Securities law problems and expenses not only arise when new companies are formed, but also arise later in a company's life. For example, when a company amasses a large number of stockholders, it may be required to register as a public company with the federal Securities and Exchange Commission (SEC). In addition, a company that repurchases stock from its stockholders may have to comply with complex tender offer rules.
In this latter regard, the SEC recently issued a no-action letter regarding the repurchase of stock by a medical holding company from its stockholders. In South Dakota State Medical Holding Company, Inc. (December 20, 1997), the SEC exempted the holding company's proposed stock repurchase program from the tender offer rules of the Securities Exchange Act of 1934.
In this matter, the company adopted a program whereby it would repurchase stock held by its stockholders at fair market value upon a stockholder's retirement, disability or death. The holding company had over 1,500,000 shares of common stock outstanding, held by approximately 670 stockholders. The stock was not listed on any exchange or Nasdaq, and historically there had been only a few isolated trades on a negotiated basis.
The repurchase program was to be offered to stockholders to facilitate liquidity; in the event of retirement, disability or death, a stockholder could request that the company repurchase all or a portion of his or her stock. The company would have the right (but not the obligation) to redeem the stock. The fair market value would be determined annually by an appraiser, and stockholders would receive notice of the fair market value prior to the repurchase.
The SEC staff responded that the repurchase program would be exempt from the otherwise applicable tender offer rules based on the following factors:
1. The Articles of Incorporation limit ownership and transfer of the stock to the physicians, clinics and employees of the company and clinics;
2. The repurchase program would be open to all employees, but is conditioned upon retirement, death or disability;
3. The program would be open for at least 20 business days;
4. The employee would have sole discretion over whether or not to participate in the program and the extent of his or her participation;
5. The company would not encourage or discourage participation in the program;
6. The annual aggregate amount of purchases will be limited;
7. The consideration to be paid would be determined by a uniform formula based on current fair market value;
8. The company would prorate the number of shares of common stock tendered in the event the program is over subscribed; and
9. The company would pay the consideration promptly after termination of the program.
The SEC reminded the company that it still must comply with any other applicable provisions of the federal securities laws, including the anti-fraud rules.
While this ruling, in and of itself, does not by any means revolutionize the securities laws, it does reflect an understanding that old seemingly immutable rules may be tailored to apply practically to the current state of business. Perhaps this portends a trend in re-evaluating the applicability of the old rules to new situations.