Company Name: California Ammonia Co.
Public Availability Date: 05-27-1983
INQUIRY LETTER 1MORRISON & FOERSTER
ONE MARKET PLAZA, SPEAR STREET TOWER
SAN FRANCISCO, CALIFORNIA 94105
TELEPHONE(415) 777-6000
February 14, 1983 Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549 ATTN: Peter Romeo Re: California Ammonia Co. Dear Mr. Romeo: On behalf of California Ammonia Co. ("Calamco"), we hereby request that the
Division of Corporation Finance not recommend any enforcement action to the
Securities and Exchange Commission if Calamco offers and sells its capital stock
as described below without registration under the Securities Act of 1933 (the
"1933 Act") or the Securities Exchange Act of 1934 (the "1933 Act"). Calamco is
a California cooperative corporation formed in 1957 for the purpose of
delivering a dependable supply of anhydrous ammonia and other nitrogen-based
fertilizers at the lowest possible cost to its shareholders. Calamco is
organized in such a manner so as to be operated and taxed as a cooperative for
purposes of federal income taxation pursuant to Subchapter T of the Internal
Revenue Code of 1954, as amended. The capital stock of Calamco consists of 1,200,000 shares of Class A Common
Capital Stock, 1,250,000 shares of Class B Common Capital Stock and 1,250,000
shares of Class C Common Capital Stock, of which 714,462, 53,755, and 632,179
shares, respectively, were outstanding at February 1, 1982. On that date, there
were 1,525 holders of Class A Common Capital Stock, 28 holders of Class B Common
Capital Stock and one holder of Class C Common Capital Stock. The Class A Common
Capital Stock can only be issued to and held by farmers, producers of
agricultural products or associations of producers of agricultural products or
corporations organized under Chapter 1 of Division 20 of the Agricultural Code
of the State of California ("Eligible Class A Holders"). Shares of Class B and
Class C Common Capital Stock can be issued to and held by only (1) manufacturers
of processors of anhydrous ammonia, nitrogenous fertilizers or nitrogenous acids
or (2) a supplier of said products to farmers or producers of agricultural
products or to corporations organized under Chapter 1 of Division 20 of the
California Agricultural Code ("Eligible Class B and C Holders"). In addition,
all shares of Class A, Class B and Class C Common Capital Stock can be issued to
and held by only bona fide residents of the State of California. The outstanding
shares of Calamco capital stock have been issued previously pursuant to Section
3(a)(11) of the 1933 Act. Calamco's Bylaws contain substantial restrictions on transfer of Calamco stock
which give Calamco the right of first refusal with respect to any proposed sale
or other voluntary or involuntary transfer of shares by a shareholder. Under
such right, Calamco may purchase the stock proposed to be transferred at the
higher of (i) book value (essentially the original price paid for the shares
since Calamco distributes virtually all of its profits in the form of patronage
refunds) or (ii) the value determined by Calamco's Board of Directors. Moreover,
if Calamco declines to exercise its right of first refusal, the shares can be
transferred only to a bona fide residents of California who are Eligible Class A
Holders or Eligible Class B and C Holders, as applicable. Pursuant to an exclusive marketing agreement with a subsidiary of J.R. Simplot
Co. ("Simplot"), Calamco's ammonia-based products are sold to Calamco
shareholder through Simplot's distribution network. Each Calamco shareholder is
entitled to purchase at current market prices, either from such dealers or
directly from Calamco, an amount of nitrogenous fertilizer produced by Calamco
based upon the year's total sales of Calamco products and the shareholder's pro
rata common stock interest. Under Calamco's Bylaws, the exercise by a
shareholder of his entitlement is conditioned upon his purchasing his
nitrogenous fertilizer requirements, up to his entitlement level, exclusively
from Calamco. Under Calamco's Bylaws, each shareholder is entitled to receive an annual
patronage refund on Calamco products purchased by the shareholder, based upon
the difference between Calamco's costs and the selling price of its products.
Such patronage refunds which are paid in cash represent for Calamco shareholders
an adjustment to the purchase price paid for Calamco products used by them. The
amount of each shareholder's annual patronage refund depends upon (i) the amount
of his actual purchases of Calamco's products during the year (up to his
entitlement) relative to the purchases by all shareholders and (ii) the costs
and expenses of Calamco attributable to the products purchased by all
shareholders (computed in similar fashion). If the shareholder purchases no
Calamco products he gets no patronage refund and, in all cases, the amount of
the patronage refund is based upon the amount of Calamco products purchased by
the shareholder (up to his entitlement) relative to the purchases of all
shareholders. Since all operating profits realized by Calamco through its operations are
allocable to its shareholders in the form of patronage refunds, no such profits
are available for payment as dividends to holders of common stock. The Articles
and Bylaws do not authorize the payment of dividends (as opposed to patronage
refunds), and no dividends (as opposed to patronage refunds) have ever been paid
to Calamco shareholders. In United Housing Foundation, Inc. v. Foreman,
421 U.S. 837 (1975), the United
States Supreme Court rejected a literal approach to the securities laws with
respect to what constitutes a "security" within the meaning of Section 2(1) of
the 1933 Act and Section 3(a)(10) of the 1934 Act. The Court stated that "in
searching for the meaning and scope of the word `security' in the 1933 Act, form
should disregarded for substance and the emphasis should be economic reality."
