Question
From: (redacted)
Sent: Wednesday, December 23, 2009 11:19 AM
To: Verne, B. Michael
Subject: Question Re 801 .11 (e)
Mike, first, I hope you have a great holiday! Second,I have a scenario I would like to confirm whether 801.11(e) is available.
There are two possible fact situations.
The first is that a newly formed partnership (PS 1)that is its own UPE and has no regularly prepared balance sheet will create anacquisition subsidiary that will acquire another company in a transaction witha value less than $260.7 m. The acquisition subsidiary would be approximately60% owned by the newly formed partnership PS 1 and have two other investorsthat each would have a less than 50% interest. At formation of the newly formedpartnership and acquisition sub, the parties will contribute only cash. Atclosing, the management of the target company would rollover some equity for anaggregate interest of approximately 20% in the acquisition subsidiary (nomanagement person will hold more than $65.2 m of stock in acquisition sub). TheUPE of the acquisition subsidiary would be the newly formed partnership PS 1.
The second scenario is similar but there is anotherlayer inserted. The newly formed partnership and 2 co investors will form asecond newly formed partnership (PS 2) and contribute cash. PS 1 will have agreater than 50% interest in PS 2 and each co investor will have a less than50% interest in PS 2. Then PS 2 will form the acquisition sub to acquire thetarget. At closing, the management of target would rollover some equity for anaggregate amount of approximately 20% in the acquisition sub (again with nomanagement having more than $62.5 million of stock). Again, the UPE of theacquisition sub will be PS 1.
Analysis: In both scenarios, the formation of thepartnerships and the acquisition sub should be exempt because only cash isbeing contributed at formation (or with respect to the acquisition sub. it is awholly owned sub in scenario 2).
It appears that in both scenarios the newly formedpartnership (PS 1) as the UPE of the acquisition sub should be able to use801.11(e) to deduct the acquisition funds plus related expenses from its proforma balance sheet in determining whether it meets the size of the persontest. I reviewed the following informal interpretations that involvedacquisition subsidiaries owned by a UPE that was newly formed without aregularly prepared balance sheet: 9412002, 9909010, 9806011. However, in eachof these, it did not appear that there were other non controlling investorsinvolved and I wanted to confirm that this would not render 801.11(e)inapplicable. In both scenarios, PS 1 is the UPE and does not have a regularlyprepared balance sheet and the size of the transaction will be less than $260.7m.
As one final note, PS 1 will have capital commitments(for cash) at the time of closing but they will not be drawn on except to fundthe acquisition cost. Based on other informal interps, it does not appear thatfor purposes of 801.11(e) the commitments need be included except to the extentdrawn upon at closing (I understand under 801.40 or 801.50 in analyzing aformation transaction it would be different).
Thanks so much and have a great holiday.