Biz Org Supp

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Director's Duty of Care

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I. Duty: General duty of care and loyalty to refrain from negligence or
imprudence.

A. Exception: Reasonable business judgment if the director acts in good faith and commits honest error, taking prudent steps to be informed.

1.π has burden re duty
2.D has burden re loyalty

II. Liability: Director is personally liable for direct and proximate losses suffered by corporation and extends to all directors who have knowledge of, participate, acquiesce or ratify the action.

A director is liable if it is an illegal action, despite good faith or if negligent (should know & don't).

III. Defenses:
1. Reliance on expert advice, or excused or nonhabitual absence from meeting.

2. Age, experience, industry are considered to establish
reasonable standard.

3. Unanimous shareholder ratification.
IV. Interested Directors: Director is liable to corporation if there exists a conflict of interest or personal interest, and transaction is not authorized, disclosed or fair.

1. If a majority of directors are interested, shareholders may authorize action.

2. Interested directors are not counted in quorum or vote unless the bylaws state to the contrary.

3. Remedies

a. Void K if no disclosure

b. Recover damage for unfair profit

V. Self Dealing: Where shareholder or director is personally involved in a transaction with the corporation and benefits at the expense of corp. or minority shareholders. Interested transaction

Test: Apply intrinsic fairness test

1) If a disinterested board or shareholders ratify then apply the business judgment rule. Burden on π to show transaction is unfair. Usually will not involve fraud, waste or serious over-reaching.

2) If the transaction is fair to the corporation based on motives of director and effect on corporation, then transaction may be valid. Burden on Δ to show fair. (Usually there has not been ratification by the board or shareholders) Marciano

3) If interested director is required for quorum and participates in meeting but does not vote, then apply intrinsic fairness test. (Usu. where all directors are interested).

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Self-Dealing Rules of Thumb

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1) If a court believes the transaction is fair, it will be upheld.

2) If the transaction involves fraud, overreaching or waste of corp. assets, it will be set aside.

3) If it doesn't involve elements in (2 ) but court is not sure it is fair, then it will be upheld only where Δ can show transaction was approved or ratified by a truly disinterested board without participation by interested party after full disclosure of material facts.

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Corporate Opportunity Doctrine

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Director can't take an opportunity that should be offered first to corporation if the

1. Opportunity is discovered while working for the corporation (can't compete, take employees or divulge corporate information);

2. Opportunity is in the same or competing business; or

3. Corporation has an interest in opportunity.

Remedies:

1. Recover profits or force director to convey property to the corporation at cost;

2. Corporation gets a constructive trust if director has converted property to cash (profits-cost); or

3. Damages if corporate business is injured.


Defenses:

1. Disclosure to the corporation.

2. Corporation can't afford to take advantage and the director got the opportunity on same terms.

3. Opportunity is beyond scope of corporate powers (ultra vires).

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Overview of Tests for Corporate Opportunity

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1. Earliest test: Expectancy test focuses on use of corporation position or information to pursue an opportunity. Unless corp. has an existing expectancy or an interest based upon pre-existing plans the manager does not have to disclose the opportunity. Ask the question, but for manager’s action, would the corporation have pursued the opportunity. If no expectancy, no disclosure required. Misappropriation will also apply.

2. Line of business: broader test and compare the existing and new opportunity--is the opportunity significantly related to current business that would take advantage if aware of it.

3. ALI Test combines narrow and broader test to include opportunities closely related to the corporation business. ALI encourages informed, internal decision making. Must offer to corporation and disclose conflicting interest, and board must reject via disinterested vote. If disinterested directors then apply business judgment rule, and if not disinterested, apply fairness test.

Under the ALI a corporate opportunity means

1) director becomes aware either in connection with performance as a director and should reasonably lead to believe that person offering opportunity expects it to be offered to corporation, or through the use of corporation property, OR

2) Opportunity is one that he should reasonably believe that it will be of interest to corporation ;OR

3) Opportunity becomes aware and executive knows is closely related to corporation business.

Challenging party has the burden of proof, but director must show rejection and that the taking was fair. Good faith but defective disclosure may be cured by ratification following disclosure by the board, shareholders, or decision maker who originally approved the rejection.

