1310004 Informal Interpretation

Date:
Rule:
802.9, 801.1(b)
Staff:
Michael Verne
Response/Comments:

Here's our take on your issues: Solely for Purpose of Investment We are OK with #1. As long as the other conditions of the exemption are met, we don't think that solely being a member of the family stockholder group would preclude the use of the exemption. We are having problems with 2(a) and 2(b). Both of these sound to us like Mr. A and Mr. B are pretty heavily involved in managing the business of X. The two interpretations you cite are pretty old (although they don't predate me J) and relate to individuals that were involved in the business of a small sub, not the issuer whose stock is being acquired. Control of a Trust We think the trust is its own UPE in both of the scenarios you lay out. K Walsh concurs

Question

From: (Redacted)
Sent: Tuesday, October 29, 2013 10:56 AM
To: Verne, B. Michael
Subject: 802.9 and other issues

Hi Mike.

I hope you are doing well. I have a few questions related to the passive investor exemption and also to the control test for trusts. Please do not publish this e-mail on the PNO's website.

The "solely for the purpose of investment" exemption

(1) X is a "controlled company" under New York Stock Exchange ("NYSE") rules. A "controlled company" is one in which more than 50% of the voting power for the election of directors is held by an individual or a group. In X's case, a group of family members together elects more than 50% of X's directors. No one stockholder, however, holds at least 50% of the voting securities or alone can elect at least 50% of X's directors. Some of the family stockholders serve as officers or directors of X, but others do not.

Would you please confirm that a member of the family stockholder group who otherwise meets the requirements of the "solely for the purpose of investment" exemption of Section 802.9 (and does not serve as an officer or director of X or of any X subsidiary) may qualify for that exemption when he or she acquires voting shares of X despite his or her participation in the family stockholder group? In other words, please confirm that participation in the group that controls a corporation under NYSE rules does not by itself preclude a person from having the subjective intent not to participate "in the formulation, determination, or direction of the basic business decisions of the issuer."

(2) We are also analyzing whether the "solely fer the purpose of investment" exemption could apply when certain of X's employees or officers- in particular Mr. A and Mr. B - acquire voting shares of X. Mr. A and Mr. Bare members o fthe family stockholder group but neither alone can elect at least 50% of X's directors and neither serves as a director of X or of any subsidiary of X. In addition, neither would qualify as an HSR Item 4(c) officer because neither was appointed by the Board of Directors of X or by the Board of any of X's subsidiaries and their positions are not provided for in the articles or by-laws of X or of any subsidiary of X. Our question is whether Mr. A' s and Mr. B's participation in the family stockholder group and their specific responsibilities as officers or employees of X would preclude them from reliance on the Section 802.9 exemption assuming all other elements of that exemption would apply to them when they acquire shares of X.

(a) Mr. A is responsible among other things for (i) helping to implement an effective pricing process and tracking system for X' s products;(ii) overseeing the training of others in pricing practices and general pricing issues; (iii)recommending actions to optimize profits; and (iv) strengthening communications between the Company and the family stockholders. In addition, he serves on committees that work on the following issues among others: developing strategies to grow the business, increase profits, reduce costs, and optimize investments; improving utilization of production assets and coordinating the management of inventory; and working on technology issues and ways to minimize bureaucracy and maximize returns on investment. He also chairs a committee that recommends technology and projects to improve and support the sales and marketing processes of X and strengthen its brand.

(b) Mr. B's title is Division Director of a region in the U.S. He monitors and measures the performance of X's distributors within that region ("Certain Regional Distributors") and manages investment and support for such distributors. He also collaborates with others to develop strategic direction for such distributors and he leads or manages the development, implementation, and execution of a business plan to help the Certain Regional Distributors deliver a targeted amount in gross profits (which targeted amount accounts for only about 5% of X's total annual gross profits}.

Under Informal Interpretation #9906022, may we take the position that Mr. A's and Mr. B's responsibilities at X do not alone preclude them from reliance on the 802.9 exemption? In that interpretation, the PNO concluded that an individual serving as an officer of multiple subsidiaries of the issuer could utilize the exemption so long as he had no intention of participating in the formation, determination, or direction of the basic business decisions of the issuer. The individual in that interpretation was an officer of a subsidiary of the issuer, but such subsidiary represented a small percentage of the issuer's total business. Similarly, in Informal Interpretation 9803007b,the PNO apparently permitted an officer or employee of an issuer with some management authority over a subsidiary of the issuer to utilize the passive investor exemption with respect to his acquisition of the issuer's voting securities so long as acting alone he did not have the authority over the issuer that a general partner would have over a limited partnership. Neither Mr. A nor Mr. B have this authority over X.

Control of a Trust

I also have a few questions regarding whether a particular CLAT-charitable lead annuity trust -is its own UPE. Specifically, during the term of the trust, an annuity is paid to a designated charity. At the end of the trust's term, any assets remaining in the trust will then be distributed to a trust that is its own UPE. During the term of the CLAT, its one trustee can be removed and replaced by a majority of the settlor's (Mr. Y's) then living descendants in the oldest generation. Presently, all of those descendants are minor children. May we conclude that Mr. Y is not the UPE of the CLAT or would we need to examine whether he can act for his minor children and therefore remove and replace the trustee until his children reach 18 years of age? Does it matter if he is the sole trustee?

If Mr. Y would be the UPE of the CLAT while his children are still minors because he can remove and replace the trustee on their behalf, would the CLAT be deemed its own UPE if Mrs. Y likewise has the legal authority to act on behalf of their minor children and thereby remove and replace the CLAT's trustee while the children are minors?

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.