Business Associations

Agency, principal, agent

(Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.) (2) The one for whom action is to be taken is the principal. (3) The one who is to act is the agent.

disloyal agents

-Agents have fiduciary obligation to not harm employer. They can be disloyal to the principal when they shoplift, give unauthorized discounts, take or use kickbacks, agent property owner sells property to buyer wo disclosure. -An agent has a duty to acquire a material benefit from a 3rd pty in connection w/ transactions conducted or other actions taken on behalf of the principal or otherwise through the agent's use of the agent's position. -An agent has a duty not to use property of the principal for the agent's own purposes or those of a third party.

Partnership

-An association of 2 or more persons/entities to carry on as coowners as a business for profit. -Each partner is an agent of the partnership. -No need for formal paperwork or lawyer. Agree to do something together forms a partnership often unknowingly. No limited liability. Pass-through taxation (income that partners receive are taxed, but the partnership itself is not). Partnership agreement. Owned by partners. Partners and Exec Committee governs. Chief is Manager.

expulsion

-expulsion must be done in good fiath for a dissolution to occur without violation of the partnership agreement. -partnership agreement is violated if the expulsion is exercised in bad faith or for a predatory purpose (money).

demand requirement

-give the board what you want before you start the suit. The board may do what you ask or negotiate a deal. The purpose of demand requirements gives teh board a chance to do something and save litigation costs. Encourage shareholders not to sue. Derivative suits are challenging the authority of the board. -policy: let the corp deal with it; minimize the burden on the ct by first requiring P to resolve the problem w corp.

distribution

1. outside creditors 2. partner creditors 3. partner's capital contributions 4. profits to partners

merger

2 corps merger/fold into one. The parties agree which the surviving corp will be (could continue under the present corp or a new firm)

freeze out merger

51% shares owned. I can control easily. Issues include conflict of interest bc minority shareholders are treated in a discriminatory/duty of loyalty way. Once you own 100% of stock, no conflict of interest arises. To get the rest of the stock, acquire the remaining stock, force them to sell. -fairness test: 1) fair dealing (honesty, full disclosure) and 2) fair price.

Safe Harbor Rule

Allows buyers to resell stock they acquired in a Reg D offering if they first hold it for two years and then resell it in limited volumes.

Indemnification

State law governs. 145 Del. Corp. Code: you can sue an officer or director in a derivative suit. They will be forced to pay into corp treasury. But will turn around and use the money to pay the litigation fees. Corp required to indemnify an officer/director when he is successful on the merits. Corp can still indemnify when they lose or settle if D acted in good faith.

call option

Subject to 10b5. not stock itself, you buy the right to purchase the stock; the terms are precisely set up at a specified price and time; these options are securities; speculators who think price will go up buy these; you get the difference in price. Essentially an agreement to buy a security at a fixed price with the anticipation of an increase in the stock price.

16b Problem 1c

CEO Bill (with 1 million shares outstanding). On Jan. 1, Bill buys 200,000 shares for $10/shares. On May 1, Bill sells 110,000 shares for $50/shares. Then resigns from corp. On May 2, Bill sells 90,000 shares for $50/share. Resignation does not affect liability so long as within 6 months. $40 x 200,000 = $8million

unconventional transaction doctrine

Certain transactions are not deemed sales. Merger and grant of option to sell were unconventional transaxns and were not deemed a sale for 16b. Acquisition of an option is the purchase or sale of the underlying stock. 3 factors: whether the transaction is volitional; whether the transaction is one over which teh beneficial owner has any influence; whether the beneficial owner had access to confidentail info about the transaxn or the issuer.

corporate donations

Donating serves corp interest in giving to charities to hire graduates. Corps can make donations up to 1% of surplus. BJR trumps violation of duty of care. Although the primary purpose of corps is to make money, there is an indirect benefit from donating to a univeristy by helping the community.

Factors of Corp Control

Factors in finding that the corp was controlled by another to justify piercing the veil: -failure to maintain adequate corp records or to comply with corp formalities -commingling of funds or assets - undercapitalization -one corp treating the assets of another corp as its own.

Williams Act 1968

Fed Reg. governs tender offers. Keep tender offer open for 20 business days. All shares must be purchased proportionately. Every share must be purchased for the same price. When you acquire 5% of the shares of any publicly traded corp, you have to make a disclosure 1) the identity of the purchaser, 2) what your financing, and 3) the purpose of the purchase at the time you buy it.

Voting Problem

Has management violated some fiduciary duty? Management should disclose the outside $9 offer. Duty of good faith: some bad intent, doing this to preserve their own jobs may be a breach of duty of good faith. Duty of loyalty: conflict of interest. They are trying to preserve their own jobs and are not being honest w shareholders.

initial public offering

IPO; first time private company goes public

ITSFEA

Insider Trading Securities Fraud Enforcement Act: allows expressly for private enforcement to get damages. You have to be a contemporaneous trader, ie, buy or sell stock at the time the insider trading was going on. Employer is liable for employees doing inside trading if the info was taken in the course of business.

Duty of Loyalty

More severe breach than duty of care. Harder to use BJR. Automatic voidability no longer the rule. If the director can show that the decision was fair and reasonable, then the ct will find that there was not a breach of the duty of loyalty. Transaction must be inherently fair to the corp. -Majority shareholder owes a fiduciary duty to the minority shareholder. If morre than one class of shareholders, you must take that into account. It is not just a duty owed to one particular class of shareholders, but you owe a duty to all classes of shareholders. Must disclose info.

Sole Proprietorship

No need for formal paperwork or lawyer. Pass-through taxation.

