Question
From:(redacted)
Sent:Wednesday, March 03, 2004 12:02 AM
To:Verne, B. Michael
Subject: ValuationQuestion
Dear Mike,
I have a question regardingvaluation of voting securities. My client is an investment fund. One of it;portfolio companies ("Target 1 ") is undertaking a recapitalization.Currently, my client has 1/2 of Target 1's board seats, but only because thereare a number of temporarily empty board seats. My client does not hold 50% ofthe voting stock of Target 1.
Pursuant to the recapitalizationplan, each issued and outstanding share of Class A Common Stock, Class B CommonStock, Class C Non-Voting Common Stock and Common Stock will undergo a 1-for-10reverse stock split whereby each outstanding share of each class of capitalstock will be converted into 1/10 of a share of such class of capital stock. Inaddition, each issued and outstanding share of Class A Common Stock and Class BCommon Stock will automatically be exchanged for 12.52 shares of Common Stock.
In November 2003, Target 1's boardretained an independent firm to conduct a valuation of Target 1 in connectionwith the process leading to the recap. Shortly after this valuation wascompleted, Target 1 acquired another company ("Target 2"). Target 1'sboard proceeded with the recap process based on the November 2003 valuationbecause Target 1's board concluded that the acquisition of Target 2 wasdilutive (in the short term). Target 1's board determined that the cost of theTarget 2 transaction, including debt, diminished the value of Target 1'sshares.
Based on the November 2003independent valuation, the shares my client will hold as a result of the recapwill have a value less than $50 million. Target 1 board's final resolutionauthorizing the recap will include a paragraph reaffirming its assessment thatthe value of Target 1 is less than the November 2003 valuation. There seem tome to be 2 potential issues regarding the valuation -- (1) the valuation wasoriginally done more than 60 days before the recap becomes effective and (2)although my client currently has 1/2 the board seats of Target 1, the valuationwas not done by the Acquiring (my client). It seems to me that one could arguethat the valuation at issue here satisfies the HSR regulations because the date of the board resolutionauthorizing the recap and reaffirming the valuation is done within 60 days ofclosing and if my client did not agree with the valuation its representativeson the Target 1 board would not have agreed to the valuation.
From:(reacted)
Sent:Wednesday, March 03, 2004 12:14 AM
To:Verne, B. Michael
Subject: Valuation QuestionPlus
Mike,
I should have also said that myclient is not paying anything for the additional shares of stock it will bereceiving as a result of the recap.