Question
From: (redacted)
Sent: Thursday, February 16, 2006 5:47 PM
To: Verne, B. Michael
Subject:Follow up on 802.4 question
Mike,
In follow up to ourconversation on Tuesday, 2/14 please confirm that you agree with the conclusionand analysis of the fact pattern described below.
Facts
X proposes to purchase allof the membership interests of LLC ("LLC Interests") from Y. Theassets of LLC are: 1) common shares of Company A, that constitute less than 50%of its voting securities and are accompanied by the right to elect 2 of 7directors (the "Shares"); 2) an unsecured, non-convertible promissorynote, of approximately $57 million issued by Company B (the "Note")and 3) rights under an exchange agreement, which provide the right to exchangethe Note and the Shares for a certain number (a non-control position) of votingsecurities in a publicly traded investment fund, Company C, based on a formula(the "Exchange Interest Rights"). Company A is controlled by CompanyC since it has the right to elect 4 of 7 directors, holds over 50% votinginterest, although less than 50% of the outstanding voting securities on afully-diluted basis. The purchase price of the Shares is determined by themarket value of C's voting securities, less the face amount of the portion ofthe Note needed to obtain a unit of C's voting securities. The parties did notassign a separate value to the Exchange Interest Rights. The value of theShares is below the applicable HSR threshold of $53.1 million.
Questions
Would the transactionsoutlined above including the proposed acquisitions of the LLC Interests, including,the Shares, the Note and the Exchange Interest Rights (the"Transactions") require a notification under the HSR Act?
Conclusion
Based on the facts andassumptions outlined above, the Transactions would not require notificationunder the HSR Act at the assumed values. However, if the per unit price of Cwere to vary, a new determination of the purchase price for the Shares must bemade and determined to be below the
HSR threshold.
Analysis
1.The Acquisition of the LLC Interests
This transaction is exemptpursuant to Section 802.4 of the HSR Rules. Pursuant to this rule, anacquisition of non-corporate interests whose assets together with those of allentities it controls consist of or will consist of assets whose acquisition isexempt from the requirements of the Act is exempt if the acquired entity andall entities it controls do not hold non-exempt assets with an aggregate fairmarket value of more than $53.1 million. Since A is not controlled by LLC thevalue of the Shares is to be excluded and the value of all other assets held byLLC must be below $53.1 million (US) or exempt. The other interests held by LLCare exempt. The Note is exempt pursuant to Section 7A(c)(2) of the Clayton Actand the Exchange Interest Rights, constitute convertible voting securities andare therefore exempt pursuant to Section 802.31 of the HSR Rules. Uponconversion there could be reporting requirements and an HSR analysis would needto be made at that time.
2. The Acquisition of the Shares
This is a secondarytransaction. The Acquired Person is A, whose UPE is C, and the Acquiring Personis D. The size of transaction test is not met since the value of the Shares isbelow $53.1 million (US).
3.The Acquisition of the Note
This is a secondarytransaction. The Acquired Person is B, whose UPE is C, and the Acquiring PersonD. The transaction is exempt pursuant to Section 7A(c)(2) of the Clayton Act.
4.The Acquisition of the Exchange InterestRights
This is another secondarytransaction. The Acquired Person is C, which is its own UPE. The value exceeds$53.1 million (US) meeting the size of transaction test, but is exemptbecause the Exchange Interest Rights must be exchanged in order to confervoting rights in an issuer - C. Therefore, they would constitute convertiblevoting securities and the acquisition is exempt pursuant to Section 802.31 ofthe Rules. Upon conversion there could be reporting requirements and an HSRanalysis would need to be made at that time.