Question
July 28, 2006
NancyM. Ovuka
Premerger Notification Office
Bureau of Competition
FederalTrade Commission
7th& Pennsylvania Avenue, NW
Washington, DC 20580
Dear Nancy:
I am writing to confirm my understanding of telephoneconversations we had today concerning the potential reportability under theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSRAct") of a proposed transaction discussed below.
Proposed Transaction
Please assume for purposes of our hypothetical setforth below that the Size of the Parties Test is met. Pursuant to an Agreementand Plan of Merger, our client, Acquiring Parent, will acquire 100% of theissued and outstanding voting securities of Target, a privately heldcorporation that is ultimately controlled by its majority owner, Target Parent.The structure of the transaction involves a merger whereby Target will bemerged with and into Merger Sub, a wholly owned subsidiary of Acquiring Parent,with Target being the surviving corporation. Accordingly, Target will become awholly owned subsidiary of Acquiring Parent.
While the overall payment being made by AcquiringParent as a part of the transaction is between $100-$200 million, the part ofthe payment for the stock of Target carrying current rights to elect directorsis cash in an amount between $40-$50 million an amount below the $56.7million HSR Size of the Transaction Test. This payment amount is based on theper share value that Acquiring Parent will pay for the currently outstandingvoting securities of Target.
The additional payments by Acquiring Parent are forthe following: (1) the acquisition of the preferred stock of Target, stock thatdoes not have voting rights with regard to the election of directors; (2) thepay off of all of the debt owed by Target, consisting of debt owed to TargetParent and to third parties; (3) transaction expenses; and (4) the cancellationof outstanding warrants and options of the Target. The options and warrantswill not be exercised and converted into common stock of Target prior toclosing. None of the options and warrants currently carry any voting rightswith regard to the election of directors of any entity. If the amounts of theseadditional payments are included in the valuation for HSR purposes, the Size ofthe Transaction Test would be met.
Analysis and Conclusions
You confirmed that the transaction described above isnot reportable under the HSR Act as the $56.7 million Size of the TransactionTest is not met.
You also confirmed the following:
(1)Preferred stock the considerationfor the preferred stock is not included in the HSR valuation as the acquisitionof non-voting securities is HSR exempt;
(2)Pay off of debt it is theposition of the FTC Premerger Notification Office that in the acquisition ofvoting securities amounts paid for the pay-off of debt owed by the targetshould not be included in the HSR valuation. See ABA Section of Antitrust Law,Premerger Notification Manual, Interpretation No. 93 (3d Ed. 2003). It does notmatter if the debt is owed by Target to third parties and to Target Parent;
(3)Transaction expenses amountspaid for the reimbursement of expenses incurred by Target and Target Parent asa result of the transaction, such as attorney and investment banker fees, arenot included in the valuation for HSR purposes. Further bonuses paid todirectors, officers and employees of target (including stay-put and retentionbonuses and pay-outs connected with employment as a result of a change ofcontrol) in connection with the transaction are not included in the valuationfor HSR reportability regardless of whether some of the recipients of suchpayments also hold a non-controlling amount of voting securities of Target; and
(4) Option and Warrants the cancellation of the optionsand warrants which do not entitle the holders to current voting rights withregard to the election of directors is an exempt event for HSR purposes asthese are convertible voting securities under 16 C.F.R. 802.31. (You addressed a similar issue in FTC Informal Interpretation No.0603028.) Even though the option and warrant holders will receive the same netconsideration as a part of this transaction that they would have received ifthe options and warrants were exercised immediately prior to closing, thecancellation of the options and warrants is nevertheless a non-reportable partof the transaction. Accordingly, the consideration paid to the holders of theoptions and warrants as a part of this transaction is not included in thevaluation for HSR purposes. Under the HSR Act, it also does not matter if mostof the warrants and options are held by the parent of the target. In thisinstance, Target Parent holds all of the warrants of Target.
Weunderstand from our conversation that this transaction will not be regarded asa transaction or device for avoidance under 16 C.F.R. 801.90 as the transaction has not been structured in any way for purposes ofnot filing under the HSR Act.
Please let me know as soon as possible if youdisagree with any of the conclusions discussed above, or if I havemisunderstood any aspect of your advice. Thank you for your assistance in thismatter.