Cady Roberts

Obligation of an insider is to disclose the material info to the investing public, or don't trade. Employees should buy wi 10 days of the 10Q report to be safe. It is unlawful to trade on material inside info UNTIL such info has been disclosed to the public and has had time to become equally available to all investors. Such material fact must be effectively disclosed to the investing public prior to the commencement of insider trading in the corp's securities.

obligation of good faith

Only directors who rely in good faith on corporate books and records or reports from corporate officers or certain advisors, are fully protected against shareholder claims.

fraud on the market

P needs to show reliance. All of us who trade on the secondary market are relying on the integrity of the market price. It is a rebuttable presumption of reliance. Public info reaches professional investors whose evaluations of that info and trades quickly influence securities' prices. IT does not extend to persons who did not reveice the false info.

fiduciary obligations of partners

Partners are held to the highest degree of duty or loyalty and care as a fiduciary to each other. Duty to disclose to partner the new business opportunity.

partnership reimbursement

Partners can get reimbursement for ordinary and proper conduct of business; carried out in the usual way.

16b Problem 1a

Problem 1(a): Bill is the CEO of SCLaw; 1 million shares outstanding. Jan 1 - Bill purchases 200,000 shares for $10/share. May 1 --Bill sells 200,000 shares for $50/share. Liability? YES $50*200K - (200K*$10) = 10,000,000 - 2,000,000 = $8,000,000 200K (50-10) = $8 million

16b Problem 5

Problem 5: SCLI has 1 million shares of class A and 1 million shares of class B a. Mary, not an officer or director, on i.March 1 buys 110,000 shares of Class A at $10/share (no ownership of any stock at the start of the transaction) ii.Mar 2, she buys 50,000 shares of Class B at $10/shares (yes) iii.April 1, she sells all of her stock at $50/share. (yes at the start she is 10% shareholder) Liability? Classes don't matter for 10%. If it did, it would create a loop hole. 50,000 x $40 = $2 million

Sarbanes Oxley Act

Requires both the CEO and CFO's signature for a corp's financial statement. Security law is an area that fed gov't has regulated; while before it was state law.

piercing the corp veil

Rule: unity of interest with corporate entity, and fraud/injustice will be perpetuated if veil is not pierced. scenarios: closely held corp and parent subsidiary cases. when you can: unity of interest btwn owner and stockholders. when you can't: no unity of interest btwn owners and tons of stockholders; medium or large corp not closely held. K case not as willing to pierce veil bc can do credit checks and exert some control. Tort case more willing to pierce veil bc pty who seeks to pierce ahs no control over torts. Not having adequate insurance may be enough for ct to find fraud or injustice going on.

Regulation FD

SEC felt their power to stop insider trading was undercut by Dirks so they issued this new reg. If someone acting on behalf of a public corp discloses material nonpublic info to securities market professionals or holder of the issuer's securities who may well trade on the basis of the info, the issuer must also disclose that info to the public.

demand futility

The demand requirement is excused if one of the 3 situations is met: 1) board majority has a conflict, 2) board majority can't be independent 3) Not within the business judgment rule (fraud or embezzlement)

reimbursement of costs for proxy fight

The expenses must be reasonable and it has to be policy not a personality issue. In a contest over policy, as compared to a purely personal power contest, corp directors have the right to make reasonable and proper expenditures, subject to the scrutiny of the cts when duly challenged, from the corp treasury for the purpose of persuading the stockholders of the correctness of their position and soliciting their support for policies which the directors believe, in all good faith, are in the best interests of the corp.

subsidiary characterization

Totality of circ must be evaluated in determining whether a subsidiary may be found to be the alter ego or mere instrumentality of the parent corp. Factors: -parent and sub have common directors and officers. -parent and sub have common business depts. -parent and sub file consolidated financial statements and tax returns. -parent finances the sub. -parent caused the inc of the sub. -sub operates w grossly inadequate capital. -parent pays the salaries and other expenses of the sub. -sub receives no business except that given to it by parent. -parent uses the subsidiary's prop as its own. -daily operations of the 2 corps are not kept separate. -sub does not observe the basic corp formalities: keeping separate books, records and holding shareholder and board meetings.

Piercing the LLC Veil

Unity of interest (alter-ego) and fraud/ injustice

lock-in option

Van Gorkom; someone comes in and buys a stake in the co. and they are given an opportunity to buy a big chunk of shares at a particular price, done before the acquisition happens. Buy 1 million shares at market price. They then know if someone outbids them; they will have to buy theset stocks. It is more like an advantage, not a lock.

freeze out merger

When one corp tries to acquire another corp, they do it by buying all the stock. Shareholders will tender their stock for a higher price. Force remaining shareholders to sell their shares to the corp. Stockholders have a right to seek appraisal from the court.

CTS

a law permitting in-state corp to require shareholder approval prior to significant shifts in corp control is constitutional.

UPA 701 partnership dissolution

a partnership does not dissolve if a partner withdraws from a partnership in contravention the partnership agreement. If a partner has rightfully withdrawn from a partnership, the partnership must buy out the withdrawing partner for an amount equal to his share of the value of the assets of the partnership.

Misappropriation theory O'Hagan

a person commits fraud in connection with a securities transaction, and thereby violates 10b and 10b5, when he misappropriates confidential info for securities and trading purpose, in breach of a duty owed to the source of the info. Deception is required.

promoter

a person who identifies a business opportunity and puts together a deal, forming a corp as the vehicle for investment by other people. -If nothing is said about liability, the formation of the corp does not terminate the promoter's liability. -disclosing profits and not secret profits then probably promoter is off the hook. -if he keeps it secret, good chance that he will be held liable. -if he signs a K before corp is formed, he is liable for the corp.

Opposite Canadian Rule - Zetlin

absent looting of corp assets, conversion of corp opportunity, fraud, or other acts of bad faith, a controlling stockholder is free to sell, AND a purchaser is free to buy that controlling interest at a premium price.

book value

accounting; what was paid for the business; usually lower than appraisal value; depreciation of value. Easy to come up with. Accountants can get the numbers out without much cost. Creating an incentive for employees to stay at the firm. If they stay then they don't have to sell.

parent subsidiary

almost all the stock is owned by the parent corporation.

Tender offer

an attempt to buy the stock of entire company. Always at a premium price which creates a spike in price.

proxy statement

an explanation as to what the issues are. It will urge you to vote the way they want.

