Question
From:
(redacted)
Sent:
Wednesday, May 13, 20096:54 PM
To:
Verne, B. Michael
Cc:
(redacted)
Subject: Premerger Notification Discussion
Dear Mr. Verne,
Thank you for taking the time to speak with us on Wednesday,May 06, 2009, regarding whether a Hart-Scott-Rodino ("HSR") filingwill be required in connection with a proposed transaction.
As I explained, the parties to the proposedtransaction do not believe that an HSR filing is required. While they arrivedat the structure of the transaction after considering a number of businessobjectives, including tax, the potential of obtaining outside expertise, andcertain contractual terms, the question of whether an HSR filing is required isimportant since the deal is time-sensitive and may not proceed if a filing isrequired.
During our call, we discussed several scenarios,each building upon its predecessor, with the final scenario outlining thetransaction as currently contemplated by the parties.
Scenario 1: Companies A, B, and C wish to form anLLC, which I will call "Newco."
Company A will contribute assets, which forpurposes of our question we will assume are nonexempt, to Newco upon formation,in return for which it will receive the right to 49% of Newco's profits and 49%of its assets upon dissolution.
Company B will also contribute assets, which forpurposes of our question we will assume are non-exempt, to Newco uponformation, in return for which it will receive the right to 46% of Newco'sprofits and 46% of its assets upon dissolution.
Company C will contribute cash or cash equivalentsto Newco upon formation, in return for which it will receive the right to 5% ofNewco's profits and 5% of its assets upon dissolution.
Newco will have a five-member Board of Managers.Under Newco's LLC Agreement,
Company A will be entitled to elect three Managersand Company B will elect two Managers.
Company C will be entitled to elect a non-votingobserver to the Board.
Notwithstanding the fact that Company A will beentitled to elect more than half of Newco's
Board of Managers, it is our understanding thatregardless of the value of the assets contributed, no HSR filing requirementwill arise as none of the Companies would have "control" of thenewly-formed LLC under 16 CFR 801.1 (b )(ii). You confirmed that this wascorrect.
Scenario 2: For tax reasons, it could beadvantageous to conduct the initial formation of the Newco LLC in two stages.Rather than the formation outlined in Scenario 1, Companies A and B would formNewco by contributing assets, and Company C would immediately thereafter buy-into Newco for cash or cash equivalents, with cash contributed to Newco, ratherthan Company A or Company B. These events would all take place on the same dayand be contingent on each other. At the end of the day, all three companieswould have the exact same interests as in Scenario 1.
You confirmed that the PNO would treat thisalternative situation as the joint formation of the Newco LLC by Companies A,B, and C under 16 CFR 801.50, as in Scenario 1, and thus, the formation wouldremain non-reportable.
Scenario 3: To ensure that Company C has theability to withdraw from this investment in the future, the parties will modifythe facts in Scenario 2 by providing Company C with a "put option"upon the formation of Newco that would allow it, at some point in the future,to compel Newco to buy-out its interest. This would be a "put," andnot a "call," which means that Newco would not have the powerto compel Company C to sell its interest. The decision would be solely up toCompany C. The strike price of the "put option" would fluctuate withthe financial performance of Newco. It would be subject to a minimum floor, butthat floor would be set at an amount lower than the amount which CompanyC is initially contributing to the LLC. As such, Company C will be at riskeconomically.
You confirmed that the creation of this optionwould not impact the preceding HSR analysis. You also noted, however, that ifand when the option is exercised, it may give rise to an HSR filing obligationat that point in time.
Scenario 4: Finally, as we discussed, the partiesactually expect to modify the facts in Scenario 3 by having Company C hold itsinterest in Newco through Company X, a newly formed LLC in which Company A willhave a minority ownership interest. Specifically, for purposes of raisingcapital and also potentially securing industry knowledge with regard to theformation and operation of Newco, Company A has enlisted the help of Company C.Prior to the formation of Newco, Company A and Company C will form Company X,an LLC which will hold the five percent interest in Newco referencedpreviously.
To form Company X, Company A will contribute cashor cash equivalents, in return for which it will receive the right to 40% ofCompany X's profits and 40% of its assets upon dissolution. Company C willcontribute cash or cash equivalents, in return for which it will receive theright to 60% of Company X's profits and 60% of its assets upon dissolution.Company C will have the right to choose the Observer which Company X isentitled to elect to the Newco Board. Company C will also be solely entitled todetermine whether to exercise the "put option" discussed earlier,which in this scenario will be provided to Company X.
You confirmed that the formation of Company Xwould not be reportable. You also confirmed that, notwithstanding Company A'sminority interest in Company X, the only profits or rights upon dissolutionconsidered for purposes of determining whether Company A has control over Newcounder 16 CFR 801.1(b)(1)(ii), for purposes of applying 16 CFR 801.50 to theformation of Newco, would be the 49% owned directly by Company A. Accordingly,Company A is not deemed to control Newco under 16 CFR 801.50, and the formationof Newco would not require an HSR notification.