Company Name: Dean Witter & Co., Inc.
Public Availability Date: Aug. 30, 1972
[INQUIRY LETTER]
PILLSBURY,
MADISON & SUTRO
STANDARD OIL
BUILDING, 225 BUSH STREET
SAN FRANCISCO,
CALIFORNIA 94104
(415) 421-6133
May 15, 1972
Securities Act of 1933
Section 4(2) Rule 144
Securities and Exchange Commission
Washington, D.C. 20549
Attention Neal S. McCoy, Esq., Chief Counsel
Gentlemen:
This letter is written on behalf of Dean Witter & Co. Incorporated, a Delaware
corporation ("Dean Witter"), to request your advice as to the proper
interpretation of Section (d)(3)(A) of Rule 144 promulgated under the Securities
Act of 1933, as amended (the "Act"). Our question is whether persons who held
capital stock of Dean Witter prior to February 9, 1972 (the "Stockholders"),
will be deemed to have had a "put or other option to dispose of" securities of
Dean Witter within the meaning of such section by virtue of certain of the
provisions contained in Dean Witter's Certificate of Incorporation from
incorporation in 1968 to February 9, 1972.
As you are aware, Dean Witter
made its first public offering on February 9, 1972, under a registration
statement on Form S-1 (your File No. 2-42360). Prior to such public offering,
Dean Witter was a closely held corporation: all of its stock was owned by
present or former partners of Dean Witter's predecessor partnership or by
present or former officers and employees (or by their estates or family trusts).
The rules of the Board of Governors of the New York Stock Exchange, Inc. (the
"Exchange"), contain stringent requirements with respect to ownership of stock
of member corporations which do not have outstanding (as Dean Witter did not)
freely transferable securities. Rule 311 provides that all shares of stock
issued by a member corporation (other than a share which is a freely
transferable security) shall be held of record and beneficially by a party
approved by the Board of Governors. Rule 313.21 requires that the certificate of
incorporation of a member corporation contain provisions giving the corporation
or its stockholders, or both, a prior right to purchase at a determinable price
the stock of any stockholder who, among other things, proposes to sell or
dispose of his stock, dies, violates any agreement with the Exchange, or ceases
to be qualified as a stockholder. Rule 313.25 provides that a member corporation
having no freely transferable stock outstanding and all its stockholders must
agree with the Exchange that, if any stock of the corporation should be acquired
by a person not approved by the Exchange, the member corporation may be deprived
by the Exchange of all the privileges of a member.
In order to comply with these
and related rules of the Exchanges, as well as regulations of the National
Association of Securities Dealers, Inc., and other exchanges and similar
institutions of which Dean Witter is a member, Dean Witter's Certificate of
Incorporation, from its incorporation in 1968 to February 9, 1972, contained
extensive restrictive provisions governing the disposition of its outstanding
capital stock. A copy of such provisions is attached as Exhibit A hereto.
Article VI of such provisions
incorporated the requirements of the Exchange rules referred to above and gave
Dean Witter broad power to determine who its stockholders were to be: pursuant
thereto, Dean Witter had the sole right and option to purchase from any
Stockholder, at net book value, any shares of its capital stock held by him upon
the happening of a number of events such as his death or bankruptcy, the
violation by the Stockholder of any agreement with Dean Witter or with any
exchange or similar institution of which Dean Witter was a member, the cessation
of the Stockholder to be an officer or employee of Dean Witter, or merely the
determination by the board of directors of Dean Witter that it would be
necessary or desirable for the welfare of the corporation that the Stockholder
cease to be such a holder. The method of determining net book value was also
specified.
Article VII of the Certificate
of Incorporation provided that Stockholders could require Dean Witter at any
time to purchase all (but not a part) of their capital stock, at net book value.
Such right was subject to Dean Witter's right to exercise its option to purchase
under Article VI and to indefinite postponement in the event that such purchase
would violate any of the rules and regulations (such as the net capital
requirements) of the various exchanges of which Dean Witter is a member.
The provisions of Articles VI
and VII of Dean Witter's Certificate of Incorporation, described above, were
amended on February 9, 1972. On that date, Article VII was eliminated and
Article VI was substantially revised so as to comply with the rules of the
Exchange governing publicly held member corporations.
