Business law exam 4

Two tactics used to create monopolies

-Predatory Pricing: The pricing of a product below cost with the intent to drive competitors out of the market. • Once the competitors are eliminated, the predator presumably will raise its prices far above its competitive levels to recapture its losses and earn higher profits. • Acquiring or merging with competitors

State securities laws/Blue sky laws

-State laws that regulate the offer and sale of securities. • Today, every state has its own corporate securities laws, or blue sky laws, that regulate the offer and sale of securities within its borders. • Apply mainly to intrastate transactions (transactions within one state) • So if all of the investors are located within the same state as the business the disclosures would have to meet blue sky laws • So same rules regarding disclosures to new and current investors apply

Protection of health and safety

-distinction between regulating the information dispensed about a product and regulating the actual content of the product • Various laws that regulate the actual products made available to consumers include: • The Federal Food, Drug, and Cosmetic Act • The Consumer Product Safety Act

Violations of the 1933 Act

-intentionally defraud investors by misrepresenting or omitting facts in a registration statement or prospectus • Liability may be imposed on those who are negligent with respect to the preparation of these publications. • Selling securities before the effective date of the registration statement or under an exemption for which the securities do not qualify results in liability.

Sherman Act

1. Section 1: makes every contract that attempts to be a restraint of trade or commerce illegal [and is a felony punishable by fine and/or imprisonment]. -focuses on agreements that are restrictive—that is, agreements that have a wrongful purpose. -The types of trade restraints that Section 1 of the Sherman Act prohibits generally fall into two broad categories: 1. Horizontal restraints & 2. Vertical restraints 2. Section 2: Every person who attempts or conspires to form a monopoly shall be deemed guilty of a felony [and is similarly punishable]. -looks at the so-called misuse of monopoly power in the marketplace. Both Section 1 and Section 2 seek to curtail market practices that result in undesired monopoly pricing and output behavior.

Horizontal merger

A merger between two firms that are competing in the same market. • If a horizontal merger creates an entity with a significant market share, the merger may be considered illegal because it increases market concentration.

Vertical and horizontal Restraint

A restraint of trade created by an agreement between firms at different levels in the manufacturing and distribution process. -In contrast to horizontal relationships, which occur at the same level of operation -encompass the entire chain of production -Ex. an agreement between a supplier and the manufacturer that restrains the suppliers ability to supply to the manufacturers competitors

Per Se Violation of Sherman Act

A restraint of trade that is so anticompetitive that it is deemed inherently (per se) illegal.

Types of violations under the Clayton Act: Price discrimination

A seller's act of charging competing buyers different prices for identical products or services.

Rule of Reason

A test used to determine whether an anticompetitive agreement constitutes a reasonable restraint on trade.

Bait and switch advertising

Advertising a product at an attractive price and then telling the consumer that the advertised product is not available or is of poor quality and encouraging her or him to purchase a more expensive item. • The low price is the "bait" to lure the consumer into the store. • The salesperson is instructed to "switch" the consumer to a different, more expensive item. • Under the F T C guidelines, bait-and-switch advertising occurs if the seller does any of the following: 1. Refuses to show the advertised item 2. Fails to have a reasonable quantity of the advertised item in stock 3. Fails to promise to deliver the advertised item within a reasonable time 4. Discourages employees from selling the advertised item -Ex: Vehicles: car dealer advertises rock-bottom price for a sports utility vehicle. You get there and the salesman can't find that particular car on the lot. Maybe "it was sold this morning."

Clayton Act

Aimed at specific anticompetitive or monopolistic practices that the Sherman Act did not cover. • deals with the following four distinct forms of business behavior: 1. Price discrimination 2. Exclusionary practices 3. Mergers 4. Interlocking directorates • These forms of business behavior are illegal but not criminal.

Price-fixing agreement

An agreement between competitors to fix the prices of products or services at a certain level. • A price-fixing agreement is always a violation of Section 1, even if there are good reasons behind it.

Group Boycott

An agreement by two or more sellers to refuse to deal with a particular person or firm. • Because they involve concerted action, group boycotts have been held to constitute per se violations of Section 1 of the Sherman Act. • To prove a violation of Section 1, the plaintiff must demonstrate that the boycott or joint refusal to deal was undertaken with the intention of eliminating competition or preventing entry into a given market.

Types of violations under the Clayton Act: Exclusive-dealing contract

An agreement under which a seller forbids a buyer to purchase products from the seller's competitors

restraints of trade

Any contract or combination that tends to eliminate or reduce competition, effect a monopoly, artificially maintain prices, or otherwise hamper the course of trade and commerce as it would be carried on if left to the control of natural economic forces.

