Opinion
No. 68-67
Decided December 4, 1968.
Securities — Sales in violation of Securities Act — Remedies of purchaser — Restitution of purchase price — Section 1707.43, Revised Code — Exempt sales — Section 1707.03, Revised Code — Qualifications for exemption not met, when.
1. Under Section 1707.43, Revised Code, the purchaser of a security sold in violation of any provision in Chapter 1707, Revised Code (Ohio Securities Act), is entitled to restitution of his purchase price unless the violation is of such a trivial nature as not to materially affect the protection contemplated by the violated provision.
2. Section 1707.03 (B), Revised Code, which exempts certain sales of securities from the registration provisions of Chapter 1707, Revised Code, does not operate to defeat recovery of his purchase price by a plaintiff under Section 1707.43, Revised Code, where the evidence shows that one or more conditions of obtaining the exemption were not met.
3. Where the evidence shows that an Ohio sale of securities was not made "on behalf of a bona fide owner, neither the issuer nor a dealer," and that such sale of securities was one of a number of "repeated and successive transactions of a similar character," the conditions of qualifications for a Section 1707.03(B), Revised Code, exemption have not been met.
APPEAL from the Court of Appeals for Washington County.
This action was brought by plaintiff, Wayne Bronaugh, to recover the purchase price of ten unregistered shares of stock sold to plaintiff by defendant, George R. Ball. There is no significant factual dispute in this controversy and the circumstances which resulted in the transaction which is the subject of this lawsuit can be ascertained quite clearly from the record we have before us.
On March 24, 1965, Robert J. Stephan and Earl R. Clemens obtained a contract in Florida with the Marco Island Developing Corporation to perform dredging work in the reclamation of land for a housing development. The defendant George R. Ball was approached by Clemens and Stephans and the defendant Ball advanced monies to be used for a down payment on certain dredging equipment (acquired under a lease-purchase agreement), plus initial operating expenses of that equipment.
Subsequently, a Florida corporation, known as the R. E. Dredging Company, Inc., was formed, with Stephans as president and Ball and Clemens as directors thereof. On April 29, 1965, the first meeting of incorporators and subscribers of shares of stock of the R. E. Dredging Company was held in Naples, Florida, and at that meeting it was agreed that all 120 shares of voting stock authorized by the articles of incorporation would be issued, with Ball to receive 40 shares for his initial contribution of $30,000 and Clemens and Stephans each to receive 40 shares for services already rendered in forming the corporation.
Dredging operations began, but it was only a short period of time before the contract with Marco Island Developing Corporation proved to be unfavorable to the R. E. Dredging Company. Consequently, on December 2, 1965, a new contract was negotiated between R. E. Dredging Company and Marco Island Developing Corporation, the terms of which were more favorable to R. E. Dredging Company.
However, even with the new contract, it became obvious that operations were not going well enough to meet the payments on the dredging equipment and current operating expenses. It became necessary to find a way to fund operations.
Clemens and Stephans both executed stock options on all their shares to Ball in January of 1966, which options contained provision for complete withdrawal by Clemens and Stephans from the R. E. Dredging Company upon exercise of the options by Ball. The stock options were dated January 31, 1966, and gave Ball 60 days in which to exercise his right to purchase.
On February 26, 1966, Stephans assigned his 40 shares, 30 to George R. Ball and 10 to Herbert A. Lamb. At the same time, Clemens assigned his 40 shares, 25 to George R. Ball and 15 to James C. Funk.
The reason all the shares were not assigned to Ball appears from the record to be that Florida law requires that there be at least three shareholders at all times.
At different times in February or March of 1966, plaintiff and several other persons were approached by defendant and asked to subscribe to outstanding shares of the R. E. Dredging Company at a cost of $666.67 per share. Plaintiff, upon being solicited by Ball at plaintiff's home in Belpre, Ohio, agreed to accept ten shares of the stock and signed a paper which constituted an offer to purchase.
This offer to purchase reads as follows:
"OFFER TO PURCHASE
"The undersigned hereby severally offer to purchase from R. E. Dredging Company, Inc., of Naples, Florida, the number of shares of the capital stock of said corporation, held as treasury shares by said corporation, that is shown opposite our respective names below. We hereby tender to said corporation the sum of six hundred sixty-six dollars and sixty-seven cents ($666.67) per share for said shares.
"The undersigned hereby agree that each of us will not withdraw this offer and if same is accepted by the officers of said corporation, it is our understanding and agreement that the money offered and received may and shall be used by said corporation in the following manner, to-wit:
"1. To pay outstanding debts and obligations of the corporation in an amount approximating twenty-six thousand ($26,000) dollars.
"2. To purchase needed spare parts, tools and equipment necessary to continue dredging operations as per contract in an amount approximating ten thousand ($10,000) dollars.
"3. To pay for the repurchase by the corporation from existing stockholders of eighty shares of the issued and outstanding shares of stock as per the existing stock options owned by the corporation.
"WITNESS the following signatures.
"NAME NO. OF SHARES TOTAL SUM "_____ _____ _____ "_____ _____ _____ "_____ _____ _____
At the time, or near the time plaintiff signed this offer, he advanced $2,000 in cash to the defendant R. E. Dredging Company. Subsequently, plaintiff executed two checks payable to the R. E. Dredging Company. One check was for $2,000 and dated April 7, 1966. This check was honored by the payee bank on April 14, 1966. A subsequent check, in the amount of $2,666.66, dated May 11, 1966, was honored by the payee bank on May 12, 1966. A receipt for the sum of $6,666.66, as payment in full for ten shares of the R. E. Dredging Company stock was given to plaintiff by defendant Ball at the time of receipt of the second check.
