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We’ve explained (in the previous articles) why it is unlikely Intel could convince a court that AMD is undergoing a change of control under the x86/x86-64 license. The other possible threat to AMD’s spin-off plans from Intel is the argument that the new Foundry company can’t manufacture x86 based chips (essentially, CPUs), since the right is licensed to AMD. The argument is pretty thin though: The Foundry Company, from the outset, has been planned as a subsidiary of AMD, and the terms of the spin-off appear to meet the license agreement’s definition of a subsidiary.
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A Subsidiary, You Say?
Before we get into the cross-license’s definition, in general, a subsidiary is a company that another company (the parent) owns all or most of, at least in terms of control. Exact definitions differ from country to country and even authority to authority within one country. Our concern is if TFC is an AMD subsidiary under the cross-license.
The terms of the cross-license state (Section 1.22) that TFC is an AMD subsidiary as long as AMD “owns or controls (either directly or indirectly) or originally contributed (either directly or indirectly) at least 50% of the tangible and intangible assets” (1.22.a)of TFC, and “owns or controls… at least 50% of the outstanding shares or securities entitled to vote for the election of directors and [TFC] is under no obligation to directly or indirectly distribute more than 70% of its profits to a third party.”(1.22.b.1)
Recalling the terms of AMD’s spin-off plans (see this article), AMD gets 50% of TFC’s voting shares. Also, based on the calculations we made to see if AMD was growing enough to trigger a change of control, we saw that: even if we consider the $700 million of cash AMD is putting in as coming from ATIC - since AMD is getting that cash from ATIC as part of the deal – AMD is still kicking in 50% of TFC’s assets. So that’s two conditions for (a) and AMD only needs one.
Having 50% of the voting shares also takes care of the first half of (b). As long as there is no weird covenant to pay out more than 70% of profits, TFC is AMD’s subsidiary. And while many parts of the 8-K filling with Securities and Exchange Commission are confidential and only available to SEC and the parties’ senior executives, it is unlikely that the SEC would let something that significant to investors remain confidential.
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So It Is That Simple, TFC is AMD’s Subsidiary?
In principal, AMD should be able to get its x86 CPU’s made by TFC. The nature of the new business, as a contract merchant foundry, however, does raise a few complications. For instance, Intel may want to, officially and contractually, clarify that just because TFC is a subsidiary doesn’t mean that its clients other than AMD get to start making x86 chips there under the terms of the existing license. They also want to make sure they continue to get their royalty payments.
Those would be stronger legal cases, and AMD probably didn’t anticipate doing anything differently from that anyways. They might, however, want to make sure it is clear that clients of TFC don’t have to give any rights to Intel under the cross license.
And as I feel compelled to remind you, again, even a considered legal opinion isn’t fool proof, and I’m not a lawyer, plus many parts of the 8-K filing and cross-license agreement aren’t available to the public.
AMD does obviously have the documents in their entirety, and they also have lawyers, and they have been working on these plans for a while. If, in reading this series, you have gotten the impression that the TFC deal is pretty carefully structured to avoid causing any problems under the cross-license you’re not alone.
We wrap up our look at possible problems for AMD from Intel in the next article, before getting into needed CFIUS and ESD approvals.
CFIUS, ESD, and Possibly Even Intel Have a Say in AMD Spinning Off Its Manufacturing Business
- AMD Shareholders and Others Likely to Approve of Plans for The Foundry Company
- Will AMD's Plans for The Foundry Company Touch Off a New Legal Battle with Intel?
- Will Intel Say AMD’s Asset Lite Plan Represents a Change of Control?
- Could an Increase in AMD’s Market Value Because of their Asset Lite Transactions Threaten their x86 Agreement with Intel?
- The Foundry Company as an AMD Subsidiary Would Receive Intel x86 License Access
- Intel Unlikely to Pose Legal Threat to AMD’s Spin-Off Plans for The Foundry Company