Company Name:
Minnesota Mining and Manufacturing Company (3M)
Public Availability Date: Oct 13, 1988

Oct 13, 1988

SEC-REPLY-1:
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

OCT 13 1988

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE

Re: Minnesota Mining and Manufacturing Company ("3M")

Incoming letter dated September 27, 1988

On the basis of the facts presented, this Division is of the view that the Contingent Payment Shares may be registered on the Form S-4 registration statement relating to the proposed merger. Further, this Division will not recommend any enforcement action to the Commission if a current prospectus complying with section 10(a)(3) of the Securities Act of 1933 ("Securities Act") is not delivered at the time the Contingent Payment shares are issued.

While the question is not free from doubt, this Division also will not recommend any enforcement action to the Commission if the proposed merger is consummated without registration of the Contingent Payment Rights under the Securities Act. In reaching this position, we have particularly noted the following: (1) the Rights to be granted to the selling shareholders are an integral part of the consideration to be received in the proposed merger; (2) the holders of the Rights will have no rights common to stockholders such as voting and dividend rights, nor will they bear a stated rate of interest; (3) the Rights will not be assignable or transferable except by operation of law; and (4) the Rights will not be represented by any form of certificate or instrument.

Because these positions are based on the representations made in your letter, it should be noted that any different facts or conditions might require a different conclusion. Further, the responses concerning registration of the Contingent Payment Rights and delivery of a current prospectus only represent the Division's positions on enforcement action and do not purport to express any legal conclusion on the questions presented.

Sincerely,

Abigail Arms
Deputy Chief Counsel
 

INQUIRY-1:

SULLIVAN & CROMWELL
125 Broad Street
New York 10004
(212) 558-4000

September 27, 1988

Securities Act of 1933
Section 2(1); Section 5;
Section 6; Rule 145; Rule
01; Form S-3; Form S-4

William E. Morley, Esq.
Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Minnesota Mining and Manufacturing Company

Commission File No. 1-3285

Registration of Contingent Payment Shares Under the Securities Act of 1933

Dear Mr. Morley:

We are writing this letter on behalf of our client, Minnesota Mining and Manufacturing Company ("3M" or the "Company"), to solicit the interpretive advice of the Staff of the Division of Corporation Finance of the Securities and Exchange Commission in connection with certain issues raised under the Securities Act of 1933, as amended (the "Act"). 3M has entered into a merger agreement providing for the acquisition of Cardiovascular Devices, Inc. ("CDI") in a stock for stock merger. The consideration to be paid in the merger by 3M to the stockholders of CDI will consist in the first instance of a fraction of a share of 3M common stock for each share of CDI capital stock. In addition, holders of CDI common stock may be entitled to receive over the next several years additional shares of 3M common stock (the "Contingent Payment Shares") in the event CDI attains certain revenue levels.

We respectfully request that the Staff concur in our views that:

(1) the Contingent Payment Shares may properly be registered under the Act on the Form S-4 Registration Statement relating to the merger;

(2) no current prospectus will be required to be distributed at the time the Contingent Payment Shares are issued; and

(3) the contractual rights to receive the Contingent Payment Shares are not securities required to be registered under the Act.

We enclose for your information and convenience two copies of the Registration Statement on Form S-4 (the "Form S-4") filed by 3M with the Commission on September 26, 1988 (File No. 33-24733) which contains a detailed description of the proposed merger and the issues which are the subject of this letter.

I. Background and Facts

A. The Parties

3M is a Delaware corporation with securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended. Its common stock, no par value (the "3M Common Stock"), is listed and principally traded on the New York Stock Exchange, and is also listed on the Midwest Stock Exchange, the Pacific Stock Exchange, the Amsterdam Stock Exchange, German stock exchanges, Swiss stock exchanges, the Paris Stock Exchange and the Tokyo Stock Exchange. According to the Form S-4, as of June 30, 1988, there were outstanding 227,358,002 shares of 3M Common Stock. 3M is principally engaged in the manufacture and sale of a broad line of industrial,commercial, health care and consumer products.

CDI, a California corporation, is principally engaged in the design, manufacture and sale of blood gas measurement devices and related services. According to the Form S-4, as of July 31, 1988 there were outstanding 1,276,316 shares of CDI common stock, without par value ("CDI Common Stock"); 158,725 shares of Series A Preferred Stock; 400,000 shares of Series B Preferred Stock; 567,790 shares of Series C Preferred Stock; 863,800 shares of Series D Preferred Stock and 350,000 shares of Series E Preferred Stock (collectively, the "CDI Preferred Stock"). Neither the CDI Common Stock nor the CDI Preferred Stock is publicly traded and there are no established trading markets for such stock.

