Untitled Texas Attorney General Opinion ( 1945 )


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  • Honorable   Claude Isbell
    Secretary   of State
    Austin,   Texas
    Attention:     Mr. Horace   B. Sessions,
    Securities   Commissioner.           !
    Dear Sir:                                Opinion NO. O-6515                   .i;'.
    Re:   constxuction      of Art. 6OOa,
    V. A. C. S., In respect        to
    the authority      of Secratarg
    of State 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
    for 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       of
    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      of the
    securities    with the Federal      Securities    and Exchange
    Commission and registration         with those States       In which
    a portion    of the securities      will   be offered     and sold.
    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 to
    the public   at $10.00 per share,    300,000 shares of which
    t\
    Hon.    Claude   Isbell,    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    by the
    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
    $432,500.00 efter    deduction   of the underwriting       dis-
    counts and commissions.       Whils the company has a fair
    earn1     record  and has pa.id i-ividends    of .V per share
    In 194..Y$ 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,     the Secretary       of State can not refuse          the
    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    the language      ‘proposed      plan of business’
    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
    that it was intended        that the lznfunge           ‘proposed       plan
    of bus*ness’     be given a meaning restricted                 to the
    corporate    business    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                        to
    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      the
    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                        of
    passing     upon whether or not it may be fair,                   just    and
    equitable      for any particular           Issue of securities           to
    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             business      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 the
    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     your favorlng            us with an
    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
    grounds that the       lan of the applicant               ~(issue?, under-
    writer,    or dealer P seeking      to qualify          the secudtles
    appears unfair,     unjust,     and InequItable            upon consider-
    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        of State to grant or deny an application
    for a permit for the sale of securities,            and.,,said fact sltua-
    tlon is presented      solely   for 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       shall   limit, or dlmlnloh        the full
    meaning of the terms ‘fraud, t ‘fr:-r&lent,            I and Fraudulent
    practice’   as applied     or accepted    In 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
    Subdivisions      (a) to (c)     :-Q-h inclusive,       of Section     3 of th-113
    P.ct, or Suhdivislons       (aj 42 ii)>    both    inclsafve     of   Section     23
    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 issuer      and attested     by the c1cretary        thereof,     3ettlng
    forth the 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 h off;:%3
    bran                  T: I Y.is State 9 if any.
    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          of its di?ecto?s,        “tockholders
    $.’                c? membe::3
    relating     to or affecttng         the issue o said security.              If a
    corporation,        a cony of It s by-laws        and of any amendments ther.-
    of.    I,P a trustee,        a copy of all Fnstruments by which the trust
    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            of the
    issuer    that 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;                   the
    par value of each share,             or if no par stock,           the price at
    which such security           is prcposed     to be 3@ld; the commission             to
    be paid for the sale of same,              including     ang     and  all  compensation
    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
    cash,    stock,     service,    0~ other-use,       or   afilly of either        or
    both;    also,                                          B
    the amount of cash to be pa d, 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
    security;    a copy of any prospectus        or advertisement
    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       the 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
    ‘I’    the actual       cost In money, and shall                  shof~the     present
    actual.    value     of’ $aid assets;          also,     whether the value          set
    forth      In the statement            is greater        or less than the actual
    cost value In money and ‘greater                    or less than the present
    market value of such assets.                    If   any of the assets
    consist      of real estate,           then sald statement            shall     show
    the amount for which said real estate                         Is rendered       for
    state and county taxes,                or assessed         for taxes.        If any
    such assets        listed       shall    consist     of anything other
    than cash Rnd real estate,                  same shall be set out in
    detail       so    as      to    give the       Secretary        of State the
    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
    filed.       Should any of the assets                 listed     In said
    statement       be subject         to any repurchase            agreement,
    or any other agreement of like character,                           by the
    terms of which the absolute                  OmelVhiD        of, or title
    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)
    Ron.   Claude    Isbell,    page    6 (O-6515)
    months from the date of such application,                    and shall
    list   separately      from such current        liabilities,         all
    other llabllltles,          contingent    or otherwise,         showing
    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
    shall    also Include       a deteLled    profit    and loss
    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
    ,:,``orating, then a financial         and profit       and laze
    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         shall 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      for
    or on behalf     of an Issuer         organized    under the laws
    of any other state,        territory,        or government,        or
    domiciled    in any ether etate 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
    business    In such state,        territory     or government,
    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      by the
    seal of sold issuer,         appoint      the Secntarg        of State
    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
    with process     therein.        It shall be the duty of
    the Secretary      of State,       whenever he shall have
    been served with any process              as Is herein provided,
    Hon.   Claude    Isbell,    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 to
    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           the
    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            the
    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-
    ing.     Such   applicant      may   appeal     from  any sling      OT
    declslon     made at such hearing            ln the same manner
    and In the same form as is hereinafter                  provided      for
    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  that
    your inquiry   will be fully  answered by our lnteroretatlon      of
    the meaning of the following    sentence  contained   Ln Set- 8,
    Art. 600a, suprar
    “If he finds that the proposed         plan of
    business    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    of the
    same are not such as will         work a fraud upon
    the purchaser     thereof,    the Secretary    of State
    shall   Issue to the applicant       a permit author-
    izing   It to issue and dispose        of such securities.”
    Hon.   Claude   Isbell,   Page 8 (o-6515)
    We first    must determine     what constitutes    the “pro-
    posed plan of business”       of an appilcant    such as the one
    mentioned by you.       In the case of Home Lumber Co. et al
    vs. Hopkins,    Attorney    General,   et al, 
    190 Pac. 601
    , wherein
    an application     for writ   of- mardamus was granted      by the
    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 the
    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    for
    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
    the illustrative         fact situatfon         on hand, we find that the
    applicant     is a nonresident         “manufacturing”       company engaged in
    manufacturing       radio parts and equipment O It must be assumed
    that In order to begin its q anufac+uring                  it bad to organize
    Itself     under the laws of its domicile,              also that in order to
    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”
    or “plan of business”           of the applicant.          If the manufacturing,
    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
    and stock)      to be sold in Texas , provided             that such securities,
    as they are proposed to be sold In this State compared with
    their    true worth as Indicated           by the stated condition        of the
    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
    that done in respect         to the selling         of its securities.        The
    sale value of same, together              with the method and manner of
    Hon.   Claude     Isbell,    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               that
    stock or debentures              could be issued in respect             to their    actual
    value     fair,     just    and equitable,        while same could be put up for
    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
    for the Seoretary             of State to engage In “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,
    ATTORNEYGFXERAL OF TEXAS
    BY /s/    Robert L. Lattlmon$Jr.
    Robert    L. Lattlmore,    Jr.
    Assistant
    RLL:LJ     -dhs
    APPROVED APR. 30, 1945                                        APPROVBD
    /s/ Carlos C. Ashley                                          OPINION
    FIRST ASSISTAN’I ATTORNEY(IENERAL                             COMMITTEE
    BY L.P.L.
    C-
    

Document Info

Docket Number: O-6515

Judges: Grover Sellers

Filed Date: 7/2/1945

Precedential Status: Precedential

Modified Date: 2/18/2017