1301001 Informal Interpretation

Michael Verne



Sent: Thursday, January 03, 2013 9:55 AM
To: Verne, B. Michael
Subject: Question concerning what is properly treated asconsideration


I had a question aboutwhether different types of "transfers" under an agreement to acquirenon-corporate interests would constitute "consideration" for purposesof the size-of-transaction test. The Seller is a C Corp. The Target is an LLC.

1. Target will default on a loan before closing. Purchaserwill advance $5 million to the Target to avoid default. The payment is fullyrefundable if the deal fails.

2. Target owes Seller service $4 million in fees relating tooperations and maintenance, administrative services and other such agreements.These amounts are presently contractually owed by the Target to the Seller.Purchaser will pay (or cause Target to pay) those service fees at closing.

3. $20 million in upgrade expenditures. The Target needs tocommit immediately to make certain capex improvements to its facilities, which willoccur after Purchaser acquires Target. Purchaser will accrue all the benefitspost closing. Seller would not make these expenditures since it is selling, butsince the expenditures need to be paid for now, the Purchaser is pre-fundingthem.

(1)Would seem like consideration since Purchaser is relieving Target of debt. Onthe other hand, one might argue that the agreement is simply the assumption ofliabilities associated with the acquisition of non-corporate interests and sothe value of that assumption of liability is reflected in the purchase price.The difference is that the liability is being "pre-paid" but isforfeitable if the deal collapses. (2) appears to be just a commitment to payan existing liability and so is an assumption of liability. (3) does not appearto be consideration since no value is being imparted to the Seller.

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