Biz Orgs

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Regulation D: exemptions 4

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EXEMPTIONS:
A. Accredited Investors: See definition above.
1. These are NOT COUNTED toward the number of investors

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Regulation D: exemptions 4

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B. Sophisticated Investors: Knowledge and experience capable of evaluating the merits and risks of the offering (Rule 506--offerings with no dollar limitation)

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Regulation D: exemptions 4

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C. Regular Investors
1. Offerings of up to $1 million in any 12 month period and where the issuer need not comply with any disclosure requirements (Rule 504)
a) If < $1 million during a year, stock can be issued to anyone
2. Offerings to up to 35 persons AND the total offering does not exceed $5 million in any 12 month period (Rule 505), and no officer, director, affiliate, or agent has misbehaved.
à 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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Regulation D: exemptions 4

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D. Federal Intrastate Exemption

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Federal Intrastate Exemption
3 elements

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1. If issuer resides in a state and wants to solicit to residents in that state-offering may be a private offering if money comes to rest in that state and ALL shareholders are in the state

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Federal Intrastate Exemption
3 elements

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2. Applies to specific transaction as opposed to transaction itself

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Federal Intrastate Exemption
3 elements

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3. The issuer claiming an exemption under Rule 147, has the burden of
showing that all of the following exist
a) 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
b) At least 80% of the net proceeds received from the offering must be used within the state
c) The issuer’s principal office must be within the same state as the offering
d) All offerees and purchasers must be residents of the same state as the issuer
e) no resales can be made within the nine month period following the close of the offering

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TYPES OF SUITS

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Direct Actions
Derivative Actions

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Direct Actions 3 elements

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A) By a shareholder
B) Against the corporation or a purchaser or seller
C) and the remedy goes to the individual/shareholder
1. Must explain to the court that a demand was not made on the Board because it was interested and state facts as to why the Board was not disinterested
E.g. à if a majority of the Board is interested, shareholders may authorize action or directors can appoint a disinterested committee

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Defense Direct Actions

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INTRINSIC FAIRNESS TEST
A) Intrinsic fairness applies to an interested transaction where shareholder ratification and/or a disinterested vote is unavailable and requires you look at the motives of the directors and the effect on the corporation. Marciano v. Nakash
B) If a court believes a transaction to be fair, it will be upheld
C) If a transaction involves fraud, overreaching or waste of corporate assets, it will be set aside
D) If it does not involve elements in (3) but court is not sure if it was fair, court will uphold only if D can show the transaction was:
1) Approved or ratified by a disinterested board
2) Without participation by any interested parties
3) After full disclosure of material facts [INTRINSIC FAIRNESS]

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Derivative Actions
3 Elements

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A) By a director or shareholder on behalf of a corporation
B) Against a director or board for breach of duty
C) and the remedy goes to the corporation

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Derivative action
1. Universal Demand Requirement

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A) Shareholder must make written demand of the Board to get permission to sue the corp.
B) Board must respond within 90 days with written findings of material fact
1) If DISINTERESTED BOARD à Not involved in the action/breach then the Board can elect for the suit to proceed or not
2) If INTERESTED BOARD à Shareholders can appoint a disinterested committee to determine whether an action should proceed and must file written report of findings of material facts.

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Defense Derivative action 3 elements

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Business Judgment Rule: Is a defense to a derivative action that insulates directors from liability from their business decisions where there is:
1) Full disclosure of all material facts;
2) Reasonable investigation of material facts/reliance on expert advice
3) Court will determine whether the Board was disinterested and the transaction is a product of good business judgment after reasonable investigation of all material

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1. Common Law Fraud
5 elements

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A) Material misrepresentation of material fact; NOT OPINION OR OMISSION
B) That the insider knows is false or reckless
C) And intends that the other person rely upon it;
D) That person actually relies; AND
E) Actual damages result

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2. Bad Faith Fraud (separate CL action) [state proxy fraud]
4

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A) Actual misrepresentation of fact
B) Intent to deceive
C) Reliance
D) Intent to rely

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1. Intrinsic Fairness Test:

