Company Name: Celina Financial Corporation
Public Availability Date: February 19, 1993
SEC-REPLY-1:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
February 19, 1993
RESPONSE OF THE OFFICE OF CHIEF
COUNSEL
DIVISION OF CORPORATION FINANCE
Re: Celina Financial Corporation (the
"Company")
Incoming letters dated October 30,
1992, January 8, and 28, 1993
Based on the facts presented, the Division will not
recommend enforcement action to the Commission if the Rights to be distributed
under the Trust, as described in your letters, are not registered under the
Securities Act of 1933. In arriving at this position, we note that: (1) the
Rights will be granted pro-rata to shareholders as an integral part of the
consideration for the proposed tender offer/merger; (2) the Rights will not be
transferable except by operation of law or by will with no form or certificate
used to represent the Rights; (3) the Rights will not have a voting or a
dividend privilege and will not bear interest; (4) the Rights will not represent
an ownership interest in the Company, Republic Mutual Insurance Company, The
Celina Mutual Insurance Company, The National Mutual Insurance Company or Celina
Acquisition Company; (5) any amount ultimately paid pursuant to the Rights will
not depend upon the operating results of the Company, Republic Mutual Insurance
Company, The Celina Mutual Insurance Company, The National Mutual Insurance
Company or Celina Acquisition Company; (6) the Trust will have a limited purpose
of orderly completion of liquidation; (7) the Trust will terminate upon the
earlier of the resolution of the claims held by it or its third anniversary
(provided, that if the Trust is extended beyond such three-year period, then the
Trust will request additional no-action assurance from the staff prior to any
extension); (8) the Trust will provide an annual financial accounting and
certain other information to its beneficiaries. We also note your oral
representation that the Trust will provide interim reports to beneficiaries upon
the occurrence of any material events affecting the Trust or the Trust's claims.
The Division of Market Regulation has asked that we inform
you that it concurs in the position expressed above with regard to registration
of the Rights under the Securities Exchange Act of 1934.
The Division of Investment Management has asked us to
inform you that, on the basis of the facts and representations in your letters,
it would not recommend enforcement action to the Commission under Section 7(b)
of the Investment Company Act of 1940 (the "1940 Act") if Celina creates a trust
(the "Trust"), the purpose of which will be to permit the shareholders of Celina
to participate in any recovery under certain legal claims (the "Celina Claims"),
without registering the Trust under the 1940 Act in reliance on the exception
from registration in Section 7(b) for "transactions which are merely incidental
to the dissolution of an investment company." n1
n1 On December 29, 1992, Gerald Greenberg, counsel to
Celina Financial Corporation, stated in a telephone conversation with Eli
Nathans of the Division of Investment Management that the Trust would rely on
the exception from registration in Section 7(b).
Our position is based in particular on the following
representations: (a) the Trust will not engage in any ongoing trade or business;
(b) the interests of the beneficiaries of the Trust will not be transferable
except by will, intestate succession or otherwise by operation of law, and there
will be no certificates of beneficial interest issued to beneficiaries; and (c)
the Trust will terminate at the earlier of the date that the last distribution
of funds resulting from the Celina Claims is made by the trustees to the
beneficiaries of the Trust or three years from the date of formation of the
Trust. This no-action relief is further contingent upon your agreement that the
existence of the Trust will not be extended beyond three years from the date of
its creation without first obtaining additional no-action assurance from the
staff.
Because these positions are based on the representations
made in your letters, it should be noted that any different facts or conditions
might require a different conclusion. Further, this response only expresses the
Divisions' positions on enforcement action and does not purport to express any
legal conclusion on the questions presented.
Sincerely,
John C. Brousseau
Special Counsel
INQUIRY-1: TAFT, STETTINIUS &
HOLLISTER
1800 STAR BANK CENTER
425 WALNUT STREET
CINCINNATI, OHIO 45202-3957
513-381-2038
CABLE: TAFTHOL TWX: 810-461-2623
FAX: 513-381-0205
WRITER'S DIRECT LINE:
513-357-9670
January 28, 1993
TELECOPY
Patty Goiniecki, Esq.
