1107012 Informal Interpretation

Date:
Rule:
15 USC 18a(c)(10) 7A(c)(10)
Staff:
Michael Verne
Response/Comments:

  – Agree.

Question

From:

(Redacted)

Sent:

Monday, July 11,2011 6:00 PM

To:

Verne, B. Michael

Subject:

Guidance on 7A(c)(10)

Mike,

I hope all's well. I'manalyzing a transaction in which the application of 7A(c)(10) comes into play,and which involves some of the same topics that we covered a few years back (includedin the email chain below).

The transaction that I'm examining involves an Investor whoholds two types of warrants that will be exercised in connection with an IPO. The first group is one that will be automatically exercisedunder the written terms of the warrant if "in the money" immediatelyprior to its expiration. The occurrence of an IPQ is one of the expirationtriggers, and these warrants were acquired prior to any "quietperiod" associated with the IPO. As a result, I understand that the exerciseof this group of warrants would not be a potentially reportable"conversion" given the guidance set forth in Interpretation #156 inthe Premerger Notification Practice Manual (4th Edition) (and the informalinterpretations it references).

The second group ofwarrants is one which does not get automatically exercised by the occurrence ofan IPO but which the Investor intends to exercise at that time. My read isthat, in line with Informal Interpretation # 021009 (http://www.ftc.gov/bc/hsr/informal/opinions/0210009.htm),and our correspondence below, the exercise of these warrants at the same timeas the IPO would fall within the coverage of 7A(c)(10) and the acquisition ofthe voting securities that results would be exempt. The number of IPO sharesbeing issued will certainly dilute Investor's holdings (even after givingeffect to its exercise of both groups of warrants).

As with theinterpretation above, and our correspondence below, any transitory uptick inthe percentage of outstanding held by Investor does not -I think -render7A(c)(10) inapplicable given that Investor's increased stake will be dilutedessentially

Simultaneously by virtueof the IPO (linearly simultaneous" here being a difference of minutes orhours, if at all, and certainly occurring the same day as the IPO shares areacquired by third parties) and leave the Investor with a smaller percentagestake of Issuer's voting securities than it held immediately prior toexercising its warrants.

Please let me know yourthoughts and thanks, as always, for your time. If you have any questions I'mhappy to address them by email and/or live at a time that works best for you.

(Redacted)

From: M Verne

I agree no filing isrequired

-----Original Message----

From: (Redacted)
Sent: Wednesday, September 19, 200711:22 PM
To: Verne, B.Michael
Subject: Guidance on the Scope of 7(A)(c)(10) where voting
percentage increases but is then immediately diluted

Mike,

I'm faced with a factpattern that I've concluded would not trigger a filing but wanted to confirmthis. I'd appreciate your views on this when you get a chance and, if needed,am happy to schedule a call to answer any questions you have.

As part of an issuer'sacquisition of another company it needs (or wants) to get an infusion of cash.A minority holder, who is the focus of this email, will contribute part ofthose needed funds and receive additional voting securities of the issuer inreturn. These newly acquired shares would increase his stake such that thenecessary jurisdictional thresholds are crossed and his percentage of votingsecurities held would also increase. However, immediately (the same day, orpossibly only minutes after this cash comes in) the issuer will also be issuingsubstantial numbers of additional voting securities as consideration for itsacquisition of the other company.

The issuance of theseadditional shares results in the minority holder actually ending up with alower percentage of the total outstanding than what he held immediately beforehis purchase of new shares in the issuer. So, although his percentage holdingsdo technically increase, this increase is extremely transitory and the almostimmediate result is actually a dilution of his holdings.

With the understandingthat if the second step didn't occur the minority holder would not be HSRcompliant, can you confirm that this temporary blip (before the inevitabledilution) isn't sufficient to trigger a filing obligation. I've been told thatthe two steps are inextricably linked, so that risk of a long-lived increaseshouldn't be a factor.

Thank you in advance andplease let me know if you have any questions. While my research didn't turn upany interpretations directly on point it seemed to me that this was somewhatanalogous to the treatment of cashless exercises of options (such as thatdiscussed at http://www.ftc.gov/bc/hsr/informal/opinions/0210009.htm).I'm hoping that this approach seems reasonable to you.

About Informal Interpretations

Informal interpretations provide guidance from previous staff interpretations on the applicability of the HSR rules to specific fact situations. You should not rely on them as a substitute for reading the Act and the Rules themselves. These materials do not, and are not intended to, constitute legal advice.

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