Recapitalizations And Reorganizations Outline

Recapitalizations and Reorganizations

1. Recapitalizations

   1. The "For Value" Requirement

      1. § 2(a)(3) defines "sale" and "offer to sell" as involving "every attempt . . . to dispose of . . . a security . . . for value." (emphasis added)

         • The issue is whether there is a "sale" under § 2(a)(3).

      2. "[F]or value" depends "not only on whether the recipient of the security gives something of value . . . but also on whether value is received from any other source." In re Capital General Corp. (pg. 394)

      3. Free Stock

         • In In re Capital General Corp, after the promoters purchased all the shares of 69 companies and made gifts of the stock to 275 to 900 persons throughout the United States and retained a controlling block of stock for each company, which they later sold for a handsome profit. The Commission concluded that the promoters received value in the form of the public markets that their gifts of stock had fostered. (pg. 394)

         • When many internet start-up companies awarded free stock to individuals who visited the company website, the SEC reasoned that the companies were violating § 5; the staff reasoned that the issuance of stock in consideration of a person's registration on or visit to the company's website fell within the meaning of § 2(a)(3). See, e.g., Vanderkam & Sanders (pg. 394)

      4. Stock Dividends

         • Because there is no consideration for those who receive stock dividends, the typical stock dividend does not involve the sale of a security.

         • Where there is a choice between receiving a cash dividend and a stock dividend, the SEC has taken the position that this is not a sale of a security:

           • "[I]f a corporation . . . declares a dividend payable at the election of the stockholders in cash or in securities, neither the declaration of the dividend, nor the distribution of securities to stockholders who elect to take the dividend in that form, would . . . constitute a sale within the meaning of the Securities Act . . . ." Securities Act Release No. 929 (pp. 394-95)

           • BUT "[I]f . . . there is declared a cash dividend payable to all stockholders, and if the board thereafter determines to grant stockholders the opportunity to waive their preexisting and vested rights to payment of the dividend in cash, and to receive the dividend in the form of securities, the stockholder electing to take securities would . . . be regarded as giving value for the securities so received." Securities Act Release No. 929 (pg. 395)

         • On the other dividend reinvestment programs, in which the stockholders may by prior agreement have their dividend applied toward the purchase of additional shares from the corporation at current market rates, are subject to registration under the Securities Act.

           • An exception to this arises when the dividend reinvestment program is structured so that an entity separate from the issuer purchases on behalf of participating stockholders the issuer's shares on the market, with the cash being the amount that the issuer would otherwise have distributed to those stockholders as a dividend. Under this structure, the SEC has taken the position that this is not the sale. Securities Act Release No. 5515 (pg. 395)

      5. Warrants and Convertible Securities

         • Bonds, warrants, and options are each specifically identified as securities in § 2(a)(1) and must be registered unless an exemption applies.

           • ASIDE: Options are generally not tradable while Warrants are tradable.

         • Whether the underlying security must be registered depends on when, by the instrument's terms, the holder can acquire the underlying security through conversion or exercise of the warrant or option.

           • If the conversion features or the warrant's or the option's terms provide that it can be exercised immediately, two district securities are being offered so that each has to be registered or qualify for an exemption.

           • If by the terms the holder cannot convert or exercise warrants or option until some future date, the underlying security is not "offered for sale" until the future date, and the underlying security's registration is not required at the time the convertible security, warrant, or option is being offered.

             • BUT of course the conversion right itself must be registered.

      6. Amendments to the Articles or Bond Indentures

         • This is re an amendment that changes the terms of securities

         • ISSUES:

           • (1) Whether the amendment is a "sale" of a security under § 2(a)(3)

             • The SEC has been fairly consistent in viewing all material changes in a security's economic or voting rights as entailing the sale of a new security

               • BUT a sale is not involved if the change involves no economic consequences to the holders, such as altering par value. See INDRESCO, Inc., SEC No-Action Letter (pg. 397)

             • Courts are SPLIT

               • Some courts: Changing the terms is functionally equivalent to surrendering the old security for a new one.

                 • In SEC v. Associated Gas & Electric Co., the extension of the maturity date on a bond's indenture was a sale as the lengthening of the maturity date is functionally equivalent to surrendering the old security for a new one. (pp. 397-98)

               • Other courts: Not creating a new security if following the terms.

                 • In Browning Debenture Holders' Committee v. DASA Corp., the court held that no substantial alteration of the bonds had occurred because the original bond indenture authorized alteration of the bondholders' rights. (pg. 397)

             • Where the issue is reincorporation in a different jurisdiction, the SEC staff maintains in No-Action Letters that registration is not required because a reincorporation involves only a change in form, not substance. See, e.g., Adolf Coors Co., No-Action Letter; see also Western Air Lines, Inc. (finding that a Delaware Corporation's amendment of the articles to abolish cumulative voting was a "sale" of a security)

           • (2) Whether the sale involves the type of exchange of securities exempted under § 3(a)(9) - SEE BELOW

      7. Spin-Offs

         • A classic spin off begins with the corporation transferring the...

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