Question
From: (redacted)
Sent: Thursday, July 20, 2006 11:55 AM
To: Verne,B. Michael
Cc: (redacted)
Subject: HSRAdvice - Formation of Joint Venture Corporation and Acquisition of
Voting Securities and Assets
Set forth below is thedescription of transaction, analysis, and conclusion with respect to a proposedtransaction to form a joint venture corporation and for the new corporation toacquire two related service businesses, which I referenced in a voice mailmessage this morning.
Pleaseconfirm that, based on the facts described, you agree with the conclusions setforth below, or clarify how the proposed transaction should be analyzed forpurposes of determining whether some or all of the parties must observe the HSRnotification and waiting period requirements.
1. Description ofTransaction. Three separate investment funds (individually "Fund" andcollectively "Funds"), and an individual who is the sole owner of tworelated services businesses (collectively "ABC"), have entered in toa letter of intent ("LOI") that provides that they will incorporate anew C-corp. ("ABC I"), that will acquire 100 percent of the ownershipinterests of ABC for a total purchase price of $67.5M to $100M. (All dollaramounts are rounded to the first decimal place for convenience.)
Thethree Funds will contribute a total of $24.2M in cash and will acquireapproximately 35.5 percent, 11 percent, and 4 percent, respectively, or a totalof 50.5 percent of the voting securities of ABC I, valued at $24.2M. The ownerof ABC will contribute 100 percent of the voting securities or membershipinterests of ABC, and will receive 49.5 percent of the voting securities of ABCI, valued at $23.7M, and an initial cash payment of $43.8M (subject to anescrow of 5 percent of that amount). The two entities that comprise ABC are anLLC and an s-corp.; the latter may contribute all of its assets to awholly-owned LLC, which ABC I will acquire. The total assets of ABC have a bookvalue of approximately $15M.
Theowner of ABC also may receive an additional contingent payment in early 2007 ofup to $30M in cash and $2.5M in voting securities of ABC I, that depends on ABCI's 2006 EBITDA. Depending on the amount, if any, of the contingent payment tothe owner of ABC, the Funds may contribute additional cash in the maximumaggregate amount of $2.6M, and will receive additional voting securities of ABCI in proportion to their respective ownership interests in ABC I as describedabove. Thus, the parties' acquisition of additional voting securities of ABC Iin early 2007, to the extent this occurs, will not change the proportion ofvoting securities owned by each of the Funds and the owner of ABC, as describedabove.
A bankunrelated to the parties ("Bank") will provide senior debt to ABC Iin an initial amount of $22.6M, which may be increased to $50M to fund theearn-out described above. The Bank will not acquire any voting securities(including convertible voting securities) of ABC I, and the senior debt will benon-recourse to the Funds and the owner of ABC (ie, none of these parties willguarantee repayment of the debt).
Theparties expect to fund ABC I and consummate ABC I's acquisition of ABC in asingle closing. As such, ABC I will not have a regularly prepared balance sheetat the time of closing.
TheL01 provides that the owner of ABC and the Fund that acquires 35.5 percent ofABC I's voting securities each will have the right to appoint two of the fivedirectors of ABC I, and that these two parties must jointly agree on theappointment of the fifth director.
2. Size of Persons for Formation of ABC I. One or moreof the Funds has total assets and/or annual net sales in excess of $113.4M, andthe owner of ABC has total assets and annual net sales in excess of $11.3M.
ABC Iwill be its own ultimate parent entity because no person will own 50 percent ormore of its voting securities or have the contractual power presently todesignate 50 percent or more of its directors. ABC I's total assets will exceed$11.3M for purposes of Rule 801.40, based solely on the initial cashcontributions by the Funds. ABC I's total assets for purposes of Rule 801.40also will include the book value of the total assets of ABC (approximately$15M), but not the $22.6M to $50M of senior debt, because the Bank will notacquire any voting securities, including convertible voting securities, of ABCI.
Accordingly,the parties will satisfy the size of person test in Rule 801.40 with respect tothe formation of ABC I.
3. Size of Transaction For Formation of ABC I. Each ofthe Funds and the owner of ABC will acquire voting securities of ABC I. UnderRule 801.40, each will be deemed an acquiring person and ABC I will be deemedan acquired person.
TheL01 provides a capitalization table for ABC I that specifies the sources anduse of funds by ABC I, as follows: $26.8M maximum aggregate capitalcontribution by the Funds; $22.6M in senior debt (and the additional seniordebt of up to $27.4M if needed to fund the contingent payment) that ABC I will(or may) borrow; and $26.2M as the maximum aggregate value of voting securitiesof ABC I that the owner of ABC may receive. The parties are preparing adefinitive agreement that will contain substantially the same terms, which aresufficient to determine the acquisition price for the initial acquisition ofvoting securities of ABC I under Rule 801.10(a)(2)(i).
Based onthe purchase prices specified in the L01, none of the parties' separate initialacquisitions of voting securities of ABC I will exceed $56.7M, the currentminimum size of transaction threshold under the HSR Act and FTC PremergerNotification Rules.
Dependingon ABC I's 2006 EBITDA, the Funds and the owner of ABC also may acquireadditional voting securities of ABC I in early 2007. Pursuant to Rule801.13(a)(2)(ii), the Funds and the owner of ABC each must determine the fairmarket value of the voting securities of ABC I that they already hold todetermine whether each of their separate 2007 acquisitions, when aggregated withthe voting securities that each of them already owns, exceeds the $56.7M sizeof transaction threshold.
4. ABC I's Size of Person for its Acquisition of ABC.The formation of ABC I as a joint venture corporation, and ABC I's acquisitionof voting securities and assets of ABC, are analyzed as separate transactions.ABC I will not have a regularly prepared balance sheet at the time that itacquires ABC. Pursuant to Rule 801.11(e), the total assets of ABC I as anacquiring person with respect to its acquisition of ABC will consist of allassets held by ABC I at the time of the acquisition, less all cash that will beused for the acquisition, including expenses incidental thereto. The onlyassets that ABC I will hold at the time of its acquisition of ABC will be cashto fund that acquisition or for acquisition-related expenses. Thus, ABC I willnot satisfy the $11.3M size of person test with respect to its acquisition ofABC.
5. Conclusion. Basedon the foregoing description of transaction and analysis, the separate initialacquisitions of voting securities of ABC I by the Funds and the owner of ABCwill not satisfy the $56.7M size of transaction test, and ABC I will notsatisfy the size of person test with respect to its acquisition of votingsecurities and assets of ABC. Accordingly, none of the parties to thetransaction are required to observe the notification and waiting periodrequirements of the HSR Act prior to consummating the initial acquisition ofvoting securities of ABC I or ABC I's acquisition of ABC.
With respect to the possible acquisition ofadditional voting securities of ABC in early 2007, the Funds and the owner ofABC each must determine the fair market value of the voting securities of ABC Ithat they already hold to determine whether each such acquisition, whenaggregated with the fair market value of the voting securities of ABC I thateach of them already holds, will exceed the $56.7M size of transactionthreshold. If so, each such acquiring person also must determine whether thesize of person tests are satisfied with respect thereto, using the most recentregularly prepared balance sheet of ABC I as of that time.