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September 30, 1980


The opinion of the court was delivered by: Marshall, District Judge.


This case involves the application of two complex sets of statutes. The first is Chapter X of the Bankruptcy Act, 11 U.S.C. § 501-676, relating to the reorganization of a corporate debtor so that its stockholders and creditors receive fair consideration of their claims and so that it emerges from the bankruptcy proceedings as a revitalized corporation with a sound financial structure; the second is the reporting and anti-fraud sections of the federal securities acts, which are designed to regulate the issuance and acquisition of securities so that investors can make realistic and informed investment decisions. The interaction between these statutes is created by a rather labyrinthian factual setting.

To give a brief outline, King Resources Corporation (KRC) received approval for a plan of reorganization which offered new securities in settlement of its indebtedness. Under the plan, claims held by certain of KRC's shareholders were exchangeable for new securities in the reorganized corporation. Before the securities were issued, and before the reorganized corporation became fully operational, Texas International Company (TI) made a take-over bid for the reorganized KRC. To effectuate its plan, TI offered to purchase the claims of the KRC shareholders. A large number of shareholders accepted the offer. The Securities and Exchange Commission (SEC) brought this action seeking an injunction against TI, contending that the TI offer violated the reporting and antifraud provisions of the securities laws. Among other things, the action raises the novel legal issue of whether an offer to purchase the claims of creditors in a reorganzation proceeding can qualify as a tender offer within the scope of the Williams Act, 15 U.S.C. § 78m(d)-(e), n(d)-(f).

Although KRC is not a party to the present action, an examination of its recent financial history is essential to an understanding of the current litigation.

KRC and its predecessors have been engaged in the exploration for, and production of, oil and gas. Its principal assets are producing and developing properties in the United States and Canada. In early 1971, after attempting a major business expansion, KRC found itself short on working capital and cash. As a result, KRC could not make the payments on $20 million of bank debt, and $40 million of its debentures. (SEC 2d Advis. Report, pp. 3-4).

On August 14, 1971, an involuntary petition for reorganization under Chapter X was filed against KRC in the United States District Court for the District of Colorado (reorganization court). Exercising its bankruptcy powers, that court appointed a trustee to take charge of KRC's assets and manage the business. The trustee soon began the tasks of selling unprofitable operations, and of working on a plan to restructure and revitalize KRC's debt and capital.

A corporate reorganization necessitates a probing examination of broad economic, legal, financial and business issues, including analysis of market conditions, appraisal of the debtor's managerial expertise, prediction of future earnings, and determination of proper financial structures. To resolve these problems, the Bankruptcy Act contemplates frequent resort to the expertise of the SEC. See Hooton, The Role of the Securities and Exchange Commission under Chapter X, Chapter XI and Proposed Amendments to the Bankruptcy Act, 18 Boston Coll.Ind. & Comm.L.Rev. 427, 428 (1977). Thus, copies of all Chapter X petitions, as well as all notices mailed to creditors, must be sent to the SEC. 11 U.S.C. § 665(a). If the SEC feels the proceedings affect substantial public investor interest, it may ask to intervene in the case. 11 U.S.C. § 608; 40 SEC Ann.Rep. 123 (1974); Hooton, supra at 430. The SEC did intervene in the KRC proceedings.

Once it intervenes in a case, the SEC serves primarily an advisory function. It has no authority to hold hearings, decide issues or approve plans of reorganization. The trustee has the primary responsibility for the preparation of a plan, and the judge of the reorganization court has sole responsibility for its ultimate approval. The SEC's main function "is to act as an impartial representative of public investors and to provide expert assistance to the court." Hooton, supra at 440, 429. If the corporation's scheduled indebtedness exceeds $3,000,000, the reorganization court must submit the proposed plan of reorganization to the SEC for an advisory report. 11 U.S.C. § 572. However, the SEC is likely to file a formal advisory report "only in a case which involves substantial public investor interest and presents significant problems." 40 SEC Ann.Rep. 127 (1974); Hooton, supra at 441. In the present case, the SEC prepared two advisory reports which were submitted to the reorganization court.

