Securities Act of 1933 - Rule 144(d)
No Action, Interpretive and/or Exemptive Letter
Response of the Office of Chief Counsel
Division of Corporation Finance
Re: Banc of America Investors, L.P. ("BACI")
Incoming Letter dated December 5, 2003
Based on the facts presented, the Division's view is that the holding period under Rule 144(d) for shares of Class C Common Stock of Nexstar Broadcasting Group, Inc. issued to BACI began not earlier than November 28, 2003. On that date, BACI executed the preferred holder agreement and thereby nullified its ability to dissolve Nexstar Broadcasting Group, L.L.C. or to veto Nexstar Broadcasting Group, L.L.C.'s reorganization or Nexstar Broadcasting Group, Inc.'s initial public offering.
This position is based on the representations made to the Division in your letter. Any different facts or circumstances might require the Division to reach a different conclusion. Further, this response expresses the Division's position on enforcement action only and does not express any legal conclusion on the questions presented.
Sincerely,
Robert T. Plesnarski
Special Counsel
Incoming Letter:
December 5, 2003
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Banc of America Capital Investors, L.P./Request for Interpretive Advice/Rule 144(d)(3)/ Tacking of Holding Periods in a Limited Liability Company Reorganization
On behalf of our client, Banc of America Capital Investors, L.P. ("BACI"), we respectfully request that the Staff of the Division of Corporation Finance of the Securities and Exchange Commission concur with our interpretation of the tacking provisions under Rule 144(d)(3) with respect to the circumstances described below.
I. Overview.
BACI is a private investment partnership affiliated with Bank of America Corporation. In August 2001, BACI invested in Nexstar Broadcasting Group, L.L.C. (the "LLC"), a television broadcasting company focused on the acquisition, development and operation of television stations. From the date of such investment until the consummation of the transactions described below, BACI was the sole holder of both Class D-2 Common Membership Interests (the "Class D-2 Common Interests") and Series AA Preferred Membership Interests (the "Series AA Preferred Interests") in the LLC, neither of which interests entitled the holders to general voting rights.
On November 28, 2003, BACI sold all of the Series AA Preferred Interests (the "Series AA Sale") as follows: the LLC purchased approximately 96% of the outstanding Series AA Preferred Interests by distributing promissory notes to BACI in the principal amount of approximately $52.8 million (the "LLC Notes"), and Nexstar Broadcasting Group, Inc., a Delaware corporation and an affiliate of the LLC (the "Corporation"), purchased the remaining Series AA Preferred Interests by issuing a promissory note from the Corporation to BACI in the principal amount of approximately $2.1 million (the "Corporation Note"). After giving effect to the Series AA Sale, BACI held only the Class D-2 Common Interests, which represented approximately 9.2% of the economic interests in the LLC.
Also on November 28, 2003 but following the Series AA Sale, the LLC was merged (the "Reorganization") with and into the Corporation in order to facilitate an initial public offering. In connection with the Reorganization, BACI received shares of the Corporation's non-voting Class C Common Stock in exchange for its non-voting Class D-2 Common Interests. Immediately following the Reorganization, BACI's Class C Common Stock represented approximately 9.2% of all outstanding classes of Common Stock of the Corporation (i.e., the same percentage economic interest BACI held in the LLC immediately prior to the Reorganization). On November 28, 2003, subsequent to the Reorganization, the Corporation consummated the initial public offering (the "IPO") of its Class A Common Stock. Following the consummation of the IPO, BACI's equity ownership of the Corporation was diluted to approximately 5.5% of all of the outstanding classes of Common Stock of the Corporation.
The Corporation expects to close the acquisition of the subsidiaries of Quorum Broadcast Holdings, LLC ("Quorum"), another television broadcast company whose principal equityholders are affiliates of ABRY Broadcast Partners, LLC ("ABRY"), in mid-December. The LLC entered into the definitive agreement relating to the Quorum acquisition on September 12, 2003. The Corporation will issue shares of Class A Common Stock and shares of Class B Common Stock as a portion of the consideration to be paid in connection with the Quorum acquisition. BACI's equity ownership of the Corporation will be further diluted following the closing of the Quorum acquisition.
In several no-action letters, the Staff has delineated the circumstances that must be present to allow holders of securities in limited partnerships and limited liability companies that are reorganized as corporations to tack their holding periods pursuant to Rule 144(d)(3). In light of the circumstances underlying the issuance of securities in the Corporation to BACI, we believe that the criteria delineated by the Staff in these no-action letters, as well as the policy underlying Rule 144, have been satisfied. Therefore, we believe that BACI should be permitted to tack the holding period of its Class D-2 Common Interests in the LLC to the holding period of the shares of Class C Common Stock of the Corporation it received in the Reorganization.