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Application of Rules Regarding Usurping the Corporate Opportunity:

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a. If there is no logical relation to the business, or corporation lacks both the financial and technical capability to pursue, then it is a non corporation opportunity as a matter of law.

b.If no fraud or breach of fiduciary duty (because full disclosure) and found not to be corporation opportunity, officer is not liable

c. If it is a corporation opportunity but no breach of duty of loyalty, good faith, and fair dealing, officer should not be liable—If the corporation votes not to take advantage after disclosure then officer or director can.

d. Presence or absence of good faith, loyalty is not an absolute defense if it is closely related.

e. Burden of proof is on D/officers or director

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Securities Act of 1933
General Provisions

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Requires full disclosure in offering documents.

Relates to purchase and sale of securities through interstate commerce or mails via offering or solicitation. Applies only to initial offerings.

1) Must file registration statement prior to solicitation. Sect. 5

2) Violation to make misrepresentations or omissions in the offering statement (includes fraud) Sect.12, 17

- Imposes liability on the issuer in favor of the purchaser for consideration paid less any income received

3) Issuer must disclose the consideration to be paid in any offering

4) Sect. 5 applies only to issuers, underwriters, or dealers
involved in a public offering

- N/A if fall within the exceptions under Regulation D or Intrastate exemptions and no solicitation, file notice with the SEC, and transaction involves offers solely to one or more accredited investors.

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Definitions Under Securities Act of 1933

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1) Underwriter: Any person who has purchased shares with a view toward further distribution.

2) Issuer: Corporation whose shares are being offered or any person controlled by the corporation or acting on its behalf.

3) Dealer: Person who acts as an agent, broker, or principal part or full time in the business of offering, buying, selling, or dealing in securities issued by another.

4) Accredited investors: Banks, Insurance Companies, Investment Companies, Business Development Companies, Employee Benefit Plans are usually subject to statutory requirements.

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REGULATION D

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Regulation D is a private offering safe harbor exemption to the registration requirement under Section 5 of the Securities Act of 1933 (SA). And although an issuer that satisfies one or more of the exemptions provided by Regulation D, the issuer remains subject to all of the anti-fraud provisions of other federal and state securities (“blue sky”) laws. As a result, the following is a very simplified overview of certain of the applicable exemptions.

Regulation D was adopted by the Commission in 1982 as a safe harbor for “private placements.” It provides an issuer of securities three possible exemptions from the registration requirement. The exemptions provided under Regulation D are:

Rule 504 - offerings of up to $1 million in any 12 month period
Rule 505 - offerings of up to $5 million in any 12 month period to a max of 35 investors.
Rule 506 - offerings with no dollar limitation but to a maximum of 35 sophisticated
investors.

Before undertaking an exempt offering of securities, the issuer will need to examine which one or more of the three exemptions provided by Regulation D can be utilized for the planned offering and sale of the issuer’s securities. Section 502 provides the factors to consider to determine if two or more offerings will be integrated and considered one offering.

1) Accredited investors include banks, Savings and Loan, directors or officers of the issuing company; and persons with a net worth that exceeds $1,000,000; or an individual with an individual income of $200,000 for the last 2 years, or a joint income of $300,000. (Accredited investors are defined in Rule 501(a) of Regulation D and specifically excluded from being counted in any offering conducted under a claim of exemption pursuant to Rule 504, 505, or 506 of Regulation D. )

2) Offerings of less than $1,000,000 during any 12 month period2 and where the issuer need not comply with any disclosure requirements. (Rule 504).

3) Offerings to up to 35 persons AND the total offering* does not exceed $5,000,000 in any 12 month period (Rule 505) provided that no officer, director, affiliate, or agent of the issuer is a “bad boy” within the meaning of Rule 262 of Regulation A.

