Case Information

*1 Honorable Claude Isbell

Secretary of State

Austin, Texas Mr. Horace B. Sessions,

Attention: Commissioner. !

Securities .i;'. Opinion NO. O-6515 Dear Sir: Re: constxuction of Art. 6OOa, In respect to V. A. C. S., the authority of Secratarg to grant or deny application for permit to ,sell securltFes.

we have received your recent request for an opinion, appearing as follows:

"This Divlslon has recently denied an application the sale of securities In Texas by an underwriting group out of Chicago and the applicant through a local aerl neg has questioned the authority of the Secretary State under Section 8 of the Texas Securities Act to pass upon the sale of securities to prospective investors in Texas as being fair, just and equitable. Since we find no Texas cases and no Attorney Oeneral's Opinion on the question we are herewith submitting the matter ., to your office.

"ue briefly outline that the applicant is a nonresident manufacturing company desiring to sell an Issue of debentures and common stock in several sections of the United States by registration securities with the Federal Securities and Exchange Commission and registration with those States In which a portion of the securities be offered and sold. will The company itself will receive proceeds from the sale of the debentures less the usual underwriting discounts and commissions.

"In addition to the debentures the company as applicant Is seeking to qualify a total of 350,000 shares of $1.00 per value common stock for sale the public at $10.00 per share, 300,000 shares of which

t\ *2 Eage 2 (O-6515) are owned by one family and the proceeds from the sale of this 300,000 shares will go to the stockholders and no part of such proceeds will be received From the total of 350 OI)O shares of common P4t”%?zi be sold the controlling stockholders will

receive $2,5%,OOQ.O0 and the company will receive $432,500.00 efter deduction of the underwriting dis- counts and commissions. Whils the company has a fair earn1 record and has pa.id i-ividends .V per share 194 ..Y$ the net asset val.ue of the stockla ai;proxi- matelg 2.12 per share. The applicant was advised 1,n. writing that the Texas application was denied as the plan of the i.ssuer rlLd not appear to be fair, just and equitable.

“The local counsel for the;underwritFng g:z;ouc, seeking to qualify the securities in the name of >rie company contends that, until ‘the proposed plan of business f referred to in Section 8 of the Texas Sec.;-- Fties Act, in this instance W-9 manufacture of 2’adi.o parts and equipment, is found to be unfair, unjust and Inequitable, of State can not refuse application, unless of course, it mrv fu?‘ber find that the securities and methods used in -issuln: and disposing of same would work a fraud upon investor? under the psc- vfsions of Section 8.

“The local counsel for the company was advised that it has been the policy of this Department to interpret ‘proposed plan of business’ language under Section 8 to mean the proposed plan of the applicant, In this case the issuer, seeking to quai.ir"g securities. The Information called for under Sections 5, 6 & 7 of the Texas Securities Act wou.ld not indicate it was intended that the lznfunge ‘proposed plan of bus*ness’ be given a meaning restricted to the corporate for which the company was organized. In the Instant case the plan and method of the company as applicant in qualifying common stock of conf:7clll.ng stockholders 1FquidatFng their intszests in the company Is of major concern to the Texas investing publ.rc, and such plan and method has no primary relation whether the company’s manufacture of radio equipment and parts is fair, just and equitable. Such a restricted mea.ning would of course give no autkolrtg to this Department to pass upon whether or not the price at whFch a controlling stockholder is bailing out by disposing of his personal holdings in a company might be fair, just and equitable.

Bon. Claude Isbell, page 3 (O-6515)

“I am sure you appreciate that this raises a ques- tion as to whether the Texas Securities Act Is intended to be merely a full disclosure statute requiring Department to pass favorably upon all applications for registration of securities unless there Is such mls- representation and failure to dlsclose material facts as might be considered fraudulent under the definl- tlon of the term found In Section 2 (f), or, .the Department Is charged with the responsibllitg passing upon whether or not it may be fair, just and equitable for any particular Issue of securities be offered and sold in Texas after giving consideration to the price, financial condltlon, earnings, dividend payments, and other factors relating to the company and disposition of the securities as distinguished from merely passing upon whether the corporate engaged in by the issuer Is fair, just and equitable. In this connection It will be noted that there Fs an absence of any provision in the Texas Securities Act for publication or use of a prospectus maklng full disclosure in connection with an offering of securities as is usually required under a full disclosure statute.

