel free tocontact me if further clarification or additional facts are needed in order toprovide informal guidance.