the Board ruled that the limits on purpose credit in Regulation G apply in specific circumstances to debt securities issued by a shell corporation, the proceeds of which would be used to finance a tender offer by the shell corporation for all, or a large block, of the margin stock of a target corporation. In the Interpretation, the Board considered a transaction in which a shell acquisition vehicle would issue debt securities that by their terms were unsecured. Section 112(b). It was not disputed that the purchase of the debt securities were purpose credit for purposes of Regulation G or that the small number of sophisticated investors that would purchase the securities in very large minimum denominations could be lenders under the Regulation. Section 112(c).
The Board stated that the debt securities should be presumed to be indirectly secured by the margin stock to be acquired pursuant to the tender offer because the lenders could not in good faith extend credit to the shell corporation without reliance on the stock. The shell corporation would have no significant business function of its own, other than to acquire the margin stock, and would have substantially no assets or cash flow to repay the credit other than the margin stock. Section 112(e), (f).
The Interpretation recognizes that the presumption that the debt securities of a shell acquisition vehicle are indirectly secured by margin stock does not apply in certain cases where it is clear that the holders of the debt securities are relying on assets other than margin stock as collateral, such as when the debt securities would not be issued unless the shell corporation has acquired enough of the target corporation's margin stock to merge with the target company without shareholder approval. The presumption also does not apply when the debt securities are issued by an operating company to finance its acquisition of margin stock, where the operating company has substantial assets and cash flow other than margin stock. Section 112 (f), (h).
THE TENDER OFFER FOR KOPPERS
The information submitted to the Board shows that BNS has made an unsolicited tender offer for all (but no less than a majority of) of the common stock and all of the preferred stock of Koppers, all of which is margin stock under Regulation G. BNS is a shell corporation that is jointly owned by Bright Aggregates, Inc., Speedward Limited, and S-L Merger, Inc. S-L Merger is a wholly-owned subsidiary of Shearson Lehman Hutton, Inc., a registered broker-dealer, and an indirect subsidiary of Shearson Lehman Brothers Holdings, Inc. ("Shearson Holdings"), which is not a registered broker-dealer. Bright is a wholly-owned indirect subsidiary of Beazer PLC, an English company engaged in the construction business. Speedward is a wholly-owned indirect subsidiary of National Westminster Bank PLC ("NatWest"), an English bank with a subsidiary bank in this country.
If the tender offer is successful, BNS or an affiliate would enter into a merger transaction with Koppers. BNS appears to have no business operations and no assets of its own other than the margin stock to be acquired.
BNS would require approximately $ 1.7 billion to finance the tender offer. BNS would obtain approximately $ 298 million of this amount from Bright in return for shares of BNS's Cumulative Preferred Stock, Series A. Approximately $ 540 million would be obtained from Shearson Holdings in return for either BNS's Cumulative Preferred Stock, Series B, or its Subordinated Notes. Approximately $ 864 million would be obtained from a syndicated bank loan, which would be secured by the stock of Koppers to be acquired.
If as a result of the tender offer, BNS receives a sufficient amount of common stock (90 percent) to effect a short-form merger with Koppers (i.e., without the requirement of shareholder approval), or if BNS has entered into a merger agreement with Koppers, BNS will issue the Notes, which unquestionably are debt securities, to Shearson Holdings. The Notes would be nominally unsecured, carry a floating interest rate and mature in 180 days or, if the merger occurs, 15 months after the merger.
If a short-form merger cannot be accomplished, BNS will issue to Shearson Holdings the Series B Preferred Stock (the "Preferred Stock"), which by its terms is not secured by Koppers Stock. The salient characteristics of the Preferred Stock are as follows:
1. Holders are entitled to a 15 percent annual cumulative dividend, payable quarterly.
2. Under applicable state law, the dividends may be paid only out of surplus or net profits of the shell corporation, as defined by statute, and only if declared by the board of directors. Del. Code Ann. tit. 8, § 170(a).