Question
From:
(redacted)
Sent:
Tuesday, January 27, 2009 6:47 PM
To:
Verne, B. Michael
Subject:Confirmation of January 26, 2009 Call
Mr. Verne
The purpose ofthis email is to confirm the conclusions reached on our telephone conversationon January 26, 2009 regarding the transaction described below. At your earliestconvenience, can you please confirm whether you agree with the conclusions setforth below?
ProposedAcquisition
A group of fourlimited partnerships (referred to herein individually as "LP1,""LP2," "LP3" and "LP4," and collectively as, the"LPs") intends to form a new corporation (referred to herein as"Holdco") and contribute sufficient capital to Holdco to allow Holdcoto acquire all of the non-corporate interests of two targets that are undercommon control (the "Target Companies"). Holdco will effectuate theacquisitions through two wholly owned acquisition subsidiaries (referred toherein as "Acquisition Sub 1" and "Acquisition Sub 2"). Thesize of transaction will be greater than $63.1 million but less than $239.2million. For purposes of the size of person test, the ultimate parent entity ofthe acquired person is a $12.6 million person but not a $126.2 million person.
BackgroundInformation on UPE of AcquiringPerson
Ultimate ParentEntity. At the time of the acquisitionof the non-corporate interest of the Target Companies, Acquisition Sub 1 andAcquisition Sub 2 will be controlled by Holdco, as Holdco will hold 100% of thevoting securities of these entities. LP1 will hold approximately 55% of thevoting securities of Holdco and, as a result, will control Holdco and be theultimate parent entity of the acquiring person.
Related LPs. The LPs are related in that they have (1) a commongeneral partner, and (2) have some common limited partners. No person, however,is entitled to 50% or more of the profits of any of the LPs or 50% or more ofthe assets of any of the LPs upon their respective dissolution.
PortfolioCompanies of the LPs. Previously,the LPs invested in two separate corporations (referred to individually hereinas "Portfolio Company 1" and "Portfolio Company 2," andcollectively as, the "Portfolio Companies"). None of the LPs holds50% or more of the voting securities of either of the Portfolio Companies. Inconnection with the acquisitions of each of the Portfolio Companies, the LPsentered into a Stockholders Agreement with the other stockholders of thePortfolio Companies (these other stockholders represent coinvestors andindividuals that were members of management of the Portfolio Companies prior tothe LPs' investments). Each of the Stockholders Agreements includes a votingprovision pursuant to which the LPs are entitled to designate individuals forelection to the board of directors of the Portfolio Companies and, whenelected, such individuals would constitute a majority or greater of the boardof directors. Under these voting arrangements, each of the parties to theStockholders Agreements agrees to vote their shares in favor of the individualsdesignated by the LPs. In order to effectuate the intent of these votingarrangements, each of the parties to the Stockholders Agreements granted anirrevocable proxy to the Secretary of the respective Portfolio Company, whichallows the Secretary to vote such stockholder's shares in a manner consistent withthe voting agreement.
Total Assets of LPs. At the end of each quarter, a combined(but not consolidated) balance sheet is prepared for the LPs. As of December31,2008, the total assets reflected on the LPs combined balance sheet was$78.26 million. Of this amount, $77 .05 million was reflected as the LPs'"portfolio investments," which was calculated using Statement ofFinancial Accounting Standard No. 157, Fair Value Measurements.
Conclusions
Based on the factsset forth above, it is my understanding that you agreed with the threeconclusion set forth below:
Conclusion 1: LP1 does not control the Portfolio Companies. Althoughthe LPs have a common general partner and some common limited partners, theyare not under common control and, as a result, the voting securities holdingsof LP2, LP3 and LP4 in the Portfolio Companies are not attributed to LP1.Accordingly, LP1 is not deemed to control the Portfolio Companies under Rule801.1 (b)(1 )(i) (voting securities test), because it individually holds lessthan 50% of the voting securities of each of the Portfolio Companies.
With regard toRule 801.1(b)(2) (contractual power to designate 50% or more of the board),although LP1 is a party to the Stockholder Agreements, it does not have thepower presently to designate 50% or more of the directors of the PortfolioCompanies. That power is held by a group of stockholders of the PortfolioCompanies which, although are "related", are not under commoncontrol. A "group" of stockholders is not an "entity" (as definedby Rule 801.1 (a)(2)) and, as a result, can not control.
During our call Iindicated that I believed the conclusion set forth in the immediately precedingparagraph was supported by Interpretation 43 of the Premerger NotificationPractice Manual (4th Ed.), which specifically addressed whether a"group" of investors (each of which held a noncontrolling interest inthe issuer) controlled the issuer as a result of the existence of ashareholders agreement pursuant to which the group of investors obtained thecontractual right to designate a majority of the board of directors of theissuer. Under this arrangement, the group of investors granted one individualinvestor an irrevocable proxy to vote their shares consistent with the votingarrangement. Under these circumstances, it was concluded that the group ofinvestors did not control the issuer as a result of the shareholders agreementand that the individual holding the irrevocable proxy was the controllingparty. Specifically, it was noted:
There may be anargument that from a practical perspective the issuer is "controlled"by the group of investors as a result of the group's contractual power todesignate a majority of the directors of the issuer, but the Rules do notrecognize a "group" as an "entity."
Conclusion 2: It is not necessary to recompute the totalassets and annual nets sales as contemplated by Rule
801. 11(b)(1). Because LP1 does not control the Portfolio Companies,it is not necessary to recompute the total assets and annual net sales of LP1to include the total assets and annual net sales of the Portfolio Companies ascontemplated by 801.11 (b)(1).
Conclusion 3: LP1 should prepare a separate balancesheet that reflects its separate total assets (as opposed to just relying onthe combined balance sheet of the LPs which reflects the total assets ofa/l the LPs). To determine the total assets of LP1, it is ourunderstanding that it is necessary to prepare a pro forma balance sheet thatreflects the total assets of LP1, which would be reflected as LP1's percentageinterest in the Portfolio Companies. As we discussed on our call, we believethat this approach is consistent with Interpretation 142 of the PremergerNotification Practice Manual (4th Ed.), which provides:
The dollar value ofasset acquisitions from two or more "related" persons (e.g., from twoseparate partnerships having some or all of the same partners but not undercommon control for HSR purposes) is not aggregated. Similarly, for purposes ofthe size-of-person test in Section 7A(a) (2), the annual net sales and totalassets of multiple sellers (or multiple buyers) aggregated only to the extentthat any of such sellers (or buyers) are commonly controlled.
Thank you for yourconsideration of this matter.