MGMT 643 Exam 1 (Hailey)

the securities act of 1933

-governs initial sales of stock by businesses -prohibits fraud -requires investors (SH) receive financial and other significant info concerning securities -many think of this law as a one-time or initial disclosure law

corporate officers and executives

-hired by the board -carry out the duties stated in the bylaws -corporate and managerial officers are agents -are employees -board can remove an officer with or without cause

Limited liability limited partnerships (LLLP)

-not all states have these (TX does, first one to do it); disadvantage -every partner has limited liability -same tax advantages as partnerships

5 basic elements of a securities fraud claim

1. a material misrepresentation (or omission) in connection with the purchase or sale of securities 2. scienter (wrongful state of mind) 3. reliance by the plaintiff on material misrepresentation 4. an economic loss 5. causation - casual connection between the misrepresentation and the loss

5 factors that lead courts to pierce the corporate veil

1. a party is tricked or misled into dealing with the corporation rather than the individual 2. the corp is set up never to make a profit or always to be insolvent. Alternatively, it is too thinly capitalized - that is, it has insufficient capital at the time it is formed to meet its prospective debts or potential liabilities 3. the corporation is formed to evade an existing legal obligation 4. statutory corporate formalities, such as holding required corporation meetings, are not followed 5. personal and corporate interests are mixed together, or commingled, to such an extent that the corporation has no separate identity

duty of care for directors and officers

1. act in good faith 2. act as a reasonably prudent director would under the circumstances 3. act in the best interests of the corporation make informed decisions - must attend meetings to stay informed so they make informed decisions directors should reasonably supervise work delegated to officers and employees if a director disagrees on a vote that takes place, the director has to enter a dissent specifically indicating it in the minutes of the meeting. if they dont, they are presumed to have agreed.

6 examples of duty of loyalty

1. competing with the corporation 2. usurping (taking personal advantage of) a corporate opportunity 3. purusing an interest that conflicts with that of the corporation 4. using information that is not available to the public (insider trading) 5. authorizing transactions that is detrimental to minority shareholders 6. selling control over the corp.

6 common examples of disclosure under rule 10b-5

1. fraudulent trading in the company stock by a broker-dealer 2. a dividend change (whether up or down) 3. a contract for the sale of corporate assets 4. a new discovery, a new process or a new product 5. a significant change in the firms financial condition 6. potential litigation against the company

issuer

1. has securities registered under section 12 under 1934 act OR 2. that is required to file reports under section 15(d) of 1934 act OR 3. that has filed a regisration statement that hasnt become effective under 1934 act

4 violations of 1933 act

1. intentionally defrauding (intentionally misrepresenting or omitting facts in a registration statement or prospectus 2. negligence in preparing registration statements or prospectus 3. selling securities prior to effective date 4. selling securities under an exemption for which the securities do not qualify

advantages of LLC

1. limited liability 2. flexible taxation - typically taxed like a partnership, but if you have a single member LLC, it is taxed like a corporation (multiple member LLC's can choose to be taxed like a corporation) 3. allows foreign investors

SOX and auditor independence

1. makes it unlawful for registered public accounting firms to perform both audit and nonaudit services for the same company at the same time 2. requires preapproval for most auditing services from the issuers (the corporations) audit committee 3. requires audit partner rotation (every 5 years) 4. cannot destroy, alter or falsify records; can be criminally prosecuted and faced with a fine and/or prison for up to 20 yrs -must keep all workpapers

5 ways LLC members can be held liability

1. member guarantees payment of a loan to the LLC 2. member comingles personal and business funds 3. egregious disregard for the LLC formalities 4. fraud is committed by the member 5. professional negligence is committed by member

3 elements of a fraud case

1. misrepresentation of material facts 2. with the intention to deceive 3. justifiable reliance by the plaintiff

5 events of dissociation/termination (dissolution) events

1. partner voluntarily gives notice of intent to withdraw 2. an event stated in the partnership agreement that causes termination or dissolution may occur 3. unanimous vote of other partners 4. court order 5. partner declares bankruptcy

