Question
From:
(Redacted)
Sent:
Monday, March 15, 2010 4:08 PM
To:
Verne, B. Michael
Dear Mike,
I wanted to call you to review a set offacts and preliminary conclusions and thought it would be helpful to you to havethem set out for you in writing first. I would appreciate it if you couldreview the below and call me at (redacted).
Seller is creating a wholly owned LLC.By itself, such a formation of a wholly owned unincorporated entity is exemptunder 802.30(b). Soon after the LLC is formed, Buyer will acquire 49% of themembership units of the LLC from Seller. Seller will retain 51 % of themembership units of the LLC. In acquiring 49% of the LLC's membership units,Buyer will not acquire the right to 50% or more of the LLC's profits or 50% ormore of the LLC's assets upon its dissolution. Without more, Buyer'sacquisition of 49% of the LLC's membership units is exempt under 801.50.
Buyer will also acquire options topurchase additional units in the same LLC from Seller (the "Buyer CallOptions"). We understand that generally, the acquisition of options topurchase voting securities is not an acquisition of voting securities. (802.31). But we have seen some Informal Interpretations finding that certainput and call rights led to a different position and want to review the facts inthis instance.
In this case, Buyer can exercise theBuyer Call Options upon one or more of the Buyer Call Events that are set forthin the LLC's operating agreement. Likewise, Seller will have Seller Put Rightsaccording to which it can require Buyer to purchase Seller's units in the LLCupon one or more of the Seller Put Events set forth in the LLC operatingagreement. Buyer Call Events and Seller Put Events include the death or disabilityof one of the founders, the second and fourth anniversaries of the LLCoperating agreement, the attempt to transfer by Seller of the LLC's shares toan unaffiliated third party, the filing of a bankruptcy application, materialbreach of the LLC operating agreement, termination of the founders as employeesor replacement of them as shareholders, and so forth. None of the Buyer CallEvents or the Seller Put Events will happen at or on the closing when Buyeracquires 49% of the LLC's units; they take some additional action or inaction,in the future, to occur. Seller is restricted from transferring its units inthe LLC to an unaffiliated third party for the first four years after the LLCoperating agreement is signed. As well, the optioned units will be held inescrow.
Notwithstanding the transfer restrictionon Seller and the units being placed in escrow, we believe Seller will retainbeneficial ownership of the optioned units unless and until the options areexercised. Buyer will not bear the risk of loss or benefit of gain with respectto the underlying units before the options are exercised. When Buyer acquires49% of the membership units of the LLC, it will also have the right todesignate 3 of the LLC's 5 members of the LLC's Board of Managers. But, becausethis right applies to an unincorporated entity, Buyer will not be gaining aninterest sufficient to control the LLC. Under 801.1(b), the test for controlof an unincorporated entity is having the right to 50% or more of theunincorporated entity's profits or 50% or more of the entity's assets upon itsdissolution. Unlike a corporation or trust, a person does not control anunincorporated entity when it has the contractual power presently to designate50% or more of the LLC's managers or others exercising functions similar tothose of directors or trustees.
The transaction in which Buyer acquires49% of the LLC's units and options is exempt. The conversion of the option orput rights into membership units is potentially reportable. The LLC operatingagreement recognizes this and makes the closing of the purchase of units in theLLC pursuant to the exercise of the call option or put rights subject toexpiration or termination of the HSR waiting period if notification under theAct is required.