Question
From:(redacted)]
Sent:Wednesday, November 12, 2008 5:34 PM
To:Ferkingstad, James H.
Subject: Proposed Transaction
Mr.Ferkingstad,
Thisemail is to confirmmy understanding ofthe treatment ofaproposed transaction, based ona telephone conversation we had on11/06/08. The proposed transaction is as follows:
CorporationA currently owns 42% of the membership interests in LLC X. Theapproximate fair market value of Corporation A's membership interests in LLC Xis currently $5,000,000.00. Corporation A proposes to provide $42,000,000in debt financing to LLC X in exchange for preferred debt securities that are convertibleinto common equity upon certain occurrences, and at a set price perinterest. In exchange for it's commitment to lend, LLC X will alsoimmediately issue toCorporation A$10,000,000inwarrants. Prior to conversion or exercise, neitherthedebt securities nor the warrants provide any current rights to profits orrights to assets upon liquidation.
Basedon these facts, the convertible debt securities would not fit the definition of"non-corporate interests" in Section 801.1(f)(ii). Thus, CorporationA is not acquiring voting securities, non-corporate interests, or assets, andis not initially subject to HSR notification requirements. Pleaseconfirm this conclusion.
[StaffComment: 801.1(f)(ii) does apply LLC ownership interest however thestructure is considered non-corporate interests. LLC is nota corporation / issuer.]
Iwould also like to clarify what would happen upon conversion or exercise of thewarrants. I would propose the following hypothetical, based on the samefacts as above:
After2 years, Corporation A converts a portion of its debt securities into commonequity interests, such that after the conversion, Corporation A has increasedits membership interest (and right to profits) from 42% to 52%. The fairmarketvalue of Corporation A's previously owned 42%membershipinterests is then $10,000,000, and the acquisition price of the additional 10%membership interests is $10,000,000. The acquisition price for theadditional 10% is disproportionate to the fair market value of the previouslyowned 42% because the conversion price was set atissuance and CorporationA wishes to pay apremium to convert in order to control LLC X.
[StaffComment: refer to 801.1(b)(1)(ii) control of an LLC >=50% of profits or>= 50% of assets upon dissolution]
Mybelief is this first conversion will transfer "control" of LLC X toCorporation A based on 801(b)(1)(ii), Corporation Awill bedeemed toacquire all of the assets of LLC X based on Section 801.2(f)(1)(i), and, basedonSection 801.2(f)(1)(ii), the value of theacquisitionforsize of transaction purposes is determined in accordance with Section801.10(d).Section 801.10(d) states that the value is the sum of theacquisition price of the interests to be acquired and the fair market value ofany interests ... held by the acquiring person prior to the acquisition.In the proposed transaction, theacquisition price of theintereststo be acquiredis$10,000,000, and the fair market valueofpreviously held interests is $10,000,000. Because the total value of$20,000,000, is less than $63,100,000, the first conversion does not meet thesize of transaction test, and neither Corporation A nor LLC X is subject to HSRnotification requirements. Please confirm this conclusion.
[StaffComment: Not reportable]
Another2 years passes, and Corporation A converts the remaining portion of its debtsecurities and exercises all of its warrants. Corporation A hasnowincreased its membership interest (and right to profits) from 55% to85%.The fair market value of Corporation A's previouslyowned55% membership interests is now $40,000,000, and the acquisitionprice of the new 30% membership interests is $42,000,000 ($32,000,000 in debtsecurities plus $10,000,000 in warrants).
Mybeliefis that after the first conversion, Corporation A is now the ultimate parententity of LLC X based on Section 801.1(a)(3). While the value of thesecond conversion would equal $82,000,000, and would be greater than the$63,100,000 (as then adjusted) size of transaction threshold, the transactionwould be an acquisition in which the acquiring person and acquired person arethe same person by reason of Section 801.1(b)(1). Thus, the secondconversion would be exempt from the requirements of the Act based on theSection 802.30 "Intraperson transaction" exemption. Pleaseconfirm this conclusion.
[StaffComment: Not reportable]
Finally,so long as the structure and timing of the transactions were not a sham, not drivenby a desire to avoid filing under the HSR Act, and thereisa goodfaith business purpose, the transaction will not be considered a device foravoidance and disregarded pursuant to 801.90. Please confirm thatwhether a multi-step transaction is a device for avoidance is a fact specific,case-by-case determination, and that no safe harborwaiting period existsin the regulations(that is, there is no set time period such as 6 monthsor 1 year that we could instruct our client that, if the conversions wereseparated by such time period, the FTC would not aggregate them as a device foravoidance).
[StaffComment: Not subject to 801.90]
Asalways, you're assistance to this point has been invaluable and muchappreciated. I look forward to your response.
BestRegards,