Untitled Texas Attorney General Opinion

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Honorable Stan Schlueter Opinion No. JM-707
Chairman
Ways and Means Committee Re: Authority of the State Securi-
Texas House of Representatives ties Board to adopt a rule deleting
P. 0. Box 2910 certain factors which the board has
Austin, Texas 78769 heretofore considered in determining
whether a particular securities
issur is fair, just and reasonable
Dear Representative Schlueter:
You ask whether the State Securities Board has authority to
promulgate proposed Rule 7 T.A.C. 113.3, 12 Tex. Reg. 456 (1987).
Your concern appears to be directed to subsection (14) which provides:
(14) Certain firm commitment conmon stock
offerings.
(A) Definitions of terms. The following
words and terms, when used in this paragraph,
shall have the following meanings, unless the
context clearly indicates otherwise.
(0 Common stock -- the non-assess-
able underlying residual equity security of a
corporate issuer, which security encitlas the
owner or holder thereof to vote on the election of
directors or others charged with the management of
the affairs of the issuer and on such matters as
merger, dissolution, or amendment of the articles
of incorporation or comparable governing instru-
ment , with no right to receive a fixed sum in
dividends and no right to priority claim in the
distribution of assets upon the voluntary or
involuntary liquidation, dissolution, or winding
up of such corporate issuer.
(ii) Corporate issuer -- A corpora-
tion or business trust organized under the laws
of. and having its principal place of business
within, any state of the United States.
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Honorable Stan Schlueter - Page 2 (``-707)
(iii) Firm ccmmitment under-writiug
- Au agreement of the underwriter or underwriters
to take and pay for the securities (other than
securities subject to over-allotment options) at a
closing within ten business days after the start
of the offering, subject only to conditions common
in agreements regarded as fins commitments in the
securities industry.
(iv) Public offering price of at
least $5.00 -- The common stock is offered to the
public for cash of at least $5.00 per share; the
common stock is not directly or indirectly
divisible, convertible into or exchangeable for,
and does not include the right to acquire one or
more other securities at a price of less than
$5.00 each or likely to sell at a price of less
than $5.00 each; and there is no plan to make a
stock or other security dividend or distribution,
stock or other security split, rights offering or
other transaction the likely effect of which will
be to reduce the market price of the cormnonstock
to less than $5.00 per share. If any of such
transactions occurs within one year after the
effective date of the registration statement
covering such common stock, it will be presumed,
subject to rebuttal by clear and convincing
evidence, that the public offering price of the
common stock was not at least $5.00 per share.
Further, such an occurrence is deemed to con-
stitute sufficient grounds for the issuance of an
order pursuant to the Securities Act, 5.0.
(v) Qualified underwriter -- A
dealer who is a member of the National Association
of Securities Dealers and either the New York
Stock Exchange or the American Stock Exchange.
(B) Applicability of fairness standards
to firm commitment-conrmonstock offering. Not-
withstanding paragraphs 2-6, S-10, 11(A) and (B),
and 13 of this subsection, the offering and sale
pursuant to a registration statement filed under
the Federal Securities Act of 1933, as amended, of
common stock by a corporate issuer in a bona fide
firm commitment. underwritten oublic offerine
managed by a qualified underwriter, shall be
deemed to be fair, just, and equitable provided
that the following conditions shall have been met
in connection with the offering and sale:
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Honorable Stan Schlueter - Page 3 (``-707)
(0 The common stock shall have a
Public offering price of $5.00 per share; and
(ii) the aggregate gross proceeds to
the corporate issuer from the fire commitment
underwriting shall be at least $2,000,000.
(Emphasis added).
You question whether the State Securities Board "would be
abdicating a large portion of the responsibility that the Legislature
has mandated, under the existing statute, that the Board should carry
out" if such rule were promulgated.
Article 581-10, V.T.C.S., Examination of Application; Permit
provides:
A. Commissioner to Examine Application; Grant
or Deny.
Upon the filing of an application for qualifying
securities under Section 7A, it shall be the duty
of the Commissioner to examine the same and the
papers and documents filed therewith. If he finds
that the proposed plan of business of the applicant
appears to be faiT, just and equitable, and also
that any consideration,paid, or to be paid, for
such securities by promoters is fair, just and
equitable when such consideration for such
securities is less than the proposed offering price
to the public. and that the 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 Commissioner shall issue to the applicant a
permit authorizing it to issue and dispose of such
securities. Should the Commissioner find that the
proposed plan of business of the applicant appears
to be unfair, unjust or inequitable, he shall
deny the application for a permit and notify the
applicant in writing of his decision.