14a7 SEC 1934 proxy statements

any shareholder may request that materials be sent to all shareholders. Gives management a choice: 1) give out addresses of shareholders or send the material to the shareholders at the requesting shareholder's expense; 2) send material yourself; don't want to give addresses to challenger. Any shareholder to request materials to be available and distributed to the shareholders.

short swing trades 16b - matching stock

applies only to equity securities, not other bonds or debentures. Cts calculate the % of stock that she would own if she converted the bond into stock. Cts match stock sales and purchases in whatever way maximizes the amount the company can recover. Match lowest priced purchases and highest priced sales.

balance test

apply the BJR; and assess the reasonableness of the defensive tactic employed. You balance the harm from the 2-tier offer (takeover) from the harm of self-tender offer.

merger test Mass

appropriate merger if: 1) legitimate business purpose, 2) inherently fair

acquisition

can be accomplished by allocating shares pursuant to the proportion of a company's worth.

closely held corporation

closed, close, closely held means the same thing. Not publicly traded stock and usually relatively small. There are ways to keep control even when the number of investors increases. Have a shareholder agreement in place.

statutory merger

combination accomplished by using a procedure prescribed in the state corp laws. The terms of the merger are spelled out in a doc called a merger agreement, drafted by the parties, which prescribes, among other things, the treatment of the shareholders of each corp. Approval by votes of board of directors and shareholders of each of the 2 corps would have been required.

employment K

combo of employment K and buy-sell agreement might be superior way to go, versus shareholder agreement. You can be very specific in the terms in which the buy-out will occur. Handles termination and leverage. Shareholders in closely held corp are free to contract regarding the managment of the corp absent the presence of an objecting minority, and threat of public injury.

pac-man defense

corp A makes a bid to takeover corp B and B turns around and tries to acquire A back. In defense to a takeover, a corp that is to be acquired actually acquires the other corp.

corp funds

corp fiduciaries may not use corp funds to perpetuate their control of the corp.

limited liability of corp

corp has limited liability for persons who do not have control over a corp as an incentive for this type of investment and business association. Also to protect the passive investor.

State Anti-takeover statutes

corp management pushed for it. Law firms were pushing for it as well bc they thought it was in their own monetary interest to have this passed. They would lose business if they didn't protect their local business. -It is now more difficult to takeover. Most states have passed these statutes. It has almost stopped all hostile takeover activity.

Poison Pill

diluted price of stock - gives everyone else right to buy at discount, excluding the new buyer of large percentage. Value of shares of new buyer would be diluted to half or less the amount they bought each share for. Eg. 2 for 1 sale. Purpose of poison pill is to prevent someone else from coming in and ousting board. It is a selfish protective measure done by the board of directors. Most shareholders are against poison pills. Poison pill destroys chance for stock value to go up. Take-overs increase the stock values and the poison pill stops them from happening.

prospectus

disclosure statement about the stock written by security lawyers and investment bankers.

shareholder straight voting

each seat is a separate election. Seat members can vote together to decide who gets the seats. Even though a shareholder has 1 vote, she may not get a seat if the other 2 vote someone else in.

how to start a corporation

file w. sec. of state/ get cert of inc. articles of inc/ constitution bylaws/ statutes bank account set up in corp's name get a stamp and seal for corp

par value

gave buyer of stock some rough idea what the value is. It is not accurate though. Not used modernly. Declaration by issuers of stock of what they thought the stock was worth at the time of issue.

Mail Fraud

gets you in prison. commits fraud in connection with the use of mail in interstate commerce. Use Dirks/ O'Hagan/ 14e3 to get the fraud, then you use mail fraud to get the criminal charge (brought by US gov't via DOJ.

insider information

gives an unfair advantage to those who are privy to the info. If you know something before anyone else does about stock, you can make money from it when it is info the market does not have.

primary market

governed by 1933 Security Act. When you have a new public offering, or new stock is being issued by a corp. First time security is sold, it is primary market and happens only once. It is the issuer of securities, the company that created the securities sells them to investors.

special litigation committees

handles the derivative suit to decide if it should be dismissed. Made up of disinterested board members who conduct research through auditors. -ct will accept the recommendation from committee so long as the directors are independent and the committee has followed proper procedures.

Dirks

has the tipper disclosed the info for personal gain? If yes, then tippee is liable for insider info.

hostile take over

hostility comes from the target company's incumbent management. They are hostile to the take over. Reaction of a target company's board to resist.

agent's liability on the K

if the other pty has notice that the agent is or may be acting for a principal but has no notice of the principal's identity, the principal for whom the agent is acting is a partially disclosed principal. 3rd pty sues principal: principal will be liable if the agent acted wi his authority. 3rd pty sues agent: if the agent fails to properly disclose who the principal is OR agent disclosed false info about a principal, making the agent liable to the 3rd pty under a misrepresentation theory. Principal sues agent: if the agent acts beyond his authority.

crown jewel defense

if your co is being targeted, you sell your most valuable assets to someone else. So that co taking over ends up not getting what they want or may lose interest.

Partnership Factors

intention of the parties; right to share profits; obligation to share losses; ownership and control of property; community of power in administration; language in the agreement; conduct towards third parties; rights of the parties on dissolution.

junk bonds

less secure than more senior securities (senior gets paid first); the have higher interest rates so you would get a higher return.

common stock

most basic type of stock that has voting rights. once you own it, you can decide when and to hwom you will sell it.

short swing trades 16b - 10% shareholders

must be 10% holder at the start of the sale transaction and at the start of the buy transaction. If not, no violation of 16b. Officers and directors don't require 10%.

vicarious liability of corp

negligent actions of someone else is shielded by the corp. Personal negligence is not protected.