II. Background.
In August 2001, BACI purchased both Series AA Preferred Interests and Class D-2 Common Interests in the LLC in a private placement exempt from the registration requirements of Section 5 of the Securities Act of 1933. Holders of these interests were not entitled to any general voting rights.
The governing document of the LLC, the Fifth Amended and Restated Limited Liability Company Agreement of Nexstar Broadcasting Group, L.L.C. dated as of November 14, 2001 (the "Operating Agreement"), provided that in the event the LLC's Manager (an affiliate of ABRY) determined that a reorganization as a corporation was necessary to effect an initial public offering of interests in the LLC, the interestholders in the LLC would consent to such reorganization. An identical provision was in the prior version of the Operating Agreement (the Fourth Amended and Restated Limited Liability Company Agreement of Nexstar Broadcasting Group, L.L.C., dated August 7, 2001), which was in effect when BACI made its investment in the LLC and was subsequently replaced and superceded by the Operating Agreement. Section 14.2 of the Operating Agreement specifically provided:
In the event that a Public Offering of equity securities is approved by the Manager, the Interestholders will take all necessary or desirable actions that are reasonably requested by the Manager in connection with the consummation of such Public Offering. If the Manager determines in good faith that the limited liability company form and/or the capital structure of the LLC may adversely affect the marketability of a Public Offering, then each Interestholder will consent to and vote for a recapitalization, reorganization, incorporation and/or exchange of its Interests into securities that the Manager and, in the case of a Public Offering of equity securities, Members which own a majority of the outstanding Class A Interests which are owned by Persons who are Members, reasonably determine to be appropriate and will take all necessary or desirable actions that are reasonably requested by the Manager in connection with the consummation of any such recapitalization, reorganization, incorporation and/or exchange; provided that (a) the resulting securities, to the extent possible, reflect and are consistent with the Interestholders' respective economic and voting interests and Capital Accounts as in effect immediately prior to such Public Offering, determined without regard to any change in economic position attributable to the fact that such securities may represent an interest in a corporation or other non-partnership entity rather than an interest in a partnership, (b) if such Public Offering is an offering of common stock, then the outstanding Class B Interests will be exchanged for or otherwise become shares of common stock of the class so offered, and (c) the Class D-2 Interests will be exchanged for or otherwise become shares of the same class and type of stock as the Class A Interests.
Section 9.1(d) of the Operating Agreement further provided that holders of the Series AA Preferred Interests and the Class D-2 Common Interests, among others, had no voting rights, and also provided that at any time the vote or consent of the interestholders of the LLC was required by the Operating Agreement, such vote or consent would be deemed to require the vote or consent of only the holders of a majority of the Class A Common Membership Interests (the "Class A Common Interests") of the LLC. Notwithstanding this lack of voting rights associated with the Series AA Preferred Interests and the Class D-2 Common Interests, the investment documents pursuant to which BACI purchased its Series AA Preferred Interests provided BACI, as the sole holder of the Series AA Preferred Interests, the right to veto certain fundamental transactions, including a merger of the type involved in the Reorganization. As described below, the Series AA Preferred Interests were sold by BACI in the Series AA Sale on November 28, 2003 prior to the consummation of the Reorganization.
On November 26, 2003, two days prior to the consummation of the IPO, the Corporation, the LLC and certain of its direct and indirect subsidiaries entered into an Agreement of Merger (the "Reorganization Agreement") in order to effect the Reorganization.
On November 28, 2003, the LLC purchased approximately 96% of the outstanding Series AA Preferred Interests by distributing the LLC Notes to BACI, and the Corporation purchased the remaining Series AA Preferred Interests in exchange for the Corporation Note. The LLC Notes and the Corporation Note issued to BACI in the Series AA Sale matured upon the consummation of the IPO. Although the investment documents pursuant to which BACI purchased the Series AA Preferred Interests provided that the Series AA Preferred Interests could be redeemed for cash, the indenture governing certain indebtedness of the LLC and its subsidiaries did not permit the LLC to distribute cash to redeem the Series AA Preferred Interests or to redeem more than approximately $52.8 million of the Series AA Preferred Interests with the LLC Notes. Therefore, BACI, upon the LLC's request, consented to the receipt of the LLC Notes in lieu of cash and the purchase of the remaining Series AA Preferred Interests by the Corporation in exchange for the Corporation Note in order to facilitate the IPO on terms permitted under the documents governing the indebtedness of the LLC and its subsidiaries.