Office of Chief Counsel
Division of Market Regulation
Securities and Exchange Commission
Washington, D.C.
Re: Celina FinancialCorporation
Dear Ms. Goiniecki:
In response to your requests for supplemental information
in our telephone conversation of this afternoon, please be advised as follows:
1. During 1985, Celina Financial Corporation (the
"Company") sold its property and casualty reinsurance subsidiary, Ohio
Reinsurance Corporation ("Ohio Re") and formed a new wholly owned subsidiary,
First National Indemnity Company ("First National"). In connection with the sale
of Ohio Re, First National acquired certain assets and reinsured the existing
liabilities of Ohio Re pursuant to a reinsurance agreement. Previously, Ohio Re
had canceled all of its reinsurance agreements. Since 1985, Ohio Re has been
involved in various legal proceedings with Pacific Reinsurance Management
Corporation ("Pacific Reinsurance"), Mission Insurance Company ("Mission") and
its liquidator, the California Commissioner of Insurance, and Mission Insurance
Group, Inc. The legal proceedings were related to a Management Agreement entered
into between Ohio Re and Pacific Reinsurance and Retrocession and Reinsurance
Agreements entered into between Ohio Re and Mission. On March 28, 1990, Ohio Re
was placed in liquidation by the Ohio Department [*6] of Insurance for
unrelated reasons. A Commutation and Settlement Agreement was entered into as of
December 30, 1991, between First National and the liquidator of Ohio Re. This
agreement called for the payment of approximately $ 17 million by First National
and the granting of mutual general releases which discharged any further
liability between First National and Ohio Re. On July 1, 1992, all conditions to
the Commutation and Settlement Agreement were satisfied and such commutation and
settlement was effectuated.
Two class action lawsuits against the officers of Pacific
Reinsurance, Mission, the directors of Mission Insurance Group and independent
accountants of the Group, were filed on September 24, 1986 by Ohio Re on behalf
of itself and others similarly situated in the United States District Court for
the Central District of California.
The actions charge these defendants with violations of the
Racketeer Influenced and Corrupt Organizations Act ("RICO"), violation of the
federal securities laws, common law fraud, breach of fiduciary duty and
negligence.
Ohio Re contends, among other things, that it was Pacific
Reinsurance's obligation to establish proper reserves for losses and loss
expenses, including incurred but not reported ("IBNR") and that Pacific
Reinsurance purposely established and maintained a knowingly inadequate IBNR
formula, that Pacific Reinsurance established arbitrary reserve figures and
manipulated same in order to conceal said knowingly inadequate IBNR formula and
significant adverse development in prior years' loss experience and to enable
Pacific Reinsurance to report consistent, favorable loss ratios on a month to
month (then quarter to quarter) basis, that Pacific Reinsurance failed to
establish any IBNR reserves on property business, that Pacific Reinsurance
established inadequate reserves for casualty business, and that Pacific
Reinsurance miscoded casualty business as property business thereby failing to
establish any IBNR reserve at all. The Company believes that additional
investigation performed subsequent to the filing of the lawsuit shows that
significant volumes of premium were written by Pacific Reinsurance for types and
classes of business that were either (1) excluded, (2) represented as being
generally avoided, and (3) not underwritten at all, and that none of this
information was ever disclosed to the participants in this underwriting pool.
2. The Company expects to deposit $ 250,000 in cash with
the Trustees to pay legal fees and expenses to be incurred in prosecuting those
claims.
3. As at January 29, 1993, the Company had approximately
1,200 holders of record of its shares. Each of the Company's shareholders on the
date of distribution of the Rights, expected to be on or about March 4, 1993,
will be a beneficiary of the Trust.
4. The Trust Agreement will be revised to provide that the
annual financial report will include a statement of receipts and disbursements,
a report on changes in Trustees, if any, a report on developments in the
litigation, including any settlement, and any other material events. Because the
Trust's assets will consist solely of the claims, cash and government
securities, and the Trust will not conduct any business other than the
prosecution of the claims, the Company believes that engaging an independent
accounting firm to audit the Trust's financial statements would be an
unnecessary ease. However, the Trust Agreement will be revised to require the
Trustees to certify that the statements are correct in all material respects to
the best of their knowledge.
