([SODQDWLRQLQ2UJDQLF&KHPLVWU\

:,//,$0*22':,1
*URXSLQ/RJLFDQGWKH0HWKRGRORJ\RI6FLHQFH8QLYHUVLW\RI&DOLIRUQLD
%HUNHOH\&DOLIRUQLD86$

$%675$&7 ,Q WKLV SDSHU D PRGHO RI D VXEFODVV RI WKH H[SODQDWLRQV JLYHQ LQ
RUJDQLF FKHPLVWU\ LV GHYHORSHG 7KLV PRGHO LV VXSSRUWHG E\ WKUHH FRQFUHWH
H[DPSOHV7KHPRGHOVXJJHVWVWKDWLQWKLVGLVFLSOLQHODZVWKHRULHVDQGFDXVDO
UHDVRQLQJDUHLQWHUUHODWHGLQLQWHUHVWLQJDQGKHUHWRIRUHXQH[SORUHGZD\V7KH
PRGHODOVRUHVHUYHVDSURPLQHQWSODFHIRULGHDOL]DWLRQVDQGFDSDFLWLHVDVFULEHG
RQWKHEDVLVRIWKHVWUXFWXUDOIHDWXUHVRIPROHFXOHV7KHDXWKRUKRSHVWRKDYH
HVWDEOLVKHGWKDWSKLORVRSKLFDOUHIOHFWLRQRQWKHPHWKRGRORJ\RIRUJDQLFFKHP
LVWU\FDQ\LHOGLQWHUHVWLQJDQGYDOXDEOHQHZLQVLJKWVLQWRFODVVLFDOLVVXHVLQWKH
SKLORVRSK\RIVFLHQFH

.(<:25'6 H[SODQDWLRQ FDSDFLWLHV PHFKDQLVP RUJDQLF FKHPLVWU\ WKHRU\

ODZVSRWHQWLDOHQHUJ\VXUIDFHSKLORVRSK\RIVFLHQFH

7KHUHDUHDYDULHW\RIZD\VLQZKLFKRQHPLJKWDSSURDFKWKHLVVXHRIVFLHQWLILFH[
SODQDWLRQ2QHPLJKWEHJLQZLWKDSDUWLFXODULPDJHRIWKHQDWXUHRIVFLHQWLILFLQTXLU\
DQGWKHQLQIHUZKDWDVFLHQWLILFH[SODQDWLRQPXVWEHLQRUGHUWRILWRQH¶VFRPSUHKHQ
VLYHYLVLRQRIVFLHQFH7KLVDSSURDFKWKRXJKLWSURPLVHVDXQLILHGDFFRXQWRIH[SOD
QDWLRQULVNVSURYLGLQJDSKLORVRSKLFDODQDO\VLVRIDFRQFHSWWKDWLVUDUHO\LIHYHU
DSSOLFDEOHWRWKHVFLHQWLILFSUDFWLFH2QWKHRWKHUKDQGRQHPLJKWEHJLQE\LQYHVWL
JDWLQJGLVFLSOLQHE\GLVFLSOLQHWKHH[SODQDWLRQVWKDWVFLHQWLVWVSURYLGHERWKWRWKHLU
SHHUVDQGWRWKRVHEHLQJWUDLQHGWRHQWHUWKHGLVFLSOLQH$QLQYHVWLJDWLRQRIH[SODQD
WLRQDWWKHORFDOOHYHOFDQEHH[SHFWHGWRSURYLGHDPRUHDFFXUDWHUHIOHFWLRQRIDFWXDO
VFLHQWLILFSUDFWLFHKRZHYHULWULVNVILQGLQJWKDWWKHUHLVQRWKLQJLQWHUHVWLQJWRVD\
DERXWDJOREDOQRWLRQRIVFLHQWLILFH[SODQDWLRQ7KLVSDSHULVLQWHQGHGWREHDFRQWUL
EXWLRQWRWKHODWWHUDSSURDFK,ZLOOVNHWFKDPRGHORIDFODVVRIWKHH[SODQDWLRQVWKDW
DUH SURYLGHG LQ RUJDQLF FKHPLVWU\ DQG VXJJHVW VRPH RI WKH LPSOLFDWLRQV WKDW WKLV
PRGHOPLJKWKDYHIRUPRUHJOREDODFFRXQWVRIVFLHQWLILFH[SODQDWLRQ

)2&86,1*7+(352-(&7

,QRUGHUWRDSSURDFKWKHSURMHFWRIFKDUDFWHUL]LQJH[SODQDWLRQLQRUJDQLFFKHPLV
WU\LQDPDQDJHDEOHZD\,ZDQWWROLPLWWKHVRUWRIH[SODQDWLRQVWKDW,ZLOOFRQVLGHU

$GGUHVVIRUFRUUHVSRQGHQFH:LOOLDP*RRGZLQ*URXSLQ/RJLFDQGWKH0HWKRGRORJ\RI6FL
HQFH8QLYHUVLW\RI&DOLIRUQLD%HUNHOH\%HUNHOH\&$9RLFHID[

ZPJRRGZLQ#DROFRP

$QQ1<$FDG6FL±‹1HZ<RUN$FDGHP\RI6FLHQFHV


 $11$/61(:<25.$&$'(0<2)6&,(1&(6

WRDQLPSRUWDQWVXEVHWRIWKRVHH[SODQDWLRQVRIIHUHGLQWKHGLVFLSOLQH2QHZD\WR
FKDUDFWHUL]HDFODVVRIH[SODQDWLRQVLVE\GHVFULELQJWKHVRUWRIµ:K\¶TXHVWLRQVLQ
UHVSRQVHWRZKLFKWKRVHH[SODQDWLRQVZRXOGEHRIIHUHG$ZK\TXHVWLRQFDQEHDQ
DO\]HGLQWRWKUHHFRPSRQHQWVDWRSLFDFRQWUDVWFODVVDQGDUHOHYDQFHUHODWLRQ7KH
WRSLFRIWKHTXHVWLRQLVWKHSURSRVLWLRQWREHH[SODLQHGZKLOHWKHFRQWUDVWFODVVLVWKH
VHWRIDOWHUQDWLYHVIURPZKLFKWKHWRSLFLVWREHGLVWLQJXLVKHG/DVWO\WKHUHOHYDQFH
UHODWLRQFKDUDFWHUL]HVZKDWVRUWRILQIRUPDWLRQLVH[SODQDWRULO\UHOHYDQWWRWKHTXHV
WLRQDWKDQG7KHFODVVRIH[SODQDWLRQVWKDW,ZDQWWRFRQVLGHULVWKRVHH[SODQDWLRQV
WKDWZRXOGEHJLYHQLQUHVSRQVHWRWKHIROORZLQJVRUWVRITXHVWLRQV
 :K\GR>UHDFWLRQVRIW\SH$RFFXUIDVWHUWKDQUHDFWLRQVRIW\SH%@UDWKHU
WKDQWKHRWKHUZD\DURXQG"
 :K\ GR >UHDFWLRQV RI W\SH $ KDYH WKH SURGXFWV % & HWF@ UDWKHU WKDQ
SURGXFWV()HWF"
 :K\ GR >UHDFWLRQV RI W\SH $ KDYH SURGXFW GLVWULEXWLRQ '@ UDWKHU WKDQ
SURGXFWGLVWULEXWLRQV()RU*HWF"
 :K\ GRHV >UHDFWLRQ RI W\SH $ SURFHHG E\ SDWKZD\ 0@ UDWKHU WKDQ SDWK
ZD\V34RU5HWF"
7KHWRSLFVRIWKHDERYHTXHVWLRQVDUHJLYHQLQVTXDUHEUDFNHWVZKLOHWKHFRQWUDVW
FODVVHVDUHVSHFLILHGLQWKHURXQGEUDFNHWV7KHFODVVLILFDWLRQRIDUHDFWLRQDV³W\SH
$´PLJKWLQYROYHQRWRQO\FRQVLGHUDWLRQRIWKHSDUWLFXODUFRPSRXQGVEHLQJUHDFWHG
EXWDOVRWKHFRQGLWLRQVXQGHUZKLFKWKDWUHDFWLRQLVUXQ7KHVHFRQGLWLRQVPLJKWLQ
FOXGHWKRXJKWKH\QHHGQRWEHOLPLWHGWRWKHWHPSHUDWXUHDWZKLFKWKHUHDFWLRQVLV
UXQWKHVROYHQWLQZKLFKWKHUHDFWLRQLVUXQDQGWKHSUHVHQFHRIDQ\FDWDO\VWVHWF,
ZLOODUJXHLQWKHQH[WVHFWLRQWKDWDOORIWKHVHTXHVWLRQVZKHQFRQVWUXHGLQDVWDQGDUG
ZD\VKDUHWKHVDPHUHOHYDQFHUHODWLRQWKDWLVWKHVDPHVRUWRILQIRUPDWLRQZLOOEH
EURXJKWWREHDULQRUGHUWRDQVZHUWKHTXHVWLRQ

$6.(7&+2)(;3/$1$7,21,125*$1,&&+(0,675<

$QDWXUDOZD\WREHJLQWRPRGHOH[SODQDWLRQVLQRUJDQLFFKHPLVWU\LVWRFRQVLGHU
ZKDWVRUWRISURSRVLWLRQVZRXOGFRQVWLWXWHDQVZHUVWRTXHVWLRQVRIWKHDERYHVRUWV
$OORIWKHTXHVWLRQVSRVHGDERYHDUHDERXWWUDQVIRUPDWLRQV7KHILUVWVRUWRITXHVWLRQ
LVDERXWWKHVSHHGRIWUDQVIRUPDWLRQVWKHVHFRQGDQGWKLUGDUHDERXWWKHSURGXFWVRI
WUDQVIRUPDWLRQVDQGWKHIRXUWKLVDERXWWKHSDWKZD\VRIWUDQVIRUPDWLRQV,WVKRXOG
QRWEHVXUSULVLQJWKDWDQLPSRUWDQWVHWRITXHVWLRQVWKDWDUHDVNHGDQGDQVZHUHGLQ
RUJDQLFFKHPLVWU\DUHTXHVWLRQVDERXWWUDQVIRUPDWLRQV2UJDQLFFKHPLVWU\LVDIWHU
DOOVXSSRVHGWREHWKHVWXG\RIRUJDQLFPROHFXOHVDQGWKHUHDFWLRQVRUWUDQVIRUPD
WLRQVWKDWWKH\XQGHUJR$VDVWDUWWKHQWKHDQVZHUWRDTXHVWLRQRIRQHRIWKHDERYH
VRUWVZLOOEHDQDVVHUWLRQDERXWDWUDQVIRUPDWLRQRUDFODVVRIWUDQVIRUPDWLRQV
7KHQH[WQDWXUDOVWHSLVWRDUWLFXODWHKRZRUJDQLFFKHPLVWVWKLQNDERXWWUDQVIRU
PDWLRQV7KLVFDQEHGRQH,EHOLHYHE\FKDUDFWHUL]LQJZKDWVRUWRIGHVFULSWLRQRID
WUDQVIRUPDWLRQ ZRXOG FRQVWLWXWH DQ LGHDO DFFRXQW RI WKH WUDQVIRUPDWLRQ IURP WKH
SRLQWRIYLHZRIDQRUJDQLFFKHPLVW,ZLOOUHIHUWRWKLVLGHDODFFRXQWRIDWUDQVIRU
PDWLRQDVDQ,GHDO([SODQDWRU\$FFRXQWRU,($,IDQ,($ZHUHDYDLODEOHWKHQWKH
FKHPLVWU\ZRXOGSRVVHVVDFRPSOHWHFKDUDFWHUL]DWLRQRIDFKHPLFDOUHDFWLRQDQGVR
FRXOGDQVZHUDQ\UHOHYDQWTXHVWLRQVDERXWWKDWWUDQVIRUPDWLRQLQDULJRURXVZD\7KH
*22':,1(;3/$1$7,21,125*$1,&&+(0,675< 

