Oceana Capitol Group Limited v. Red Giant Entertainment, Inc.

Filing 12

ORDER granting 10 Proposed Order. Signed by Judge Miranda M. Du on 12/17/15. (Copies have been distributed pursuant to the NEF - JC)

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UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF NEVADA

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OCEANA CAPITOL GROUP
LIMITED,

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Case No.: 3:15-cv-00428-MMD-WGC
Plaintiff,

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vs.
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RED GIANT ENTERTAINMENT, INC.,
a Nevada Corporation
Defendant.

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[PROPOSED] MEMORANDUM AND ORDER

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The Motion for Approval of Stipulation for Settlement of Claims (Doc. 6) of

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Plaintiff OCEANA CAPITAL GROUP LIMITED (“Plaintiff” or “Oceana Capital”) came on for

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hearing on December 17, 2015 before the Honorable Miranda Du, U.S. District Judge presiding.

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The Court having been presented with a Stipulation for Settlement of Claims (Doc. 5)

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("Stipulation"), between Plaintiff and Defendant RED GIANT ENTERTAINMENT, INC.

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(“Defendant” or “Red Giant”), considered the Motion and supporting and responding papers,

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Declaration of Tatenda Gotosa (Doc. 6-1), Declaration of Benny R. Powell (Doc. 6-2), and

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arguments of counsel, conducted a fairness hearing on the Motion as set forth in the Stipulation,

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and good cause appearing therefor, the Court grants to Motion for the reasons explained below.

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ORDER APPROVING STIPULATION FOR SETTLEMENT OF CLAIMS
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FINDINGS OF FACT AND CONCLUSIONS OF LAW

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The Court makes the following Findings of Fact, Conclusions of Law and decision.

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FINDINGS OF FACT

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Defendant is a Nevada corporation.

(See Powell Decl. at ¶1.)

Defendant is an

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intellectual property development company in business to produce entertainment properties,

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including comic book publications that reach over one million readers every week. (See Powell

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Decl. at ¶3.) Defendant’s stock is publicly traded on the OTC Pink marketplace under the ticker

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symbol "REDG.” (Id.)

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Plaintiff is a British Virgin Islands company. (See Gotosa Decl. at ¶1.) Plaintiff asserts

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claims in the sum of $180,288.00. (See First Amended Complaint (Doc. 4).) Plaintiff is a

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creditor of Defendant. Plaintiff purchased $180,288.00 in outstanding accounts receivable from

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creditors of Defendant, pursuant to the agreements attached as exhibits to the operative First

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Amended Complaint in this action. (Id.; Powell Decl. at ¶4.)

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Defendant has acknowledged that the claims held by Plaintiff are bona fide outstanding,

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resulted from arms-length agreements negotiated in good faith, and that the amounts being

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settled are currently due debts arising in the ordinary course of business. (Id. at ¶5.) Defendant

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further acknowledges that it is obligated to pay the full amount of the claims without

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counterclaim or right of offset. (Id.)

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Plaintiff and its U.S. attorneys, advisors and representatives have worked cooperatively

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with Defendant and its attorneys and advisors, to reach a mutually-beneficial agreement. (Id. at

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¶6.) The parties have entered into a stipulation, to settle the outstanding claims in exchange for

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stock, subject to Court approval following a fairness hearing. (Id. at ¶7.) The terms and

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conditions of the settlement are set forth in the Stipulation for Settlement of Claims (Doc. 5)

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filed in this action. Defendant’s CEO and board of directors have determined that the settlement

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is fair to Defendant, and in the best interests of its stockholders. (Id. at ¶6.)

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Trading in Defendant’s shares is volatile and unpredictable. (Id. at ¶8.) Over the last

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year, the trading price and volume for the shares have fluctuated substantially. (Id., Exh. “A.”)
ORDER APPROVING STIPULATION FOR SETTLEMENT OF CLAIMS
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Accordingly, the Stipulation provides for an adjustment mechanism, whereby the number of

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shares will be calculated based upon an agreed formula.

