642 N.E.2d 1115 | Ohio Ct. App. | 1994
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[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *488
Defendants-appellants, M.C. Capital Corp. and Wayne Meadows, appeal from a judgment of the Ohio Court of Claims in favor of plaintiffs-appellees, Nancy Chiles, Director of the Ohio Department of Commerce, and Mark V. Holderman, Commissioner of the Ohio Division of Securities (collectively, "ODS"), who found that defendants sold unregistered securities in Premier Broadcasting Company ("Premier") in violation of R.C.
Premier is an Ohio corporation which operates a low power television station in Columbus known as Channel 62, WCLS-TV. Organized on February 26, 1992, Premier has been in the early stages of development since that time. On December 9, 1992, Premier filed a "Form 6(A)(1) Application," pursuant to R.C.
From December 18, 1992 to January 13, 1993, Premier sold the fifty units to sixteen individual investors. On January 19, 1993, after completing the sale, Premier declared a one thousand to one forward stock split. As a result, the securities sold as part of the unit offering totaled fifty thousand preferred shares, fifty thousand common shares and one hundred fifty thousand warrants; each of the original units thus contained one thousand shares of preferred stock, one thousand shares of common stock and three thousand warrants, each warrant bearing an exercise price of $
M.C. Capital is a small intrastate penny stockbroker/dealer whose president and sole shareholder is Wayne Meadows. M.C. Capital frequently sells stock in small Ohio companies that are start-up ventures, and attempts to create a market for shares in such companies by purchasing stock for its own account and selling the stock to prospective penny stock investors. Don Francill, Meadow's social and business acquaintance, held stock in Premier and informed Meadow of the Premier unit offering.
After investigating the initial offering, M.C. Capital engaged in a series of transactions involving the "short" sale1 of Premier common stock. Specifically, between mid-January and January 29, 1993, M.C. Capital telephoned potential buyers to gauge interest in Premier common stock, representing that about one hundred fifty thousand shares of Premier common stock would be available at between $3 and $5 per share. On January 29, 1993, after concluding that sufficient demand existed to support M.C. Capital's engaging in "short" sale transactions in Premier stock, M.C. Capital contacted and received commitments from a number of the holders of the original Premier units to sell their warrants for $.50 each. Between January 29 and February 4, 1993, M.C. Capital then solicited orders for seventy-three thousand five hundred shares of Premier common stock at $5 per share. After gaining these stock subscriptions, M.C. Capital purchased sixty thousand warrants from the unit holders. At the time of the present litigation, M.C. Capital had exercised thirty-two thousand five hundred of its acquired warrants and had twenty-seven thousand five hundred remaining to be exercised. Because M.C. Capital acquired each warrant for $.50 and paid only $
On March 1, 1993, ODS filed an action against defendants in the Franklin County Court of Common Pleas alleging that defendants violated R.C. Chapter 1707 et seq., by selling unregistered securities. ODS sought an injunction against the further sale of securities, as well as the appointment of a receiver. Defendants counterclaimed against ODS, and the case was removed to the Ohio Court of Claims.
At trial, neither party disputed that the securities were unregistered; the issue was whether the sale of the securities was exempt. In its decision, the trial court concluded that the stock sales were not exempt from the registration requirements of R.C. Chapter 1707 because the stock was not "issued and outstanding" prior to being sold, as required by R.C.
Defendants appeal, assigning the following six errors:
"I. The court below erred to the prejudice of appellants by finding that the words `issued and outstanding' contained in R.C.
"II. The court below erred to the prejudice of appellants by finding that shares sold `short' by an Ohio licensed broker dealer must be `tracked' to insure that shares delivered or covering such short sale are issued and outstanding at the time of sale for the exemption contained in R.C.
"III. The court below erred to the prejudice of appellants by finding Premier Broadcasting Company, Inc. did not have more than twenty-five beneficial owners prior to January 20, 1993.
"IV. The court below erred to the prejudice of appellants by finding that appellants sold stock in violation of R.C.
"V. The court below erred to the prejudice of appellants by granting injunctive relief to appellees against the manifest weight of the evidence.
"VI. The court below erred in entering a judgment against Wayne Meadows individually."
ODS cross-appeals, assigning a single error:
"The trial court committed reversible error by holding that R.C.
Defendants' first and second assignments of error will be addressed together, as both challenge the trial court's conclusion that the securities defendants sold were not "issued and outstanding" at the time of sale for purposes of the transactional exemption from registration provided in R.C.
Generally, under R.C.
"A sale by a licensed dealer, acting either as principal or as agent, of securities issued and outstanding before such sale, is exempt, unless such sale [falls into] one or more of the following [exceptions.]"
While the term "issued and outstanding" is not defined in the Ohio Revised Code, some guidance concerning its meaning is provided in the separate definitions of the terms "issued" and "outstanding" in the context of securities law.
Issued stock generally is that part of a corporation's authorized stock that has been distributed to the public, while outstanding stock is that portion of the issued stock which remains in the hands of the public. The critical distinction between the two is that treasury stock may be included in issued stock, but not in outstanding stock. 11 Fletcher, Encyclopedia of the Law of Private Corporations (Perm.Ed.1986) 22, Section 5082; Black's Law Dictionary (6 Ed.Rev.1990) 1416, 1417;Brumfield v. Horn (Ala. 1989),
Defendants assert that the trial court misconstrued R.C.