QRWLRQWKDWFRPHVFORVHVWWRWKDWRIDQ,($LQRUJDQLFFKHPLVWU\LVWKDWRIDSRWHQWLDO
HQHUJ\VXUIDFHIRUDWUDQVIRUPDWLRQ,IRQHKDGDTXDQWLWDWLYHGHVFULSWLRQRIWKHHQ
HUJ\RIERWKSURGXFWVDQGUHDFWDQWVDQGDOOWKHSRVVLEOHSDWKZD\VFRQQHFWLQJWKHWZR
WKHQRQHFRXOGHPSOR\TXDQWLWDWLYHWKHRULHVVXFKDVWKHUPRG\QDPLFVDQGRUWUDQVL
WLRQVWDWHWKHRU\WRDQVZHUDQ\RIWKHTXHVWLRQVRIWKHDERYHVRUWVIRUDSDUWLFXODUUH
DFWLRQ%HFDXVHWKHSRWHQWLDOHQHUJ\VXUIDFHIRUDWUDQVIRUPDWLRQZRXOGLQJHQHUDO
EHPXOWLGLPHQVLRQDOLWLVXVXDOO\HDVLHUWRWKLQNRIWUDQVIRUPDWLRQLQWHUPVRIWKHLU
SRWHQWLDOHQHUJ\GLDJUDPV,QDSRWHQWLDOHQHUJ\GLDJUDPWKHSRWHQWLDOHQHUJ\RID
WUDQVIRUPDWLRQLVSORWWHGDJDLQVWWKHUHDFWLRQFRRUGLQDWHRUWKHPHDVXUHRISURJUHVV
WKURXJK D WUDQVIRUPDWLRQ  7KH SRWHQWLDO HQHUJ\ VXUIDFHV RU GLDJUDPV EULQJ WKH
FKHPLFDOWUDQVIRUPDWLRQLQWRTXDQWLWDWLYHWKHRULHV7KLVLVMXVWWRVD\WKDWLIRQHLV
DEOHWRJLYHVXFKGHVFULSWLRQVRIDUHDFWLRQWKHQWKHULJRURXVRUTXDVLULJRURXVPD
FKLQHU\ RI WKHUPRG\QDPLFV DQGRU D TXDQWLWDWLYH WKHRU\ RI UHDFWLRQ UDWHV FDQ EH
EURXJKWWREHDURQTXHVWLRQVDERXWWKHWUDQVIRUPDWLRQ
2IFRXUVHFKHPLVWVJHQHUDOO\GRQRWKDYHDFFHVVWR,($VQRQHWKHOHVVZKHQDQ
VZHULQJTXHVWLRQVDERXWWUDQVIRUPDWLRQVWKHVH,($VIRUPWKHEDFNJURXQGWKHRUHWL
FDOPRGHODJDLQVWZKLFKWKHDQVZHULVIRUPXODWHG(YHQLIRQHFDQQRWPHDVXUHRU
RWKHUZLVHTXDQWLI\WKHDFWLYDWLRQHQHUJLHVRIDVHWRIUHDFWLRQVWKHGLIIHUHQFHVLQWKH
UDWHVRIWKHVHUHDFWLRQDUHVWLOOH[SODLQHGE\PDNLQJDVVHUWLRQVDERXWGLIIHUHQFHVLQ
WKHLUHQHUJ\EDUULHUV0RUHJHQHUDOO\DQDQVZHUWRRQHRIWKHTXHVWLRQVRIWKHDERYH
VRUWVLVDFODLPDERXWWKH,($VRIWKHUHDFWLRQVPHQWLRQHGLQWKHWRSLFRIWKHTXHV
WLRQ7KHDQVZHUVWRWKHVHTXHVWLRQVZLOOJHQHUDOO\QRWVWDWHTXDQWLWDWLYHIDFWVDERXW
WKH,($EHFDXVHWKHVHVRUWVRIIDFWVDUHQRWUHDGLO\DYDLODEOH,QVWHDGRQHZRXOGDQ
VZHUDTXHVWLRQRIRQHRIWKHDERYHVRUWVE\PDNLQJDTXDOLWDWLYHDVVHUWLRQDERXWWKH
FODVVRI,($VRIWKHUHDFWLRQW\SHLQTXHVWLRQ,QWHUPVRIWKHDQDWRP\RITXHVWLRQV
WKHQWKHVRUWRILQIRUPDWLRQWKDWLVH[SODQDWRULO\UHOHYDQWWRWKHTXHVWLRQVEHLQJFRQ
VLGHUHGLVDIDFWDERXWDFODVVRI,($V
$QDVVHUWLRQDERXWWKHFODVVRI,($VFRUUHVSRQGLQJWRDW\SHRIUHDFWLRQRIIHUHG
LQUHVSRQVHWRDTXHVWLRQRIRQHRIWKHDERYHVRUWVVKRXOGLILWLVWRIRUPSDUWRID
JRRGH[SODQDWLRQDOORZRQHWRFRQFOXGHWKDWWKHWRSLFRIWKHTXHVWLRQLVWUXHZKLOH
WKHDOWHUQDWLYHVPHQWLRQHGLQWKHFRQWUDVWFODVVDUHQRWWUXH7KXVLIRQHZLVKHVWR
H[SODLQZK\DSDUWLFXODUVXEVWDQFH;LVWKHSURGXFWRIDUHDFWLRQUDWKHUWKDQWKH
PHPEHUVRIVRPHVHWRIDOWHUQDWLYHSURGXFWV<=HWFRQHZRXOGKDYHWRDVVHUW
HQRXJKDERXWWKH,($RIWKHUHDFWLRQLQRUGHUWRLQIHUWKDW;ZRXOGLQIDFWEHWKH
SURGXFWZKLOH<=ZRXOGQRW6RRQHPLJKWRIIHUDQH[SODQDWLRQRIWKHIROORZLQJ
VRUWWKHDFWLYDWLRQHQHUJ\DORQJWKHSDWKZD\OHDGLQJWRSURGXFW;LVVLJQLILFDQWO\
ORZHUWKDQWKHDFWLYDWLRQHQHUJ\OHDGLQJWRHLWKHU<RU=HWF7KLVFODLPLIWUXHRI
WKH,($RIWKHUHDFWLRQLQTXHVWLRQXQGHUWKHDSSURSULDWHFRQGLWLRQVDQGVRIRUWK
ZRXOGHQWDLOWKDW;LVWKHSURGXFWRIWKHUHDFWLRQDQGWKDWQHLWKHU<QRU=ZRXOGEH
SURGXFHG7KXVWKHDVVHUWLRQDERXWWKH,($WKDWFRQVWLWXWHVWKHGLUHFWDQVZHUWRWKH
TXHVWLRQLVSHUIHFWO\DGHTXDWHWRGLVWLQJXLVKWKHWRSLFRIWKHTXHVWLRQIURPWKHDOWHU
QDWLYH PHQWLRQHG LQ WKH FRQWUDVW FODVV (YHQ WKRXJK WKH DVVHUWLRQ DERXW WKH ,($
RIIHUHG DV D GLUHFW UHVSRQVH WR WKH TXHVWLRQ LV DGHTXDWH LQ D FHUWDLQ VHQVH IRU
DQVZHULQJWKHTXHVWLRQLWZRXOGQRWLQLWVHOIFRQVWLWXWHDJRRGRULQWHUHVWLQJH[SOD
QDWLRQRIWKHSKHQRPHQDEHLQJLQTXLUHGDERXW
,QRUGHUWRSURYLGHDJRRGRULQWHUHVWLQJDQVZHUWRDTXHVWLRQRIWKHVRUWGHVFULEHG
DERYHLWLVQRWVXIILFLHQWWRDVVHUWVRPHWKLQJDERXWWKH,($RIWKHUHDFWLRQVLQTXHV
WLRQ2QHPXVWDOVRSURYLGHZKDW,ZLOOFDOOD³VWUXFWXUDODFFRXQW´RIWKDWGLUHFWDQ
 $11$/61(:<25.$&$'(0<2)6&,(1&(6