Subsection D, Examination of Application; Permit, was added to
article 581-10, V.T.C.S., by Acts 1983, 68th Leg., ch. 465, 54. at
2716 (eff. Sept. 1. 1983). It provides:
D. Commissioner's Discretion. In applying the
standards of this Act, the Commissioner may waive
or relax any restriction or requirement in the
Board's rules that, in his opinion, is unnecessary
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Honorable Stan Schlueter - Page 4 (JM-707)
for the protection of investors in a particular
case.
Your concern is directed to language in that portion of the
proposed rule which reads:
(B) Applicability of fairness standards to
firm commitment-common stock offering. Notwith-
standing paragraphs 2-6. S-10, 11(A) and (B), and
13 of this subsection, the offering and sale
pursuant to a registration statement filed under
the Federal Securities Act of 1933. as amended, of
common stock by a corporate issuer in a bona fide
firm comaitment. underwritten public offering
managed by a qualified underwriter, shall be
deemed to be fair, just, and equitable provided
that the following conditions shall have been met
in connection with the offering and sale:
(1) the common stock shall have a public
offering price of $5.00 per share; and
(ii) the aggregate gross proceeds to the
corporate issuer from the firm commitment under-
writing shall be at least $2.000,000.
The scenario you envision if the proposed rule is promulgated is
set out succinctly in your inquiry, and states:
The board would be saying, in effect, that if an
investment banker or syndicate of investment
bankers (&, stock brokers) determine at a
minimum that they are willing to buy for approxi-
mately $1.800.000 an issue of common stock (which
they will have already pre-sold to public
investors for et least $2,000,000), the offering
will be conclusively presumed by the State to be
fair, just and equitable to such public investors.
That presumption would exist, no matter how much
watered stock the corporate insiders hold, no
matter how unequal the voting rights of the public
investors, no matter how extensive are manage-
ment's conflicts of interest and no matter how
much of the corporation's assets the insiders may
have taken in the form of loans to themselves.
Whatever the merits of the proposed rule, our concern must be
limited to whether the rule is authorized by and consistent with
statutory provisions. Texas Fire and Casualty Company v. Harris
County Bail Bond Board, 684 S.W.2d 177 (Tex. App. - Houston [14th
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Ronorable Stan Schlueter - Page 5 (JM-707)
Dist.] 1984, writ ref'd n.r.e.). In determining whether an agency has
exceeded its rule-aakiug authority, the critical factor to be
considered is whether the rule harmonizes with the general objective
of the statute. State Board of Insurance v. Deffebach. 631 S.W.2d 794
(Tex. App. - Austin 1982, writ ref'd n.r.e.).
Subsection D of article 581-10. V.T.C.S.. vests broad authority
in the commissioner to waive or relax rules. However, it does not
grant the commissioner authority to waive any requirement mandated by
the statute. Article 581-10A is explicit in requiring that an
application for qualifying securities under section 7A be examined by
the commissioner and found to be "fair, just and equitable" as it
relates to (1) the proposed plan of business of the applicant and (2)
any consideration paid, or to be paid for such securities when such
consideration for such securities is less than the proposed offering
price to the public. The statute also mandates that the commissioner
deny the application for a permit if the comissioner finds "that the
proposed plan of business of the applicant appears to be unfair,
unjust or inequitable."
It is our opinion that a rule which would allow the securities
commissioner to waive the "fair, just and equitable" requirement on
the basis of the offering price per share and the amount of aggregate
gross proceeds to the corporate issuer from the firm commitment
underwriting, would permit the commissioner to subvert the intent of
the legislature.
SUMMARY
The State Securities Board does not have
authority to promulgate proposed Rule 7 T.A.C.
113.3. Its provisions, which authorize the
commissioner to waive the requirement that
offerings "shall be deemed fair, just and
equitable," cannot be harmonized with the legisla-
tive intent expressed in article 581-lOA,
V.T.C.S., that application be denied if the plan
of business appears to be unfair, unjust or
inequitable.
JIM MATTOX
Attorney General of Texas
JACK HIGHTOWER
First Assistant Attorney General
/-
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Honorable Stan Schlueter - Page 6 (JM-707)
MARY KELLER
Executive Assistant Attorney General
JUDGE ZOLLIE STEAKLN
Special Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Tom G. Davis
Assistant Attorney General
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