The goal of a debtor relief proceeding under Chapter X is to confirm a plan of reorganization that settles the rights of creditors and stockholders who will participate in the new company. Corotto, SEC Reporting, Proxy and Antifraud Compliance — An Additional Perspective on Bankruptcy Reorganization Proceedings, 63 Calif.L.Rev. 1563, 1577 (1975). After seven years of proceedings in the reorganization court and the rejection of several proposed plans, the trustee finally secured acceptance for a plan for KRC in 1977. After receiving an advisory report on the plan from the SEC the reorganization court approved the plan in May, 1977. At that time, the court found that KRC was insolvent, i. e., that its liabilities exceeded its assets. Because the general creditors must receive full satisfaction before stockholders may participate in a plan, see Consolidated Rock Products Co. v. DuBois, 312 U.S. 510, 61 S.Ct. 675, 85 L.Ed. 982 (1941), this finding of insolvency had the practical effect of eliminating KRC stockholders from the plan, and from voting thereon. All shares of KRC common stock would be cancelled under the plan. After judicial approval, the plan was submitted to KRC creditors for their acceptance. The requisite number of acceptances were received, and the reorganization court confirmed the plan on October 7, 1977.

A partial description of the plan is required so that we may identify two classes of creditors that have a bearing on the present case, and so that we may understand the securities law problems in this case in the context of the capital structure of the reorganized company.

The plan provided for the continuation of KRC's business by an essentially debt-free reorganized company, renamed Phoenix Resources Company. Under the plan, the allowed claims of all creditors of KRC totalled $95.3 million. Of those claims, $7.1 million were to be paid in full in cash. The remaining $88.2 million of claims were to be discharged by the distribution of new stock in the reorganized company. Two classes of Phoenix stock, A and B, were to be issued to the creditors. Class A shares would have certain preferred rights over Class B shares. Specifically, each Class A share would be convertible into 1 1/2 Class B shares during the first year after confirmation of the plan, and into 1 1/4 Class B shares during the second year after confirmation. Class B shares would not be convertible.

To recognize the varying priorities of the different classes of KRC creditors, the plan contemplated a distribution of different numbers of shares of Class A and B stock to each group of creditors. Thus, senior creditors would receive 50 shares of Class A stock for each $1,000 of allowed claims. Debenture holders would receive approximately 8 shares of Class A stock and 42 shares of Class B stock for each $1,000 of allowed claims. General unsecured creditors would receive 25 shares of Class A stock and 25 shares of Class B stock for each $1,000 of allowed claims.

Included in the general unsecured creditors were a particular class of KRC shareholders and debenture holders. In September, 1971 these security owners had filed a class action lawsuit against KRC, charging it with having conducted fraudulent securities transactions. (Dietrich v. King Resources Co.). The action sought damages of more than $100 million and included more than 20,000 claimants. To avoid a costly and lengthy trial, the reorganization trustee settled these claims for $13 million in 1975. As a result of the settlement, the Dietrich class members were entitled to participate in the plan of reorganization of KRC as general unsecured creditors. It is clear that the basis of their participation was the fraud settlement and not their stock as such; nevertheless their status as stock and debenture holders in KRC was an essential ingredient of their settled fraud claim.

The Dietrich class members and the senior creditors play a prominent role in the financial maneuvers leading to the present litigation. In addition, the value, character and distribution of the new Phoenix stock has important ramifications for the application of the securities laws in this case.

Before reaching those issues, however, we must introduce another corporation into the picture-Texas International Company (TI), which is the defendant in the present action. TI is a Texas-based corporation engaged in the manufacture of oil field equipment, the provision of oil field services and the exploration for and production of crude oil and natural gas. It has adopted a continuing program of acquiring companies in the oil and gas exploration and production industry. In late 1977 TI decided to attempt to obtain control of KRC and to ultimately effect a merger of the two companies. Its preliminary "take-overtures" were directed at two groups of KRC creditors-the senior creditors and the Dietrich class members.

On August 3, 1977, about two months after approval of the plan of reorganization and two months prior to its final confirmation, TI made an offer to purchase for cash the allowed claims of certain "eligible creditors." Eligible creditors were defined to include the $29 million in claims held by about 12 senior creditors, and $4 million in claims held by about 1,300 "trade creditors." Trade creditors were defined as a special group of unsecured general creditors, and did not include the Dietrich class members. The offering price was $0.90 for each $1.00 of allowed claims, but the offer was subsequently raised to $1.02 on the dollar after negotiations between TI and the eligible creditors. The soliciting materials gave detailed information on the terms of the offer, the method of acceptance and payment, information about TI and KRC, and TI's purpose in making the offer. TI's announced objective was ". . . to acquire all Allowed Claims of all Eligible Creditors as a preliminary step to obtaining control of KRC and, perhaps, consummating a merger of KRC into or the combination of KRC with, TI." As a result of its offer, TI acquired $30.8 million of the targeted $33 million of claims of senior and trade creditors.

