Question
Sent: Monday, July 20, 2009 12:13 PM
To: Ferkingstad, James H.
Cc: (redacted)
Subject: 7/17 discussion of HSR question
Dear Mr.Ferkingstad:
Thank you for speakingwith me and (redacted) last Friday, July 17th about a potential transaction. Inour conversation, we discussed a transaction in which a buyer will acquire 80%of the voting securities of a target, but will also have the right or theobligation to acquire the remaining shares upon certain events tied to theemployment of the target's CEO (who is also a shareholder). The purchase pricefor the 80% is approximately $63.6 million which, taken alone, would mean thetransaction does not meet the size of transaction test. We noted, however, thatat the closing, the buyer and the remaining 20% shareholder are to enter into aShareholders Agreement. The Shareholders Agreement provides for certain put andcall options tied to the remaining shareholder's employment: If the remainingshareholder's employment as CEO is terminated for any reason, either the buyer,the remaining shareholder or both parties will have a put or call at fairmarket value with respect to the 20% held by the remaining shareholder. A few (non-exhaustive)examples: (a) if the remaining shareholder dies, his heirs will have a put andbuyer will have a call at fair market value; (b) If the remaining shareholderis fired without Cause, the remaining shareholder will have a call at fairmarket value, but the Buyer will not have a put until the one year anniversaryof the firing; and (c) If the remaining shareholder is fired with Cause, thebuyer will have a call, but the remaining shareholder will not have a put. Thistransaction structure has been chosen for business reasons independent of anyHSR considerations.
In consideringwhether the option to acquire additional voting securities through thisput/call feature would make the deal reportable, Joel and I first pointed outto you that the Premerger Notification Office has consistently taken theposition that the acquisition of an option to acquire voting securities isexempt from reporting, although the eventual exercise of the option ispotentially reportable (assuming the relevant size tests are met and no otherexemption applies). 16 C.F.R. 801.32, 802.31. In this case, the remainingshareholder will retain the right to vote his shares and will retain thedividend rights and the economic risk as to the future value of his shares. Wefurther pointed out that under Section 7(A)(c)(3) of the HSR Act, anacquisition of an issuer's voting securities is exempt if the buyer alreadyholds 50% or more of the issuer's voting securities before the acquisition atissue. We said we believe this exemption applies in this case because atwhatever time buyer acquires additional shares through the exercise of the putor call options, it will already hold at least 50% of the voting securities oftarget. We noted to you that our analysis is based on an informal staff opinion(http://www.ftc.gov/opinions/404017.htm, dated April 26, 2004). We notedas well that the only notable factual difference we saw in the facts describedin that opinion and our facts is that, in our case, the buyer's option cantheoretically be exercised at any time after the closing as detailed above. Inthe informal opinion, the put/call option could not be exercised for fiveyears.
After listening tothe above and highlighting the applicability of the exemption in Section7(A)(c)(3), you concurred in our conclusion that this deal is not reportable. Iwould appreciate a telephone call confirming that I have correctly stated youradvice.