October 8, 1958 

Hon. William M. King 

State Securities Commissioner 

Austin, Texas 

Dear Sir: 

Opinion No. WW-504 

Re: Whether the proposed offer of 

common stock to holders of surplus debentures under the facts 

given is an exempt transaction 

under the provisions of either 

5(R) or 5(B) of The Securities 

Act. 

You have asked the opinion of this office concerning whether 

a certain offering of the Citizens Standard Life Insurance Company of 

Corpus Christi, Texas, of common stock to its "advisory board investment 

certificate holders" is exempted from the provisions of The Securities 

Act. Your letter is as follows: 

"In May, 1954, Citizens Standard Life Insurance Company, Corpus Christi, Texas, authorized the issuance at 

public sale of 3,000 ADVISORY BOARD INVNSTlMENT CERTIFICATES, of the face value of $600.00 each. By December 31, 

1954, subscriptions for 1449 Certificates had been taken 

on which $238,590.00 in payments had been made. A time 

pay-out plan was offered subscribers. 

"The purpose of this offering was to raise surplus 

funds for expanding the life insurance business of the 

company, and all net receipts have been In the past creditedto its unassigned surplus account. The company's 

obligation:> on the Certificates is not recognized or reported as a statement liability in the annual reports to 

the State Board of Insurance. 

"The original terms are set forth In the attached 

copy of a Certificate. The original offer of the Certificates to the public was made prior to the effective 

date of the Insurance Securities Act; therefore, the offering was not subject to registration with a State 

agency. 

"On September 17, 1957, over signature of the company's,secretary, and on September 30, 1957, over the 

signature of the company's president, offers to exchange 

stock of the company for certificates outstanding were 
Eon. William M. King, page 2 (WW-504) 

made under terms that were different from the terms provided in the certificates. Copies of these two letters 

are attached. No application for registration of securities has been filed. 

"In your examination of these letters it will be 

noted that an offer is made by the company to e*chsnge 

subscription contracts for the purchase of stock for 

subscription contracts for the purchase of Advieory 

Board Certificates in addition to an offer to exchange 

stock shares for paid-up certificates. 

"The Securities Act sets out in Section 7.A.that 

securities must be registered thereunder if sold or offered unless otherwise registered under Section 7.B., or 

Section 7.C., or unless such securities are defined by 

Section 5. as exempt transactions or by Section 6. as exempt securities. The Securities Act in Section 4.A. defines a security and in Section 4.E. defines the term 

' sale ' or 'offer for sale'. 

"Under the facts as given above, is the exchsnge 

offer made in the attached letters subject to registration under the Securities Act, unless exempt under Section 52-7.1 

"Section 5.F. of the Securities Act sets out as an 

exempt transaction the issuance of securities by a company to its securities holders, or creditors, when made 

in good faith in the process of a bona fide reorgsnizatlon. In your opinion would an amendment to a corporation's charter changing its capital stock from par value 

to non par value, and increasing the number of shares, 

joined with the stockholders ' decision to exchange common stock for surplus debentures, altering the terms 

thereof, constitute .s readjustment of capital structure 

or a serious overhauling by legal procedures to bring 

such change within the meadng of a bona fide reorganization as used in Section 5.F.T 

"Your consideration of these matters will be 

greatly appreciated." 

The Citizens Stan&d Life Insurance Company issued approximately 3,000 of its so-called "advisory board investment certificates," 

each having a $600 face or maturity value. The certificates were issued 

either for cash or upon a five-year payment plan. Under the terms of 

the certificate, the company agreed to pay the certificate holder interest at the rate of 4$ on all payments made under the certificate, with 
Hon. William M. King, page 3 (WW-504) 

the first year's payment of interest to be made out of contributed surplus, and thereafter out of earned surplus. It was further provided 

that at the end of the first full calendar year after the date of the 

certificate, 8nd the end of each calendar year thereafter until m8turity, 

the company would create an "annualbonua fund" for the benefit of the 

registered certificate holders out of the profits and/or earned surplus 

of the company, which it would divide into 3,000 equal parts; 81$ so 

long a8 a certificate was in force, one such part would be paid to each 

owner of the certificate. The amount of the annual bonus fund was to 

be Z$ of the renewal life insursnce premiums paid during the year to 

the company on all life insurance policies, plus l$ of the "excess interest earnings on all investments" of the company. The company was 

required to continue the payments into the annual bonus fund until the 

maturity of the certificate or until the certificate had been called 

in the m8nner provided in the contract. 

