Opinion ID: 405111
Heading Depth: 1
Heading Rank: 1

Heading: ppg's appeal

Text: 16 The district court essentially held that because the securities were not exempt from registration, and because Cole was not a person sophisticated in transactions of this kind or having inside knowledge of the business, he was entitled under the rule set forth in Graham v. Kane, 264 Ark. 949, 576 S.W.2d 711 (1979), to a refund of the money paid for the securities, notwithstanding the absence of fraud, misrepresentation, or scienter on PPG's part. Id. 576 S.W.2d at 713-14. For the purposes of its first three contentions on appeal, PPG concedes that the rule in Graham v. Kane is as stated, but that Graham v. Kane is inapplicable here, either because the securities are exempt from registration or because Cole was an insider having superior knowledge of the business. 17 The Effect of Section 14(b)(9) and Rule 8(F)(3) 18 PPG's first contention is that it was not required to register the Car Color stock or to file a proof of exemption because the transactions of May 6 and 7, 1974 constituted a corporate formation and private placement of securities under Section 14(b)(9) and Rule 8(F)(3). These two provisions, when combined, essentially exclude from registration and from the filing of a proof of exemption any transaction pursuant to an offer, if: 19 (1) the offer is directed to not more than twenty-five persons; 20 (2) the seller reasonably believes that all buyers in the state are purchasing for investment; 21 (3) no commission or remuneration is paid or given, directly or indirectly, for soliciting the prospective buyer in this state; and 22 (4) the transaction involves the formation of a corporation and receipt of securities of that corporation by five persons or less. 3 23 Initially, we observe that Section 13(j)(2) of the Act defines an offer as including every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value. Ark.Stat.Ann. § 67-1247(j)(2) (emphasis supplied). Because we think an option to purchase a security is an interest in the security, we find that PPG, by agreeing to grant Cole the option, made an offer to Cole on May 7, 1974, and that, for the purposes of Section 14(b)(9), all subsequent payments to the escrow account and other subsequent transactions between the parties and involving the exercise of the option were transactions pursuant to an offer as contemplated by the statute. We must therefore determine whether the transactions of May 6 and 7, 1974 were exempt from registration and proof of exemption requirements of the Act. 24 The district court held that even if the transactions were properly exempted from registration under Section 14(b)(9), Section 14(f) removed the availability of that exemption unless a proof of exemption was filed. Rule 8(F)(3) was held not to operate to waive the Section 14(f) requirement, because (1) the transactions were not characterized as a corporate formation by Cole and PPG; 4 and (2) there was no evidence that the Commissioner of Securities had the authority to promulgate Rule 8(F)(3) in conflict with the legislative enactment. We need not address the issue whether both Cole and PPG formed the corporation within the meaning of the rule, because we agree with the district court that the rule was not a valid exercise of the Commissioner's authority under the Act. 25 For the purposes of this appeal, Sections 14(b)(9) and (f) can be said to give the Commissioner the following pertinent powers: 26 (1) the power to withdraw or further condition the availability of the exemption; 27 (2) the power to increase or decrease the number of offerees to whom the exemption applied;(3) the power to waive the requirement that the seller must reasonably believe that all buyers are purchasing for investment; 28 (4) the power to waive the requirement that no remuneration be given for soliciting prospective purchasers; and 29 (5) the power to amend or rescind the filing fee requirement of subsection (f). 30 Ark.Stat.Ann. § 67-1248(b)(9) and (f). 5 Nowhere in these two subsections, however, is there language that could reasonably be construed to give the Commissioner the power to waive the requirement that a proof of exemption must be filed. 6 Consequently, we hold that the rule is not a valid exercise of the rule-making authority granted to the Commissioner under Section 14(a) of the Act, Ark.Stat.Ann. § 67-1248(a), 7 and that PPG was required to file a proof of exemption with the Commissioner. By reason of PPG's not meeting this requirement, moreover, the private placement exemption is unavailable to PPG. See Ark.Stat.Ann. § 67-1248(f). 8 The Effect of Section 14(b)(1) 31 PPG next argues that the transaction of February 18, 1977, wherein Cole exercised his option to purchase the Car Color stock, was exempt from registration because it was an isolated, non-issuer transaction under Section 14(b)(1). The district court, however, held that PPG was the issuer of the Car Color stock. We agree. 32 The purpose of the 14(b)(1) exemption is to exempt from registration small, isolated transactions between private individuals. See L. Loss, Securities Regulation 182-83 (1961). At least for the purposes of the Securities Act of 1933, however, such exclusions were not intended to apply to persons holding 100% of the outstanding stock of the issuing corporation. 