VZHU WR WKH TXHVWLRQ /RRVHO\ VSHDNLQJ D VWUXFWXUDO DFFRXQW EHJLQV ZLWK WKH
LQIRUPDWLRQSURYLGHGE\WKHVWUXFWXUDOIRUPXODVRIWKHW\SHVRIPROHFXOHVLQYROYHG
LQWKHUHDFWLRQW\SHLQTXHVWLRQDQGDUJXHVIRUWKHGLUHFWDQVZHUWRWKHTXHVWLRQRQ
WKHEDVLVRIWKDWVWUXFWXUDOLQIRUPDWLRQ)RUH[DPSOHLIWKHGLUHFWDQVZHUWRDTXHV
WLRQLVDQDVVHUWLRQDERXWWKHUHODWLYHHQHUJLHVRIVRPHSURGXFWVVD\LQUHVSRQVHWR
DTXHVWLRQDERXWWKHSURGXFWGLVWULEXWLRQRIDUHDFWLRQXQGHU³WKHUPRG\QDPLFFRQ
WURO´WKHVWUXFWXUDODFFRXQWRIWKLVGLUHFWDQVZHUPXVWSURYLGHIRUWKHHQHUJ\GLIIHU
HQFHVRIWKHSURGXFWVLQWHUPVRIWKHVWUXFWXUHVRIWKRVHSURGXFWV
$VWUXFWXUDODFFRXQWJHQHUDOO\SURFHHGVE\DSSO\LQJUREXVWO\DSSOLFDEOHFRQFHSWV
WKDWDOORZRQHWRFRQYHUWUHFRJQL]DEOHVWUXFWXUDOIHDWXUHVRIWKHPROHFXOHVRUFODVVHV
RIPROHFXOHVLQYROYHGLQWKHTXHVWLRQLQWRTXDOLWDWLYHHQHUJ\GLIIHUHQFHVEHWZHHQ
WKRVHHQWLWLHV7KHVHUREXVWO\DSSOLFDEOHFRQFHSWVIRUPDEULGJHEHWZHHQVWUXFWXUH
DQGHQHUJ\7KH\DOORZRQHWRLQIHUTXDOLWDWLYHUHODWLYHHQHUJ\GLIIHUHQFHVEHWZHHQ
VWUXFWXUHVE\DSSHDOLQJWRHDVLO\PHPRUL]HGWUHQGVRUUHDGLO\DFFHVVLEOHGDWD6RPH
RIWKHVHFRQFHSWVFDQEHDSSOLHGRQWKHEDVLVRIUHFRJQL]LQJLQGLYLGXDODWRPLFV\P
EROVRUSDWWHUQVRIVXFKV\PEROV²VXFKDVIXQFWLRQDOJURXSV)RUH[DPSOHLQGLYLG
XDODWRPVRUPRUHFRPSOH[VXEVWLWXHQWVFDQEHFDWHJRUL]HGDV³HOHFWURQZLWKGUDZLQJ
JURXSV´ RQ WKH EDVLV RI HLWKHU WKHLU DWRPLF V\PERO LQ WKH FDVH RI FKORULQH IRU
LQVWDQFHRUWKHIXQFWLRQDOJURXSWRZKLFKWKH\EHORQJ2QFHDJURXSKDVEHHQUHF
RJQL]HGDVDQHOHFWURQZLWKGUDZLQJJURXSWKLVIDFWFDQLQFHUWDLQFLUFXPVWDQFHVEH
XVHGWRLQIHUIDFWVDERXWWKHUHODWLYHVWDELOLW\RIWKHVSHFLHVWRZKLFKLWEHORQJVFRQ
VLGHU WKH VWDELOLW\RI FDUEDQLRQV IRU H[DPSOH 7KHUHDUH DOVR VRPH FRQFHSWVWKDW
OORZRQHWRLQIHUUHODWLYHHQHUJ\GLIIHUHQFHVRQWKHEDVLVRIPRUHJHQHUDOVWUXFWXUDO
IHDWXUHV)RUH[DPSOHRQHFDQLQIHUWKDWWKHUHZLOOEH³UHVRQDQFHVWDELOL]DWLRQ´LQ
F\FOLF DONHQHV ZLWK SDUWLFXODU QXPEHUV RI DOWHUQDWLQJ GRXEOH ERQGV &ROOHFWLYHO\
WKHVHFRQFHSWVVHUYHWKHSXUSRVHRIFRQYHUWLQJWKHVWUXFWXUDOLQIRUPDWLRQJLYHQLQD
TXHVWLRQLQWRWKHVRUWRILQIRUPDWLRQDERXWWKH,($VWKDWFDQSURYLGHWKHEDVLVIRUD
GLUHFWDQVZHUWRWKHTXHVWLRQ
6RPHWLPHVWKHUHODWLYHHQHUJ\GLIIHUHQFHVUHFRJQL]DEOHLQYLUWXHRIWKHVHVWUXF
WXUDOFRQFHSWVZLOOEHVXIILFLHQWWRDFFRXQWIRUWKHGLUHFWDQVZHUWRWKHTXHVWLRQ6R
LIRQHKDSSHQHGWRNQRZWKDWDUHDFWLRQZDVXQGHUWKHUPRG\QDPLFFRQWUROWKHQWKH
UHODWLYHVWDELOLW\RIWKHSURGXFWVZRXOGEHVXIILFLHQWWRDFFRXQWIRUWKHLUGLVWULEXWLRQ
,QJHQHUDOKRZHYHUWKHUHODWLYHHQHUJ\GLIIHUHQFHVEHWZHHQVSHFLHVLQYROYHGLQWKH
WUDQVIRUPDWLRQVEHLQJH[SODLQHGDUHQRWVXIILFLHQWWRDFFRXQWIRUWKHDVVHUWLRQDERXW
WKH,($WKDWFRQVWLWXWHVDGLUHFWDQVZHUWRWKHTXHVWLRQ,QPDQ\FDVHVDTXHVWLRQLV
IUDPHGLQWHUPVRIWKHVWUXFWXUHVRIWKHUHDFWDQWVDQGWKHSURGXFWVRIDWUDQVIRUPD
WLRQKRZHYHUWKHDQVZHUWRWKHTXHVWLRQGHSHQGVXSRQLQIRUPDWLRQDERXWWKHSDWK
ZD\ RIWKDW WUDQVIRUPDWLRQ ,Q FDVHV VXFK DVWKHVH LQIRUPDWLRQDERXWWKH UHODWLYH
HQHUJLHVRIWKHUHDFWDQWVRUSURGXFWV²ZKLFKFDQEHGLVFHUQHGRQWKHEDVLVRIVWUXF
WXUDOIHDWXUHVRIWKHVHVSHFLHV²PXVWEHFRQYHUWHGLQWRLQIRUPDWLRQDERXWWKHUHODWLYH
HQHUJLHV DW YDULRXV SRLQWV DORQJ WKH SDWKZD\V RI WKH WUDQVLWLRQV )RU H[DPSOH LQ
RUGHUWRH[SODLQWKHUHODWLYHUDWHVRIUHDFWLRQVRQHJHQHUDOO\QHHGVWRFRPSDUHWKH
HQHUJLHVRIWKHWUDQVLWLRQVWDWHVRIWKHUHDFWLRQV:KHQLQIRUPDWLRQDERXWWKHSDWK
ZD\VRIWUDQVIRUPDWLRQVLVUHTXLUHGLQRUGHUWRDQVZHUWKHTXHVWLRQWKHVWUXFWXUDO
DFFRXQWRIWKHDQVZHUZLOOLQJHQHUDOSURMHFWHQHUJ\GLIIHUHQFHVEHWZHHQWKHUHDF
WDQWVRUWKHSURGXFWVLQWRHQHUJ\GLIIHUHQFHVDORQJWKHSDWKZD\RIWKHWUDQVIRUPD
WLRQ7KLVSURMHFWLRQZLOOLQPRVWFDVHVUHTXLUHDQXQGHUVWDQGLQJRIWKHPHFKDQLVP
RI WKH UHDFWLRQ )XUWKHUPRUH HYHQ ZKHQ RQH XQGHUVWDQGV WKH PHFKDQLVP RI WKH
*22':,1(;3/$1$7,21,125*$1,&&+(0,675< 

WUDQVIRUPDWLRQDQDFFRXQWRIKRZVWUXFWXUDOFKDQJHVLQWKHUHDFWDQWVRUSURGXFWVRI
WKHUHDFWLRQRURWKHUDVSHFWVRIWKHUHDFWLRQFRQGLWLRQVWUDQVODWHLQWRHQHUJ\GLIIHU
HQFHV LQ WKH WUDQVLWLRQ VWDWH ZLOO LQYROYH DGGLWLRQDO WKHRUHWLFDO DVVXPSWLRQV )RU
H[DPSOHRQHPLJKWLQYRNHWKH+DPPRQG3RVWXODWHRUVRPHVLPLODUWKHRU\LQRUGHU
WRH[SODLQZK\DVKLIWLQWKHHQHUJ\RIWKHSURGXFWVZRXOGKDYHDQLPSRUWDQWHIIHFW
RQWKHWUDQVLWLRQVWDWHVDQGWKXVRQWKHUDWHVRIVRPHHQGRWKHUPLFUHDFWLRQ7KHVH
WKHRULHVDERXWKRZWKHWUDQVLWLRQVWDWHVRIUHDFWLRQVUHVSRQGWRFKDQJHVLQWKHUHDF
WLRQFRQGLWLRQVEHFRPHHVSHFLDOO\LPSRUWDQWZKHQWKHUHDUHFRPSHWLQJLQIOXHQFHVRQ
WKHUHODWLYHHQHUJ\RIWKHWUDQVLWLRQVWDWHDQGZKHQWKHUHLVDFRPSHWLWLRQEHWZHHQ
VHYHUDOPHFKDQLVPVE\ZKLFKDWUDQVIRUPDWLRQPLJKWWDNHSODFH
7RUHFDSLWXODWH0DQ\RIWKHLQWHUHVWLQJTXHVWLRQVDVNHGDQGDQVZHUHGLQRUJDQLF
FKHPLVWU\DUHDERXWWUDQVIRUPDWLRQV7KHUHLVDEDVLFWKHRUHWLFDOEDFNJURXQGVWUXF
WXUHLQZKLFKVXFKTXHVWLRQVDUHDGGUHVVHG7UDQVIRUPDWLRQVDUHXQGHUVWRRGDVWUD
MHFWRULHVDORQJDSRWHQWLDOHQHUJ\VXUIDFHDQGTXHVWLRQVDERXWVXFKWUDQVIRUPDWLRQV
DUHDQVZHUHGE\PDNLQJDVVHUWLRQVDERXWWKDWWUDMHFWRU\DQGLWVSRWHQWLDOHQHUJ\7KH
GLUHFW DQVZHU WR D TXHVWLRQ DERXW D WUDQVIRUPDWLRQ LV D FODLP DERXW WKH UHOHYDQW
SRWHQWLDOHQHUJ\VXUIDFHRUGLDJUDP'LUHFWDQVZHUVDUHLGHDOO\VXSSOHPHQWHGE\D
VWUXFWXUDODFFRXQW$VWUXFWXUDODFFRXQWVXSSRUWVWKHGLUHFWDQVZHUE\DUULYLQJDWLW
IURP VWUXFWXUDO LQIRUPDWLRQ SURYLGHG LQ WKH TXHVWLRQ 7KLV SURFHVV LQYROYHV WKH
DSSOLFDWLRQ RI FRQFHSWV WKDW FRQYHUW VWUXFWXUDO IHDWXUHV RI VSHFLHV LQYROYHG LQ WKH
WUDQVIRUPDWLRQ LQWRUHODWLYH HQHUJ\ GLIIHUHQFHV ,Q PRVW FDVHV WKH UHODWLYH HQHUJ\
GLIIHUHQFHVLQGLFDWHGE\WKHVHFRQFHSWVDUHGLIIHUHQFHVLQWKHHQHUJ\RIWKHSURGXFWV
RUWKHUHDFWDQWV(QHUJ\GLIIHUHQFHVDWWKHHQGSRLQWVRIDWUDQVIRUPDWLRQFDQEHFRQ
YHUWHGWRHQHUJ\GLIIHUHQFHVDORQJWKHWUDMHFWRU\E\DSSHDOLQJWRWKHPHFKDQLVPDQG
RUDGGLWLRQDODEVWUDFWWKHRULHV

(;$03/(5(/$7,9(5$7(62)18&/(23+,/,&68%67,787,21
5($&7,21621+$/2$/.$1(6

,QWKLVW\SHRIUHDFWLRQDQXFOHRSKLOHRUFKHPLFDOVSHFLHVZLWKDQXQVKDUHGHOHF
WURQSDLUGLVSODFHVDKDORJHQIURPDVXEVWUDWH7KHUDWHVRIWKHVHUHDFWLRQVZLOOYDU\
ZLWKDYDULHW\RIIDFWRUVLQFOXGLQJWKHQDWXUHRIWKHQXFOHRSKLOHWKHVWUXFWXUHRIWKH
DON\O JURXS DQG WKH SRODULW\ RI WKH VROYHQW LQ ZKLFK WKH UHDFWLRQ LV UXQ ,Q WKLV
H[DPSOH,ZLOOIRFXVRQRQHVXFKIDFWRU²WKHSDUWLFXODUKDORJHQEHLQJGLVSODFHG,W
KDVEHHQIRXQGWKDWDOOHOVHEHLQJHTXDOWKHVHUHDFWLRQVSURFHHGPRUHTXLFNO\DQG
WRDJUHDWHUH[WHQWZKHQFHUWDLQKDORJHQVDUHGLVSODFHGUDWKHUWKDQRWKHUV7KHUHOD
WLYHHDVHZLWKZKLFKDVXEVWLWXHQWFDQEHGLVSODFHGIURPDVXEVWUDWHLQDQXFOHRSKLOLF
VXEVWLWXWLRQUHDFWLRQLVNQRZQDVWKH³OHDYLQJJURXSDELOLW\´RIWKDWVXEVWLWXHQWWKXV
WKHJUHDWHUWKHOHDYLQJJURXSDELOLW\DOOHOVHEHLQJHTXDOWKHJUHDWHUWKHUDWHRIWKH
VXEVWLWXWLRQUHDFWLRQ$QRUGHULQJRIWKHOHDYLQJJURXSDELOLW\RIWKHKDORJHQVZLOO
WKHUHIRUH DPRXQW WR D TXDOLWDWLYH FRPSDULVRQ RI WKH UHODWLYH UDWHV RI QXFOHRSKLOLF
VXEVWLWXWLRQUHDFWLRQVRQKDORDONDQHV7KHZK\TXHVWLRQWKDW,ZLVKWRFRQVLGHULQ
WKLVVHFWLRQLV³:K\LVWKHRUGHURIWKHOHDYLQJJURXSDELOLWLHVRIWKHKDORJHQV,>%U
>&O>)UDWKHUWKDQDQ\RIWKHRWKHUSRVVLEOHRUGHULQJV"´7KLVLVDVKRUWKDQGZD\RI
DVNLQJ IRU DQ H[SODQDWLRQ RI WKH UHODWLYH UDWHV RI D FODVV RI UHDFWLRQV 7KH GLUHFW
DQVZHUWRWKLVTXHVWLRQZLOOEHDJHQHUDOFODLPDERXWWKH,($VRIWKLVFODVVRIUHDF
WLRQV%HFDXVHWKLVTXHVWLRQLVDERXWWKHUDWHVRIFKHPLFDOUHDFWLRQVLWVDQVZHUZLOO
 $11$/61(:<25.$&$'(0<2)6&,(1&(6