B. The Merger

Pursuant to an Agreement and Plan of Merger, dated as of September 12, 1988 (the "Merger Agreement") among 3M, CDI and 3M CDI Merger Corporation, a California corporation and a wholly owned subsidiary of 3M, 3M will acquire CDI in a stock for stock merger (the "Merger"). Under the terms of the Merger Agreement, holders of CDI Common Stock (other than those exercising dissenters' rights) will receive 0.065 of a share of 3M Common Stock for each share of CDI Common Stock. Holders of each of the five series of CDI Preferred Stock will also receive shares of 3M Common Stock, with a different exchange ratio applicable to each such series. Holders of CDI Preferred Stock may also convert such stock into CDI Common Stock prior to the effective date of the Merger (the "Effective Date") and may receive for each such converted share of CDI Common Stock 0.065 of a share of 3M Common Stock. Options outstanding on the Effective Date to purchase CDI Common Stock will be cancelled on the Effective Date and substitute 3M stock options will be granted to the holders of the cancelled CDI stock options entitling them to receive upon exercise the number of shares of 3M Common Stock they would have received if the CDI Common Stock subject to the cancelled option had been outstanding on the Effective Date, plus the related number of Contingent Payment Shares.

C. The Contingent Payment Shares

In addition, holders of CDI Common Stock on the Effective Date, including those exercising substitute 3M stock options after the effective Date ("CDI Record Holders"), will be entitled to receive in the future Contingent PaymentShares. The number of Contingent Payment Shares issued will be based upon CDI's attainment of certain "Revenues" (as defined in the Merger Agreement) during specified periods following the Effective Date, up to a maximum total of approximately 575,000 shares of 3M Common Stock. More specifically, Contingent Payment Shares will be paid following each of the twelve month periods ended December 31, 1989, December 31, 1990 and December 31, 1991 if CDI Revenue exceed stated goals for each of these periods (each such period, a "Contingent Payment Period"). If the Revenues goal is not met in any particular Contingent Payment Period, no Contingent Payment Shares will be issued for that period. It is therefore possible that no Contingent Payment Shares will be issued at all, since it is possible the Revenues goals will not be attained. Conversely, it is also possible that the maximum limit of Contingent Payment Shares could be issued.

Contingent Payment Shares also could be issued based on CDI's "New Product Revenues", defined in the Merger Agreement as the net worldwide sales of blood gas measurement devices developed by CDI, other than existing and future cardiopulmonary bypass gas systems. If the New Product Revenues for CDI for any consecutive twelve month period prior to December 31, 1992 meet or exceed the sum of $ 1 million, CDI Record Holders would be entitled to receive Contingent Payment Shares with an aggregate value of $ 3 million, based on the then-current market price of 3M Common Stock. Additionally, if the New Product Revenues for any consecutive twelve month period prior to December 31, 1992 exceeds $ 4 million, additional Contingent Payment Shares with an additional aggregate value of $ 3 million, based on the then-current market value of 3M Common Stock, would be issued to CDI Record Holders.

II. Registration of the Contingent Payment Shares May be Made on Form S-4

We respectfully request the Staff's concurrence in our view that the Contingent Payment Shares may be properly registered under the Act on a Form S-4 Registration Statement. (The Contingent Payment Shares issuable to holders of substitute 3M stock options would be registered on a Form S-8 registration statement covering the shares issuable upon exercise of such options.) We base this view on an examination of the Instructions to Form S-4, a review of "no-action" letters issued by the Staff, and commonly accepted securities law practice.

General Instruction A.1. to Form S-4 states that Form S-4 may be used to register securities to be issued in a merger or other Rule 145 transaction. The Merger, therefore, clearly qualifies as a permissible transaction for the registration on Form S-4 of shares issued in connection therewith. A review of no-action letters issued by the Commission supports the view that the Contingent Payment Shares are deemed to have been "issued" in the Merger despite the fact they are not physically issued until a later date, since "earn-out" shares are deemed to have been purchased at the initial merger date. See, e.g., Pennsylvania Life Company, 1972-73 CCH Fed. Sec. L. Rep. P79,119 (S.E.C. 1972) (for purposes of determining the holding period under Rule 144, earn-out shares are deemed to have been acquired at the time of the initial closing under the purchase agreement since the issuer was committed to issue the shares at such time subject only to conditions other than the payout of future consideration for such securities). See also National Capital Real Estate Trust (October 13, 1984) (shares issuable upon exercise of warrants being issued as partial consideration in a merger deemed to be "issued in" the merger and could therefore be registered on Form S-4).

