(a) Contingent
rights, convertible securities, options, and warrants.
(1) A person that controls a security,
option, warrant, or other financial instrument that is convertible
into, exercisable for, exchangeable for, or otherwise may become a
security controls each security that could be acquired as a result
of such conversion, exercise, exchange, or similar occurrence.
(2) If a financial instrument of the
type described in paragraph (a)(1) of this section is convertible
into, exercisable for, exchangeable for, or otherwise may become a
number of securities that varies according to a formula, rate, or
other variable metric, the number of securities controlled under paragraph
(a)(1) of this section is the maximum number of securities that the
financial instrument could be converted into, be exercised for, be
exchanged for, or otherwise become under the formula, rate, or other
variable metric.
(3) Notwithstanding
paragraph (a)(1) of this section, a person does not control voting
securities due to controlling a financial instrument if the financial
instrument:
(i) By
its terms is not convertible into, is not exercisable for, is not
exchangeable for, and may not otherwise become voting securities in
the hands of the person or an affiliate of the person; and
(ii) By its terms is only convertible
into, exercisable for, exchangeable for, or may otherwise become voting
securities in the hands of a transferee after a transfer:
(A) In a widespread public distribution;
(B) To the issuing company;
(C) In transfers in which no transferee (or
group of associated transferees) would receive 2 percent or more of
the outstanding securities of any class of voting securities of the
issuing company; or
(D) To a transferee
that would control more than 50 percent of every class of voting securities
of the issuing company without any transfer from the person.
(4) Notwithstanding paragraph
(a)(1) of this section, a person that has agreed to acquire securities
or other financial instruments pursuant to a securities purchase agreement
does not control such securities or financial instruments until the
person acquires the securities or financial instruments.
(5) Notwithstanding paragraph (a)(1) of
this section, a right that provides a person the ability to acquire
securities in future issuances or to convert nonvoting securities
into voting securities does not cause the person to control the securities
that could be acquired under the right, so long as the right does
not allow the person to acquire a higher percentage of the class of
securities than the person controlled immediately prior to the future
acquisition.
(6) Notwithstanding
paragraph (a)(1) of this section, a preferred security that would
be a nonvoting security but for a right to vote on directors
that activates only after six or more quarters of unpaid dividends
is not considered to be a voting security until the security holder
is entitled to exercise the voting right.
(7) For purposes of determining the percentage
of a class of voting securities or the total equity percentage of
a company controlled by a person that controls a financial instrument
of the type described in paragraph (a)(1) of this section:
(i) The securities controlled by
the person under paragraphs (a)(1) through (6) of this section are
deemed to be issued and outstanding; and
(ii) Any securities controlled by anyone
other than the person under paragraph (a)(1) through (6) of this section
are not deemed to be issued and outstanding, unless by the terms of
the financial instruments the securities controlled by the other persons
must be issued and outstanding in order for the securities of the
person to be issued and outstanding.
(b) Restriction on securities. A person
that enters into an agreement or understanding with a second person
under which the rights of the second person are restricted in any
manner with respect to securities that are controlled by the second
person, controls the securities of the second person, unless the restriction
is:
(1) A requirement that
the second person offer the securities for sale to the first person
for a reasonable period of time prior to transferring the securities
to a third party;
(2) A requirement
that, if the second person agrees to sell the securities, the second
person provide the first person with the opportunity to participate
in the sale of the securities by the second person;
(3) A requirement under which the second
person agrees to sell its securities to a third party if a majority
of security holders agrees to sell their securities to the third party;
(4) Incident to a bona fide loan transaction in which the securities serve as collateral;
(5) A short-term and revocable proxy;
(6) A restriction on transferability
that continues only for a reasonable amount of time necessary to complete
an acquisition by the first person of the securities from the second
person, including the time necessary to obtain required approval from
an appropriate government authority with respect to the acquisition;
(7) A requirement
that the second person vote the securities in favor of a specific
acquisition of control of the issuing company, or against competing
transactions, if the restriction continues only for a reasonable amount
of time necessary to complete the transaction, including the time
necessary to obtain required approval from an appropriate government
authority with respect to an acquisition or merger; or
(8) An agreement among security holders
of the issuing company intended to preserve the tax status or tax
benefits of the company, such as qualification of the issuing company
as a Subchapter S corporation, as defined in 26 U.S.C. 1361(a)(1)
or any successor statute, or prevention of events that could impair
deferred tax assets, such as net operating loss carryforwards, as
described in 26 U.S.C. 382 or any successor statute.
(c) Securities held by senior management
officials or controlling equity holders of a company. A company
that controls 5 percent or more of any class of voting securities
of another company controls all securities issued by the second company
that are controlled by senior management officials, directors, or
controlling shareholders of the first company, or by immediate family
members of such persons, unless the first company controls less than
15 percent of each class of voting securities of the second company
and the senior management officials, directors, and controlling shareholders
of the first company, and immediate family members of such persons,
control 50 percent or more of each class of voting securities of the
second company.
(d) Reservation of
authority. Notwithstanding paragraphs (a) through (c) of this
section, the Board may determine that securities are or are not controlled
by a company based on the facts and circumstances presented.