5.It is contemplated that the Trustees will be three
individuals who are currently directors or officers of the company. Each of
these persons is a shareholder of the Company and, accordingly, will be a
beneficiary of the Trust, although their aggregate interest in the Trust is not
expected to exceed 10%. Because the Trustee's objective is to achieve maximum
recovery for the beneficiaries, we do not see any inherent conflict of interest
in their service as Trustees. None of these persons has any independent personal
interest in the litigation. In addition, we believe that, because of the amount
of discretion which the Trustees will be required to exercise, it would be both
difficult and expensive to engage an independent institutional trustee.
If you require any additional information, please call the
undersigned or my partners, Timothy Hoberg or Thomas Crutcher. Because the
Company plans to hold a Board of Directors meeting to consider and vote upon the
transaction on February 2, 1993, your prompt response would be appreciated.
Sincerely,
Gerald S. Greenberg
INQUIRY-2: TAFT, STETTINIUS &
HOLLISTER
1800 STAR BANK CENTER
425 WALNUT STREET
CINCINNATI, OHIO 45202-3957
513-381-2038
CABLE: TAFTHOLTWX: 810-461-2623
FAX: 513-381-0205
WRITER'S DIRECT LINE:
513-357-9670
January 8, 1993
TELECOPY
Eli Nathans, Esq.
Securities and Exchange Commission
450 Fifth Street
Washington, D. C. 20549
Re: Celina Financial Corporation
Dear Mr. Nathans:
This will confirm our discussion to the effect that the
Trust Agreement referred to in our letter to the SEC dated October 30, 1992 will
be revised to provide that the Trust will be terminated not later than the
earlier of the resolution of the claims held by it and its third anniversary
unless Celina has received further "no-action" comfort from the Staff to the
effect that the term of the Trust may be extended. As we discussed, although
Celina hopes that the claims held by the Trust can be resolved as promptly as
possible, due to the nature of the claims it is difficult to forecast the time
period which may be required for resolution.
Thank you for your assistance in this matter.
Sincerely,
Gerald S. Greenberg
INQUIRY-3: TAFT, STETTINIUS &
HOLLISTER
1800 STAR BANK CENTER
425 WALNUT STREET
CINCINNATI, OHIO 45202-3957
513-381-2038
CABLE: TAFTHOL TWX: 810-461-2623
FAX: 513-381-0205
October 30, 1992
FEDERAL EXPRESS
Securities and ExchangeCommission
Division of Corporation Finance
Division of Investment Management
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Celina Financial Corporation
Ladies and Gentlemen:
This letter is submitted on behalf of our client, Celina
Financial Corporation, an Ohio corporation ("Celina"). We hereby request that
the Division of Corporation Finance confirm that it will not recommend any
enforcement action to the Commission if, in the circumstances described below,
rights ("Rights") to receive cash from an irrevocable trust (the "Trust") are
not registered under the Securities Act of 1933 (the "1933 Act") and, following
the tender offer and merger described below, Celina ceases periodic reporting
under the Securities Exchange Act of 1934 (the "1934 Act"). We also request that
the Division of Investment Management confirm that it will not recommend any
enforcement action to the Commission if the Trust does not register as an
investment company under the Investment Company Act of 1940 (the "1940 Act").
These requests are made on the basis of our view that such rights are not
"securities" under any of the 1933 Act, the 1934 Act and the 1940 Act, that
establishing the Trust anddistributing cash to the holders of Rights upon the
termination of the Trust do not constitute "sales" within the meaning of such
term as used in the 1933 Act and that the maintenance of the Trust constitutes a
transaction incidental to the dissolution of an investment company as that
phrase is used in Section 7 of the 1940 Act.
The Class A Common Shares of Celina are publicly traded and
registered pursuant to the Securities Exchange Act of 1934 (the "1934 Act").
Republic Mutual Insurance Company, an Ohio mutual insurance company ("Republic
Mutual"), The National Mutual Insurance Company, an Ohio mutual insurance
company ("National Mutual"), and The Celina Mutual Insurance Company, an Ohio
mutual insurance company ("Celina Mutual" and, together with Republic Mutual and
National Mutual, the "Mutual Companies"), currently own approximately 3%, 16%
and 31%, respectively, of the Class A Common Shares of Celina, and Celina Mutual
and National Mutual own all 100,000 outstanding Class B Common Shares of Celina.
