1104012 Informal Interpretation

Michael Verne

Agree – both can be excluded.





Tuesday, April 26, 2011 10:12 PM


Verne, B. Michael

Subject: HSR Question - Size ofTransaction Test

Mike,Iwrite with a question regarding the calculation of the"size-of-transaction" for an acquisition of 100% of the votingsecurities of a target company, determined based on 801.10(a)(2), where thenominal purchase price is above the HSR thresholds, but where adjustments incomputing the value of the voting securities to be acquired, may make theacquisition not-reportable or may impact the filing fee if the acquisition isreportable. My question relates to whether it is appropriate to reduce thenominal purchase price for certain categories of expense in computing the"acquisition price" for HSR purposes.

First, I understand that the followingshould not be included in the acquisition price based on previous informalstaff opinions:

Repayment of Company Debt: The acquisition price should be reduced by anyrepayment from the deal proceeds of outstanding debt of the company, even ifthe debt is owed to the parent company, as explained in Informal Staff Opinion0805010 (May 16, 2008).

Transaction Expenses: The acquisition price should also be reduced by anytransaction expenses to be paid from deal proceeds, because they are not viewedas consideration that is being paid to the shareholders, but are merely thecost of getting the deal done, as explained in the same Informal Staff Opinion0805010.

Change of Control Payments toEmployees: Because these paymentsare to compensate current employees and are either compensation for servicesrendered or retention payments, they can be excluded from the acquisitionprice, as suggested in Informal Staff Opinion 0706005 (May 5, 2007).

I write to ask about two otheradjustments and whether they should also be excluded from the size oftransaction calculation.

TaxAdjustment Amounts: These amounts represent taxes that accrue to the targetcompany prior to closing, including for a spin-off immediately before closing.Because the tax adjustment amounts are for taxes that accrue to the targetcompany and not to the shareholders, it would appear that these amounts shouldbe excluded from the acquisition price. Like the amounts above (company debt,transaction expenses, and payments to employees), these payments will reducethe deal proceeds paid to the shareholders.

PreferredStock Accrued Dividends: The accrued dividends for preferred stock are aliability insofar as in the event of liquidation of a company, the targetcompany would be required to pay such dividends as a liquidation preference.Such liability, however, would not survive an acquisition, insofar as the stockis convertible and receives compensation in such acquisition. Moreover, themerger agreement defines the "merger consideration" for the preferredstock to include the accrued dividends and such consideration will bedistributed on a per share basis.

Please let me know if it is appropriateto adjust the acquisition price by these amounts. If it would be useful for usto discuss these issues, I would be pleased to do so. I am forwarding thisinquiry by email without calling in advance because I will be on an airplane onWednesday morning, and time is of the essence in the matter. I can be availableon Wednesday afternoon, however, if clarification of any of the above would beuseful.

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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.

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