1103005 Informal Interpretation

Michael Verne

– Agree.





Thursday, March 10, 2011 2:23 PM


Verne, B. Michael

Subject: ServiceContract Question


I have a questionregarding long-term service contracts in the context of a voting securitiesacquisition.

Let's assumeCompany A plans to buy all of the issued and outstanding voting securities ofCompany B for $20 million. Company B plans to enter into a new long-termservice contract with Company A to service Company B's current customers.Company B will be paid for its performance under this contract based on certainsales targets. It is expected that the potential additional revenue to CompanyB could be as high as $80 million. No premium is being paid by Company A forthis long-term contract, and all of the services relating to the to be-executedservice contract will be performed in the future.

It is myunderstanding based on the informal guidance I have read that thesize-of-transaction in this situation includes only the $20 million payment forthe voting securities of Company B, and that the service contract does notconstitute an asset which needs to be valued where no premium is being paid by CompanyA for this new contractual arrangement. I wanted to confirm that you agree withme on this. The relevant guidance that I am drawing upon in reaching thisconclusion, while not directly on point, is set out below.

I base myconclusion in part on the following informal interpretations: PremergerNotification Practice Manual, Interpretation 100 (4th ed. 2007), stating thatin the context of an asset acquisition, the buyer's assumption of an obligationto pay a fixed amount in the future to the seller is not included in theacquisition price if that obligation represents payments under an executorycontract with the seller ... for which ... services have not yet been received.I assume that the same principle will apply in a voting securities context via 802.4.

In the context ofa newly formed JV, a joint-ventures entry into a service contract with a JVrequiring future performance by the JV in exchange for future revenues to theJV would not be considered an asset of the JV, unless the co-JV partner wouldpay a premium to assume the obligations under the contract.

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