Business Law Flash Cards
The Rule 504 exemption is used by most small businesses and provides that noninvestment offerings up to _________ in any 12-month period are exempt.
$1,000,000
Any corporate director who sits on more than one board is engaging in illegal activity.
False
The reason most states either permit or require the use of cumulative voting when electing directors is to:
allow minority shareholders a greater chance at representation on the board.
Shareholder meetings must occur at least
annually
The law allows shareholders to appoint _______ person as their agent to vote their shares at the annual meeting
another
The business judgment rule states that:
directors and officers are immune from liability for exercising poor business judgment in certain circumstances.
The SEC requires that all publicly held companies to distribute _______ proxy materials.
electronic
Most voting trusts have no expiration date.
false
Ordinarily, who is entitled to vote at an annual corporate meeting?
only persons whose names appear on the corporation's stockholder records as owners
Genève is a member of the board of directors and the chief financial officer of the corporation. Under the duty of care that she owes that corporation, she does NOT need to:
oversee every aspect of the business, including such things as ordering merchandise and arranging for janitorial services.
Drag and drop the appropriate words to complete Liability of Directors and Officers:
own, personnel, violating, sued
The Securities Act of 1933 was designed to:
require disclosure of all relevant information concerning the issuance of securities to the public
Before a shareholder's meeting, a group of shareholders can create a shareholder voting agreement by agreeing in writing to vote their shares together in a specified manner.
true
Shareholders have the power to vote to elect or remove members of the board of the directors.
true
The SEC is NOT responsible for:
issuing government bonds
Liability under Section 16(b) is strict liability, which means that:
neither scienter nor negligence is required.
Corporate officers and other executive employees are hired by the board of directors.
True
SEC Rule 10b-5 only applies to cases concerning the trading of securities on organized exchanges, such as the New York Stock Exchange.
false
Shareholders do not have the inherent power to remove directors from office for cause by a majority vote.
false
The Howey test is a test
involves the definition of an investment contract
A corporation must notify its shareholders of the date, time, and place of an annual meeting at least ______ days before the meeting date.
10
Drag and drop the appropriate words to complete The Elements of a Securities Fraud Action Are as Follows:
-A material misrepresentation (or omission) in connection with the purchase and sale of securities. -Scienter (a wrongful state of mind). Reliance by the plaintiff on the material misrepresentation. -An economic loss. -Causation, meaning that there is a causal connection between the misrepresentation and the loss.
Individual corporate directors have the ability, as agents of a corporation, to bind the corporation:
Not at all, as individual directors do not have agency power.
investment company
A company that acts on behalf of many smaller shareholder-owners by buying a large portfolio of securities and professionally managing that portfolio.
Highlight the two theories under which outsiders may be held liable for insider trading.
Tipper/Tippee Theory Misappropriation Theory
When Craig sells securities in his company, he deliberately overstates the value of the company in the prospectus and begins selling the shares one week before the effective date of the registration. Craig is subject to:
prosecution by the Department of Justice and liable for fines and damages if investors are harmed by his acts.
Roscoe signs a written agreement with Philip, giving Philip the right to cast Roscoe's votes for a certain group of people nominated by the Stillbar Corporation board of directors. The agreement between Roscoe and Philip is known as a
proxy
Only those shareholder proposals that relate to ________ policy considerations must be considered at the shareholders' meeting.
significant
The difference between the Securities Act of 1933 and the Securities Exchange Act of 1934 is:
that the 1933 act is a one-time disclosure law whereas the 1934 act provides for continuous periodic disclosures by publicly held corporations
A board of directors does NOT have responsibility over:
the election and removal of members of the board.
What happens if cumulative voting is not required by statute or under the articles of incorporation?
the entire board can be elected by a majority of shares at a shareholders' meeting
When the Internet is used for the delivery of a prospectus:
the same rules apply that apply to the delivery of a paper prospectus.
A major power held by shareholders is the power to
vote amend the articles of incorporation or bylaws, to conduct a merger or dissolve the corporation, and to sell all or substantially all of the corporation's assets
Highlight the three most important rights of directors
Right to participation Right of Inspection Right of indemnification
The exemption to the Securities Act of 1933 that is most important to firms wishing to issue securities without registering them, also known as the private placement exemption, is found in
Rule 506
Highlight the two sections and rules under which private parties can sue violators.
Section 10(b) Rule 10b-5
prospectus
A document required by federal or state securities laws that describes the financial operations of a corporation, thus allowing investors to make informed decisions.
A quorum consists of
51% of all directors
Inside director Quorum Outside Director
A person on the board of directors who is also an officer of the corporation. The number of members of a decision-making body that must be present before business may be transacted. A person on the board of directors who does not hold a management position at the corporation.
mutual fund
A specific type of investment company that continually buys or sells to investors shares of ownership in a portfolio.
free-writing prospectus
Any type of written, electronic, or graphic offer of securities that describes the issuing corporation or its securities and includes a legend indicating that the investor may obtain the prospectus at the SEC's Web site.
investment contract
In securities law, a transaction in which a person invests in a common enterprise reasonably expecting profits that are derived primarily from the efforts of others.
Accredited investors
In the context of securities offerings, "sophisticated" investors, such as banks, insurance companies, investment companies, the issuer's executive officers and directors, and persons whose income or net worth exceeds certain limits.
Drag and drop the appropriate words to complete Comparison of Coverage, Application, and Liability Under SEC Rule 10b-5 and Section 16(b:)
What is the subject matter of the transaction? Any security (does not have to be registered). Any security (does not have to be registered). What transactions are covered? Purchase or sale. Short-swing purchase and sale or shortswing sale and purchase. Who is subject to liability? Almost anyone with inside information under a duty to disclose—including officers, directors, controlling shareholders, and tippees. Officers, directors, and certain shareholders who earn 10 percent or more. Is omission or misrepresentation necessary for liability? Yes. No. Are there any exempt transactions? No. Yes, there are a number of exemptions. Who may bring an action? A person transacting with an insider, the SEC, or a purchaser or seller damaged by a wrongful act. A corporation or a shareholder by derivative action.
