1111008 Informal Interpretation

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

  - We are still taking the position that 7A(c)(10) is absolute and there is no de minimis exception. I think that's the right position, because otherwise we would be interpreting the plain language of a statutory exemption to mean something other than what it unambiguously says.

Question

From: (Redacted)
Sent: Monday, November 14, 2011 2:36 PM
To: Verne, B. Michael
Subject: Fwd: HSR question --application of Section 7A(c)(10)
Attachments: Picture (Device Independent Bitmap) 1.ipg

Mike --hope that you hada relaxing Veterans Day Weekend.

I have a questionregarding the application of the Section 7A(c)(10) exemption to the followingscenario.

Facts: Holdco hasmultiple shareholders consisting of several private equity investment funds,management and individual shareholders. The shareholders hold common stock ofHoldco. Holdco has a direct sub, Intermediate, in which it holds all of theCommon stock representing the majority of Intermediate's outstanding votingshares. The shareholders of Holdco hold the remaining outstanding voting sharesof Intermediate in the form of preferred stock. Holdco has created a new classof convertible participating preferred stock which it will offer to all of itsshareholders in exchange for their shares of preferred stock of Intermediateand unpaid dividends of Intermediate. (Each share of Common stock and each shareof newly issued Preferred stock will be entitled to one vote per share.)

It is anticipated thatmost, if not all of Holdco's shareholders, will elect to participate in theexchange. However, the exchange is voluntary and it is possible that a few ofthe individual shareholders will not participate in the exchange (although itis not known at this time). If this occurs, the percentage of outstandingvoting shares held by the other shareholders of Holdco would increase but theincrease would be a rounding error, as little as a thousandth of a percentagepoint.

Approximately 99.2% ofHoldco's outstanding voting shares are held by private firms all of which willparticipate in the exchange. The other 0.8% are held by 43 individuals.

My question is whether theSection 7A(c)(10) exemption would apply to the exchanges by the five or sixshareholders whose holdings exceed $66 million in value if all shareholders donot elect to participate in the exchange. Although the percentage ofoutstanding voting shares of Holdco held by the shareholders of Holdco wouldincrease if all of the preferred shareholders of Intermediate do notelect to exchange their shares, the increase in the percentage of voting sharesheld would be insignificant because all of the major shareholders willparticipate in the exchange on a pro rata basis and the few shareholders whomay not participate are individuals as who have very small shareholdings. Thatsaid, this seems like the type of internal reorganization that Section 7A(c)(10) was meant to cover.

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