Beruflich Dokumente
Kultur Dokumente
a) Start-up capital.....................................................................................................................11
b) Equity securities – See SEC §12 & Reg. D.........................................................................11
c) Retained earnings.................................................................................................................11
3) Debt Financing........................................................................................................................11
a) Instruments (bonds & debentures).......................................................................................11
b) Leverage Buy-outs (LBO)...................................................................................................11
4) Balance Sheet..........................................................................................................................11
a) Generally; Assets – Liabilities = Equity..............................................................................11
b) Capital categories................................................................................................................12
III) Stock Offerings..............................................................................................................................12
A) SEC §12 Registration of Securities............................................................................................12
1) 15 USC §78l(a) SEC Registration...........................................................................................12
2) 15 USC §78l(g) Exceptions.....................................................................................................12
3) Intrastate Resident Exemption ................................................................................................12
4) Regulation D Exception, Rules 501, 502(c), 504, 505, & 506................................................12
a) Rule 501 - Accredited investor............................................................................................12
b) Rule 502(c) – No general media advertising.......................................................................12
c) Rule 504 – nonpublic corporation in ‘blue sky law’ state...................................................12
d) Rule 505 – non-reporting corporation.................................................................................12
e) Rule 506 ‘safe harbor’ private offering...............................................................................12
5) Resale of securities, Rule 144..................................................................................................13
6) Remedies for Securities Violations.........................................................................................13
B) Stock Transactions......................................................................................................................13
1) Stock Issuance.........................................................................................................................13
a) Preferred Stock....................................................................................................................13
b) Common Stock....................................................................................................................13
c) Par Value..............................................................................................................................13
d) Diluted stock........................................................................................................................13
e) Initial public offering – clean up & disclose........................................................................13
2) Share transfer restrictions........................................................................................................13
3) Conversion...............................................................................................................................14
4) Stock buyback as distribution..................................................................................................14
C) Shareholder Preemptive Rights - no dilution of equity..............................................................14
1) Inherent rights..........................................................................................................................14
2) Opt-in and opt-out rights, §6.30(a) opt-in...............................................................................14
3) Remedy for dilution.................................................................................................................14
IV) Management & Control.................................................................................................................14
A) Articles of Incorporation, Bylaws, Resolutions .........................................................................14
B) Duties of Directors & Officers....................................................................................................15
1) Promoters.................................................................................................................................15
2) Board of Directors/ Active Partners........................................................................................15
3) Officers and managers.............................................................................................................15
4) Removal and election of parties..............................................................................................15
a) Directors...............................................................................................................................15
b) Officers................................................................................................................................15
c) Shareholders.........................................................................................................................15
5) Management and Control of Meetings....................................................................................15
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a) Assembly of owners.............................................................................................................15
b) Voting rules.........................................................................................................................15
c) Recordation..........................................................................................................................16
C) Distributions................................................................................................................................16
1) Dividends.................................................................................................................................16
a) Permissible Distribution, MBCA §6.40, insolvency & balance tests..................................16
b) Non-MBCA, retained earnings & impairment tests............................................................16
2) Compensation & Bonuses.......................................................................................................16
3) Distribution of capital surplus, MBCA §46.............................................................................16
4) Capital asset use for distributions............................................................................................16
D) Rights of passive investors (shareholders & partners)...............................................................16
1) Approval of board actions.......................................................................................................16
2) Proxy service – see VIII B. Statutory §14(a)...........................................................................17
3) Right of inspection - reasonably related..................................................................................17
4) Proposal rights.........................................................................................................................17
a) The shareholder, $2000 or 1%, > 1 year, <500 words, in advance.....................................17
b) Relate to > 5% of business & a power of the company.......................................................17
c) No violations or conflicts.....................................................................................................17
5) Shareholder agreements – voting blocks & voting trusts........................................................17
a) Agreements to elect board members ...................................................................................17
b) Particular person in key job agreement ..............................................................................17
c) Share-transfer restrictions....................................................................................................18
6) Shareholder rights plans..........................................................................................................18
E) Common Law Duty.....................................................................................................................18
1) Duty of Care – Reasoned investigation, information, & decision ..........................................18