“We shall appreciate favorlng us with an your opinion on the question of whether or not the Secre- tary of State may deny an application for ragistration of securities under the Texas Securltles Act on the lan of the applicant ~(issue?, under- grounds that the writer, or dealer P seeking to qualify secudtles appears unfair, and InequItable upon consider- unjust, ation of all factors concerning which the ?~pplicant is required to furnish Information under the provisions of the Act.”

As we understand your question, you are not calling upon the Attorney General for a decislpn in the particular fact situation presented in your letter, but you are merely requesting an interpretation of Section 8 of Article 6OOa, Vernon’s Annotated Civil Statutes, in respect to the author- ity of the Secretary to grant or deny an application for a permit for the sale of securities, and.,,said fact sltua- tlon is presented solely the purpose oPstating the ques- tion in concrete form.

With the understanding that we are not passing upon the fact situation submitted in your communication, we shall proceed to answer your question.

Subsection (f) or Sec. 2, of Art. 6OOa, V. A. C. S.,

provides as follows:

“The terms ‘fraud, t f fraud:ulent -t,actIce’ shall Include any misreI;resentations, Fn any manner, of a relevant fact; any promise or representation or prediction as to the future not made honestly and in good faith, or an Intentional failure to i13cloee a material fact; the gainlrg, dlrectlg or Indirectly, through the sale of any securLty, on an underwriting or promo- tion fee or profit, selllng or man.ag:i-sg commission or profit, so groscr or exorbitant as to be uncoc~cionzble; any scheme, device cr other artifice to obtain such profit, fee or commission; providea, that nothing herein limit, or dlmlnloh the full meaning of the terms ‘fraud, t ‘fr:-r&lent, I and Fraudulent practice’ as applied or accepted courts of law or equity.”

Sections 5, 6, and 8 of Art. 6ooa, V. A. C. S., provide as follows:

“Sec. 5. No dealer, age&t or sa,lesman shall sell or offer for sale any securities issued after the passage of this Act, except those whlrh COW within the classes enumerated in :-Q-h inclusive, of Section 3 of th-113 Subdivisions (a) to (c) (aj 42 ii)> both inclsafve of Section 23 P.ct, or Suhdivislons of this Act, untX1 the Ise:lez of such securities 3hell hvtre been granted a permit by t?..,+ Secretary of St:?P:a,. and no such permit shali be granted by the Secretary of Sta5e until the Issuer of such securities shall have fi.led tit% the Secretary of State a sworn statement veriffed under the oat? of an executive officer of the and attested by the c1cretary thereof, 3ettlng issuer forth follodng Fnfo?matLonn

$ “(a) The name3, res,fdence3 ati post office addrease3 of the officers and directors of the company.

e ‘iocation or ft5 princ:ipal. GfrfC+ and of all 1 c T: I Y.is State 9 if any. bran h off;:%3

I’(C) A copy of Its ar+,l.cles Or 1,nc.r,:~p~or”ation or part- nership or assotlat.i.on, as the case may be, and of any amend- ments thereto, if any. If a corpoz%tior;, a cor;y of’ all minutes of a;y proceeding its di?ecto?s, “tockholders c? membe::3 $.’ relating to or affecttng issue o said security. If a corporation, a cony of It s by-laws and of any amendments ther.- a copy of all Fnstruments by which the trust I,P a trustee, of. Is created and in which it is accepted, acknowledged or declared. .,.- ~. 2~~ ‘.Z

“(d) A statement shc~&?g the amount cf capital stock, if any, and if no capital stocky. the amount of capital issuer is contemplated to ‘ue employed: the number of share3 into which such stock 1s divided, or if not divided Znto shares of stock, what di.vi.‘sion is to be made or is ccntemplated; par value of each share, or if no par stock, the price at which such security is prcposed to be 3@ld; the commission including ang and all compensation be paid the sale of same, of every neture that Is in any way to be allowed for the sale of same; and how such compensation is to be paid - whether in 0~ other-use, or afilly of either or cash, stock, service, the amount of cash to be pa d, B both; also, or stock to be

!

1 .

Hon. Clsude Isbell, page 5 (O-6515)

Issued for pmmotlon and/or organization ser-vices and expenses, and the amount of promotion and/or organiza- tion services and expenses’ irhich- will’ be assumed OF in any way paid by the issuer.

“(a) Coplee of oertiflcates of the stock and all other securities to be sold, or offered for sale, together with application blanks therefor; a copy of any contract it proposes to make concerning such a copy of any prospectus or advertisement security; or other desoription of security prepared by o? for it for distribution or publication.

