Question
June 9, 2000
Via Facsimile
Michael Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
7th & Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Dear Mike:
I am writing to confirm my understanding of telephone conversations we had yesterday and the day before yesterday concerning the potential reportability under the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act") of a proposed transaction discussed below.
Step 1 (Formation of Newco): Several investors ("Investors") will form a new corporation ("Newco"). One investor ("Parent") will acquire in excess of 50% of the 10,000 shares of voting securities of Newco to be issued. Parent has in excess of $100 million in total assets or net sales, and is contributing in excess of $15 million in cash to Newco in exchange for the voting securities of Newco it is receiving. At least one other investor who also is acquiring voting securities of Newco has annual net sales or total assets of $10 million or more. It is our understanding that Parent will have a reporting obligation pursuant to 16 C.F.R. 801.40. You can assume for purposes of this analysis that none of the other Investors will have a reporting obligation from the formation of Newco because the size of the parties test or the size of the transaction test in not met.
Step 2 (Merger and Recapitalization): It is intended that Newco will be merged with and into a corporation ("Target"). Target currently is and will be at the point immediately prior to the merger ultimately controlled by another corporation ("Seller") which holds 100% of the 10,000 shares of issued and outstanding voting securities of Target. The merger of Newco with and into Target is to be recorded as a recapitalization for financial reporting purposes. After the merger, Newco will cease to exist and Target will be the surviving corporation under its current name.
Each of the 10,000 shares of voting securities of Newco will be converted on a share for share basis into voting securities of Target.(1) Each of the 10,000 shares of voting securities of Target held by Seller immediately prior to merger will be converted into cash consideration in excess $15 million and newly issued voting securities of Target constituting approximately 6.5% of the voting securities of Target post merger. It is my understanding that the voting securities being issued to Seller are valued at less than $15 million.(2)
Immediately after the merger occurs, Parent will hold in excess of 50% of the voting securities of Target, although it (as well as the other investors in Newco) will hold a slightly lower percent of the voting securities of Target than were previously held in Newco because approximately 10% of the voting securities of Target will be held by Seller and the Option Holders.
You concluded, based on your understanding that Parent will file a notification and report form with regard to the formation of Newco, that no additional reporting obligation exists with regard to the other aspects of the proposed transaction. Specifically, you concluded that the merger of Newco with and into Target was exempt under the HSR Act since (1) Target should be viewed as a "successor corporation" to Newco; and (2) the exemption under 15 U.S.C. 18a(c)(10) applies since there will be no per centum increase in the share of outstanding voting securities held by Parent or any of the other Investors after the merger.
lease let me know as soon as possible if you disagree with any of the conclusions discussed above, or if I have misunderstood any aspect of your advice. Thank you for your assistance in this matter.
Very truly yours,
[redacted]
1. Nonvoting stock of Newco also will be converted on a share for share basis into nonvoting stock of Target.
2. While we did not discuss this issue, my assumption is that even if the voting securities being issued to Seller were valued at in excess of $15 million the "acquisition" of these securities still would not be reportable. An additional fact that I did not mention to you is that immediately before the merger, several option holders ("Option Holders") in Target will exercise their options into voting securities of Target to acquire in aggregate well under $15 million voting securities. Accordingly, at the time of merger, the option Holders will receive cash consideration in exchange for their voting securities in Target. The Option Holders will not receive any shares of Target as a result of the merger. However, certain Option Holders will invest their after-tax proceeds of merger consideration (approximately $2 million in the aggregate) to acquire approximately $2 million in voting securities of Target, which will constitute in aggregate less than 5% of the voting securities of Target post merger. I assume that the exercise of the options and the reinvestment of proceeds by certain Option Holders does not import the HSR analysis.