The Sarbanes-Oxley Act of 2002

Attempts to increase corporate accountability by imposing strict disclosure requirements and harsh penalties for violations of securities laws • Requires chief corporate executives to take personal responsibility for the accuracy of financial statements and reports that are filed with the S E C • Requires that certain financial and stock-transaction reports be filed with the SEC earlier than was required under the previous rules • Established private civil actions • Expanded the S E C's remedies in administrative and civil actions

Deceptive advertising claims

Claims That Appear to Be Based on Factual Evidence • Advertising that appears to be based on factual evidence but, in fact, is not reasonably supported by evidence will be deemed deceptive. Claims Based on Half-Truths • Some advertisements contain "half-truths," meaning that the presented information is true but incomplete and may therefore lead consumers to a false conclusion. • Advertising that contains an endorsement by a celebrity may be deemed deceptive if the celebrity does not actually use the product.

Sherman Act Section 2

Condemns "every person who shall monopolize, or attempt to monopolize." • Two distinct types of behavior are subject to sanction under Section 2: 1. Monopolization 2. Attempts to monopolize

Securities

Generally, stocks, bonds, or other items that represent an ownership interest in a corporation or a promise of repayment of debt by a corporation. **We are only talking about corporations** • If you can buy it on Wallstreet or when you hear a reference to "making an investment," then you are dealing in securities of some sort

The Securities Act of 1933

Governs initial sales of stock by businesses. -When a business "goes public" they must follow this -The act was designed to: • Prohibit various forms of fraud • requiring that investors receive financial and other significant information concerning the securities being offered for public sale • The act provides that all securities transactions must be registered with the S E C unless they are specifically exempt from the registration requirements

Antitrust laws

Laws protecting commerce from unlawful restraints and anti-competitive practices. -regulate economic competition; to foster competiton • At the national level, important antitrust legislation includes: • The Sherman Antitrust Act (passed in 18 90) • The Clayton Act (passed in 19 14) • The Federal Trade Commission Act (passed in 19 14 • Behind these laws lies our society's belief that competition leads to: • Lower prices • Better products • A wider selection of goods • More product information

Registration Statement

Step 1 when a business wants to go public - register the securities with the SEC • if a security does not qualify for an exemption, that security must be registered before it is offered to the public. • Issuing corporations must: File a registration statement with the S E C • The registration statement must be written in plain English and fully describe the following: • The securities being offered for sale, including their relationship to the registrant's other securities • The corporation's properties and business (including a financial statement certified by an independent public accounting firm) • The management of the corporation, including managerial compensation, stock options, pensions, and other benefits • Any interests of directors or officers in any material transactions with the corporation must also be disclosed • How the corporation intends to use the proceeds of the sale • Any pending lawsuits or special risk factors • Once the S E C has reviewed and approved the registration statement and the waiting period is over, the registration is effective, and the post effective period begins. • During the post effective period, the issuer can offer and sell the securities without restrictions. • If the company issued a preliminary or free-writing prospectus to investors, it must provide those investors with a final prospectus either before or at the time they purchase the securities.

Vertical Merger

The acquisition by a company at one stage of production of a company at a higher or lower stage of production (as when a company merges with one of its suppliers or retailers).

Insider trading

The purchase or sale of securities using information that has not been made available to the public. • This inside information can affect the value of the corporate stock and is often known by: • Corporate directors • Officers • Majority shareholders • If they act on this information, their positions give them a trading advantage over the general public and other shareholders. -ex: Martha Stewart selling stocks she knew were about to lose value -insiders means officers, directors, and large stockholders of Section 12 corporations • Large stockholders are those owning 10 percent of the class of equity securities registered under Section 12 of the 19 34 act. • To discourage insiders from using nonpublic information to their personal benefit in the stock market, the S E C requires them to file reports concerning their ownership and trading of their corporation's securities.

Types of violations under the Clayton Act: monopolization

a person or business organization cannot hold stock or assets in more than one business when "the effect ... may be to substantially lessen competition."

consumer

a person who buys goods and services for personal use; not a business that buys goods or services to use in their business

Misappropriation Theory

holds liable an individual who wrongfully obtains (misappropriates) inside information and trades on it for her or his personal gain. -Ex: threatening, blackmailing, hacking

Consumer law

laws protecting consumers of goods and services • dangerous manufacturing techniques • mislabeling • unfair credit (loans) practices • deceptive advertising • and other such practices.