4) Offerings to up to 35 investors with no dollar limit so long as all of the investors are sophisticated, i.e. knowledge and experience capable of evaluating the merits and risks. (Rule 506)

An issuer that claims that an offering is exempt from Section 5, has the burden of proof. All of the securities sold in offerings under Rules 505 and 506 must contain a restricted securities legend restricting their resale. Securities sold in a Rule 504 offering may be issued without a restricted securities legend provided that certain state registration requirements are met. Even if an offering fails to meet any of the above exemptions, it may still meet the requirements of the statutory Section 4(2) exemption. The latter is today widely used primarily in venture capital transactions and as a “residual claim of exemption” where an issuer has otherwise failed to fully comply with one or more other exemptions.

*Note that the total offering limitation will be affected by whether the transactions are construed as part of the same integrated plan or different transactions.

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FEDERAL INTRASTATE EXEMPTION

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There is also an Intrastate Offering Exemption. Section 3(a)(11) of the Securities Act of 1933 is a statutory intrastate offering exemption which was part of the original provisions of the Securities Act of 1933 so as to allow offerings that are “purely local” in character to be conducted without the burdens of Section 5 being imposed on the issuer. Subsequently and to bring greater certainty to claims made by issuers that their offering was an intrastate offering, the Commission adopted Rule 147 which is a “safe harbor” for the intrastate offering exemption.

While both Section 3(a)(11) and Rule 147 offer an issuer an exemption from the registration requirements imposed by Section 5, if an issuer complies with Rule 147 (and the specific requirements thereunder), the issuer will automatically meet the more uncertain contours of the Section 3(a)(11) statutory exemption.

Under Rule 147 and as a summary, the issuer claiming an exemption under Rule 147, has the burden of showing that all of the following exist:

1. Residency/Business of Issuer: The issuer must be a resident of and doing business within the state or territory in which all of the offers to sell, offers for sale, and sales are made. The issuer will be deemed to be a resident of the state in which it is incorporated and it will be deemed to be doing business within the state in which at least 80% of its gross revenues and those of its subsidiaries on a consolidated basis are derived.

2. Offering Proceeds. At least 80% of the net proceeds received from the offering must be used within the state.

3. Principal Office. The issuer’s principal office must be within the same state
as the offering.

Residency of Offerees & Purchasers. All offerees and purchasers must be
residents of the same state as the issuer.

5. Resale Limitations. All of the securities sold “must come to rest” within the state wherein the offering is conducted and no resales can be made within the nine month period following the close of the offering. A restricted securities legend must be imposed on each certificate representing securities sold in the offering.

If the issuer is mistaken in its belief, however innocent and unintended the mistake, the issuer loses the claim of exemption. However, unlike offerings under Section 4(2) and Rules 505 and 506 of Regulation D and subject to compatible state “blue sky” laws, the issuer may conduct advertising and general solicitation within the state in connection with an offering conducted under Section 3(a)(11) and Rule 147. This can be a significant advantage for an issuer. Further, neither Section 3(a)(11) nor Rule 147 impose any dollar or investor head count limitations.

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STEPS IN DETERMINING IF A TRANSACTION IS EXEMPT FROM REGISTRATION

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Determine if it is a private offering under SA Section 4(2). Look at the use of interstate commerce, the number and type of the proposed investors, and the total dollar amount of the offering. See Question 1 of practice problems. If not, then the issuer may be found to have violated Section 5 and thereby Section 12(a)(1).

2) Determine if the transaction is exempt under one of the federal exemptions.
Remember that an issuer bears the burden of pleading and proving that the offering met the requirements of at least one exemption. Many offerings can be conducted under more than one claim of exemption.

If an issuer conducts two or more offerings in any 12 month period, examine whether the offerings may be deemed to be one offering. Regulation D has specific aggregation rules for offerings conducted under Rule 504 and Rule 505.Where offerings are aggregated, the issuer may lose the claim of exemption for the second offering if the dollar limits or head count limitations exceed those allowed.

Offerings conducted within a 6-month period may be aggregated. Again, if the amounts are not allowed under the applicable exemption, the issuer could lose the claim of exemption.

Each offering, solicitation, and sale of a security must also meet applicable provisions of state “blue sky” laws in each state or jurisdiction where such activity occurs. Thus, even if an offering is conducted under a valid claim of exemption under federal law, it must still meet the independent tests of validity under applicable state securities laws.