In addition to the annual bonus fund provided, the company 

also agreed to set up on its books 8 "special surplus fund account" and 

agreed to credit to that account at the end of each calendar year after 

the date of the certificate a sum equal to 33-l/3$ of its net surplus 

earnings for each year. It w8s provided th8t the certificate should 

mature and the face value thereof paid to the registered owner within 

60 days after the amount accumulated in said "special surplus fund BCcount" should be equal to the aggregate of the total face value of all 

outstanding advisory board investment certificates and the accumulated 

interest, if any. 

At such maturity the company agreed to pay to the registered 

owner the face value of $600.00'plus interest and further "within the 

limits of its presently existing legal contractual powers, to permit 

the owner of this certificate, if he so elects, in lieu of acceptance 

of payment of the face value in cash, to convert the face value of this 

certificate into the compaay's common stock at the stipulated price of 

$100 per.sh8re.w 

Under the terms in the certificate under the heading "Guaranteed Surrender Value," the certificate holder could discontinue payment 

and could receive 8 “modified certificate" which in effect was a pro 

rata advisory board certificate, less certain liquidated d8mage charges 

giving the certificate holder the right to participate on a pro rat8 

basis in 811 the benefits except the 8Mual bonus fund. 

Under the heading "Miecellaneoun," it was ProVidd that any 

moneys paid for the investment certificate should be treated 8s paidin surplus and th8t the company could make use of such funds in any way 

that surplus funds of the company might be lawfully used. It was further provided that all interest was payable only 88 therein set forth, 

and that the investment certificate, together with the interest thereon, 

should not be a liability of the company or a claim against any of its 

I. 
4 . 

Eon. William M. King, page 4 (WW-504) 

assets except 8s above specified in the paragraph. And in seemingly 

conflicting terms, it was further provided that in the event of liquidation of the company the investment certificate should immediately mature 

and become 8 present liability of the company subject to the rights of 

the policyholder. 

~...,". 

These certificates have not yet matured. It is the purpose 

of the Citizens Standard Life Insurance Company to offer to each holder 

of an advisory board investment certificate 60 shares of its common stock 

in exchange for a surrender of qych certificate plus 8 bonus of 6 shares 

to each certificate holder c&&l&ing h& payments by a date specified 

which would be in advance of the &&es specified in the certificate. 

It should be noted that under the terms of the certificate the company 

hd agreed that at maturity the face value should be payable in cash 

or stock of the company at the election of the certificate holder. Thus, 

under the terms of the certificate at maturity, each certificate holder 

of a full $600.00 certificate would have been entitled to elect to receive six shares of stock. Since the issuance of these certificates 

the corporate structure of the Citizens Standard Life Insurance Company 

has been changed resulting in 8 ten-for-one split.. 

i Prior to the charter amendment creating the stock here in question, the company had issued stock to other certificate holders who had 

paidyin full the amount of their certificate. The general plan of the 

company has been to Obtain charter amendments increasing their capital 

stock periodically to accommodate these certificate holders. 

The Securities Act states that securities as defined therein 

must be registered under Section 7 if sold or offered for sale unless 

the sale or offer of sale of such securities constitute "exempt transactions" as defined by Section 5, or such securities are "exempt securities" as &fined by Section 6. The term "sale" and related terms are 

defined in great detail in Section 4(E) and it is only necessary to refer to 8 portion of this definition to ascertain that the contemplated 

exchsnge in this case would constitute a sale or offer to sell of securities requiring registration unless exempted. Section 4(E) is 8s follows: 

"The terms 'sale' or 'offer for sale' or 'sell' shall 

include every disposition, or attempt to dispose of a security for 8 value. The term 'sale' means and includes 

contracts and agreements whereby securities are sold, traded 

or exchanged for money, property, or other things of value, 

or anyJtrensfer or agreement to transfer, in trust or otherwise . , . The sale of 8 security under conditions which entitle the purchaser . . . to exchange the same for, or to 

purchase some other security, shsll not be deemed 8 sale or 

offer fbr sale of such other security; but no exchange for 

or sale: of such other security shall ever be msde unless and 

." until the sale thereof shall have been first authorized in 

Texas under this act, if not exempt hereunder, or by other 

provisjons of law. . .' 
Hon. William M. King, page 5 (WW-504) 

Clearly, the consummation of the prospective plan would fall 

within this definition. 

