Securities Regulation Keyed to Coffee
There are no principal cases in Chapter 1 of this casebook
The Basic Structure and Prohibitions of the Securities Act
The Registration Process
Definitions of Security and Exempted Securities
The Private Offering Exemptions: Sections 4(2) and 4(6)
Intrastate Offerings: Section 3(a)(11) and Rule 147
Reorganizations and Recapitalizations
Securities and Exchange Commission v. Datronics Engineers, Inc. 490 F.2d 250 (4th Cir. 1973)
Offerings by Underwriters, Affiliates, and Dealers
Regulation of the Securities Markets
Regulation of Broker-Dealers
Tender Offers, Management Buyouts, and Takeover Contests
Civil Liability Under the Securities Act of 1933
Rule 10b-5 in Connection With a Purchase or Sale of a Security
General Civil Liberty Provisions
Federal Securities Law and Shareholder Voting
Civil Liability Under the Investment Company Act
SEC Enforcement Actions
Criminal Enforcement of the Federal Securities Laws
International Enforcement
Securities Regulation > Securities Regulation Keyed to Coffee > Reorganizations and Recapitalizations
Securities and Exchange Commission v. Datronics Engineers, Inc.
Citation. SEC v. Datronics Engineers, Inc., 490 F.2d 250, Fed. Sec. L. Rep. (CCH) P94,502 (4th Cir. Md. July 27, 1973)
CitationSEC v. Datronics Engineers, Inc., 490 F.2d 250, 1973 U.S. App. LEXIS 8573, Fed. Sec. L. Rep. (CCH) P94,502 (4th Cir. Md. July 27, 1973)
Brief Fact Summary. The Securities and Exchange Commission (Plaintiff) argued that the regulations stipulations of the Securities Act were violated when Datronic Engineers, Inc. (Defendant) began buying and merging private businesses.
Synopsis of Rule of Law. A corporation has the potential to violate the Securities Act by buying and merging private companies.
Such motions should be granted in only the rarest of instances.
Facts. Datronics Engineers, Inc., a publicly traded company, arranged a transaction where a private company merged into a subsidiary of Datronics, giving the private companies former owners a bulk of the subsidiary's stock. This occurred on nine different occasions. The remaining stock was to be distributed among shareholders within Datronics. The SEC alleged violations of the registration provisions of the Securities Act and brought an action against Datronics. The SEC's application for preliminary injunction was denied by the district court and the SEC appealed.
Issue. Are regulations requirements of the Securities Act violated when a corporation buys and merges private companies?
Held. (Bryan, J.) Yes. Regulations requirements of the Securities Act may be violated when a corporation buys and merges private companies. As stated in § 5 of the Act, utilizing mails to dispense unregistered securities "for the purpose of a sale or for delivery after sale†is banned. While Datronics argued that the merger transactions were not sales, a sale, as defined in § 2(3) of the Act, is inclusive of dispersion of securities for sale. In these merger transactions, a small percentage of the shares were dispersed among Datronics shareholders, seeing as the shares were marketable, they had value. Therefore, it is true that the mergers used mails as a means to distribute unregistered sales, establishing a violation of § 5. Future harm is likely, seeing as nine mergers have occurred thus far, which is satisfactory to justify an injunction. Vacated and remanded.
Concurrence. (Widener, J.) It appeared that no business purpose existed other than forming a market for the merged corporations' interests, which is one of the most convincing reasons for finding a § 5 violation.
Discussion. Stock dividends are the form of transaction witnessed in this case. Datronics eluded registration provisions by giving their shareholders additional shares of pre-issued stock, referred to as a "back-door†offering. This case shows that substance may triumph over formin securities laws enforcement actions.