1108007 Informal Interpretation

Date:
Rule:
None.
Staff:
Michael Verne
Response/Comments:

 No comment

Question

From: (Redacted)
Sent: Thursday,August 25, 2011 1:21 PM
To: Verne,B. Michael
Subject: HSR Filing Questions

Hi Mike,

Thank you again forspeaking with us on Tuesday. I just want to confirm the results of ourdiscussion.

As we discussed, werepresent a client ("Seller") that is the owner of a large commercialbusiness. The Seller intends to sell the business by auction process, involvingboth financial and strategic buyers. Maximizing value from the sale of thebusiness and the certainty of obtaining this value are key considerations forthe Seller.

Any sale would besubject to the reporting and waiting period requirements of the HSR Act as wellas of the merger control requirements of various other jurisdictions.

The purchase agreementwill contain a termination provision specifying a "drop-dead date",which is the date by which all regulatory conditions to closing must besatisfied. If the conditions are not satisfied by the drop dead date, theSeller can either unilaterally terminate the purchase agreement and retain thetarget business for its own account, or it can elect to sell the targetbusiness to another buyer. In either scenario, the failed buyer would notreceive any interest in the target business. In particular, the failed buyerwould not receive any dividends or earnings, would not have the right to voteor direct any vote of any shares in the target business, and would not have theright to influence the target business' management or otherwise influence therunning of the target business.

You agreed that each ofthe following arrangements would not entail the failed buyer acquiring abeneficial ownership interest in the target business. In each of thesearrangements, the payment by the failed buyer would not occur until after thedrop-dead date. In addition, in each arrangement, the Seller, in its solediscretion, may decide to unilaterally terminate the purchase agreement (andretain the target business for its own account) or sell the target to anotherbuyer. If the Seller elects to sell the target business, the on-sale would besubject to the HSR Act as well as the merger control regimes of various otherjurisdictions.

Arrangement 1.

The Seller elects tounilaterally terminate the purchase agreement. The failed buyer must pay theSeller a 100% reverse breakup fee (Le., a breakup fee equal in amount to theagreed purchase price for the target business) within a certain specified timeafter the termination of the purchase obligations.

Arrangement 2.

The Seller elects tosell the target business to another buyer. Upon the on-sale of the targetbusiness, the failed buyer must pay the Seller a "make-whole" reversebreakup fee equal to any difference between the purchase price which the failedbuyer agreed to pay for the business (the "Original Purchase Price")and the actual purchase price the Seller receives from the on-sale. If theon-sale price is greater than the Original Purchase Price, the Seller retainsthe upside and the failed buyer has a zero reverse breakup fee.

Arrangement 3.

The Seller elects tosell the target business to another buyer. The failed buyer must pay to theSeller an amount equal to the Original Purchase Price within a certainspecified time after the drop-dead date. At closing of the on-sale, the Sellerwould refund the failed buyer the proceeds of the on-sale, capped at theOriginal Purchase Price, likely yielding a net payment by the failed buyer tothe Seller of a make-whole reverse breakup fee.

Arrangement 4.

Same as in Arrangement3, except that, if the Seller elects to sell the target business to anotherbuyer, the failed buyer can suggest a potential third party buyer to theSeller. The Seller has no obligation to accept the suggestion. So the Sellerwould have three options: (i) terminate the purchase agreement and keep thebusiness, (ii) sell the business to the third party buyer suggested by thefailed buyer, or (iii) sell the business to another third party buyer of theSeller's choice.

Arrangement 5.

Same as Arrangement 3,except that, if the Seller elects to sell the target business to another buyer,the failed buyer has the right to direct the Seller to sell the business to aspecific third party buyer. So, the Seller would have two options: (i)terminate the purchase agreement and keep the business, or (ii) sell thebusiness to the failed buyer's designated third party buyer.

Arrangement 6.

Same as in Arrangement3, except that, if the Seller elects to on-sell the target business to anotherbuyer, the failed buyer provides an interest-free loan to the Seller in anamount equal to the Original Purchase Price (instead of making an outrightpayment equal to the Original Purchase Price). The Seller then proceeds withthe sale of the business to another buyer as described in Arrangement (3), (4)or (S) above. The Seller would repay the loan from the failed buyer from theproceeds of the on-sale but offset by a make-whole reverse breakup fee. (Thereason for doing this one way or the other is likely to be tax driven.)

We did not discuss this,but assume that it would be permissible for the Seller to recoup its costs ofthe on sale process and to be held harmless by the failed buyer againstliabilities arising as a consequence of the failure to close the transaction bythe drop-dead date, that is, to set the make-whole reverse breakup fee to beequal to the amount required to put the Seller in the position it would havebeen in had the transaction closed by the drop-dead date.

I also want to confirmthat the Arrangements described above would also be permissible for a partialsale of the target business, i.e., the parties close the portion of thetransaction for which they receive the necessary approvals, and the remainderof the transaction would be subject to one of these Arrangements.

 

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