You have requested in your letter the opinion of this office 

whether or not the transaction in question is exempt from registration 

under the provisions of The Securities Act. It has been suggested that 

the transaction may be exempt either under the provisions of 5(D)(E)(G) 

exempting certain distributions by a corporation of securities directly 

to its stockholders, or the provisions of 5(F) relating to transfers 

in the course of reorganization. We shall take up the exemption under 

5(D)(E)(G) first. 

Section 5 of The Securities Act is, in part, 88 follows: 

"Section 5. Exempt Transactions. 

"Except as hereinafter in this Act specifically provided, the provisions of this act shallnot apply to the 

sale of any security when made in any of the following 

transactions and under any of the following conditions, 

and the company or person engaged therein shall not be 

deemed s dealer within the meaning of this act; that is 

to say, the provisions of this act shall not apply to 

any sale, offer for sale, solicitation, subscription, 

dealing in or delivery of any security under any of the 

following transactions or conditions: 

‘1. . . 

"I). The distribution by a corporation of securities 

direct to its stockholders as a stock dividend or other 

distribution paid out of earnings or surplus. 

'73. The sale of sn increase of capital stock of a 

corporation only to its stockholders and without payment 

of any commission or expense to any officer, employee, 

broker or agent; 

‘1. . . 

“CL The transfer or exchange by, or on account of, 

one corporation to another or to its stockholders of 

their or its own securities in connection with a proposed consolidation or merger of such corporation or in 

connection with the change of par value stock to non par 

value stock or vice versa, or the exchange of outstsnding shares for a greater or smaller number of shares, 

provided that in such case such stockholders do not pay 

or give or promise and are not obligated to pay or give 
Eon. William M. King, Page 6 (WW-504) 

any consideration for the eecu'ritlee So transferred or 

exchanged other than the securitieri of said corporation 

then held by them; . . ." 

These exemptions apply only to "stockholders" of the corporation. 

The contention has been advanced that because under the terms 

of the so-called advisory board investment certificates, the holders 

of the certificates, after completing the terms of their agreement and 

sfter maturity, 8re given the right to require the company to redeem 

the certificate ,ia common stock rather than in cash, they should be claesifled 88 stockholders. However, under the facts recited, the certificates in question have not matured and there is not at this time under 

the terms of the contract any existing right on the part of the certificate holders to require the redemption of these certificates, either in 

C8Sh or in stock. While it may be true that in some circumstances and 

under certain conditions perSonS holding by right of contract or otherwise 8 right to become 8 Stockholder may exercise under~certain conditions Some of the right8 and prerogatives of 8 Stockholder, the certificate holders do not fall withih the normal definition of the term "stockholdere." We hold that the transaction is not exempt under Sections 

5(D), 5(E) or 5(G). 

We next consider whether the tr8neaction in question qualifies 

as an exemption as the issue of Securities in the course of a reorganization under the provisions of Section 5(E) which is as follows: 

"F. The issue in good faith of Securities by a company to its security holders, or creditors, in the process 

of 8 bona fide reorg8nlzation of the company made in good 

faith, . . . provided that . . . Such Securities are issued 

in exchange for securities of such holders or claims of 

such creditors, or both, and . . . security holders or creditors do not p8y or give or promise and 8re not obligated to 

pay or give any consideration for Securities so issued other 

than the Securities Of or CtiiQIS 8g8inSt Said company . . . 

then held or owned by them." 

