|February 13, 1996|
Dear [Name deleted] :
This responds to your letter of August 4, 1995, concerning the forward purchase by your company ("the issuer") of its own stock from the [word(s) deleted] ("the seller"). In addition to the information contained in your letter and a prospectus provided by [word(s) deleted] , we have discussed the matter in person or on the telephone with you, [word(s) deleted] , and [word(s) deleted] .
We understand the facts to be as follows. The issuer has entered into a forward purchase transaction with the seller in order to address certain shareholder dilution issues. The transaction has been arranged by a broker-dealer affiliate of the seller. Payment will be made with the issuer's common stock. Therefore, on delivery date the seller and the issuer will each have an obligation to deliver common stock of the issuer to each other. The obligations will be netted so that only one party will in fact deliver common stock of the issuer. No cash will be exchanged.
The issuer has collateralized the forward transaction with shares of its common stock. The pledged stock is being valued at 50 percent of its market value so that its loan value conforms with the Board's margin regulations. Although you have collateralized the transaction, it is your view that collateralization is not required under the Board's margin regulations. It is our understanding that you would like to withdraw the collateral and leave the transaction unsecured.
In most cases, it is not possible for a borrower to withdraw margin stock pledged to support a purpose credit under Regulations G and U unless other collateral is substituted, as the withdrawal would cause the credit to exceed the maximum loan value of the collateral or increase an existing deficiency. However, the issuer in your transaction is in a peculiar position. A lender's acceptance of the pledge by an issuer of the issuer's own stock as collateral is tantamount to accepting a guarantee of the issuer. To make a distinction between these two alternatives would elevate form over substance and would not serve to further the purposes of the Board's securities credit regulations. Board staff therefore has no objection to the withdrawal of the issuer's stock that has been pledged to the seller, as long as this is acceptable to both parties.
We understand that you are also discussing this transaction with staff of the SEC's Division of Market Regulation concerning the applicability of section 11(d) of the Securities Exchange Act of 1934 and other issues under the federal securities laws. These discussions may affect our view of the applicability of the arranging section of Regulation T (12 CFR 220.13). This letter is limited to the issue of whether the seller may release the collateral to the issuer under Regulations G and U and expresses no opinion on any other matter. This letter represents a staff opinion only, as the matter has not been presented to the Board, and is limited to the facts presented. Different facts could compel a different conclusion.
(signed) Laura Homer
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