Sent: Wednesday, June 15, 2011 8:30AM
To: Verne,B. Michael
Subject: 7A(c)(10); Rule 801.12; retained voting rights
Hopethat all is well with you. I am working through an IPO transaction where theunderwriters have the option to allocate some of the IPO shares to the existingshareholders of the currently private company, and it appears that at least alimited allocation will not trigger a filing due to 7A(c)(10). I set forthbelow the two basic issues and my analysis. Let me know if you agree, or if youwould like to have a call to discuss the analysis.
1. Currently, the company has several classes of shareswith different voting rights. As part of the IPO transaction, there will be acharter filing at the closing that will change the voting rights of the variousclasses of stock (e.g., some classes will have their voting power reduced) sothat some of the existing shareholders will have their pro rata share of thevoting securities decrease, as calculated by Rule 801.12. This decrease in thepro rata share is in addition to the dilution resulting from the issuance ofthe IPO shares. Under 7A(c)(10), an existing shareholder can acquire additionalshares at the IPO closing as long as the shareholder's pro rata share of thecompany does not increase. Further, we would use Rule 801.12 to calculate thepre and post closing pro rata shares, taking into account not only theadditional shares in the company, but also the changed voting rights of thevarious classes of stock.
2. One of the current shareholders is a fund that ownsits shares directly. The fund has also distributed some shares to itsemployees, but retained the right to vote those shares. I have not found anyinterpretations exactly on paint, but it seems that the closest are thosedealing with proxies. On the one hand, the PNO has attributed the sharesunderlying an irrevocable proxy to the holder of the proxy for the purposes ofdetermining "control" of the issuer. On the other hand, the PNO hasstated the proxy holder does not have beneficial ownership of the shares andtherefore does not "hold" them. See ABA Manual, Interpretations 40and 55. Thus, under this logic, even if the fund employees do not have thepower to revoke the fund's rights to vote the employees' shares (and thereforewould be similar to irrevocable proxies), for the purposes of performing thepro rata calculations for 7A(c)(10), we should treat those shares as those ofthe employees and not those of the fund, because only the employees"hold" the shares.