Question
(redacted)
March 7, 1986
Hand Delivery
Mr. Andy Scanlon
Premerger Notification Office
Federal Trade Commission
6th Street & Pennsylvania Avenue, N.W.
Room 303
Washington, D.C. 20580
Dear Mr. Scanlon:
I am writing to request your advice concerning the application of the Hart-Scott-Rodino Premerger Notification Rules (Rules) to a series of transactions contemplated by our client. I discussed these proposed transactions with you briefly by telephone yesterday, and you requested that I outline the transactions in a letter to you. The proposed transactions may be described as follows:
XYZ Corporation, a publicly held corporation with total assets exceeding $100 million (XYZ), plans to effect a series of transactions collectively referred to herein as the Recapitalization. The Recapitalization will include the following principal elements:
(1) the adoption by XYZ of a new employee stock ownership plan (the ESOP) that is designed to invest primarily in the voting securities of XYZ (Voting Securities) and is authorized to borrow funds to acquire such voting securities but which at the time of its formation will have no assets;
(2) a sale by XYZ from its treasury of approximately $750,000 shares of Voting Securities for a price exceeding $15 million (which purchase the ESOP will finance through a borrowing from XYZ, which in turn will borrow the funds to lend to the ESOP).
*Presumably a Trust with XYZ having power to effect trustees.
XYZ (ESOP) acquiring
XYZ acquired
(3) the contribution of such shares by the ESOP to ESOPCO, Inc., a Delaware corporation wholly owned by the ESOP (ESOPCO);
(4) the merger (Merger) of ESOPCO with and into XYZ, which will be the surviving corporation;
(5) the conversion in the Merger of each outstanding share of Voting Securities (other than shares held by ESOPCO and shares in respect of which dissenters rights of appraisal are perfected under Delaware law) into the right to receive cash and .178 of a new share of voting securities of XYZ (New Common Stock);
**Acquired XYZ
Acquiring XYZ (ESOP)
***old XYZ - common - all new common stock remains after merger
(6) the conversion in the Merger of the shares or ESOPCO common stock into the right to receive a number of shares of New Common Stock equal to the number of shares pf Voting Securities held by ESOPCO immediately prior to the Merger (which shares of Voting Securities will be cancelled); and
(7) a subsequent split of the New Common Stock issued in the Merger on a three-for-one basis.
Thus, as a result of the Recapitalization, the ESOP will receive three shares of New Common Stock for each share of Voting Securities held by ESOPCO, while every other holder of Voting Securities (other than stockholders who perfect dissenters rights of appraisal under Delaware law) (the Participating Stockholders) will receive cash and .534 (.178 x 3) of a share of New Common Stock for each share of Voting Securities owned. The fractional share interest of each Participating Stockholder will represent a percentage equity interest in XYZ immediately after the Merger equal to approximately 75% of such participating Stockholders current equity interest in XYZ. The ESOP will own approximately 25% of the equity in XYZ. Because the Participating Stockholders will retain less than 80% of their equity interest in XYZ, the Recapitalization will be a substantially disproportionate redemption within the meaning of Section 302(b)(2) of the Internal Revenue Code of 1954, as amended, thus, the distribution of cash to Participating Stockholders generally will be taxed at capital gains rates.
*individual stockholder acquisitions New Common Stock should be issued separately
Thus, as a result of the Recapitalization, the ESOP will receive three shares if New Common Stock for each share of Voting Securities (other than stockholders who perfect dissenters rights of appraisal under Delaware law) (the Participating Stockholders) will (redacted) receive cash and .534 (.178 x 3) of a share of the New Common Stock for each share of Voting Securities owned. The fractional share interest of each Participating Stockholder will represent a percentage equity interest in XYZ immediately after the Merger equal to approximately 75% of such Participating Stockholders current equity interest in XYZ. The ESOP will own approximately 25% of the equity in XYZ. Because the Participating Stockholders will retain less than 80% of their equity interest in XYZ, the Recapitalization will be a substantially disproportionate redemption within the meaning of Section 302 (b) (2) of the Internal Revenue Code of 1954, as amended, and thus the distribution of cash to Participating Stockholders generally will be taxed as capital gains rates.
I should appreciate your advice concerning which, if any, of the transactions outlined above must be reported under the Rules. Please feel free to call me at (redacted) or in my absence, (redacted) of our Firm at (redacted) with any questions or comments you may have.
Thank your for your attention to this.
Very truly yours,
(redacted)
(redacted)
3/12 T/C (redacted) Scanlon