Sunday, February 13, 2011 9:13 PM
Verne, B. Michael
Question on Beneficial Ownership
We represent an individual("Buyer") who seeks to make an investment in Target valued below theminimum HSR notification threshold. (Redacted) (cc'ed here) representsTarget.
Buyer is also a non-controllingshareholder in a closely held Canadian Corporation ("ExistingShareholder") that currently holds a stake in Target, and ExistingShareholder is the registered holder of the Target shares.
Buyer, as well as the other shareholdersin Existing Shareholder, is party to a shareholder agreement (the"Shareholder Agreement") relating to Existing Shareholder that has anunusual provision concerning the right to vote the Target shares held byExisting Shareholder, and these provisions give rise to a "beneficialownership" question. Importantly, if Buyer were to be deemed to have"beneficial ownership" over his pro rata portion of the Targetposition held by Existing Shareholder in Target, and therefore be deemed to"hold" such Target shares, the aggregate position to be held by Buyerresulting from the proposed investment would exceed the minimum HSRnotification threshold. Existing Shareholder also has the right to nominatethree board members of Target, and pursuant to the Shareholder Agreement, Buyerhas the right to designate one of those nominees.
In essence, the terms of the shareholderagreement require that Existing Shareholder can take an action (such as votingthe Target shares) only after there is unanimous consent by the ExistingShareholder shareholders to do so, and in doing so, each shareholder"shall be entitled" to direct the Existing Shareholder as to how tovote such shareholder's pro rata share.
The relevant provisions are as follows:
Section 3.4 Exercise of Authority.
Subject to [irrelevant language omitted],all decisions, approvals, determinations and consents of the Directors or theholders of Voting Shares required by this Agreement will be decided, approved,determined or consented to by all of the votes cast at a Directors' meeting or,unless otherwise required by law, by all the votes cast at a meeting of theholders of Voting Shares or by written resolution signed by all of theDirectors or, unless otherwise required by law, all of the holders of VotingShares, as the case may be.
Section 4.4 Shareholder Approvals.
(1) Subject to ... Section4.4(2), .. "' the [Existing Shareholder] may not make a decision, takeaction or implement a change without the unanimous approval of the holders ofthe Voting Shares, in addition to any other approval required by law.
(2) Each holder of CommonShares shall be entitled to direct the [Existing Shareholder] as to the mannerin which the [Existing Shareholder] shall exercise the voting rights attachedto the number of Special Voting Shares equal to the number of Common Sharesheld by such Shareholder at the relevant time and the [Existing Shareholder]shall exercise such voting rights as so directed.
We believe that Buyer should not beviewed as having beneficial ownership over his pro rata portion of the Targetposition held by Existing Shareholder since Buyer does not have the unilateralability to vote, or even instruct the manner by which Existing Shareholdervotes, Buyer's pro rata portion at his discretion, since Buyer is entitled todirect the Existing Shareholder to vote his pro rata portion only if all of theother shareholders of Existing Shareholder agree that Existing Shareholder mayin fact take an action. Therefore since Buyer's ability to instruct the mannerby which such Target shares are voted is contingent upon certain events thatare out of Buyer's control, we do not believe beneficial ownership arises.Please let us know whether you agree with our analysis or whether you believethese provisions confer upon the Buyer "beneficial ownership" overhis pro rata share of Target voting securities. As this is a time sensitivematter, and the answer to this issue is likely to be dispositive, we'd begrateful if you could let us know your thought at your earliest opportunity. Weare, of course, available to discuss at your convenience.