Basic - Fraud Case

no corp official was accused of profiting from insider trading. Fraud was failure to release necessary info. Still a violation if ct finds that the info was material.

voting agreement

not a voting trust. They are lawful in Del. Just bc they are not mentioned in the code does not meant they are not authorized. Voting agreements binding indivudual shareholders to vote in concurrence with the majoirty constitute valid Ks.

apparent authority

not actual authority (real) but is the authority the agent is held out by the principal as possessing. It is a matter of appearances on which 3rd ptys come to rely.

proxy fight

occurs when someone gets organized to challenge the current managment and propose a new board. Send out your own materials: vote for may team bc we will manage better than the current management. Proxy fights are subjec to 1934 SEA and to state corp statutes.

poison pill flip over

occurs when there is a merger involving the bidding co and the acquiring co. Sale of discounted shares to shareholders, excluding bidder. They don't get the 2 for 1 stock sale. The value of stock is now watered down.

dissolution vs. buy-out

often doesn't end the business. It is sold off to someone (could be same owners who will bid higher). Buy-out judge will give parties chance to get together to agree what the price should be. They get a chance at negotiations before judge specifies the terms.

corporation by estoppel

one who contracts with what he acknowledges to be and treats as a corp, incurring obligations in its favor, is estopped from denying its corporate existence, particularly when the obligations are sought to be enforced.

poison pill dead hand

only persons who could waive the triggering event is the board of directors who resided at the time of the negotiations.

enterprise theory

requires piercing the corp veil and reverse piercing. Separate entities should be treated as one big entity. This way you have owner's assets and other corps' assets.

compensatory stock options

stock options used to compensate employees. Call options are given to employees as part of compensation. Pay employees with stock options so that they are incentivized to increase profits of company.

types of securities

stock; bond; notes; investment Ks; member's interest in LLC may be security

absence of good faith

subjective bad faith with actual intent to do harm. gross negligence no bad intent. A reasonable person would have been aware - consciously aware.

test for materiality

substantial likelihood that a reasonable shareholder would consider important in deciding whether to buy or sell.

proportionate rule

tender offers have to be open proportionally to all shareholders. You will get your proportionate share whether you are the first to tender or the last to tender. You are under no pressure to rush to tender your shares. There is a time limit of 15 days for shareholders to tender.

de facto merger

the same thing as a merger.

Revlon Rule

there's a duty that is triggered when board of directors know about takeover. Your duty is to deal fairly and get the best deal for shareholders. Focus on getting the best deal possible, instead of keeping your job.

Internal Affairs Doctrine

you apply the law of the state of inc whenever it is a matter that is internal to the corp. Which state law applies to the internal doc as long as it is an internal affair, you apply the law of corp.

partnership disassociation

you don't have to create a new one if you want to continue the old partnership.

agency theory

-Goes against the principles of corp; the purpose of a corp is limited liability unless you can establish piercing the veil. Agency theory can't trump the limited liability of corps. -Applies whenever anyone exercises control of the corp to further his own interest rather than the company's business, he will be liable for the corp's acts upon the principle of respondeat superior.

buy-sell agreement

-Mechanism for how the business is to change in the future. Gives someone the option to buy the partnership from the other. -you can get out of the investment on reasonable terms you know in advance. -agreement that allows a partner to end her or his relationship with th eother partners and receive a cash paymnet, or series of payments, or some assets of the firm, in return for her interest in the firm.

test for direct or derivative suit

-To pursue a direct action, the stockholder P must allege more than an injury resulting from a wrong to the corp. The injury must be separate and distinct from that suffered by other shareholders or wrong involving a contractual right of a shareholder. P is usually asking for an injuction. -For derivative suits, a stockholder must allege either that the board rejected his pre-suit demand that the board assert the corp's claim or allege with particularity why the stockholder was justified in not having made the effort to obtain board action.

partnership agreement

-assign jobs to the better suited partner, have a provision that allows mediation rather than dissolution. If something in the partnership agreement departs from default provision of UPA you have to make it clear so that i can trump UPA. -have a sliding scale that addressing dissolution in 1 day or 1 year. Uncompensated time may equal capital investment.

3 categories of punishable inside traders

-insiders (persons who have the fiduciary duty themselves, directors, employees) -temporary insiders (lawyers, accountants, PR) -tippees (liable only if the insider who disclosed the info was acting on an improper motive)

Duty of partners to render information

-parties shall render on demand true and full info of all things affecting the partnership to any partner or the legal representative of any deceased partner or partner under legal disability. -can compete with previous employer so long as they don't violate fiduciary duties. A partner who lies violates the fiduciary duties.

Corporate Opportunity Doctrine

-sub-part of duty of loyalty. It is improper to take advantage of an opportunity when you owe a corporate duty to another corporation that could take advantage of this opportunity. -when corp does not have the finances to take advantage of the opportunity. -a corp fiduciary agrees to place the interests of the corp before his or her own in appropriate circumstances. -Trigger: 1) has to be in the same line of business, or 2) must have acquired the knowledge of the opportunity, as a result of your employment with the corp, or 3) firm has the interset or a reasonable expectancy, or 4) financially able to undertake the opportunity 5) conflict with the interests of the corp and the self-interest of the officer or director.

10b5 requirements

1) materiality: info that reasonable investor would need to know to invest. 2) reliance: class can rely on the fraud on the market theory while individuals cannot. 3) standing: only buyers or sellers of stock can bring an action for 10b5 fraud. Merely holding stock is not enough. 4) scienter: intent - requires something more than mere negligence; intentionally deceived the public. 5) secondary liability: there is no auto secondary liability, you have to prove that the accounting firm had scienter, if you can do that then you can get them. 6) interstate commerce: anything that uses the interstate communication system for fraudulent info passing along (phone, internet, wi one state only) 7) non-disclousre related: you are out of court

3 ways you can take-over another company

1) merger: provision that governs mergers; there is only one corp left bc the target corp is merged. 2) acquire stock of the other corp: there can still be 2 corp, ie I own all the stock but it is a wholly owned subsidiary. 3) Acquire assets of the other corp: there can still be 2 corp; the assets change.

major components of buy/sell agreement

1) trigger mechanism: someone dies, leaves 2) obligation to buy the departing person's shares 3) price/valuation: fair market value, book value, appraisal, formula, set price earh year, relation to duration. 4) method of payment 5) protection against debts of partnership 6) procedure for offering either to buy or sell

scope of employment (Rst 2d Sec.219)

1. time, place, and purpose of the act, 2. similarity to acts which the servant is authorized to perform 3. whether the act is commonly performed by servants 4. extent of departure from normal methods 5. whether the master would reasonably expect such act would be performed

Piercing the Corporate Veil Rule

A corp entity will be disregarded, and the veil of limited liability will be pierced when 2 requirements are met. 1) unity of interest and ownership that the separate personalities of the corp and the individ (or other corp) no longer exist; 2) circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice.