Following the Series AA Sale, BACI's Class D-2 Common Interests represented an approximately 9.2% economic interest in the LLC. These Class D-2 Common Interests had no voting rights. A substantial majority of the economic and voting interests in the LLC were held by ABRY Broadcast Partners II, L.P. and ABRY Broadcast Partners III, L.P., both of which are affiliates of ABRY. Following the Series AA Sale, ABRY and its affiliates held approximately 88% of the economic interests in the LLC and approximately 98% of the voting power of the LLC, in each case through their ownership of Class A and Class B Common Interests of the LLC.
Following the Series AA Sale on November 28, 2003, the Reorganization was consummated. As a result of the Reorganization, the LLC and certain of its subsidiaries were merged with and into the Corporation, and the membership interests in the LLC were converted into Class A Common Stock, Class B Common Stock (which is entitled to ten votes per share and is freely convertible into Class A Common Stock) and Class C Common Stock of the Corporation (which is non-voting and freely convertible into Class A Common Stock). The Series AA Preferred Interests purchased by the LLC and the Corporation in the Series AA Sale were cancelled in the Reorganization.
After the Series AA Sale and immediately prior to the Reorganization, BACI had no voting rights and its Class D-2 Common Interests represented approximately 9.2% of all outstanding common equity interests of the LLC. Immediately following the Reorganization, BACI's Class C Common Stock had no voting rights and represented approximately 9.2% of all classes of outstanding Common Stock of the Corporation. The exchange of the securities in the Reorganization was effected for no consideration other than the securities exchanged.
The holders of Class A and Class B Common Interests in the LLC received high-voting Class B Common Stock of the Corporation.1 BACI, as the sole holder of the Class D-2 Common Interests, received non-voting Class C Common Stock of the Corporation in proportion to its remaining economic interest in the LLC. Although Section 14.2(c) of the Operating Agreement provided that holders of Class D-2 Common Interests would receive the Class B Common Stock in the same manner as would be received by the holders of Class A Common Interests, BACI requested that it instead receive a class of non-voting stock in the Corporation in light of certain regulatory requirements of the Federal Communications Commission (the "FCC") that may otherwise limit BACI's ownership of media companies and that would subject BACI to certain regulatory requirements and limitations with respect to its ownership of voting securities of the Corporation. Given these concerns, the other parties to the Reorganization consented to BACI receiving non-voting Class C Common Stock in exchange for its non-voting Class D-2 Common Interests. Other than the difference in voting rights, the Class C Common Stock is identical to the Class A and Class B Common Stock and is freely convertible at BACI's option into Class A Common Stock, subject to compliance with applicable FCC regulations.2 Thus, the Reorganization substantially complied with the requirements of Section 14.2 of the Operating Agreement.
On November 28, 2003, following the Series AA Sale and the Reorganization, the IPO was consummated. After the consummation of the IPO, affiliates of ABRY held approximately 97% of the outstanding shares of the Corporation's Class B Common Stock, which represented approximately 52% of the outstanding Common Stock of the Corporation and approximately 90% of the voting power of the Corporation. BACI held all of the outstanding shares of the non-voting Class C Common Stock, which represented approximately 5.5% of the outstanding Common Stock of the Corporation.
The LLC entered into the definitive agreement relating to the Quorum acquisition on September 12, 2003, and the Corporation currently expects to consummate the Quorum acquisition in mid-December. Quorum's principal equityholders and the Corporation's two principal stockholders are affiliates of ABRY. The Corporation will issue 3,490,883 shares of Class A Common Stock and 80,230 shares of Class B Common Stock as a portion of the consideration to be paid in connection with the Quorum acquisition. Following the Corporation's anticipated issuance of shares of Common Stock in the Quorum acquisition, BACI's shares of non-voting Class C Common Stock will represent approximately 4.8% of all outstanding shares of Common Stock of the Corporation. Following the Quorum acquisition, ABRY and its affiliates will own approximately 26% of the outstanding shares of Class A Common Stock and approximately 97% of the outstanding shares of Class B Common Stock, representing in the aggregate approximately 58% of all outstanding shares of Common Stock and approximately 90% of the total voting power of the Corporation.