"cooling-off" laws

laws that allow buyers of goods sold in certain transactions to cancel their contracts within three business days • The contracts that fall under these cancellation rules include: • Trade show sales contracts • Contracts for home equity loans • Internet purchase contracts • Home (door-to-door) sales contracts- Solar Panels are sold constantly through door to door sales • Certain states have passed laws allowing consumers to cancel contracts for: • Dating services • Gym memberships • Weight loss programs

Monopoly

market in which there is a single seller or a very limited number of sellers. • Monopoly power - The ability of a monopoly to dictate what takes place in a given market. • Market power - The power of a firm to control the market price of its product.; A monopoly has the greatest degree of market power.

Deceptive advertising

one of the most important federal consumer protection laws in the federal trade commission act • The act created the Federal Trade Commission (F T C) - their responsibility is preventing unfair and deceptive trade practices, including deceptive advertising. -*deceptive advertising*: Advertising that misleads consumers, either by making unjustified claims about a product's performance or by omitting a material fact concerning the product's composition or performance. • Vague generalities and obvious exaggerations, known as puffery, are permissible. -ex: consumer filed lawsuit against Texas Pete hot sauce alleging false advertising because it was not made in TX

1934 Securities exchange act

provides for the regulation and registration of: • Securities exchanges • Brokers • Dealers • National securities associations • Unlike the 19 33 act, which is a one-time disclosure law, the 19 34 act provides for continuous periodic disclosures by publicly held corporations to enable the S E C to regulate subsequent trading. -Applies to companies that have: • Assets in excess of $10 million • Five hundred or more shareholders • These corporations are referred to as Section 12 companies because they are required to register their securities under Section 12 of the 19 34 act. • Section 12 companies must file reports with the S E C annually and quarterly, and sometimes even monthly. • Authorizes the S E C to engage in market surveillance to deter undesirable market practices such as: • Fraud • Market manipulation • Misrepresentation

The Fair Packaging and Labeling Act

requires that food product labels identify: 1. The product 2. The net quantity of the contents (and, if the number of servings is stated, the size of a serving) 3. The manufacturer 4. The packager or distributor

Types of violation under the Clayton Act: exclusionary practices

sellers cannot condition the sale of goods on the buyer's promise not to use or deal in the goods of the seller's competitor

Outsiders and S E C Rule 10 b-5

• "outsiders"—those who trade on inside information acquired indirectly. The 2nd person to receive inside information from the previous outsider • Two theories under which outsiders can be sued for insider trading: 1. Tipper / tippee theory 2. Misappropriation theory

Remedies for violations of 1933 Act

• 1- DOJ- Criminal violations of the 1933 act are prosecuted by the U.S. Department of Justice • Violators may be fined up to $10,000, imprisoned for up to five years, or both. • 2- SEC-is authorized to impose civil sanctions against those who willfully violate the act. • It can request an injunction to prevent further sales of the securities involved or ask a court to grant other relief, such as ordering a violator to refund profits. • 3- Private parties - who purchase securities and suffer harm as a result of false or omitted statements or other violations may bring a suit in a federal court to recover their losses and additional damages.

Investment Newsletters

• A lot of investors, brokers etc. who regularly trade stocks for a living rely on newsletters that give them information about the status of certain stocks - such as the price of Amazon stocks went up today etc. • Companies can even pay newsletters to feature them - but if they are paid by a company they are required to disclose it, so the reader can understand there may be some bias there • Legitimate online newsletters can help investors gather valuable information, but some e-newsletters are used for fraud. • An investor reading an e-newsletter may believe that the information is unbiased, when in fact the fraudsters will directly profit by convincing investors to buy or sell particular stocks.

Labeling and packaging laws

• A number of federal and state laws deal specifically with the information given on labels and packages. • Labels must be accurate. • Labels must use words that are easily understood by the ordinary consumer. • In some instances, labels must specify the raw materials used in the product. • In other instances, the product must carry a warning; ex: Cigarette and e-cigarette packages and advertising

Ponzi Scheme

• A pyramid scheme is a fraudulent and unsustainable investment pitch that relies on promising unrealistic returns from imaginary investments • they are not selling a good - just an investment • What makes it fraudulent is they use the money paid in from new investors to pay back those that already invested touting as 'their return'

Tipper/Tippee Theory

• Anyone who acquires inside information as a result of a corporate insider's breach of his or her fiduciary duty can be sued under the Act • This liability extends to: 1. Tippees: A person who receives inside information. 2. Remote tippees (tippees of tippees) • The tippee is liable only if the following requirements are met: 1. There is a breach of duty not to disclose inside information. 2. The disclosure is made in exchange for personal benefit. 3. The tippee knows (or should know) of this breach and benefits from it.