145a Indemnification

A corporation SHALL HAVE power to indemnify any person who was OR is a party... by reason of the fact that he is OR was a director, officer, or employee OR agent of the corporation... if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation.

Master-servant agency

A master is held liable for the act of his employee, not an independent contractor. The key difference btwn master-servant and independent contractor is the amount of control used. Elements for master/servant: servant agrees to work on behalf of the master; and servant has agreed to be subject to the master's control OR right to control the physical conduct of the servant.

short swing trades 16b

Applies only to companies that register their stock under the 1934 Act. Companies w stock traded on a national exchange, and with assets of at least $10 million and 500+ shareholders. Officers, directors and 10% shareholders must pay to the corp any profits they make, wi a 6-mo period, from buying and selling the firm's stock. This rule restricts officers and insiders of a company from making short-term profits at the expense of the firm. Requires you to show that an officer, director or 10% shareholder bought and then sold. Match a sale and purchase together in any order to show a profit. Eg. $60 sold*10 shares - [(10 shares*$1 bought) + (10*$50 per share)] = $90

Consumer Protection Statute 10b5

Applies to secondary market. SEC adopted it to implement and enforce 10b. Fraud and omissions. Governs any fraud by any person in connection with the purchase or sale of any security. It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange to employ any device, scheme, or artifice to defraud; to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made not misleading; or to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

voting trust

Del. you can create a voting trust. All the ppl in the voting trust, they give all their shares to the trustee. The trustee would have the right to vote for the duration of the trust.

derivative lawsuit

Derivative suits are brought to enforce the rights of the corp, for all of the shareholders. Class actions are brought to enforce the independent rights of a particular group of persons. Shareholders derive their power to sue from the corp. The shareholder brings suit on behalf of the corp and on behalf of all shareholders of corp. Corp managers who have harmed the corp will be relieved of risk of personal losses if the corp pays large atty fees in return for their willingnesss to accept a settlement.

Duty of Care

Directors of a corp have a fiduciary duty to their stockholders to inform themselves of all info reasonably available to them and relevant to their decision regarding mergers/acquistions. Hire an investment banking firm to issue an opinion as to the fairness of the price that has been offered. Amend cert of inc to have limited liability for directors. Duty extends to creditors. Violation if there was a duty owed and the breach of the duty was the proximate cuase of the injury.

EDGAR

Electronic Data Gathering, Analysis, and Retrieval: resource of info about publicly traded companies. 10K reports: annual reports filed by all companies 10Q reports: filed 3 times a year; every 3 months 8K reports: 15 days important developments (losing customer, CEO) Regulation SK: allows companies to consolidate and refer back to info already given in other reports.

liability for torts of independent contractors

GR: independent contractors are generally laible for their own torts. The principal has no direct control over the independent contractor. Exceptions: 1) principal retains control of the manner and means of the work of an agent, 2) principal hires an incompetent independent contractor, 3) the activity is inherently dangerous/ ultra-hazardous or nuisance per se

Call 1900 Statutory Dissolution

If 50% or more shareholders - it is an automatic grant of dissolution.

Wilkes Theory

If P can show that breach of highest duty of good faith towards co-owners esetablishes the case. Other side can show that they had a reasonable business purpose. P can come back and show that there was a way to meet the reasonable business purpose by less oppressive means. Don't apply Wilkes test to publicly traded firms bc anytime you want to get out, you just sell your shares on the market.

Securities Act 12

Imposes private civil liability on any person who offers or sells a security in interstate commerce, who makes a material misrepresentation or omission in connection with the offer or sale, and can't prove that he did not know of the misrepresentation/ omission and could not hav eknown even with the exercise of reasonable care. Material - matters as to which an average prudent investor ought reasonably to be informed before purchasing the security registered; misstatements would cause an investor not to purchase.

Securities Act 11 Civil liabilities

It is the principal express cuase of action directed at fraud committed in connection with the sale of securities through the use of a registration statement. Bc the misrepresentation is in the registration statement, this will not apply to exempt offerings. 11 has no privity requirement so the list of potential Ds is expansive; everyone who signed the registration statement (by statute, has to be issuer, principal executive officers, and a majority of its board of directors) Defense is due diligence. It is delegated to lawyers. If the lawyers fail to carry out an adequate due diligence review, any Ds who delegated their due diligence tasks will lose the defense. Due diligence is making a reasonable inquiry to ensure that the info in the registration statement is correct.

strike suit

P's atty doesn't have a case, but brings suit to get a quick settlement. Brought by a single person or a group of people with the purpose of gaining a private settlement before going to ct that would be less than the cost of the D's legal fees. P's atty finances the litigation. If they win, they get paid through contingency fee by winning the suit. The can be sanctioned for bringing frivolous lawsuits though.

16b Problem 1b

Problem 1(b): CEO Bill (with 1 million shares outstanding). On Jan. 1, Bill buys 200,000 shares for $10/shares. On May 1, Bill sells 110,000 shares for $50/shares. On May 2, Bill sells 90,000 shares for $50/share. YES liable. $40 x 200,000 = $8million

16b Problem 2a

Problem 2(a): Renee, neither officer nor director, owns 200,000 shares of SCLI stock a.Jan 1, sells all shares for $50/share, (qualifying share) b.then on May 1, buys 50,000 for $10 share, and (at the start of transaxn she was a 5% shareholder) c.On May 2, buys 110,000 more at same price. (at the start of the transaxn she was not a 10% shareholder) d.Liability? No bc she was not a 10% holder at the start of each of the transactions. So it does not matter that she started out with purchase of 10%.

