Question
(redacted)
Victor Cohen
Preserver Notification Office
Room 303
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, D.C. 20580
Dear Mr. Cohen:
I am writing to confirm our recent telephone discussion with regard to the applicability of the preserver notification requirements of the Hart-Scott-Rodino Act to the following facts:
Target is presently a wholly owned subsidiary of Target Parent, which has assets in excess of $100 million. Prior to closing, Target will issue preferred stock assumed to be worth $7,500,000 to Target Parent in exchange for shares of Targets common stock having an equivalent value. A newly formed company, Holding, will then issue in excess of 50% of it s common stock issued to four individuals comprising the senior management of Target (none of whom have contribute approximately $125, 000 to Holding in exchange for the common stock issued to them. The remaining common stock of Holding, between 40% and 50%, will be issued to Investor in exchange for an amount of cash less than $125,000. Holding will also issue warrants to Target Parent which would, if exercised, entitle Target Parent to approximately 20% of the common stock of Target on a fully diluted basis, and issue warrants to Investor sufficient to entitle it upon exercise to sufficient common shares to give it approximately 20% of the common shares to give it approximately 20% of the common stock on a fully diluted basis. Holding will then purchase all of Targets common stock for $18.7 million and will put into escrow subordinate debt of $4 million and warrants to acquire up to 20% of the common stock of Target on a fully diluted basis, and issue warrants to Investors sufficient to entitle it upon exercise to sufficient common shares to give it approximately 20% of the common stock on a fully diluted basis. Holding will then purchase all of Targets common stock and 80% of its newly issued preferred stock for $18.7 million and will put into escrow subordinate debt of $4 million and warrants to acquire up to 20% of the common stock of Target on a fully diluted basis pursuant to an escrow agreement which contemplated that Holding will sell the debt and warrants to a third party investor within on year and remit the proceeds to Target Parent. In addition, Holding will pay Target Parent $2 million in return for a covenant not to compete.
To finance its purchase of common and preferred stock and its payment for Target Parents covenant not to compete, Holding will borrow $20.7 million from a financial institution which will receive warrants which would, if exercised, entitle it to approximately 20% of the common stock of Target on a fully diluted basis. Target Parent will give a guarantee to the financial institution for the payment of the principal and interest due in the first two years, and will make available to Target a revolving line of credit 2.5 million. In a worst possible case of immediate default, Target Parents payments on its immediate default, Target Parents payments on its guarantee and losses of unrepaid loans pursuant to the revolving line of credit might amount to $11 to $12 million.
In our discussion, we agreed that, at least apart from Target Parents guarantee of Holdings loan payments to the financial institution for two years and its own revolving line of credit, none of the above entities would required to file a premerger notification pursuant to the Hart-Scott-Rodino Act. In addition, you advised me that in considering the value as assets to Holding of the loan guarantee and revolving line of credit pursuant to Rule 801.40(c) the test would not be the full amount that might under and eventuality be paid, but rather the market value of the guarantee and revolving line of credit, which would typically be a small fraction of the total amount in question in an arms-length transaction. Accordingly, such assets would presumably be significantly less than $10 million and would not give to a reportable event.
I would appreciate it if you could call me to confirm my understanding that none of the above facts constitute a reportable event as soon as possible, and in any event, prior to next Wednesday, April 19, 1989.
Very truly yours,
cc: (redacted)