Food labeling: Nutritional Content of Food Products

• Food products must bear labels detailing the nutritional content, including: • The number of calories that the food contains • The amounts of various nutrients that the food contains • The Nutrition Labeling and Education Act: • Requires food labels to provide standard nutrition facts • Regulates the use of such terms as "fresh" and "low fat" • The primary agencies that issue regulations on food labeling are: • The U.S. Food and Drug Administration (FDA) • The U.S. Department of Agriculture

Scienter Requirement

• For either criminal or civil sanctions to be imposed, scienter must exist—that is, the violator must have had an intent to defraud or had knowledge of his or her misconduct. • Violators of the Act can be charged criminally or sued civilly

The FSMA

• Gives the F D A authority to directly recall any food products that it suspects are tainted, rather than relying on the producers to recall items • Requires anyone who manufactures, processes, packs, distributes, receives, holds, or imports food products to pay a fee and register with the U.S. Department of Health and Human Services • Owners and operators of such facilities are required to: 1. Analyze and identify food safety hazards 2. Implement preventive controls 3. Monitor effectiveness 4. Take corrective actions • Places additional restrictions on importers of food and requires them to verify that imported foods meet U.S. safety standards

Marketing

• In addition to regulating advertising practices, Congress has passed several laws to protect consumers against other marketing practices, including: • Telephone solicitation • Fraudulent telemarketing

Multi-level marketing

• In an MLM- sales agents and teams are encouraged to sale products directly to consumers and recruit other sales agents who will work under them • So each agent gets a commission from their sales, AND a commission from the sales of those under them • So they sale goods and they get commissions from sales of those below them

FDCA: Tainted Foods

• In response to the problem of food contamination, Congress enacted the Food Safety Modernization Act (FSMA) to provide greater government control over the U.S. food safety system • It gives them authority to recall any item they deed unsafe or tainted.

Problems with Stock Options

• Options have turned out to be an imperfect device for encouraging effective governance. • Executives in some companies have been tempted to "cook" the company's books in order to keep share prices higher so that they can sell their stock for a profit. • Executives in other corporations have experienced no losses when share prices dropped because their options were "repriced" so that they did not suffer from the price decline.

U.S. antitrust laws in the Global context

• Persons in foreign nations may be subject to U.S. antitrust law provisions. • The laws may also be applied to protect foreign consumers and competitors from violations committed by U.S. business firms. • "Foreign persons," a term that by definition includes foreign governments, may sue under U.S. antitrust laws in U.S. courts

Federal Food, Drug, and Cosmetic Act (FDCA)

• Protects consumers against adulterated (contaminated) and misbranded foods and drugs • Establishes food standards • Specifies safe levels of potentially hazardous food additives • Provides classifications of foods and food advertising • Most of these statutory requirements are monitored and enforced by the FDA

Securities exchange act: Section 10 (b), S E C Rule 10 b-5, and Insider Trading

• Section 10 (b) of the Securities Exchange Act prohibits the use of any manipulative or deceptive mechanism in violation of S E C rules and regulations. • Such practices include: • Fraud related to the sale of a security • Omission of material fact related to the sale of a security • Insider trading • Outside trading Disclosure under S E C Rule 10 b-5: Any material omission or misrepresentation of material facts in connection with the purchase or sale of a security • A material fact is significant enough that it would likely affect an investor's decision as to whether to purchase or sell the company's securities. • Some examples of material facts that must be disclosed: 1. Fraudulent trading in the company stock by a broker-dealer 2. A dividend change 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 firm's financial condition 6. Potential litigation against the company

Concurrent Regulation

• Since the adoption of the 19 33 and 19 34 federal securities acts, the state and federal governments have regulated securities concurrently • Issuers must comply with both federal and state securities laws. • Exemptions from federal law are not exemptions from state laws. • The National Conference of Commissioners on Uniform State Laws substantially revised the Uniform Securities Act to coordinate state and federal securities regulation and enforcement efforts. • Nearly half of the states have adopted the most recent version of the Uniform Securities Act.

Aligning the Interests of Officers and Shareholders

• Some corporations have sought to align the financial interests of their officers with those of the company's shareholders by providing the officers with stock options. -stock option: A right to buy a given number of shares of stock at a set price, usually within a specified time period. • When the market price rises above that level, the officers can sell their shares for a profit. • Because a stock's market price generally increases as the corporation prospers, the options give the officers a financial stake in the corporation's well-being and supposedly encourage them to work hard for the benefit of the shareholders.

