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68 Cards in this Set

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What is a public corporation?
a corporation whose shares are traded on Secondary Markets
What are the ways to value a company?
1. value of assets
2. multiple of current sales or earninign compared to other businesses in similar companies
3. discounted cash flow
What is the basic theory behind the efficient capital markets hypothesis?
Markets are efficient and integrate information, so current prices reflect all relevant information about the goods traded.
What is the weak form of the capital markets hypothesis?
current price reflects all information on past prices
What is the semi-strong form of the capital markets hypothesis?
Current price reflects all public information
What is the strong form of the efficient capital markets hypothesis?
the market incorporates all information, both public and private
How does the Securities Act seek to protect SHs?
Through mandating disclosure and preventing fraud (aka misleading statements)
What does the Securities Exchange Act regulate?
Securities fraud, insider trading, short-swing profits, proxy, tender offers
Why do plaintiffs want to file securities fraud claims instead of just regular fraud claims?
The cause of action for securities fraud is usually easier to prove than regular civil fraud, and you might get better damages in the federal forum.
Is an investment contract a security?
Yes.
What are the required elements of a stock?
1. Has to be called a stock
2. SH get dividends
3. it is negotiable
4. SHs get voting right
5. has capacity to apprecitae
What are the elements of an investment contract?
1. investment of $$
2. common enterprise: i. horizontal (relationship among investors); or ii. vertical (relationship between investors and promoter) - fortunes must be linked in some way
3. profits come solely from others (meaning investor doesn't have control)
4.
Private offerings are exempt from what under the Securities Act?
The filing of a registration statement.
What does the status as a private offering depend upon?
The offeree's knowledge. 4 factors:
1. the number of oferees and their relationship to each other and the issuer
2. the number of units offered
3. the size of the offering
4. the manner of the offering (no advertising, solicitation)
What is the average number of offerees that is acceptable for a private offering?
Less than 25.
In order to sell securities you need to first do what?
File a registration statement.
When can you sell securities?
From the time the reigstration statement becomes effective.
What is Regulation D
It is an elaboration of the "safe harbor" exemption from filing a registration statement un Section 4(2).
How does Regulation D define "private offering"?
1. If amount raised is under $1mil, then it will be considered a private offering regardless of number of o'ees.
2. If amount raised is under $5 mil, offer can be made to up to 35 o'ees.
3. If amount raised is above $5 mil, offer can be made to up to 35 o'ees who pass certain tests of financial sophistication.
What can't an issuer do if it is trying to qualify as a private offering under Regulation D?
1. can't advertise publicly; and
2. MUST file a notice of the sale with the SEC shortly after it issues the securities.
What are the civil liabilities a corp faces under Sec. Act Section 11?
A corp is liable for misrepresentation made in registration statements.
Who bears the burden of proof for a Section 11 claim?
Defendant has the burden to show that the conduct did not cause plaintiff's damages.

Plaintiff does not need to show reliance, causation, or scienter.
What are the two exceptions to a Section 11 claim?
1. no cause of action if the plaintiff know of the untruth or omission
2. does not apply to transactions that are exempt from registration.
Which persons are liable for a Section 11 violation?
1. Anyone who signed the registration statement
2. Every person named int eh reg. statement as about to become a direct;
3. every expert named in the statement who prepared the statement or any report used in the statement;
4. every underwriter of the security.
What liablilty does Section 12(a)(1) establish?
Liability for offering or selilng a security in violation of the registration process. STRICT LIABILITY.
What liability does Section 12(a)(2) establish?
Liability for misrepresentations in the prospectus/oral communications.
What is a defense to a Section 12(a)(2) violation?
Defendants who conducted a rxble investigation cannot be held liable.
In order to establish a valid SEction 11 claim, what does the Plaintiff need to prove?
1. Falsity or omission in registration.
2. materiality
3. Defendant failed to establish the affirmative defense of due diligence
What does materiality mean in a Section 11 violation?
Materiality = all matters which an average prudent investor would rely upon
Liability for Issuer over misstatements in Prospectus?
Strictly liable over all aspects of the prospectus
Liability for Expert over misstatements in prospectus?
Expertised portion: liable unless can show that engaged in rxble investiagtion and had rxble ground s to believe that the statements were not misleading.

Non-expert portion: no liability
Liability for Non-Expert over misstatements in Prospectus?
Expert portion: liable unless had no reason to believe and did not believe that statements were misleading or that the statements did not reflect the expert's opinion.

Non Expert portion: liable unless rxble investigation shows rxble ground to believe and you did believe that the statements were true
Does Sec. Ex. Act 10(b) apply to non registered securities?
YES. and registered obvi.
What does 10b(5) prohibit?
Prohibits fraud in security sales
What are the elements of a 10(b)(5) claim?
1. Jurisdictional nexus (interstate commerce)
2. transactional nexus
3. materiality
4. reliance
5. causation
6. scienter
What does materiality mean in a 10(b)(5) claim?
There must be a substantial likelihood that the disclosure would have altered the "total mix of information" available to the rxbly prudent invest.
What is the Fraud on the Market theory?
Falls under "reliance" factor in 10(b)(5) analysis: Price of a company's stock is determined by the available material info regarding the company and its business. Misleading info will defraud stock purchasers even if they do not directly rely on the misstatements.

