|June 10, 1997|
Michael S. Goldman, Esq.
Bradley Y. Smith, Esq.
Dear Messrs. Goldman and Smith,
This responds to your correspondence of June 4, 1997, supplemented by telephone conversations between Board staff and your firms, concerning loans to be extended by United States banks and other lenders to finance the acquisition of a United Kingdom company whose securities are registered on the New York and London Stock Exchanges. The corporate acquisition involves the use of a shell acquisition vehicle, leading your firms to ask Board staff for its views concerning the Board's 1986 Interpretation regarding "Purchase of debt securities to finance corporate takeovers" (12 CFR 207.112).
The Board's 1986 Interpretation concerned the definition of the term indirectly secured in Regulations G and U (12 CFR Parts 207 and 221). The Board concluded in its 1986 Interpretation that debt securities issued in a private placement by a shell corporation to finance the acquisition of a company whose shares qualified as margin stock under Regulations G and U were presumed to evidence purpose credit secured by the target's margin stock, subject to the 50 percent margin requirement for such loans under the respective regulations (12 CFR 207.112(e)). The interpretation was based on a fact pattern in which it was possible that the shell corporation would hold the margin stock for a significant and indefinite period of time. The 1986 Interpretation also concluded that this presumption would not apply if there were specific evidence that lenders could in good faith rely on assets other than margin stock as collateral. The Board provided three examples of such specific evidence: (1) a guaranty of the borrowing by another company that has substantial nonmargin stock assets or cash flow; (2) a merger agreement between the acquiring and target companies; and (3) a requirement that the shell acquire the minimum number of shares necessary to effect a merger between the acquiring and target companies without the approval of either the shareholders or directors of the target company (12 CFR 207.112(f)).
We understand that the proposed acquisition will be financed with a number of loans, some of which will be guaranteed by companies that have substantial nonmargin stock assets or cash flow. The presumption of indirect security contained in the 1986 Board Interpretation does not apply to these guaranteed loans. As to the other loans funding the acquisition, it is necessary to determine whether there are other factors to rebut the presumption of indirect security.
We further understand the following. The tender offer will be recommended by the board of directors of the target company to its shareholders. Although ordinarily the commitment to lend would be preceded by the execution of a merger agreement between the target and the acquiring company if the target were a U.S. company, generally merger agreements are not executed in the tender offer context in the United Kingdom. The proposed acquisition procedure is a common procedure in the United Kingdom.
In the instant case, the loan is conditioned on the requirement that 90 percent of the target's shares be tendered because once the 90 percent level has been reached the acquiring company can cause the remaining shareholders of the target to be involuntarily cashed out. While this condition would appear to rebut the presumption of indirect security, this condition is routinely waived in the United Kingdom once 50 percent of the target's shares have been tendered because certain institutional investors are precluded from tendering shares if the offer is not unconditional.
You have represented that, based on your knowledge of a significant number of tender offers in the United Kingdom, the overwhelming majority of tender offers recommended by the target have received 90 percent acceptance. The rare exceptions have occurred when there is a competing bid for the target. The banks making the acquisition loans in this case will not waive the 90 percent requirement unless they are certain that the 90 percent level will be achieved. This will allow them to determine whether there are any competing bids for the target company before waiving the 90 percent requirement.
Based on our understanding of these transactions and of the local laws and customary procedures for acquisition transactions in the United Kingdom, all as set forth above, Board staff is of the view that the transactions would not be presumed to be indirectly secured by the margin stock of the target under the Board's 1986 Interpretation. This is a staff opinion only, as the matter has not been presented to the Board for its consideration. Different facts could lead to a different conclusion.
(signed) Oliver Ireland
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