Under established rules of statutory interpretation, a court must look to the language of the statute itself to determine legislative intent. Shover v. Cordis Corp. (1991),
Despite defendants' contentions that the exemption contained in R.C.
Defendants next contend that the trial court's holding places a burden on security dealers which the legislature did not intend and which will have a chilling effect on the secondary market for penny stocks.
Holding that defendants' sale of securities was illegal because the shares were not issued and outstanding at the time they were "sold," the trial court apparently assumed that the "sales" took place at the time defendants solicited buyers for the stock sold. Arguably, however, the actual "sales" in this case, or in any case involving a short sale, did not occur until the dealer delivered the stock to its buyer, by which time the stock was issued and outstanding, having been issued by Premier to defendants upon their exercise of the warrants.
Under R.C. Chapter 1707, however, such an argument fails due to the definition of "sale" contained in R.C.
"* * * a contract to sell, an exchange, an attempt to sell, an option of sale, a solicitation of a sale, a solicitation of an offer to buy, a subscription, or an offer to sell, directly or indirectly, by agent, circular, pamphlet, advertisement, or otherwise."
Given such an expansive definition of "sale," the trial court was correct in concluding that the sales in this case occurred each time defendants solicited a buyer for Premier common stock.
While defendants correctly argue that under the trial court's holding, securities dealers in Ohio are prohibited from "covering" short sales with unregistered securities which were not issued and outstanding at the time of the "sale," we cannot agree that the burden is one not intended by the legislature in view of the statutory language the legislature employed. Indeed, given the language of R.C.
Defendants also argue that the "tracking" requirement imposed by the trial court's decision contravenes the fungibility doctrine. R.C.
"Unless otherwise agreed and subject to any applicable law or regulation respecting short sales, a person obligated to transfer securities may transfer any certificated security of the specified issue in bearer form or registered in the name of the transferee or indorsed to him or in blank, or he may transfer an equivalent uncertificated security to the transferee or a person designated by the transferee."
R.C.
Initially, issues related to R.C.
Furthermore, R.C.
Defendants' first and second assignments of error are overruled.
In their third assigned error, defendants allege that the trial court erroneously concluded that, even if the stock defendants sold was issued and outstanding, the transaction was not exempt under R.C.
Although R.C.
"Any class of shares issued by a corporation when the number of beneficial owners of such class is less than twenty-five, with the record owner of securities being deemed the beneficial owner for this purpose, in the absence of actual knowledge to the contrary[.]"
Under R.C.
Initially, defendants assert that the share journal fails to reflect the fact that the beneficial owners of the shares for which Robert J. Baker is record owner are two independent trusts, a self-employment retirement trust and an employee profit-sharing plan, on whose behalf Baker purchased the stock. Next, defendants argue that three of the record owners of Premier common stock listed in the share journal shared investment and voting power with their spouses, resulting in the spouses' becoming additional beneficial owners of the stock pursuant R.C.
As to defendants' first contention, although Baker signed separate subscription agreements for two trusts, Baker was the only individual participating in either trust. Under these circumstances, the trial court properly could conclude that, despite the existence of the separate trust instruments, only one beneficial owner existed because only Baker actually had any rights to the Premier stock held in the trusts. Defendants' second contention suffers from similar problems. Although defendants' witnesses at trial testified that three of the record owners shared voting and investment powers with their spouses, defendants did not support the testimony with any documentation; in fact, the testifying witnesses admitted on cross-examination that such documentation did not exist. Therefore, the trial court legitimately could have rejected defendants' joint ownership claims based on a lack of credible evidence.
Further, to the extent defendants contend that R.C.
Based on our review of the record, we cannot say the trial court erred in its determination. Defendants' third assignment of error is overruled.
In their fourth and fifth assignments of error, defendants assert that the trial court improperly placed the burden of proof on defendants regarding certain elements of the offense charged, which in turn resulted in ODS's failing to sustain its burden of proof on those elements and the trial court's granting injunctive relief against the manifest weight of the evidence.
ODS alleged that defendants violated R.C.
Defendants also assert that the state failed to introduce any evidence showing that defendants sold securities "knowing" that they were unregistered in violation of R.C.
The knowledge requirement of R.C.
The effect of R.C.
Although the record in this case does not contain any evidence from which one could reasonably conclude that defendants had actual knowledge that the stock they were selling was unregistered in violation of R.C.
Nonetheless, defendants maintain that they satisfied the reasonable diligence requirement of R.C.
Given the foregoing, "some competent, credible evidence" exists supporting all essential elements of ODS's case. C.E.Morris Co. v. Foley Constr. Co. (1978),
Defendants' fourth and fifth assignments of error are overruled.
In their sixth assignment of error, defendants allege that the trial court erred in entering judgment against defendant Wayne Meadows, individually.
Defendants argue that ODS failed to prove that Meadows violated R.C.
In its cross-appeal, ODS asks this court to review the trial court's statement that the stock defendants sold did not lose its exemption from registration under R.C.
As noted, the trial court held that the stock defendants sold was not exempt from registration under R.C.
The trial court's final "determination" was entirely unnecessary to deciding the present case. Indeed, addressing the applicability of the R.C.
Having overruled each of defendants' six assignments of errors, and having overruled cross-appellants' single assignment of error, we affirm the decision of the trial court.
Judgment affirmed.
DESHLER and CLOSE, JJ., concur.