The circumstances you describe indicate that the proceeds being used to settle prior debts are consideration. The liabilities described are not related to the transaction and, therefore, cannot be subtracted from the purchase price as transaction-related expenses.
Question
We are writing to inquire whether certain unpaid liabilities can be considered debt or transaction expenses and deducted from the HSR valuation.
In this example, after deducting certain transaction costs (transaction bonuses, legal fees), the transaction value is near the HSR filing threshold. The Target, a portfolio company of a private equity firm, has liabilities to a law firm not directly related to the current transaction that will be paid with the proceeds of the transaction. We understand that certain of the Target’s legal fees relate to (a) previous unsuccessful attempts to sell the company and (b) ordinary course of business legal work or related to other divestitures of parts of the Target’s business. Assume for these purposes that the legal work unrelated to the current transaction is not ongoing or recently incurred (i.e., they are at least a year old). Target deferred the payment of the legal fees until the sale of the Target to conserve cash for the business (unrelated to HSR). The Target considers these legal fees to be long-term liabilities. The Target is now being sold and the transaction contemplates paying the law firm’s legal fees from the proceeds of the transaction. The law firm liabilities are not secured by shareholders or the PE firm.
We would like to understand whether certain or all of these legal fees are deductible either as debt or transaction expenses.
- Pursuant to FTC guidance on The Treatment of Debt as Consideration, we are aware that “assumption of liabilities, if consideration for an acquisition, must all be valued in computing the acquisition price,” but, nonetheless, “not all debt retired as a part of a proposed transaction is consideration.” Given that the law firm liabilities are owed to a third party, not secured by shareholders, more than a year old, and will be paid with the proceeds of the transaction, may they be deducted from the transaction value as third-party debt?
- If the answer to 1 is no, may the parties deduct the aforementioned liabilities as transaction expenses to the extent such liabilities were incurred as part of prior efforts to sell the Target in a prior sales process?