Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
84 Cards in this Set
- Front
- Back
|
SECURITIES ACT OF 1934
|
Deals with the buying and selling of securities after initial offering (deals with purchasing shares)
Imposes periodic reporting requirements and proxy disclosure |
|
|
SECURITIES ACT OF 1933
|
Relates to the purchase and sale of securities through interstate commerce
Purpose: To provide potential investors, who are not insiders, with full and detailed disclosure of information to make better investment choices How: requiring filing and dissemination of disclosure documents |
|
|
FILING REQUIREMENTS OF SEA 1933
|
s. 5, prohibits the sale of ANY security using the mails or other interstate means of communication unless:
The issuer has filed a registration statement and prospectus with the SEC prior to solicitation The registration statement has become effective |
|
|
REGULATION D EXEMPTION
|
Private Offering Safe harbor exemption to registration requirement under s. 5 of SA 1933
Don’t have to register their securities or file reports, but do have limited filing requirements (ie. identifying the exemption that applies) Still subject to all of the anti-fraud provisions of other federal and state securities (blue sky) laws in each state/jurisdiction where activity occurs No advertising is permitted under Regulation D (instead: people you know, AI, interested parties, pre-existing relationship) IF solicitation, require full disclosure + SEC registration Non accredited investors should receive written disclosure and opportunity to ask questions of issue to avoid anti-fraud provisions |
|
|
AGGREGATION
|
Specific aggregation rules for offering conducted under 504 and 505
Ask: whether or not the company had an intent to engage in multiple offerings over multiple years If yes, have to aggregate the offerings and then apply the exemptions |
|
|
ACCREDITED INVESTORS
|
Include:
Banks Directors or officers of the issuing company Net worth= 1 mill Annual income= 200K/last two years Joint income= 300K Not included in counting towards exemptions, assume sophisticated |
|
|
RULE 504
|
Small offerings subject to state blue sky laws, no disclosure
Offerings of up to $1 million in any 12-month period (includes AI) |
|
|
RULE 505
|
Medium sized offerings, subject to SEC conditions
Offerings of up to $5 million in any 12-month period and offered to no more than 35 persons (unlimited AI, no more than 35 non AI) |
|
|
RULE 506
|
Private offerings subject to SEC
Offerings with no dollar limit up to 35 sophisticated investors (unltd AI) |
|
|
Sophisticated Investor
|
Has knowledge and experience in business and financial matters to evaluate merits and risks of investment
|
|
|
DUTY OF CARE
|
Addresses attentiveness and prudence of managers in performing their decisions making and oversight functions
General duty of care and loyalty to refrain from negligence or imprudence How: reasonable investigation of all material facts, reliance on experts, full disclosure Violations: Negligence, waste, failed to implement reporting/monitor system or reckless |
|
|
LOYALTY
|
Addresses fiduciaries’ conflict of interest and requires fiduciaries put corporations interests ahead of their own
Involves: diverting corporate assets, business opportunities or proprietary information for personal gain Requires full and complete disclosure and non-compete Violations Self dealing, usurping corporate opportunity, interested transactions, insider trading Intent is immaterial, if you sit on both sides you have to make full disclosure and get disinterested approval |
|
|
GOOD FAITH
|
Subset of duty of care and loyalty
Requires absence of ill intent/fraud, reasonable care, prudence Violations Bad faith, fraud, insider trading |
|
|
DEFENCE OF DUTY (CARE )
|
Action undertaken in good faith and committed honest error
Director took prudent steps to be informed Undertook reasonable investigation, reasonably relied on experts, made full disclosure of all facts Received ratification or approval from disinterested directors Absent from meeting Unanimous shareholder ratification |
|
|
STEPS TO BRING DERIVATIVE ACTION
|
Shareholder makes a written demand to board to bring the action