Class B shareholders are entitled to exercise 40% of the entire voting power of
Celina. Four of the seven directors of Celina have been elected by the holders
of the Class A Common Shares and three have been elected by the holders of the
Class B Common Shares. Celina and the Mutual Companies are under common
management.
It is contemplated that National Mutual will make a cash
tender offer for any and all of the Class A common shares of Celina at a price
still to be determined. Republic Mutual and Celina Mutual do not intend to
tender their shares. The tender offer will be conditioned, inter alia, on the
tender of at least 50% of the Class A Common Shares not held by the Mutual
Companies. The tender offer will be made in compliance with the requirements of
Rules 13e-3 and 14d-1 under the 1934 Act.
It is further contemplated that, immediately after the
consummation of the tender offer, Celina, the Mutual Companies and Celina
Acquisition Company, an Ohio corporation to be wholly owned by the Mutual
Companies and organized for that purpose ("CAC"), will enter into an Agreement
and Plan of Merger, pursuant to which CAC will merge into Celina and the
surviving corporation will be wholly-owned by the Mutual Companies.
As a result of the merger the Mutual Companies will own all
of the outstanding stock of the surviving corporation and each holder of Class A
CommonShares of Celina (other than the Mutual Companies), will be entitled to
receive for each share owned at the time of the merger an amount in cash equal
to the price per share to be paid in the tender offer. It is expected that
certain employees of Celina who hold unexercised options to purchase Class A
Common Shares will enter into agreements with Celina providing that upon such
merger all of such options shall be cancelled in exchange for (a) a cash payment
equal to the difference between the exercise price of the options and the merger
price and (b) the Rights which the holders of such options would have been
entitled to receive if they had exercised such options prior to the consummation
of the tender offer.
It is also contemplated that, if the conditions to the
tender offer are met, immediately preceding the consummation of the tender
offer, Celina will distribute Rights to its shareholders pro rata (including the
Mutual Companies and treating the Class A Common and Class B Common Shares
equally and assuming that all outstanding options to purchase Class A Common
Shares had been exercised as of such time (such shareholders and the option
holders described above being referredto herein as the "Pre-Tender Offer
Shareholders")) as rights to participate in the Celina Claims (defined below)
through the Trust as discussed below.
To implement such distribution, Celina will assign all
rights which it may have with respect to certain claims (the "Celina Claims"),
together with cash to finance legal fees and expenses, to the Trust described
below. The Celina Claims consist of claims Celina may have against third parties
in connection with the failure of Mission Insurance Company and its affiliate
Pacific Reinsurance Management Corporation. The value of the Celina Claims and
the amount which may be recovered in connection therewith are difficult to
estimate with a reasonable degree of certainty at this time. To attempt to put a
value on the Celina Claims at the present time would require conjecture and,
therefore, may be unfair to the Pre-Tender Offer Shareholders of Celina. See
Slater Development Corp. (May 9, 1988)
Celina will enter into a trust agreement (the "Trust
Agreement") with three individuals who are currently directors or officers of
Celina (the "Trustees"). The form of the Trust Agreement is attached to this
letter for your reference. Under the termsof the Trust Agreement, Celina will
assign to the Trustees its rights in the Celina Claims and deposit with the
Trustees cash to pay legal fees and expenses to be incurred in prosecuting the
Celina Claims. The Trustees will pursue the Celina Claims in such manner as they
deem to be in the best interests of the Pre-Tender Offer Shareholders, maintain
the Trust and will invest any cash in the Trust in government securities having
maturities of less than five years. Interest earned by the Trust (net of
applicable income tax) will become part of the Trust. The purpose of the Trust
is to provide the public Pre-Tender Offer Shareholders of Celina with a means to
participate in any recovery under the Celina Claims. Any amount paid to the
Trustees with respect to the Celina Claims as a result of a final unappealable
judgment or a settlement, net of any legal fees and expenses and together with
any other cash held by the Trustees under the Trust Agreement, will be
distributed to all of the Pre-Tender Offer Shareholders of Celina (including the
Mutual Companies) on a pro rata basis. Any recovery by the Trustees will be held
in trust for the Pre-Tender Offer Shareholders of Celina and will notbe subject
to the claims of Celina's creditors.
