Question
From:
(redacted)
Sent:
Friday, May 08,2009 10:41 AM
To:
Verne, B. Michael
Cc:
(redacted)
Subject: Confirming e-mail re/ reorganization of(REDACTED)
Mike:
Thanks for speaking with us yesterday morning.This is to confirm the substance of our call.
As we discussed, there are two transactions takingplace. The first involves the split-off by (redacted)((REDACTED)) of a newlyformed subsidiary, (redacted)((REDACTED)). (REDACTED) will hold (REDACTED)'s54% interest in (REDACTED), a 100% interest in (redacted)a 65 % interest in(redacted)(which includes (redacted)) and cash and $2 billion of indebtedness.The split-off will be accomplished through the exchange of shares of thetracking common stock of Liberty Entertainment for shares on (REDACTED). As aresult of the split-off, the current shareholders of (REDACTED)will receiveshares of (REDACTED) in proportion to their current shareholdings of (REDACTED).When the split-off is completed, (REDACTED), also referred to herein as"SplitCo", will indirectly hold 54% of the outstanding votingsecurities of (REDACTED) and other non-(REDACTED) assets.
After the split-off, an entity holding 46% of theoutstanding voting securities of (REDACTED) will be merged with SplitCo througha transaction involving a series of steps described in more detail below. As aresult of the merger, Holdco, a newly created holding company of SplitCo, alsowill indirectly hold 100% of the outstanding voting securities of (REDACTED);the former public shareholders of (REDACTED) that previously indirectly held46% of (REDACTED)'s outstanding voting shares, will hold shares of Holdco; andthe former shareholders of SplitCo, will hold shares of Holdco, the new parentof SplitCo. The transaction is essentially the creation of new holding company,Holdco, that will be accomplished through the exchange by the shareholders ofSplitCo, for shares of Holdco and the merger of an entity that holds 46% of(REDACTED)'s outstanding voting shares in exchange for shares of Holdco. Thetransaction will be accomplished through a series of steps that will happen atthe same closing.
Detailed description of the transaction steps:
The current transaction structure contemplates athree step process that will take place at the same closing after the split-offby (REDACTED) of (REDACTED) (SplitCo).
First, Mr. (redacted)and his spouse and trusts forhis children will contribute all of the shares of SplitCo Common Stock thatthey hold to Holdings, a wholly owned subsidiary of (REDACTED), in exchange forshares of Common Stock of Holdings.
Second, Merger Sub 1, a wholly owned subsidiary ofHoldings (which, at the time, will be wholly owned by (REDACTED)), will mergewith and into (REDACTED) with (REDACTED) surviving. Public shareholders of(REDACTED) Common Stock will receive one share of Holdings Common Stock foreach share of (REDACTED) Common Stock.
Third, Merger Sub 2, a wholly owned subsidiary ofHoldco, will merge with and into SplitCo with SplitCo surviving.
SplitCo A and B shareholders will receive CommonStock of Holdings based on a fixed ratio in connection with the merger. As aresult of the SplitCo merger, Holdco will become the parent of SplitCo and theshareholders of Holdco will include the former A and B shareholders of SplitCo(including (redacted) and his interested parties) and the former publicshareholders of (REDACTED). No single shareholder will hold 50% or more ofHoldco's outstanding voting securities.
Analysis:
From an HSR perspective, we believe that thetransaction can be analyzed in several ways but, because the steps of the transactionwill take place more or less simultaneously at the same closing, the mostlogical approach is to look at the end result and determine what if anythingwill change from the pre-transaction standpoint that may require an HSR filing.