EHDQDVVHUWLRQDERXWWKHUHODWLYHDFWLYDWLRQHQHUJLHVRIWKHVHUHDFWLRQVRUPRUHJHQ
HUDOO\DERXWWKHSDWKVRIWKHVHWUDQVIRUPDWLRQV7KHDQVZHUZRXOGEHVRPHWKLQJOLNH
WKHIROORZLQJ)RUDJLYHQDON\OJURXSDJLYHQQXFOHRSKLOHDQGDJLYHQVHWRIUHDF
WLRQFRQGLWLRQVWKHDFWLYDWLRQHQHUJ\IRUWKHQXFOHRSKLOLFVXEVWLWXWLRQUHDFWLRQRQ
WKHLRGRDONDQHLVOHVVWKDQWKDWIRUWKHEURPRDONDQHZKLFKLVOHVVWKDQWKHFKORUR
DONDQHZKLFKLVOHVVWKDQWKHIOXRURDONDQH
:KLOHWKLVDQVZHULVSHUIHFWO\DGHTXDWHLQWKHVHQVHWKDWLWZRXOGDOORZVRQHWR
HPSOR\WKHWKHRUHWLFDODSSDUDWXVRIWKH,($WRGLVWLQJXLVKWKHSKHQRPHQDGHVFULEHG
LQWKHWRSLFIURPWKHPHPEHUVRIWKHFRQWUDVWFODVVLWKDVQRW\HWEHHQGHYHORSHG
IURPWKHVWUXFWXUDOIHDWXUHVRIWKHPROHFXOHVLQWKHUHDFWLRQVLQTXHVWLRQ%HFDXVH
WKHRQO\IHDWXUHVWKDWYDU\EHWZHHQWKHUHDFWLRQVEHLQJFRPSDUHGDUHWKHKDORJHQV
EHLQJGLVSODFHGDVWUXFWXUDODFFRXQWRIWKHGLIIHUHQFHVLQWKHDFWLYDWLRQHQHUJLHVRI
WKHVXEVWLWXWLRQUHDFWLRQVPXVWEHGHYHORSHGLQWHUPVRIWKHQDWXUHRIWKHKDORJHQV
DORQH7KHVWUXFWXUDODFFRXQWRIWKHGLIIHUHQFHVLQDFWLYDWLRQHQHUJ\DVVHUWHGE\WKH
DQVZHUWRWKHTXHVWLRQGHSHQGVRQDQLGHQWLILFDWLRQRIOHDYLQJJURXSDELOLW\ZLWKWKH
JURXS¶V³FDSDFLW\WRDFFRPPRGDWHDQHJDWLYHFKDUJH´7KHJUHDWHUWKLVFDSDFLW\
WKH PRUH VWDEOH WKH SURGXFWV RI WKH QXFOHRSKLOLF VXEVWLWXWLRQ UHDFWLRQ ZLOO EH
%HFDXVHWKLVVDPHFDSDFLW\LVUHVSRQVLEOHIRUWKHYDU\LQJDFLGLW\RIWKHK\GURJHQ
KDOLGHV+)+&O+%U+,LWLVLQIHUUHGWKDWWKHRUGHULQJRIOHDYLQJJURXSDELOLW\
ZLOOSDUDOOHOWKHRUGHULQJRIWKHFRUUHVSRQGLQJDFLGVWUHQJWKV,QWKHFDVHRIWKHKDOR
JHQVWKLVFDSDFLW\DQGWKHFRQVHTXHQWDFLGVWUHQJWKLVLWVHOIVRPHWLPHVDQDO\]HGLQ
WHUPVRIPRUHIXQGDPHQWDOQRWLRQVIRUH[DPSOHHOHFWURQHJDWLYLW\DQGDWRPLFVL]H
ZKLFKDUHERWKWDNHQWRFRUUHODWHZLWKWKHUHODWLYHVWDELOLW\RIWKHDQLRQ7KHVHWZR
FRQVLGHUDWLRQVDUHDWRGGVZLWKHDFKRWKHULQWKHFDVHRIWKHKDORJHQV)&O%U,
EHFDXVHDV\RXSURFHHGGRZQWKLVOLVWWKHDQLRQVJHWODUJHUDQGOHVVHOHFWURQHJDWLYH
,WWXUQVRXWWKDWWKHVL]HHIIHFWVGRPLQDWHVRWKDWWKHFDSDFLW\WRDFFRPPRGDWHDQHJ
DWLYHFKDUJHLQFUHDVHVDV\RXSURFHHGGRZQWKHSHULRGLFWDEOH
7RWKLVVWDJHWKHVWUXFWXUDODFFRXQWRIWKHDQVZHUWRWKHTXHVWLRQKDVZKHWKHURQH
VWRSVDWWKHDQDO\VLVLQWHUPVRIDFLGLW\RUSURFHHGVWKURXJKWRHOHFWURQHJDWLYLW\DQG
VL]HWDNHQUHDGLO\DYDLODEOHGDWDREWDLQHGE\FRQVLGHULQJDGLIIHUHQWUHDFWLRQVDQG
DVVXPHGWKDWWKHUHDFWLRQLQTXHVWLRQGHSHQGVRQWKHYHU\VDPHFDSDFLW\WKDWZDV
UHVSRQVLEOHIRUWKHPHDVXUHGGLIIHUHQFHVLQHQHUJ\LQWKHSULRUFDVH7KLVDOORZVRQH
WRFRPSDUHWKHFDSDFLW\WRDFFRPPRGDWHDQHJDWLYHFKDUJHEHWZHHQWKHKDORJHQVRQ
WKHEDVLVRIWKHSUHYLRXVO\REWDLQHGUHVXOWV6LQFHWKHFDSDFLW\WRDFFRPPRGDWHD
QHJDWLYHFKDUJHLVVXSSRVHGWRFRUUHODWHZLWKDQLQFUHDVHGVWDELOLW\RIWKHSURGXFWV
LQQXFOHRSKLOLFVXEVWLWXWLRQUHDFWLRQVRQHH[SHFWVWKHKDORJHQVWKDWGHPRQVWUDWHWKLV
FDSDFLW\WRDODUJHUH[WHQWWRKDYHORZHUUHODWLYHO\VSHDNLQJSURGXFWHQHUJ\WKDQ
WKRVHKDORJHQVZLWKDOHVVHUFDSDFLW\%\HYDOXDWLQJWKLVFDSDFLW\LQWHUPVRIGDWD
WKDWFDQEHORFDWHGRQWKHEDVLVRIWKHVWUXFWXUDOLQIRUPDWLRQFRQWDLQHGLQWKHTXHV
WLRQRQHZRXOGRQO\VHHPWRJHWLQIRUPDWLRQWKDWDOORZVIRUDFRPSDULVRQRIWKHVWD
ELOLW\RIWKHSURGXFWVRIWKHUHDFWLRQVLQTXHVWLRQ%HFDXVHWKHDQVZHUWRWKHTXHVWLRQ
UHTXLUHVNLQHWLFLQIRUPDWLRQWKHLQIRUPDWLRQDERXWWKHHQGUHVXOWVRIWKLVWUDQVIRU
PDWLRQPXVWEHFRQYHUWHGLQWRLQIRUPDWLRQDERXWWKHSDWKVRIWKHWUDQVIRUPDWLRQVLQ
TXHVWLRQ
7KHVHFRQGVWHSLQDFFRXQWLQJIRUWKHDQVZHUWRWKHTXHVWLRQLVWRFRQYHUWWKH
LQIRUPDWLRQDERXWWKHSURGXFWVWKDWZDVJOHDQHGIURPWKHVWUXFWXUHVJLYHQE\WKH
TXHVWLRQDQGUHDGLO\DYDLODEOHGDWDLQWRLQIRUPDWLRQDERXWWKHDFWLYDWLRQHQHUJLHVRI
WKHUHOHYDQWUHDFWLRQV
*22':,1(;3/$1$7,21,125*$1,&&+(0,675< 

6XFKFRQFOXVLRQVDUHUHDFKHGRQWKHEDVLVRIZKDWLVSULPDULO\LQIRUPDWLRQDERXW
WKHVWDELOLW\RIWKHSURGXFWVRIWKHUHDFWLRQE\HPSOR\LQJFHUWDLQDVVXPSWLRQVDERXW
WKHUHODWLRQVKLSEHWZHHQWKHUPRG\QDPLFVWDELOLW\DQGDFWLYDWLRQHQHUJ\,QWKLVFDVH
WKHDVVXPSWLRQLVWKDWHQHUJ\GLIIHUHQFHVEHWZHHQWKHSURGXFWVRIWKHUHDFWLRQVZLOO
WUDQVODWH LQWR HQHUJ\ GLIIHUHQFHV LQ WKH WUDQVLWLRQV VWDWHV RI WKH UHDFWLRQV 7KXV
EHFDXVHLRGLQHKDVDJUHDWHUFDSDFLW\WRDFFRPPRGDWHQHJDWLYHFKDUJHWKHHQHUJ\
RIWKHWUDQVLWLRQVWDWHIRUWKHVXEVWLWXWLRQUHDFWLRQZKHUHLQLRGLQHLVGLVSODFHGZLOOEH
OHVV7KLVLQIHUHQFHIURPWKHHQHUJ\GLIIHUHQFHVEHWZHHQWKHSURGXFWVRIWKHUHDFWLRQ
DQGWKHWUDQVLWLRQVWDWHVRIWKHUHDFWLRQLVVXSSRUWHGE\DQDSSHDOWRWKHPHFKDQLVP
RIWKHUHDFWLRQ,QWKLVFDVHLWLVEHFDXVHWKHOHDYLQJJURXSZLOOKDYHDSDUWLDOQHJD
WLYHFKDUJHGXULQJWKHWUDQVLWLRQVWDWHDQGWKXVUHVHPEOHWKHSURGXFWVWRDFHUWDLQ
H[WHQWWKDWRQHH[SHFWVWKHDFWLYDWLRQHQHUJ\WRGHFUHDVHZLWKLQFUHDVHGFDSDFLW\WR
DFFRPPRGDWHQHJDWLYHFKDUJH
7KLV H[DPSOH GHPRQVWUDWHV WKH JHQHUDO VWUXFWXUH WKDW , RXWOLQHG HDUOLHU LQ WKLV
SDSHU7KHH[SODQDWLRQEHJLQVZLWKDQDVVHUWLRQDERXWDFODVVRI,($V7KLVDVVHUWLRQ
LVLWVHOIVXSSRUWHGE\DVWUXFWXUDODFFRXQW7KHVWUXFWXUDODFFRXQWHPSOR\VDUREXVW
FRQFHSWWKDWDOORZVFRQYHUVLRQRIUHDGLO\DFFHVVLEOHH[SHULPHQWDOGDWDREWDLQHGIRU
GLIIHUHQW VLPSOHU UHDFWLRQV LQWR TXDOLWDWLYH IDFWV DERXW HQHUJ\ GLIIHUHQFHV LQ WKH
,($V 7KHVH HQHUJ\ GLIIHUHQFHV DUH WKHQ FRQYHUWHG LQWR GLIIHUHQFHV LQ DFWLYDWLRQ
HQHUJLHVE\LQYRNLQJDVVXPSWLRQVDERXWWKHVKDSHVRISRWHQWLDOHQHUJ\FXUYHVWKDW
DUHVXSSRUWHGE\LQIRUPDWLRQDERXWWKHSURSRVHGPHFKDQLVPRIWKHUHDFWLRQ