The Rights of the Pre-Tender Offer Shareholders to receive
cash from the Trust will be represented by the Trust Agreement and the
resolutions of the Board of Directors of Celina approving the distribution of
the Rights and the creation of the Trust; they will not be assignable or
transferable except by operation of law or by intestacy and will not be
evidenced by any certificate or other instrument. The Rights will not pay any
dividends or bear any stated rate of interest and will have no voting rights.
The Rights will represent only the contingent right to receive additional cash
consideration under certain defined circumstances.
Discussion
1933 Act.
A. The Rights are not "Securities" Under the 1933 Act.
The definition of the term "security" under the 1933 Act,
as set forth in Section 2(1) of the 1933 Act, provides that "unless the context
otherwise requires," a security is:
Any note, stock, treasury stock, bond, debenture, evidence
of indebtedness, certificate of interest or participation in any profit-sharing
agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share,investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil, gas
or other mineral rights, or, in general, any interest or instrument commonly
known as a "security" or any certificate of interest or participation in,
temporary or interim certificate for, receipt for, guarantee of, or warrant or
right to subscribe to or purchase, any of the foregoing.
Congress has stated that the 1933 Act defines "the term
security in sufficiently broad and general terms so as to include within that
definition the many types of instruments that in our commercial world fall
within the ordinary concept of a security." H.R. Rep. No. 85, 73d Cong., 1st
Sess. 11 (1933). The Congressional debates demonstrate that the legislators
assumed that the ordinary concept of a security connoted some form of
investment. The intent of the 1933 Act was seen as "regulate[ing] the sale of
investment securities to the innocent public." 77 Cong. Rec. 2940 (1933)
(remarks of Rep. McFadden). See also, Id. at 2912 (remarks of Rep. Mapes).
Although the term "security" has been given a broad
definition, the Rights are not specifically identified in its definition nor do
the Rights fall within any of the included categories. In addition, the Rights
will not possess any of the characteristics of a security. They carry no rights
common to equity holders (no dividends, voting or equity interest); they do not
represent the obligation to pay a sum certain nor do they carry a stated
interest rate; and they are not transferable or evidenced by any certificate or
other instrument. Moreover, in economic reality, they do not represent
investments. Thus, in our view, as discussed below, the Rights are not
securities within the meaning of Section 2(1) of the 1933 Act so as to require
registration under that Act.
1. The Rights Are Not Investment Contracts
In our view, the Rights do not fall within the definition
of an "investment contract" as crafted by the courts. The Supreme Court in SEC
v. W.J. Howey Co. stated that an investment contract is a scheme which "involves
an investment of money in a common enterprise with profits to come solely from
the efforts of others." 328 U.S. 293, 301 (1946). "The touchstone is the
presence of an investment in a common venture premised on a reasonable
expectation of profits to be derived from the entrepreneurialor managerial
efforts of others. By profits, the Court has meant either capital appreciation
resulting from the development of the initial investment . . . or a
participation in earnings from the use of investors' funds . . . In such cases
the investor is attracted solely by the prospects of a return on his
investment." United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852
(1975). See, Quanex Corporation (July 28, 1989) and GID/TL, Inc. (March 21,
1989) (arguing that deferred payment rights given pursuant to a merger were cash
substitutes and not an investment in a common venture).
The Celina Pre-Tender Offer Shareholders' interest in the
Trust is not an investment contract within the meaning of Howey. First, such
shareholders' receipt of the Rights does not involve an investment of money in a
common enterprise. Indeed, the public Pre-Tender Offer Shareholders are
terminating an investment, not making one. The public Pre-Tender Offer
Shareholders will receive the Rights as part of the consideration for their
shares of Celina disposed of in the tender offer or the merger, not in exchange
for a cash investment. The Rights constitute a contingent cash payment as
partialconsideration for terminating their interest in Celina.