Assumes SEMI-STRONG form
What is the difference between transaction causation and loss causation?
Transaction causation - you have to show that you bought b/c of the missrep. (presumed by fraud on market theory)

Loss causation - you have to show that you lost money as a result of the misstatement - that the price of the security went down
What is the scienter requirement of a 10(b)(5) claim?
There must be an intent to decive manipulate or defraud but reckless disregard satisifies.
What is the common law approach to insider trading?
There was no ban on insider trading, unless there were special circumstances: a duty to disclose might be imposed when it was highly material info, concealment of identiy of insider, or other active fraud - especially when it is a vulnerable plaintiff
How can insider trading be a 10(b)(5) violation?
Because sometimes it is deemed as an ommission of a material fact.
What is the traditional theory of insider trading?
The reason for insider trading rules stems from concerns bout fiduciary duties - least expansive theory, least expansive definition of "insider." see Chiarella.

Duty to abstain arises out of the relationship of trust b/t the corporations SH and its e'ees.
What is the derivative (tippee) liability?
Insider trading if material info provided to a tipee and:
1. insider breached fiduciary duty (DoL)
2. insider will personally benefit from the breach.
3. Tippee knows/has reason to know of the breach
Under the derivative/tipee insider trader theory, does a DoC violation qualify as a breach of a fiduciary duty?
No, because the insider is only prohibited from giving info for personal gain - so its more likely to be a DoL violation.
What is the Regulation Fair Disclosure (FD)?
When a public corp discloses private info to 1 securities market professional (like an analyst) even if it does so inadvertently, it must disclose to all professionals (can't selectively reveal info.)
What did the SEC do in response to Dirks and Chiarella?
Passed 14(e) making it unlawful to make any untrue statement, or to engage in any fraud acts, in connection with any tender offer.
What does 14(e)(3) say?
When a tender offer has commenced, it is a violation for a person other than the offering person (the acquiring company) to trade in the relevant securities - if that person has material non-public information relating to the tender offer, which the person knows or has reason to know was acquired (directly or indirectly) from: i. the offering person; ii. the target company; or iii. any officer, director, employee or other person acting on behalf of either the target or acquiring company
What is the misappropriation Theory?
Attorney breaches his DoL if he uses nonpublic info to trade securities
What are the elements of the misappropriation theory?
1. undisclosed use of
2. material, nonpublic information
3. belonging to the principal
4. for personal gain.
What happens when you have a long list of gossipers trading inside info?
You need to establish insider liability on each level.
What are the three situations in which a person has a duty of trust or confidence for the purpose of the misappropriation theory according to 10(b)(5)-2
1. Whenever a person agrees to maintain info in confidence
2. General habit (sharer expects person to shut up)
3. Immediate family - wheneer the info is obtained from spouse, parent, child, sibling.
What is the dysunctional family exception to 10(b)(5)-2
no duty of confidence established if there is a history of no expectation of confidentiality
What can shareholders vote on?
1. election of directors
2. amendments to articles of incorp. and bylaws
3. fundamental transactions
4. misc (approval of indp. auditors, etc)
Who can call a meeting of shareholders?
The BoD or by a SH who owns 10%. Individual smaller SHs can only call a meeting if it so allows in the bylaws.
What is a proxy vote?
When a SH appoints an agent to attend the SH meeting and vote on their behalf.
Can insurgents be reimbursed for the expenses they incurred during a proxy fight?
Yes - it must be a bona fide policy contest (legit disagreement with how company is run), and the expenses must be reasonable (includes wining and dining) and SHs must approve
What are the elements for a private cause of action over a proxy rule violation (14a-9)?
1. violations (false, misleading or omitted statement)
2. materiality (sig. propensity to affect the vote)
3. causation (if materiality - probably causation)
4. damages
What damages wil a plaintiff likely get in a proxy rule violation case?
Court unlikely to undue merger - but they will get damages or litigation expenses
What is a SH proposal and how is it accomplished?
14a-8 - It allows eligible SHs to put a proposal before their fellow SHs, and have proxies solicited for them on the company's proxy statement (therefore the expense of the soliciting proxies is borne by the company)
Who is eligible to submit a SH proposal?
A SH who has held at least $2K in market value - or a 1% interest - in the company continuously for over a year.
What are the 8 grounds for the company to exclude a SH proposal?
1. Proposal is not proper subject SH action under state law.
2. Propsal would, if implemented, cause company to violate law/proxy rules
3. Prop relates to the redress of a personal claim or is for personal benefit
4. Prop relates to operations accounting for less than 5% of earnings or gross sales
5. Company lacks power/authority to implement the proposal
6. Prop deals with a matter relating to the company's ordinary business operations
7. Prop relates to BoD election or conflicts with the corp's proposal
8. Proposal is a resubmission
What role does the SEC play in a SH proposal submission?
It acts as referee.
What is the exception to the requirement that the business matter must make up at least 5% of the companies earninigs?
Can put up a SH proposal if it is otherwise related to the company's business.

Lovenheim - most ethical issues relate to the company's business
Can't put a SH proposal on the proxy if it relates to an election, but what if its just rules about the elections?
Then this is OK. (AFscme)
If a SH requests the corp's book to contact SHs, how can management respond?
1. it can send insurgent's material directly to SHs and bill the insurgents
2. It can give a list of SHs to insurgents so that insurgents send it themselves
What does a SH have to prove in order to get access to the company books?
Proper business (i.e. ECONOMCIAL, not ethical) purpose for contacting other SHs (Pillsbury (vietnam vet - napalm)
Who bears the burden of proof of showing proper business purpose for access to books?
Burden is on the corp to show that the SH does not have a proper purpose for the SH list.

Any other information the burden is on teh plaintiff to show proper purpose.
What SH lists can you get in DE?
Only can get the CEDE list (just lists the street name - does not list name of holder)