Sent: Wednesday,February 23, 2011 6:12 PM
Subject: Analysis of a proposed transaction
I write to confirm with you my analysisof the transaction described below.
Company A is seeking to acquire CompanyB, an LLC with substantial outstanding third-party debt, preferred units, commonunits, and outstanding warrants to purchase common units.
Company A will provide cash and otherconsideration in excess of the $50 million (as adjusted) threshold so that:
Steps 1 through 4 might be accomplishedvia a merger.
Although the cash and otherconsideration to be provided exceeds the $50 million (as adjusted) threshold,we believe that only the value of the existing common units is relevant forpurposes of the size-of-transaction test.
A. Holders of thepreferred units are entitled to receive distributions from Company B, but onlyin an amount equal to their preferred return plus their principal capital. Thepreferred return is a set annual percentage rate return of 10% per annum thatincreases every year by 1%, up to a maximum of 15%, and is compounded twiceannually. As such, the preferred units do not directly participate in theprofits of Company B.
B. Holders of thepreferred units are entitled to receive a quarterly distribution --a taxdistribution --to cover the amount of quarterly federal taxes due on any incomereceived on those units. This quarterly tax distribution simply reduces thedistribution otherwise made.
C. Upon dissolutionof Company B, holders of the preferred units would be paid up to the amount oftheir capital and prescribed return after other creditors, but before anypayment to the holders of common units. Again, this seems consistent withtreatment of the preferred units as debt instruments since they have priorityover the common but can take no more than their capital plus prescribed return.
D. The preferredunits are subject to both a mandatory redemption in February 2017, on the 7thanniversary of the Effective Date, and are also subject to an optionalredemption in full or in part prior to such date at Company B's option.
E. The preferredunits do not have creditor's claims and thus cannot force Company B intobankruptcy if Company B fails to pay the return and principal capital on thepreferred shares.
F. A majority of thepreferred units can elect a single director to Company B's five person board ofdirectors. We believe that is irrelevant, however, because the ability to votefor directors is not a relevant attribute of non-corporate interests under801.1(f)(ii). (This is of course different from the definition of votingsecurities under 801.1(f)(i) where the ability to vote for directors is whatdetermines whether a security in the corporate context is a "votingsecurity". This distinction is borne out by the definition of"control" in 16 CFR 801.1(b)(1 )(ii) where, for purposes ofdetermining whether an acquisition confers control of an unincorporated entityone does not look to the percentage of voting securities held (as forcorporations per 801.1(b)(1)(i but merely to the right to fifty percent of profitsor assets upon dissolution.)
Accordingly, we believe that the onlyrelevant acquisition for HSR purposes is the acquisition of the existing commonunits, i.e., the transaction would not be reportable unless the actual price tobe paid for those units (or, if not determined, the fair market value of thoseunits) exceeds the $50 million (as adjusted) threshold and no exemptionapplies.
I would greatly appreciate it if youcould confirm this analysis in writing whenever convenient for you.