1207009 Informal Interpretation

Date:
Rule:
801.2
Staff:
Michael Verne
Response/Comments:

  – Agree.  K Walsh concurs.

Question

From: (Redacted)
Sent: Wednesday, July 18, 2012 10:49 AM
To: Verne, B. Michael
Subject: HSR

Mike:

Buyerand Seller have agreed to a sale of Seller's business, but the structure isunusual, and we want to make sure we are analyzing this correctly. You mayassume that the size-of-persons test (if applicable) would be satisfied.(Seller has several owners, and although we do not think this is relevant to theanalysis, Seller is controlled for HSR purposes by a single shareholder whoholds 50% or more of Seller's voting securities.)

Atsigning, Buyer acquire an option to purchase Seller's business. The option willbe divided into two sequential options. The first option will permit Buyer toacquire up to a 25% interest in Seller's business. This first option isexercisable anytime from now until a specified date in 2017. The second optionis exercisable only in 2017 (for a thirty day period after the exercise periodfor the first option has run) and permits Buyer to acquire whatever share ofthe business it has not previously acquired.

Buyerwill pay an "upfront amount" for the options; if Buyer exercisesoptions, each exercise will require an "exercise payment." If thesecond option were exercisable today (which it is not), then the total of thesethree payments (the upfront payment and the exercise payments) would be belowthe current size-of-transaction threshold. The exercise payment on the secondoption is subject to an upward or downward adjustment depending on Seller'sfinancial performance.

Selleris an "S" corporation. For tax reasons, Buyer will not actuallyacquire any voting securities in the "S" corporation at any time.(Acquiring such securities would disqualify the corporation from "S"treatment for tax purposes and subject it to corporate taxation.) Rather, whenBuyer first exercises an option, the S corporation will drop its assets into anLLC. What Buyer will get is either up to 25% of the LLC interests (if itmaximizes its exercise of the first option) or 100% of the interests (if itexercises the second option).

Atthe initial signing (that is, when Buyer has bought the options and made theupfront payment, but before it has exercised the options), Buyer will beentitled to appoint a director to sit on the "S" corporation's boardand will be entitled to certain minority-protection rights (such as requiringminority consent to sale of assets or entry into a material contract). If Buyerdecides to exercise its first option (for up to a 25% interest in thebusiness), then, Buyer's director seat and minority protection rights will thenshift to the LLC, and Buyer will no longer have a Board seat on the"S" corporation board.

Webelieve that this transaction is not reportable today, because Buyer is notacquiring either voting securities or an LLC interest. Nor is it reportable onexercise of the first option, because Buyer's acquisition of interests will notconfer control of the LLC. Exercise of the second option is potentiallyreportable, because acquisition of the LLC interest will confer control of theLLC. Reportability will depend on the value of the LLC interests that Buyerwill hold after exercise of the second option, which would be the sum of (i)the FMV of the any LLC interests that Buyer has previously acquired and stillholds, and (ii) the purchase price (if "determined") or FMV (ifpurchase price is not "determined") for the LLC interests that Buyeracquires through exercise of the second option.

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.

Learn more about Informal Interpretations.