The total value of Celina is difficult to determine at the
present time due to the uncertainty as to the amount of the net recovery, if
any, to be obtained with respect to the Celina Claims. The public Pre-Tender
Offer Shareholders, therefore, initially will receive consideration equal to the
value of Celina without regard to the value of the Celina Claims. If there is
any net recovery with respect to the Celina Claims, such shareholders will
receive such funds on a pro rata basis. See, for example, Slater Development
Corp., May 9, 1988, in which shareholders received Deferred Cash Consideration
Rights entitling them to share in the recovery with respect to a patent
infringement lawsuit.
Second, the Rights do not reflect an expectation of profits
from the efforts of others. The Rights are part of the purchase price for
Celina. They represent a contingent cash payment which is dependent upon the
recovery, if any, with respect, to the Celina Claims. The occurrence of such an
event will determine whether the Pre-Tender Offer Shareholders will receive any
distribution from the Trust. The likelihood that the Celina Claims will be
successfully pursued does not depend primarily on the efforts of Celina or the
Mutual Companies.
2. The Rights Are Not Evidences of Indebtedness.
There can be no assurance or reasonable expectation that
any particular amount will be received by the Pre-Tender Offer Shareholders from
the Trust; the Rights do not represent an obligation to pay a predetermined
amount of money, nor, indeed, to pay any money, and any recovery will depend on
circumstances beyond the control of Celina; nor do the Rights bear any stated
rate of interest or return. Accordingly we do not believe that the Rights are
notes or other evidences of indebtedness under the definition of a security.
3. Previous No-Action Positions of the SEC.
The Staff has consistently taken the position that it would
not recommend enforcement action where, pursuant to a proposed merger,
contingent deferred payment rights having the same essential elements as the
Rights were not registered under the 1933 Act. Although the proposed Celina
transaction includes a tender offer and a distribution of the Rights to
shareholders by board action rather than pursuant to a merger agreement and is,
therefore, structured somewhat differentlythan the transactions described in
the no-action letters referred to below, it is essentially the same from the
point of the view of the public Pre-Tender Offer Shareholders who receive cash
and Rights in exchange for their continuing interest in Celina. The Rights are
an integral part of the consideration to be received in the transaction and will
be received by all Pre-Tender Offer Shareholders if a majority of the public
Pre-Tender Offer Shareholders elect to accept the tender offer.
In Essex Communications Corp. (June 28, 1988), the SEC
staff took a no-action position on a plan similar to the Trust. In its request
letter, Essex stated that, pursuant to a proposed merger, a portion of the
purchase price would be placed in an escrow account to serve as security for
post-closing purchase price adjustments and indemnity claims against the selling
company. Approximately 16 months after the effective date of the merger, the
escrow agent was authorized to release the funds to the former shareholders of
Essex. In reaching its no-action conclusions in this letter, the SEC staff
focused on the following elements: 1) the rights granted to the former
stockholders were an integral part of the consideration to be received in the
proposed merger; 2) the rights did not represent an equity or ownership interest
in the company and did not carry voting or dividend rights, or bear a stated
rate of interest; 3) the rights were not transferable, except by operation of
law or by will; 4) the rights were not represented by any form of certificate or
instrument; and 5) any amount ultimately paid to the selling shareholders
pursuant to the rights did not depend upon the operating results of the
surviving company or any constituent company to the merger.
These factors were also cited by the SEC staff as key
elements in its decision to not recommend enforcement action in Quanex
Corporation, supra; Genentech Clinical Partners (April 28, 1989); GID/TL, Inc.
(March 21, 1989); First Boston, Inc. (December 2, 1988); Minnesota Mining and
Manufacturing Company (October 13, 1988); Slater Development Corp., supra; and
Lorimar, Inc. (November 4, 1985).
The five criteria generally used in granting no-action
request letters are present in the proposed Trust:
1. The Rights are an integral part of the consideration for
the shares of Celina. Celina's Board of Directors has determined that it is
currently difficult to estimate the value of the Celina Claims with a reasonable
degree of certainty. On the other hand, the Board was advised by counsel that
the Celina Claims may have substantial value, and the Board, therefore, has
concluded that it would be desirable to permit the Pre-Tender Offer Shareholders
to share in any such recovery.