As a consequence of its two offers, TI acquired about $35.2 million of the $95.3 million in total allowed claims. Under the plan of reorganization, its purchases were convertible into about 44% of the Class B stock to be issued, which is somewhat less than majority ownership.*fn1 Pursuant to reorganization court authorization, the trustee began issuing Phoenix stock in exchange for claims of creditors on January 27, 1978.

On March 7, 1978, the SEC filed the present action for injunctive and equitable relief against TI. It alleged that TI's offer to the Dietrich class members violated sections 10(b), 14(d) and 14(e) of the Securities Exchange Act, as amended, 15 U.S.C. § 78j(b), 78n(d) and 78n(e), and Rules 10b-5 and 14d-1, 17 C.F.R. §§ 240.10b-5 and 240.14d-1, promulgated thereunder. The SEC's charges are separated into three counts, but may be conveniently divided into two broad allegations: 1) that TI failed to file a report with the SEC describing its offer to the Dietrich class, as required by section 14(d) of the Exchange Act (Count 3) and 2) that TI's offering materials to the Dietrich class contained statements and omissions which fall short of the disclosure standards set forth in the anti-fraud sections of the Exchange Act (Counts 1 and 2).

There are pending for decision the SEC's motion for a preliminary injunction pursuant to Rule 65, F.R.Civ.P., the SEC's motion for summary judgment on Counts 1 and 2 pursuant to Rule 56, F.R.Civ.P., TI's motion to dismiss Count 3 and its cross-motion for summary judgment on Counts 1 and 2.

I. The Section 14(d) Claim

The SEC's claim which alleges a violation of the filing requirements of the federal securities laws, rests on an unusual construction of the Williams Act, amendments to the Securities Exchange Act of 1934, 15 U.S.C. § 78m(d)-(e), n(d)-(f). Those amendments were designed to ensure the disclosure to investors of material facts concerning the identity, background and plans of the person or group which makes a cash take-over bid or other acquisition that may cause a shift in control of a corporation. To implement this objective, section 14(d) of the Act provides that any person making "a tender offer for . . . any class of any equity security which is registered pursuant to" section 12(g) of the Act, 15 U.S.C. § 78l(g), must file a statement with the SEC, if the person would be the beneficial owner of more than 5% of the securities after the tender offer is completed.

The SEC alleges that TI's offer to purchase the reorganization claims of the Dietrich class members satisfied the requirements for 1) a tender offer 2) for a class of equity security 3) which is registered under § 12(g) of the Act and 4) more than 5% of which would be beneficially owned by TI after the offer. Thus the SEC contends that although TI offered to purchase the creditor claims in bankruptcy of the former KRC security holders, those claims should be regarded as the equivalent of an equity security, since the plan of reorganization made the claims readily exchangeable into shares of Phoenix stock which clearly qualify as an equity security. Next, the Phoenix equity security fulfilled the registration requirement of § 14(d) for either of two reasons. First, the Phoenix stock was a "successor security" to the common stock and convertible debentures of KRC, which had been registered under § 12(g) of the Act. Phoenix is essentially the same corporation as KRC; it is the same reorganized business under a new name. Therefore, the Phoenix stock should be "deemed registered" under § 12(g) as of the date of confirmation of the plan of reorganization, which was some two months before TI's tender offer. Alternatively, the SEC contends that the Phoenix stock should be "deemed registered" pursuant to its Rule 12g-3(a) which implements § 12(g). The rule requires a continuity of compliance with § 12(g) when a corporation undergoes certain fundamental business changes. It provides that when securities not previously registered are issued during such fundamental business changes in exchange for registered securities of another issuer, the new securities shall be "deemed registered" under § 12(g). The fundamental business changes are defined as "a succession by merger, consolidation, exchange of securities or acquisition of assets." The SEC contends that the KRC reorganization had the same net effect as a merger or consolidation. It also argues that the Dietrich class members effectively experienced an "exchange of securities," since their ownership rights in KRC securities became creditor claims in the reorganization proceeding and in turn became exchangeable for Phoenix stock under the plan. Finally, to fulfill the "beneficial ownership" requirement of § 14(d), the SEC urges that TI's purchase of the Dietrich members' claims can be equated with beneficial ownership of Phoenix stock, because after TI's offer was accepted the only missing incident of ownership was the actual possession of Phoenix stock certificates. The formula for converting claims to shares was settled when the plan was confirmed, and the issuance of the Phoenix shares under the plan in the very near future was an almost certain eventuality.