Always suggest following universal demand requirement to protect SH procedurally Directors, once receive demand, make determination after reasonable investigation of all material facts to determine whether it is in the best interests of the corporation to allow the action to go forward Wait 90 days for response from board whether they have decided to consent to action or if they have chosen to reject it If they choose to believe that it is not in the best interest of the company, they can reject the demand If they reject the demand, shareholder cannot bring the action Or, the shareholder can challenge the denial If the decision whether or not to permit the action to be brought, involves self dealing, that decision will be protected by BJR, if the persons making the decision are disinterested If you have an interested transaction: intrinsic fairness test If the directors are interested then demand may be excused and a suit filed or a disinterested committee appointed to investigate and determine if in the best interests of the company If you want to circumvent demand and argue demand futility, have to plead with particularity facts that show that parties are interested, bad faith, grossly uninformed decision making, or significant failure of oversight (Stone v. Ritter/Arson v. Lewis) Board can still create independent committee to investigate after the fact, and file motion to dismiss (along with committee’s report that recommends not to proceed with litigation) to court |
|
|
TIMING AND DERIVATIVE ACTION
|
Have 90 days from time you make written demand until the time you can file action
Demand Futile- have to plead why you didn’t make the demand, and show the demand was futile (court will review whether or not the demand was futile) Written Demand- 90 days Written Rejection- Challenge to rejection because parties interested, 90 days Written Demand- investigation, wait 90 days, to approve it, action goes forward Written Demand- wait board says no, person challenges it, no basis to challenge parties not interested, motion to dismiss Written Demand- board does nothing, can be treated as a rejection- and shareholder can challenge If No Demand- shareholder goes forward claims board disinterested, after complaint has been filed, board can convene a committee of disinterested individuals to view complaint (after the fact) and decide whether the complaint should go forward. Can file; motion to dismiss, if disinterested committee rejects complaint stating that it is not in the best interest of the corporation |
|
|
SELF-DEALING
|
Person acquires information and then enters into transaction that is contrary to corporations best interests
Transactions are not per se illegal. Duty to abstain or disclose to board who ratify transaction |
|
|
Burden in Action
|
Shareholder has to prove director’s conflicting interest
Director has to show that the transaction was valid |
|
|
CORPORATE OPPORTUNITY
|
When fiduciary seizes business opportunity that corporation may have taken and profited from, diversion occurs if fiduciary denies corporation opportunity
|
|
|
Corporate Opportunity Includes
|
Includes:
Diverting corporate assets to develop business opportunity, Opportunity is discovered while working for corporation (cant compete, take employees or divulge information) Opportunity is in same or competing business Corporation has interest in opportunity Opportunity as a way of expressing thanks: personal gratuity v. gratuity for past business |
|
|
Avoid Corporate Opp. Liability
|
Requires full disclosure and rejection by board after reasonable investigation (North Harbor)
If you never disclose, board cannot be estopped from challenging it |
|
|
Corporate Rejection
|
Corporation consents to directors pursuit of opportunity after disclosure
Rejects interest in specific deal |
|
|
Corporate Incapacity
|
Corporation cant afford (and director gets it on same terms)
Not determinative, corporation should still be presented with opportunity (they can get money elsewhere) Opportunity is beyond the scope of the corporate powers (ultra vires) If disclosed to board, and they don’t say anything and you don’t change your position they will be estopped from challenging it Change of circumstance requires additional ratification (North Harbor) |
|
|
EXPECTANCY
|
If corporation has an existing expectancy in business opportunity, required to get corporations consent. If not, do not have to disclose
|
|
|
LINE OF BUSINESS
|
If new business is functionally related to corporations existing or anticipated business, requires consent
|
|
|
ALI TEST
|
Includes opportunities closely related to the corporation’s business
If no logical relation or corporation lacks financial capability to pursue- non corporate opportunity Requires: offered to board and disclose conflicting interest- and board rejects (can ratify after the fact by vote by disinterested board) |
|
|
Under ALI Corporate Opportunity Means:
|
Director aware as result of being director and should lead to belief that person offering opportunity expects it to be offered to the corporation
It is one that director should reasonably believe that it will be of interest to the corporation Opportunity closely related to corporation business |
|
|
EXECUTIVE COMPENSATION
|
When director sells his executive services to the corporation, diversion can occur if the executive compensation exceeds the fair value of his services
|
|
|
Will not be waste if:
|
Informed, disinterested, independent directors approving compensation
Board reasonably relied on experts, no evidence of self dealing, disinterested approval- even when board fails to compute actual costs (Brehm v. Eisner) If executive compensation is approved by a disinterested and independent board- subject to BJR |