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Usually applied with an interested Board of Directors
LOOK AT
1) MOTIVE OF THE DIRECTORS; and
2) AFFECT ON THE CORPORATION
A) If a DISINTERESTED BOARD OR SHAREHOLDERS RATIFY, apply BJR:
1) Burden on P to show transaction was unfair
2) Usually will not involve fraud, waste, or overreaching
B) If the transaction is fair to the corporation based on motives of director and effect on corporation, transaction may be valid
1) Burden on D to show the transaction was fair
2) Usually there has not been ratification by the Board or shareholders
C) If INTERESTED DIRECTOR is required for quorum and participates, BUT DOES NOT VOTE, then apply intrinsic fairness test

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Business Judgment Rule(

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arises in FOUR situations à where Board is DIS- interested:
A) Exercising reasonable care in performance of duties; includes reasonable reliance on experts
B) To approve or ratify a transaction after the fact
C) Whether to pursue a derivative action for actions that harm the corporation; directors must be INTERESTED and given FULL DISCLOSURE; if all directors are interested, can appoint disinterested Board or go to shareholders
D) Whether to dismiss a derivative action brought by a shareholder because demand was futile
à Disinterest is presumed even though directors may incur liability, may be related or affiliated to the decision maker, own stock or have a financial interest in the corporation. THEY MUST HAVE A STAKE IN THE PARTICULAR TRANSACTION.

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In Re Caremark

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1) There will be no liability to directors for bad, erroneous, or stupid business decision when directors acted in gpod faith and took reasonable steps to institute a rational process.

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Stone v. Ritter

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2) Failure to make a demand will only be excused when there is a showing of facts alleged the Directors knew they had a duty and failed to discharge it.

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Cuker

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4) BJR rule may be invoked after a suit is brought to dismiss an action after company appointed an independent committee and makes a reasonable investigation and issues a written report.

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C. SELF-DEALING

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Rules of Thumb
If a court believes the transaction is fair, it will be upheld.
If the transaction includes fraud, overreaching or waste of corp. assets, it will be set aside
If it doesn’t involve the elements in (2), but court isn’t sure it’s fair, it will be upheld only where D can show the transaction was approved or ratified by a truly disinterested board w/o participation by Interested party after full disclosure of material facts.

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selfdealing defined

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. Defined: A person who acquires special knowledge or information by virtue of a confidential or fiduciary relationship with another may not exploit that knowledge or information for his own personal benefit. Any benefits derived from use of that information must be accounted to the corporation. To avoid liability, the person with knowledge must first
A) Disclose the information to the other party OR
B) Forego the transactionALSO Where a shareholder or director is personally involved in a transaction with a corporation and benefits at the expense of the corporation or minority shareholder.

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Types of Self-Dealing:

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A) Interested Transaction
B) Corporate Opportunity
C) Bad Faith/Fraud
D) 10b5 Insider Trading
E) Misappropriation

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Types of self dealing
Apply Intrinsic Fairness Test: à Usually applied with an interested Board of Directors

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LOOK AT
1) MOTIVE OF THE DIRECTORS; and
2) AFFECT ON THE CORPORATION.
A) If a DISINTERESTED BOARD OR SHAREHOLDERS RATIFY, apply Business Judgment Rule:
1) Burden on P to show transaction was unfair
2) Usually will not involve fraud, waste, or overreaching
B) If the transaction is fair to the corporation based on motives of director and effect on corporation, transaction may be valid
1) Burden on D to show the transaction was fair
2) Usually there has not been ratification by the Board or shareholders
C) If INTERESTED DIRECTOR is required for quorum and participates, BUT DOES NOT VOTE, then apply intrinsic fairness test

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. Interested/Self-Dealing Trans require:
3 Elements

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A) They be authorized, fair, and/or ratified by a
B) Disinterested Board of shareholders
C) After full and complete disclosure

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5. Interested Directors:

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Director is liable to the corporation if there exists a conflict of interest of personal interest, and the transaction is not authorized, disclosed, or fair.
A) If a majority of directors are interested, shareholders may authorize
B) Interested directors are not counted in quorum or vote unless bylaws state otherwise

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6. Special Facts Doctrine:

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A director of a corporation may be liable to a shareholder for self-dealing in purchasing or selling stock if the director:
A) Solicits stock from a shareholder with knowledge he only receives by virtue of his position
B) Uses an intermediary to avoid disclosing that he/she is the buyer
C) Takes steps to conceal the information or makes misrepresentations regarding material facts which would affect his decision.