2. The Rights will not represent any ownership or equity
interest in Celina or the Mutual Companies. The holders of the Rights will have
no rights, such as voting or dividend payments, common to a shareholder of the
surviving or any constituent corporation nor will they carry a stated rate of
interest or return. The Rights represent only the right to receive the funds in
the Trust once the amount thereof, if any, has been determined.
3. The Rights will not be transferable or assignable except
by will, the laws of intestacy or other operation of law.
4. The Rights will not be represented by any form of
certificate or instrument.
5. Any amount ultimately paid to the Pre-Tender Offer
Shareholders will not depend on the operations of the surviving corporation or
the Mutual Companies. There is no connection between the performanceof the
surviving corporation or the Mutual Companies and the amount of the funds to be
distributed by the Trust. The amount of such funds will depend solely upon the
resolution of the Celina Claims, a contingent event beyond the control of the
parties.
The Staff reached a similar conclusion in Crime Control
Inc. (August 3, 1987) with respect to a trust established in connection with the
liquidation of a corporation. The Staff noted that "(1) beneficial interests in
the Trust will be non-transferable except as described in [the] letter; (2) the
Trust will have a limited purpose of orderly completion of liquidation and will
have a restricted term of existence; and (3) the trustee will be required to
issue annual financial accountings to the beneficiaries of the Trust."
Again, these factors are present in
the Trust:
1. The Rights will not be transferable or assignable except
by will, the laws of intestacy or by other operation of law.
2. The Trust exists to liquidate in an orderly manner the
public Pre-Tender Offer Shareholders' interest in Celina. The Trust Agreement
provides that all funds held by the Trustees will be distributed promptly after
a final resolution of the CelinaClaims.
3. The Trustees will make an annual financial report to the
Pre-Tender Offer Shareholders.
Upon examination of the position taken by the SEC staff in
the prior no-action letters referred to above, the Rights do not fit within the
scope of the definition of a "security" under the 1933 Act because they lack the
traditional characteristics of a security. In addition, the public interest will
not be furthered by requiring registration of the Rights under the 1933 Act
because the holders of the Rights will receive an offer to purchase in
connection with their consideration of the tender offer, in accordance with SEC
Regulations.
B. Distribution of Rights Does Not Constitute a "Sale".
Similar to the discussion above relating to investment
contracts, distribution of Rights to the Pre-Tender Offer Shareholders does not
involve a "sale" which requires registration under the 1933 Act. A shareholder
would receive a Right as part of the payment for all the shares of Celina. There
is no additional investment required to receive a Right. No new consideration is
given for it, and no separate investment decision is made. A shareholder does
not have an option to forego the Right in exchangefor another form of
consideration. The shareholder makes an investment decision when such
shareholder decides to terminate his investment in Celina for the right to
receive the cash tender offer price plus the Right. To provide the shareholder
with information to make such a decision, the shareholder will receive an offer
to purchase regarding the tender offer, including information on the rights of
Pre-Tender Offer Shareholders of Celina to receive funds from the Trust.
However, there is no independent sale of Rights. The Rights are merely an
attempt to determine an amount to be received by public Pre-Tender Offer
Shareholders which reflects the "true" value of Celina Class A Common Shares. If
a majority of the Class A Shares held by public Pre-Tender Offer Shareholders
are tendered, the Rights will be distributed to all Pre-Tender Offer
Shareholders without further action on their part.
1934 Act
In our view, for the same reasons set forth above, the
Rights should not be considered to be a "security" or an "equity security" under
the 1934 Act. Accordingly, upon the completion of the tender offer and the
merger, Celina should be entitled to deregister the Class A Common Sharesunder
the 1934 Act, the Rights should not be required to be registered under Section
12(g) of the 1934 Act and Celina and the Trustees should be exempt from periodic
reporting under the 1934 Act. Crime Control, supra.
