Question
From: (Redacted)
Sent: Thursday, January 28, 2010 12:00 PM
To: Verne, B. Michael
Subject: Interpretation 91, Premerger Notification Practice Manual
Mike
Company A and Company B have had discussions on and off for several years about Company A either buying all of Company B, a subsidiary of Company B ("Subsidiary B"), or portions of Subsidiary B. Discussions were renewed in June, 2009 and were focused on Company A's interest in a portion of Subsidiary B. For accounting/tax reasons, Company A had a slight preference for an asset acquisition, assuming that Company B had relatively low book basis for the assets, a fact that Company A still does not know. Company B, however, preferred a stock acquisition for various reasons. During discussions, Company A learned that in an asset acquisition the value of liabilities had to be added to the purchase price in determining whether the transaction was reportable under the HSR Act. Although the parties had not determined a purchase price or a specific deal structure, Company A believed that the purchase price plus the amount of the liabilities could require that the transaction be reported under the HSR Act.
After further negotiation, the parties turned to a transaction where Company B would retain certain assets of Subsidiary B which Company A did not want. Company A would then purchase the voting securities of Subsidiary B after Company B carved out the assets that would not be included in the transaction. Initially, Company A offered a tentative purchase price for the voting securities of Subsidiary B which was below the minimum HSR reporting threshold, however, Company A also offered to provide non-cash consideration (products and services) to Company B. The fair market value of such non-cash consideration has not been estimated. Through subsequent discussions, Company A learned that Subsidiary B had several hundred million dollars of longstanding inter-company debt owed to a different subsidiary of Company B which greatly exceeded the amount Company A was willing to pay for the voting securities of Subsidiary B. With the inter-company debt, Company A valued Subsidiary B's voting securities at less than zero. Indeed for Company A to buy Subsidiary B with the inter-company debt, Company B would have to pay Company A instead of the other way around. To be clear, when Company A made its initial proposal, Company A assumed that the Subsidiary B had no debt.
After additional negotiations, the companies have agreed that Company B will relieve Subsidiary B of its obligation with respect to the inter-company debt with the exception of approximately $100 million. Company A has agreed to purchase Subsidiary B with the remaining inter-company debt for a payment for the voting securities of Subsidiary B for approximately $5 million in cash and services with a fair market value of $25 million. Company A has determined that the fair market value for the voting securities is equal to the purchase price plus the fair market value of the services provided to Company B. The parties have also agreed that Company A will payoff the inter-company debt at or shortly after closing.
It is my view that even though the parties were clearly aware that this structure would result in not having to file an HSR report that the substance is a non-reportable transaction. It is also my view that the structure is not a device for avoidance under 801.90. Under 801.90 one looks through the "device" to the substance of the underlying transaction. Here the underlying transaction is the purchase of voting securities with a purchase price and fair market value which does not exceed the minimum HSR reporting thresholds. Its non reportability is consistent with Pre merger Notification Practice Manual Interpretation 91.
Please let me know if you agree with my conclusion, happy to provide any additional facts you might deem important to your consideration.