a) Duty of Care – monitor, inquire, but clairvoyance not required..........................................18
b) Breach of Duty of Care........................................................................................................18
c) Defense to Duty of Care......................................................................................................18
d) Remedy for Breach of Duty of Care....................................................................................19
2) Duty of Loyalty - No conflict of interest, Equal Opportunity.................................................19
a) Duty of Loyalty by Management.........................................................................................19
b) Limited Duty of Loyalty by Shareholders – fair opportunity, not equal.............................19
c) Breach of Duty of Loyalty by Management – Waste & Freeze-out....................................19
d) Breach of Duty of Loyalty in a Close corporation - equal opportunity...............................19
e) Defense to Breach of Duty of Loyalty ................................................................................20
f) Remedies for Breach of Duty of Loyalty.............................................................................20
3) Fiduciary Duty - Agency.........................................................................................................20
a) Fiduciary Duty.....................................................................................................................20
b) Breach of fiduciary duty – improper bind, freeze-out.........................................................21
c) Defense to breach of fiduciary duty.....................................................................................21
d) Remedies for breach of fiduciary duty................................................................................21
4) Corporate Opportunity Doctrine..............................................................................................21
a) Requirements – Guth line of business, ALI disclosure.......................................................21
b) Defense to the Corporate Opportunity Doctrine..................................................................22
c) Remedies for Breach of the Corporate Opportunity Doctrine.............................................22
F) Assumption of duty.....................................................................................................................22
V) Statutory Federal Actions...............................................................................................................22
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A) Disclosure Requirements............................................................................................................22
1) Materiality...............................................................................................................................22
2) Reliance...................................................................................................................................22
3) Selective Disclosure – Regulation FD.....................................................................................22
a) Any statements regarding the earnings report are material.................................................22
b) Failure to disclose is not 10b-5 actionable..........................................................................22
4) Forward-looking statements – Regulation S-K......................................................................22
5) Consolidated report..................................................................................................................23
6) Omissions................................................................................................................................23
B) SEC §14(a) Proxy solicitations...................................................................................................23
1) Proxy solicitation requirements...............................................................................................23
a) Any request, express or implied, for a proxy.......................................................................23
b) Filing with the SEC 10 days before.....................................................................................23
c) Bold-face type, dating, identification of the matter, solicitations & proponents.................23
d) Prohibition of false or misleading statements......................................................................23
2) Requirements for prosecution..................................................................................................24
a) Any requirement failure.......................................................................................................24
b) Misleading failures..............................................................................................................24
3) Remedies.................................................................................................................................24
C) SEC §14(e)-3a Misappropriation................................................................................................24
1) Elements..................................................................................................................................24
2) Presumption of fraudulent acquisition.....................................................................................24
D) SEC §10b Illegal Transactions...................................................................................................24
1) §10b-1 Manipulative or deceptive devices..............................................................................24
2) SEC §10b-5 Insider trading ....................................................................................................25
3) Strict liability with a small scienter element...........................................................................25
a) Elements...............................................................................................................................25
b) Traditional vs. misappropriation theories............................................................................25
c) Private right of action..........................................................................................................25
d) Statute of Limitation............................................................................................................25
4) Remedies - Civil penalties for insider trading.........................................................................26
a) Section 21A, 15 USC §78u-1..............................................................................................26
b) Section 20A– Liability to Contemporaneous Traders for Insider Trading..........................26
c) Statute of limitations............................................................................................................26
d) Private rights of action based on contemporaneous trading................................................26
E) SEC §16b Short-swing profits – public/private..........................................................................26
1) Requirements for prosecution..................................................................................................26
2) Employee compensation exceptions........................................................................................26
3) Remedies.................................................................................................................................26
F) PSLRA & SLUSA '98 Limitations..............................................................................................26
1) PSLRA '95...............................................................................................................................27
a) Certification.........................................................................................................................27
b) PSLRA Safe Harbor............................................................................................................27
c) Aftermath.............................................................................................................................27
2) SLUSA '98...............................................................................................................................27
3) Delaware “carve-out,...............................................................................................................27
G) Sarbanes-Oxley (SOX) Provisions.............................................................................................28
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LLP partners are only liable for their own negligence/ wrongful acts/ misconduct to the full extent of
their wealth.
c) Formalities
Draft operating agreement to do business, act like a business; open separate bank account.
To get LLP status, the GP must file the O/A with Sec. State.
d) Management & Rights – GP has all management capacity
General partnership - active management by all partners with binding capacity of other partners
LLP – Only general partner has power to bind; passive investors have no management rights,
Partners has voting rights & reasonable right of accounting.