We believe that said Article VII
did not constitute such a "put or other option to dispose of" securities under
Rule 144(d)(3)(A) and, accordingly, that the Stockholders' holding period under
Rule 144 should include any period prior to February 9, 1972, during which they
held Dean Witter capital stock, even though such charter provisions were then in
effect. Our reasons for this interpretation of the Rule are as follows:
1. Article VII of Dean Witter's
Certificate of Incorporation did not give the Stockholders a "put or other
option to dispose of" securities within the generally accepted meanings of those
terms. In normal market parlance, both terms contemplate a right on the part of
the holder to sell stock to the maker of the put or option at a certain price on
or before a certain date; such right is obtained for a consideration, and its
purpose is to protect the holder's profit. The relevant provisions of Dean
Witter's Certificate of Incorporation had no such purpose. Article VI was
intended primarily to comply with Exchange requirements. Secondarily, Article VI
was intended to insure the same protection for stockholders that many closely
held corporations seek through stockholders' agreements granting the corporation
a right to repurchase stock at a discounted price. The provisions of Article VI
are so broad, however, that Article VII was felt to be necessary in fairness to
the parties and in order to make Article VI enforceable. In addition, a
provision such as Article VII had become customary among corporations in the
securities industry, most of which had been partnerships for many years prior to
incorporation and tried to preserve important elements of the partnership
relation even after incorporation. The right of a Stockholder to require the
corporation to purchase all (but not part) of his stock was comparable to a
partner's right to withdraw from the partnership and thereupon receive his
capital whenever be wished to do so. A Stockholder exercised his rights under
Article VII if, and only if, he decided to leave the employ of Dean Witter.
Article VII was not intended to assure the Stockholders of a profit; on the
contrary, since the purchase price was fixed at net book value, exercise by a
Stockholder of his right to require Dean Witter to purchase his stock might well
involve a loss. Further, Dean Witter had the right under certain circumstances
to postpone the purchase indefinitely or to make payment of the purchase price
in evidences of indebtedness rather than in cash. Thus the Stockholder's rights
under Article VII were in the nature of the rights of a partner in a partnership
or of a stockholder in a closely held corporation and did not constitute a "put
or other option to dispose of" securities in the usual sense.
2. The rights of the
Stockholders under Article VII of Dean Witter's Certificate of Incorporation are
not the sort of rights intended by the Commission to preclude the running of the
holding period under Rule 144. The Synopsis of the Rule contained in Securities
Act of 1933 Release No. 5223 indicates that the purpose of the limitations on
the holding period for restricted securities set forth in Section (d) of the
Rule is to insure that persons holding restricted securities are subject to the
full economic risks of investment during the holding period. As discussed above,
Stockholders were subject to the full economic risks of their investment during
such portion of the period preceding February 9, 1972, as they held stock
because the consideration to be paid to them was the net book value of their
Dean Witter stock at the time of purchase, rather than a fixed price. As a
result, the Stockholders took the full risk of business vicissitudes and
fluctuations in value. In addition, their right to require Dean Witter to
repurchase the stock at a given time was subject to conditions such as Dean
Witter's ability to satisfy applicable net capital requirements and could be
indefinitely postponed if Dean Witter's financial situation did not permit the
repurchase.
On the basis of the above, we
would appreciate your confirming that Article VII of Dean Witter's Certificate
of Incorporation did not constitute a "put or other option to dispose of" stock
within the meaning of Section (d)(3)(A) of Rule 144 and, consequently, that any
portion of the period from incorporation to February 9, 1972, during which the
Stockholders held Dean Witter stock may be included in computing the holding
period referred to in Section (d) of said Rule 144.
Please call the undersigned
collect if you have any questions concerning the foregoing.
Very truly yours,
(Mrs.) Margaret G. Gill for
Pillsbury, Madison & Sutro
[STAFF REPLY LETTER]
JUL 31 1972
Margaret G. Gill, Esq.
Pillsbury, Madison & Sutro
Standard Oil Bldg.
225 Bush Street
San Francisco, California 94104
Re: Dean Witter & Co., Inc.
Dear Mrs. Gill:
This is with reference to your letter of May 15, 1972 concerning the
applicability of Section (d)(3)(A) of Rule 144 to the Stock of Dean Witter &
Co., Incorporated held by certain persons from incorporation in 1968 to February
9, 1972.
Prior to its public offering on
February 9, 1972, Dean Witter was a [ Original Text Illegible ] held corporation
(incorporated in 1968): all of its stock was owned by present or former partners
of Dean Witter's predecessor partnership or by present or former officers and
employees (or by their [ Original Text Illegible ] or [ Original Text Illegible
] trusts). In order to comply with the rules of the Board of [ Original Text
Illegible ] of the New York Stock Exchange, the National Association of
Securities Dealers, Inc. and other exchanges and similar institution which Dean
Witter is a member, its stock contained extensive [ Original Text Illegible ]
provisions governing the disposition of its outstanding capital stock.
The articles of the Certificate
of Incorporation provided that stockholders would require Dean Witter at any
time to purchase all of their capital [ Original Text Illegible ] at net book
value. Such right was subject to Dean Witter's right to [ Original Text
Illegible ] its option to purchase such shares, and to [ Original Text Illegible
] in the event that such purchase would violate any of the rules and regulations
of the various exchanges.
On the basis of the facts
presented, Rule 144(d)(3)(A) is not applicable in this situation.
Sincerely yours,
John Heneghan
Deputy Chief Counsel
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