4 effects of dissolution

1. partnership must purchase the dissociated partners interest 2. the buyout price for the partners interest at dissociation is based on the amount that would have been distributed to that partner if the partnership had would up on the dissociation date 3. dissociated partner no longer has the right to participate in management or conduct business for the partnership 4. liability to 3rd parties continues for 2 years after a partner has disassociated -a partner might not be allowed to disassociate (even if they want to) according to the partnership agreement

5 regisration statement contents

1. securities being offered for sale, including their relationship to the registrant's other securities 2. the corporations properties and business (including the financial statement certified by an independent public accounting firm) 3. the management for the corporation, including managerial compensation, stock options, pensions and other benefits and any interests of directors or officers in any material transactions with the corporation 4. how the corporation intends to use the proceeds of the sale 5. any pending lawsuits or special risk factors

3 essential elements of . a partnership (doesnt have to be written)

1. sharing of profits and losses 2. a joint ownership of the business 3. an equal right to be involved in management

agency by estoppel

1. the PRINCIPAL'S action creates the appearance of an agency that does not actually exist 2. a third person reasonably believed that the agency existed

6 requirements to be a s corp

1. the corporation must be a domestic corporation 2. the corporation must not be a member of an affiliated group of corporations 3. the shareholders must be individuals, estates or certain trust and tax exempt organizations. partnerships and nonqualifying trusts cannot be shareholders. corporations can be shareholders under certain circumstances 4. the corporation must have no more than one hundred shareholders 5. the corporation must have only one class of stock, although it is not necessary that all shareholders have the same voting rights 6. no shareholder of the corporation may be a nonresident alien

corporations should evaluate each decision on the basis of...

1. the legal implications 2. the public relations impact 3. the safety risks for consumers and employees 4. the financial implications

4 elements of standard negligence

DUTY is owed that was BREACHED and is the CAUSATION of the DAMAGES

ultramares rule

The traditional rule regarding an accountant's liability to third parties based on privity of contract was enunciated by Chief Judge Benjamin Cardozo in 1931. The Ultramares rule was restated and somewhat modified in a 1985 New York case, Credit Alliance Corp. v. Arthur Andersen & Co. [Footnote] In that case, the court held that if a third party has a sufficiently close relationship or nexus (link or connection) with an accountant, then the Ultramares privity requirement may be satisfied without the establishment of an accountantclient relationship. The rule enunciated in the Credit Alliance case is often referred to as the "near privity" rule. Only a minority of states have adopted this rule of accountants' liability to third parties. **privity is required

joint and several liability

a 3rd party has the option of suing all the partners together or one of more of the partners separately -all partners can be liable even if they didnt know or participate in the activity -judgment against one partner severally does not extinguish the liability of the others

joint liability

a 3rd party must sue all the partners as a group, but each partner can be held liable for the full amount (personal liability) failure to sue all partners means partnership assets will not be used to satisfy the judgement

s corp

a close corp. that meets subchapter s of the IRC can operate as an s corp.; files an s corp. election with the IRS and it is taxed like a partnership. must meet 6 requirements

corporations

a corporation is an artificial being, recognized under US law as a person - an artificial legal person; it has access to courts and the concepts of due process and other constitutional guarantees apply to corporations

prospectus

a disclosure document that describes the security being sold, the financial operations of the issuing corporation and the investment or risk attaching to the security is also a selling tool for the issuing corporation helps unsophisticated investors evaluate the financial risks

well-known seasoned issuer

a firm that has issued at least 1 billion in securities in the last 3 years or has outstanding stock valued at 700 million or more in the hands of the public

buy-sell agreements

a great way to agree in advance on how to value partnership assets in the event of dissolution or termination

limited liability partnerships

a hybrid form of business designed mostly for professionals who normally do business as partners in a partnership. professional services forms like law firms and accounting firms use this entity -advantage: pass-through taxation and limited personal liability

limited liability company

a hybrid form of business that combines the limited liability of a corporation and the tax advantages of a partnership

agent

a person who agrees to act on behalf of or represent another

independent contractor

a person who contracts with another to do something for him/her but who is not controlled by the other nor subject to the other's right to control with respect to his/her physical conduct in the performance of the undertaking. he/she may or may not be an agent

