Question
From: (Redacted)
Sent: Thursday, November 04, 2010 12:41 PM
To: Verne, B. Michael
Subject: LBO Acquisition - Rules 801.40,801.21, 802.4, 801.11(e)(1)
Please confirm the conclusions statedbelow based on the assumed facts stated therein, including in particular that(i) formation of Newco is exempt from the requirements of the HSR Act, (iI) forAlternative 1, Newco's acquisition of A is subject to the requirements of theHSR Act, and F1 as the ultimate parent entity of Newco and A as the acquiredperson are required to file HSR Forms, and (iii) for Alternative 2, Newco'sacquisition of A is not subject to the requirements of the HSR Act, no party isrequired to file HSR Forms for same, and F1 and Newco would not be subject tothe requirements of the HSR Act in connection with F1's exercise of thecontingent right to expand the size of the board and designate additionaldirectors of Newco as described below.
1. Four private equity funds (F1, F2, F3, F4) will forma new joint venture corporation (Newco) to acquire 100 percent of the votingstock of an existing corporation (A) through a merger of Newco with and into Awith A surviving, in consideration for cash payments to the shareholders of Ain a total amount of $170M.
2. Newco will be capitalized with $100M in nonrecoursedebt from third-party sources (i.e., the debt is not guaranteed by the ownersof Newco), and equity contributions of (i) $50M by F1, (ii) a total of $25M byF2, F3, and F4, and (iii) a total of $17M of rollover equity by the existingowners of A.
3. Each of the Funds has total assets and annual netsale in excess of $100M (as adjusted; now $126.9M); A does not engage inmanufacturing and has total assets of approximately $95M, of which less than $1Mis cash.
4. The formation of Newco is covered by Rule 801.40 butis exempt pursuant to Rules 801.21 and 802.4, in that F1, F2, F3, and F4 willcontribute cash and no other assets to Newco/ [MV comment Also no fund istaking back >$63.4MM in NEWCO v/s]
5.Alternative 1.
(i) F1 will acquire50 percent or more of Newco's voting stock and/or will have the power presentlyto designate 50 percent or more of Newco's directors, and thus will controlNewco under Rule 801.1(b)(1) and (2) of the FTC Premerger Notification Rules.
(iI) F2, F3, F4, andthe existing owners of A each will acquire minority interests in voting stockof Newco; none of these persons will have the power presently to designate amajority of Newco's directors, and none will receive voting stock of Newcovalued in excess of $50M (as adjusted; now $63.4M).
(iii) The acquisitionof A by Newco is subject to the requirements of the HSR Act. The size of persontests are satisfied by A and by Fl, which will control Newco. The size of transactionfor the acquisition of A is $170M and exceeds the minimum size of transactionthreshold of $50M (as adjusted; now $63.4M).
(iv)Newco's acquisition of A is not exempt under Rule 802.4 because A holdsnon-exempt assets in excess of $50M (as adjusted; now $63.4M), and no otherexemption applies to Newco's acquisition of A based on the facts describedabove.
(v) Flwill file an HSR Form as the UPE of Newco; A will file an HSR Form as theacquired person; the other owners of Newco will not file HSR Forms, as theiracquisitions of Newco voting stock do not satisfy the minimum size oftransaction threshold.
6. Alternative 2.
(i) Fl,F2, F3, F4, and the existing owners of A each will acquire less than 50 percentof Newco's voting stock. Each of these persons may have rights to presentlydesignate one or more directors of Newco, but none of these persons will havethe power presently to designate a majority of Newco's directors. Thus, none ofthese persons will control Newco under Rule 801.1(b)(1) and (2).
(ii) Flwill have contingent rights under the Bylaws of Newco to expand the size of theBoard and designate one or more additional directors of Newco subsequent toclosing. If F1 exercises this right, it will have the power to designate amajority of the directors of Newco and thus would control Newco under Rule801.1(b)(2).
(iii) The acquisitionof A by Newco is not subject to the requirements of the HSR Act: Newco wouldnot satisfy the size of person test by virtue of Rule 801.11(e)(1), in that allof Newco's assets would be cash held for the acquisition of A, which areexcluded under that Rule for purposes of determining Newco's total assets.
(iv)Additionally, some or all of the Funds and former owners of A may determinethat their respective acquisitions of Newco voting stock do not exceed theminimum size of transaction threshold of $50M (as adjusted; now $63.4M), basedon the transaction prices stated in the merger agreement or based on a fairmarket valuation of same.
(v) Noneof the parties would file HSR Forms for Newco's acquisition of A.
(vi) F1will not be subject to the requirements of the HSR Act in connection with theexercise of its right to expand the size of the Board and designate one or moreadditional directors of Newco as described above in subpart (ii), because F1will not acquire any assets or voting securities of Newco at that time.