“(P) A detailed statement showing all the assets and all the llabllitles of the Issuer, said statement to reflect financial condition of the Issuer on a day not more than ten (10) days prior to the date such statement la filed. Such statement shall list all assets lti~ detail and shall show how the value of such assets was detetilned - that Ps, whether.the value ;;;pet forth in sald~ statement represents the a.ctJ-al cost .-in money of such~ assets, or whether such value represents , their pri?sent market value, or sbme &h&r values than In money, and shall shof~the present actual ‘I’ cost also, whether the value actual. value of’ $aid assets; set forth In the statement is greater or less than the actual cost value In money and ‘greater or less than the present If any of the assets market value of such assets.

consist of real estate, then sald statement shall show the amount for which said real estate Is rendered state and county taxes, or assessed for taxes. If any such assets listed consist of anything other than cash Rnd real estate, same shall be set out in detail so as give

fullest possible lnformatlon concerning same, and the Secretary of State shall have the power to require the filing of such addltlbnal lnfomation as he may deem necessary to determine whether or not the true value of saLd assets are reflected in the statement said filed. Should any of the assets listed statement be subject to any repurchase agreement, or any other agreement of like character,

terms of which the absolute of, or title OmelVhiD to said assets is qualified or limited in any way, then the terms and conditions of said agreement by which the absolute ownership of, or title to said assets 1s qualified or limited, as well as the amount and character of the assets subject thereto shall be fully stated. Said statement Phall list all current liabilities - that ia, all liabilities which will mature and hecorn- AW wlthln six (6) *6 Ron. Claude Isbell, page 6 (O-6515)

months from the date of such application, and shall list separately from such current liabilities, all showing other llabllltles, contingent or otherwise, the amount of those which are secured by mortage or otherwise, the assets of the issuer which are subject to such mortage, and the dates of maturity of any such mortage indebtedness. Such applLcation Include a deteLled profit and loss shall also statement, which shall cover the last three (3) years operations of the Issuer, if such Fssuer has been in operation for three (3) years - but, if not, said profit and loss statement shall cover the time that sa1.i Lssuer has been opemting.

If said issuer has not been operat'Lng, but is tak'.ng o'iar a concern of any kind which has been previously and profit and laze ,:,~~orating, then a financial statement showing the operations of the concern thus taken over for a pertod of the last three (3) years next preceding the taking over of said concern shall be included In said statement; said profit and loss statement clearly reflect the amount >f net,profit or net loss incurred dur%ng each of the years shown.

"Sec. 6. If the application ba filed or on behalf of an Issuer organized under the laws of any other state, territory, or government, or in any ether etate domiciled than Texas, such application shall also contain a certificate executed by the proper officer of such state, terri- tory or government dated not more than thirty (30) days prior to the date of filing of the applicatior showing that such Issuer is authorized to transact In such state, or government, territory and is not delinquent in any taxes or assebsments required to be paid to such state, territory or government. Such applicant shall also by written instrument duly executed by an executive officer thereof, under proper resolution of its board of directors, and authenticated and attested Secntarg seal of sold issuer, appoint of Texas Irrevocably its true and lawful attorney upon whom all process in any actlon or proceeding agaFnst it may be served with the same effect as if such issuer were organized or created under the laws of this state and had been lawfully served It shall be the duty of with process therein. of State, whenever he shall have

been served with any process as Is herein provided, *7 page 7 (O-6515) to forward same by United States mall to the home office of such issuer.

“sec. 8. Upon the filing of an application, ,< l$ shall be the duty of the Secretary of State

examine the same and the papers and documents flled therewith. If he finds that- the proposed-~plan of business of the applicant appears to be fair, just and equitable, and~~that the securities which it proposes to-issue and the method9 to be used by it in Issuing and dlbposlng of the same are not such as will work a fraud upon the purchaser thbreof; the Secretary of State shall issue to the applicant a permit authorizing it to issue and disnose of such securities. Should the Secretary of State find that the proposed plan of business of the applicant ap- pears to be unfair, unjust or InequItable, he shall deny the application for a permit and notify applicant in writing of his decision. Any issuer, as the same is defined herein, who is dissatisfied with any ruling or decision of the Secretary of State, may file within ten (10) days the=after, an application for a hearing before the Secreta= of State, who shall, within ten (10) days after receipt of such application, set said hearing at such time and place as he may fix, and shall.give said applicant ten (10) days notice of such hear- Such applicant may appeal from any sling OT ing. declslon made at such hearing ln the same manner and In the same form as is hereinafter provided appeals by or on behalf of dealers, and the rules applicable thereto and the relief to be had shall be the same.

