Question
From:
(Redacted)
Sent:
Monday, September 27, 2010 9:26 PM
To:
Verne, B. Michael
Subject: ValuationQuestion
Mike,
I have a difficultvaluation issue for which I could use some guidance:
Company A, Inc.and Company B, LLC plan to form a joint venture, HoldCo LLC. Company A, Inc. willcontribute substantially all of its assets to Holdco LLC in exchange forapproximately 95% of the membership interests of Holdco LLC. Similarly, CompanyB, LLC will contribute substantially all of its assets to HoldCo LLC inexchange for approximately 5% of the membership interests of Holdco LLC, somecash at closing, and the potential for some additional equity in Holdco uponthe joint venture's achievement of future benchmarks.
Since it is CompanyA and Company B that will be receiving the membership interests of Holdco(rather than their respective shareholders and membership interest holders), myunderstanding is that this will be treated as the formation of a joint ventureunder 801.40 and only Company A, Inc. has a potential filing obligation sinceit is acquiring control of Holdco LLC.
My questioninvolves Company A, Inc.'s valuation of the interests it will receive in HoldCoLLC. Since the purchase price is not determined for purposes of 801.10, a fairmarket valuation of the HoldCo LLC membership interests must be made. Myunderstanding is that, as explained in the Premerger Notification PracticeManual, it is the PNO's position that Company A, Inc. can rely on a fair marketvaluation of the assets it is contributing in exchange for the Holdcomembership interests in order to determine the fair market value of thoseinterests. In this case, Company A recently had an independent valuation of itsbusiness which valued the entirety of Company A, Inc. at less than $30 million,which would render the transaction unreportable.
There are,however, substantial synergies between Company A, Inc. and Company B, LLC suchthat the value of the joint venture, while somewhat speculative, could be as highas $300 million. Indeed, a company similar to Company B, LLC was recently soldfor approximately $300 million to a buyer who could realize similar synergies.Such a high valuation would, however, be somewhat speculative since the onlyasset held by Company B, LLC is a contract to develop a specific project whichmayor may not ultimately prove successful.
In light of thesefacts, can Company A, Inc. nevertheless rely on its fair market valuation ofthe assets it is contributing to Holdco LLC as a valuation of the Holdco LLCmembership interests it is receiving in the transaction?