Question
From: (redacted)
Sent: Tuesday, November 22, 2005 11:39 AM
To: Verne,B. Michael
Cc: (redacted)
Subject: Informalinterpretation call
Dear Mr. Verne:
A is a New York company that manufactures and distributes consumer apparelaccessories.
As discussedover the phone, we are sending you this written description of the proposedtransaction that we went over with you, and our conclusion as to theapplicability of the continuum theory, which you confirmed. Please let us knowif this email does not reflect your views in any way.
B is a newlyformed New York company unaffiliated with A or C.
C is a United States subsidiary of a foreign corporation.
A, B and C haveagreed to enter into the following transactions:
A will be mergedwith a subsidiary of B (the "Merger"). As a result of the Merger, A willbecome a wholly owned subsidiary of B
Simultaneouslywith the Merger, B will sell to C all of the outstanding stock of A (the"B-C Stock Sale").
Immediatelybefore the Merger, A will sell to B certain assets of A, including inventory,receivables, cash, leases, and manufacturing plants and related assets (the"A-B Asset Sale"). A will retain, and B will not acquire, the rightto continue A's current product line, including rights of distribution and allof A's trademarks, designs and other intellectual property.
As a result ofthese transactions, C will own A, and, indirectly, the product line currentlyowned and marketed by A, including the product brand name. However, A willcease much or all of its prior manufacturing operations, with the assetsrelated thereto being owned by B. Following the transaction, B will manufactureand distribute A products in certain territories pursuant to a license from A.
The aggregateconsideration payable to A's shareholders is $100 million ($97.5 million incash and $2.5 million in installment payments). More than 80% of suchconsideration will be paid by C in consideration for A's stock. The balancewill be paid by B in consideration of the assets acquired in the A-B Asset Sale.
A and C intendto file a notification with respect to the sale of A's stock to C that is beingeffectuated pursuant to these back-to-back transactions (the "A-C StockSale").
We haveconcluded, and you confirmed, that, provided that the A-C Stock Sale isreported by A and
C, under thecontinuum theory the sale of A's stock to B pursuant to the Merger and B'sresale of A's stock to C pursuant to the B-C Stock Sale need not be reported.
This is because:
1. Theback-to-back sale of A's stock, from A to B and then from B to C, are"part of the same transaction." Indeed, B is a mere conduit for theultimate transfer of A's stock to C.
2. The sale ofA's stock to C following its acquisition by B must occur due "tocontract." Closing of these transactions will occur under a complex escrowagreement intended to make sure that neither transaction is consummated unlessthe other closes as well. Further, the relevant agreements includecross-closing conditions precedent intended to insure that B will not acquire A'sstock unless it is transferred simultaneously to C.
3. A's sale ofits stock to B and B's subsequent sale of A's stock to C will occursimultaneously.
4. The ultimatetransaction, i.e., the sale of A's stock to C (the A-C Stock Sale), isreportable.
We also notethat the asset transaction immediately preceding closing of the Merger (the A-BAsset Sale) is not reportable.