Santa Monica Pictures, LLC, Perry Lerner, Tax Matters Partner - Page 84

                                        -167-                                         
          purposes.”  In the final draft of the exchange and contribution             
          agreement, Generale Bank and CLIS warranted and represented that            
          they had received no payment of principal on the $974 million in            
          receivables and the $79 million receivable, respectively, and               
          that those receivables had not been written down for accounting             
          or tax purposes.  Pursuant to this final draft, the Ackerman                
          group was entitled to indemnification from CDR of up to $10                 
          million for any breaches of these representations or warranties.            
                         b.  Redemption and Liquidation Rights                        
               Petitioner contends, however, that Generale Bank and CLIS              
          had an interest in maximizing their return from a redeveloped               
          SMHC.  Petitioner points to the redemption rights (and ostensibly           
          the conversion rights) provided in the letter agreement and                 
          distilled into the SMP LLC agreement.  Under the SMP LLC                    
          agreement, Generale Bank and CLIS were given conversion rights              
          for their preferred interests in SMP which were exercisable on or           
          after December 10, 2001.118  The preferred interests were                   
          convertible into nonvoting Common II interests.119  In the event            
          that SMP received a conversion notice, it had the option to                 
          redeem the preferred interests, in whole but not in part, at a              

               118 The agreement provided that the conversion right would be          
          immediately exercisable in the event SMP failed to make a certain           
          required distribution.                                                      
               119 The preferred interests were convertible on a basis equal          
          to the “Convertible Percentage”, which the LLC agreement provided           
          would initially equal 45 percent.                                           





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