Question
From: (redacted)
Sent:Thursday, December 03, 2009 1:56 PM
To: Verne, B. Michael
Subject: HSR Question
Mike, we would appreciate your advice on thefollowing transaction. Our client, A, is a major investor in LLC, B,which, in turn, is proposing to acquire assets from Company C (the"Acquisition"). The question presented is whether A is the ultimateparent of B or whether B is its own ultimate parent for purposes of an HSRfiling to be made with respect to the Acquisition. The specific factualcircumstances are described below.
FactualCircumstancesc. In stepthree of the waterfall, occurring only when there has been full payment understeps one and two above, the holders of the Preferred Units and Class Bunits share 50:50 in distributions until the Class B unit holders receive 15percent of the 8% return received by the holders of the Preferred Units instep two described above.
d. In stepsfour of the waterfall, the holders of the Preferred Units and Class B unitsshare 85:15 in remaining distributions. Under the above describedarrangements, the holders of Class B units are subordinate to the holders ofthe Class A units.
Payments on liquidation follow the same waterfallarrangement described above.
HSR Analysis
1. We would view the payout arrangements withrespect to the LLC as variable in nature, with the result that the HSR controltest would turn on whether anyone investor would have a right to50 percent or more of the assets of B on liquidation after payment of "debts".16 C.F.R. 801.1 (f). Please confirm if our understanding in that regard iscorrect.
2. It is our understanding that the rights of theholders of the Preferred Units to repayment of the cost of their investmentplus a return of 8% is considered a "debt" of the LLC for purposes of16 C.F .R. 801.1 (f)(the "Preferred Debt"). If a liquidation were tooccur immediately prior to the closing of the Acquisition, based on assetvalues expected to be on the balance sheet of B at that time, it is anticipatedthat step one of the waterfall would not be completed and there would not beenough funds or assets to pay all of the Preferred Debt and other debt (such asthird-party bank loans). As a result, there would be no assets to distribute tothe holders of the Preferred Units or Class B units. If such is the case, it isour further understanding that no One would be considered to control Band Bwould be its own ultimate parent for HSR purposes. Thus any HSR filing requiredon the acquiring side with respect to the Acquisition would be by B and not A.Please advise if you agree that B would be the proper party to file.