16b Problem 2b

Problem 2(b): Renee, neither officer nor director, owns 200,000 shares of SCLI stock. a. On Jan. 1, Renee sells all shares for $50/share (yes 10% at start of this trans) b. On May 1, buys 110,000 shares for $10/share (not qualifying transaction) c. On May 2, buys 50,000 more for $10/share (Yes 10% at start of this trans) $40 x 50,000 = $2 mil

16b Problem 2c

Problem 2(c): Renee, neither officer nor director, owns 200,000 shares of SCLI stock. On Jan 1. Sells 110,000 shares for $50/share (yes qualifying) On Jan 2, sells remaining 90,000 shares for $50/share (no bc not 10% at the start of the trans.) On May 1, buys 300,000 shares for $10/share (no bc not 10% at the start of the trans) No liability

16b Problem 3

Problem 3 Bill still CEO Mar 1, buys 100,000 shares at $10/share (match) On April 1, buys 700,000 shares at $90/share On May 1, sells all his shares at $30/share (match) Did he make any money? NO. He lost. Liability? YES. $2 million The reason for the $2million liability in problem three is that the plaintiff may match ANY two transactions within 6 months to show a profit. Matching the March 1 purchase and May 1 sale results in a $2 million profit. The overall loss suffered by Bill is irrelevant.

16b Problem 4

Problem 4: Renee owns no shares, but does own 5,000 convertible debentures purchased for $1000 each. There are 2 million shares outstanding. a.Each debenture is convertible into 100 shares of common stock. b.On March 1, Renee buys 100 additional debentures for $800 each, then (yes at the start) c.On April 1 sells 100 debentures for $900 each. (yes at the start) d.Liability? i.Is Renee a 10% shareholder? yes 5,000 x 100 = 500,000 stock. This is over the 10%. Since it is a convertible debenture 16(b) does apply. Convertible debentures rise and fall with stock price. If you didn't cover convertible debentures, there would be a giant loop hole. 100 x 100 = $10,000

CA demand requirement

Stockholders must allege in particularity the reasons for not making such effort. 1) make a demand, or explain to the ct why you didn't make an effort; and 2) deliver a copy of the compliant to the corp before filing suit.

put option

Subject to 10b5. right to sell at a certain price; speculators who think price will go down buy these; you get the difference in price. An agreement to sell a security at a fixed price with the anticipation of a decrease in the security price.

insurance

When is a corp required to reimburse? When the D is successful on the merits or otherwise. Maybe a SOL defense. Corp is still required to reimburse. When is reimbursement allowed? Even if you lose, the corp may reimburse if the D meets the good faith requirement. When can you get expenses for advanced payment? Legal fees are very expensive. May be reimbursed if you lose, you will be forced to pay them back. The ct may authorize the payment.

scope of employment

Whether employer should be responsible for the tort of the employee and whether the actions are foreseeable. What is foreseeable wi scope of employment is based on proximity in location and time. Test: first test scope of employment, move to foreseeability, was there an interference with the agent's duty to perform?

Van Gorkom

Yes, you can breach duty of care. Facts: decision by manager and officers was uninformed. Held: ct finds breach here bc of extreme rush and carelessness. Even if it was a fair price, it could have been higher. Van Gorkom tried to put Trans Union back on the market, but it failed since it was not a level playing field. The directors did not adequately inform themselves as to Van Gorkom's role in forcing the sale of the company and in establishing the per share purchase price; were uninformed as to the intrinsic value of the company; given these circumstances, at a minimum, they were grossly negligent in approving the sale of the company upon 2 hours of consideration. Advice: Present report to the board bc the more you rely on reliable reports, the more protected you will be. The company will pay for the appraisal.

implied authority

actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated. Factors: agent's understanding of his authority, ie agent believes that principal gave him authority; nature of the task; existence of prior similar practices; specific conduct by the principal in the past permitting the agent to exercise similar powers.

ratification

affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account. Requires: acceptance of the results of the acts with, an intent to ratify, with full knowledge of all the material circumstances. -anything that is a violation of the duty of loyalty, may be lawful, if there is some sort of ratification. After-the-fact acceptance/approval by disinterested shareholders/directors.

poison pill no hand

after a certain period of time when the percent rate was reached, no one can waive it (poison pill). Del said not allowed bc they need to have the power to run the corp.

independent contractor

agent if he has agreed to act on behalf of another, the principal, but not subject to the principal's control over how the result is accomplished. non-agent if he operates independently and simply enters into arms' length transactions with owners.

premium for control

agreements keep leverage for X2 even when he loses control. Share in the premium for control.

staggered board

all shareholders can select board but only 1/3 of board is elected per year. A percentage of a board being voted on every year; staggered elections in time. For first year you will have marjority of stock, but not control if they follow the staggered board schedule. Staggered board is a way to exhort the new buyer to give them golden parachutes to leave. It may also deter takeovers.

right of first refusal

allows one to meet the terms of a proposed contract before it is executed. Give him a chance to buy control of the corp before anyone else. If X1 wants to sell shares, they first ahve to offer to X2 at the same price they would sell to someone else.

closely held corporation

almost all the stock is owned by an individual shareholder.

liability of undisclosed principal

an undisclosed principal is subject to liability to a 3rd pty who is justifiably induced to make a detrimental change in position by an agent acting on the principal's behalf and without actual authority if the principal, having notice of the agent's conduct and that it might induce others to change their positions, did not take reasonable steps to notify them of the facts. Inherent authority is undisclosed principal liability.

Caremark violation

any claim that is based on failure of oversight of directors and board. P must show one of 2 things: 1) directors utterly failed to implement any reporting or info system; 2) directors consciously failed to monitor or oversee operations of that system. This makes it hard for P to win derivative suits bc they can't show these.

