[No. 994] IN THE MATTER OF TROXEL MANUFACTURING COMPANY File No. 1-2825. Promulgated March 5, 1940 WITHDRAWAL FROM REGISTRATION AND STRIKING FROM LISTING. Application by Issuer or Exchange. Where exchange seeks to block withdrawal by an issuer of its common stock on the ground that its "rules" have not been complied with, held where governing committee of exchange alone has power to adopt rules and regulations alleged "settled practice" of stock committee governing delisting does not have the force of a rule. Where exchange seeks to block withdrawal by an issuer of its common stock on the ground that an alleged "settled practice" has not been met held where alleged "settled practice" was "adopted" by the committee on stock list less than 2 years previously, and has never before been raised as bar to withdrawal, it is no "settled practice having the force of a rule." Where issuer applies for withdrawal from registration and listing on a national securities exchange, it is incumbent upon it to furnish information as to the purposes that prompted it to apply for delisting so that the Commission may determine what terms are required for the protection of investors. Scope of Commission's Power. Since Commission must determine what, if any, terms or conditions are appropriate for protection of investors where applicant fails to furnish sufficient information as to the motives for its application, held, decision upon the application will be suspended until the applicant has submitted the necessary information. Where it appears that the application for delisting was made because the president of the applicant felt that he could dispose of his holdings more profitably in the over-the-counter market, but where this fact was not disclosed either to the Commission or to the security holders, held, consideration of the application would be deferred until the applicant had submitted a full statement of the facts to the security holders, and such security holders should have an opportunity to present their views as to the imposition of terms and conditions on the withdrawal. APPEARANCES: E. Allen MacDuffie, of the Trading and Exchange Division of the Commission. King E. Fauver, for Troxel Manufacturing Company. FINDINGS AND OPINION OF THE COMMISSION This proceeding was instituted by an application filed on December 12, 1938, by Troxel Manufacturing Company pursuant to Section 12 (d) of the Securities Exchange Act of 1934,1 to withdraw its $1 par value common stock from listing and registration on the Cleveland Stock Exchange. The application was authorized by a resolution unanimously adopted by the applicant's board of directors. No stockholders' vote on the question was obtained. At the request of the Commission, made pursuant to Rule X-12D2-1 (b) (2), the company sent notices to stockholders containing the alleged grounds for the application, and advising them of their rights under the rule. At the hearing, which commenced on October 18, 1939, appearances were made by applicant, the Cleveland Stock Exchange, and several stockholders. Letters from various stockholders were addressed to the trial examiner, either protesting the application or stating that they had no objection to withdrawal if certain conditions were attached thereto. One letter favored the withdrawal. It was the contention of the Cleveland Stock Exchange that the applicant had not complied with Section 12 (d) of the Securities Exchange Act in that it had failed to comply with a rule of the exchange which provided that "it shall be the settled practice of this exchange not to strike from the list at the request of the management; a security which is eligible to remain on the list, unless at a meeting of the stockholders in which a large majority is represented the removal of the security from the exchange has been requested by a substantial number of stockholders." It is our opinion that the requirement attempted to be laid down by the exchange as a condition of withdrawal is neither a rule, nor a settled practice having the effect of a rule, and that failure to comply therewith did not result in noncompliance with the requirements of Section 12 (d). 1 Section 12 (d) reads in part: A security registered with a national securities exchange may be withdrawn or stricken from listing and registration in accordance with the rules of the exchange and, upon such terms as the Commission may deem necessary to impose for the protection of investors, upon application by the issuer or the exchange to the Commission 'This rule provides: "If the application is made by the issuer, such issuer, if so directed by the Commission, shall promptly send notice of such application to all known holders of the security which is the subject of the application. Such notice shall state the time and place of hearing on the application and shall advise such security holders of their right to present their views by appearing at such hearing or writing the Commission on the subject of what terms, if any, should be imposed for the protection of investors in granting the application." Five letters were received from stockholders. Three of those stockholders objected to the application. Two stockholders requested the Commission to impose a condition on the withdrawal requiring the applicant to submit to stockholders annual and quarterly reports. The so-called rule was adopted by the committee on stock list of the exchange. That "rule" was never ratified by the governing committee of the exchange which alone has the power, under the constitution of the exchange, to adopt rules and regulations. While it is true that the governing committee may appoint standing and special committees," there is nothing to indicate that "rules" adopted by such committees become operative as rules of the exchange until ratified by the governing committee. Since the requirement in question was neither adopted nor ratified by the governing committee, we cannot hold that it was a "rule" within the meaning of Section 12 (d). We cannot accept the contention of the exchange that there was a "settled practice" having the force and effect of a formal written rule, compliance with which was necessary