On May 13, 1966, a meeting of shareholders was held, and plaintiff and other subscribers were present. At that meeting the financial condition of the R. E. Dredging Company was reviewed and the shareholders voted to discontinue operations. Plaintiff then demanded the return of his money from defendant Ball, and was refused.
Later, plaintiff instituted this action in the Common Pleas Court of Washington County. Trial was to the court, without a jury, and upon the close of all the evidence, judgment was rendered in favor of the defendants.
Upon appeal, that judgment was reversed and the cause was remanded to the Common Pleas Court, with instructions to enter final judgment for the plaintiff.
The cause is here pursuant to the allowance of a motion to certify the record.
Mr. James R. Addison, for appellee.
Messrs Metcalf, Thomas Bonsky and Mr. Randall Metcalf, for appellants.
The only question before us which we need to determine is whether Chapter 1707, Revised Code (the Ohio "blue sky law"), entitles the plaintiff to restitution of the money he paid to the defendant Ball for shares of stock of the defendant corporation, the R. E. Dredging Company.
Plaintiff relies upon the provisions of Section 1707.43, Revised Code, as a basis for this action. So far as is pertinent that section provides:
"Every sale or contract for sale made in violation of Sections 1707.01 to 1707.45, inclusive, of the Revised Code, is voidable at the election of the purchaser * * * unless the court determines that the violation did not materially affect the protection contemplated by the violated provision."
It is clear that there was a "sale" made to the plaintiff in this case, as that term is defined in Section 1707.01(C), Revised Code. it is also evident that the sale was in violation of Section 1707.44(C)(1), Revised Code, which provides:
"No person shall knowingly and intentionally sell, cause to be sold, offer for sale, or cause to be offered for sale, any security which comes under any of the following descriptions:
"(1) Is not exempt under Section 1707.02 of the Revised Code, nor the subject matter of one of the transactions exempted in Sections 1707.03, 1707.04, and 1707.34 of the Revised Code, has not been registered by description or qualified, and is not the subject matter of a transaction that has been registered by description * * *."
The defendants attempt to qualify for exemption under Section 1707.03(B), Revised Code, which provides in part that:
"A sale of securities made by or on behalf of a bona fide owner, neither the issuer nor a dealer, is exempt, if such sale is made in good faith and not for the purpose of avoiding Sections 1707.01 to 1707.45, inclusive, of the Revised Code, and is not made in the course of repeated and successive transactions of a similar character. * * *" (Emphasis added.)
Unfortunately for defendants, the offer to purchase (set forth in full in the statement of the case) executed by plaintiff in this case was made to the corporation, the R. E. Dredging Company. The corporation was not at that time the owner of the common stock which plaintiff agreed to purchase. Nor, as was falsely stated in the offer to purchase, did the corporation own existing stock options. Furthermore, the corporation was the original issuer of the shares and a sale on behalf of the issuer cannot qualify for the exemption. Finally, the evidence in the record in this case clearly shows that several persons (nine in all, as admitted by defendant Ball's own testimony) were solicited at different times to subscribe to varying amounts of stock in the defendant corporation and therefore there were "repeated and successive transactions of a similar character."
Defendants do not qualify for the exemption, regardless of whether they acted in good faith and not for the purpose of avoiding Sections 1707.01 to 1707.45, inclusive, of the Revised Code.
As an alternative to reversal on the basis of qualifying for the Section 1707.03(B), Revised Code, exemption, the defendants seek a reversal for a trial court determination, under Section 1707.43, Revised Code, as to whether the defendants are entitled to judgment on the basis that "the violation did not materially affect the protection contemplated by the violated provision." Such a determination is necessarily a question of law and can properly be resolved by this court.
The provision violated is Section 1707.44(C)(1), Revised Code, and the purpose behind the violated provision is to prevent those persons willing to market worthless or unnecessarily risky securities from soliciting the purchasing public without first subjecting themselves and their securities to reasonable licensing and registration requirements designed to protect the public from its own stupidity, gullibility and avariciousness.
We do not find that the defendant's violation of Section 1707.44(C)(1) was of such a trivial nature so as to "not materially affect the protection contemplated" by that provision.
Accordingly, we affirm the judgment of the Court of Appeals.
Judgment affirmed.
TAFT, C.J., ZIMMERMAN and DOYLE, JJ., concur.
DOYLE, J., of the Ninth Appellate District, sitting for HERBERT, J.
The trial court found that this sale was an exempt transaction under Section 1707.03, Revised Code, in that it was by an owner and was not made in the course of repeated and successive transactions of a similar character. The evidence is clear that the sale was made in good faith and not for the purpose of avoiding Sections 1707.01 to 1707.45, Revised Code. The result of the majority opinion in this case is to refund the investment of one who makes no complaint except loss of investment and who has no complaint that he has been the victim of any wrongdoing. The mere fact that the agreement recites a sale by the corporation must be considered in light of the undisputed fact that the vendor, with the knowledge of the vendee, held a valid assignment of the stock in question at all times which are material. The Court of Appeals reversal of the holding of the trial court is a finding that on these admitted facts form must prevail over substance. Only on this basis can this dispute be disposed of in that court as a matter of law.
I would reverse the holding of the Court of Appeals and affirm the judgment of the trial court.
O'NEILL and SCHNEIDER, JJ., concur in the foregoing dissenting opinion.