Question
From: (redacted)
To: HQ.DCMAIL2(RSMITH)
Date: Tue, Mar 16, 1999 10:41 am
Subject: Sec. 7A(c)(10) Question
Dick--
The issuer has a number of classes of stock, common and preferred: some vote and some do not. An existing shareholder is selling assets to the issuer (a/k/a the acquiring person) and will receive Class A Preferred as part of the consideration. The selling shareholder already owns all of the outstanding Class A Preferred shares. A shareholder already owns all of the outstanding Class A preferred shares. A shareholders agreement provides that this class of stock will not be issued to anyone else, except under conditions that are not here relevant. The issuer's articles of incorporation provide that under conditions that are still, and will remain, applicable, the holders of Class A Preferred, voting as a class, has the right to elect 2 directors to sit on a 13 member board. After this transaction, this shareholder will hold no other class of voting stock of the issuer.
Because the additional shares of Class A preferred will not permit the holder to vote for any directors other than the two it elects with its existing shares, I conclude that the acquisition of the additional shares is not reportable under the (c)(10) exemption, because the additional shares will not increase the shareholder's voting power in any way. If my math is correct, the result is supported by 801.12(b), because the number of shares in this situation is irrelevant. The first calculation under the Rule will always be 1, rather than a fraction; the shareholder's percentage of voting securities for that class will always be 15.35%(2 divided by 13). Because the shareholder has, and will not receive, any other class of voting stock, its percentage of outstanding voting securities does not increase.
Do you agree?
(redacted)