The term "reorganization" is not defined in the statute. Nor 

do we find any cases in Texss Interpreting the meaning of this exemption 

though it has been in effect in substantially the same language in the 

Securities Acts since 1935. Nor have we been able to find any Texas 

caSes dealing with the meaning of this term which would have a Significance to its present application. The term "reorganization" has been 

defined by Texas Jurisprudence in,Volume 10-B, page 676, as follows: 

"A 'reorg8niS8tlon' has been termed 8 plan under which 

the financial structure of the corporation was rearranged, 

as by 811 Increase or decrease of capital." 
n 

Hon. William M. King, page 7 (WW-504) 

This definition of the term "reorganization" 

it would include every transaction whereby the capital 

poration was increased or decreased. While it is true 

"reorganization" will effect a change in the financial 

. I. ^. 

is so broad that 

stock of a corthat almost every 

structure of the 

corporation, it is not true tnat every cnange *n zne rlnancial structure 

is 8 "reorganization." 

We find thst the above quoted. from Texas Jurisprudence is not 

supported by the cases cited therein. 

At 15 Fletcher's Cyclopedia Corporations, Section 201, page 

318 (1938 revised volume), it is demonstrated that the term "reorganization" has many meanings. 

"The term 'reorganization' signifies the act or process of organieing anew. As anplied to corporations, it 

denotes various proceedings and transactions by which a 

succession of corporations is brought about. Ordinarily 

it involves the creation of a new corporation to take over 

the assets and property and continue the business of the 

old. This, however, is not necessarily the effect of a 

reorganization. The terms of the statute and the intention of the Legislature and of the parties may be merely 

to continue the existing corporation, without dissolution, 

under the same or different name and with the same or different powers, and under the 881116) or a different management. According to Mr. Morawetz, the term 'reorganization' 

is 'commonly applied to the formation of a new corporation 

by the creditors and shareholders of a corporation which is 

in financial difficulties, for the purpose of purchasing 

the company's works and other property after the foreclosure of a mortgage or judicial sale'. 

"It is proper to classify reorganizations as (1) reorganizations in connection with the foreclosure of corporate mortgages, or in connection with other judicial or 

execution sales of the corporate property by the purchasers 

at the sale, and (2) other reorganizations or reincorporat ions. The latter class is divisible into (a) reincorporations where the purpose is merely to correct illegalities 

or defects in the original incorporation, or to broaden the 

scope of the powers of the corporation, including, in one 

sense of the word, the amendment as well as the extension 

or revival of charters; (b) the scaling of securities by 

voluntary agreements and (c) the organization, primarily 

by or on behslf of the stockholders as distinguished from 

the creditors, of 8 new corporation, without 8ny forced 

sale, to take over the property of the existing corporation. 

The term is used most often in connection with the foreclosure 

. 
Hon. William M. King, page 8 (UW-504) 

of corporate mortg8geS where 8 new corporation is formed 

by the foreclosure purchases, and most of the law, as laid 

down in the decision, in connection with reorganizations, 

relates to the first class of reorg8nization, and much of 

such law is not applicable to other reorganizations. 

"The reasons inducing 8 reorganization are not in 

every case the same, but for the most part they are to be 

found in the weak financial or insolvent condition of the 

p8rticul8r corporation. And so the aim of a corporate reorganizstion is generally to put the company upon a sound 

finsncialbasis, and to enable it to take care of it8 obligations, thereby avoiding llquld8tlon or bsnkruptcy. 

But in Some cases 8 reorganization IS effected, notwithstanding the corpor8tiOn IS SolVent. Very often 8 'sound 

enterprise, earning an adequate return, will be hampered 

by 8n unsound finsnclal Structure involving excessive fixed 

charges, such 8s bond Interest; or again the difficulty of 

refunding 8 material bonded indebtedness during 8 time of 

financial stringency, or the urgent need of additional capital for improvements, or the weight of an unfunded debt will 

make 8 reorganizationecessary. 

"The reorganization of an Insolvent business involves 

considerations not present in the reorganization of a solvent one. Almost alxays the 18tter is 8 matter of purely 

business policy not intended to nor resulting in dieturbante of existing legal rights of creditors or Stockholders. 

It Is carried through in strict conformity with Such rights, 

the purpose being to better an existing condition. The 

former is compelled by the ineXOr8ble logic of 8 bad situation, is designed to save 8s much 8s possible from impending 

wreckage, 8IId 8lw8yS inYOlYeS change8 in the existing legal 

rights of some, if not all', of those having rights in connection with the property involved." 

