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Date
Rule
801.10
Staff
Michael Verne
Response/Comments
I'm not following your thinking here. Isn't this like having a working capital adjustment to the purchase price? If that's the case, it doesn't matter what category of assets makes up the shortfall, just whatever is specified in the agreement. I think you might be confusing this with our position that accounts receivable are not cash equivalents, but that isn't applicable to this. If the agreement specified that the purchase price would be $70 million unless B had less than $10 million in widgets, the same analysis would apply. If A has some basis for estimating the shortfall then the acquisition price is determined. If not, A must do a fair market valuation of B's voting securities.

Question

From: Redacted]
Sent: Friday, July 09, 2010 1:27 PM
To: Verne, B. Michael
Cc: Redacted
Subject: Question Concerning Purchase Price and Size-of-Transaction (801.10)

Mike

I hope that you aredoing well and had a pleasant holiday weekend.

(Redacted) and I have a question about determining acquisitionprice under 801.10(a)(i). The hypothetical we have is a transaction where Awill acquire 100% of the voting securities of B for $70 million as long as Bhas at closing at least $10 million in cash, accounts receivable and other cashequivalents. If B has less than $10 million of these assets, the considerationwill be reduced by the amount of the shortfall.

We believe that tothe extent that B will satisfy the requirement by holding cash, demanddeposits, certificates of deposit, notes and treasury bills, that amount shouldbe excluded from the purchase price. On the other hand, to the extent that Bwill satisfy the requirement by holding accounts receivable, the amount of theaccounts receivable should not be excluded from the purchase price.

In other words, ifB holds $10 million in cash and demand deposits, this is a $60 milliontransaction, and would not be reportable. If, on the other hand, B holds $5million in cash and $5 million in accounts receivable, this is a $65 milliontransaction, and would be reportable.

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