Question
CONFIDENTIAL
October 31, 2008
VIA ELECTRONIC MAIL
B. Michael Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
7th & Pennsylvania Avenue, NW
Washington, DC 20580
Re: HSR Treatment of Put Arrangement
Dear Mike:
In follow-up to ourconversation on October 28, 2008, I am writing to confirm my understanding ofthe applicability of the Hart-Scott-Rodino Antitrust improvements Act of 1976,as amended ("HSR Act") to the proposed transaction described below.
Proposed Transaction
Acquiring Company is ahedge fund. As a part of one of its investments, it owns voting securities ofIssuer. Please assume that this investment is "solely for the purpose ofinvestment" under the HSR Act and related rules.
The hypotheticaltransaction relates to a possible acquisition by Acquiring Company as theacquiring person of additional voting securities of Issuer. There is a publicexchange whereby "put" and "call" arrangements can beentered into. Acquiring Company intends to enter into a transaction whereby theparty on the other side of the transaction will have the right whenever itelects, for a certain period of time, to "put" a certain number ofshares of Issuer to Acquiring Company at an agreed upon price. The price thatthe shares are trading for at the time the put arrangement is entered into willbe well above the put price. Accordingly, there is some likelihood that theseshares will never actually be put to Acquiring Company, The most probablescenario when the put would be exercised would be if there were a substantialdrop in the market value of the shares to a value below the put price. Inreturn for Acquiring Company taking the risk of having to buy the shares ofIssuer at a point when the price it must pay will be above the market price, AcquiringCompany will receive a premium payment for each share it agrees to have put toit. Acquiring Company retains this premium payment regardless of whether theput expires without being exercised.
If the put is exercised,Acquiring Company will still hold the shares of Issuer "solely for thepurpose of investment" but will hold greater than 10% of the votingsecurities of Issuer, aggregating the shares it already holds with the sharesto be acquired pursuant to the put. The HSR size of the transaction test andsize of the parties test also will be met.
Conclusions
You confirmed that no HSRobligation would be triggered at the point of entering into the put agreementdescribed above since Acquiring Company would not hold the shares of Issuersubject to the put unless and until the put is exercised. You also confirmedthat an acquisition of additional shares of Issuer by Acquiring Company as aresult of the exercise of the put would not be subject to the HSR Act (eventhough Acquiring Company temporarily would hold greater than 10% of the votingsecurities of Issuer) so long as within the same day Acquiring Company sells asufficient number of shares of Issuer such that it again would hold 10% or lessof the voting securities of Issuer and accordingly qualify for the exemptionunder 16 C.F.R. 802.9. I also understand that if based on the time of day whenthe put exercise closes it is not feasible for Acquiring Company to sell-offshares of Issuer that same day, Acquiring Company still will not be subject tothe HSR Act so long as on the next business day on which the exchange is openwhere the shares of Issuer are traded Acquiring Company sells a sufficientnumber of shares of Issuer to reach a position where it again would hold 10% orless of the voting securities of Issuer. Further, I understand that it does notimpact the conclusion whether Acquiring Company sells off shares it held frombefore the exercise of the put, shares it just acquired or some combination toget back to a holding of 10% or less of the voting securities of issuer.Finally, I understood that HSR will not be triggered even if, followingAcquiring Company's sell off of shares of issuer to get back to a 10% or lessholding of voting securities of Issuer, Acquiring Company will hold a greaterpercent of the voting securities of Issuer (but not above 10%) than it didbefore the put was exercised (i.e., it does not matter from an HSR perspectivethat Acquiring Company sells off fewer shares than acquired under the exerciseof the put as long as the sell off results in Acquiring Company holding 10% orless of the shares of Issuer).
Please let me know assoon as possible if you disagree with any of the conclusions discussed above,or if I have misunderstood any aspect of your advice. Thank you for yourassistance in this matter.
Sincerely,