TI has moved to dismiss the SEC's § 14(d) claim, contending that none of the prerequisites to a § 14(d) action are present here. The SEC in turn has moved for summary judgment on this claim, since TI admittedly failed to file any statement with the SEC concerning its offer to the Dietrich class members. For the reasons now stated we deny TI's motion to dismiss and grant the SEC's motion for summary judgment on this claim (Count 3).*fn2

The first question is whether TI's offer to purchase the claims in bankruptcy held by the Dietrich class members qualifies as a "tender offer" within the meaning of § 14(d) of the Williams Act. Neither Congress nor the SEC has defined the term. Its meaning develops on a case-by-case basis. Smallwood v. Pearl Brewing Co., 489 F.2d 579, 596-98 (5th Cir. 1974). In conventional understanding, a tender offer is a public invitation addressed to all shareholders of a corporation to tender their shares for a specified price. Typically, the offer is open for a limited time, the price is set at a premium above the current market price, and the offer is conditioned upon the receipt of a stated number of shares. Note, The Developing Meaning of "Tender Offer" under the Securities Exchange Act of 1934, 86 Harv.L.Rev. 1250, 1251-52 (1973). Most courts and commentators have agreed that the definition should be extended beyond its conventional meaning, and should encompass offers which are likely to pressure shareholders into making uninformed, ill-considered decisions to sell. Note, supra; Nachman Corp. v. Halfred, CCH Fed.Sec. Rep., ¶ 94,455 (N.D.Ill. July 13, 1973); Cattlemen's Investment Corp. v. Fears, 343 F. Supp. 1248 (N.D.Okla. 1972). In formulating this definition, courts have applied a method of statutory construction by which borderline or "unorthodox" transactions are included within the broad statutory definition if they may serve as a vehicle for the evil which Congress sought to prevent. See Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 593-94, 93 S.Ct. 1736, 1744, 36 L.Ed.2d 503 (1973) (applying this method to the meaning of "purchase" and "sale" under § 16(b) of the Exchange Act).

TI's offer had many characteristics of a conventional tender offer, and also had characteristics which satisfy the evolving judicial standard which implements Congressional intent. The method of solicitation used was a public invitation to all members of a well-defined class of claim holders in a publicly-held company. There were no ordinary market transactions where an investor takes the initiative and steps forward to sell on his own. Note, supra at 1279; Kennecott Copper Corp. v. Curtiss-Wright Corp., 449 F. Supp. 951, 961-62 (S.D.N.Y. 1978). The offer was made by an outside corporation which intended to gain control of KRC. The offer was directed at a large number of solicitees, over 20,000, and therefore had a widespread impact on the investing public. See Aranow, Einhorn & Berlstein, Developments in Tender Offers for Corporate Control, 4-6 (1977). The Dietrich class members held claims representing about 15% of the corporation's assets. The offer was for a fixed price, specified in advance. The offer was not conditioned upon the tender of a specified number of shares. It is difficult to tell whether the price included a premium above the current market price which might have pressured the Dietrich claim holders into quick selling. The reorganization court valued KRC as a going concern at between $90-100 million, and the total value of claims in reorganization was $95.3 million. The offer was for $0.86 per $1.00 of claim. Assuming these claims were fully converted into Class B stock of Phoenix, the offer was worth $13.77 per share. At the time of the offer, the unissued Phoenix stock was being traded in the over-the-counter market on a "when, as and if issued" basis. The market "bid" price stood at around $17 1/2 per share. No regular market for the stock existed. Despite this uncertainty about the precise value of the TI offer and the absence of a first-come, first-served condition on the offer, the Dietrich claim holders could easily have been pressured into a hasty investment decision by the two-week time limit contained in the offer. Viewed in its totality, and in light of the purposes of the Williams Act, we hold that the TI offer qualifies as a "tender offer" within the meaning of § 14(d).

