Question
From: (REDACTED)
Sent: Monday, February 02, 2009 12:02 PM
To: Verne, B. Michael
Cc: (REDACTED)
Subject: HSR Advice -Acquisition of Non-Corporate Interests -Rule801.1 O(d);Rule 802.4
Set forth below isthe description of a proposed transaction for an existing business corporationto acquire 100 percent of the membership interests of an existingunincorporated entity, and tentative conclusions on HSR reportability for same.
Pleaseconfirm based on the stated facts that you agree with the conclusions set forthbelow, or clarify how the proposed transaction should be analyzed for purposesof determining whether some or all of the parties must observe the HSRnotification and waiting period requirements for the proposed transaction.
1. ABC LP and DEF LLC are two existing privateinvestment funds, each of which is its own ultimate parent entity, and each ofwhich presently holds voting stock of GHI Corp. ABC holds more than 50 percentof GHl's voting stock and we presume here that ABC is the ultimate parent entityof GHI.
2. ABC and DEF have executed a letter of intent (LOI) toacquire 100 percent of the membership interests of JKL LLC, an existingoperating company, from MNO LLC, a holding company that holds the membershipunits of JKL.
3. The total purchase price stated in the LOI is $71 M,comprised mostly of cash, plus GHI voting stock that will be issued to certainmembers of JKL management as described below. GHI will fund the cash paymentwith new senior and subordinated debt totaling $approximately $40M, and newequity contributions into GHI by ABC, DEF, and certain members of JKLmanagement totaling approximately $31 M. The equity contributions to GHI forthe proposed transaction will not materially affect the percentage ownership ofGHI voting stock, and ABC will continue to hold more that 50 percent of GHIvoting stock post-closing.
4. Certain individuals in JKL management presently holda small percentage of membership units in MNO, and at closing will be paid cashand will receive GHI voting stock from MNO (or directly from GHI if so directedby MNO), in exchange for their ownership interests in MNO. The total value ofGHI voting stock issued to these individuals has not been determined, but theparties presently expect that the value of same in the aggregate will besubstantially less than $5M.
5. GHI and ABC satisfy the current $130.3M size ofperson test, and JKL satisfies the current $13M size of person test.
6. JKL's current balance sheet shows: (i) total assetswith book value of approximately $39M, which includes $31 M of intangibles andgoodwill from prior acquisitions by JKL; (ii) existing long-term debt ofapproximately $31 M, which includes earnout liabilities of approximately $2.4Mfrom prior transactions, which MNO will assume or pay prior to closing, leavingtotal long-term debt at closing of approximately $28.6M; and (iii) cash andcash equivalents of approximately $2.5M.
7. The LOI provides that the $71 M purchase priceassumes a debt-free and cash-free transaction at closing. The parties arenegotiating a definitive Securities Purchase Agreement for the proposedtransaction, which provides as follows:
"The aggregateconsideration for the Securities [JKL LLC interests] to be purchased by Buyershall be equal to $71 million (the "Purchase Price"). The PurchasePrice plus the amount of Cash as of the Closing Date, minus the amount ofFinancial Debt of the Companies as of the Closing Date, minus the amount ofTransaction Expenses, minus the Retained Liabilities, minus ContingentPayments, minus the Escrow Amount, shall be paid to Seller on the Closing Date,as provided in Section 8.3. The Financial Debt of the Companies and theTransaction Expenses shall be paid in accordance with the funds flow memorandumthat shall be delivered to Buyer in advance of Closing."
8. The parties presently expect that GHI as Buyer willpayoff JKL's Financial Debt at closing, consisting of GHI's existing long-termdebt net of earnout liabilities, in the approximate amount of $28.6M, and thatJKL will distribute its cash and cash equivalents to MNO prior to closing.
9. Net of the adjustment to Purchase Price for GHl'spay-off of JKL Financial Debt at closing, the parties presently expect that GHIas Buyer will pay a total of approximately $40M to MNO at closing in cash andGHI voting stock, with a portion of the cash payment used to fund a customaryEscrow Amount as referenced above.
10. The parties tothe proposed transaction are not required to comply with the notification andwaiting period requirements under the HSR Act for the following reasons:
(i)Under Rule 801.1 O(d), the value ofnon-corporate interests in JKL that GHI will acquire, net of JKL debt that GHIwill payoff at closing, does not exceed the current minimum size of transactionthreshold of $65.3M;
(ii) Theexemption in Rule 802.4 will apply to GHI's acquisition of non-corporateinterests in JKL if GHl's UPE determines that the fair market value of JKLassets is less than $65.3M; and
(iii) None of the acquisitions of GHI voting stock by members of JKL management willexceed the current minimum size of transaction threshold of $65.3M.
Withrespect to the first point, we reference the following FTC Staff InformalOpinions:
http://www.ftc.gov/bc/hsr/informal/opinions/0802010.htm
http://www.ftc.gov/bc/hsr/informal/opinions/0707023.htm
http://www.ftc.gov/bc/hsr/informal/opinions/0809010.htm
Withrespect to determining whether the exemption in Rule 802.4 may apply, wepresume that GHI's UPE may use normal valuation methods to determine the fairmarket value of JKL assets at the time of closing, and is not required toimpute a value to same of $71 M, which is the approximate amount of payments toholders of JKL membership units and for pay-off of JKL's existing long-termdebt, as described above.
Pleaseadvise if you agree with the above conclusions, or advise as to how the partiesmust account for the payments described above to determine whether the proposedtransaction exceeds the current $65.3M minimum size of transaction threshold,and whether the exemption in Rule 802.4 applies.