Deceptive advertising: State Laws Concerning False Advertising

• State consumer-fraud statutes also prohibit false, misleading, and deceptive advertising. • Recovery under a state law typically requires proof of the following elements: 1. The defendant committed a deceptive or unfair act. 2. The act was committed in the course of trade or commerce. 3. The defendant intended that others rely on the deception. 4. The plaintiff suffered actual damages proximately caused by the deception -Ex: Juul advertising by claiming their product was safer alternative to traditional tobacco

Governance and Corporate Law

• State corporation statutes set up the legal framework for corporate governance. • Under the corporate law of Delaware, where most major companies incorporate, all corporations must have certain structures of corporate governance in place. • The most important structure is the board of directors, because the board makes the major decisions about the future of the corporation. • Directors are responsible for ensuring that the corporation's officers are operating wisely and in the exclusive interest of the shareholders. • Directors receive reports from the officers and give them managerial direction. • Ideally, SH monitor the Directors' supervision of the officers, and if the Directors are failing to closely supervise the officers then the SH would vote to remove the Director- though due to business judgment rule and other defenses, this can be difficult

Food labeling: caloric content of restaurant foods

• The Affordable Care Act, or Obama care, included provisions aimed at combating the problem of obesity in the United States. • All restaurant chains with twenty or more locations are now required to post the caloric content of the foods on their menus so that customers will know how many calories the foods contain • Foods offered through vending machines must be labeled so that their caloric content is visible to would-be purchasers. • Restaurants must post guidelines on the number of calories that an average person requires daily so that customers can determine what portion of a day's calories a particular food will provide. • The federal law on menu labeling supersedes all previous state and local laws in this area.

Ponzi/pyramid schemes

• The S E C files numerous enforcement actions against perpetrators of Ponzi schemes. • Ponzi schemes are fraudulent investment operations that pay returns to investors from new capital paid to the fraudsters rather than from a legitimate investment. • Such schemes sometimes target U.S. residents and convince them to invest in offshore companies or banks. • It is a felony to run or operate a ponzi scheme • A ponzi scheme is different from a Multi-Level Marketing (MLM)

Sarbanes-Oxley Act: More Internal Controls and Accountability

• The Sarbanes-Oxley Act introduced direct federal corporate governance requirements for publicly traded companies. • require high-level managers (the most senior officers) to establish and maintain an effective system of internal controls. • Exception for smaller companies: for smaller companies in which public companies with a market capitalization, or public float, of less than $75 million no longer need to have an auditor report on management's assessment of internal controls.

Marketing: Fraudulent telemarketing

• The Telemarketing and Consumer Fraud and Abuse Prevention Act directed the F T C to establish rules governing telemarketing and to bring actions against fraudulent telemarketers. • The F T C's Telemarketing Sales Rule (T S R): • Requires a telemarketer to: • Identify the seller's name • Describe the product being sold • Disclose all material facts related to the sale (such as the total cost) • Makes it illegal for telemarketers to misrepresent information or facts about their goods or services • Requires a telemarketer to remove a consumer's name from its list of potential contacts if the customer so requests -Telemarketers must refrain from calling those consumers who have placed their names on the DO NOT CALL REGISTRY

Marketing: telephone solicitation

• The Telephone Consumer Protection Act (T C P A): • Prohibits telephone solicitation using an automatic telephone dialing system or a prerecorded voice • Makes it illegal to transmit unsolicited advertisements without the sender having an established business relationship with the recipient or first obtaining the recipient's permission • Gives consumers a right to sue for either $500 for each violation of the act or for the actual monetary losses resulting from a violation, whichever is greater • If a court finds that a defendant willfully or knowingly violated the act, the court has the discretion to treble (triple) the amount of damages awarded. • If you are getting a robocall then that is a violation and you can get $500 every time they call

Defenses against violations of 1933 Act

• There are three basic defenses to charges of violations under the 19 33 act: 1. The statement or omission was not material. 2. The plaintiff knew about the misrepresentation at the time the stock was purchased. 3. The defendant exercised due diligence in preparing or reviewing the registration and reasonably believed at the time that the statements were true. • This defense is available to an underwriter or subsequent seller but not to the issuer.

Sarbanes-Oxley Act: Certification and Monitoring Requirements

• requires that chief executive officers and chief financial officers certify the accuracy of the information in the corporate financial statements. • The statements must "fairly represent in all material respects, the financial conditions and results of operations of the issuer." • This requirement makes the officers directly responsible for the accuracy of their financial reporting and precludes any "ignorance defense" if shortcomings are later discovered. • All members of a publicly traded corporation's audit committee, which oversees the corporation's accounting and financial reporting processes, must be outside directors.