Question
From: (redacted)
Sent: Sunday, November 07, 2004 8:30 PM
To: Verne, B. Michael
Cc: (redacted)
Subject: HSR Questions
Hi Mike,
A proposed transaction has generated a couple questions.
With respect to fair market valuations, we have transaction in which an issuerhas both common and preferred stock and both are voting securities under the HSR Act. Both classes will be acquired in what I will call"Acquisition 1 ". (Note that the parties to the transaction believethere is an exemption to the acquisition of the preferred stock, but that theywill have to file in respect of the acquisition of the common stock if suchacquisition meets the size-of parties and size-of-transaction thresholds.)Because the preferred stock currently have certain enhanced governance rights,their value is significantly greater than the value of the common stock.However, at some point after consummation of Acquisition 1, the holders of thepreferred stock will exchange their shares of preferred stock for votingsecurities of another issuer, which may trigger another filing and which I willcall "Acquisition 2". Upon completion of Acquisition 2, the preferredstock (and its attendant enhanced governance rights) will be effectivelyextinguished. As a result, the value of the common stock will increase. Myquestion is whether our fair market valuation of the common stock in respect ofAcquisition 1 needs to take account the future effect of Acquisition 2 on theirvalue. My initial reaction is that is does not, as long as the valuation isconducted in good faith, because you are concerned with the common stock'scurrent value, not the value after considering a future event.
On a related note, Acquisition 2 effectively operates as an option. The holdersof the preferred stock may, after a waiting period, exchange their preferredstock for voting securities of another issuer. Upon completion of Acquisition1, the parties will have signed an agreement governing the mechanics of theAcquisition 2 exchange (the "Exchange Agreement"). As mentioned inthe foregoing paragraph, the holders of the preferred stock will not have fileda Form in connection with their acquisition of the preferred stock because webelieve an exemption exists for such acquisition. However, the parties may wishto file notification in respect of Acquisition 2 upon the closing ofAcquisition 1. Could the parties file on Acquisition 2 if they included theExchange Agreement as evidence of their agreement and good faith intention toclose (i.e., can parties file on something that so closely resembles anoption?) If the parties can file in respect of Acquisition 2 upon closing ofAcquisition 1, is it accurate to say that the parties would have to consummateAcquisition 2 within one year of the expiration of the waiting period? (Orre-file if it happens later?)
I realize this potential transaction is complicated and these questions arecomplex, so if you have any questions please don't hesitate to call me. If youreach my voicemail, you can always push "0" and ask the receptionistto page me. You can also ask my secretary to do the same.