[Federal Register Volume 59, Number 7 (Tuesday, January 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-625]
[[Page Unknown]]
[Federal Register: January 11, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 20000; 812-8592]
Equity Strategies Fund, Inc., et al.; Notice of Application
January 5, 1994
agency: Securities and Exchange Commission (``SEC'').
action: Notice of Application for Exemption under the Investment
Company Act of 1940 (``Act'').
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applicants: Equity Strategies Fund, Inc. (``Fund''), Nabors Industries,
Inc. (``Nabors''), and Martin J. Whitman, on behalf of themselves and
all ``Affected Persons,'' as defined below.
relevant act sections: Order requested under section 17(b) exempting
applicants from section 17(a), and under rule 17d-1 to permit certain
joint transactions otherwise prohibited by section 17(d) and rule 17d-
1.
summary of application: Applicants seek an order that would permit
Nabors to purchase substantially all of the assets of the Fund in
exchange for Nabors common stock. The Fund would then liquidate and
distribute the Nabors stock pro rata to its shareholders.
filing date: The application was filed on September 20, 1993, and
amended and restated on November 15, 1993, and January 3, 1994.
hearing or notification of hearing: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on January 31,
1994, and should be accompanied by proof of service on the applicants,
in the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons who wish to
be notified of a hearing may request such notification by writing to
the SEC's Secretary.
addresses: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, 767 Third Avenue, New York, NY 10017.
for further information contact: Barry A. Mendelson, Senior Attorney,
at (202) 504-2284, or C. David Messman, Branch Chief, at (202) 272-3018
(Division of Investment Management, Office of Investment Company
Regulation).
supplementary information: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch.
Applicants' Representations
1. The Fund, incorporated in 1981 under the laws of the state of
Maryland, is an open-end, non-diversified management investment company
registered under the Act. The Fund's investment adviser is EQSF
Advisers, Inc. (``EQSF''). The Fund does not qualify to elect to be
taxed as a regulated investment company under Subchapter M of the
Internal Revenue Code, and thus pays taxes on its income in the same
manner as a business corporation. As of October 31, 1993, approximately
92% of the Fund's assets consisted of the common stock of Nabors.
2. Nabors, a Delaware corporation incorporated in 1978, is
principally engaged in the business of contract drilling and other
oilfield services. It has one class of stock, voting common stock,
which is traded on the American Stock Exchange (the ``AMEX''). As of
October 31, 1993, approximately 18% of Nabors' stock was held by the
Fund.
3. Martin J. Whitman is Chairman, President, and Chief Executive
Officer of the Fund. As of October 31, 1993, he owned approximately
7.8% of the outstanding stock of the Fund. Mr. Whitman serves as a
director of Nabors and has a financial interest in Nabors other than
through the Fund by virtue of his direct and indirect ownership
interests in various private partnerships that hold Nabors stock. (As
of October 31, 1993, these partnerships owned in the aggregate
approximately 3% of the outstanding stock of Nabors.) Mr. Whitman also
controls 100% of the outstanding common stock of EQSF, the Fund's
investment adviser.
4. Applicants seek relief on behalf of themselves and any
individuals (other than Mr. Whitman) who require relief from section
17(a) and rule 17d-1 (collectively, ``Affected Persons''). ``Affected
Persons'' are officers, directors, or employees of Nabors, the Fund,
and EQSF who own shares of the Fund.
5. Pursuant to an Agreement and Plan of Reorganization (the
``Reorganization Agreement''), the Fund proposes to transfer to Nabors
all of its assets, other than cash and cash equivalents equal to $1
million, but none of its liabilities. The $1 million retained by the
Fund shall be placed in a ``Reserve Fund'' for payment of any
contingent liabilities and obligations of the Fund. In exchange for the
Fund's assets, Nabors will transfer to the Fund shares of Nabors stock,
as described more fully in the next paragraph. The exchange of Fund
assets for Nabors stock will occur on the ``Closing Date.'' As soon as
practicable after the Closing Date, the Fund will liquidate and
dsitribute pro rata to its stockholders of record the shares of Nabors
stock received by the Fund pursuant to the Reoganization Agreement.
6. Immediately prior to the reorganization, the Fund's assets will
consist entirely of Nabors stock, cash, and cash equivalents. For
purposes of the reoganization, shares of Nabors stock will be valued at
the average of the closing prices of Nabors stock for the five trading
days immediately preceding the Closing Date (the ``Market Price of
Nabors Stock'').\1\ Cash and cash equivalents held by the Fund will be
valued in accordance with generally accepted accounting principles. The
number of shares of Nabors stock to be issued to the Fund in the
reorganization will be determined by dividing the aggregate value of
the assets transferred from the Fund to Nabors by the Market Price of
Nabors Stock.
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\1\The Boards of the Fund and Nabors believe that using a five-
day average, rather than a single day's price, would decrease the
possibility of manipulation of Nabors stock by third party market
participants.
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7. The Reserve Fund is designed to satisfy any currently unknown
contingent liabilities that may become actual after liquidation of the
Fund. Potential contingent liabilities include the possibility that the
IRS or a state tax authority would assert that the Fund has made
inadequate provision for taxes on past transactions, or that the Fund's
net asset value had been erroneously computed. Although the Fund
currently is unaware of any such liabilities, the Reserve Fund will be
established to protect Fund officers and directors, who otherwise would
be personally liable for such liabilities. The Reserve Fund shall be
administered by one or more of the Fund's disinterested directors. Any
amounts remaining in the Reserve Fund upon its termination (which,
under applicable Maryland law shall occur no earlier than three years
from its inception) shall be distributed pro rata to the Fund's
stockholders of record as of the Closing Date.