Finally, even if an issuer can demonstrate that it successfully satisfied the requirements for one or more exemptions under the Securities Act of 1933 and similarly for exemptions under applicable state securities laws, the issuer’s offering and sale of securities may still be successfully attacked because it violated the anti-fraud provisions of federal and state securities laws.

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THREE BASIC POINTS RE PROXY REGULATION
Securities Act of 1934

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1. Proxy solicitations and statements for public corporations relate to such matters as electing the board, approving compensation plan for directors, agree to merger, consolidation or some fundamental change in corp. structure. Solicitation must be registered with the SEC. Cannot make material misrepresentations or misleading statements, e.g.,
1) predictions of future market values;
2) impugn the character, integrity or personal reputation or makes charges regarding illegal or immoral conduct w/o factual foundation;
3) failure to identify document as a proxy statement, form of proxy or other soliciting material;
4) claims regarding the results of a solicitation.

2. In proxy fights, insurgents must disclose their identity, interest in company; securities financing arrangement, participation in other contests and understandings regarding future employment, source of funds used, purpose for which the offer is made, plans of aggressor if successful and any contracts have regarding target company.

3. Defensive tactics in a typical proxy fight include: 1) move up or postpone meeting at which board will consider the offer; 2) change the record date to minimize insurgents voting power; 3) amend bylaws to make it more difficult by increasing minimum vote required to pass.

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Proxy Regulation

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Relates to the use of interstate commerce to solicit proxies or consent or authorization.

1) Must file a registration before the broker can effect transaction on national exchange.

2) Prohibits false or misleading information in proxy solicitations and statement.

3) Proxy must be for specific: notice of the meeting and fully disclose the proposed action and options regarding voting.

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Proxy Solicitation Rules

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It is a violation of SEA 14a to include false or misleading material facts or omit material facts in proxy statement. The rule applies, for example, in the following circumstances.

1) Predictions about future market values;

2) Impugn character, integrity, or personal reputation; or make charges regarding illegal and immoral conduct without factual foundation;

3) Failing to identify a proxy statement, form of proxy or other soliciting materials; or

4) Claims regarding results of a solicitation.

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Contents of a Proxy Solicitation

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Depends on type of issue being presented.

A. Compensation Plans must include:

1) Material features of plan;

2) Each class of persons eligible to participate;

3) Number of persons in each class and basis for participation;

4) Benefits to be received; and

5) Existing plans in effect during last 3 years.

B. Retirement or Pension Plans must include:

1) Amount necessary to fund the plan for past services;

2) Period over which the pension is paid; and

3) Annual payments for current services.

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SHAREHOLDER PROPOSALS: Governed primarily by state law, SEC 1934 implies a private action but has higher standard to overcome. Can request no action letters.

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There are three categories of shareholders proposals that are submitted for inclusion: Often shareholders seek to include proposals that are designed to change policies of the corporation indirectly w/o going through the board. There is an implied private action re proxies and request from SEC for whether action is proper.

1) Corporate Governance-structure and composition of the board, poison pills (i.e. special class of stock created for a bidder that requires that the corporation redeem at a higher price if unsuccessful, or allows shareholders to acquire additional shares at a discount to dilute the value)-generally favorably treated by SEC in recent years (2001-2002 @ 55.7% approve) though management tends to exclude by 47% during the same period

2) Operational-executive compensation, production/business matters, company communications (2001-2002 @49% of proposals SEC has found includable)

3) Social/political: environmental, political, military and labor (2001-2002 @ 41.4 % included by SEC which says that most are excludable)

If management excludes proposal, then board must give shareholder opportunity to cure any defect.

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SHAREHOLDER PROPOSALS:
General Rules:

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1) Notice requirements are defined by Bylaws for annual and special meetings.

2) Proxy can allow person to vote in a specific way for or against a proposal, leave to the discretion of the board to vote shares. You can show up and defeat proxy submitted.
3) Expenses for proxy fight have to be borne by the person submitting the proposal. If they are successful, and take over the board, then can request reimbursement.