In addition, a review of various precedents indicates that the common practice of securities practitioners is to register securities analogous to the Contingent Payment Shares on the registration statement initially filed in connection with the merger transaction in question. See, e.g., the Form S-15 Registration Statement dated April 10, 1984, filed by Eli Lilly and Company in connection with its acquisition of Advanced Cardiovascular Systems, Inc. (In a transaction very similar to the one at hand, Lilly issued a fraction of a Lilly common share in exchange for each ACS revenues and earnings goals were achieved. The Lilly contingent payment shares were registered on the initial registration statement filed in connection with the merger); the Form S-4 Registration Statement dated April 13, 1987, filed by RepublicBank Corporation in connection with its acquisition of InterFirst Corporation (RepublicBank issued as part of the merger consideration shares of a newly created Class A common stock which becomes convertible into regular RepublicBank common stock five years after consummation of the merger. The formula for conversion of the Class A stock into common stock is based on earnings of the combined company. The common stock into which the Class A stock is convertible was registered on the Form S-4 filed by RepublicBank at the time of the merger even though the Class A stock could not be converted into common stock for a five-year period); and the Form S-4 Registration Statement dated February 14, 1986, of Eli Lilly and Company in connection with its acquisition of Hybritech Incorporated (As part of the merger consideration, Lilly issued warrants to purchase Lilly common stock. The warrants become exercisable following consummation of the merger. Lilly registered the common stock into which the warrants are exercisable on the Form S-4).

III. If the Contingent Payment Shares are Registered on Form S-4, No Current Prospectus Need be Distributed at the Time the Contingent Payment Shares are Issued

We respectfully request the concurrence of the Staff in our view that no current prospectus need be prepared and distributed at the time the Contingent Payment Shares are issued. We believe that the "purchase and sale" of the Contingent Payment Shares will occur at the time the holders of the CDI Common Stock receive 3M Common Stock plus a right to receive Contingent Payment Shares in exchange for their shares of CDI Common Stock in connection with the consummation of the Merger. Since all investment decisions with respect to the Contingent Payment Shares are to be made at the time the CDI stockholders vote on the Merger, and the consideration for the shares of CDI Common Stock may be deemed to have been paid at the Effective Date, it is our belief that the "sale" of the Contingent Payment Shares will occur at the Effective Date. Subsequent to the Effective Date, there will remain only the mechanical acts of (i) applying the formulae described in Section I.C. above to calculate the number of Contingent Payment Shares to be issued and (ii) delivering the Contingent Payment Shares to the CDI Record Holders. Accordingly, we are of the view that the Contingent Payment Shares may be delivered to the former holders of CDI Common Stock without the requirement that they be accompanied by a current prospectus.

We believe analogous support for our position may be derived from Radiation Dynamics,Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972), where, in the context of Rule 10b-5, the Court held that "the time of 'purchase or sale' of securities within the meaning of Rule 10b-5 is to be determined at the time when the parties to the transaction are committed to one another", rather than the formal closing date for the transaction.

Likewise, treatment of the Contingent Payment Shares as having been "purchased" at the Effective Date is compatible with the way "earn out" shares are treated for purposes of determining the holding period under Rule 144. See the discussion above of Pennsylvania Life Company, 1972-73 CCH Fed. Sec. L. Rep. P79,119 (S.E.C. 1972).

The Staff has previously taken the position in an analogous factual situation that a current prospectus need not be distributed upon the subsequent issuance of delayed consideration if the investment decision in connection with the acquisition was made at the time of the initial filing of the registration statement. Templeton Energy, Inc. (November 29, 1982). In July 1981 Templeton Energy offered to exchange up to 17,365,050 of its shares of common stock for certain interests in oil and gas assets.As to certain undeveloped properties, Templeton was required under the terms of the exchange offer to reevaluate the amounts paid for such properties one year after consummation of the exchange offer and to distribute to holders of such reserves additional common shares (the "Reevaluation Shares") to cover any underestimate of the reserves' value, up to an aggregate of 682,993 additional shares.

