The staff doesn’t issue many Section 16 no-action letters these days, but a sympathetic requestor has gotten both a staff no-action letter and an SEC exemptive order granting it relief from Section 16. The requestor is the PG&E Fire Victims Trust, a trust that was formed as part of the Chapter 11 reorganization of PG&E Corporation (the issuer) and its subsidiary Pacific Gas and Electric (the “utility”) to receive and distribute a settlement fund for the benefit of victims of fires that occurred during 2015-2018.
The plan of reorganization calls for the issuer to issue to the trust 480 million shares of its common stock (the “initial shares”), representing more than 10% of the class outstanding. The trust will sell shares to generate cash to pay fire victims as their claims are processed. To avoid having the trust be subject to tax at the time of sales, the issuer obtained a private letter ruling from the IRS treating the trust as a “grantor trust.” The effect of that treatment is to allow the trust to satisfy Treasury Regulation Section 1.1032-3(c), which allows for nonrecognition of gain upon a sale of shares if, among other things, the shares are sold immediately after they are received. The problem, though, is that the initial shares won’t be sold immediately, because it takes time to process all the claims. To address that problem, the plan of reorganization provides that, when the trust is ready to sell shares, it will first deliver the initial shares back to the utility, and the issuer will issue to the trust in exchange an equal number of shares of newly issued common stock, which the trust will then sell “immediately.”
There were a lot of tax and securities law issues raised by the arrangement, and apparently there were reasons why the exchange of shares might be considered a purchase and sale. So, the trust obtained a no-action letter confirming the staff’s agreement that the trust, which is a fiduciary, is exempt from Section 16 under Rule 16a-2(d)(1), which exempts transactions by an executor, guardian, receiver, or “fiduciary in a similar capacity.”
The Rule 16a-2 exemption is available for only 12 months after the fiduciary is appointed. The exemptive order exempts the trust’s share exchanges (but not other trust transactions) occurring after the 12-month period.
-Alan Dye, Section16.net September 7, 2021
