1206001 Informal Interpretation

Date:
Rule:
801.10
Staff:
Michael Verne
Response/Comments:

  – See Comments.  K Walsh concurs.

Question

From:

(Redacted)

Sent:

Monday, June 11, 2012 4:34 PM

To:

Verne, B. Michael; Walsh, Kathryn

Subject:

Size-of-transaction question

Mike/Kate:

Iam looking into a transaction, and hoping that you can assist with a few questionsthat I have. Our client, LLC 1 is contemplating a merger whereby itssubsidiary(s) will form one or more wholly-owned subsidiaries to merge with andinto Targets A, Band C, which are currently controlled by Entity X. LLC 1 is aprivate company, and its UPE is currently Entity Y. In consideration for themergers, LLC 1 will issue new equity to Entity X (or an entity affiliated withEntity X). Following the mergers, Entity Y will lose control of LLC 1. It isanticipated that no member of LLC 1 will have 50% or more of the rights toprofits, or assets upon liquidation, of LLC 1. The purchase agreement ascurrently contemplated does not include a determined acquisition price for theequity of Targets A, Band C, nor a stated value for the LLC 1 equity thatEntity X will receive.

Underan alternate scenario, Entity X (or an entity affiliated with Entity X), mayacquire 50% or more of the equity in LLC 1 in consideration for the mergers asdescribed above. It is still anticipated that Entity Y would have less than 50%of the rights to profits, or assets upon liquidation, of LLC 1 post-mergers.

Inaddition, debt of LLC 1's subsidiaries and of Targets A, Band C will berefinanced in connection with the mergers, such that the old debt of LLC 1'ssubsidiaries and of Targets A, Band C will be paid off in cash and new debtwill be taken on jointly and severally by LLC 1's subsidiaries and Targets A,Band C. A portion of the debt of LLC's subsidiaries being paid off in cash isheld by Entity Y.

Couldyou please confirm our understanding with regard to each of the following:

1-Under the first scenario (where Entity X is theacquired person), assuming that there will not be a value ascribed in thepurchase agreement to the LLC 1 equity that Entity X (or its affiliate) willreceive in consideration for the mergers, the acquisition price for the mergersis undetermined. Therefore, size-of-transaction should be the fair market valueof the equity of Targets A, B, and C (as determined by the board of Entity V).Should the pre-acquisition debt of Targets A, B, and C be taken into account indetermining the fair market value of their equity? (YES MV)

2-Under the alternate scenario, Entity X would be deemedto be the acquiring person. As the size-of-transaction is similarlyundetermined, the size-of-transaction will be the fair market value of theequity interests that Entity X will be acquiring in LLC 1 (as determined by theboard of Entity X) will be the pre-acquisition debt of LLC 1 be taken intoaccount in determining the fair market value of its equity (YES - MV)

3-Does the refinancing result in any adjustment to thesize-of-transaction?
(NO unless additional debt is taken on MV)

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