1104003 Informal Interpretation

Michael Verne






Monday, April 11, 2011 7:54 PM


Verne, B. Michael

Subject: HSRAnalysis


I hope all is well. Please let me knowwhether my analysis of the transaction described below is correct.


Twocompanies, W (our client) and M, want to enter into a JV to purchase,indirectly, an interest in a Delaware limited liability company (A) that wasformed in 2007 to develop and operate wind farms. A currently operates fourwind farms. The interest in A to be purchased by JV currently is owned by an enentity controlled by M (M Affiliate) and is a minority interest in A. Thepurchase would be effected in three related contemporaneous transactions.

InTransaction 1, Wand M would invest in a dormant LLC presently controlled by W.W would amend and restate the operating agreement of JV and would invest $27million for class B membership interests, while M would invest $36.6 millionfor class A and class C membership interests. M would also lend to the JV $226million.

InTransaction 2, M Affiliate would transfer a majority of its (minority) interestin A to two LLCs (1 and 2), which are presently dormant LLC subsidiaries of M.

InTransaction 3 - JV Co would acquire a 99% interest in each of 1 and 2 from anaffiliate of M with the proceeds of the capital contributions and the loan.When the dust settles, 1 will have an investment of $243 million in A and 2will have an investment of $46 million in A. Collectively, 1 and 2 will own 49%of A's class B membership interest, but ultimately would not have the right to50% of A's profits or assets upon dissolution.

Each ofthe class B interests and the class C interests in JV are entitled to a statedrate of return which would accumulate if not paid currently. Income of the JVreceived from its investment in A would first be used to pay principal andinterest on the loan from M. Once the loan is repaid in full, available cash,if distributed by the Board of JV, would be paid in the following priority: (i)first to the accumulated return to the Class C interests; (ii) second to theaccumulated return on the Class B interests; (iii) third, 85% to the Class Binterests and (iv) the remainder to the Class A interests. I understand that,based on current cash flows from A, the parties expect the loan to be repaidsometime in year 2 which means there will be a few months beginning in year 2in which the Class C and Class B returns are expected to be paid before Wbecomes entitled to exercise the put.

Inliquidation proceeds are paid in the following priority: (i) liquidationexpenses, (ii) accumulated return on the Class C interests, (iii) accumulatedreturn and return of capital to Class B interests, (iv) return of capital toClass C interests, (v) 85% of remainder to Class B interests, and (vi)remainder to Class A interests. The parties expect that structure would remain inplace for approximately 3 years, after which W can "put" itsinterests in A to M. Various events, generally within the control of M, wouldallow W to exercise its put prior to 3 years.


Stage 1 -W has no filing obligationbecause its purchase of a $27 million membership interest falls below the sizeof transaction test. Furthermore, although W's acquisition of class B(preferred) interests will entitle it to 85% of the assets/profits, thewaterfall is structured such that W will exit within 3 years. Moreover, W isnot expected at this time to receive payments until middle of year 2.Accordingly, W does not "control" JV; rather, M controls JV.

Stage 2 -Because M controls JV, itspurchase of membership interests in LLC 1 and 2, which were dormant downstreamsubsidiaries of M, is exempt under 802.30.

Stage 3 -Because M will not be acquiringcontrol of A, that acquisition is not subject to HSR either.

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