On February 14, 1975, Commissioner of Corporations of the State of California, Willie R. Barnes, issued a release on Repurchase Offers that commented on Section 25507 (b) of the Corporate Securities Law of 1968.(link to release)This release also discussed Rule 260.507 of the California Code of Regulations in the context of the rule’s requirements for issuing an offer under Section 25507 (b).

Section 25507 (b) bars suit if the buyer receives a written offer approved by the Commissioner before the suit begins. The written proposal must contain:

• an offer to repurchase the security for cash price (payable on delivery of the security);
• a cash offer to pay the buyer an amount recoverable by him under Section 25503 (link to 25503); or
• an offer to rescind the transaction by putting the parties back in the same position they were in before the transaction.

Rule 260.507 sets forth requirements related to an offer’s content. These requirements include thatan offer mustbe in writing and that an offer mustcontain necessary information about the offeree’s investment decision related to the offer.

Selective Offers

Rule 260.507 details the application requirements when seeking the Commissioner’s approval of an offer. Item 6(a) of the application form requires disclosure of any offer made to less than all investors as to whom liability may exist. Substantial unfairness results when offers are only made to selected shareholders, and there is only sufficient justificationfor partial repurchase offers in unusual circumstances. Lacking sufficient funds to meet offers if all shareholders accept is not a sufficient basis for according preferences to selected investors.

Valuation of Consideration

Item 6(b) of the application form requires a showing of the basis for the value of the initial consideration paid by the buyers when the initial consideration was not cash, but a cash repurchase offer is anticipated. It is unsatisfactory to consider the valuation of the consideration as merely nominal in particular circumstances. These situations include reorganizations, recapitalizations, or employee stock options.

Rescission

Section 25507 (b) states that when rescission is to be offered, the rescission must put the parties in the same situation they were in before the transaction occurred.Often, an offer will be considered illusory or misleading unless the obligations of the offeror and offeree (and sometimes third parties) are described. The obligations must include specific provisions stipulating the time frame when performance of an offer must be completed.

An offeree can commence an action under the statute if the offeree rejects the offer on the basis that offered damages or rescission are insufficientwhen there is reasonable doubt about the sufficiency of the offer. This condition is only imposed if the consideration paid by the offeree is not monetary, or if rescission is offered.

The Commissioner will generally require that adequate protection is afforded to securities and other transmitted property. The offer must be sent within thirty days after Commissioner approval. The specified time period could be extended if a showing Is made within a reasonable time after Commissioner approval.

Required Warnings in Offers

If all offerees accept and the total assets of the offeror are not enough to meet cash demands, a repurchase offer will generally not be approved. Information furnished to the offeree must include descriptions of situations where possible acceptances may jeopardize the offeror from continuing in business or where possible acceptances may imperil the interests of the offeree. Further, the offer must provide adequate warning to those who reject the offer if they discover that the issuer is finding it difficult or impossible to continue in business after rejection.

The Commissioner may impose a condition that operates to void the offer ifthe issuer is disabled from continuing business because of acceptances. This revives the right of offerees to assert their civil remedies.

Thirty Day Waiting Period

Section 25507 Subdivision (b)(3) provides a statutory “waiting period” of thirty days after the receipt of the offer when the offer cannot be accepted by the buyer. The purpose of the provision is to give the offerees adequate time to think about their interests in the matter whenconsidering potential complexities. This condition does not preclude an offereefrom rejecting the offer prior to the specified time period. The offeree may deem termination to be in his best interests and in this situation, the statutory waiting period does not serve public interest.

Legend Conditions

Subsection 8 D(9) stipulates that the possibility of an imposition of a legend condition must be disclosed in the offer. However, this disclosure is not mandatory where the facts are such that the imposition of a legend condition is a remote possibility.