(;$03/(5(*,26(/(&7,9,7<$1'67(5(26(/(&7,9,7<,1
7+()250$7,212)$/.(1(6

7KHW\SHRIUHDFWLRQWKDW,ZLVKWRFRQVLGHULQWKLVH[DPSOHLVWKHIRUPDWLRQRI
DONHQHVIURPKDORDONDQHVE\ELPROHFXODUHOLPLQDWLRQ,QWKHVHUHDFWLRQVDFDUERQ±
FDUERQGRXEOHERQGLVIRUPHGE\³UHPRYLQJ´DK\GURJHQKDOLGHVXFKDV+&O+%U
RU+,IURPDKDORJHQFRQWDLQLQJDONDQH,WLVRIWHQWKHFDVHWKDWWKHUHDUHVHYHUDO
GLIIHUHQW K\GURJHQV WKDW PLJKW EH UHPRYHG LQ D PDQQHU FRPSDWLEOH ZLWK WKH SUR
SRVHG PHFKDQLVP 7KH TXHVWLRQ WKHQ EHFRPHV ³:K\ LV RQH SDUWLFXODU K\GURJHQ
SUHIHUHQWLDOO\ UHPRYHG UDWKHU WKDQ RWKHU K\GURJHQV WKDW DUH FRPSDWLEOH ZLWK WKH
PHFKDQLVP"´7KHSUHIHUHQWLDOUHPRYDORIRQHSDUWLFXODUK\GURJHQUDWKHUWKDQRWKHUV
FDQOHDGWRWKHUHJLRVHOHFWLYLW\DQGRUVWHUHRVHOHFWLYLW\RIWKHUHDFWLRQ,IWKHSUHIHU
HQWLDOUHPRYDORIDSDUWLFXODUK\GURJHQOHDGVWRDSURGXFWGLVWULEXWLRQIDYRULQJRQH
ORFDWLRQIRUWKHGRXEOHERQGRYHURWKHUVWKHQWKHUHDFWLRQGLVSOD\VUHJLRVHOHFWLYLW\
,IWKHUHPRYDORISDUWLFXODUK\GURJHQIDYRUVWKHIRUPDWLRQRIDSDUWLFXODUVWHUHRLVR
PHUDFLVGRXEOHERQGYVDWUDQVGRXEOHERQGWKHQWKHUHDFWLRQLVVWHUHRVHOHFWLYH
%RWKUHJLRVHOHFWLYLW\DQGVWHUHRVHOHFWLYLW\DUHH[SODLQHGE\UHODWLYHGLIIHUHQFHV
DPRQJWKHDFWLYDWLRQHQHUJLHVRIWKHSDWKZD\VOHDGLQJWRWKHYDULRXVSRVVLEOHSURG
XFWV7KHTXHVWLRQLVQRWDGLUHFWFRPSDULVRQRIWKHUDWHVRIGLIIHUHQWUHDFWLRQVQRQH
WKHOHVV WKH SURGXFW GLVWULEXWLRQ RI HVVHQWLDOO\ LUUHYHUVLEOH UHDFWLRQV LV WR EH
H[SODLQHGE\WKHUHODWLYHUDWHVDWZKLFKWKHUHDFWDQWVSURFHHGGRZQWKHYDULRXVSRV
VLEOHUHDFWLRQFRRUGLQDWHV5HDFWLRQVLQZKLFKSURGXFWGLVWULEXWLRQLVGHWHUPLQHGE\
WKHGLIIHUHQFHVRIUDWHRIIRUPDWLRQDUHUHIHUUHGWRDVEHLQJXQGHU³NLQHWLFFRQWURO´
,QVXFKFLUFXPVWDQFHVTXHVWLRQVDERXWSURGXFWGLVWULEXWLRQVFDQEHFRQYHUWHGLQWR
TXHVWLRQVDERXWWKHDFWLYDWLRQHQHUJLHVRIYDULRXVUHDFWLRQSDWKZD\V7KXVWKHGLUHFW
 $11$/61(:<25.$&$'(0<2)6&,(1&(6

DQVZHUWRWKHTXHVWLRQJRHVDVIROORZV)RUDQ\JLYHQKDORDONDQHWKHK\GURJHQWKDW
LVSUHIHUHQWLDOO\UHPRYHGZLOOEHWKDWK\GURJHQZKRVHUHPRYDOKDVWKHORZHVWDFWL
YDWLRQHQHUJ\$VLWVWDQGVWKLVDQVZHULVWRRJHQHUDOWREHRIPXFKLQWHUHVWEHFDXVH
WKHK\GURJHQZKRVHUHPRYDOKDVWKHORZHVWDFWLYDWLRQHQHUJ\GHSHQGVRQDYDULHW\
RIVWUXFWXUDOIDFWRUV,QWKHFDVHVZKHUHWKHUHDFWLRQLVUXQZLWKD³QRQEXON\´EDVH
WKHVHOHFWLYLW\FDQEHDFFRXQWHGIRULQWHUPVRIWKHUHODWLYHWKHUPRG\QDPLFVWDELOLW\
RIWKHGLVWLQFWSURGXFWVWKDWUHVXOWIURPWKHUHPRYDORISDUWLFXODUK\GURJHQV%HFDXVH
WKHVHSURGXFWVGLIIHURQO\LQWKH ORFDWLRQDQG VWHUHRFKHPLVWU\RI WKHGRXEOHERQG
ZLWKLQWKHPROHFXOHWKHLUUHODWLYHVWDELOLWLHVFDQEHFRPSDUHGE\FRPSDULQJKRZ
PXFKKHDWLVJLYHQRIIZKHQWKLVGRXEOHERQGLVK\GURJHQDWHGWR\LHOGDQDONDQHLW
ZLOOEHWKHVDPHDONDQHLQHDFKFDVH7KLVLVNQRZQDVWKH³KHDWRIK\GURJHQDWLRQ´
DQGLWFRUUHODWHVWRWKHVWDELOLW\RIWKHDONHQHWKHODUJHUWKHKHDWRIK\GURJHQDWLRQ
RUWKHOHVVQHJDWLYHWKHPRUHVWDEOHWKHDONHQH7KHUHVXOWVRIWKHVHVRUWVRIH[SHU
LPHQWVFDQEHJHQHUDOL]HG³7KHUHODWLYHVWDELOLW\RIDONHQHVLQFUHDVHVZLWKLQFUHDV
LQJ VXEVWLWXWLRQ DQG WUDQV LVRPHUV DUH XVXDOO\ PRUH VWDEOH WKDQ WKHLU FLV
FRXQWHUSDUWV´7KLVUXOHRIWKXPELVLWVHOIH[SODLQHGRUSDUWLDOO\VRDVIROORZV³WKH
ILUVWWUHQG«LVGXHLQSDUWWRK\SHUFRQMXJDWLRQ«7KHVHFRQGILQGLQJLVPRUHHDVLO\
XQGHUVWRRGE\ORRNLQJDWPROHFXODUPRGHOV,QFLVGLVXEVWLWXWHGDONHQHVWKHVXEVWLW
XHQWJURXSVIUHTXHQWO\FURZGHDFKRWKHU´+\SHUFRQMXJDWLRQLVWKHQDPHRIDSKH
QRPHQRQWKDWLVJHQHUDOO\GHVFULEHGLQWHUPVRIPROHFXODURUELWDOWKHRU\(VVHQWLDOO\
ERQGLQJ SDLUV RI HOHFWURQV IURP QHLJKERULQJ DWRPV LQWHUDFW ZLWK WKH RUELWDOV WKDW
PDNHXSWKHFDUERQFDUERQGRXEOHERQGLQVXFKDZD\WKDWWKHUHLVDQHWVWDELOL]LQJ
HIIHFW 7KHFURZGLQJGHVFULEHGLQWKHTXRWHDERYHLVDQDSSHDOWRDSKHQRPHQRQ
NQRZQDV³VWHULFKLQGUDQFH´9ROOKDUGWVD\V³7RDILUVWDSSUR[LPDWLRQWKLVHIIHFW
FDQEHDWWULEXWHGWREXON7ZRPROHFXODUIUDJPHQWVFDQQRWRFFXS\WKHVDPHUHJLRQ
LQVSDFH´:KHQWZREXON\JURXSVDUHSRVLWLRQHGQHDUHDFKRWKHULQDPROHFXOH
WKHUHLVDORVVRIVWDELOLW\EHFDXVHWKHHOHFWURQFORXGVUHSHOHDFKRWKHU$SSHDOVWR
VWHULFKLQGUDQFHDUHH[WUHPHO\FRPPRQLQDQDO\VLVRIUHODWLYHVWDELOLWLHV
%RWKWKHK\SHUFRQMXJDWLRQDQGWKHVWHULFKLQGUDQFHFDQEHUHFRJQL]HGLQDVWUXF
WXUDOGHVFULSWLRQRIWKHPROHFXOHVDQGWKH\IDFLOLWDWHLQIHUHQFHVDERXWWKHHQHUJ\RI
WKHVWUXFWXUHVLQZKLFKWKH\DUHUHFRJQL]HG7KHUHODWLYHH[WHQWWRZKLFKWKHK\SHU
FRQMXJDWLRQVWDELOL]HVWKHDONHQHFDQEHHYDOXDWHGE\FRPSDULQJWKHQXPEHURIDON\O
JURXSVWKDWDUHDWWDFKHGWRWKHFDUERQVLQWKHGRXEOHERQG7KHVWHULFKLQGUDQFHFDQ
DOVREHYLVXDOO\LGHQWLILHGLQWKHVWUXFWXUDOIRUPXODRIWKHDONHQHLQWKDWWKHODUJHU
VXEVWLWXHQWVDSSHDURQWKHVDPHVLGHRIWKHGRXEOHERQGLQWKHILJXUH%RWKRIWKHVH
DUHUREXVWO\DSSOLFDEOHFRQFHSWVWKDWDOORZRQHWRFRQYHUWVWUXFWXUDOIHDWXUHVRIWKH
SRVVLEOHSURGXFWVRIWKHHOLPLQDWLRQUHDFWLRQLQWRTXDOLWDWLYHLQIRUPDWLRQDERXWWKH
UHODWLYHVWDELOLW\RIWKHPROHFXOHV,QWKLVFDVHDVRSSRVHGWRWKHODVWH[DPSOHWKHVH
UREXVWO\DSSOLFDEOHFRQFHSWVGHSHQGRQJHRPHWULFDOIHDWXUHVRIPROHFXOHVUHSUHVHQW
HGLQWKHVWUXFWXUDOIRUPXODQRWMXVWLQWKHLQGLYLGXDODWRPLFV\PEROV7KHSKHQRP
HQRQRIK\SHUFRQMXJDWLRQDQGVWHULFKLQGUDQFHDUHDOVRGLVWLQFWIURPEDVLFLW\RUWKH
FDSDFLW\WRDFFRPPRGDWHDQHJDWLYHFKDUJHLQWKDWWKH\DUHERWKDFFRXQWHGIRUE\
DSSHDOWRDWKHRUHWLFDOPRGHORIFKHPLFDOERQGLQJ7KHUHVXOWVRIPDQ\HOLPLQDWLRQ
UHDFWLRQVFDQEHH[SODLQHGE\DSSHDOWRWKHJHQHUDOL]DWLRQWKDWWKHWKHUPRG\QDPLFDO
O\SUHIHUUHGSURGXFWWKHPRVWVWDEOHZLOOGRPLQDWHDQGWKHVLGHSURGXFWVZLOOEH
SURGXFHGLQUDWLRVWKDWUHIOHFWWKHLUUHODWLYHVWDELOLW\8OWLPDWHO\KRZHYHUWKHDQVZHU
WR WKLV TXHVWLRQ PXVW EH LQ WHUPV RI UHODWLYH GLIIHUHQFHV LQ DFWLYDWLRQ HQHUJLHV
EHFDXVH WKHUHDFWLRQV DUHHVVHQWLDOO\ LUUHYHUVLEOH $JDLQWKHNLQHWLF FRQFOXVLRQLV
*22':,1(;3/$1$7,21,125*$1,&&+(0,675< 