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Stipulation at ¶¶7, 8.) Defendant is a small business with a fairly low stock price, and as such

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will likely require millions and possibly billions of Defendant’s shares to settle the claims, which

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will be immediately resold by Plaintiff into the public markets. Given the size of the claims

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relative to Defendant’s market capitalization, the settlement will likely result in substantial

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dilution. However, the alternative for Defendant is to incur a monetary judgment it cannot afford

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to pay, go out of business or file bankruptcy.

(Id. at ¶7; Gotosa Decl. at ¶5;

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Plaintiff is a highly sophisticated institutional investor who regularly enters into

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transactions of this type, and is fully aware of the significant risks in exchanging debt for

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common equity of a small public company that has substantial doubt as to its ability to continue

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as a going concern. (See Gotosa Decl. at ¶6.) Plaintiff can afford a complete loss of its

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investment, and is willing to accept that risk provided Defendant abides by the terms of the

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Stipulation. (Id. at ¶5.) If Defendant succeeds and performs, there is the potential for Plaintiff to

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fully recoup its investment and possibly generate a sizable return. Plaintiff is receiving shares

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that it should be able to sell for more than the amount of the claims. (Id.) Plaintiff has analyzed

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the provisions of the stipulation, company fundamentals and market dynamics, and determined

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that the negotiated agreement is fair and reasonable, and adequate to settle its claim. (Id. at ¶7.)

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CONCLUSIONS OF LAW

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I.

Proposed Settlement

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The parties have agreed to settle the claims in this action in exchange for issuance of

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Defendant’s stock to Plaintiff, subject to obtaining the Court approval required by Section

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3(a)(10) of the Securities Act of 1933, as amended, 15 U.S.C. § 77c(a)(10), and the comparable

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provision of Nevada state “blue sky” law, Nevada Revised Statutes § 90.280(6)(c).

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Court approval is required because payment for the settlement will be in the form of

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unregistered shares of Defendant’s common stock, and the parties are relying on the state and

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federal exemptions that allow such stock to be issued without registration if court approval is
ORDER APPROVING STIPULATION FOR SETTLEMENT OF CLAIMS
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obtained. See ScripsAmerica, Inc. v. Ironridge Global LLC, 56 F. Supp. 3d 1121, 1132, fn. 16

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(C.D. Cal. 2014) (“Because the shares were unregistered, [Defendant] and [Plaintiff] had to

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obtain court approval under [state] and federal securities laws before a transfer of the stock could

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take place.”). All parties believe that the terms of the settlement are fair and reasonable, as

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expressed by each party’s willingness to enter into the stipulation. There is no objection from any

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party, and indeed Plaintiff and Defendant jointly ask that the stipulation be approved by the

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Court.

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II.

Jurisdiction and Venue

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This court has subject matter jurisdiction under 28 U.S.C. § 1332(a)(2), because the

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amount in controversy exceeds $75,000 and the action is between a citizen of a State and a

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citizen of a foreign state. Plaintiff is a British Virgin Islands company, and asserts claims in the

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sum of $180,288.00. Defendant is a Nevada corporation. See 28 U.S.C. § 1332(c)(1), Hertz

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Corp. v. Friend, 559 U.S. 77, 93 (2010).

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Since Defendant is a Nevada corporation, venue lies in this district under 28 U.S.C. §

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1391(b)(1). See 28 U.S.C. § 1391(c)(2), Pacer Global Logistics, Inc. v. Nat'l Passenger R.R.

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Corp., 272 F. Supp. 2d 784, 788 (E.D. Wis. 2003).

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III.

Background and Purpose of Section 3(a)(10)

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Generally, public companies are not permitted to issue their stock, and persons receiving

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it are not permitted to immediately resell the shares into the public markets, without first filing a

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registration statement. See 15 U.S.C. § 77e(c), 15 U.S.C. § 77d(a)(1). The Securities Act

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provides an exemption for, “any security which is issued in exchange for one or more bona fide

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outstanding securities, claims or property interests, or partly in such exchange and partly for

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cash, where the terms and conditions of such issuance and exchange are approved, after a

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hearing upon the fairness of such terms and conditions at which all persons to whom it is

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proposed to issue securities in such exchange shall have the right to appear, by any court…” See

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15 U.S.C. § 77c(a)(10).
ORDER APPROVING STIPULATION FOR SETTLEMENT OF CLAIMS
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Section 3(a)(10) was adopted as part of the original Securities Act in 1933, and then

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amended and recodified to “extend the exemption” and ensure broader application, as part of the

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adoption of the Securities Exchange Act in 1934. In re Bd. of Directors of Multicanal S.A., 340

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B.R. 154, 162 (Bankr. S.D.N.Y. 2006). Congress’s objective as stated in the legislative history

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was to address, “complaints that the present act is too drastic, and is interfering with business.”

