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Summary of Interpretations Division of Corporation Finance SUMMARY OF INTERPRETATIONS DIVISION OF CORPORATION FINANCE FOR STAFF USE ONLY No.126 -- February 1-29, 1964 1933 Act 1. Section 2(1) -- Security; Commodity Contract; Intrastate Offering. February 5 and 6, 1964 -- Memorandum re: San Francisco Regional Office Company proposed intrastate offering of commodity contracts on a percentage basis relying on Section 3(a)(11) exemption and at the same time offering interstate contracts on a flat fee basis claiming no security involved. Fee arrangement is a factor to be considered to determine if a commodity contract involved an investment contract. However, the fact that a flat fee basis is provided would not by itself take the commodity contract out of the realm of a security. No exemption if the two contracts offered were each a security. 2. Section 3(a)(3) -- Current Transactions; Utility Borrowing. February 18, 1964 -- Letter re: A. G. Becker & Co., Incorporated Becker proposes to purchase from large utility companies notes with maturities not in excess of 270 days and resell them as principal. The public utility companies would be using such financing as a supplement to their bank credit. Because of the difficulty in tracing dollars, a formula would limit the amount of notes to not more than the (1) dollar amount of its receivables arising out of the sale of electricity, gas and appliances plus (2) the dollar amount of its fuel supply and appliance inventories. No action recommended if the plan were effected as proposed without registration in reliance upon Section 3(a) (3) of the Act. 3. Section 3(a)(4) -- Educational Exemption. February 26, 1964 -- Letter re: Architectural Register of America, Inc. The company proposes to issue registered subordinated certificates of debt. The purposes of the organization are to unite into one national professional organization all registered architects; to promote the welfare of the profession and members; to assist in interstate and international architectural alliances, joint ventures, conventions, and to act as an information and referral center for the services and products of the profession. In order for Section 3(a)(4) to apply, the corporation must be organized and operated exclusively for the purposes stated in that section. Since the purposes of the corporation did not appear to correspond with any of the purposes referred to in Section 3 (a) (4), the exemption did not appear to be available. 4. Section 3(a)(11) -- Intrastate Offering; Keogh Act (H.R. 10). February 5, 1964 -- Memorandum re: H.R. 10 Commingled Trust Fund of Chase Manhattan Bank Bank now offers participations in H.R. 10 plan without registration in reliance on Section 3(a)(11). If a professional society offered a plan to its members with an option to purchase insurance and an option to buy participations in the fund, the insurance option would not destroy the exemption. If such a plan constituted a separate security (as in AMA plan), it would probably also be exempt under Section 3(a)(11). 5. Section 5 -- Rights Offering; Foreign Securities. February 6, 1964 -- Memorandum re: Robert Young Rights offering made to American stockholders of a foreign corporation cannot be publicly made in the United States without registration. Since the exclusion of American shareholders from foreign corporation’s rights offering is prejudicial, no objection is raised to sending subscription rights to them with a statement declaring the shares are not registered and are not being offered in the United States, and that no subscription will be accepted from a U.S. resident. Such rights or warrants can be sold abroad without being an offer or sale in the United States. If a foreign company were to advise its U.S. shareholders that it will accept offers to buy if sent to the issuer outside the U.S. and that it will retain such shares, registration would be required under the circumstances. 6. Rule 154 -- Employees’ Stock Option Plan. Forms S-1; S-8 February 3, 1964 -- Memorandum re: Leonard Calvert A company intends to establish an employees’ savings plan which would invest in company shares. Plan provides that employee will receive cash on retirement, so company must sell stock in his account at that time. Even though offering of participations is registered on Form S-8, sale by company of shares in employee’s account will require registration on Form S-1 at time of sale or at least amendment of the Form S-8 prospectus to meet the requirements of Form S-1. Company could repurchase stock but resale would require registration. Rule 154 provides no exemption to an issuer’s broker or broker of a plan controlled by the issuer. 