4) Can request no action letter from the SEC that the request was properly excluded.

5) Submit proposals within 120 days of mailing. Proposal has to be registered with SEC and identified as proxy. All of the pertinent information needs to be included.

6) There are word limits 500 words (2 pp)

7) If management collects proxies that give them authority to vote on matters within their discretion, then if a motion from the floor is made and supported by shareholders, then the board can use its discretion whether to approve or not.

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BOARD APPROVAL OF PROPOSALS

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Reasons to exclude: Board is not required to include any proposal in a proxy re:

1. Violate state law,
2. Contrary to proxy rules,
3. Redress a personal claim or grievance,
4. Relates to operations of less than 5% of total assets,- Unrelated to co business-
5. Deals with ordinary business operations,
6. Relates to election of office,
7. Counter to proposal submitted by majority board- not required to submit conflicting proposals or duplicative,
8. Similar to previous proposals- that have failed in the past
9. Relates to specific cash or stock dividend.
10. Not a proper subject- asks that a study be conducted without compelling specific action
11. Beyond the authority of the corporation
12. Moot because the board is already doing it.

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THREE BASIC POINTS RELATED TO INSIDE INFORMATION

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1) Any person is liable under 10b5 for intentional use of any means of interstate commerce to defraud, make material omissions or misrepresentations or acts which tend to defraud another in the purchase or sale of securities in close or public corporations. An action may be private or under the federal statute and can result in damages that include rescission, out of pocket, and conversion.

2) Directors, officers, shareholders or a fiduciary who, by virtue of their position have access to confidential information, have a fiduciary duty to refrain from trading based upon it or will be liable for insider trading. Directors have an affirmative duty to correct misleading information that may be attributed to the corporation, if they have reason to know that people are trading based upon the information.

3) Outside persons, who, by virtue of some special relationship, e.g, contract (but who may not owe any duty to the corporation) get access to confidential information about a corporation and who trade on it may be liable under the misappropriation theory.

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RULE 10 (b) 5

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IN CONNECTION WITH THE PURCHASE AND SALE OF STOCK, A PERSON IS LIABLE FOR USING INTERSTATE COMMERCE OR THE MAILS TO

1) DEFRAUD;

2) MAKE UNTRUE STATEMENTS OF MATERIAL FACTS OR OMIT TO STATE MATERIAL FACTS; OR

3) ENGAGE IN ANY PRACTICE WHICH OPERATES AS A FRAUD OR DECEIT UPON ANY PERSON.

"MATERIALITY" IS BASED ON THE REASONABLE PERSON STANDARD: WHETHER A REASONABLE PERSON WOULD ATTACH IMPORTANCE OR SIGNIFICANCE TO THE INFORMATION SO AS TO INFLUENCE HIS OR HER DECISION REGARDING THE VALUE OF THE STOCK AND WHETHER TO BUY OR SELL HIS OR HER SHARES.

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SUMMARY OF RULE 10 (b) 5

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1) APPLIES TO PUBLIC AND CLOSE CORPORATIONS

2) DUTY TO DISCLOSE: TIMING IS KEY

--APPLIES WHERE THE PERSON SOLICITING OR USING AN INTERMEDIARY MISLEADS OR DECEIVES BY OMISSION OR MISSTATEMENT

--AFFIRMATIVE DUTY TO CORRECT A MISUNDERSTANDING

--HARM TO THE CORPORATION IS NOT REQUIRED

3) THERE IS AN AFFIRMATIVE DUTY TO DISCLOSE REQUIRED:

a) IF UNDISCLOSED INFORMATION RENDERS PREVIOUSLY DISCLOSED PUBLIC STATEMENTS BY CORPORATION MISLEADING (E.G., PROPOSED MERGER)

b) IF CORPORATION HAS REASON TO BELIEVE INDIVIDUALS ARE TRADING BASED ON MATERIAL INFORMATION NOT DISCLOSED (E.G., DROP IN NET EARNINGS)

c) WHERE RUMORS ARE CIRCULATED IN THE BROKER COMMUNITY THAT ALTHOUGH INCORRECT, ARE ATTRIBUTABLE TO THE ISSUING CORPORATION

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UNDERSTANDING THE CONTEXT OF 10b5 REGULATION

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Anti-fraud statutes have evolved over the years to respond to specific facts raised by case law. Securities and Exchange Act of 1934 is the general statute under which actions are brought pursuant to authority under 10b. The theories of liabilities have been expanded by federal and state case law to include common law theories of insider trading (liable to corporation per derivative action Diamond- no harm to the corporation is required) and misappropriation (common law doctrine codified by state law). Apply the theory and elements that best suit the facts.