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78 CONG. REC. 8668 (1934) (statement of Senator Duncan Fletcher). With regard to the §

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3(a)(10) exemption in particular, the purpose was to “substantially extend the present provisions

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[originally in § 4 of the Securities Act] in order to cover various forms of readjustments of the

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rights of holders of outstanding securities, claims and property interests, where the holders will

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be protected by court supervision of the conditions of the issuance of their new securities.” Id.

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Congress did not require that the SEC be named as a party in the proceeding or be given notice

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of the hearing. Id. The Congressional intent was for the § 3(a)(10) exemption to fall entirely

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within the purview of the long-established court system, rather than the newly-created

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commission. “By the requirement that securities, claims and property interests must be bona fide

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outstanding, the new section will provide protection against resort to the exemption for the

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purpose of evading the registration requirements of the act.” Id. “The primary purpose of the

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amendment is to make clear that the exemptions accorded extend beyond the particular

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transactions therein covered, to the security itself.” Id.

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The Section 3(a)(10) exemption is often used to effectuate settlements of claims against

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public company defendants. See, e.g. In re Tripath Tech., Inc., Sec. Litig., No. C 04 4681 SBA,

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2006 WL 1009228, at *2 (N.D. Cal. Apr. 18, 2006) (“The Settlement Shares are to be issued in

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exchange for bona fide outstanding claims; all parties to whom it is proposed to issue such

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securities have had the right to appear at the hearing on the fairness of the Settlement; and the

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Settlement Shares are therefore unrestricted and freely tradeable exempted securities pursuant to

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Section 3(a)(10) of the Securities Act of 1933, 15 U.S.C. § 77c(a)(10).”); Adams v. Amplidyne,

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Inc., No. CIV.A. 99-4468 (MLC), 2001 WL 34885324, at *2 (D.N.J. Aug. 15, 2001) (same); In

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re Rite Aid Corp. Sec. Litig., No. 2:99-CV-1349 SD, 2001 WL 35963382, at *2 (E.D. Pa. Aug.

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16, 2001) (same).
ORDER APPROVING STIPULATION FOR SETTLEMENT OF CLAIMS
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The Section 3(a)(10) exemption avoids the time and expense of registering shares and

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allows for the issuance of shares that are not restricted as they would have been if issued its

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shares in a private placement.”

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Finance and the Securities Laws § 1.05[E] (4th ed. 2006 & Supp. 2013) (“Facebook took

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advantage of Section 3(a)(10) in August 2012 when it obtained a determination from the

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California Department of Corporations that the terms and conditions of its cash and stock

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acquisition of Instagram, Inc. were fair to the Instagram shareholders.”) See also Corporations

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Fairness Hearings, http://www.dbo.ca.gov/ENF/FairnessHearings (“Fairness hearings provide a

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fast and cost-efficient alternative to federal registration”).

See Charles J. Johnson & Joseph McLaughlin, Corporate

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Section 3(a)(10) is preferable to exemptions such as Regulation D because, “it precludes

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the need to hold the shares for 1 year, and the shares could have been tradable immediately” and

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assures that the person receiving and immediately reselling the shares is “not an underwriter.”

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McKim v. NewMarket Technologies, Inc., 370 F. App'x 600, 606 (6th Cir. 2010). See also In re

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Trade Partners, Inc. Investor Litig., No. 1:07-MD-1846, 2008 WL 4911797, at *3 (W.D. Mich.

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Nov. 13, 2008) (“The stock can be sold immediately, without restriction.”).