1933 act section 12 liability

accountant can have civil liability if they participated in preparing materials for investors like a prospectus, etc. in which a false misrepresentation or omission is made AND criminal liability exists too and is prosecuted by DOJ can face 5 yrs in prison and/or 10,000 fine

restatement fule

accountants are subject to liability for negligence not only to their clients but also to forseen or known users of the reports/financial statements...must be forseen to the auditor when the audit was published -texas (along with most states) follow this rule

partnership agreement

agreements to form partnerships can be oral, written or implied from conduct -if partnership is transferring interest in real property the agreement must be in writing -for loans of money, banks may require the agreement to be in writing

corporate directors

all policy making decisions carry out routine corporate business select and remove officers determine capital structure of the corporation declare dividends each director has 1 vote/majority vote counts NOT agents NOT trustees

property ownership of partnerships

all property bought by the partnerships is owned by the partnership and not by the partners individually -a partner is NOT a co-owner of property with the partnership -partnership property cannot be used to satisfy personal debts of individual partners -personal assets of partners can be attached to a lawsuit and are at risk -it is not a good idea to be in a partnership with high liability

liability for LLP

allows professionals (cpas, attorneys, doctors) to avoid personal liability for the malpractice of other partners -each partner is liable for his or her own malpractice -another partner may be liable if he/she supervised the wrondoer

powers of shareholders

amend bylaws, decide if the corporation can merge/dissolve, vote on sale of the majority of the assets, elect/remove directors

partnership

an association of 2 or more persons to carry on as co-owners a business for profit -"person" includes corporations -intent to association is the key element and so to join a partnership, all partners must consent; doesnt have to be in writing, can be verbal

regulation a offerings

an issuers security offerings that do not exceed 50 million in securities in any 12 month period -simplified/less expensive procedures - files a notice of the issue and an offering circular for SEC and investors -testing the waters -online IPO's

insider trading

any time a person buys or sells securities on the basis of information that is not available to the public -liability present when the "insider" takes advantage of such info in their personal transactions when they know that the info is unavailable to those with whom they are dealing -liability and penalties under the statute extend to anyone (not just insiders) who has access to or receives info of a nonpublic nature on which trading is based

manager managed LLC

appoint a manager/management team; makes sense for LLC's with alot of members

investment contract

as described by the howey test: any transaction in which a person 1. invests 2. in a common enterprise 3. reasonable expecting profits 4. derived primarily or substantially from others' managerial or entrepreneurial efforts

general partner

assume management and full debt responsibility. even their personal assets can be used to satisfy the limited partnership debts liability: liable for everything, its as if no entity exists (tx allows a corporation to be a general partner in LP which shields from personal liability)

accredited investors

banks, insurance companies, investment companies, employee benefit plans, the issuer's executive officers and directors, and persons whose income or net worth exceeds a certain threshold (everyone else is unaccredited)

waiting period

begins on the date the registration statement is filed. cannot sell securities but can release freeriding prospectus and preliminary prospectus

duty of loyalty

being loyal to partnership; dont engage in self dealing that will hurt the partnership (unless fully disclosed)

behavior of owners and managers

certain types of behavior on the part of managers and owners can contribute to unethical behavior among employees. ex: setting unrealistic production or sales goals

1933 act section 11 liability

civil liability of accountant extends to anyone who acquires a security covered by a registration statement that contains misstatements and omissions of material facts purchaser proves they suffered a loss

tort

civil wrongs except for breach of contract

implied authority

conferred by custom (understood based on what you are doing), inferred from the agent's position or it is reasonably necessary to carry out express authority

limited partership

consist of 1 or more general partners and 1 or more limited partners

limited partner

contribute cash or other property and owns an interest in the firm but is not involved in management; only held liable to the extent of their investment liability: only liable to the extent of their investment

tipper/tippee theory

corporate insider (tipper) breaches fiduciary duty to not disclose (to tippee) only one tipper and can have multiple tippees

