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      Honorable Stan Schlueter           Opinion No. JM-707
      Chairman
      Ways and Means Committee           Re:   Authority of the State Securi-
      Texas House of Representatives     ties Board to adopt a rule deleting
      P. 0. Box 2910                     certain factors which the board has
      Austin, Texas   78769              heretofore considered in determining
                                         whether a particular securities
                                         issur is fair, just and reasonable

      Dear Representative Schlueter:

           You ask whether the State Securities Board has authority to
      promulgate proposed Rule 7 T.A.C. 113.3, 12 Tex. Reg. 456 (1987).
      Your concern appears to be directed to subsection (14) which provides:

                   (14) Certain   firm   commitment   conmon   stock
                offerings.

                        (A) Definitions of terms. The following
                words and terms, when used in this paragraph,
                shall have the following meanings, unless the
                context clearly indicates otherwise.

                             (0    Common stock -- the non-assess-
                able underlying residual equity security of a
                corporate issuer, which security encitlas the
                owner or holder thereof to vote on the election of
                directors or others charged with the management of
                the affairs of the issuer and on such matters as
                merger, dissolution, or amendment of the articles
                of incorporation or comparable governing instru-
                ment , with no right to receive a fixed sum in
                dividends and no right to priority claim in the
                distribution of assets upon the voluntary or
                involuntary liquidation, dissolution, or winding
                up of such corporate issuer.

                             (ii) Corporate issuer -- A corpora-
                tion or business trust organized under the laws
                of. and having its principal place of business
                within, any state of the United States.




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Honorable Stan Schlueter - Page 2   (~~-707)




                       (iii) Firm ccmmitment under-writiug
          - Au agreement of the underwriter or underwriters
          to take and pay for the securities (other than
          securities subject to over-allotment options) at a
          closing within ten business days after the start
          of the offering, subject only to conditions common
          in agreements regarded as fins commitments in the
          securities industry.

                       (iv) Public offering price of at
          least $5.00 -- The common stock is offered to the
          public for cash of at least $5.00 per share; the
          common stock is not directly or indirectly
          divisible, convertible into or exchangeable for,
          and does not include the right to acquire one or
          more other securities at a price of less than
          $5.00 each or likely to sell at a price of less
          than $5.00 each; and there is no plan to make a
          stock or other security dividend or distribution,
          stock or other security split, rights offering or
          other transaction the likely effect of which will
          be to reduce the market price of the cormnonstock
          to less than $5.00 per share. If any of such
          transactions occurs within one year after the
          effective date of the registration statement
          covering such common stock, it will be presumed,
          subject to rebuttal by clear and convincing
          evidence, that the public offering price of the
          common stock was not at least $5.00 per share.
          Further, such an occurrence is deemed to con-
          stitute sufficient grounds for the issuance of an
          order pursuant to the Securities Act, 5.0.

                       (v)   Qualified underwriter -- A
          dealer who is a member of the National Association
          of Securities Dealers and either the New York
          Stock Exchange or the American Stock Exchange.

                  (B) Applicability of fairness standards
          to firm commitment-conrmonstock offering. Not-
          withstanding paragraphs 2-6, S-10, 11(A) and (B),
          and 13 of this subsection, the offering and sale
          pursuant to a registration statement filed under
          the Federal Securities Act of 1933, as amended, of
          common stock by a corporate issuer in a bona fide
          firm commitment. underwritten oublic offerine
          managed by a qualified underwriter, shall be
          deemed to be fair, just, and equitable provided
          that the following conditions shall have been met
          in connection with the offering and sale:




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Honorable Stan Schlueter - Page 3   (~~-707)




                       (0    The common stock shall have a
          Public offering price of $5.00 per share; and

                       (ii) the aggregate gross proceeds to
          the corporate issuer from the fire commitment
          underwriting shall be at least $2,000,000.
          (Emphasis added).

     You question whether the State Securities Board "would be
abdicating a large portion of the responsibility that the Legislature
has mandated, under the existing statute, that the Board should carry
out" if such rule were promulgated.

     Article 581-10, V.T.C.S., Examination of    Application; Permit
provides:

             A. Commissioner to Examine Application; Grant
          or Deny.

             Upon the filing of an application for qualifying
          securities under Section 7A, it shall be the duty
          of the Commissioner to examine the same and the
          papers and documents filed therewith. If he finds
          that the proposed plan of business of the applicant
          appears to be faiT, just and equitable, and also
          that any consideration,paid, or to be paid, for
          such securities by promoters is fair, just and
          equitable when     such  consideration for     such
          securities is less than the proposed offering price
          to the public. and that the securities which it
          proposes to issue and the methods to be used by it
          in issuing and disposing of the same are not such
          as will work a fraud upon the purchaser thereof,
          the Commissioner shall issue to the applicant a
          permit authorizing it to issue and dispose of such
          securities. Should the Commissioner find that the
          proposed plan of business of the applicant appears
          to be unfair, unjust or inequitable, he shall
          deny the application for a permit and notify the
          applicant in writing of his decision.

