As you are in possession of all the facts related to this analysis, you will have to make the call on instrumentality and be prepared to defend it if the agency investigates. We note that we think it would be very hard to argue that Mr. Y isn’t instrumental given his position at X.
Question
From: Walsh, Kathryn E. <kwalsh@ftc.gov>
Sent: Wednesday, April 14, 2021 3:01:48 PM (UTC-05:00) Eastern Time (US & Canada)
To: [Redacted]
Cc: [Redacted]
Subject: FW: Instrumentality
As you are in possession of all the facts related to this analysis, you will have to make the call on instrumentality and be prepared to defend it if the agency investigates. We note that we think it would be very hard to argue that Mr. Y isn’t instrumental given his position at X.
From: [Redacted]
Sent: Tuesday, April 13, 2021 8:30:18 PM (UTC-05:00) Eastern Time (US & Canada)
To: [Redacted]
Subject: Instrumentality
Hi folks.
I hope you are all doing well.
I am writing to confirm that Fund A and Mr. Y are not instrumental in the transaction described below and therefore do not have an HSR filing obligation in connection with the transaction.
Fund A
Fund A, a minority stockholder of Company X, currently holds X voting shares valued in excess of $92 million. Fund A has a contractual right to designate a representative to serve on X’s board. Fund A’s representative (Mr. A) is one of four directors on X’s board.
Some of X’s senior management have decided to sell some of their X shares to obtain liquidity and X has decided to repurchase such shares. As a result, and as an unintended consequence of such repurchase, Fund A’s percentage of X’s voting shares would increase.
In addition, X will likely enter into purchase agreements to acquire other selling stockholders’ shares of X pursuant to a right of first refusal (“ROFR”). These stockholders are also looking for liquidity. As a result, and as an unintended consequence of such repurchases, Fund A’s percentage of X’s voting shares would increase.
We do not believe that Fund A should be considered instrumental in causing or financing the buybacks. Fund A and Mr. A were not involved in persuading the selling stockholders to sell their shares. Even if Mr. A, as a director of X, votes in favor of X entering into repurchase agreements or exercising its ROFR with the selling stockholders, we understand that such a vote would not in and of itself cause Fund A to be instrumental in the buyback. See Informal Interpretation #1901001 (January 29, 2019) reproduced below.
There is also a chance that the stockholders of X could be asked to vote to approve some of X’s buybacks from some of the selling stockholders, but it is not yet certain whether any such vote will occur.
Questions
Do you agree that even if Mr. A votes as a director in favor of X’s purchases from the selling stockholders, Fund A would not necessarily be deemed instrumental in causing these buybacks? See Informal Interpretation #1901001 below.
If Mr. A’s affirmative vote as a director standing alone could make Fund A instrumental, do you agree that Fund A would not be instrumental if Mr. A abstains from voting as a director for the buybacks?
Do you agree that if X’s stockholders (including Fund A) actually vote for any of the buybacks, Fund A would not necessarily be deemed instrumental in causing these buybacks? See Informal Interpretation #1901001 below.
If not, do you agree that Fund A would not be instrumental if it abstains from voting as a stockholder for the buybacks?
Mr. Y
Although Mr. Y is a minority stockholder in X, he is X’s UPE because he has the right to designate at least 50% of X’s directors. Mr. Y is also a director of X and is X’s CEO. He holds X voting shares with a value in excess of $92 million and his percentage of X’s voting shares will increase when the Company buys the shares to be sold by the selling stockholders as described above.
Like Fund A, Mr. Y did not try to persuade the selling stockholders to sell their shares. Upon learning that the selling stockholders intended to sell some of their shares, however, he was involved in the Company’s decision to repurchase the shares and also to enter into the repurchase agreements with the selling stockholders.
For all the reasons described above and in the informal interpretation reproduced below, we do not believe that Mr. Y is instrumental in causing the selling stockholders to sell their shares and his involvement in deciding that the Company should acquire shares from the selling stockholders, with its unintended consequence of causing the percentage of voting shares he holds in X to increase, should not result in him being deemed instrumental and having an advance HSR filing obligation.
Do you agree?