nonprofit corp

corporations formed for purposes other than making a profit - private hospitals, educational institutions, charities, religious organizations; allows these groups to own property and form contracts without individual members having personal liability

private corp

created in whole or in part for profit; most corporations are private, even if they serve a public purpose like SuddenLink

criminal/civil penalties for violation of 1933 act

criminal: fined up to 10,000 and/or prison up to 5 years civil: only for willful violations, injunctions available

bonds

debt securities; borrowing funds from investors

business judgment rule

defense to alleged violation by directors and officers of duty of care Rule applies if: director/officer 1. took reasonable steps to be informed on the matter 2. had a rational basis for the decision AND 3. no conflict of interest existed between personal interest and interest of the corporation -directors and officers do NOT insure business success

pre-incorporation activites

do business before forming a corporation; not many of these anymore -any business done before incorporation means personal liability for individuals involved until the business is transferred to corporation

duty of care

dont be grossly negligent or engage in knowing violations of the law or any intentional disregard

agency and partnership

each partner is deemed to be the agent of the other partners and an agent of the partnership itself

going and coming rule

employee traveling to and from work is NOT acting in course and scope of employment unless the worker is a traveling sales person if the employee is a traveling sales person, they are within course and scope from the time they leave to the time they get back

stocks

equity securities; represent purchase of ownership in the company

piercing the corporate veil

exposing SH to personal liability; done by the courts when the owners use a corporate entity to perpetrate a fraud or other illegitimate objective

formation of LLC

file an articles of organization form on the secretary of state website

taxing a partnership

for federal income tax purposes, the partnership is a pass-through entity and not a taxpaying entity -entity itself doesnt pay federal income taxes -each partner pays federal income taxes at personal rates based on their share of income (distributed or not) from the partnership -partnership files an information return with the IRS

public corp

formed by the government to meet political or governmental purpose (ex: USPS)

formation of LLP

forms must be filed with the secretary of state's office and the business name must include the words "limited liability partnership" or "LLP" must file an annual report to remain qualified

private equity capital

funds pooled together by private equity firms to invest in existing companies

liability for independent contractors torts

general rule - person who hires and independent contractor is not liable if a 3rd party is injured by the acts of the independent contractor in performing the contract exceptions: 1. right to control, inherently dangerous (or hazardous) activities

management of partnerships

generally, each partner has one vote in management matters regardless of their ownership interest (unless stated otherwise in the partnership agreement) -majority vote on ordinary course of business matters -unanimous vote on outside ordinary course of business matters (ex: admitting new partner, entering into new line of business, changing partnership agreement, etc)

power of attorney

gives express authority to the agent and is written and is usually notarized

3 exceptions to course and scope

going and coming rule special errand exception detour/frolic exception to special errand

fiducairy

heart of agency law a person having a duty created by his or her undertaking to act primarily for anothers benefit in matters connected with the undertaking

"works for hire"

if a person creates a copyrighted work, the general rule is it is owned by the copyright holder, unless it is a work for hire. so if an employer has an employee create a sculpture (or any copyrighted work), then the employer owns the copyright.

frolic/detour exception to special errand

if employee deviates from the special errand substantially, then employee is liable

special errand exception

if employee is on a special errand for an employer at the time of the accident, employer is liable (course and scope from the time they leave for the errand until the time they get back; even if they are going home after the errand is over)

equal dignity rule

if the contract being executed is or must be in writing, then the agent's authority must be in writing also exceptions: 1. executive officer in a corporation when acting for the corporation in an ordinary business situation 2. when the agent acts in the principals presence 3. when the agent's act of signing is merely perfunctory (carried out with a minimum of effort or reflection)

illegal dividends

illegal if improperly paid from unauthorized account or if the payment caused the corp to become insolvent