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7. Remedies Self dealing

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A) Void K if no disclosure
B) Recover damages for unfair profit

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8. Defenses

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A) Intrinsic fairness Test
B) Process: Disinterested vote after full disclosure and reasonable investigation

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E. CORPORATE OPPORTUNITY DOCTRINE

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1. A director cannot take an opportunity before offering it to the corporation if the:
A) Opportunity is discovered while working for the corporation (can’t compete, take employees or divulge corporate information);
B) Opportunity is in the same or competing business; OR
C) Corporation has an interest in the opportunity/expects to be offered to the corporation.
I.E. full disclosure and rejection/ratification by the corporation is required after reasonable investigation.

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2. TESTS (Burden of proof on D/officers/Directors)

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C) ALI TEST (JUST NEED THIS ONE): COMBINES tests to include opportunities closely related to the corporate business. Meaning Director becomes aware and should reasonably lead to believe the person offering opportunity expects it to be offered to the corp or through use of corp property; OR opportunity is one he should reasonably believe will be of interest to the corp; OR opportunity becomes aware and executive knows is closely related to corporate business.
If a corporate opportunity encourages, MUST
1) Offer to the corporation and disclose the conflicting interest
2) Board must reject via a disinterested vote
3) If Board is DISINTERESTED, apply business judgment rule
4) If INTERESTED, apply intrinsic fairness

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3. Defenses

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A) Line of Business: If there is no logical relation to the business or the corp lacks the financial and technical capability to pursue, it is a non corporation opportunity
B) Duty: If no fraud or breach of fiduciary duty, and found not to be a corporate opportunity, officer is not liable
C) Absence of Breach: If it IS a corporate opportunity, but there is no breach of any duty, officer is NOT liable à if the corporation votes not to take advantage after disclosure.
D) Corporation couldn’t afford to take advantage of the opportunity
E) Opportunity is beyond the scope of corporate powers

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4. Remedies

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A) Recover profits or force director to convey property to the corporation at cost
B) Corporation gets a constructive trust if director converted property to cash (profits - cash); OR
C) Damages if corporate business is injured.

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5. Case Law

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A) A corp director must offer an opportunity first to the corp after full disclosure which is an absolute condition precedent to the validity of the rejection; good faith but a defective disclosure may be ratified after the fact only by an affirmative vote of disinterested directors or shareholders. Northeast Harbor Golf Club v. Harris

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SARBANES-OXLEY CORPORATE RESPONSIBILITY

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) Additional disclosure requirements
B) Expands financial responsibility of CEO, CFO, and corporate attorneys
C) Established security-related crimes
1) Violation to alter or destroy any record to impede or obstruct or influence an investigation
2) Makes it a crime to commit mail, wire, bank, healthcare fraud
3) Felony to retaliate against whistleblowers
D) Increases penalties for SEC violations
E) Increases oversight and enforcement
F) Establishes an Accounting Oversight Board to oversee and prosecute accounting firms and conducts audits of public companies.
G) Officers must certify annual or quarterly reports that they:
1) REVIEWED the report and it does not contain any untrue statement of material fact or omission
2) Company established internal controls to ensure material information is made known to the officers
3) Officers evaluated the effectiveness of internal controls and concluded on that
4) There are no material changes that could affect controls
H) Personal Loans: Prohibits executives and directors from receiving personal loans except for home improvement, purchases, and consumer credit
I) Create Audit Committee Independent from Co-Management to oversee and direct auditing.
1) Accountants must not also provide consulting services, unless just tax services.
J) Attorneys: Must report EV of a material violation of securities laws or breach of fiduciary duty to chief legal counsel or CEO; if action isn’t taken by attorney, must then inform the audit committee; à can affect a “noisy withdrawal” I.e. when no action is taken and the attorney must withdrawal from representation and report it to the SEC.