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The statutory prerequisites for an issuer claiming a § 3(a)(10) exemption are as follows:

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(i) an exchange of securities, claims or property interests; (ii) a hearing on the fairness of the

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exchange at which all persons to whom the securities will be issued pursuant to such exchange

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may appear and be heard; and (iii) a finding of fairness and consequent approval by a court or

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other governmental authority of the terms and conditions of the exchange. Multicanal, 340 B.R.

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at 161.

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The SEC has published an interpretive bulletin summarizing the conditions for reliance

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on the section 3(a)(10) exemption, which also states that: “The Section 3(a)(10) exemption is

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available without any action by the Division or the [Securities and Exchange] Commission.”

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(Id., p. 2, ¶ 1.). See Division of Corporation Finance: Revised Staff Legal Bulletin No. 3 (Oct.

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20, 1999); Staff Legal Bulletin No. 3A (Jun. 18, 2008). The “courts are not obligated to give full

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Chevron deference to this staff bulletin,” because it is prepared by SEC staff and the § 3(a)(10)

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exemption falls outside the purview of the SEC. See Argentinian Recovery Co. LLC v. Bd. of
ORDER APPROVING STIPULATION FOR SETTLEMENT OF CLAIMS
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Directors of Multicanal S.A., 331 B.R. 537, 550 (S.D.N.Y. 2005) (internal citations omitted),

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United States v. Mead Corp., 533 U.S. 218, 226-227 (2001) (Chevron deference only appropriate

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when “Congress delegated authority to the agency generally to make rules carrying the force of

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law, and that the agency interpretation claiming deference was promulgated in the exercise of

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that authority”). However, “the bulletin provides guidance based on expertise, which should be

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considered.” Id., see also Trade Partners, 2008 WL 4911797, at *2 (“Although the Staff Legal

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Bulletin is not binding on the court, the court finds it to be helpful and persuasive in setting forth

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factors to be considered in determining fairness for purposes of section 3(a)(10).”).

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IV.

Determination of Fairness of the Proposed Exchange

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Fundamentally, the court must find that the proposed issuance and exchange of securities

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is fair after considering the totality of the evidence. Trade Partners, 2008 WL 4911797, at *3.

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See also UAW v. Gen. Motors Corp., 235 F.R.D. 383, 384 (E.D. Mich. 2006) aff'd sub nom. Int'l

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Union, United Auto., Aerospace, & Agr. Implement Workers of Am. v. Gen. Motors Corp., 497

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F.3d 615 (6th Cir. 2007) (“a district court's role in evaluating a private consensual agreement

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‘must be limited to the extent necessary to reach a reasoned judgment that the agreement is not

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the product of fraud or overreaching by, or collusion between, the negotiating parties, and that

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the settlement, taken as a whole, is fair, reasonable and adequate to all concerned”).

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The primary consideration to the determination of “fairness” under Section 3(a)(10) is

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“promoting full disclosure of the information believed to be necessary to the making of informed

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investment decisions.” Sec. & Exch. Comm'n v. Blinder Robinson & Co., 511 F. Supp. 799, 802

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(D. Colo. 1981), citing S.E.C. v. Ralston Purina Co., 346 U.S. 119, 124 (1952). As such, the

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question is whether those receiving shares in settlement “have had a full and fair opportunity to

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learn everything required to make their decision” such that they can “act in awareness of the

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risks involved in acceptance … and nothing more is required in the determination that th[e]

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settlement should be approved.” Id.

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All of the prerequisites for application of the Section 3(a)(10) exemption are met in the

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instant case. The shares are being exchange for bona fide outstanding claims. (See Powell Decl.
ORDER APPROVING STIPULATION FOR SETTLEMENT OF CLAIMS
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at ¶¶4, 5.) Defendant has advised the Court in advance of the hearing that it intends to rely upon

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the exemption afforded by the statute. See 15 U.S.C. § 77c(a)(10). Plaintiff is the only person to

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receive stock in the exchange, and has the right to appear at the fairness hearing. Id.

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Plaintiff, together with its professional financial advisors, have extensive knowledge and

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investment experience such that it is more than capable of protecting its own interests. (See

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Totosa Decl. at ¶6.) Plaintiff’s entire business model is to buy and sell securities, including

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entering into multiple transactions of type provided for in the stipulation. (Id.) Plaintiff is “a

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sophisticated investor, not in need of the protections afforded by registration.” See Ackerberg v.

