-170-
The preferred debt option effectively allowed Mr. Lerner to
control whether the banks would remain as partners in SMP beyond
the put period. If the banks did not exercise their put rights
by December 31, 1997, Mr. Lerner could convert the banks’
preferred interests into preferred debt at any time between
January 31, 1997, and December 10, 2001 (the date that the banks’
conversion rights would accrue). If SMP exercised the preferred
debt option, the result would be the economic equivalent of an
interest-free loan by the banks of the $5 million put purchase
price from December 31, 1996 (the date the banks could have
exercised their put rights and claimed the $5 million put price)
until the conversion of the preferred interests into preferred
debt. Taking into consideration the time value of money, the
banks would appear to have had every economic incentive to
exercise their put option as soon as possible, on December 31,
1996, for $5 million.121 If the banks remained in SMP beyond the
121 The SMP LLC agreement provided that each preferred
interest holder’s capital account would be credited with the
holder’s distributive share of “Net Income”. Under the LLC
agreement, SMP’s “Net Income” was allocated first to each holder
of preferred interests in an amount equal to 8 percent of the
balance of the holder’s preferred capital account on the last day
of the partnership’s fiscal year. It does not appear, however,
that these adjustments would have affected the put price: The
side letter agreement defines the put purchase price, in relevant
part, as an amount equal to: “the amount of the Preferred
Capital Account as described in the Limited Liability Company
Agreement of the Company and as in effect on the EC [exchange and
contribution agreement] Closing Date * * * for the original
holder or holders of such Preferred Interests”. We construe this
(continued...)
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