Since all investment decisions with respect to the Reevaluation Shares were made at the time the exchange offer was consummated and the consideration for the shares was paid at such time, Templeton argued that the "sale" of the Reevaluation Shares occurred upon consummation of the exchange offer, and, accordingly, the Reevaluation Shares could be delivered to the former holders of the proved undeveloped properties without the requirement that they be accompanied by a current prospectus. The Commission accepted these arguments and granted the no-action request, specifically noting that since recipients of Reevaluation Shares would make no investment decision, no current prospectus would be needed. In this regard, it is clear that the recipients of Contingent Payment Shares similarly make no investment decision at the time they receive such shares.

For the above-stated reasons, we believe that no current prospectus need be distributed in connection with the issuance of the Contingent Payment Shares.

IV. If a Current Prospectus is Required, it may be a Prospectus Included in a Registration Statement on Form S-3 which would be Filed as a Post-Effective Amendment to the Form S-4 Registration Statement Covering 3M Common Stock Initially Issued in the Merger

If the Staff does not concur with the views expressed in Section III of this letter, we respectfully request that the Staff confirm our view that any current prospectus need only comply with the requirements of Form S-3. A post-effective amendment to the original Form S-4 Registration Statement filed in connection with the Merger would be filed on Form S-3 following the consummation of the Merger.

Under Rule 401(e) under the Act, a Form S-3 may be used to file a post-effective amendment to Form S-4, provided the Form S-3 requirements are otherwise met. 3M clearly meets the registrant requirements for the use of Form S-3 and has utilized that form on numerous occasions for the registration of securities under the Act.

We also believe that the transactional requirements of Form S-3 should be deemed to be satisfied. General Instruction I.B.4 to Form S-3 is designed to address situations such as the delayed issuance of the Contingent Payment Shares. If a current prospectus is required, 3M undertakes that it will send to all record holders of rights to receive Contingent Payment Shares material containing the information required by Rule 14a-3(b) under the Securities Exchange Act of 1934 and Items 401, 402 and 403 of Regulation S-K.

In addition, the Commission has repeatedly taken a public position which supports our belief that a Form S-3 prospectus may be used to update other forms of registration statements. See, e.g., Brock Hotel Corporation (March 2, 1987) (Commission permits Company to postpone the filing of a post-effective amendment to its registration statement until such time as it appears likely that the conversion of warrants into common stock will occur and permits the Company to use Form S-3 for such amendment to the Form S-1 provided the Company meets the registrant eligibility requirements); see also E&J Properties, Ltd. (October 28, 1985) (almost identical position to Brock Hotel); National Capital Real Estate Trust (October 13, 1984) (following a restructuring, Company is permitted to file a post-effective amendment to a Form S-4 registration statement on Form S-3 to cover any delayed offering of shares issuable upon the exercise of warrants); Pan American World Airways Inc. (May 29, 1984) (Company need not file new registration statement covering securities issuable on conversion of convertible debentures issued in reorganization until such time as conversion appears likely and registration may be effected by a post-effective amendment to Form S-14 registration statement on Form S-3).

We recognize that the transactional requirements specified in Instruction I.B.4 to Form S-3 speak in terms of transferable warrants. The rights to receive the Contingent Payment Shares, which may be analogized to warrants, are not transferable. Nevertheless, we do not believe the issue of transferability should be dispositive, since, on a substantive level, the analogy still applies. The ability to use Form S-3 under these circumstances should depend on compliance with the substantive requirements of the Form and not on a technical distinction with respect to transferability.

For the reasons stated in Section III above, we believe no current prospectus is required in connection with the issuance of the Contingent Payment Shares. However, if the Commission takes the position that such a prospectus is required, we respectfully submit that the prospectus may be included in a registration statement on Form S-3 filed as a post-effective amendment to the original Form S-4 Registration Statement.

V. The Contractual Rights Representing the Contingent Payment Shares are not Securities Required to be Registered under the Act

The Merger Agreement grants a contractual right (the "Contingent Payment Right") to holders of CDI Common Stock on the Effective Date entitling them to receive future payments of Contingent Payment Shares if certain revenue goals are reached by CDI after the Effective Date. We believe the contractual right to receive the Contingent Payment Shares is not a security requiring registration under the Act.

We believe that the specific characteristics of the Contingent Payment Rights remove them from the common indicia of a security. Chief among those characteristics are (1) that the Contingent Payment Rights will not be represented by any form of certificate or instrument; (2) that the holders thereof have no rights common to stockholders such as voting and dividend rights, nor do they bear a stated interest rate; (3) that the Contingent Payment Rights will not be assignable or transferable, except by operation of law; and (4) that a Contingent Payment Right will not represent a separate security with a separate trading market.

