Question
From:(Redacted)
Sent: Friday, November 19, 2010 2:01PM
To: Verne,B. Michael
Subject: 802.63/801.15 Q
Mike:
This email describes a proposedtransaction that implicates 16 C.F.R. Sections 802.63 and 801.15. Based on ourprior discussions and my review of the publicly available materials, we believethe proposed transactions would be exempt from HSR filing obligations pursuantto Rule 802.63 and 801.15 (as to the second step). After you have had anopportunity to review this email, please let me know whether you agree with theanalysis presented below or if your view differs. If you need further detailsin order to supply a view, please let me know.
FACTS
1.Target is in financial distress and is negotiating abona fide debt workout with its creditors. The workout is likely to beundertaken in the context of a Chapter 11 bankruptcy proceeding. However, it ispossible that the workout may be consummated privately, without bankruptcycourt oversight
2. Creditor A and Creditor B (our clients) are two ofthe significant creditors of Target Creditor A and Creditor B is each a privateequity investor that invests in companies such as Target in the ordinary courseof its business. The debt held by Creditor A and Creditor B is comprised ofsenior subordinated note claims and term loan claims.
3.The proposed debt workout incorporates a number ofelements, as it relates to Creditor A and Creditor B:
a. Eachof Creditor A and Creditor B (as well as other creditors) will extinguishsenior subordinated note claims in exchange for shares of newly issued commonstock of Reorganized Target
b. Eachof Creditor A and Creditor B will convert claims arising from a certain termloan into newly issued common stock of Reorganized Target or shares of newlyissued preferred stock of Reorganized Target
c.Holders of senior subordinated note claims (including Creditor A and CreditorB), in addition to receiving their pro rata share of newly issued commonstock (referenced in 3a, above), will receive the right to participate in aRights Offering whereby the participants may subscribe for their pro rata shareof up to an additional $70 million worth of shares of newly issued common stockof the Reorganized Target
d.Creditor A and Creditor B have agreed, in exchange for a fee to be paid inshares of newly issued common stock (at most, approximately $4.1 million worthof newly issued common stock, in the aggregate), to backstop the $70 millionRights Offering. In the event no holders of senior subordinated note claimschoose to participate in the Rights Offering, Creditor A would be expected tohave to subscribe for approximately 79% of the backstop commitment(approximately $55.3 million). However, under certain scenarios (for instance,if Creditor B breaches its backstop purchase obligation), Creditor A maypurchase the remainder of the unsubscribed portion of the Rights Offering.Thus, it is possible that Creditor A (or Creditor B in the event that CreditorA breaches its purchase obligation) may ultimately subscribe for more than$63.4 million of newly issued common stock of Reorganized Target as a result ofits commitment to backstop the Rights Offering.
4. Neither Creditor A nor Creditor B currently holds acontrolling interest in any entity that may be viewed as standing in acompetitive relationship to Target
5. Creditor Aand Creditor B may enter into a bilateral agreement (without Reorganized Targetas a party to the agreement) outside of the debt workout that would grant toCreditor A an option to acquire sufficient shares from Creditor B that wouldtake Creditor A to a 50% or greater position in Reorganized Target That optionwould be exercisable after the debt workout (or plan or reorganization) hasbeen consummated. The incremental value of the additional shares to be acquiredfrom Creditor B is expected to have a value of not more than $63.4 million.
ANALYSIS
A. The Restructuring Transactions: We donot believe the foregoing proposed transactions arising from the debt workout(or plan or reorganization) would implicate HSR filing obligations, regardlessof the value of voting securities that Creditor A or Creditor 6 would hold as aresult of the consummation of the restructuring since all of the elements ofCreditor A's and Creditor 6's "acquisition" would be exempt pursuantto 16 CFR 802.63(a), which provides:
Creditors. An acquisition of collateral or receivables, or anacquisition in foreclosure, or upon default, or in connection with theestablishment of a lease financing, or in connection with a bona fide debtworkout shall be exempt from the requirements of the act if made by a creditorin a bona fide credit transaction entered into in the ordinary course of thecreditor's business.
Accordingly, the shares of newly issuedcommon stock (described in paragraphs 3a and 3b) that may be acquired byCreditor A and Creditor 6 in exchange for ex1inguishing creditor claims wouldbe covered by the Rule 802.63
(a) exemption, and the associated valueof such common stock (and/or preferred stock) is disregarded for purposes ofthe HSR Act (including for purposes of applying the "size-of-transaction"test).
As to the shares of newly issued commonstock that Creditor A (or Creditor 6) may be entitled to purchase on a prorata basis, or may become obligated to purchase as a consequence of itscommitment to backstop the Rights Offering, we understand that (i) since theRights Offering is being done in connection with, and as a critical element of,a bona fide debt work-out and (ii) Creditor A holds its creditorposition, and its right to participate in the Rights Offering, as a result of abona fide credit transaction entered into in the ordinary course of itsbusiness, the shares to be acquired by either Creditor A or Creditor 6(both its pro rata portion as well as any additional shares that itbecomes obligated to purchase as a result of its backstop commitment) wouldsimilarly be covered by the exemption provided by Rule 802.63.
On the basis of the foregoing analysis,Creditor A and Creditor B may acquire the shares of voting securities ofReorganized Target (including those shares purchased as a result of itscommitment to backstop the Rights Offering) without triggering a filingobligation under the HSR Act.
B.The Option Agreement: Pursuant to the application ofthe "aggregation" rule (16 C.F.R. 801.15(a)(2), any acquisition pursuantto the Option would not trigger a filing obligation under the HSR Act, so longas the shares being acquired pursuant to the option do not, by themselves, havea value in excess of the minimum notification threshold, since the sharesacquired by Creditor A pursuant to the restructuring transactions would not bedeemed to be "held" by Creditor A for purposes of the"size-of-transaction" test (since Section 802.63 is specificallyincluded in Rule 801.15(a)(2)). Thus, as long as Creditor A would be acquiringshares with an incremental value that does not exceed $63.4 million (orwhatever the relevant minimum threshold is at the time of the exercise of theOption) as a result of the exercise of the Option, an HSR filing obligationwould not be triggered.