The second question is whether TI's tender offer was made for an "equity security." By its terms, the TI offer to the Dietrich class claim holders was for "interests in the [Dietrich] class settlement fund." It is undisputed that such "interests," viewed in isolation, could not qualify as an "equity security," as that term is defined in section 3(a)(11) of the Exchange Act. 15 U.S.C. § 78c(a)(11). However, the SEC argues that substance rather than form should control, and that the substance of TI's offer was for the Phoenix stock into which the "interests" were exchangeable. Clearly the Phoenix stock would qualify as an equity security, since the statutory definition covers "any stock or similar security."

We agree with the SEC position. The principles of construction which have been applied to the definition of a "security" under section 3(a)(10) are equally applicable to the definition of an "equity security" under section 3(a)(11). Thus, it is clear that these definitions "embod[y] a flexible rather than a static principle," SEC v. Howey, 328 U.S. 293, 299, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946), and that in searching for the meaning "form should be disregarded for substance and the emphasis should be on economic reality." Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967); Hirk v. Agri-Research Council, Inc., 561 F.2d 96, 99-100 (7th Cir. 1977). In its solicitation materials to the Dietrich class members, TI describes an economic reality which clearly contemplates the issuance of Phoenix stock for the purchased interests. The materials frequently state that if the plan of reorganization is consummated, Phoenix stock would be distributed to the Dietrich class members. Although TI attempts to make much of pending appeals and the complexity of the reorganization proceedings to demonstrate "substantial uncertainty" regarding the actual consummation of the plan, its solicitation materials indicate that issuance of the stock was quite probable:

  "While the distribution of shares of New King
  Stock pursuant to the Plan is subject to
  consummation of the Plan and the related motions
  and appeals described under Section 6 below,
  the Trustee has indicated that he intends to
  consummate the Plan during January 1978, if the
  proceedings are not delayed by a stay of
  consummation by judicial order."

While there were several stay-related motions which were before the reorganization court and which were clustered closely in time around the December 1977 tender offer, they do not seriously weaken the probabilities of imminent issuance of the Phoenix stock. Despite those motions, the reorganization court entered an order authorizing the issuance of the Phoenix stock on January 6, 1978, the day TI's tender offer terminated. The trustee began issuing Phoenix stock some 21 days later. Although our post-tender offer hindsight gives us a clearer picture of the probabilities than may have been apparent in December 1977, the contemporaneous expressions by TI in its tender offer display similar expectations. Indeed, the offer included a clause which provided that if the trustee began issuing stock "during the pendency of the Offer . . ., payment for any Interests tendered will be made only against receipt of certificates evidencing the shares distributed . . ." and "[t]he certificates must be accompanied by duly executed stock powers . . ." Finally, there is no doubt that, in TI's own words, its "objective in making the Offer is to acquire all the [Phoenix] Stock to be issued to the Class Settlement Fund . . ." Given the pragmatic economic reality that the Dietrich claims and the Phoenix stock were wedded in both a temporal and a conceptual sense, we conclude that TI's offer was made for an "equity security" under § 14(d).

The third question under § 14(d) is whether TI's tender offer was made for an equity security which was registered under section 12(g) of the Exchange Act. It is here that TI wages its most vociferous defensive battle. It argues that no targeted security was registered under 12(g) at any time before or during the offering period, and that the SEC effectively admitted this fact by its conduct in early 1978 when it recommended that Phoenix file certain forms for the registration of the Phoenix stock.

At the outset, we set forth the pertinent facts and statutes on this issue in somewhat greater detail. Section 12(g) of the Exchange Act provides that every issuer engaged in interstate commerce or whose securities are traded by use of the mails or any means or instrumentality of interstate commerce, which has total assets exceeding $1,000,000 and a class of "equity security" held of record by 500 or more persons, must register that security with the SEC by filing a registration statement that contains such information and documents as the SEC may specify. 15 U.S.C. § 78l(g)(1)(B). This provision applied to KRC when it entered the Chapter X proceedings. As a large, publicly-held corporation with sizeable assets, it had two classes of equity securities registered under § 12(g): common stock and convertible debentures. These securities were section 12(g) securities until at least October 7, 1977 when the plan of reorganization was confirmed. Once KRC's securities were registered under § 12(g), it became a reporting company and thereafter was required by law to file current and periodic reports with the SEC pursuant to § 13(a) of the Exchange Act, 15 U.S.C. § 78m. Those reporting requirements ordinarily remain in force despite the onset of reorganization proceedings, since trading ...

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