III. Analysis.
A. Rule 144.
The preliminary note to Rule 144 states that the purpose of the holding period requirement is to ensure that the holder of the securities has assumed the economic risks of its investment. Rule 144(d) sets forth the method by which the holding period is calculated. In certain circumstances listed in Rule 144(d)(3), such as recapitalizations, the Rule provides that the holding periods for different securities may be tacked. In these situations, the underlying economic risk of the investment has not changed, and the investor does not make a new investment decision in receiving the new security.3
B. Elements Required for Tacking After a Reorganization.
In several no-action letters, the Staff has permitted partners of a limited partnership and members of a limited liability company to tack the holding period of their interests in the limited partnership or limited liability company to the holding period of securities of a corporation which succeeded to the business of the limited partnership or limited liability company. These reorganizations may be accomplished through share exchanges or mergers4 and are often effected to facilitate an initial public offering of the entity's securities. In cases where tacking was permitted, Staff has required the presence of the following elements: (1) the partnership agreement or other organizational document expressly contemplated reorganization into a corporation; (2) the equity interests of the shareholders of the successor corporation were based on their proportionate interests in the prior entity; (3) no additional consideration was provided by the equity holders of the predecessor entity in connection with the issuance to them of the shares of the successor corporation; (4) the holders of the securities of the predecessor entity seeking to tack did not have veto or other meaningful voting rights with respect to the transaction; and (5) there was no change to the business or operations of the entity as a result of the reorganization.5
With regard to BACI's acquisition of the Class C Common Stock, we conclude that all five elements have been satisfied. A discussion of each element follows.
1. Contemplation of Reorganization Into Corporate Form.
Since first allowing tacking in corporate reorganizations of limited partnerships and limited liability companies, the Staff has required that the reorganization into a corporation in advance of an initial public offering be expressly contemplated in an agreement among the securityholders at the time the partnership or limited liability company was formed.6 With regard to the LLC, Section 14.2 of the Operating Agreement (and the prior version of the Operating Agreement in effect at the time of BACI's investment in August 2001) specifically contemplated reorganization into a corporation in that it states that the Manager had the authority to change the entity's form in order to effect an initial public offering by "recapitalization, reorganization [or] incorporation." (Emphasis added.)
This provision is similar to that addressed by the Staff in Juno Online Services, Inc.7 In Juno, the operative provision in the limited partnership agreement provided the general partner with the ability to convert or reorganize the limited partnership "in a corporation or other entity." The limited partnership was subsequently reorganized as a corporation, and its stock was offered to the public in an initial public offering. Although the partnership agreement contemplated that a form other than a corporate form could be elected by the general partner, the Staff permitted tacking, noting that a corporate form was identified and it was the form chosen. Similarly, the Operating Agreement specifically authorizes the Manager to utilize a corporate entity to consummate the initial public offering - the term "incorporation" is used twice in the section - and it was the corporate form that was chosen. Therefore, we believe that this element is satisfied.
2. Proportionate Equity Interests.
The second element required for tacking under these circumstances is that the interest received in the successor corporation must be proportionate to the interest held in the predecessor entity. In connection with the Reorganization, the interestholders of the LLC received equity interests in the Corporation proportionate to the equity interests they held in the predecessor entity.
BACI received shares of non-voting Class C Common Stock in the Reorganization in exchange for its non-voting Class D-2 Common Interests in the LLC. BACI had a 9.2% economic interest in the LLC immediately prior to the Reorganization and owned 9.2% of all outstanding Common Stock immediately after the Reorganization. While Section 14.2 of the Operating Agreement specifically contemplated that the Class D-2 Common Interests would be exchanged for the same security as the Class A Common Interests (in the Reorganization, the Class A Common Interests were exchanged for shares of high-voting Class B Common Stock), BACI requested that it instead receive non-voting Class C Common Stock in exchange for its non-voting Class D-2 Common Interests in order to accommodate certain FCC regulatory requirements and limits that would be imposed on BACI as a result of the nature of the Corporation's business. The fact that BACI received non-voting securities of the Corporation instead of voting securities should not be relevant to the tacking analysis. The presence or absence of voting rights does not impact the economic risk associated with BACI's investment, particularly in light of the overwhelming voting control over both the LLC and the Corporation held by ABRY and its affiliates. Indeed, BACI's request that it receive non-voting securities of the Corporation caused it to receive securities in the Reorganization that were as nearly as identical as possible to those owned by it in the predecessor LLC.
In Cravath, the Staff permitted tacking where the minority member was able to choose between high and low voting common stock, but its equity interest remained proportionate. Further, in the Goldman Sachs no-action letter, the Staff permitted tacking of the holding period of limited partnership interests where the limited partners were given the option of receiving cash, subordinated debentures or common stock in the successor corporation. However, in each case, the limited partners would receive consideration consistent with their respective proportionate interests in the successor corporation. Likewise, BACI will maintain its proportionate interest in the Corporation. Given the analysis in Cravath and Goldman Sachs, it appears that an election as to the voting rights or other nature of the consideration received does not prohibit tacking, so long as the underlying economics remain proportionate. The Reorganization did not change the ownership or the economic risk that BACI took upon its initial investment in the LLC. Therefore, we believe that this element was satisfied.