Anti-fraud statutes include Federal laws, i.e., 10b5, 16b, 14e-a (tender offers), Wire and Mail Fraud, RICO; State laws, i.e., blue sky, trade secret laws, anti fraud laws; and common law doctrine, i.e., fraud and misappropriation.

1) COMMON LAW TORT OF FRAUD OR DECEIT-Still in effect. Elements include 1) material misrepresentation of material fact; 2) that insider knows is false or is reckless; 3) and intends that the other person rely upon it; 4) actual reliance; and 5) actual damages.

2) SEC ACT OF 1934-Anti-fraud statute-applied to sales of stock only.

3) 10B5- enacted in 1942 to cover presidents buying stock in their companies. It is applied to buying and selling and authorized the SEC to act. This gave rise to a duty to act.
--Elements developed via case law: in connection with a purchase and sale (Blue Chip), intent to deceive or defraud (Ernst), material fact or omission (Basic), and manipulative practices (Sante Fe)

--Most common facts are when information is disclosed to the public that impacts on value of stock--10b5 violation gives rise to an affirmative duty to disclose, refrain from trading, or damages if have traded.

--10b5 implies a private right of action to bring an action, so it is not just limited to SEC.

--Fraud on the Market-created a rebuttable presumption that if information is material, reliance is presumed; focus on reasonable significance placed on the information. Basic

4) Insider Trading is an outgrowth of 10b5. Arises in two contexts:

a) CLASSIC INSIDER TRADING: where an insider uses trades based upon nonpublic information about his or her corporation which is obtained in their corporate capacity. Arises out of the relationship to the corporation. Tipper/Tippee

b) OUTSIDER TRADING: where an outsider is trading on misappropriated information about another corporation. There may or may not be a relationship but there is access.

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10 (b) 5 REMEDIES

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1) RESCIND CONTRACT: IF STOCK WAS NOT RESOLD; USUALLY IN FACE TO FACE ENCOUNTERS.

2) RESCISSION DAMAGES: IF STOCK IS RESOLD; DAMAGES = BUYER'S PROFIT (PRICE BOUGHT STOCK - PRICE SOLD STOCK).

3) OUT OF POCKET DAMAGES: DIFFERENCE BETWEEN PRICE YOU BOUGHT OR SOLD STOCK FOR AND WHAT STOCK IS WORTH.

4) COVER OR CONVERSION: DIFFERENCE BETWEEN THE PRICE PURCHASED AND THE MARKET PRICE AT WHICH YOU COULD SALE OR REPURCHASE ONE FRAUD IS REVEALED; DUTY TO MITIGATE.

5) NO PUNITIVE DAMAGES IN 10 (b) 5; MAY BE AVAILABLE IN STATE STATUTES

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DISTINGUISHING INSIDER TRADING, MISAPPROPRIATION
AND WILLIAMS ACT

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10b5- Reaches any activity involving the purchase and sale of stock in a close or public corporation where intent to deceive or recklessness and materiality is established

Insider Trading-Type of 10b5 action that relies on breach of a fiduciary duty of an insider or tipper. Duty to disclose, correct, and refrain from trading. Includes agents, employees, directors, shareholders, attorneys, accountants, underwriters, or consultants

--Tipper/Tippee liability: Arises when an insider tells someone else. Breach of fiduciary duty and personal benefit to the tipper, both of which are known or should be known to the tippee.

Misappropriation-Type of 10b5 action that relies on a breach of a duty to the source of the information, often an employer (not the corporation).