|
|
To Challenge Compensation
|
Grossly informed (as opposed to negligent (Brehm v. Eisner)
Waste- no relation between amount and services Board was dominated by interested director/SH |
|
|
To Determine if Corp. Pay is Fair
|
relation to services,
corporation’s market value, incentive, comparable comp. |
|
|
INTERESTED TRANSACTIONS
|
There must be a personal stake in the particular transaction
Can be established when directors should have done something but they didn’t or received some monetary benefit/kickback or some reason why they would vote the way they did (Stone v. Ritter) Disinterest is presumed even if: they incur liability as directors, may be affiliated with decision maker, or have financial interest in corporation Deciding on act is not enough to make directors interested (Stone v. Ritter) |
|
|
FACTORS THAT INDICATE DISINTEREST (Cuker Mikalauskas)
|
Disinterested committee
Assistance from counsel that would show reasonable reliance on expert Preparation of a written report What was adequacy of investigation What’s in best interest of corporation |
|
|
BUSINESS JUDGMENT RULE
|
Rebuttable presumption that directors, in performing their functions, are informed and rationally undertaken
|
|
|
To Challenge Business Decision
|
Must show that the directors failed to act: in good faith, in honest belief that action was in best interest of company and on an informed basis (Arson v. Lewis)
No interested decisions allowed unless appoint a committee to assume rile of reviewing or approving action or decision is made by shareholders |
|
|
IN RE CAREMARK:
|
No liability to directors for bad, erroneous, or stupid business decisions when directors acted in good faith and took reasonable steps to institute a rational process
|
|
|
When to use BJR:
|
Exercising reasonable care in performance of duties
To approve/dismiss/review derivative action (even if after action brought without demand) Approve transaction after the fact |
|
|
INTRINSIC FAIRNESS TEST
|
Applies to an interested transaction where shareholder ratification and/or disinterested vote is unavailable and requires that you look at the motive of the directors and effect on the corporation
|
|
|
WHEN TO USE
|
Where shareholder or director is personally involved in a transaction with the corporation and benefits at the expense of the corporation, or minority shareholders (interested transaction)
|
|
|
Audit and Accounting Firms
|
Audit committees are to be composed of independent directors
Established accounting standards, and regulated accounting profession SEC actions for auditors intentional and reckless conduct Accountants cannot provide consulting services |
|
|
Financial Reports
|
CEO and CFO are to certify that SEC filings are true (focus corporate attention on proper disclosure) [failure results in statements being misleading]
Rule retroactive, previous fliers of fraudulent statements can be indicted Mandates internals controls regarding disclosure, finances and role of auditors Disclosure of current changes to financial condition |
|
|
Officers and Directors
|
Authorizes SEC to remove unfit directors
Ban personal loans, except in ordinary course of business Forfeit executive pay when company restates financials due to misconduct Criminal sanctions for destruction and violation of document retention and tampering |
|
|
Attorneys
|
Required to report violations and breach of FD up internal corporate ladder
SEC enforcement against attorneys for malpractice |
|
|
Whistleblowers
|
Private actions for those who face retaliation
Criminal liability for those who retaliate |
|
|
Violations in SOX
|
Alter, destroy record to impede investigation (fine + up to 20 years)
Attempts to commit fraud (5 years) Retaliate against whistleblower (but no protection for whistleblower unless presented to congress) |
|
|
10(b)(5)
|
Focuses on the liability of a party who has a fiduciary duty to the corporation and breached that duty
Chiarella- There is no fraud or 10(b)(5) violation absent a duty to speak or refrain from trading In connection with the purchase and sale of securities, a person is liable for using interstate commerce or the mails to intentionally: defraud, make material misrepresentations or omissions of fact, or engage in practice that resembles fraud (use of third party to buy securities) |
|
|
MATERIALITY
|
Whether a reasonable person attach importance to the information so as to influence their decision whether to buy or sell shares (reliance presumed) Basiv v. Levinson
|
|
|
INTENT 10b5
|
Private plaintiff must prove intent to deceive, defraud or misrepresent for action under 10(b)(5)- Ernst
|
|
|
ABSTAIN OR DISCLOSE
|
Directors, etc. who, by virtue of their position have access to confidential information, have a fiduciary duty to refrain from trading based on information or will be liable for insider trading.