SEC funtions

interprets federal securities laws and investigates securities law violations issues new rules and amends existing rules oversees the inspection of securities firms, brokers, investment advisors and rating agencies oversees private regulatory organizations in the securities, accounting and auditing fields coordinates US securities regulation with federal, state and foreign authorities

cumulative voting to elect directors (for corporations)

makes it possible for minority shareholders to elect a direct -formula - each shareholder is entitled to a total number of votes equal to the number of board members to be elected multiplied by the number of voting shares that the SH owns

agency by agreement

may be an expressed (written or orally) or implied agreement (implied from conduct/way the principal and agent act)

fiduciary relationship

means that the relationship involves trust and confidence

testing the waters

means the company can determine potential interest without actually selling any securities or requiring any commitment on the part of those who express interest

member managed LLC

members make all management decisions

LLC & operating agreements

most states do NOT require an operating agreement and if there is no operating agreement it does NOT have to be in writing

conflicts of interest within corporations

not all conflicts of interest is a problems, many can exist with directors must make full disclosure must abstain from voting on matters with a conflict

Section 16b of the Securities Exchange Act of 1934

often called the recapture provision any "insider" who buys and sells or sells and buys for profit within 6 months (short swing profits), must regturn profits to the corporation -violations on this is based on strict liability (scienter nor negligence is necessary)

attitude of top management

one of the most important ways to create and maintain an ethical workplace is for top management to demonstrate their commitment to ethical decision making

reasonably forseeable users rule

only a small, minority of courts follow this accountants are held liable to any users whose reliance on an accountant's statements or reports was reasonably foreseeable..extends liability to people who it 'might' harm

misappropriation theory

outsiders wrongfully obtains (steals) inside info and then trades on it for personal gain

corporation personnel

owners - shareholders (buy stock) board of directors - have management role; elected by shareholders officers

agency by ratification

principal accepts agents actions without a true agreement

unauthorized acts by agent

principal is not liable but the agent is

undisclosed principal

principal's identity is totally unknown by the 3rd party, and the 3rd party has no knowledge that the agent is acting on the principal's behalf at the time of the contract agent is liable but is entitled to indemnification (compensation for loss/harm) from the principal

disclosed principal

principals identity is known by the 3rd party at the time the contract is entered into with the agent no contractual liability for principal's nonperformance

preferred stock

priority to dividends/pmt. may not have the right to vote

rule 504

private noninvestment company offerings up to 1 million in any 12 month period private = not engaged primarily in the business of investing or trading in securities

rule 505

private, noninvestment company offerings up to 5 million in any 12 month period -offer may be made to an unlimited number of accredited investors and up to 35 unaccredited investors -SEC notification is necessary, no general adv or solicitaiton are allowed -disclosure documents must be given to the unaccredited investors

rule 10b-5

prohibits the commission of fraud in connection with the purchase or sale of any security (whether registered or not)

10(b)

prohibits the use of any manipulative or deceptive mechanism in violation of SEC rules and regs

venture capital

provided to new businesses by venture capitalists. money to new businesses (normally) for exchange for stocks

formation of LP

public and formal proceedings required. certificate of limited partnership is filed by the general partner and each limited partner with the secretary of state's office. this requires very specific info and its usually open for public inspection (can be costly)

domestic corp

refers to the corp. home state (state of incorporation). so, a corp. formed in texas and doing business in texas is a domestic corp

section 12 of 1934 securities act

requires these companies to file annual, quarterly and sometimes even monthly reports with the SEC also, authorizes the SEC surveillance of the market looking for fraud, market manipulation and misrepresentations

preemptive rights

rights of shareholders to preference over other stockholders in buying a prorated share of a new issue of stock; allows a majority SH to maintain their proportionate control, voting power and financial interest -these SH are given a timeperiod in which they have to purchase the additional shares

