0803012 Informal Interpretation

Date:
Rule:
801.10
Staff:
Michael Verne
Response/Comments:

Agree.

Question

From: (redacted)

Sent: Friday, March 14, 2008 3:31 PM

To: Verne, B. Michael

Subject: Indebtedness to be Repaid

Hi Mike,

I have a scenario I would like to run past you:

Company A is planning to acquire all of the outstanding voting securities of Company B for $72 million, less the amount of any outstanding indebtedness. Before the shareholders of Company B are paid, any outstanding indebtedness will be repaid. The outstanding indebtedness totals $17 million. Of that amount: (1) about $9 million is owed to a minority shareholder of Company B; (2) $6 million to Company B's parent in the form of a subordinated note issued by Company B's parent directly, and (3) the remainder to a minority shareholder of the entity that directly controls Company B (the entity just below Company B's UPE), also in the form of a subordinated note issued directly by this shareholder.

It is my understanding that:

1) The value of the debt to be repaid by Company A to the minority shareholder of Company B would not be included in the value of the transaction. This is based on the fact that this shareholder is a non-controlling shareholder that is otherwise unrelated to Company B. See PNO Manual, Interpretation No. 88 (noting that if the buyer pays off debt of a controlling shareholder that is not related to the acquired entity, the PNO would consider such repayment to be part of the consideration for the acquisition). Thus, I would consider this minority shareholder to be a third-party, and the repayment of debt to this third party to be excluded from the value of the transaction.

2) I believe that the value of the debt that will be repaid by Company A to Company B's parent would further not be included in the value of the transaction. I base this conclusion on PNO Manual, Interpretation 91, which indicates that where a buyer arranges for a third-party loan to a seller's subsidiary, to retire debt owed by the target to its parent, this value is not included in the HSR valuation of the transaction. Here, Company A will be directly repaying the loan made by Company B's parent to Company B. I believe that the value would not be included in the HSR value of the deal.

3) As with 1) above, the value of the debt to be repaid to the minority shareholder of the entity that controls Company B would not be included in the value of the transaction, since this entity is not included within Company B's ultimate parent entity.

Please let me know if you agree with my conclusions. Thank you very much for your assistance with this matter.

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