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Shortly after the formation of the limited partnerships,
those partnerships each granted an option to Engineering Systems
Corp. (ESC) for the purchase of all rights to the invention
involved, exercisable upon its becoming market-ready. In
consideration of the option, ESC secured the loans of the limited
partnerships with time deposits made with Wells Fargo, and agreed
to pay the partnerships quarterly payments until the option was
exercised. The quarterly payments for the option were equal to
the interest that became due on the loans. The minimum exercise
price of the option was equal to the principal amount of the
loan. Pursuant to a collateral agreement, the partnerships
agreed to pay interest and principal as it became due on the
loan,4 not to make any disbursements until the loan was
liquidated or the pledged assets were returned, and to cause the
pledged assets to be released as the partnerships received
royalties.
During the years in issue, petitioner was the chairman5 of
the board of directors of A-Alpha, but at no time owned any stock
of A-Alpha. The shareholders of A-Alpha were outside investors
whose interests were held by nominees, and whose identities were
4 The offering memorandum indicated that the option
agreement provided sufficient income to cover loan interest.
5 Chairmanship of a Hong Kong limited liability company is
the equivalent of being an executive officer of a U.S.
corporation.
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Last modified: May 25, 2011