Question
January 3, 2008
VIA FACSIMILE AND EMAIL
MichaelVerne, Esq.
Premerger Notification Office
FederalTrade Commission
600 Pennsylvania Ave., N.W.
Washington, D.C. 20580
Re: Applicationof Hart-Scott-Rodino Rules and Regulations
DearMike:
I am writing to follow up ona general inquiry of your office regarding the interpretation of theHart-Scott-Rodino Act and the rules and regulations interpreting it. Ingeneral, the question has to do with rulesregarding the determination of the value of the transaction where the entity tobe acquired, Company B, a publicly traded company, has substantial cash,cash equivalents and marketable equity and debt securities on its books asassets which pursuant to Rule 802.4 would exempt the transaction from theHart-Scott-Rodino notification requirements.
CompanyA and Company B are both software companies in complementary businesses thatmeet the size-of-person requirement. However, we are seeking confirmation aboutthe method for determining whether or notthe transaction would satisfy the size-of-transaction requirement basedon our interpretation of Rule 802.4. We represent Company A, the acquirer, inthis transaction.
Structure of Transaction:
In December 2007, Company Bentered into an Agreement and Plan of Merger (the "Merger Agreement")with Company A, and Company C, a Delaware corporation and wholly-ownedsubsidiary of Company A ("Merger Sub"), pursuant to which Merger Subwill be merged with and into the Company B(the "Merger"), with the Company B continuing as the survivingentity. Pursuant to the Merger Agreement, at the effective time of theMerger, each share of the Company B's common stock will be converted into theright to receive $7.20 cash and each outstandingoption will be converted into the right to receive $7.20 cash less the exerciseprice of such option. As reported inCompany B's last Form 10-K, as of March 31, 2007, Company B had 9,542,063 shares of common stock outstanding. Theclosing price of Company B's stock on the day prior to the execution of theMerger Agreement was $3.72 (Market Price value of $35,496,474.00). TheAcquisition Price is approximately $68,702,853.00 prior to adjusting foroutstanding stock options and other closing adjustments. The closing price asof today is $5.79 giving Company B a Market Value as of the date of this letterof approximately $55,248,544.00.
The proposed transaction issubject to the completion of due diligence by Company A, which condition mustbe satisfied or waived by January 10, 2008, and Company A's ability to obtain asatisfactory commitment from its primary lender to finance the purchase price,which condition must be satisfied or waived by Company A on or prior to January18, 2008. Company A has the right to terminate the Merger Agreement if eitherof these conditions is not satisfied by such dates. The transaction is alsosubject to approval by Company B's shareholders. It is possible but unlikelythat the closing will be within the 45 day period beginning from the date ofthe Merger Agreement.
Determination ofTransaction Size
Pursuant to Rule 801.10, thevalue of an acquisition of voting securities is the value of the votingsecurities that will be held as a result of the acquisition. According to theValuation Guide promulgated by the FTC, "If the stock is publicly traded,the value of the shares to be acquired is either Market Price or AcquisitionPrice, whichever is greater. For transactions subject to rule 801.30 (e.g.,open market purchases, tender offers, conversions, or exercises of options orwarrants) Market Price means the lowest closing quotation during the 45calendar days prior to closing. For transactions not subject to rule 801.30 (generally,acquisitions pursuant to a contract or letter of intent such as we have in thistransaction), Market Price is the lowest closing quotation during thatportion of the same 45-day period that begins one day before execution of thecontract or letter of intent. If Acquisition Price is not determined, MarketPrice governs the value of the transaction. If Market Price is indeterminablebecause closing is more than 45 days away, and the Acquisition Price isdetermined, then Acquisition Price is the value of the transaction. If neitherMarket Price nor Acquisition Price is determined, Fair Market value determinesthe value."
Rule 801.10 further providesthat the Acquisition Price is "determined" if the parties have agreedupon the consideration, or if the amount of consideration (e.g., by reason ofpost-closing adjustments or contingent future payments) can be reasonablyestimated. Company A therefore believes that the Acquisition Price of thetransaction has been determined and the value of the transaction isapproximately $68,702,853.00 prior to adjusting for outstanding stock optionsand other closing adjustments. Based on the size of the transaction test, thenotification threshold is met.
Applicabilityof Rule 802.4 to Company B
Rule 802.4 states inpertinent part:
"Anacquisition of voting securities of an issuer or non-corporate interests in an unincorporatedentity whose assets together with those of all entities it controls consist orwill consist of assets whose acquisition is exempt from the requirements of theAct pursuant to Section 7A(c) of the Act, this part 802, or pursuant to 801.21of this chapter, is exempt from the reporting requirementsif the acquired issuer or unincorporated entity and all entities it controls donot hold non-exempt assets with an aggregate fair market value of morethan $50 million (as adjusted). The value of voting or non-voting securities ofany other issuer or interests in any non-corporate entity not included withinthe acquired issuer does not count toward the $50 million (as adjusted)limitation for non-exempt assets."
For purposes of fairmarket valuation of Company B under the HSR Act, Company A is required to makea good faith determination of what a third-party would pay for the votingsecurities of Company B in an arm's length transaction between a willing buyerand a willing seller. In November of 2006, the Board of Directors of Company Bdetermined that a tender offer for all the shares of Company B for $5.50 pershare was inadequate and not in the best interests of Company B's shareholders.Given that the Board of Directors of Company B has approved the Merger, CompanyA takes the position that the Acquisition Price closely proximates the FairMarket value of the Company B prior to deducting the value of certain exemptassets.
Company A accordinglybelieves that this transaction is exempt from the reporting requirements sinceCompany B does not hold non-exempt assets with an aggregate fair market valueof more than $59.8 million. Company A takes this position based on the FairMarket value of the nonexempt assets of Company B when it deducts from the fairmarket value of all of the assets Company B the following exempt assets on thebooks of Company B as of November 30, 2007:
CASH AND EQUIVALENTS$10,313,587
CORPORATEBONDS$8,107,257
TAXABLE MUNICIPAL BONDS $2,156,853
GOVERNMENTBONDS$2,629,179
COMMERCIALPAPER$1,500,000
TIMEDEPOSITS$14,587
RESTRICTEDCASH DEPOSITS_ $142,815
TOTAL$24,864,278
Accordingly, Company Atakes the position that the Company B holds non-exempt assets with an aggregatefair market value of approximately $43,838,575 prior to any pre and postclosing adjustments. It is my understanding that based on Rule 802.4, thetransaction would be exempt if the fair market value of the non-exempt assetsof Company B and its subsidiaries is below $59.8M.
We are requestingconfirmation that Company A's position regarding this interpretation of Rule802.4 is correct and can be the basis upon which we should decide whether ornot the contemplated transaction would be subject to the Hart-Scott-Rodinonotification requirements.
I would appreciate atelephone call or an email with regard to our analysis of Rule 802.4 as itapplies to Company B. My direct dial number is (redacted) and my email addressis (redacted). Thank you in advance for your assistance in this matter.