Trevor is the director of Special Energy. His wife and he own a large number of shares. She is an attorney in a law firm and finds out that her firm is filing a class-action lawsuit against Special Energy. They predict that the shares in Special Energy will drop after the lawsuit hits the news. Trevor and his wife:
must disclose that they know about the lawsuit if they want to sell their stock before news about the lawsuit becomes public knowledge
An example of an exempt security under the Securities Act of 1933 is
a bond issued by the American Red Cross
When a quorum of shareholders is not present at an annual meeting, voting can proceed if the majority of those present agrees.
false
Insider trading involves individuals who are:
insiders within publicly traded companies, including officers, directors, and majority shareholders
Drag and drop the appropriate words to complete Director's Management Responsibilities:
negotiations, assets, product executives, employees issuance, dividends
Section 16(b) of the Securities Exchange Act of 1934 provides for the:
recapture by a corporation of short-swing profits resulting from insider trading.
Drag and drop the appropriate words to complete Generally, the Duty of Care of Directors and Officers Requires that a Director or Officer:
-Act in good faith (honestly). -Exercise the care that an ordinarily prudent (careful) person would exercise in similar circumstances. -Do what she or he believes is in the best interests of the corporation [RMBCA 8.30(a), 8.42(a)].
Drag and drop the appropriate words to complete Cases Dealing with the Duty of Loyalty Typically Involve One or More of the Following:
-Competing with the corporation. -Usurping (taking personal advantage of) a corporate opportunity. -Pursuing an interest that conflicts with that of the corporation. -Using information that is not available to the public to make a profit trading securities (see the discussion of insider trading in Chapter 42). -Authorizing a corporate transaction that is detrimental to minority shareholders. -Selling control over the corporation.
Drag and drop the appropriate words to complete Examples of Material Facts Calling for Disclosure Under SEC Rule 10b-5:
-Fraudulent trading in the company stock by a broker-dealer. -A dividend change (whether up or down). -A contract for the sale of corporate assets. -A new discovery, a new process, or a new product. -A significant change in the firm's financial condition. -Potential litigation against the company.
Drag and drop the appropriate words to complete The Broadest Definition of Securities Including the Following:
-Instruments commonly known as securities, such as preferred and common stocks, treasury stocks, bonds, debentures, and stock warrants. -Any interests commonly known as securities, such as stock options, puts, calls, or other types of privilege on a security or on the right to purchase a security or a group of securities in a national security exchange. -Notes, instruments, or other evidence of indebtedness, including certificates of interest in a profit-sharing agreement and certificates of deposit. -Any fractional undivided interest in oil, gas, or other mineral rights. -Investment contracts, which include interests in limited partnerships and other investment schemes.
securities
-Instruments commonly known as securities, such as preferred and common stocks, treasury stocks, bonds, debentures, and stock warrants. -Any interests commonly known as securities, such as stock options, puts, calls, or other types of privilege on a security or on the right to purchase a security or a group of securities in a national security exchange. -Notes, instruments, or other evidence of indebtedness, including certificates of interest in a profit-sharing agreement and certificates of deposit. -Any fractional undivided interest in oil, gas, or other mineral rights. -Investment contracts, which include interests in limited partnerships and other investment schemes.
Drag and drop the appropriate words to complete The Basic Functions of the SEC:
-Interprets federal securities laws and investigates securities law violations. -Issues new rules and amends existing rules. -Oversees the inspection of securities firms, brokers, investment advisers, and ratings agencies. -Oversees private regulatory organizations in the securities, accounting, and auditing fields. -Coordinates U.S. securities regulation with federal, state, and foreign authorities.
Drag and drop the appropriate words to complete A Defendant Can Avoid Liability to Charges of Violations Under the 1933 Securities Act by Proving Any of the Following:
-The statement or omission was not material. -The plaintiff knew about the misrepresentation at the time the stock was purchased. -The defendant exercised due diligence in preparing the registration and reasonably believed at the time that the statements were true.
Drag and drop the appropriate words to complete The Tippee Is Liable Only If the Following Requirements Are Met:
-There is a breach of a duty not to disclose inside information. -The disclosure is made in exchange for personal benefit. -The tippee knows (or should know) of this breach and benefits from it.
Drag and drop the appropriate words to complete Rule 144 Exempts Restricted Securities from Registration on Resale If the Following Conditions Are Met:
-There is adequate current public information about the issuer. ("Adequate current public information" refers to the reports that certain companies are required to file under the Securities Exchange Act of 1934.) -The person selling the securities has owned them for at least six months if the issuer is subject to the reporting requirements of the 1934 act. If the issuer is not subject to the 1934 act's reporting requirements, the seller must have owned the securities for at least one year. -The securities are sold in certain limited amounts in unsolicited brokers' transactions. -The SEC is notified of the resale
Drag and drop the appropriate words to complete Typical Contents of a Registration Statement with the SEC:
1. the securities offered for sale. 2. the corporation's properties and business. 3. the management of the corporation, including managerial compensation, stock options, pensions, and other benefits. 4. how the corporation intends to use the proceeds of the sale. 5. any pending lawsuits or special risk factors.
Proxy Voting trust
In corporation law, a written agreement between a stockholder and another under which the stockholder authorizes the other to vote the stockholder's shares in a certain manner. An agreement (trust contract) under which legal title to shares of corporate stock is transferred to a trustee who is authorized by the shareholders to vote the shares on their behalf.