8. The Fund will bear all of the expenses associated with the
reorganization, except that Nabors will bear all legal fees incurred by
it related to the negotiation of the Reorganization Agreement.
Applicants expect the total cost of the Reorganization to range from
$400,000 to $450,000, of which the Fund will pay all but approximately
$100,000.
9. The Reorganization Agreement has been approved by the Board of
Directors of the Fund, including the disinterested directors thereof,
and by the Board of Directors of Nabors, including the nonmanagement
directors thereof. (The two boards have one common member, Mr.
Whitman.) Consumation of the reorganization is subject to the
Commission's issuance of the order requested by applicants and to the
approval of Fund stockholders. The Reorganization Agreement will be
submitted to the stockholders of the Fund for approval at a special
meeting. Fund stockholders will receive a proxy statement/prospectus
containing information about Nabors and describing the proposed
reorganization and the reasons therefor.
10. In approving the Reorganization Agreement, the Fund Board
considered a number of factors. First, and most important, the
reorganization is tax-free. The Fund received an IRS ruling on May 20,
1993, to the effect that, for federal income tax purposes, the
reorganization will be tax-free to the Fund, the Fund's stockholders,
and Nabors. Alternatives to the reorganization, including a simple
liquidation of the Fund, would result in a taxable event to both the
Fund and its stockholders. In this regard, applicants note that
alternatives to the reorganization would require the Fund to pay tax,
estimated to be about $30.3 million (approximately 35% of the Fund's
net asset value), on the capital gains attributable to the appreciation
of Nabors stock held by the Fund. In addition, the Fund Board
considered that (i) the reorganization will eliminate the management
fee currently paid by Fund stockholders, because such individuals will
own Nabors stock directly, rather than indirectly through the Fund;
(ii) Fund shareholders will receive readily marketable securities,
since Nabors stock is traded on the AMEX; and (iii) the costs to the
Fund of engaging in the reorganization will not be significant in
relation to the benefits conferred.
11. Fund stockholders who oppose the reorganization may redeem
their shares at any time before the Closing Date. Redeeming
stockholders, however, would forego the tax benefit of the
reorganization because the elimination of the capital gains tax
associated with the Nabors stock will inure only to the benefit of Fund
stockholders who receive liquidating distributions.
Applicants' Legal Analysis
1. Because the Fund owns of record more than 5% of the outstanding
shares of Nabors, Nabors is an ``affiliated person'' of the Fund within
the meaning of section 2(a)(3) of the Act. Because Mr. Whitman controls
the Fund's investment adviser, is a director of the Fund and Nabors,
and holds a substantial indirect interest in Nabors, Mr. Whitman is an
affiliated person of the Fund and Nabors. The Affected Persons, by
virtue of their official positions and/or employment relationships, are
affiliated persons of the Fund or affiliated persons of such persons.
2. Section 17(a)d of the Act, in relevant part, makes it unlawful
for any affiliated person of a registered investment company, or any
affiliated person of such an affiliated person, acting as principal, to
purchase from or sell to such registered company any security or other
property. Section 17(b) of the Act authorizes the Commission to exempt
a proposed transaction from section 17(a) if: (i) The terms of the
proposed transaction, including the consideration to be paid or
received, are reasonable and fair and do not involve overreaching on
the part of any person concerned; (ii) the proposed transaction is
consistent with the policy of each registered investment company
concerned, and (iii) the proposed transaction is consistent with the
general purposes of the Act.
3. For the reasons discussed above, the Fund Board and the Nabors
Board found that the reorganization is in the best interests of the
Fund and Nabors, respectively, and will not dilute the interests of the
existing stockholders of either company. In addition, each Board
determined that the terms of the proposed reorganization and the
consideration to be paid or received are fair and reasonable and do not
involve overreaching by any person. Although the Fund has agreed to pay
most of the costs associated with the reorganization, applicants aver
that the benefits to the Fund, in particular the elimination of a $30
million deferred tax liability, substantially outweigh any such costs.
Accordingly, applicants submit that the proposed reorganization
satisfies the standards of section 17(b).
4. Section 17(d) and rule 17d-1, taken together, prohibit an
affiliated person of a registered investment company or an affiliated
person of such person, acting as principal, from participating in any
joint enterprise or other joint arrangement in which such registered
company is a participant, without prior receipt of a Commission order.
Under rule 17d-1(b), the Commission will consider whether the
participation of such registered company in such joint enterprise or
arrangement on the basis proposed is consistent with the provisions,
policies, and purposes of the Act, and the extent to which such
participation is on a basis different from or less advantageous than
that of other participants.
5. There are no employment contracts or other special benefits
accorded to any affiliated person of the Fund or Nabors under the
Reorganization Agreement. Indeed, the reorganization could be
considered detrimental to Mr. Whitman and those Affected Persons who
are employees of EQSF because it will eliminate the management fee
currently payable to EQSF by the Fund. Accordingly, applicants submit
that the proposed reorganization satisfies the standards for an order
under rule 17d-1.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-625 Filed 1-10-94; 8:45 am]
BILLING CODE 8010-01-M