C) Close corporations
1) Factors – Liability, Scrutiny, Liquidity, Taxation
Good - low public scrutiny
Bad - No self-interest for Directors and Officers, - care, loyalty & fiduciary duty to others; Illiquid,
difficult to sell individual ownership; personal guarantee liability for shareholders; annual meeting &
record keeping requirements.
Taxes – income is taxed at low corporate rate, distributions taxed at personal income rates.
A Close corporation is typified by: (1) a small number of stockholders; (2) no ready market for the
corporate stock; and (3) substantial majority stockholder participation in the management, direction and
operations of the corporation. Donahue v. Rodd Electrotype.
2) Formalities
Raise money & people, draft articles of incorporation, file for incorporation /w fee, state approval,
act like a business, keep & maintain records, open separate bank account
In Cal file statutory certificate exemption.
3) Management & Rights
Close corporation boards have less limitations than public corporation boards because close
corporations do not have the wide SEC notice requirements, nor a large base of outside shareholders
with voting control. Shareholders hold rights of fair dealing
D) Public corporations – liquidity, central mgmt, continuity, w/o liability
1) Factors – limited liability, liquidity, high scrutiny, low taxes
Good - Liability limited to investment, public stock is a liquid asset so it’s easy to sell individual
ownership on national exchanges;
Bad – Corporations may have minimum capitalization requirements – loans to the corporation are
not capital! Annual meeting & record keeping requirements; Annual incorporation fees; Public scrutiny
Taxes - Income is taxed at low corporate rate, distributions taxed at personal income rates;
Corporation can retain operating/ development earnings; low corporate tax rate with double taxation on
pass through income.
2) Formalities – records filed
Raise money & people, draft articles of incorporation, file for incorporation /w fee, wait for state
approval, open separate bank account, act like a business, keep & maintain records.
3) Centralized management & rights
Centralized management of board of directors, who must pass resolutions to authorize or ratify all
acts of directors, officers, managers, etc. Centralized management survives death or retirement without
restructuring, and can issue, sell & buy stock over the public exchanges. Shareholders have limited
rights if coupled with an interest, but no rights without interest.
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4) State laws
Different states follow different statute and case law. Tax rates vary between the states, as does the
experience of the state bureaucracy and court system with handling corporate issues. The rules for
distributions are also different.
5) Delaware
Streamlined application process (as short as 2 hours) but franchise tax hurts small corporations
Legislature which focuses on corporate law issues every year
Judicial branch very well versed in corporate law, with well-reasoned opinions
Legal environment favorable to flexibility in corporate governance issues
The Delaware Chancery Court is a specialized business court
II) Start-up & Financing
A) Partnership operating agreement
1) Factors to address
Written if lasting longer than 1 year (statute of limitations)
Initial contribution recorded
Sharing profits and losses - (1) Flat percentage; (2) Salary; (3) Ownership percentage; (4) Income
percentage; (5) Tiered percentage;
Proportioned sharing of taxes (equally, or unequally?)
Management compensation (named GP for LLP)
Voting rights
Disassociation and Dissolution provisions
2) When the O/A is silent
A partnership agreement to share profits equally does not automatically mean that the partners agree
to share the losses equally. Where the partnership agreement is silent on a matter, the Uniform
Partnership Act will be controlling. Richert. Partners are not fiduciaries of retired partners and are not
personally liable for a retirement plan. Bane.
B) Corporation
1) Promotion
Promoter contracts for capital, & place of business
2) Filing of Articles of Incorporation
Name and address of corporation, registered agent (for service of process), purpose clause, share
volume and class. Initial share volume is usually low since some state fees are chargeable according to
the number of shares issues. The initial share volume does not prevent the Board of Directors from later
declaring stock splits for later sales or IPO.
3) Organizational Meeting
a) People - Naming of directors & officers;
b) Paper - Adoption of bylaws, share value, & certificate issue;
Bylaws include listing the number of directors, procedures for handling vacancies on the board,
qualifications, term, and election schedule of directors, power and indemnification of directors, Place
and Notice of Meeting of Board, presence, quorum and voting rules (approval) of the board, and powers
of officers of the corporation.
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3) Conversion
Forced shares are redeemed when the value of shares obtainable on conversion exceeds the
redemption price.