     Subsection D, Examination of Application; Permit, was added to
article 581-10, V.T.C.S., by Acts 1983, 68th Leg., ch. 465, 54. at
2716 (eff. Sept. 1. 1983). It provides:

          D.  Commissioner's Discretion. In applying the
          standards of this Act, the Commissioner may waive
          or relax any restriction or requirement in the
          Board's rules that, in his opinion, is unnecessary




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          for the protection of investors in a particular
          case.

     Your concern is directed to language in that portion of the
proposed rule which reads:

            (B) Applicability of fairness standards to
         firm commitment-common stock offering. Notwith-
         standing paragraphs 2-6. S-10, 11(A) and (B), and
         13 of this subsection, the offering and sale
         pursuant to a registration statement filed under
         the Federal Securities Act of 1933. as amended, of
         common stock by a corporate issuer in a bona fide
         firm comaitment. underwritten public offering
         managed by a qualified underwriter, shall be
         deemed to be fair, just, and equitable provided
         that the following conditions shall have been met
         in connection with the offering and sale:

                  (1)   the common stock shall have a public
          offering price of $5.00 per share; and

                  (ii) the aggregate gross proceeds to the
          corporate issuer from the firm commitment under-
          writing shall be at least $2.000,000.

     The scenario you envision if the proposed rule is promulgated is
set out succinctly in your inquiry, and states:

          The board would be saying, in effect, that if an
          investment banker or syndicate of investment
          bankers (&,      stock brokers) determine at a
          minimum that they are willing to buy for approxi-
          mately $1.800.000 an issue of common stock (which
          they will have already pre-sold to public
          investors for et least $2,000,000), the offering
          will be conclusively presumed by the State to be
          fair, just and equitable to such public investors.
          That presumption would exist, no matter how much
          watered stock the corporate insiders hold, no
          matter how unequal the voting rights of the public
          investors, no matter how extensive are manage-
          ment's conflicts of interest and no matter how
          much of the corporation's assets the insiders may
          have taken in the form of loans to themselves.

     Whatever the merits of the proposed rule, our concern must be
limited to whether the rule is authorized by and consistent with
statutory provisions. Texas Fire and Casualty Company v. Harris
County Bail Bond Board, 684 S.W.2d 177 (Tex. App. - Houston [14th




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     Ronorable Stan Schlueter - Page 5   (JM-707)




     Dist.] 1984, writ ref'd n.r.e.). In determining whether an agency has
     exceeded its rule-aakiug authority, the critical factor to be
     considered is whether the rule harmonizes with the general objective
     of the statute. State Board of Insurance v. Deffebach. 631 S.W.2d 794
     (Tex. App. - Austin 1982, writ ref'd n.r.e.).

          Subsection D of article 581-10. V.T.C.S.. vests broad authority
     in the commissioner to waive or relax rules. However, it does not
     grant the commissioner authority to waive any requirement mandated by
     the statute. Article 581-10A is explicit in requiring that an
     application for qualifying securities under section 7A be examined by
     the commissioner and found to be "fair, just and equitable" as it
     relates to (1) the proposed plan of business of the applicant and (2)
     any consideration paid, or to be paid for such securities when such
     consideration for such securities is less than the proposed offering
     price to the public. The statute also mandates that the commissioner
     deny the application for a permit if the comissioner finds "that the
     proposed plan of business of the applicant appears to be unfair,
     unjust or inequitable."

          It is our opinion that a rule which would allow the securities
     commissioner to waive the "fair, just and equitable" requirement on
     the basis of the offering price per share and the amount of aggregate
     gross proceeds to the corporate issuer from the firm commitment
     underwriting, would permit the commissioner to subvert the intent of
     the legislature.

                                  SUMMARY

                    The State Securities Board does not have
               authority to promulgate proposed Rule 7 T.A.C.
               113.3.   Its provisions, which authorize the
               commissioner to waive      the requirement that
               offerings "shall be deemed fair, just and
               equitable," cannot be harmonized with the legisla-
               tive intent expressed in        article 581-lOA,
               V.T.C.S., that application be denied if the plan
               of business appears to be unfair, unjust or
               inequitable.




                                            JIM     MATTOX
                                            Attorney General of Texas

     JACK HIGHTOWER
     First Assistant Attorney General
/-




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MARY KELLER
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLN
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Tom G. Davis
Assistant Attorney General




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