The Commission has taken the position on a number of occasions that Deferred Cash Consideration Rights (i.e., rights entitling the holder to receive as part of the merger consideration cash at a later date following consummation of the merger), which are clearly analogous to the Contingent Payment Rights, need not be registered under the Act. In Essex Communications Corp. (June 28, 1988) the Commission permitted the distribution of a Deferred Cash Consideration Right as part of the merger consideration for Essex's acquisition of U.S. Cable Television Group without requiring that such rights be registered under the Act. The Commission noted that the rights, among other things, were (1) granted as part of the merger consideration, (2) not transferable, except by operation of law and (3) not represented by any form of certificate, all characteristics shared by the Contingent Payment Rights. See also Slater Development Corp. (May 9, 1988) (adopting a position almost identical to that of Essex); CMC Real Estate Corporation (March 21, 1987) (non-transferable Deferred Cash Consideration Rights issued as part of the merger consideration, where each such Right would represent the right to receive a stated sum of either the cash proceeds received from the sale or other disposition of commuter rail lines then subject to a pending eminent domain condemnation proceeding or the amount of cash equal to the fair market value of the rail lines, need not be registered under the Act).

Similarly, in Lorimar, Inc. (November 4, 1985), the Staff also took the view that deferred payment rights would not need to be registered under the Act. The deferred payment rights in Lorimar were to consist of three annual payments following the closing date of a merger. Those rights were subject to a reduction if revenues did not reach a certain level or if the representations and warranties made by the acquired company werenot true or correct. Several other no-action requests have been granted under facts similar to Essex, Slater, CMC, Lorimar and those contained herein. See, e.g., Northwestern Mutual Life Insurance Company, (March 3, 1983); Star Supermarket, Inc., (December 22, 1982); and Lifemark Corporation, (November 17, 1981). It should make no difference that the Contingent Payment Rights represent the right to receive Contingent Payment Shares rather than cash; the issues in both cases are the same and relate to the characteristics of the rights and not the consideration to be received upon conversion of the rights.

While the Staff no-action responses cited above do not specifically state that deferred rights are not securities, they do take the position that registration would not be required. Such a position is consistent with the notion that there is no public interest in requiring registration of deferred rights, such as the Contingent Payment Rights described herein. This is especially appropriate under the present circumstances, when it is clearly contemplated that the Contingent Payment Shares issuable pursuant to the Contingent Payment Rights will be registered.(Moreover, we note that the Contingent Payment Rights are fully described in the Form S-4.) It is also worth noting that in the Lilly-ACS transaction described in Section II of this letter, the rights to receive the Lilly contingent payment shares were not registered under the Act, while the contingent payment shares themselves were so registered. However, in the event the Staff nevertheless concludes that the Contingent Payment Rights should be registered, then we believe that the Contingent Payment Shares need not be registered since the issuance of such shares upon conversion of the Contingent Payment Rights would be exempt from registration under Section 3(a)(9) of the Act.

For the reasons set forth above, we do not believe that the Contingent Payment Rights are required to be registered under the Act.

VI. Conclusion

For the reasons stated herein, we believe that the views expressed in this letter are consistent with the provisions of the Act and the rules and regulations promulgated by the Commission thereunder and consonant with the Staff's publicly-stated positions on the issues and respectfully request that the Staff confirm our views that:

(1) the Contingent Payment Shares may be registered under the Act on the Form S-4 Registration Statement relating to the Merger;

(2) no current prospectus need be distributed in connection with the issuance of the Contingent Payment Shares; and

(3) the Contingent Payment Rights do not have to be registered under the Act.

We greatly appreciate your time and efforts on our behalf. We respectfully request that the Commission address our request for interpretive advice as soon as possible in view of the fact that the CDI meeting of stockholders is scheduled to be held on October 31, 1988, requiring a mailing of the proxy materials several weeks prior thereto. In any event, we would appreciate an oral response as soon as possible, especially if the Staff does not concur in our views. If you have any questions or wish to discuss this matter, please call the undersigned (212-558-3716) or Mark L. Bibi (212-558-3897) of Sullivan & Cromwell or Roger P. Smith (612-733-7643) of the Company.

Very truly yours,

Ricardo A. Mestres, Jr.