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May 8, 1984

LYLE E. BERTSCH, Defendant; LYLE E. BERTSCH, Counterclaim Plaintiff, v. ANDREW COLSON, Counterclaim Defendant, and MAJOR POOL EQUIPMENT CORP., et al., Additional Defendants on Counterclaims

The opinion of the court was delivered by: SAROKIN

 This case again presents for the court's consideration the extremely difficult legal problem of defining the term "security" for purposes of the securities acts. In deciding this issue the court must attempt to ascertain the intention of Congress, although the world which Congress saw when it drafted these Acts is far different from the world today. The use of the corporate entity in the business world has become commonplace for a variety of reasons, including taxes, insulation from personal liability, etc. Sales of stock can be utilized as a vehicle for the sale of land, small businesses and for the acquisition of control and management of ongoing concerns. Although traditional stock may be utilized, to place every such sale within the ambit of the statute would far exceed the reach of the statute contemplated by Congress.

 Just as it is inconceivable that the statute was intended to cover the sale of 100% of the stock in a privately held corporation owned only a vacant lot or a corner grocery store, so was the statute not meant to control every sale of property, assets or controlling interests in ongoing companies. The mere fact that such sales are through the vehicle of stock does not automatically render the act applicable.

 The Securities Acts were meant to protect the passive investor, one who would not ordinarily take the same precautions as one purchasing for purposes of control and management. The latter would normally be expected to investigate and evaluate and not to rely solely upon the representations of the seller without accounting and/or legal advice. The average investor, on the other hand, usually relies upon the representations of the seller and takes no independent action to investigate, evaluate or protect against the failure of the true facts to comport with the representations so made. It is this latter class of purchasers and that class alone which the statute intends to protect.

 Such an approach requires courts to place investors into one of these two classes. In undertaking such an analysis, in cases such as these, a court should consider factors such as the following:

 1) whether the purchaser intended to acquire control and to exercise it;

 2) whether the purchaser actually exercised or had the power to exercise such control and management after acquisition;

 3) whether the purchases were made through negotiations as opposed to solely on the open market;

 4) whether the purchaser utilized or had the opportunity to utilize legal and/or accounting services in seeking to acquire control;

 5) whether the purchaser had direct dealings with management or the owners.

 With these factors in mind, the court here confronts a close case. In this instance, the problem arises as the result of shares of stock in Major Pool Equipment Corp. ("Major") sold to defendant Bertsch by plaintiff Colson and by Major itself, which stock comprised between 35% and 49% of the corporation's outstanding shares. Bertsch claims that Colson, Major, individual directors of Major and Major's accountant ("the counterclaim defendants") violated the securities laws and otherwise defrauded Bertsch by falsely inflating the fiscal health of Major in financial reports made available to Bertsch, and in oral and written statements made by the counterclaim defendants which allegedly induced Bertsch to rely upon those reports. Bertsch therefore brings this action *fn1" against the aforementioned parties for violations of sections 10(b), 13(a), 18 and 20 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j, 78m, 78r, 78t, sections 12(2), 15 and 17 of the Securities Act of 1933, 15 U.S.C. §§ 77l, 77o, 77q, and New Jersey statutory and common law.

 The counterclaim defendants here move for summary judgment on Bertsch's claims arising under the federal security laws, arguing that Bertsch was not an investor but a purchaser of control. In support of their motion, they point to Bertsch's own deposition testimony to the effect that his intention in purchasing stock was to take control of Major. They also contend that upon purchasing such stock, pursuant to two Stock Purchase Agreements and one Voting Trust Agreement, Bertsch did gain a controlling share of Major; that Bertsch exercised his control by appointing himself Chairman of the Board of Major and installing a majority of the directors on the Board; and that he took over the day-to-day management of Major by installing new officers, including his son, Robin Bertsch, as President of the Corporation. Bertsch does not controvert most of these facts; he does, however, argue that deposition testimony reveals that he did not manage the day-to-day operations of Major. He also contends that, as the securities he purchased constituted the stock of a publicly-traded corporation, such securities ought to be governed by the federal securities laws, as he assumed they would be in structuring the transaction as he did.


 A. The economic reality ...

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