421 U.S. at 848. The shares of "common stock" of Calamco possess few, if any, of
the characteristics which the Supreme Court listed as traditionally associated
with a "security". Shareholders of Calamco, for example, do not have the right
to receive "dividends contingent upon an apportionment of profits"; in fact,
they have no right to receive dividends, as such, at all. The second
characteristic of a "security" mentioned by the Foreman court, "negotiability",
is also not meaningfully present, since transfers of common stock are greatly
restricted and only certain qualified persons (e.g., residents of California who
are farmers and suppliers, manufacturers, processors and producers of farm
products ammoniated products) can be shareholders of Calamco. Finally, the
"ability of Calamco's stock to appreciate in value" is greatly limited, since
virtually all "profits" are distributed in the form of patronage refunds (so
that there is no increase in the book value per share) and shareholders have
limited rights of transfer with Calamco being given the right to purchase the
shares at the higher of book value (essentially the amount originally paid for
the stock) or a value determined by the Board of Directors. As the Foreman court emphasized, the economic reality and the intent of the
purchaser of a share of "stock" are critical in determining whether that stock
is a "security". In that regard, it should be noted that Calamco shareholders
are not attracted to the ammonia cooperative because of financial returns on
their investment of common stock in the traditional sense. Rather, they are
attracted by the prospect of a certain supply of ammonia products at prices
which would not otherwise be available to them because of their receipt of a
patronage refund based on the amount of their purchases of Calamco products. A
share of Calamco common stock, therefore, should not be considered an
"investment security," but merely evidence of an entitlement to enter into a
purchaser relationship with Calamco and obtain a refund on products purchased,
with the amount of such refund based principally on the amount of product
purchased by the shareholder, not the number of shares held by him. The
"profits" received by Calamco shareholders in the form of patronage refunds
represent adjustments to their aggregate purchase price for Calamco products
that year and do not represent "capital appreciation resulting from the
development of the initial investment or a participation in earnings resulting
from the use of investors' funds," a distinction which the Foreman court found
crucial to the determination of whether a "security" is present for Federal
securities law purposes. In cases involving cooperatives with factual circumstances similar to Calamco's,
the Division of Corporation Finance staff has taken a no-action position on the
question of whether registration of the "securities" under the 1933 Act and/or
1934 Act was required. See, e.g., Associated Grocers' Company of St. Louis,
Missouri (available May 22, 1972); Wine & Spirits Shippers Cooperative, Inc.
(available March 8, 1977); United Suppliers, Inc. (available April 13, 1977);
Voluntary Hospitals of America (available May 21, 1979); Information Services
Corp. (available June 26, 1981); and United Dairy Inc. (available September 17,
1981). In view of the foregoing, we respectfully request your confirmation that the
staff will not recommend any action to the Commission if Calamco offers and
sells its Class A, Class B and Class C Common Capital Stock without registration
under the 1933 Act or 1934 Act. Seven additional copies of this letter are enclosed. Please do not hesitate to
give me a call if further information is required concerning this matter. Very truly yours, Robert M. Mattson, Jr. INQUIRY LETTER 2MORRISON & FOERSTER
ONE MARKET PLAZA, SPEAR STREET TOWER
SAN FRANCISCO, CALIFORNIA 94105
TELEPHONE(415) 777-6000 April 15, 1983 Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549 Att'n: Ann Glickman Re: California Ammonia Company Dear Ms. Glickman: This letter is in response to several questions you have raised concerning
California Ammonia Company's February 14, 1983 no-action request letter (the
"Request Letter"). 1. Is there a secondary market in Calamco shares? Calamco's shares are not traded publicly. However, Calamco keeps a list of
shareholders who are interested in selling their shares and persons interested
in purchasing Calamco stock for the purpose of facilitating limited sales of
Calamco shares. The company's records indicate that there were 20 "unaffiliated"
secondary sales of Calamco stock in 1982 (i.e., sales to purchasers who were not
affiliates of the sellers) involving 6,879 shares at an average price per share
of $10.34. The sales price in each case was dependent upon the terms which the
purchasing party could negotiate with the selling shareholder. However, as a
1982 appraisal of the value of Calamco stock noted, the prices paid for the
small blocks of Calamco stock sold in 1982 reflect the discounted present value
of the cost savings associated with Calamco ownership and certain intangible
values related to the assurance of a stable supply of ammonia. On December 31, 1982, Oxy Chemical Company sold its 632,179 shares of Class B
Common Capital Stock to a subsidiary of J.R. Simplot & Co. ("Simplot") which
contemporaneously entered into a ten-year marketing agreement with Calamco. As a
part of the marketing agreement Simplot exchanged its Class B Stock for Class C
Common Capital Stock on a share-for-share basis. The sale of Calamco shares to
Simplot was in connection with the sale of Occidental Petroleum's Western U.S.
