Question
April 22, 2004
VIAELECTRONIC MAIL AND POSTAL SERVICE
Mr. B. Michael Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Ave, NW
Washington, D.C. 20580
Re: Confirmation of Advice Regarding Acquisition of VotingSecurities Combined with First Offer and Put/Call Option
DearMr. Verne:
In our conversation of April 21, I described for you a transactionin which Buyer will acquire 50% of the voting securities of SellCo but willalso have either the right or the obligation to acquire the remaining sharesafter five years. I write to confirm the analysis and your informal advice.
Description
Seller isits own ultimate parent. Buyer will buy shares from shareholders, but will alsobuy some newly issued shares from SeI1Co. The result will be that Buyer willhold exactly 50% of the voting shares of SellCo issued and outstanding as ofclosing. (There is only a single class of shares.) The purchase price isapproximately $30 million, and even if the purchase price is not considered"determined" (there is an adjustment at closing), the fair marketvalue of these shares (which are not publicly traded) is significantly lessthan $50 million. Consequently, the transaction appears to be nonreportable.Since the transaction has the following additional features, however, I askedyou to confirm my analysis.
Theparties' agreement also provides for put and call options. In five years' time(but not earlier), Buyer will have the right to call the selling shareholders'remaining shares, and the selling shareholders will have the right to put theirshares, in accordance with a pricing formula stated in the agreement. While thelikely outcome is that Buyer or the selling shareholders will exercise theoption, it is conceivable that neither side would do so. During the five yearspreceding the option date, there are restrictions on the selling shareholders'rights to transfer shares, including a right of first offer in favor of allshareholders (including Buyer) who choose not to transfer their shares, if lessthan 70% of the selling shareholders decide to sell their remaining shares inthe five-year period. During the five years preceding the option date, theselling shareholders will retain the economic benefit of their retained shares.For example, the shares are currently dividend-paying, and if the Boardcontinues to declare dividends, the selling shareholders would continue for thenext five years to receive the dividends on their retained shares (but not onthe shares that they are selling today).
Alsoduring the next five years, the selling shareholders will have the right toelect four of the seven members of Seller's Board of Directors (unless Buyercomes to hold 85% of the voting shares). The selling shareholders alsootherwise will continue to have the right to vote their shares, althoughcertain major decisions will require supermajority consent (of the Board or theshareholders).
Afterclosing, Buyer will have both the right and duty to appoint at least one seniorexecutive into Seller's management.
Thistransaction structure has been chosen for business reasons independent of anyHSR considerations.
Analysis
The Premerger Notification Office has consistently takenthe position 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) is met and no otherexemption applies). 16 C.F.R. 801.32, 802.31. Here, the sellingshareholders will clearly retain the right to vote their shares, so theexception noted at ABA, PREMERGER NOTIFICATION PRACTICE MANUAL No. 31 (3d ed.2003), does not apply. Similarly, the selling shareholders retain the incomerights and, at least within the broad range provided in the option-exerciseformula, the economic risk as to the future value of their shares.
If Buyer acquires additional shares, either through thefirst offer provision or through the eventual exercise of the put or calloptions, that acquisitions) will not be reportable as long as, at the time ofany such acquisition, Buyer continues to hold at least 50% of the votingsecurities of Se11Co. Under 15 U.S.C. 18a(c)(3), an acquisition of anissuer's voting securities is exempt if the buyer already holds 50% or more ofthe issuer's voting securities before the acquisition at issue.
Conclusion
Theacquisition is not currently reportable. The Buyer's acquisition of additionalSellCo voting securities will not be reportable unless, prior to any suchacquisition, Buyer ceases to hold 50% of SellCo's voting securities.
Thank you again for yourassistance. I would appreciate a telephone call confirming that I havecorrectly stated your advice.