Further condensing your question, we believe your inquiry will be fully answered by our lnteroretatlon the meaning of the following sentence contained Ln Set- 8, Art. 600a, suprar

“If he finds that the proposed plan of of the applicant appears to be fair, just and equitable, and that t’he securities Which it proposes to issue and the methods to be used by It in issuing and disposing

same are not such as will work a fraud upon the purchaser thereof, Issue to the applicant a permit author-

izing It to issue and dispose of such securities.” *8 Page 8 (o-6515)

We first must determine what constitutes the “pro- posed plan of business” of an appilcant such as the one the case of Home Lumber Co. et al mentioned by you. et al, 190 Pac. 601, wherein

vs. Hopkins, Attorney General, an application for writ of- mardamus was granted Supreme court of Kansas, compelling the state charter board to consider and pass upon the merits of an application of a trust company’seeklng to sell shares of its stock in the, State of Kansas, the following was said:

“The board assumed that plairtlff was seeking to do business in Kansas under an organ- ization not recognized in the State. The per- mission sought, however, was not admission Into state for the purpose of doing business, and was no more %an an oppcrtunlty to sell shares of stock with a view of raising money on which to do business.

The general holding of the courts is that the doing of business is the txarcise of some of the functions and the carrying on OF the ordinary business which the company is organized.”

While not detei-minative of our question, we believe the above expression of the Kansas Supreme Court warrants cur eliminating the selling of stock ,and debentures by the company in question from the category of “plan of business”. In illustrative fact situatfon on hand, we find that the applicant is a nonresident “manufacturing” company engaged in radio parts and equipment O It must be assumed manufacturing its q anufac+uring that In order to begin it bad to organize Itself under the laws of its domicile, also in order raise money “on which to do business” It issued debentures and common stock. We see no reason wbg all this would got be properly ciasslfled as component parts of the “business” If the manufacturing, or “plan of business” of the applicant. organization, financing, liabilfties and assets, etc., in other words - the corporate structure - of applicant are deemed fair, just and equitable by the Secretary of State, as appearing in the statement fl.led by applicant, then he is authorized to Issue a permit for such securities (debentures in Texas , provided that such securities, and stock) to be sold as they are proposed to be sold In this State compared with their true worth as Indicated by the stated condition company, are not such as will work a fraud upon the purchaser thereof. We think the Intent of the provision of the statute in question was to apply the test of fairness, justness and equitableness to everything dotie by tine applicant company, for which a report or statements must be filed, other than to the selling of its securities. that done in respect The sale value of same, together with the method and manner of *9 page 9 (O-6515) selling same, was intended to be tested by the standard of fraud. This distinction can be seen when Ft is recalled stock or debentures could be issued in respect to their actual fair, just and equitable, while same could be put up for value sale at a value such as to work a fraud on the purchaser. We do not belleve that said Art. 600a, supra, gives any authority the Seoretary to engage “price fixing” of secur- ities, unless a fraud is thereby perpetrated on the Investor as provided In Subsec’tlon *(f) of Sec. 2, Art. 6Ooa, supra. However, we believe the Legislature by Its definition of “fraud” and “fraudulent practice” In said Subsection (f) of Art. 600a, eupra, 1. e., “the gaining, directly or lndlrectly , through the sale of any security, or any underwriting or promotion fee or profit, selling or managing commission or profit, so gross or exorbitant as to be unconscionable; any scheme, device or other artifice to obtain such proflt, fee or commission;” authorized the refusal to issue a permit on the grounds of fraud In cases where the proposed selling price of the securi- ties is so out of line with their actual value as to make the selling profit on same “so gross or exorbitant as to be unconscionable.” This would be a ques’tlon of fact to be determined in any given case by the findings of the Secretary of State.

We trust the foregoing fully answers your inquiry. Yours very truly, ATTORNEY GFXERAL OF TEXAS BY /s/ Robert L. Lattlmon$Jr. Robert L. Lattlmore, Jr. Assistant RLL:LJ -dhs

APPROVED APR. 30, 1945 A PPROVBD /s/ Carlos C. Ashley OPINION FIRST ASSISTAN’I ATTORNEY (IENERAL COMMITTEE

BY L.P.L.

C-