chemical operations to Simplot. 2. Has Calamco ever exercised its right of first refusal respecting transfers of
its shares? Calamco's current management cannot remember a situation in which the company
has exercised its right of first refusal concerning proposed transfers of
Calamco shares by shareholders, although the Board of Directors seriously
considered that option in connection with the 1982 sale of Calamco's Class B
Common Capital Stock by Oxy Chemical Company to Simplot. The principal reason
why the right of first refusal has not been exercised is that it is in the
company's (and thus its shareholders') best interests to encourage purchases of
its ammonia products. The more shares outstanding the more ammonia is likely to
be purchased. Since Calamco's operating structure involves a significant degree
of fixed costs. Calamco's profitability is dependent upon realizing a volume of
sales at a gross profit margin which is sufficient to cover such fixed costs. As
volume increases beyond the break-even level, profitability increases
substantially. Since additional through-put of ammonia reduces the cost of
ammonia for all shareholders, and management consistently has been satisfied
that the sales of Calamco shares have been made only to qualified shareholders,
there has been no reason for Calamco to exercise its right of first refusal (an
act that would have the effect of reducing aggregate shareholder ammonia
entitlement). 3. What determines the number of Calamco shares which a shareholder purchases? The number of shares is directly tied to the amount of ammonia which the
shareholder anticipates he will require for the year. Attached as Exhibit A to
this letter is an illustration of how the share needs of a potential Calamco
shareholder are calculated. As confirmed above, the value of a Calamco share is
not in its investment potential but in the amount of ammonia (from an assured
source) which it entitles a shareholder to purchase and the attendant patronage
refund for ammonia actually purchased by such shareholder. 4. What are the various rights of the different classes of Calamco stock? As indicated above, the most valuable right associated with Calamco stock is the
right to purchase an assured supply of ammonia and receive patronage refunds
based upon the amount of ammonia purchased by the shareholder. Shares of Calamco
Class A, Class B and Class C Common Capital Stock are identical as to the
entitlement of ammonia and the patronage rights they represent. However, as the
Request Letter indicated, Class A stock can only be held by farmers and Class B
and C stock can only be held by manufacturers, suppliers or producers of
ammonia. Holders of Calamco Class A and Class B Common Capital Stock are entitled to one
vote per share as to all matters submitted to stockholders except that,
notwithstanding the relative number of shares outstanding, holders of Class A
stock, voting as a class, are entitled to elect a majority of Calamco's
directors, and holders of Class B stock, voting as a class, are always entitled
to elect at least one director. In 1982, Calamco shareholders amended the Articles of Incorporation and Bylaws
of the company to provide for a third class of capital stock ("Class C Common
Capital Stock"). The holders of Class C stock are entitled to one vote per share
as to all matters submitted to stockholders except that holders of the Class C
stock are not entitled to vote with respect to the election of directors.
However, the Class C holders are entitled to elect non-voting representatives to
the company's Board of Directors. Such non-voting representatives function only
in an advisory capacity and have no right to vote at any Board meeting which
they attend. The Class C stock is held entirely by Cal Ida Chemical Company, a subsidiary of
Simplot, which, as mentioned above, has a ten-year ammonia marketing contract
with Calamco. The Class C stock is convertible into Class B stock on a
share-for-share basis upon the termination of the marketing arrangement with
Simplot. Moreover, during the term of the marketing arrangement Simplot has
granted the Secretary of Calamco its irrevocable proxy to vote the Class C
shares on all shareholder matters (other than the election of the Class C
non-voting representatives to Calamco's Board of Directors) in the same way as a
majority of the Class A and Class B stock held by non-affiliates of Simplot are
voted. Attached as Exhibit B to this letter is the Proxy Statement distributed in
connection with the creation of the Class C stock and the approval of the
Simplot marketing arrangement. Please let me know if you have any further questions concerning this matter. Very truly yours, Robert M. Mattson, Jr. Enclosure CC: Mr. Mel G. Rice STAFF REPLY LETTERRESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE Re: California Ammonia Co.
Incoming letters dated February 14, and April 15, 1983 On the basis of the facts presented, this Division will not recommend any
enforcement action to the Commission if California Ammonia Co. ("Calamco")
offers and sells its Common Capital Stock as described without compliance with
the registration requirements of the 1933 Act or the 1934 Act. In arriving at this position, we have taken particular note of the following:
(1) ownership of the various classes of stock is limited to certain specified
groups of users and producers of anhydrous ammonia and other nitrogen-based
fertilizers, who purchase the stock for the purpose of assuring a stable supply
of ammonia products at an attractive price; (2) transfers of the stock are
greatly restricted and can be made only to certain qualified purchasers; (3)
there is no right to receive dividends on the common stock; (4) any appreciation
in the price of Calamco shares reflects the discounted present value of the cost
savings associated with Calamco ownership (i.e., the potential to receive
patronage refunds if ammonia is purchased) and certain intangible values related
to the assurance of a stable supply of ammonia. Because this position is based upon representations contained in your letter, it
should be noted that any different facts and circumstances might require a
different conclusion. Sincerely, Ann M. Glickman
Special Counsel
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