1940 Act.
The introduction to Section 3 of the 1940 Act states that
an investment company must be an "issuer", and Section 3(a)(22) defines an
"issuer" to be any person who issues or proposes to issue a security. For the
reasons cited above under the subheading "1933 Act", we do not believe that the
Rights constitute securities for purposes of the 1940 Act. Nor do the Rights fit
within the categories of investment contract or evidence of indebtedness. The
Rights are not readily identifiable as any of the securities listed in the 1933
Act definition of a "security". The Rights possess the five criteria generally
noted by the Staff in granting no-action positions for failure to register
similar deferred payment rights. Further, because the shareholders would receive
an offer to purchase describing the Rights, registration would not further the
purposes of the 1933 Act. We note that the definition of a "security" under the
1933 Act is essentially the same asthe definition of a "security" under the
1940 Act.
Further, the Trust should not be viewed as an "investment
company" under Sections 3(a)(1) and 3(a)(3) of the 1940 Act. Under Section
3(a)(3) of the 1940 Act, an issuer may be deemed an "investment company" if it
invests, holds, trades or owns investment securities exceeding 40% of the value
of such issuer's total assets. Government securities are expressly exempted from
the definition of "investment securities". Under the Trust Agreement, the only
"investments" that may be made by the Trustees are in government securities.
Under Section 3(a)(1) of the 1940 Act an "investment
company" is an issuer which is (or holds itself out as being) engaged primarily
in the business of investing, reinvesting or trading in securities. The Trust is
not principally engaged in the business of investing because its purpose is to
provide a means to recover funds for the benefit of the former shareholder of
Celina; any "investment activity" by the Trust is only incidental until the
termination thereof. See, Quanex Corporation and Damson Energy Co., L.P., supra.
Even assuming that the Rights may constitute "securities"
for purposes of the 1940 Act (and thus that the Trust may be an "issuer"), we
believe that the 1940 Act should not apply to the Trust pursuant to Section 7
thereof because it is, even upon its creation, in the process of winding up;
that is, its activities are limited and its term is definite.
The SEC has noted the following characteristics in granting
a favorable no-action position based on Section 7:
"1. The beneficial interests in the trusts are
nontransferable, except by death or operation of law.
2. The trustees are obligated under the Trust Agreement to
provide financial or other information to the former stockholders.
3. The trust's purpose is the orderly liquidation of its
assets and the satisfaction of its liabilities, and the trust will not engage in
any ongoing trade or business.
4. The trust will be terminated in a reasonable period of
time." Heizer Corp. (February 8, 1984).
As noted above, the beneficial interests in the Trust are
non-transferable. The Trustees will make annual financial reports on the balance
of funds in the Trust and transmit copies of such reports to the Pre-Tender
Offer Shareholders. The purpose of the Trust is analogous to the liquidation of
the public Pre-Tender OfferShareholders' interests in the assets of Celina
subject to Celina's liabilities. The Trust will be created to wind up the
interests of Celina's shareholders in the company. The Trust will not engage in
any ongoing trade or business. Finally, the Trust will terminate at a fixed
time. See also, Quanex, supra; Damson Energy Co., L.P., supra; Glenborough
Limited (June 17, 1986).
After the Trust serves its purpose as a means of collecting
the Celina Claims, the Trust will terminate at a definite time, and its assets
will be distributed to the Pre-Tender Offer Shareholders of Celina. While the
Trust is in existence, any cash held by the Trustees will be invested in
government securities. The low amount of risk involved in an investment in
government securities is consistent with the Trust's sole purpose. Any interest
received would be retained in the Trust and used to pay taxes due and expenses
of the Trustees, including legal fees and expenses relating to the Celina
Claims.
Conclusion and Request
On the basis of the foregoing, we believe that the Rights
are not securities that must be registered under the 1933 Act or the 1934 Act
and the Trust is not an investment company"for purposes of the 1940 Act.
Accordingly, we respectfully request that the Commission staff advise us in
writing that it would not recommend any enforcement action to the Commission if
the Rights are not registered pursuant to the 1933 Act or the 1934 Act and the
Trust is not registered pursuant to the 1940 Act.
In accordance with SEC Release 33-6269, seven additional
copies of this letter are enclosed.
If you have any questions or wish to discuss this matter,
please call Timothy E. Hoberg, J. Thomas Crutcher or Gerald S. Greenberg of this
firm.
Sincerely,
Gerald S. Greenberg
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