Cal 1800 Statutory Dissolution

any group of shareholders who have 1/3 or more of stock can petition for dissolution. They must meet a std: necessary to protect the minority shareholder's interest, or majority has acted unfairly. If designated as close corp; drops down to ANY shareholder. He must meet one of the std.

Essence of 10b5 Rule

anyone who, trading for his own amount in the securities of a corp, has access, directly or indirectly, to info intended to be available only for a corp purpose and not for the personal benefit of anyone may not take advantage of such info knowing it is unavailable to those with whom he is dealing.

shareholder cumulative voting

assures you a seat on the board, even though it does not assure you control. Big corps doen't like this bc they don't want to make it easier for smaller minority interests to get a chance for the board. Smaller groups of investors will ensure cumulative voting. I can vote for myself 3 times. I can get a seat when I couldn't get one in straight voting. I won't control the corp, but I can still attend the meetings, get info, get paid.

stock buy-back - green mail

buy back at a premium. Co does not want you to own the shares so they offer to pay you more than market price for the shares. In defense to a takeover, an incumbent manager buys back shares at a higher value than fair market value. Does not serve shareholder's interest. It promotes longevity of employment for corp managers.

buyting on margin

buy stock on credit today; you are gambling that the market will go up; you fixed your price that you bought on margin and when it goes up you get paid more. Borrow money to buy stock.

fair market value

capital account; how much would the business be worth if we go out and sell it. Usually higher than book value. Valid reason to leave the firm should not be punished. Fair market value is preferred and more fair.

dissolution by decree of court

courts may order the dissolution of a partnership where there are quarrels and disagreements of such a nature and to such extent that all confidence and cooperation btwn the parties has been destroyed or where one of the parties by his misbehavior materially hinders a proper conduct of the partnership business.

take me along

creates an obligation of X1 to pay X2 the same amount that they are getting. X1 also has to mention to 3rd pty to buy X2's shares as well.

business judgment rule

ct follows and gives board of directors deference to make business judgments. Only in clear case of abuse or violation of law will the ct step in. There must be fraud or a breach of that good faith which directors are bound to exercise toward the stockholders in order to justify the cts entering into the internal affairs of the corp. BOP is on P.

practical mergers

do not use the statutory procedure. There are no votes bc this is a transaction btwn one corp and the individual shareholders of the other. Eg. co offers its shares to the shareholders of another co. in return for their shares.

private placement

does not have to file with SEC. Factors: -number of offerees and their relationship to each other and the issuer. The more offerees, the greater the likelihood that it is public. -number of units offered. The larger the offering it is public. -the size of the units. The larger the number it is public. -marketing method: public ads or intermediaries it is public. -disclosure

14a8 SEC 1934 shareholder initiative process

even if the board of directors doesn't want to do something, the shreholders can come in and reform. They can put a proposal on the ballot. If the proposal is properly included, the shareholder pays nothing. Lots of free advertising for shareholder. You have to be shareholder with at least $2K worth of stock or 1% of corp's stock. Exclude these initiatives: -can't put on a ballot an initiative that seeks redress for a personal claim or grievance. -can't put on ballot that deals with ordinary business of corp. -Can't put yourself to be elected to board. -Beyond power to effectuate (social policy, stop war) -if it relates to 5% or less the assets or net earnings. Changed to: if it involves less than $10 million or less than 3%. If it just affects a small percentage then it can't be included. Shareholders can force board to do certain things. Eg. amend the by-laws to outlaw poison pills.

special effects doctrine

exception to the rule (no unlawful behavior in insider trading) if you could show that you personally dealt with the owner of a stock, the courts were willing to impose liability.

Regulation D

exemption only in initial sales. 1) less than $1 million you are exempt no matter how many offerees you have 2) less than $5 million AND less than 35 investors will exempt you 3) greater than $5 million AND less than 35 buyers AND buyers are sophisticated will exempt you Issuers can protect the exemption by using reasonable care to make sure the buyers are planning to hold the stock themselves. Disclose to buyers that the stock is unregistered and subject to various resale restrictions and print those restrictions directly on the stock.

secondary market

governed by Security Exchange Act of 1934. Any other sale of stock, after the initial sale of the act. Investors trading with each other. Stock market exchanges are all secondary trades. They are re-sales of securities that are already in the market. Issues include: insider trading, securities fraud, short-swing profits by corp insiders, regulation of shareholder voting via proxy solicitations, regulation of tender offers, and periodic disclosures by publicly held corps.

appraisal rights

if you dissent from merger, you are given the right to seek appraisal for the shares. Can throw a wrench in the transaction bc buyer can back out if appraisal is too high. -They aren't a perfect remedy for stockholder. It exists, but it may not be the best. May be more necessary when there is no public market. Recovery is limited to market value of stock. -Problems: shareholder has to pay to go to ct; you have BOP; you don't have the docs; not worth it for P atty to bring case on one shareholder; not an easy remedy.

short form merger

if you have 90% of the stock, you can force the remaining 10% to sell to you. The 10% gets appraisal rights.

key distinction btwn corp and partnership

liability: corp has limited liability; partnership does not. management: corp centralized with CEO; partnership decentralized cost of formation: corp more expensive than partnership taxation: corp has double taxation; partnership has pass-thru

Corporation

limited liability. No pass through taxation. Corp is taxed and the owners of the corp are taxed (business profits and then shareholder income). Double taxation can be avoided by paying salaries to owners in lieu of dividends, by simply not paying dividends, or by creating an S corp. State filing req. Cert of Inc. Articles. By-laws. Owned by stockholders. Governed by Board of Directors and CEO. Pierce Corp Veil.