3. No Additional Consideration.
BACI did not provide any additional consideration in connection with the issuance of Class C Common Stock to it in the Reorganization.
4. No Veto or Voting Rights Over Reorganization Decision.
The Staff has also required that the holders of the securities of the predecessor entity seeking to tack not have veto or meaningful other voting rights with respect to the transaction.8 Although BACI held Series AA Preferred Interests, which would have allowed BACI a veto right with regard to the Reorganization, BACI sold these Series AA Preferred Interests in the Series AA Sale and, at the time the Reorganization was consummated, held only non-voting Class D-2 Common Interests. Holders of the Class D-2 Common Interests had no veto or voting rights with respect to the Reorganization.
We do not believe that BACI's consent to receiving the LLC Notes and the Corporation Note in connection with the Series AA Sale may be considered a voting right with respect to the Reorganization. Rather, BACI accommodated a request for the use of consideration in connection with the sale that differed from that contemplated by the redemption provision contained in the documents governing BACI's Series AA Preferred Interest investment. The Staff did not find that a choice of consideration, including cash or debentures, constituted a voting right in Goldman Sachs and, likewise, BACI's consent to the use of the notes in lieu of cash as consideration in the Series AA Sale should not be construed as a voting right in connection with the Reorganization.
Additionally, Section 14.2 of the Operating Agreement provided that each interestholder of the LLC, including BACI as a holder of Class D-2 Common Interests, would "take all necessary or reasonable actions requested by" the Manager of the LLC in order to effect the Reorganization. Although BACI, as a holder of Class D-2 Common Interests, had no voting or consent rights pursuant to Section 9.1(d) of the Operating Agreement, to the extent it would somehow have otherwise been entitled to vote on or consent to the Reorganization, Section 14.2 also required all interestholders to "consent to and vote for" the Reorganization. Thus, BACI had no veto or other voting rights with respect to the Reorganization. Further, the agreement by which the Series AA Sale was effected contained an acknowledgement by all parties that BACI's consent was not necessary or required in order for the Reorganization to be consummated.
Although BACI consented to the manner in which the Series AA Sale was effected, we do not believe that this should be construed as providing BACI with any veto or meaningful voting rights with respect to the Reorganization. As such, we believe this element has been satisfied.
5. No Change to the Business or Operations.
Finally, the Staff has required that there be no change to the business or operations of the entity as a result of the reorganization. In this situation, the Reorganization did not result in any change to the business or operations of the LLC. Immediately following the Reorganization and the IPO, the Corporation had the same assets, liabilities and business as the LLC. While the Corporation has entered into an agreement to acquire Quorum, the existence of this proposed transaction should not alter the conclusion that BACI is entitled to tack its holding period of the Class D-2 Common Interests in the LLC to its holding period of its Class C Common Stock of the Corporation. The Reorganization was not contingent in any manner upon the Quorum transaction. Further, in the proposed Quorum acquisition, the Corporation will simply be effecting an acquisition by issuing shares of its Class A Common Stock and Class B Common Stock to the holders of Quorum's equity interests as partial payment of the acquisition consideration. BACI is not an equityholder of Quorum, will not receive any of the consideration payable in connection with the proposed Quorum acquisition and has at no time had any right to consent to or vote upon the Quorum acquisition.
We believe that this element relating to no changes in the business or operations of the entity as a result of the reorganization has been satisfied.
IV. Conclusion.
Based upon the foregoing facts and analysis, we conclude that BACI may include the time it held the Class D-2 Common Interests in the LLC in calculating its holding period for the shares of Class C Common Stock it received in the Reorganization. We respectfully request that the Staff concur with our opinion that the circumstances described above are sufficient to permit tacking of the Rule 144(d) holding periods for BACI in connection with the Reorganization.
In accordance with Release No. 33-6269 (available December 5, 1980), seven additional copies of this letter are enclosed. If for any reason you do not concur with our conclusions, we would appreciate the opportunity to confer with you by telephone prior to any written response to this letter. If you need any additional information regarding this letter, or if we may otherwise be of assistance, please call me at (704) 331-7406 or Debra Ingraham at (704) 331-5735.
Please acknowledge receipt of this letter by stamping the additional enclosed copy of this letter and returning it to the undersigned in the enclosed self-addressed, stamped envelope.
Sincerely,
/s/ Sean M. Jones
Sean M. Jones
For the Firm
Endnotes
http://www.sec.gov/divisions/corpfin/cf-noaction/boa022404.htm
