1309002 Informal Interpretation

Date:
Rule:
801.12
Staff:
Michael Verne
Response/Comments:

Because applying the formula in§ 801.12, LLC holds 55.56%, not 46.18%. § 801.12(b) requires calculations of the percentage of voting securities held to be made according to the following formula: Number of votes of class A held divided by Total votes of class A times Directors elected by class A stock divided by Total number of directors. In your case, calculating the percentage of voting securities held by LLC: 35,288,762 (Class 1votes held by LLC) 5 (Number of directors elected by Class 1) 35,288,762 (Total LLC Class 1 votes) X 5 (# of directors elected by Class 1)=55.56% 35,288,762 (Total Class 1 votes) 9 (Total number of directors) (35,288,762 / 35,288,762) X (5 / 9) = 55.56%

Question

From: (Redacted)
Sent: Thursday, September 19, 2013 11:19 AM
To: Verne, B. Michael; Walsh, Kathryn
Cc: (Redacted)

Subject: RE: HSR Question -- UPE

Yes. Meant to say Class 1 and 2. Also, yes, Class 1and Class 2 vote separately for the election of directors and not as a single class. My first thought was yours. However, under 801.1(b), the LLC would not seem to be the UPE because it does not control Company B. While it elects 5 of the 9 directors, it only holds approximately 46% of the outstanding voting securities. Thoughts?

 

From: Verne, B. Michael [mailto:MVERNE@ftc.gov]
Sent: Thursday, September 19, 2013 11:09 AM
To: (Redacted); Walsh, Kathryn
Cc: (Redacted)

Subject: RE: HSR Question -- UPE

(Redacted)- Still somewhat confusing. We are assuming in the second table you mean Class 1 & Class 2, not Class A & Class B. We are also assuming that, despite the parenthetical, Class 1 and Class 2 vote separately for the election of directors, not together as a single class. If those assumptions are correct, then why isn't the LLC that holds all of the Class 1 stock the UPE? It can elect 5 of 9 directors on its own. What are we missing?

From: (Redacted)
Sent: Thursday, September 19, 2013 10:52 AM
To: Walsh, Kathryn; Verne, B. Michael
Cc: (Redacted)

Subject: RE: HSR Question -- UPE

Mike:

To clarify the parentheticals in #4 and #6 below, Class 1and Class 2 stock is all common stock. Thus from a total outstanding common stock perspective, Class 1represents approximately 46% of the common stock and Class 2 represents approximately 54% of the common stock as follows:

 

Shares of
Class 1
Common
Stock

Shares of
Class 2
Common
Stock

Percentage of Total
Class 1 & Class 2
Common Stock

issued and Outstanding Class 1 Shares

 

35,288,762

46.18%

Issued and Outstanding Class 2 Shares

41,120,128

 

53.82%

 

 

Shares of Class 1 and Class 2

Percentage of

 

Common Stock

Total Class A & Class B Common Stock

Issued and Outstanding Class A & B Shares:

76,408,890

100%

One other wrinkle, Class 2 common stock is called non-voting because the holder has no voting rights other than the election to Company B's board of 4 of the 9 board directors. In other words with respect to the merger, the members that they elected to Company B's board voted for the transaction but the actual holders of Class 2 common stock did not get to participate in the shareholders' vote for the transaction. In contrast, in addition to having the right to elect 5 of the 9 directors to Company B's board, the holders of class 1common stock got to participate in the shareholder vote for the transaction.

While this is a wrinkle, under 801.1(f)(1)(i)'s definition of a voting security, the Class 2 common stock would seem to be a "voting security" given that it "entitle[s] the owner or holder thereof to vote for the election of directors of the issuer . .. " even though it called non-voting Class 2 common stock by Company B.

Because I have never run into this fact pattern before, I wanted to run it by you to get your views. Best,

 

From: (Redacted)
Sent: Thursday, September 19, 2013 9:48AM
To: Walsh, Kathryn (kwalsh@ftc.gov); mverne@ftc.gov
Cc: (Redacted)

Subject: RE: HSR Question -- UPE

Mike and Kate:

I hope all is well. I would like to run something by you in connection with determining the UPE of my client (the seller in a merger transaction).

Here are the facts:

1. Merger between Company A and Company B (the target).

2. Company B is a corporate entity.

3. There are two classes of Company B common stock.

4. Class 1stock represents 46% of all common stock (Classes 1and 2 combined).

5. Class 1stock entitles the holders to vote for 5 of the 9 directors for Company B.

6. ·Class 2 stock represents 54% of all common stock (Classes 1and 2 combined)

7. Class 2 stock entitles the holders to vote for 4 of the 9 directors for Company B.

8. Class 1stock is held by an LLC, which in turn is controlled by a Fund.

9. Class 2 stock is held by individuals investors with the largest investor holding 12.5% of the Class 2 stock.

Analysis

Because Classes 1and 2 stock each have the right to vote for directors they are voting securities under 80l.(f)(1)(i) of the HSR rules. However, Company B is its own UPE because no person holds 50% or more of the outstanding voting securities of Company B.

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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