Limited Liability Company

limited liability. Pass through taxation. State filing req. Articles of Org and Operating Agreement. Members are owners. Pierce LLC Veil. For taxation reasons you can set up in a different state if you have no factory or stores, eg work in home office. If LLC does not disclose to the world that they are one, they will lose their limited liability shield.

alter-ego theory

makes the parent liable for the actions of a subsidiary. unity of interest and failure to pierce the corp veil would lead to an inequitable result. -It must be made to appear that the corp is not only influenced and governed by that person or other entity, but that there is such a unity of interst and ownership that the indivuduality, or separateness, of such a person and corp has ceased, and the facts are such that an adherence to the fiction of the separate existence of the corp would, under the particular circumstances, sanction a fraud or promote injustice.

selling short

making money or insuring without paying the full price of the stock; you sell stock for a future day wo actually owning the stock; do this when you think stock will go down; at some point you may but the stock to sell it. Borrow stock and sell it immediately for the current price. 60 days later I have to procure it and sell it back to broker.

enhanced scrutiny BJR

more intense scrutiny; take a little bit of discretion from business. Determining when mergers are lawful. Follow Revlon Rule. Draconian, preclusive or coercive are not legal defensive measures.

due diligence defense

not available to the corp itself. If you make a materially misleading statement/omission, corp is always liable. They put their name on it and must answer to the shortcomings in the registration statement.

state laws vary

on the req of a shareholder vote and on the availability of an appraisal right where a combo is accomplished by an asset acquisition. Del: requires approval of majority of shareholders/ no appraisal rights. Sale assets: no appraisal. Merger: appraisal rights. Shareholder election-majority must approve of a sale. Penn: approval of majority of shareholders/ appraisal rights. Sale assets: appraisal right. Merger: appraisal right.

stock acquisition

one corp acquires another corp by acquiring the stocks of the other. Generally, a stock acquisition requires over 50% of the share. However, there may be times when less than 50% ownership of all outstanding shares can be de facto control.

assets acquisition

one corp buys all the assets of the other corp for cahs; this is good bc the corp buying does not assume any liability of the old corp since the purchase price would include this.

front end loaded two tier tender offer

outside party tenders a certain amount of money for the corp's offering a number of shares. There are two levels of offers: one offer for a certain amount for the first 51%; second offer for a lower amount for the 49%. -it is coervice bc it forces shareholders to try to sell their shares ASAP to get the higher price. -no longer allowed.

Limited Partnership

pass-through taxation.

Limited Liability Partnership

pass-through taxation. limited liability while maintaining partnership structure.

preferred stocks

preferred in dividends, liquidation or both. You will be paid dividends before the common stock holders do. You will be paid liquidation and get your money back before the common stock holders do.

3 principal forms of agency

principal/agent; master/servant; employer/proprietor and independent contractor.

test for omission

probability-magnitude: your duty to disclose will be dependent on how likely the event will occur and what importance the even will have. Negligible importance impacts the effect of certainty. eg. Firm 1 makes a merger offer formally in writing; Firm 2 makes a counter offer; 2 CEOs make an agreement in principle.

14a SEC 1934 proxy statements

prohibits people from soliciting proxies in violation of SEC rules. Purpose of the rule is to govern the truth of proxy statements. If you put false or misleading statements then you are guilty of violation this rule. Any statement CEO makes, may be violation of 10b5. It only governs proxy statement.

14e3 - Insider trading of stock of firm subject to a tender offer

prohibits trading while in possession of material, nonpublic ifno relating to a tender offer. Does not require breach of fiduciary duty; all you have to show is that you traded on info that you knew was inside info that had to do with tender offer.

tender offer

publicly made offer to all shareholders to tender their shares and I will buy them.

14a9 SEC 1934 proxy statements

requires full and honest disclosure on proxy statements.

partnership dissolution

right to dissolve: if you want to continue the partnership, you have to create a new one. Possible for anyone who is a partner ro demand dissolution of the partnership. winding up: going out of business; announce it. wrongfully dissolving partner: pay damages to other partner, lose control of the winding up phase, don't have a say anymore in terminating business, lose good will value of business pre 1997.

poison pill flip in

sale of discounted shares to shareholders, excluding bidder. They don't get the 2 for 1 stock sale. The value of stock is now watered down. Occurs when specified percentage is acquired by bidding co. More effective since it kicks in earlier to give them max leverage.

corporate raiders

sell out the assets one at a time, by doing this, they will make more money than they had when they bought the stock. Bidding war ensues bc their activity started a flurry of take over bids. Putting a corp into play bc then a bunch of people get interested and buy stock. Then he sells stocks at a profit.

proxy

shareholders may appoint an agent to attend shareholder meetings and vote on their behalf. Sign here the corp will vote your shares as you instruct. To throw out proxy forms helps the current board stay in power.

S-Corp

similar to corp/inc by taxation is the key difference. IRS approves you as an S-Corp and no tax paid on behalf of the corp, only for the owners. Pass-through taxation.

bonds

sold by corp; debt - lending money to the corp.

stocks

sold by corp; ownership equity.

Blue Sky laws

state security regulation laws: you can find a gullible buyer then security has to comply with these laws.

critical test for agency

the nature and extent of the control agreed upon.

Authority

the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal's manifestaitons of consent to him.

agency by estoppel

trigger: the principal knew of the wrong belief and could have prevented the harm. A principal may nevertheless become subject to liability on the transaction to a person who has changed his position bc of the belief that the transaction was entered into when he carelessly permitted such belief to exist, or when knowing of the belief he did nothing to notify the other party of the erroneous belief. If the principal knows of the agent's misuse of the authority and does nothing otherwise, the principal may be estopped from using the defense that the agent does not have authority. Elements: the principal must allow either actively or tacitly allow that this person has authority, the third pty must in good faith reasonably rely on that, the third party must have changed position based on this reliance.

Underwrite

underwrite the issuance of a security means to buy the security from the issuer and resell them to another buyer.

actual-express authority

verbal or written authority to hire.

classifed board

when class A elects board members and Class B elects board members. One for which different classes of stock elect different sets of directors.

leveraged buy-out

when managers try to buy out a corp; you put up a small amt of capital and borrow the rest of the money to put up with what you need to take over the company. Use company's own assets to do a deal. Financing the take-over with debt.