Question
From: [redacted]
To: "mverne@ftc.gov" <mverne@ftc.gov>
Date: Fri, Dec 8, 2000 12:24 PM
Subject: HSR
As I thought about one of our several conversations yesterday and tried to reconstruct the interpretive principles, I found myself getting very confused. May I lay out the following problem in a more methodical way?
Suppose that Company X has 3 directors, elected by the holder of its common stock. Company X is going to issue a new class of preferred stock, the holders of which will elect two new directors, making a total of 5 directors. The holders of Company X common stock will continue to elect the other 3 directors.
Person A will acquire (first case) all the preferred shares. Person A will become a 40% shareholder of Company X. Straightforward.
Person A will acquire (second case) half the preferred shares, plus one share. Assume no cumulate voting. I would have said that Person A becomes a 20% shareholder of Company X, since it will hold half the shares that elect two-fifths of the directors. But I?m confused about your comment yesterday concerning the ability to ?seat? directors. Person A in this case presumably has the practical power to elect both of the directors elected by the preferred shareholders. Does that make Person A a 40% shareholder? My answer ? for purposes of determining whether Person A is making a reportable acquisition ? would be no. Staff Comment - Agree
A modification of my first case: Person A will acquire all the preferred shares, but his purchase contract with the issuer says he gets the right to designate one additional director (out of the 3 otherwise reserved to the common shareholders). We talked about this scenario yesterday. Your answer was that you look to the voting power inherent in the shares, and not to the purchase contract, so Person A is viewed as acquiring 40% (not 60%) of Company X?s total outstanding voting securities. Staff Comment - Agree
If, instead of trying to figure out whether Person A?s acquisition is reportable, we?re now trying to figure out whether Person A controls Company X after the acquisition is competed, is Person A viewed as having the power to ?seat? three of five directors, and therefore as controlling Company X?
I would say yes. Staff Comment - Agree
Sorry to make this complicated, but I think we?ve both seen variations on each of these variation. Thanks for your help. Staff Comment ? Agree