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Johnson, 892 F.2d 1328, 1337 (8th Cir. 1989); Berckeley Inv. Grp., Ltd. v. Colkitt, 455 F.3d 195,

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215 (3d Cir. 2006) (“shares were sold to a single sophisticated investor”). Defendant is a public

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company whose Chief Executive Officer and Board of Directors have thoroughly reviewed the

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proposed settlement with counsel. (See Powell Decl. at ¶6.) Plaintiff has had a full and fair

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opportunity to obtain all of the information it requires to make its investment decision, has

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conducted its own independent analysis of the market for Defendant’s securities, and fully

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understands both the upside potential and the downside risks inherent in the Stipulation. These

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factors are sufficient for the Court to find that the negotiated agreement between sophisticated

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commercial parties is fair. See Blinder Robinson, 511 F. Supp. at 802.

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V.

Consideration of Registration Requirements

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If the court approves the exchange as fair, no registration is required under Section 5 of

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the Securities Act, 15 U.S.C. § 77e, because the issued shares will be entirely exempt from the

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Securities Act. See 15 U.S.C. § 77c(a)(10), Multicanal S.A., 340 B.R. at 162. In addition, no

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registration is required under Section 15(a) of the Exchange Act, 15 U.S.C. § 77o(a), because

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Exchange Act registration requirements do not apply to participants in court-approved Section

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3(a)(10) exchanges. See Brucker v. Thyssen-Bornemisza Europe N.V., 424 F. Supp. 679

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(S.D.N.Y. 1976) (rejecting challenge to approval of Section 3(a)(10) settlement on the grounds

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that settlement violated the Exchange Act’s filing requirements for tender offers because those

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requirements “were not meant to apply to judicially approved settlement agreements, particularly
ORDER APPROVING STIPULATION FOR SETTLEMENT OF CLAIMS
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in light of the legislative history”), aff’d sub nom., Brucker v. Indian Head, Inc., 559 F.2d 1202

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(2d Cir. 1977); Gilbert v. Bagley, 492 F. Supp. 714, 731 (M.D.N.C. 1980) (“supervision of the

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court afforded an extra measure of shareholder protection”). See also Metlyn Realty Corp. v.

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Esmark, Inc., 763 F.2d 826, 833 (7th Cir. 1985) (“The securities laws were designed to handle

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transactions in markets” and “do not apply expressly to … the course of litigation… To the

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contrary, § 3(a)(10) of the Securities Act of 1933, 15 U.S.C. § 77c(a)(10), exempts from ordinary

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registration procedures securities issued in an exchange transaction approved by a court.

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Litigation contains its own safeguards—including discovery, cross-examination, the supervision

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of a judge, and exposure to prosecution for perjury”).

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Reselling the freely tradeable shares acquired in a court-approved Section 3(a)(10)

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exchange does not make the person receiving the shares a dealer that would be required to

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register. See ScripsAmerica, 56 F. Supp. 3d at 1165 (party who received shares in Section

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3(a)(10) exchange “was permitted to sell the shares however it pleased; it was not illegal to sell

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freely transferrable shares in a publicly traded company”). Staff Legal Bulletin No. 3A states

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that securities issued in court-approved exchanges are immediately free trading, and contains no

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mention of any possible dealer registration obligation. Requiring parties to court-approved

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exchanges to register as dealers would effectively eliminate the benefit of the Section 3(a)(10)

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exemption, which is that the issued securities are “unrestricted and freely tradeable exempted

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securities.” See Tripath Tech., 2006 WL 1009228, at *2. See also Ackerberg, 892 F.2d at 1335

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(person who was potentially an underwriter involved in a distribution was nevertheless “clearly”

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not an underwriter); Acqua Wellington N. Am. Equities Fund, Ltd, 2001 WL 1230266, at *5

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(S.E.C. No - Action Letter Oct. 11, 2001) (statutory underwriter not a dealer); Gordon Wesley

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Sodorff, Jr., Admin. File Proc. No. 3-7390, 1992 WL 224082, at *5 (Sept. 2, 1992) (dealer

