Question
(redacted)
April 30, 1999
Dick Smith
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
6th & Pennsylvania Avenue, NW, Room 303
Washington, D.C. 20580
Dear Dick:
I am writing to confirm the advice you provided me over the telephone yesterday afternoon. I asked you whether the purchase price for warrants or options to buy voting securities should, upon exercise of the warrants or options, be aggregated with the exercise price (or some other measure) to determine the value of the transaction. I also asked how one determines the value of the shares purchased in the exercise transaction.
You responded that there would be no aggregation. You told me that, although the purchase of warrants or options is a purchase of voting securities, so long as the warrants or options do not carry present voting rights their purchase is exempt under 802.31. (See 801.1(f) The exercise of the warrants or options would be viewed as a separate purchase of voting securities with no aggregation with the earlier, exempt transaction per 801.15.
You then told me that for purposes of determining the size of the transaction, the value of the voting securities purchased pursuant to the exercise is determined under 801.10. Thus if the shares acquired upon exercise are publicly traded, their value would be the greater of the acquisition price of the market price. ( 801.10(a)(1.) If the shares are not publicly traded, the value would be the acquisition price (or, if there is no acquisition price, the fair market value). (801.10(a)(2).)
I then posed a hypothetical in which Company A acquired non-voting warrants to purchase what would amount to 20% of the non-publicly traded voting shares of Company B. The warrants, which are granted at no cost to induce A to loan money to B, give A the right to purchase the B shares at $.01 apiece. One year later A exercises the warrants and purchases 20% of the voting shares of B for $15. Meanwhile, the value of B has increased dramatically, such that 20% of the company would be worth substantially more than $15 million. You advised that the value of the transaction for purposes of determining the size if the transaction and eligibility for the minimum dollar value exemption (802.20) would still e the acquisition price of the shares, i.e., $15.
Please let me know if the above does not correctly portray your advice.
Thank you very much for your help.
Best regards.
(redacted)