Rule 506 (private placement exemption)

rule 506 exempts any private, noninvestment company offerings in unlimited amounts that are not generally solicited or advertised -offer may be made to an unlimited number of accredited investors and up to 35 unaccredited investors -issuer must believe the unaccredited investors have sufficient knowledge or experience in financial matters to qualify -most important exemption for firms that want to raise funds through the sale of securities without registration

the private securities litigation reform act

safe harbor for publicly held companies who make forward looking statements like financial forecasts

how to incorporate

secretary of state website

corporate powers

set by state and federal laws and the articles of incorporation, bylaws and corporate resolutions expressed powers

set term vs at will

set term - stating the duration of the partnership at will - no stated duration, dissolution can happen anytime

close corp

shares of stock are held by relatively few people; could be family members; could be employees; "closely held"; "family"; :privately held: all refer to a close corp.; no trading market for the shares and a close corp. is often operated like a partnership, even though it usually has a BOD

members of LLC

similar to shareholdes, have limited liability, true owners of the company -a LLC is viewed as a member in every state that their members live in (can be advantage and disadvantage)

regulation d offerings

small offerings rule 504, 505 and 506

posteffective period

starts when the SEC approves the registration statement. if you had issued either of the above prospectus, you have to go back and give them updated information

disadvantages of LLC

state LLC statutes arent uniform

criminal acts by corporation

the corporation may be held liable for the criminal acts of its agents and employees - pays fines and directors and officers can go to jail

bylaws

the internal rules for management of the corporation not filed anywhere

principal

the person whom the agent represents or acts on behalf of

partially disclosed principal

the principal's identity is not known by the 3rd party, but the 3rd party knows that the agent is or may be acting for a principal at the time of the contract agent is treated as a party to the contract

doctrine of respondeat superior

the principal/employer is liable for any harm caused to a third party by an agent/employee AND committed by the agent/employee within the course and scope of employment (cant be an independent contractor for this to apply, have to be an employee)

ethics

the study of what constitutes right or wrong behavior. it is a branch of philosophy focusing on morality and the way moral principles are derived and implemented. has to do with the fairness, justness, rightness or wrongness of an action

the securities exchange act of 1934

thought of as an ongoing disclosure law focuses on insider trading and fraudulent activities requires continues periodic disclosure by publicly held corporations, so SEC can regulate subsequent trading applies to companies that have asets in excess of 10 million and 500 or more shareholders

common stock

true ownership; right to vote, one vote per share. Gives stockholder right to assets. Possibility of no benefits

prefiling

trying to get ready for the filing. legally, the company has no right to sell anything yet unless they are a well seasoned issuer

meetings for shareholders of a corporation

typically held annually with special meetings determined by the bylaws advanced notice must be given between 60 and 10 days before the meeting is to be held

registration of securities

unless expemt, securities must be registered with the SEC before offering the security to the public, file a registration statement with the SEC, provide all investors a prospectus very expensive and burdensome process

interest in partnership

unless stated otherwise, profits are shared equally and losses are shared in the same ratio as profits

agency by operation of law

usually when there is an emergency situation and when there is no power of attorney

business ethics

what constitutes right and wrong behavior in the world of business and how moral and ethical principles are applied by business people to situations that arise in their daily work lives

revocation

what its called when termination is done by prinicpal without agents agreement

foreign corp

what the corp is called in a second state. so, a texas corp doing business in oklahoma is referred to as a foreign corp in the state of oklahoma

alien corp

what we call a corp formed in another country but doing business in the US

dissocation

when a partner ceases to be associated with the carrying of the business of the partnership. the partnership can continue after dissociation or it can terminate

constructive fraud

when a professional is grossly negligent

renunciation

when its called when termination is done by agent without the prinipals agreement

SH derivative suit

when the BOD fails to file a lawsuit based on harm to the corporation, the SHs may file the lawsuit "derivatively" -written demand to the board is required -board has 90 DAYS to file lawsuit requested by SH -courts dismiss derivative suits if a majority of the directors or an independent panel says (based on good faith) it's not in the best interest of the corporation -damages awarded go to the CORPORATION (SH may be reimbursed for reasonable expenses including attorneys' fees)

watered stock

when the corporation issues stock for less than fair market value. SH receiving watered stock is liable to the corporation for the difference between their price and fair market value

actual fraud

when they intentionally misstate a material fact to mislead a client and the client is injured as . result of justifably relying on the misstated fact

indemnification

with joint and several liability, a partner who commits a tort can be required to pay back (reimburse/indemnify) the partnership for the damages the partnership has to pay, unless the tort was in the ordinary course of business