Can trade on information after disclosing it to the person to whom they owe FD Or if internal policies dictate trading- approved periodic investing program/after annual report |
|
|
SEC v. Texas Gulf
|
Directors in receipt of non-public information have a affirmative duty to disclose the information or refrain from trading on it. Insiders can trade after the public has the opportunity to react to the information
|
|
|
STANDING
|
Only purchasers or sellers have standing to bring action Blue Chips
|
|
|
AFFIRMATIVE DUTY TO CORRECT MISUNDERSTANDING
|
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.
If disclosed information is misleading, if trading and undisclosed info or rumors |
|
|
PRIMARY VIOLATORS
|
A private action under Rule 10b can be made against parties as primary violators who use money from new investors to pay off earlier investors until the scheme collapses, or repeated practices that show intent to defraud or recklessness of action in exchange for personal or monetary gain. Enron
|
|
|
Who is primary violator?
|
Parties who knowingly continue dishonest acts, services, develop sham entities and pursue other illegitimate deals (engagement in fraudulent acts)
|
|
|
NOT LIABLE: EAVESDROPPER/ STRANGER
|
A stranger with no relationship to the source of material, non-public information, whether from an insider or outsider, has no 10(b)(5) duty to disclose or obtain Chirella
|
|
|
SAFE HARBOR 10b5
|
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.
|
|
|
WHAT KINDS OF ACTIONS
|
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. |
|
|
INSIDER TRADING
|
Type of 10(b)(5) action that arises when person who has a fiduciary duty to the corporation, breaches their duty by disclosing confidential information, and trading takes place on the basis on the material
Duty to disclose, correct and refrain from trading Includes agents, employees, directors, shareholders, attorneys, accountants, underwriters, or consultants. (Temporary insiders) |
|
|
Dirks v. SEC:
|
Tippee who receives information without deceit and does not use the information for personal benefit has no fiduciary or other relationship to corporation is not liable for 10(b)(5). (look to whether trying to uncover fraud to fulfil FD)
|
|
|
INSIDER
|
Director, officer, employee or controlling shareholder who obtain, non-public information as a result of their position have the clearest duty not to trade under 10b5- Chiarella
Have an implied duty of confidentiality, abstain or disclose |
|
|
TEMPORARY INSIDER
|
Constructive insiders who are retained temporarily by the company in whose securities they trade- attorneys, accountants, investment bankers- are viewed as having the same 10(b)(5) duties as corporate insiders
|
|
|
FAMILY INSIDER
|
Constructive insiders can also exist in family setting where there are expectations of confidentiality
Implicates a FD when spouse has a reasonable expectation of confidentiality If yes, there is an assumption that the information will be kept confidential. If benefit martial estate= temporary insider |
|
|
TIPPER
|
Insiders and outsiders with a confidentiality duty who knowingly make improper tips are liable as participants in illegal insider trading
Liable only if the tip breaches a fiduciary duty to corporation or shareholders; no breach if no personal benefit is received The tip is improper if the tipper expects the tippee will trade and anticipates benefits |
|
|
TIPPEE
|
Those without a confidentiality duty inherit a 10b5 abstain duty if they knowingly trade on improper tips
|
|
|
OUTSIDER TRADING- MISAPPROPRIATION
|
Outsiders who breach fiduciary duty of confidentiality to persons unrelated to the corporation- who, by virtue of their relationship, use confidential information and trade on it
Requires a breach of duty to the source- the person who has information based on some relationship to corporation Not liable if there is no benefit- no trading on information- or no duty to source Involves unauthorized confidential information, through deceptive practice (deceiving source that entrusted him the material- breach of FD) in connection with securities trading (use information to buy shares) |
|
|
AIDERS AND ABETTORS
|
Not directly profiting by purchasing and selling, but they are enabling the transaction Enron
Only SEC can bring action Post Central Bank |
|
|
16(b)
|
Every 10% owner, director, or officer of a public corporation who purchases and sells their shares within a six month period will be liable under Section 16b and must disgorge any profits.
Its about the substance of their function- if comparable to direction 16(b) applies UNLESS: preexisting right to acquire stock as part of retirement package, stock option, compensation plan |
|
|
PROXY REGULATION
|
SEC of 1934 regulate proxy voting in public corporations to ensure SH get full and complete disclosure of all material facts
How? SEC mandated disclosure, no open ended proxies, shareholder access, private cause of action |
|
|
PROXY STATEMENT
|
Includes all of the proposals (bd and SH), annual report, information pro and con about why they should or should not vote on proposals
|
|
|
PROXY REGULATION
|
Relates to the use of interstate commerce to solicit proxies
Must file a registration before the broker can effect transaction on national exchange Prohibits false or misleading information in proxy solicitations and statement. Proxy must be for specific proposals: notice of meeting, full disclose on proposed action and options regarding voting. |
|
|
PROCESS FOR PROXY SOLICITATION
|
Proxy solicitations relate to: electing the board, approving compensation plan for directors, agreement to merger, consolidation or some fundamental change in corporation’s structure.