Williams Act 14e- Any trade related to a tender offer where confidential information is used and includes conversations between tippers and tippees, a person who steals, misappropriates material non-public information, statements made by offeror to any person or 3rd person who knows information is confidential. No need to prove breach of duty for personal benefit.

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Rules re Director and Officer Investments

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1)Ok if periodic investment program already approved and simply making investments as part of plan.

2) OK to buy stock 1 week after annual report is issued for 30 days

3) May be ok for trades if contact CEO before trade to see if any info needs to be made public in the following circumstances:
a) after quarterly reports issued;

b) making wide information dissemination regarding the status of company, e.g. proxy statement re merger or action;

c) when relative stability in market.

4) Avoid 3-4 months before an announcement; prior to release of earnings, dividends - Must wait until after release of information and dissemination.

5) Same thing applies to stock options.

6) If by disclosing the information to board would jeopardize corporate security, need not reject the options but refrain from exercising them until full disclosure. Ratification after the fact may be ok.

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Williams Act 14e

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Imposes a duty to disclose on any person who trades in stock sought for tender offer while in possession of material information which he knows or should know is nonpublic and has acquired it directly or indirectly from an offering person, issuer, officer, partner, or employee; No duty if don't purchase or sale. 14e imposes broader liability because no breach is required.

-Establishes a specific duty to disclose or refrain from trading

-14e-3a applies to

1) conversations re tender offer which are nonpublic for tippers and tippees; and

2) extends to offering person who sends nonpublic letter to subject co. noticing a proposed tender offer at specified terms and price--management cannot purchase or sell or cause the purchase or sale per a tender offer nor can unaffiliated persons who are told by management purchase or sell;

3) a person who steals, converts or misappropriates material, nonpublic information (Chiarella overruled); and

4) if offeror tells another of intent to make a tender offer and person tells 3rd person that offer will be made and 3rd person knows or should know information is nonpublic.

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TIPPER-TIPPEE LIABILITY

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TIPPER LIABILITY: LIABLE ONLY IF THE TIP BREACHES A FIDUCIARY DUTY TO CORPORATION OR SHAREHOLDERS; NO BREACH IF NO PERSONAL BENEFIT IS RECEIVED

[NOTE: YOU CAN RECEIVE A BENEFIT IF YOU SPLIT THE PROFITS WITH ANOTHER OR YOUR REPUTATION IS ENHANCED].

TIPPEE LIABILITY: LIABLE IF THE TIPPER HAS A FIDUCIARY DUTY TO SHAREHOLDER NOT TO TRADE: 1) IF TIPPER HAS BREACHED FIDUCIARY DUTY BY DISCLOSING INFORMATION TO TIPPEE; AND 2) TIPPEE KNOWS OR SHOULD KNOW OF BREACH.

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POST O’HAGAN RULES

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1. Post O’Hagan: A relation with any fiduciary falls w/in the misappropriation and includes atty/client, executor/heir; guardian/ward; principal/agent; trustee/trust beneficiary; doctor/patient; priest/parishioner; family members in a special relation to one another (presumes person is acting as an insider/tipper, not a tippee);

2. Open questions unanswered by the case: a) if fiduciary knows the info is confidential then it creates an inference that any trading is based upon it; however, can overcome the inference by showing the absence of a causal connection (SEC v Adler-- 11th Cir 1998)

3. Safe harbor exists if the purchaser or seller has a binding contract or plan entered into before he or she is aware of the information, and the terms of the contract include the amount, price and date or some formula and no influence or discretion and demonstrates that it is pursuant to a plan whose terms have not changed.

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SUMMARY OF ACTIONS AGAINST DIRECTORS

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A. Actions vs. Directors, officers by corp.
1) If the facts pertain to taking advantage of an opportunity to the disadvantage of minority shareholders, then the principles that may apply are
a. Self-dealing-interested transaction
b. Corporate opportunity: ALI test re line of business, expectancy
c. Sale of control-premium
d. Waste of corporate assets or overreaching

2) The breach may arise out of a breach of duty of loyalty, care and good faith to the corp. The obligations will be judged based upon extent of disclosure, and disinterested approval or ratification. Apply either the intrinsic fairness or business judgment rule. Factors to be considered (defenses) are reasonableness of investigation and information provided, extent of waste, looting, or fraud and if authorized in the by-laws.