Cur attention la called to the case of Utility Investing Corporation v. Stewart, 11 Fed. Supp. 391 by the Federal District Court in 

Pennsylvania, which opinion w8e affirmed In Stewart v. Utility IIwesting 

Corporation (C.C.A. 3rd) 78 Fed.2d 279. Thin case Is apparently the 

only one interpreting the meaning of the term "reorganization" in the 

context of the State Securities Act. The PennSylvania Securities Act 

provided that: 

"The issue of securities to the Security holdera or 

other creditors of 8 corporation, in the process of 8 bon8 

fide reorganization of such corporation, made In good 

faith . . . In exchange for the securities . . . of such 

creditors . . . [Should not constitute the perSon or company engaged therein 8 dealer within itS meaning].” 
Hon. William M. King, page 9 (WW-504) 

Under the facts involved in the case, the corporation in question was offering to debenture holders of that company certain new or 

different securities in exchange for their debentures. It was the purpose of the company to relieve itself of the burden of having to meet 

fixed interest charges at definite periods by inviting the holders of 

fixed interest debentures to exchange them for new obligations at a high 

rate of interest, cumulative, but payable only as earned and coupled 

with a sinking fund provision. The holders were also offered two options, 

the exercise of either of which was described by the court as having the 

effect of naturally lightening the fixed interest burden upon the equities of the holding company. The court stated: 

"I entertain no doubt that this rearrangement of its 

capital structure is a reorganization of the company within the meaning of the act. While corporate reorganizations 

are frequently, in fact usually, effective through the medium of receivership and judicial sale, the ordinary meaning of the word is quite broad enough to include voluntary 

capital readjustments. Nor is it necessary that there be a 

new corporation or change of management or ownership of 

physical assets. Nor need the equities be affected (though 

in this case they are). That the act contemplates, among 

others, reorganizations entirely confined to the credit 

structure appears from the fact that the provision in question may be read as applicable to 'issue of securities to 

the . . . creditors . . . in exchange for the . . . claims 

of such creditors.' 70 P.S. Pa. Sec. 2(c) and (11). 

"The underlying purpose of this and similar statutes 

is to protect the investing public. The method by which 

the Pennsylvania Act does it is the licensing of dealers. 

Exceptions from the operation of the law are created by excluding from the class of dealers persons engaged in certain specified transsctions, one of which is the offer of 

securities in the course of corporate reorganizations. The 

only condition is that the reorganization be bona fide and 

the offer of securities made in good faith." 

This decision recognizes that whether a given transaction is 

a reorganization depends upon the particular facts involved. Though 

recognizing certain similarities, we believe the fact situation involved 

in your request differs from those in this decision so that it would 

not control even though it be the law in Texas. 

In connection with this transaction the Citizens Standard Life 

Insurance Company has made application to the Commissioner of Insurance 

for approval to amend their charter to permit the increase of their capltal in order to transfer the stock to their so-called certificate holders. 

We call attention to certain testimony taken by the Commission on February 
Hon. William M. King, page 10 (WW-504) 

25, 1958, in connection with said application. On page 13 of this transcript Mr. Preston Doughty, President of the Citizens Standard Life Insurance Company, explained the purpose of the amendment in the following 

language: 

"In fact, the program of getting these ~ . . this 

charter amendment was motivated by constant requests from 

the advisory board, of certificate holders that they be 

permitted to surrender their certificate and be issued 

stock. The stock of the company, on a local market, has 

a very good, high demand." 

On this same subject matter Mr. Doughty stated on page 14: 

"Many of these certificate owners, having completed 

their payments, continuously requested of us that they be 

Issued stock." 

Again, on page 15 Mr. Doughty stated: 

II . . . We felt, and the holders of the certificates 

felt, too, that their position would be improved if they 

could be permitted to become stockholders." 