Solicitations must be registered with the SEC |
|
|
Violation of SEA 14a to include false or misleading material facts or omit material facts in proxy statement. (Materiality is what a reasonable person would attach importance to)
|
Predictions of future market values;
Has to be factual. Opinions if believed to be true are ok, if they are false/stated as fact actionable Impugn the character, integrity or personal reputation or makes charges regarding illegal or immoral conduct w/o factual foundation; Failure to identify document as a proxy statement, form of proxy or other soliciting material; Claims regarding the results of a solicitation |
|
|
Affirmative Action Required
|
If SH wants to vote against board, required to take affirmative action (vote against, show up and defeat)
|
|
|
SHAREHOLDER PROPOSALS
|
Recommendation or request by shareholder that company take action
No action letter available to corporation who want to reject a proposal If board rejects proposal, then must give SH opportunity to cure any defect, and file reasons for rejection with SEC |
|
|
WHO, HOW TO SUBMIT
|
SH with 1% or 1K
Notice defined in bylaws One proposal/SH Submitted within 120 days of mailing, included in material given to SEC Limited to 500 wds Received within 4 months of meeting, 30 days if it has been moved or within a reasonable time |
|
|
THREE CATEGORIES OF PROPOSALS THAT ARE SUBMITTED FOR INCLUSION
|
Corporate Governance
Structure, term, rights and obligation of board Operational Executive compensation, production/business matters, communications Social/Political Environmental, political, military and labor |
|
|
Inconsistent with centralized management (interference with traditional structure of corporate governance)
|
Relates to operations of less than 5%- unrelated to corp. business
Deals with ordinary business operations- up to board to decide Relates to specific cash- board has discretion to declare dividends Not a proper subject |
|
|
Interference with management’s proxy solicitation (interference with orderly proxy voting)
|
Relates to election of office- board is responsible, don’t want SH views on particular officers clouding judgment (Rauchman v. Mobil Corp)
Similar to failed previous proposals Counter to proposal submitted by majority board- ultimately result in open forum/undermine management |
|
|
Proposals are illegal, deceptive or confused
|
Violate state/SEC laws
Contrary to proxy rules- cannot impugn character Personal claim or grievance- no disgruntled employees Beyond the authority of the corporation Moot because the board is already doing it |
|
|
PROXY FRAUD ELEMENTS
|
Misrepresentation or omissions of material fact
Opinions/motives actionable unless speaker believes to be true/correct (Va. Bankshare) Materiality establishes reliance, so reliance need not be specifically proved. TSC- requires substantial likelihood that a reasonable shareholder would attach importance to the material in deciding how to vote. Not material if otherwise available Loss Causation “Essential link in the transaction,” so vote is necessary and transaction has harmed the shareholders Va. Bankshare [requires that there must be a solicitation of a vote and injury to the shareholders in exercising right to vote] Intent- not required. Negligence is enough if the transaction has resulted in a loss. |
|
|
OPINIONS
|
If an opinion is misleading, but the directors believe it is correct and there is nothing to suggest that they do not believe it, then it will not be actionable under proxy fraud, even if it is actionable under 10b5 or breach of fiduciary duty.
|
|
|
CAUSATION
|
Transaction causation requires that there must be a solicitation of a vote, and injury to the shareholders in exercising right to vote, e.g. drop in price or loss of appraisal right.
Have to ask shareholders to do something, and there has to be some injury to them as a result of voting |
|
|
VOTING ON MATTERS
|
Shareholders affect by action get right to vote on proposal
Permitted if no disinterested board On changes to substantially all of the assets |
|
|
INSPECTION OF RECORDS
|
Thomas & Betts- Shareholders have a right to inspect the books only upon a proper showing of purpose (why is it necessary?); and the court has wide latitude to define the parameters of that right, based on the facts of the particular case
|