in order to effectuate withdrawal. As we pointed out in In the matter of Dominion Stores, Ltd., 4 S. E. C. 700 (1939), the bare claim by an exchange that a "settled practice" exists is not sufficient to permit us to accept it as such. Neither custom nor usage supports the "practice" in question. The committee on stock list first adopted the "settled practice" on July 8, 1938. And so far as appears, this is the first instance in which the exchange has raised noncompliance with the "settled practice" as a bar to withdrawal. We hold, therefore, that applicant's failure to abide by a requirement of the exchange that is neither a rule nor a settled practice having the force of a rule is no bar to its application. But we cannot grant the application for a different reason: Applicant has failed to make a full and accurate disclosure of the reasons for its application. In its notice to stockholders the applicant stated the following reasons for the application: 46 (a) * * that there is no public trading interest or activity in such stock on the Cleveland Stock Exchange by reason of the small volume of trading"; (b) "The small volume of trading has resulted in small transactions involving comparatively few shares, fixing the market and collateral value of all outstanding stock"; (c) "There is no interest on the part of the Cleveland Stock Exchange brokers in such stock by reason of the limited commissions allowed on exchange transactions";' and (d) "The expense to the Company of maintaining such listing and registration is not justified by the small trading volume." • Section 1 of Article 7 of the constitution of the Cleveland Stock Exchange provides: "The Governing Committee shall have power to adopt such rules and regulations as it may deem necessary to the good order, control, or convenience of the members." Section 2 of Article 7 of the constitution of the Cleveland Stock Exchange provides : "The Governing Committee shall also have the power, if it be deemed necessary, to appoint any standing or special committee and such committee shall report and be subject to the decision of the Governing Committee." The brokers' commission on shares selling at 1 and up to and including 9% on the Cleveland Stock Exchange is 71⁄2¢ per share. 6 S. E. C. The applicant has outstanding 75,000 shares of common stock, all of which are listed and registered. Almost 30,000 of these shares are held by officers and directors. As of November 30, 1938, there were 507 shareholders; 320 held less than 100 shares; 168 held 100 to 499 shares; 19 held 500 shares or more. Trading in the stock has not been very active. From April 1937 (the month of listing) through December 1937, the average monthly volume was 276 shares. The average monthly volume for 1938 was 210 shares The price of the stock declined steadily from its high of 1014 in the month of listing, to a low of 2% in May 1938. The applicant's evidence as to the expense of maintaining listing is sparse, vague, and unsatisfactory. The applicant could not offer even an approximation of the expense of maintaining listing. It was stated that the work involved in preparing annual reports to stockholders approximated the work involved in preparing reports required under the Securities Exchange Act. Auditors had been retained before listing and would be retained if the stock were withdrawn. The applicant stated that it intends to maintain its transfer agent in the event of withdrawal. In answer to the question whether any changes in the Commission's rules had brought about a changed attitude toward maintaining listing, the applicant's attorney mentioned changes in the rules under Section 14 (a) of the Securities Exchange Act requiring proxy statements to accompany all solicitations of proxies. However, he could not estimate the additional expense, if any, which compliance with the rules would entail. It appears plainly from the record that the proposal for withdrawal was initially made by J. W. Brandt, president of the applicant, and holder of 26,000 shares of its listed stock. His sole reason for proposing withdrawal was that the market price of the stock as quoted on the exchange made it unprofitable for him to dispose of his holdings. It was his belief that if the stock were withdrawn from the exchange, over-the-counter brokers, not limited to the 712¢ commission permitted to brokers on the exchange, would stimulate activity in the stock, widen its market, and raise its price. Mr. Brandt admitted that the expense of maintaining listing was not a factor in his desire to have the security withdrawn from listing and registration. No hint of this reason was given either in the application or the notices sent out by the company. We stated in In the matter of Capital City Products Company, "My thought is that I can give it to a stock peddler with the dope sheet and he will do the work." 5 S. E. C. 721 at 723 (1939), as follows: Compliance with the rule relating to notice to security holders requires that the facts set forth in such notice be accurate and not misleading. A lesser requirement would render the rule nugatory; for an issuer, by means of false and misleading statements in the notice, might avert objections to withdrawal by security holders. Where security holders are led to refrain from voicing their objections to withdrawal because of false or misleading statements in the notice, we are denied the benefit of facts which might be brought to our attention, and consequently are hindered in discharging our statutory function of imposing necessary terms. When that situation exists, we may properly dismiss the proceeding or suspend decision on the application until the defective notice to security holders has been rectified. Consideration of this application will be deferred until the applicant submits a corrected notice containing a full statement of the facts and until security holders have had full opportunity, based on knowledge of all the facts, to present their views as to the imposition of terms and conditions on the withdrawal. An order will issue in accordance with this opinion. By the Commission: Commissioner Mathews concurring in the result. 6 S. E. C. |