MXVWLILHGE\H[WUDSRODWLQJIURPWKHHQHUJ\GLIIHUHQFHRIWKHSURGXFWVWRWKHHQHUJ\
GLIIHUHQFHV RI WKH WUDQVLWLRQ VWDWHV )RU H[DPSOH 9ROOKDUGW H[SODLQV ³7KH PRUH
VWDEOHSURGXFWLVIRUPHGIDVWHUEHFDXVHWKHVWUXFWXUHRIWKHWUDQVLWLRQVWDWHRIWKHUH
DFWLRQUHVHPEOHVWKDWRIWKHSURGXFWVWRVRPHH[WHQW´
7KHVHHOLPLQDWLRQUHDFWLRQVFDQEHUXQLQVXFKDZD\WKDWWKH\YLRODWHWKHJHQHUDO
UXOH RI IDYRULQJ WKH PRVW VWDEOH SURGXFW E\ FKDQJLQJ WKH UHDFWLRQ FRQGLWLRQV WR
HPSOR\D³EXON\´EDVHUDWKHUWKDQD³QRQEXON\´RQH,QWKHVHFDVHVWKHOHVVWKHU
PRG\QDPLFDOO\VWDEOHDONHQHPD\EHWKHGRPLQDQWSURGXFW6LQFHWKHPHFKDQLVPLV
WKHVDPHWKHWUDQVLWLRQVVWDWHVRIWKHVHUHDFWLRQVZLOOVWLOOUHVHPEOHWKHSURGXFWRI
WKH UHDFWLRQ EXW WKLV WHQGHQF\ IRU WKH WKHUPRG\QDPLFDOO\ PRUH VWDEOH SURGXFW WR
KDYHWKHORZHUDFWLYDWLRQHQHUJ\PXVWEHRYHUZKHOPHGE\RWKHUIDFWRUV7KHWUDQVL
WLRQVWDWHRIUHDFWLRQVRIWKLVW\SHLQYROYHVDEDVHUHPRYLQJDK\GURJHQZKLOHWKH
KDORJHQ LV GHSDUWLQJ :KHQ WKH EDVH LV ³EXON\´ VWHULF KLQGUDQFH GHVWDELOL]HV WKH
WUDQVLWLRQ VWDWH RI WKH PHFKDQLVP OHDGLQJ WR WKH WKHUPRG\QDPLFDOO\ PRUH VWDEOH
SURGXFWUHODWLYHWRWKHWUDQVLWLRQVWDWHOHDGLQJWRWKHWKHUPRG\QDPLFDOO\OHVVVWDEOH
SURGXFW5HPRYLQJWKHK\GURJHQWKDWUHVXOWVLQWKHPRUHVWDEOHSURGXFWUHTXLUHVWKH
EDVHWRDWWDFNDWDSRVLWLRQWKDWLVPRUH³LQWHUQDO´LQWKHKDORDONDQH7KH³EXON\´
EDVH ZLOO HQFRXQWHU PRUH VWHULF KLQGUDQFH ZKHQ DWWDFNLQJ WKLV LQWHUQDO K\GURJHQ
WKDQLWZRXOGDWWDFNLQJWKHWHUPLQDOK\GURJHQ$VDUHVXOWWKLVUHDFWLRQZLOOSURGXFH
WKHOHVVWKHUPRG\QDPLFDOO\VWDEOHDONHQHDWDIDVWHUUDWHWKDQWKHPRUHVWDEOHDONHQH
7KLVLVWDNHQWRH[SODLQWKHUHJLRVHOHFWLYLW\LQVXFKFDVHV
7KHVWUXFWXUDODFFRXQWRIUHJLRVHOHFWLYLW\DQGRUVWHUHRVHOHFWLYLW\LQDONHQHIRU
PDWLRQ DJDLQ PDNHV HVVHQWLDO XVH RI WKH PHFKDQLVP RI WKH UHDFWLRQ LQ RUGHU WR
H[WUDSRODWHIURPHQHUJ\GLIIHUHQFHVWKDWFDQEHGLVFHUQHGRQWKHEDVLVRIVWUXFWXUDO
IHDWXUHVRIWKHPROHFXOHVLQWKHUHDFWLRQWRGLIIHUHQFHVLQWKHHQHUJ\RIWKHWUDQVLWLRQ
VWDWHVRIWKHUHDFWLRQV7KHPHFKDQLVPSURYLGHVWKHOLQNEHWZHHQWKHIDFWVDERXWWKH
,($WKDWSURYLGHDGLUHFWDQVZHUWRWKHTXHVWLRQDQGWKHVWUXFWXUDOIHDWXUHVRIWKH
PROHFXOHVLQYROYHG,QWKHFDVHRID³EXON\´EDVHLWLVE\GLUHFWO\FRQVLGHULQJWKH
JHRPHWU\RIWKHWUDQVLWLRQVWDWHSRVWXODWHGE\WKHPHFKDQLVPWKDWRQHFDQUHFRJQL]H
WKHVWUXFWXUDOIHDWXUHVWHULFKLQGUDQFHWKDWLVUHVSRQVLEOHIRUWKHGLIIHUHQFHLQDFWL
YDWLRQHQHUJ\$QRWKHULQWHUHVWLQJIHDWXUHRIWKLVH[DPSOHLVWKDWWKHUHDUHFRPSHWLQJ
LQIOXHQFHVRQWKHHQHUJ\RIWKHWUDQVLWLRQVWDWHDQGWKHUHDUHRWKHUVQRWDGGUHVVHGLQ
WKLVH[DPSOHWKXVWKHRXWFRPHRIDQ\SDUWLFXODUUHDFWLRQZLOOGHSHQGRQWKHEDODQFH
EHWZHHQDWOHDVWWZRIHDWXUHVRIWKHWUDQVLWLRQVWDWHWKHVWHULFKLQGUDQFHHQFRXQWHU
E\WKHEDVHLQDEVWUDFWLQJWKHK\GURJHQDQGWKHVWDELOLW\RIWKHSDUWLDOO\IRUPHGGRX
EOH ERQG ,Q JHQHUDO ZLWKRXW VLJQLILFDQWO\ PRUH LQIRUPDWLRQ DERXW WKH SRWHQWLDO
HQHUJ\VXUIDFHRIWKHUHDFWLRQLQTXHVWLRQRQHFRXOGQRWSUHGLFWRQWKHEDVLVRIVWUXF
WXUDOIHDWXUHVZKLFKRIWKHVHWZRHIIHFWVZRXOGGRPLQDWH+RZHYHUJLYHQWKHSURG
XFWGLVWULEXWLRQRIDSDUWLFXODUUHDFWLRQWKDWRXWFRPHFRXOGQRQHWKHOHVVEHH[SODLQHG
E\DVVHUWLQJWKDWWKHUHOHYDQWIHDWXUHRIWKHWUDQVLWLRQVWDWHZDVUHVSRQVLEOHIRUWKH
RXWFRPH7KHSURFHVVRIFRPSDULQJWKHDFWLYDWLRQVHQHUJLHVRIUHDFWLRQVLVQRWJHQ
HUDOO\DVWUDLJKWIRUZDUGSURMHFWLRQIURPWKHHQHUJLHVRIWKHSURGXFWVWRWKHHQHUJLHV
RIWKHWUDQVLWLRQVWDWHV,QVWHDGLWLQYROYHVDGHWDLOHGFRQVLGHUDWLRQRIKRZWKHHQHU
JHWLFVRIWKHWUDQVLWLRQVWDWHYDULHVZLWKFKDQJLQJUHDFWLRQFRQGLWLRQV7KLVSURFHVV
EHFRPHHYHQPRUHFRPSOLFDWHGZKHQWKHUHDUHFRPSHWLQJPHFKDQLVPVE\ZKLFKWKH
VDPHWUDQVIRUPDWLRQPLJKWRFFXU0XFKRIWKHZRUNLQWKHRUHWLFDORUJDQLFFKHPLVWU\
VXFKDVWKH+DPPRQG3RVWXODWHDQGUHODWHGDSSURDFKHVLVGHYRWHGWRGHYLVLQJZD\V
WRLQIHUWKHHIIHFWVRIFKDQJHVLQUHDFWLRQFRQGLWLRQVRQWKHORFDWLRQDQGHQHUJ\RI
 $11$/61(:<25.$&$'(0<2)6&,(1&(6