3) If the remedy is for the benefit of corporation, file a shareholder derivative action where demand must be made, or if futile-facts alleged to support. Both actions to bring an action and underlying transaction may be judged by business judgment rule. Damages are constructive trust or disgorge profits, rescission

B. Actions regarding shares-misappropriations, 10b5, 14e (Williams Act-tender offer) and 16b
1) 10b, 10b5 apply to fraud or deception per a purchase or sale of securities: intent to defraud, purchase or sale, and materiality. Reliance may be presumed if information is material or reasonable person attach importance (fraud on the market)

2) William Act applies to use of nonpublic information related to trades in a tender offer. The existence of a relationship to the source or the corporation is not required to impose liability.

3) 16b applies to officers, directors, and 10 % shareholders-purchase and sale w/in 6 months is presumed to be based on insider information. Imposes strict liability. Match the highest sale with the lowest purchase, then the next etc.

4) Action can be brought in Federal court by SEC for violation of securities laws, private person who bought or sold, the corp. under a derivative action (by a shareholder); or in state court under state blue sky laws (actions have been narrowed)

5) Remedies are rescission, rescission charge (price bought-price resold), out of pocket (purchase or sale price and what was worth), cover (purchase price - market price once disclosed); no punitive damages but penalties may be imposed by SEC

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REMEDIES FOR DIFFERENT ACTIONS

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1. Regulation D: register for IPO, exemptions: SEC can deregister a company, require amended S1 form with corrected information; cancel or terminate the offering; and impose fines on co or principal persons where trading has occurred = to 3 times the profit or $1,000,000.
S1: registration is effective 20 days after it is filed
-Regulation 230.502 Requires that securities must be registered before they can be resold after initial purchase.

2. Preemptive right of the company to acquire shares does not apply to stock given as compensations per MBCA Section 6.30 (b)(3). Does apply to options as well as stock purchases.

3. Violations of fiduciary duty: Fired if officer, removed from board; turn over profits or constructive trust on assets.

4. Insider trading: Civil penalties under 10 b, private direct action for damages; derivative action for breach of duty, Section 21 provides SEC can impose penalties can be 3 times profit or loss avoided OR vs controlling persons $1,000,0000 or 3 times profit. Removed from the board
-duty to disclose or correct public statements

5. Proxy regulation: Failure to comply with the rules can result in excluding the proposal, or request No action Letter, i.e., SEC will take no action vs the company. Enjoin meeting, file corrected statement, invalidate vote.
-request for proxy list- response w/in 5 days and include list of no. holders, type and class of stock, and cost of mailing.
-(if hostile action) or board refuses to include then can sue for the list and send out information to shareholders. Must front the cost but if successful, will control the board and can seek reimbursement.

6. Shareholder proposals- Only 1 proposal/shareholder. Proposals have to be received within 4 mo OR if the date has moved by more than 30 days then within a reasonable time.

7. Exclude proposals that include false or misleading information.

8. Regulation FD (Fair Disclosure)- if make selective disclosure to analysts privately, then must publicly disclose the information. Disclosure via press release , wire service, email is required if intentional then simultaneously, or unintentional then make prompt disclosure. Can also file statement with SEC.
-if the information was included in a public statement, e.g. annual report then not material non-public, BUT if you change what was included in statement so private info would change then may require disclosure.
-will not alone result in a 10b5 violation
-innocent snippets that aren’t material but allow a professional to figure it out may not be a violation.

9. Sarbanes-Oxley- Outside auditors must disclose non audit services rendered and that cannot provide audit and other non-audit services.
-Services must be pre-approved by corporate management and audit committee. Accounting firms cannot provide book-keeping, accounting, and financial statements, fairness opinions, management functions, legal services and expert services.

10. Audit committee must have procedures for protection of whistleblowers and engage independent legal counsel. Sect 301.

11. CFO and CEO must certify financial statements that contain no material false statements or omissions. That would render financial statements to be misleading.