33 All the outstanding stock of a particular corporation may be owned by one individual or a select group of individuals. At some future date they may wish to dispose of their holdings and to make an offer of this stock.... Such (an) ... offering may possess all the dangers attendant upon a new offering of securities. Wherever such a redistribution reaches significant proportions, the distributor would be in the position of controlling the issuer and thus able to furnish the information demanded by the (1933 Act). This being so, the distributor is treated as equivalent to the original issuer and, if he seeks to dispose of the issue ..., he becomes subject to the act. The concept of control herein involved is not a narrow one, depending upon a mathematical formula of 51 percent of voting power, but is broadly defined to permit the provisions of the act to become effective wherever the fact of control actually exists. 34 H.R.No.85, 73rd Cong., 1st Sess. 13-14, reprinted in 2 J. Ellenberger & E. Mahar, Legislative History of the Securities Act of 1933 and Securities Exchange Act of 1934 (1973). 35 PPG argues that the control definition of issuer cited above is contained in the 1933 Act's definition of the term underwriter, and not in that Act's general definition of issuer. See 15 U.S.C. § 77b(4) and (11). In addition, PPG correctly points out that the term underwriter is not defined in the Arkansas Act. See generally Ark.Stat.Ann. § 67-1247. From these facts, PPG argues that it is not an issuer under the Arkansas Act, notwithstanding its prior ownership of 100% of the Car Color stock. 36 We reject this argument. To hold that a sale of 100% of the stock in a corporation by its parent to another is exempt from registration as an isolated, non-issuer transaction would, we think, be completely contrary to the remedial purposes of the Act. The General Assembly has adopted the doctrine of caveat venditor for sellers of securities, and it was not the intent of the Act to allow sophisticated sellers of securities to unfairly benefit from such sales without fully complying with the Act's requirements. See Graham v. Kane, 576 S.W.2d at 713. Accordingly, we hold that Section 14(b) (1) does not operate to exempt these transactions from registration. Cole's Insider Status 37 PPG's third argument is that Cole is not entitled to rescission because he was an insider and controlling person who is not entitled to relief under the Act. This argument is based on language in Graham v. Kane, supra, and Schultz v. Rector-Phillips-Morse, Inc., 261 Ark. 769, 552 S.W.2d 4 (1977), that laches, estoppel and waiver may be applied to actions such as the present action for rescission. While we agree that such defenses, if proved, are generally available in actions for rescission, we observe in the case at bar that these defenses have not been proved. 38 The district court found as a fact that Cole was unsophisticated in the business dealings giving rise to the creation of Car Color, and that he worked primarily as a salesman during the first one and one-half years of Car Color's corporate existence, notwithstanding his title as Vice President and General Manager of Car Color. 9 The district court also found that Cole was unaware at the time he exercised his option that Car Color's corporate charter had been revoked, and we observe that Car Color's operations deteriorated markedly soon after Cole's wife ceased helping to run the business. These findings are not clearly erroneous, and also provide a strong indication that Cole lacked both the sophistication and the inside information that could operate to bar relief to him. See Graham v. Kane, 576 S.W.2d at 713, and the cases cited therein. Because we are unable to say that the district court's conclusion that the parties were not in pari delicto is incorrect as a matter of law, we hold that the equitable defenses against rescission are not available against Cole. Sale of the Entire Business 39 PPG has cited two recent decisions of the Seventh Circuit which hold that where a stock sale is merely a mechanism whereby the commercial purchase and sale of an entire business is effected, the securities laws are not applicable. See Canfield v. Rapp & Son, Inc., 654 F.2d 459, 462-65 (7th Cir. 1981); Frederiksen v. Poloway, 637 F.2d 1147, 1152-54 (7th Cir.), cert. denied, 451 U.S. 1017, 101 S.Ct. 3006, 69 L.Ed.2d 389 (1981). PPG, however, has failed to cite any Arkansas cases so holding, and we have discovered no such cases. 40 In the absence of any authority from the State of Arkansas in support of this proposition, we are not prepared to depart from the traditional and accepted meaning of the terms stock and securities. 41 (I)f the applicability of the (Act) depended in all cases solely on the economic realities of a transaction, an investor might be unjustifiably misled by the use of a particular label and form to believe his purchase protected by the securities law. Consequently, ... when the existence of a covered security is in issue, the name given to an instrument cannot be disregarded, and may, in fact, be highly relevant, especially if the instrument possesses some of the intrinsic features customarily associated with it. 42 Bronstein v. Bronstein, 407 F.Supp. 925, 928 (E.D.Penn.1976). See United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 850-51, 95 S.Ct. 2051, 2059-60, 44 L.Ed.2d 621 (1975); Mifflin Energy Sources, Inc. v. Brooks, 501 F.Supp. 334, 336 (W.D.Penn.1980). 10 43 In sum, we agree with the district court that the transactions involved herein involved the sale and purchase of securities under the terms of the Arkansas Securities Act. In addition, because we find that the Car Color stock was not exempt from registration, and because we find that Cole was not subject to any equitable defenses as a result of his dealings with Car Color, we agree with the district court that Cole is entitled to rescission under the provisions of the Act. See Ark.Stat.Ann. § 67-1256(a).