The nature of the transaction is further discussed by Mr. Doughty 

on page 15 when he was asked whether the certificate holders were surrendering their certificates and taking out stock under the option called 

for in the certificate, and Mr. Doughty replied that they were not obtaining their certificates under the option but in addition to the option, 

and further stated in response to a question as to whether or not the 

exchange was made on the same basis of the option, as follows: 

"Altered only by the fact that the stock--the ten 

shares of no par stock had been authorized and issued for 

each share previously issued and authorized par stock and 

giving them full . . .I' 

He affirmed that the certificate holders were getting 60 shares 

of no-par stock in exchange for the certificate and that the company 

was giving the certificate holders the opportunity of obtaining Six additional shares if they had previously paid in full or would now pay 

in full the amount of their certificate. 

Mr. Doughty further stated on page 1.6 that a subsequent offer 

to the certificate holders was made purely on the basis of the certificate holders' options contained in the certificate. 

Again, on page 20 Mr. Doughty, in explaining the purpose of 

the charter amendment, stated: 
Hon. William M. King, page 11 (WW-504) 

"In order to be of assistance to them and at the same 

time the company, to relieve the company of the burden of 

paying them interest and paying them this participation in 

the bonus pool, the stockholders, the directors, and the 

officers of the company felt that we should do both these 

things, go to no-par stock and at the same time offer these 

people the opportunity to become shareholders." 

We are of the opinion that under the facts surrounding the 

issuance of the stock in question that the transaction does not constitute a reorganization as that term is used in Section 5(F) for the reason that the principal purpose of the distribution appears to be the 

honoring of contractual commitments made by the company to Its certificate holders to allow them the privilege of becoming stockholders. None 

of the ordinary or usual elements giving rise to a need for the organization appears to be predominant. There are no facts to indicate that 

the transaction is motivated by the financial dietress of the corporation, nor does it appear that the primary motive is the lessening of 

the financial burden of the company because of its obligations to the 

holders of the certificates. It should heLnoted that in the ordinary 

circumstances one of the primary purposes of reorganization is the protection of the equity of the present stockholders. That this purpose 

is not entirely the purpose of the'present transaction is evidenced by 

the fact that the offer of the company to certificate holders who have 

not paid in full the amount of their certificate is not simply an offer 

of stock equal to the present value of their certificate but rather under 

the plan advanced by the company the company has offered these people 

the opportunity to exchange their advisory board certificates for subscription contracts. Clearly, from this point of view the transaction 

in question does not constitute a reorganization under the terms of Section 5(F). The holders of the advisory board certificates that are not 

fully paid are only security holders or creditor6 of the company to the 

extent that they have paid on their certificate. Particular note must 

be given of the qualifying clause to Section 5(F) which provides that 

before the exchange in reorganization may be exempt, it must be a transaction in which the "security holders or creditors do not pay or give 

or promise and are not obligated to pay or give any consideration for 

the securities so issued other than the securities of or claims against 

said company . . . then held or owned by them." 

The certificate holder6 who have not fully paid for their certificates by accepting subscription contracts would be bound to pay further consideration for the stock of the company other than the simple 

surrender of the certificate that they held. 

We are of the opinion also that the transaction in question 

does not qualify as an exempt transaction under Section 5(F) for the 

additional reason that some of the stock to be issued is in the form 

of a bonus for early payment or prior payment of the face amount of 
Hon.. William M. King, page 12 (WW-504) 

their certificates. Clearly, such certificate holders have given consideration in the form of early oti prior payment which is in addition 

to and in excess of the simple surrender of the certificate which they 

hold. 

In the course of this opinion we have of necessity made certain factual conclusions based on the material which you have furnished 

this office and from the material collected by the State Board of Insurance in connection with the charter amendment application of the company. 

The fact finding authority under The Securities Act rest6 ,with you and 

you are at liberty to arrive at different factual conclusions from those 

utilized in this opinion. 

Issuance of stock to holders of advisory 

board certificates under circumstances in 

question is not exempt from registration 

either under the provisions of Section 

. 

5(D), 5(E), .5(F) 

Act of 1957. 

FBW:llU 

APPROVED: 

‘OPINION COMMITTEE: 

Geo. P. Blackburn, Chairman 

John Reeves 

Morgan Neebitt 

or 5(G) of The Securities 

Yours very truly, 

WILL WILSON 

Attorney-.General ofTexas 

-" Fred B. Werkenthin 

Aaeistant 

REVIEWED FORTKE ATTORNEY GENERAL 

BY 

Riley Eugene FlCtcher