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means buying and selling regularly in the service of others, rather than self-interestedly for

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“one’s own account”); Burton Securities, SEC No-Action Letter, 1977 WL 10680, at *1 (Dec. 5,

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1977) (“a person who buys and sells securities for his own account in the capacity of a ‘trader’ or

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individual investor is generally not considered to be” required to register as a dealer); National

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Council of Savings Institutions, SEC No-Action Letter, 1986 WL 67129, at *2 (July 27, 1986)
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(describing factors that make someone a “trader” rather than a dealer); Guide to Broker-Dealer

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Registration (April 2008), http://www.sec.gov/divisions/marketreg/bdguide.htm#II (factors to be

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considered in determining “who is a dealer”).

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As a British Virgin Islands company, Plaintiff is exempt from registration as a foreign

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broker-dealer, because the claim acquisition, settlement and exchange submitted to the Court for

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approval will be effected by Plaintiff selling Defendant’s shares through Plaintiff’s brokerage

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accounts at registered broker-dealers. (See Stipulation at ¶14.) See 17 C.F.R. § 240.15a-

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6(a)(4)(i) (“A foreign … dealer shall be exempt from the registration requirements of sections

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15(a)(1) or 15B(a)(1) of the Act to the extent that the foreign … dealer [e]ffects transactions in

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securities with or for … [a] registered broker or dealer, whether the registered broker or dealer is

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acting as principal for its own account or as agent for others.”) Accordingly, Plaintiff should not

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be required to register as a dealer due to the negotiation of the settlement of the claims, the

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exchange of the claims for shares of stock pursuant to court approval, or the immediate resale of

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Defendant’s shares on the open market. Id.

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ORDER

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In consideration of the foregoing Findings of Fact and Conclusions of Law,
IT IS HEREBY ORDERED AS FOLLOWS:
1.

The Stipulation for Settlement of Claims (Doc. 5), incorporated herein by

reference, is adopted and approved in its entirety;
2.

The Court was advised prior to the hearing on the Motion of Approval of

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Stipulation for Settlement of Claims (Doc. 6), that Defendant would rely on the exemption of

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Section 3(a)(10) of the Securities Act of 1933, as amended, 15 U.S.C. § 77c(a)(10), and NRS

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90.280(6)(c);

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3.

Plaintiff owns and holds bona fide outstanding securities, claims and property

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interests; the terms and conditions of the issuance and exchange for shares of Common Stock of

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Defendant, as set forth in the Stipulation, are approved after a hearing upon the fairness of such

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ORDER APPROVING STIPULATION FOR SETTLEMENT OF CLAIMS
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terms and conditions at which Plaintiff, the only person to whom it is proposed to issue securities

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in such exchange, had the right to appear;

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4.

Defendant shall forthwith issue to Plaintiff unrestricted and freely tradable shares

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of Defendant’s Common Stock as set forth in the Stipulation, which shares shall be exempt from

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all provisions of the Securities Act pursuant to Section 3(a)(10) thereof;

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5.

Plaintiff may immediately resell all of the shares on the public markets without

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any restriction and without any registration under either the Securities Act or the Securities

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Exchange Act of 1934, as amended; the parties are not required to file a registration statement

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under Section 5 of the Securities Act, and the parties and their affiliates are not required to

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register as broker-dealer under Section 15 of the Exchange Act as a result of the acquisition,

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exchange or resale of the shares; and

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6.

The Court shall retain jurisdiction to enforce the terms of this Order by

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application or motion, and upon completion of the terms of the Stipulation, this action shall be

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dismissed with prejudice in its entirety.

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IT IS SO ORDERED.

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DATED: December _17__, 2015
Hon. Miranda Du
U.S. District Court Judge

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Proposed order submitted by:
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ROBERTSON, JOHNSON,
MILLER & WILLIAMSON
50 West Liberty Street, Suite 600
Reno, Nevada 89501

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By:
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/s/ Jarrad C. Miller
Jarrad C. Miller, Esq.
Attorney for Plaintiff

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ORDER APPROVING STIPULATION FOR SETTLEMENT OF CLAIMS
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