The result of the above proposed transaction isthe creation of a new parent holding company, Holdco, as parent of SplitCo; theacquisition by the shareholders of SplitCo, via the merger of Merger Sub 2 intoSplitCo, of additional Common Stock of (REDACTED), an entity that SplitCoalready controls under the HSR Rules; and the addition of former (REDACTED)public shareholders as shareholders of Holdco. Holdco, as the new parent ofSplitCo, will control and hold the same entities formerly controlled and heldby SplitCo. Nothing will change with respect to SplitCo's former holdings otherthan the ownership (direct and indirect) of (REDACTED) which will increase from54% to 100%. The former A and B shareholders of SplitCo will now hold votingsecurities of a new parent, Holdco, that essentially controls what the formerparent, SplitCo, controlled. The percentage interests held by the individualformer A and B shareholders of SplitCo will decrease. In contrast, the publicshareholders of (REDACTED) will end up holding voting securities of an entity,Holdco, that controls and holds entities in which the former publicshareholders of (REDACTED) held either an indirect, minority interest((REDACTED)) or no interest at all (the non-(REDACTED) SplitCo assets).
Under the PNO's current informal interpretationsof the HSR Act, the merger of Merger Sub 2 into SplitCo can be viewed as thecreation of a new parent company of SplitCo and the distribution of Holdco'sshares to SplitCo's former shareholders and to the (REDACTED) public shareholders.Viewed in this way, the acquisition/exchange by the current A and Bshareholders of SplitCo for shares of Holdco appears to qualify for exemptionunder Section 7A(c)(10) of the HSR Act. Based on existing informalinterpretations of the FTC's Premerger Notification Office, the creation of anew shell parent company and the exchange by shareholders of their shares ofthe existing parent for shares of new shell parent on a pro rata basis isexempt under Section 7A(c)(10) of the HSR Act. The new shell parent is treatedas the same issuer and the shareholders do not increase their percentage ofholdings of the new parent's outstanding voting shares as a result of the prorata exchange. This provision exempts an acquisition of voting securities ifthe person's percentage of outstanding voting securities of n issuer (acorporation) does not increase as a result of the acquisition. Although Holdcotechnically is a different issuer, under existing interpretations, Holdco islikely to be treated as the same issuer as SplitCo for purposes of theexemption. Consequently, the A and B SplitCo shareholders arguably are notincreasing their percentage holdings of the "issuer" as a result ofthe acquisition.
The Section 7A(c)(10) exemption would not apply tothe acquisitions of Holdco's Common Stock by (REDACTED)'s former publicshareholders because Holdco is a different issuer than (REDACTED) (or theentity holding the publicly held shares of (REDACTED)) since it holds entitiesthat (REDACTED) did not hold prior to the exchange. Consequently, any formerpublic shareholder of (REDACTED) that receives voting securities of Holdcovalued in excess of $65.2 million will be required to make an HSR filing unlessthe acquisition qualifies for exemption under the HSR Act or Rules.
The transaction also may be viewed as theacquisition by SplitCo of the outstanding voting securities of (REDACTED) heldby the public shareholders with the public shareholders of (REDACTED) receivingshares of Holdco in exchange for their shares of (REDACTED).
If viewed in this manner, the acquisition bySplitCo of additional voting securities of (REDACTED) is exempt under Section7A(c)(3) of the HSR Act. The public shareholders of (REDACTED) would berequired to file HSR notification for their acquisitions of voting securitiesof Holdco if the jurisdictional thresholds are met and the acquisitions are notother wise exempt. Lastly, the current shareholders of SplitCo, would receiveshares of Holdco via the creation of a new parent holding company. Theacquisition of Holdco voting shares by the SplitCo shareholders would qualifyfor exemption under Section 7A(c)(10) of the HSR Act, assuming that none of theshareholders' percentage interests in Holdco's outstanding voting sharesincreases as a result of the exchange.
(Redacted) filing obligations
In connection with SplitCo's formation, (REDACTED)will acquire SplitCo voting securities which have voting power that slightlyexceeds the voting power he held in (REDACTED). As a result he will file forthe acquisition of the (REDACTED) (SplitCo) shares. It is my understanding thatyou agree that he will have no additional filing obligations with respect toany subsequent acquisitions of Holdco voting securities unless he exceeds ahigher notification threshold or after the expiration of the five year periodprovided by 16 CFR 802.21.
Again thank you for time and help on this matter.Please confirm that you agree with the analysis set forth above.