WUDQVLWLRQ VWDWHV *HQHUDOO\ WKHVH LQIHUHQFHV EHJLQ ZLWK VWUXFWXUDOO\ LGHQWLILDEOH

HQHUJ\GLIIHUHQFHVLQWKHVSHFLHVLQYROYHGLQWKHUHDFWLRQ

(;$03/(67(5(263(&,),&,7<,17+()250$7,21
2)$/.(1(6

6WHUHRVSHFLILFLW\ LQ WKH IRUPDWLRQ RI DONHQHV E\ HOLPLQDWLRQ RFFXUV ZKHQ WKH
KDORDONDQHIURPZKLFKWKHK\GURJHQKDOLGHLVWREHUHPRYHGKDVDGMDFHQWVWHUHR
FHQWHUVRQHFRQWDLQLQJWKHKDORJHQDQGWKHRWKHUWKHSUHIHUUHGK\GURJHQ,QVXFK
FDVHVXQGHUDSSURSULDWHFLUFXPVWDQFHVRQHRIWKHVWHUHRLVRPHUVHLWKHUWKH(RU=
ZKLFKLVDIDQF\YHUVLRQRIWKHFLVYVWUDQVGLVWLQFWLRQRIWKHDONHQHZLOOEHIRUPHG
H[FOXVLYHO\ 7KH VWHUHRLVRPHU WKDW LV IRUPHG QHHG QRW EH WKH VWHUHRLVRPHU WKDW LV
WKHUPRG\QDPLFDOO\PRVWVWDEOH7KHTXHVWLRQWKDW,ZLVKWRFRQVLGHULV³:K\LVRQH
SDUWLFXODUVWHUHRLVRPHUSURGXFHGH[FOXVLYHO\UDWKHUWKDQWKHRWKHURUDPL[WXUHRI
WKHWZR"´%HFDXVHWKHSKHQRPHQRQRIVWHUHRVSHFLILFLW\FDQRFFXUHYHQZKHQWKHOHVV
WKHUPRG\QDPLFDOO\VWDEOHDONHQHLVIRUPHGWKLVTXHVWLRQPXVWDOVRUHFHLYHDQDQ
VZHUWKDWH[SODLQVZK\WKHUDWHRIWKHUHDFWLRQWKDWRFFXUVLVPXFKIDVWHUWKDQWKHUDWH
RIWKHIRUPDWLRQRIWKHVWHUHRLVRPHUWKDWLVQRWSURGXFHG7KXVWKHGLUHFWDQVZHUWR
WKHTXHVWLRQZLOOEHVRPHWKLQJOLNH)RUDQ\KDORDONDQHRIWKHDSSURSULDWHVRUWXQGHU
WKHDSSURSULDWHFRQGLWLRQVWKHDFWLYDWLRQHQHUJ\RIWKHSDWKZD\OHDGLQJWRWKHVWHUH
RLVRPHUWKDWLVSURGXFHGLVPXFKOHVVWKDQWKHDFWLYDWLRQHQHUJ\OHDGLQJWRLWVDOWHU
QDWLYH$JDLQWKHLQWHUHVWLQJSDUWRIWKLVH[SODQDWLRQZLOOEHDQDFFRXQWRIKRZRQH
FDQUHFRJQL]HRQWKHEDVLVRIWKHVWUXFWXUHRIWKHKDORDONDQHWKDWRQHHOLPLQDWLRQ
SDWKZD\ZLOOKDYHDPXFKODUJHUDFWLYDWLRQHQHUJ\WKDQLWVDOWHUQDWLYH
7KHVWUXFWXUDODFFRXQWRIWKLVDQVZHUGHSHQGVLQDPRUHGLUHFWZD\WKDQRXURWKHU
H[DPSOHVRQNQRZLQJWKHPHFKDQLVPRIWKHUHDFWLRQ(VVHQWLDOO\E\IROORZLQJWKH
ERQGEUHDNDJHDQGIRUPDWLRQWKDWRFFXUGXULQJWKHPHFKDQLVPRIWKHHOLPLQDWLRQ
RQHFDQ³VHH´ZK\RQHSDUWLFXODUJHRPHWULFLVRPHULVFUHDWHGWRWKHH[FOXVLRQRIWKH
RWKHU7KHPHFKDQLVPWKDWLVDSSHDOHGWRLQWKHVWUXFWXUDODFFRXQWRIWKLVDQVZHULV
NQRZQDVWKH(PHFKDQLVP7KLVLVDFRQFHUWHGPHFKDQLVPZKLFKPHDQVWKDWVHY
HUDOSURFHVVHVRFFXUVLPXOWDQHRXVO\LQWKHWUDQVLWLRQVWDWHWKHEDVHUHPRYHVWKH
K\GURJHQWKHOHDYLQJJURXSWKHKDOLGHGHSDUWVDQGWKHFDUERQVEHJLQWR
IRUP D GRXEOH ERQG 7KH ( PHFKDQLVP UHTXLUHV WKDW LQ WKH WUDQVLWLRQ VWDWH WKH
K\GURJHQWREHUHPRYHGDQGWKHOHDYLQJJURXSDUHDUUDQJHGLQDQDQWLFRQILJXUDWLRQ
7KLVHVVHQWLDOO\PHDQVWKHVHWZRDWRPVDUHGHJUHHVDZD\IURPHDFKRWKHURQ
DGMDFHQWFDUERQV,I\RXEXLOGDPRGHORIWKLVFRQILJXUDWLRQRUGUDZLWDFFXUDWHO\
\RXFDQVHHZKLFKRIWKHSRVVLEOHSURGXFWV(RU=ZLOOEHIRUPHGIURPDWUDQVLWLRQ
VWDWHLQWKLVFRQILJXUDWLRQ7KXVJLYHQWKDWWKHHOLPLQDWLRQRFFXUVE\WKH(PHFK
DQLVPRQHFDQDFFRXQWIRUZK\RQHSDUWLFXODUVWHUHRLVRPHULVIRUPHGWRWKHH[FOX
VLRQRIWKHRWKHU²EDVLFDOO\RQO\RQHRIWKHVWHUHRLVRPHUVLVFRPSDWLEOHZLWKWKH
PHFKDQLVP
7KHGLUHFWDQVZHUWRWKHTXHVWLRQFRQVLGHUHGLQWKLVH[DPSOHLVDVWDWHPHQWDERXW
DFWLYDWLRQHQHUJLHVWKXVWKHDSSHDOWRWKHDQWLFRQILJXUDWLRQRIWKHWUDQVLWLRQVWDWH
RIWKH(PHFKDQLVPPXVWEHVXSSOHPHQWHGE\VRPHVWUXFWXUDODFFRXQWRIZK\WKH
(PHFKDQLVPKDVDPXFKORZHUDFWLYDWLRQHQHUJ\WKDQRWKHUDYDLODEOHHOLPLQDWLRQ
SDWKZD\V%RWKWKHNLQHWLFVRIWKHUHDFWLRQDQGWKHIDFWWKDWLWLVVWHUHRVSHFLILFLQGL
FDWHWKDWWKHPHFKDQLVPRIWKHUHDFWLRQPXVWEHFRQFHUWHG7KLVZRXOGUXOHRXWRWKHU
*22':,1(;3/$1$7,21,125*$1,&&+(0,675< 

HOLPLQDWLRQSDWKZD\VWKDWHLWKHUKDYHILUVWRUGHUNLQHWLFVRUSURFHHGWKURXJKDV\P
PHWULFDOLQWHUPHGLDWH7KHUHPDLQLQJDOWHUQDWLYHZRXOGEHDFRQFHUWHGHOLPLQDWLRQ
LQZKLFKWKHK\GURJHQDQGWKHKDORJHQDUHOLQHGXSRQWKHVDPHVLGHRIWKHSDUWLDOO\
IRUPHGGRXEOHERQG$QHOLPLQDWLRQUHDFWLRQWKDWSURFHHGHGWKURXJKDWUDQVLWLRQ
VWDWHRIWKLVW\SHZRXOGEHDV\QHOLPLQDWLRQ7KHIDFWWKDWWKHHOLPLQDWLRQVSURFHHG
WKURXJKWKHDQWLFRQILJXUDWLRQRIWKHWUDQVLWLRQVWDWHUDWKHUWKDQWKHV\QFRQILJXUD
WLRQLVDFFRXQWHGIRULQWHUPVRIVWHULFKLQGUDQFH%\UHTXLULQJWKHOHDYLQJJURXSDQG
WKHEDVHWREHRQRSSRVLWHVLGHVRIWKHDONDQHWKLVPHFKDQLVPPLQLPL]HVWKHVWHULF
KLQGUDQFHEHWZHHQWKHVXEVWLWXHQWVRQWKHDGMDFHQWFDUERQV7KRXJKWKHDFFRXQWRI
WKHVWHUHRVSHFLILFLW\RIWKHVHHOLPLQDWLRQVLVJLYHQDPHFKDQLVWLFH[SODQDWLRQWKH
DQDO\VLVRIZK\WKHUHDFWLRQSURFHHGVE\WKHPHFKDQLVPLQTXHVWLRQDJDLQGHSHQGV
XSRQ WKH UHFRJQLWLRQ RI VWUXFWXUDO IHDWXUHV ,Q WKLV FDVH WKH UREXVW FRQFHSWV WKDW
DOORZ RQH WR FRQYHUW VWUXFWXUDO LQIRUPDWLRQ LQWR UHODWLYH HQHUJ\ GLIIHUHQFHV DUH
DSSOLHG GLUHFWO\ WR WKH SURSRVHG VWUXFWXUHV RI WKH WUDQVLWLRQ VWDWHV RI WKH SRVVLEOH
DOWHUQDWLYHSDWKZD\V

3+,/2623+,&$//<,17(5(67,1*$63(&762)(;3/$1$7,21
,125*$1,&&+(0,675<

/DZVKDYHWUDGLWLRQDOO\SOD\HGDSURPLQHQWUROHLQDFFRXQWVRIVFLHQWLILFH[SOD
QDWLRQ+RZHYHULQWKHFODVVLFVHQVHRISUHFLVHDQGJHQHUDOTXDQWLWDWLYHUHODWLRQ
VKLSVODZVGRQRWSOD\DFHQWUDOUROHLQWKHPRGHORIH[SODQDWLRQDUWLFXODWHGLQWKLV
SDSHU7KHRQO\ODZVWKDWPLJKWVHHPWREHDWSOD\LQWKHVHH[SODQDWLRQVDUHWKHODZV
RIWKHUPRG\QDPLFVDQGWKHODZVRITXDQWXPPHFKDQLFV:KLOHLWLVWUXHWKDWERWK
VRUWVRIODZVSOD\VRPHUROHLQWKHH[SODQDWLRQVWKHVHODZVDUHQRWVXIILFLHQWRQWKHLU
RZQWRSURYLGHHYHQWKHGLUHFWDQVZHUVWRWKHNLQGVRITXHVWLRQVFRQVLGHUHGHDUOLHU
%HFDXVHPRVWRIWKHGLUHFWDQVZHUVGHSHQGRQVRPHDFFRXQWRIWKHNLQHWLFVRIWUDQV
IRUPDWLRQVWKHODZVRIWKHUPRG\QDPLFVDQGRUTXDQWXPPHFKDQLFVPXVWEHVXSSOH
PHQWHGE\VRPHDFFRXQWWKDWDOORZVRQHWRWUDQVIRUPLQIRUPDWLRQDERXWWKHSDWKVRI
UHDFWLRQVLQWRLQIRUPDWLRQDERXWWKHLUUDWHV7KLVUROHLVW\SLFDOO\SOD\HGE\VRPH
YHUVLRQRI7UDQVLWLRQ6WDWH7KHRU\)XUWKHUPRUHWKRXJKVRPHRIWKHFRQFHSWVWKDW
IDFLOLWDWH WKH FRQYHUVLRQ RI VWUXFWXUDO IHDWXUHV LQWR HQHUJ\ GLIIHUHQFHV DUH JLYHQ
H[SODQDWLRQVLQWHUPVRIPROHFXODURUELWDOWKHRU\RUYDOHQFHERQGWKHRU\K\SHUFRQ
MXJDWLRQIRULQVWDQFHWKHVHWKHRULHVDUHWKHPVHOYHVRQO\ORRVHO\EDVHGDWOHDVWLQ
WKHFRQWH[WRIRUJDQLFFKHPLVWU\RQWKHODZVRITXDQWXPPHFKDQLFV,IWKLVJHQHUDO
REVHUYDWLRQZHUHFRUUHFWWKHQLWZRXOGEHDPLVWDNHWRLQVLVWWKDWRUJDQLFFKHPLVWV
H[SODLQE\GHULYLQJSURSRVLWLRQVIURPODZV7RLQVLVWXSRQH[SODQDWLRQVRIWKDWVRUW
ZRXOGEHWRUHIXVHWRUHFRJQL]HWKHDFWXDOQRQODZLQWHQVLYHH[SODQDWLRQVVHHQLQ
WKHVFLHQWLILFSUDFWLFH
-XVWDVVWULNLQJDVWKHUHODWLYHO\PLQRUUROHWKDWVWULFWTXDQWLWDWLYHODZVSOD\LQ
WKHVHH[SODQDWLRQVLVWKHLPSRUWDQWUROHWKDWWKHUREXVWO\DSSOLFDEOHVWUXFWXUDOFRQ
FHSWV SOD\ 7KHVH FRQFHSWV DUH UHODWLYHO\ IHZ LQ QXPEHU EXW WKH\ DUH DSSOLFDEOH
DFURVV D EURDG UDQJH RI FKHPLFDO VWUXFWXUHV 7KH\ DOORZ RQH WR DVVHVV TXDOLWDWLYH
HQHUJ\GLIIHUHQFHVRQWKHEDVLVRIHDVLO\LGHQWLILDEOHIHDWXUHVRIDQRUJDQLFPROHFXOH
RUWUDQVIRUPDWLRQ%\LVRODWLQJFRQFHSWVVXFKDVOHDYLQJJURXSDELOLW\DQGVWDELOL]D
WLRQGXHWRK\SHUFRQMXJDWLRQRQHLVDEOHWRSURMHFWHQHUJ\GLIIHUHQFHVWKDWFDQEH
PHDVXUHG LQ VRPH FRQWH[W DFLGEDVH UHDFWLRQV RU K\GURJHQDWLRQ RI DONHQHV RQWR
 $11$/61(:<25.$&$'(0<2)6&,(1&(6