7. Form S-8 -- Employee Offering; Restricted Stock Option. February 28, 1964 -- Memorandum re: Litton Industries, Inc. Company had filed Form S-8 effective October 1962. The revised Form S-8 provides such form may be used to register options that qualify as “restricted stock options” under Section 421(d) of the Internal Revenue Code of 1954, which was not part of the S-8 form when the company originally filed. Plan does not qualify for tax purposes since optionee pays only 25% of the current market value of the stock. Registration was allowed on Form S-8 as exercise price of stock option at amount lower than permitted by Revenue Code is less significant than the requirement that options be issued to employees and not be transferable. 1934 Act 8. Section 14 Schedule 14A. Item 7(f)(4) -- Material Interest; Associate. Item 7, Instruction 7 February 28, 1964 -- Memorandum re: Hoskins Manufacturing Company A director of Hoskins was vice president of International Nickel from whom Hoskins purchased nickel, representing 38% of Hoskins’ total purchases. The transaction, constituting about 3/10 of 1% of International’s total sales volume and about 7/10 of 1% of the nickel it produced, need not be disclosed in Item 7 as it was not material. 9. Section 14 Rule 14a-7; 14a-8(c)(1) and (5); 14a-9 -- Proxy; Shareholder Proposal. February 20, 1964 -- Commission Minute re: GM Commission determined that shareholder proposal that Cadillac division manufacture Corvette rather than Chevrolet division not a proper subject and might be omitted from the proxy but that the company must comply with requirement of Rule 14a-7 that company mail material for stockholder notwithstanding that the proposal may not be a proper subject. 10. Section 14 -- Proxy; Shareholder Proposal; Dividends; Ordinary Business Operations. Rule 14a-8(c)(1) and (5). February 27, 1964 -- Memorandum to Commission re: Crown Cork & Seal Company, Inc. Shareholder proposal in the form of a resolution recommending that the directors declare a dividend in 1964, was opposed by management as not being a proper subject under state law and as relating to the conduct of its ordinary business operations and, therefore, excludable under Rule 14a-8 c) (1) and (5) respectively. The Division recommended the Company include the proposal in its proxy soliciting material as not so excludable. The Commission divided two to two. (See Commission Minute dated February 28, 1964.) 11. Section 14 -- Proxy; Shareholder Proposal. Rule 14a-8 February 5, 1964 -- Letter re: The One William Street Fund, Inc. Shareholder proposal, that the investment advisory contract between the Fund and Lehman Brothers be terminated, and pending the selection of another investment adviser, the Fund perform its own investment advisory services, is the converse of management’s proposal to renew the contract, and need not he included in the proxy soliciting material. Other proposals that the Fund not enter into investment advisory contracts except upon shareholder approval of the contracts after submission of bids and proposals; that no investment advisory contract be approved unless it entitles the Fund to recapture any profit by the investment adviser, its partners or directors, in any security owned or researched for on behalf of the Fund, were considered as in opposition to management’s proposal to ratify and approve the present advisory contract but would be appropriate for inclusion in the company’s proxy material, if rephrased to be applicable only to future contracts. A proposal which directed the directors to institute suit against Lehman Brothers for losses and damages incurred by the Fund should be included if changed to a request or recommendation. 12. Section 14 -- Proxy; Shareholder Proposal. Rule 14a-8(c)(5) February 26, 1964 -- Memorandum re: Rohm & Hass Stockholder proposal that management adopt “The Mirage System,” a method of construction, may be omitted from the proxy statement as a matter relating to conduct of ordinary business operations. 13. Section 14 -- Proxy Contest; Election of Directors; Solicitation. Rule 14a-9 Schedule 14B February 25, 1964 -- Memorandum re: Buttes Gas and Oil Company Two shareholders, who wish to engage in a proxy contest, will approach not more than ten people to make up a slate of directors, all of whom will file Schedule 14B’s. Proxy material is to be sent to major stockholders in an effort to call a stockholders’ meeting to elect directors and will be filed with the Commission. It was proposed that all solicited will file 14B’s and join the committee, which will then comprise from 100 - 200 people. The propriety of calling this number of persons members of the committee was questioned. See Union Pacific Railroad Company v. Chicago and North Western Railway Company, in the Northern District of Illinois, Eastern Division, February 1964, which criticized a group of unrelated shareholders for representing they were a “committee”. 14. Section 16(a) -- Ownership; Ownership Reports. February 13, 1964 -- Memorandum re: Atlantic Research Corporation Control person who defaults on payment of loan may be required to file a report under Section 16(a) of the 1934 Act if the record ownership of the pledged shares is transferred to lender’s nominee, even though legal title under the loan agreement may remain with borrower.
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