PROHFXOHVZKHUHWKRVHHQHUJ\GLIIHUHQFHVKDYHQRWRUFDQQRWEHGLUHFWO\PHDVXUHG
:LWKRXW WKHVH SRUWDEOH FRQFHSWV HDFK FODVV RI UHDFWLRQV ZRXOG KDYH WR EH
DSSURDFKHGDQHZZLWKRXWRQH¶VEHLQJDEOHWRDSSO\WKHOHVVRQVOHDUQHGE\VWXG\LQJ
WKHODVWFODVVRIUHDFWLRQV,WLVWKHVHFRQFHSWVWKDWPDNHRUJDQLFFKHPLVWU\FRPSUH
KHQVLEOH,IRQHZHUHXQDEOHWRUDWLRQDOL]HRUH[SODLQWKHWUDQVIRUPDWLRQVXQGHUJRQH
E\RUJDQLFPROHFXOHVZLWKWKHVHUREXVWFRQFHSWVWKHQRUJDQLFFKHPLVWU\ZRXOGEHD
PXFKPRUHGHVFULSWLYHVFLHQFH²DQGOHVVRIDWKHRUHWLFDOVFLHQFH²WKDQLWDFWXDOO\
LV7KHKHDY\GHSHQGHQFHRIH[SODQDWLRQVRIWKHVRUWWKDWKDYHEHHQFRQVLGHUHGRQ
WKHLGHQWLILFDWLRQRIVWUXFWXUDOIHDWXUHVRIPROHFXOHVDQGWKHFRQVHTXHQWWHQGHQFLHV
WRUDLVHRUORZHUSRWHQWLDOHQHUJ\LQYDULRXVFLUFXPVWDQFHVVXJJHVWVWKDWWKHQRWLRQ
RIDFDSDFLW\PLJKWSOD\DQLPSRUWDQWUROHLQDPRUHFRPSOHWHDFFRXQWRIWKHUHDVRQ
LQJWKDWRFFXUVLQRUJDQLFFKHPLVWU\7KHQRWLRQRIDFDSDFLW\DQGLWVUROHLQVFLHQWLILF
H[SODQDWLRQKDVUHFHLYHGVLJQLILFDQWDWWHQWLRQLQUHFHQWZRUNVLQWKHSKLORVRSK\RI
VFLHQFH7KLVSUHOLPLQDU\ZRUNVXJJHVWVWKDWRUJDQLFFKHPLVWU\PLJKWSURYLGHD
IHUWLOHJURXQGIRUFRQVLGHULQJVXFKLVVXHV
7KH PHFKDQLVPV RI FKHPLFDO WUDQVIRUPDWLRQV DOVR SOD\HG D FHQWUDO UROH LQ WKH
H[SODQDWLRQVFRQVLGHUHG0HFKDQLVPVZHUHHVVHQWLDOWRWKHFRQYHUVLRQRIVWUXFWXUDO
LQIRUPDWLRQLQWRLQIRUPDWLRQDERXWWKHUDWHVRIUHDFWLRQV4XHVWLRQVDERXWWKHUDWHV
RIUHDFWLRQV DUH JHQHUDOO\DQVZHUHGE\ DSSHDOLQJWR IDFWVDERXWWKHHQHUJ\RIWKH
WUDQVLWLRQVWDWHRIWKHUHDFWLRQ7KHVHHQHUJLHVFRXOGEHHYDOXDWHGDQGFRPSDUHGRQO\
LIRQHNQHZHQRXJKDERXWWKHPHFKDQLVPRIWKHUHDFWLRQHLWKHUWRGLUHFWO\FRPSDUH
WKHWUDQVLWLRQVWDWHVRIYDULRXVSDWKZD\VRQWKHEDVLVRIWKHLUVWUXFWXUHRUWRSURMHFW
HQHUJ\ GLIIHUHQFHV LQ WKH WUDQVLWLRQ VWDWH IURP UHODWLYH HQHUJ\ GLIIHUHQFHV LQ WKH
UHDFWDQWVRUSURGXFWV7KHPHFKDQLVPRIDUHDFWLRQVHHPVWREHFORVHO\UHODWHGWRWKH
FDXVDO SURFHVV E\ ZKLFK D WUDQVIRUPDWLRQ RFFXUV WKXV WR D FHUWDLQ H[WHQW WKLV
DFFRXQWRIH[SODQDWLRQUHLQIRUFHVWKHFHQWUDOUROHWKDWFDXVDOSURFHVVHVKDYHEHHQ
DOOHJHGWRSOD\LQVFLHQWLILFH[SODQDWLRQ
7KHUH DUH VHYHUDO SODFHV ZKHUH RQH PLJKW UHFRJQL]H D UROH IRU WKHRULHV LQ WKLV
DFFRXQWRIH[SODQDWLRQ)LUVWRIDOOWUDQVLWLRQVWDWHWKHRU\DQGLWVYDULDQWVZHUHVHHQ
WRSOD\DQHVVHQWLDOUROHHYHQLQWKHGLUHFWDQVZHUVWRWKHTXHVWLRQVFRQVLGHUHG7KHVH
WKHRULHVDOORZWKHFRQYHUVLRQRILQIRUPDWLRQDERXWWKHHQHUJ\DORQJWKHSDWKRID
WUDQVIRUPDWLRQLQWRLQIRUPDWLRQDERXWWKHUDWHRIWKDWWUDQVIRUPDWLRQ7KHSRVVLELOLW\
RIPDNLQJVRPHVXFKFRQYHUVLRQLVDEVROXWHO\HVVHQWLDOWRWKHXVHRIIDFWVDERXWWKH
,($ LQ DQVZHUV WR TXHVWLRQV DERXW WKH UDWHV RU SURGXFW GLVWULEXWLRQV RI UHDFWLRQV
7KLVVRUWRIWKHRU\VHHPVIXQGDPHQWDOWRWKHEDFNJURXQGXQGHUVWDQGLQJRIWUDQVIRU
PDWLRQVWKDWXQGHUZULWHVH[SODQDWLRQVRIWKLVVRUW,QDGGLWLRQVRPHRIWKHVWUXFWXUDO
FRQFHSWVVXFKDVK\SHUFRQMXJDWLRQRUUHVRQDQFHUHFHLYHDMXVWLILFDWLRQLQWHUPVRI
WKHRULHVRIFKHPLFDOERQGLQJ7KLVXVHRIWKHRULHVZDVQRWH[SORUHGLQDQ\GHWDLOLQ
WKLVSDSHUEXWLWGRHVVHHPOHVVHVVHQWLDOWKDQWKHUROHRIWUDQVLWLRQVWDWHWKHRU\(YHQ
LQWKHDEVHQFHRIDFRQYLQFLQJMXVWLILFDWLRQWKHVHVWUXFWXUDOFRQFHSWVFDQEHDSSOLHG
VRORQJDVWKH\FDQEHFRQYLQFLQJO\GHPRQVWUDWHGE\H[SHULPHQWVLQUHODWHGFDVHV
5HFDOOWKDWWKHFDSDFLW\WRDFFRPPRGDWHDQHJDWLYHFKDUJHZDVFRUUHODWHGZLWKWKH
VWUHQJWKRIWKHFRQMXJDWHDFLGHYHQLIWKHVWUHQJWKRIWKHDFLGFRXOGQRWEHFRQYLQF
LQJO\ H[SODLQHG LQ WHUPV RI PRUH IXQGDPHQWDO QRWLRQV VD\ DWRPLF VL]H DQG HOHF
WURQHJDWLYLW\/DVWO\WKRXJKDJDLQWKLVUROHZDVRQO\KLQWHGDWLQWKLVSDSHUWKHRU\
SOD\HGDQLPSRUWDQWUROHLQSURMHFWLQJKRZWKHWUDQVLWLRQVWDWHRIDUHDFWLRQZRXOG
UHVSRQG WR FKDQJHV LQ UHDFWLRQ FRQGLWLRQV &RQVHTXHQWO\ WKHRUHWLFDO DVVXPSWLRQV
VXFKDVWKH+DPPRQG3RVWXODWHDQGLWVUHODWLYHVFDQEHH[SHFWHGWRSOD\DPDMRUUROH
*22':,1(;3/$1$7,21,125*$1,&&+(0,675< 

LQ H[SODQDWLRQV RI KRZ WKH UDWH DQG PHFKDQLVPV RI WUDQVIRUPDWLRQV UHVSRQG WR
FKDQJHVLQWKHVXEVWUDWHVRUFRQGLWLRQVRIDUHDFWLRQ

127(6$1'5()(5(1&(6

 ,KDYHIROORZHGYDQ)UDDVVHQ¶VWUHDWPHQWRIH[SODQDWLRQVDVDQVZHUVWRZK\TXHVWLRQV
,KDYHGRQHWKLVRQO\EHFDXVHLWRIIHUVDFRQYHQLHQWZD\RIIRFXVLQJP\SURMHFWQRW
EHFDXVH,ZLVKWRHQGRUVHYDQ)UDDVVHQ¶V3UDJPDWLF7KHRU\RI([SODQDWLRQ6HH9$1
)5$$66(1%7KH6FLHQWLILF,PDJH2[IRUG8QLYHUVLW\3UHVV2[IRUG
 :KHQ WKH TXHVWLRQ LV DERXW D FODVV RI WUDQVIRUPDWLRQV WKDW KDV VRPH IHDWXUH LQ FRP
PRQWKHIDFWVUHOHYDQWWRWKHTXHVWLRQZLOOEHIDFWVWUXHRIWKLVFODVVRIWUDQVIRUPD
WLRQV $OO RI WKH TXHVWLRQV EHLQJ FRQVLGHUHG DUH DERXW UHDFWLRQV RI D FHUWDLQ W\SH
WKXVLQJHQHUDODQVZHUVWRWKRVHTXHVWLRQVZRXOGEHIDFWVDERXWWUDQVIRUPDWLRQVRID
FHUWDLQW\SH
 +$0021'*$FRUUHODWLRQRIUHDFWLRQUDWHV-$P&KHP6RF±
 92//+$5'7. 16&+25(2UJDQLF&KHPLVWU\QGHGS:+)UHH
PDQ1HZ<RUN
 /2:5<7 .5 ,&+$5'6210HFKDQLVPDQG7KHRU\LQ2UJDQLF&KHPLVWU\UG
HGS+DUSHU 5RZ1HZ<RUN
 5RXJKO\VSHDNLQJFLVDONHQHVKDYHWKHWZRODUJHVWJURXSVRQWKHVDPHVLGHRIWKHGRX
EOH ERQG ZKLOH WUDQV DONHQHV KDYH WKH WZR ODUJHVW JURXSV RQ RSSRVLWH VLGHV RI WKH
GRXEOHERQG
 92//+$5'7 6&+25(2UJDQLF&KHPLVWU\S
 +\SHUFRQMXJDWLRQFDQEHJLYHQDPRUHULJRURXVMXVWLILFDWLRQLQWKHFRQWH[WRIPROHFX
ODU RUELWDO WKHRU\ EXW WKDW ZRXOG OHDG XV WRR IDU DILHOG ,W VKRXOG EH QRWHG WKDW WKH
WHUP K\SHUFRQMXJDWLRQ LV JHQHUDOO\ DSSOLHG WR FDVHV ZKHUHLQ QHLJKERULQJ RUELWDOV
RYHUODSZLWKSDUWLDOO\ILOOHGRUELWDOVUDWKHUWKDQWKHFRPSOHWHO\RFFXSLHGRUELWDOWKDW
DUHDWLVVXHLQWKLVFDVH
 92//+$5'7 6&+25(2UJDQLF&KHPLVWU\S
 ,ELGS>9ROOKDUGW¶VLWDOLFV@
 ,PDJLQH D FDVH ZKHUH D PRGHUDWHO\ EXON\ EDVH LV UHDFWHG ZLWK D KDORDONDQH WKDW FDQ
OHDGWRWZRGLIIHUHQWDONHQHVWKDWDUHPRGHUDWHO\GLIIHUHQWLQHQHUJ\,IWKHUHDFWLRQ
HQGHGXSIDYRULQJWKHPRUHVWDEOHDONHQHZHZRXOGH[SODLQWKLVUHVXOWE\DSSHDOLQJ
WRWKHSDUWLDOO\IRUPHGGRXEOHERQGVLQWKHWUDQVLWLRQVWDWH2QWKHRWKHUKDQGLIWKH
UHDFWLRQHQGHGXSIDYRULQJWKHOHVVVWDEOHDONHQHZHZRXOGH[SODLQLWLQWHUPVRIWKH
EXONLQHVVRIWKHEDVH
 &$57:5,*+71+RZWKH/DZVRI3K\VLFV/LH&ODUHQGRQ3UHVV2[IRUG
 &$57:5,*+7 1  1DWXUH¶V &DSDFLWLHV DQG WKHLU 0HDVXUHPHQW &ODUHQGRQ 3UHVV
2[IRUG