Downstream shares authorize preferred shareholders to convert shares into common shares,
Common shares are not convertible to preferred shares.
4) Stock buyback as distribution
A corporation may buy-back is stock as part of its capital or income distribution program.
Redemptions are supposed to be proportionate in class being redeemed. The corporation cannot
discriminate in that it must buyback shares in proportion to shareholder ownership. Repurchase
programs allows the corporation to negotiate for both the quantity of stock bought-back, and the price.
Both programs decrease the number of available shares, and increase the share price.
C) Shareholder Preemptive Rights - no dilution of equity
1) Inherent rights
Pre-emptive rights safeguard a stockholders right to protection against dilution of their equity
(recapitalization) in the corporation and protection against dilution of their proportionate voting control.
Katzowitz – recapitalization is invalid where it dilutes shareholder equity & voting rights. A stockholder
has an inherent right to a proportionate share of new stock issued for money, in some other equitable
way that will enable him to protect his interest by acting on his own judgment and using his own
resources.
2) Opt-in and opt-out rights, §6.30(a) opt-in
Under § 6.30(a), no preemptive right exists unless provision for it is expressly made. As a result, a
“plain vanilla” corporation whose articles of incorporation contain the statutory minima will not have
preemptive rights. As of 1998, nineteen states adopted an “opt out” rather than opt in provision.
A corporate executive owes a fiduciary duty to the shareholders, and cannot abrogate that duty
through stock manipulation, even for seemingly beneficial purposes, if the acts are inconsistent with that
fiduciary duty. Lacos – attempt rejected to force the board to issue super-voting stock to president.
3) Remedy for dilution
A shareholder can waive the right, but can’t have it taken away. Stokes – the remedy for dilution is
the difference between the purchase price and market value of the stock. The difference is not based on
par value.
IV) Management & Control
A) Articles of Incorporation, Bylaws, Resolutions
Ultra Vires (replaced by breach of duty) – The State (or shareholders if permitted by the A/I or
bylaws) seeks to cancel an act by the Board, directors, or officers who acted outside within the bounds
of the Article of Incorporation, Bylaws, and resolutions of the board of directors. A third party may not
sue a company under ultra vires.
Reverse Ultra Vires (not supported) – The Board, directors, or officers seek to cancel a transaction
because they acted outside within the bounds of the Article of Incorporation, Bylaws, and resolutions of
the board of directors.
Unless granted authority by the Articles of Incorporation, or Bylaws, the Board must seek
shareholder approval before executing any agreements reflecting on composition of the Board, or
ownership of the corporation.
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c) Share-transfer restrictions
A purchaser without actual knowledge of pre-existing restrictions, will not be bound unless
restrictions were conspicuously noted. Right of first refusal by corporation or other shareholder,
restriction normally applies only if shares are sold, not gifted or as a bequest.
6) Shareholder rights plans
There is no exclusive authority granted boards of directors to create and implement shareholder
rights plans, where shareholder objection is brought and passed through official channels of corporate
governance. Shareholders may, through the proper channels of corporate governance (unless prohibited
by the articles of incorporation), restrict the board of directors authority to implement shareholder rights
plans. Teamsters.
E) Common Law Duty
1) Duty of Care – Reasoned investigation, information, & decision
a) Duty of Care – monitor, inquire, but clairvoyance not required
Reasonable investigation, reasonably informed, and a reasonable decision.
Monitor the corporation and other employees. Directors must inquire into corporate practices upon
receiving notice of impropriety.
Directors are personally liable for failing to prevent wrongdoings by other corporate officers, if (1)
they owed a duty to the victim, (2) they were negligent in monitoring the other officers, and (3) their
negligence was the proximate cause of the injury.
A trustee has a duty to the corporation of reasonable investigation and due care regarding the
background of a suspect buyer. The measure of damages is compensation for all the detriment causes,
i.e., the loss of assets, and the loss of earning power. DeBaun/FirstWestern
Directors, as trustees, stand in a fiduciary relationship with the corporation, and are liable for
negligence in the performance of their duties – but clairvoyance isn’t required. Accepting a contract
where the bank bore all the risk, and had no gain possible was negligence, but damages were limited to
that attributable to only the obligation they incurred. All directors and officers who participated in the
option vote are found liable here –even though the vote was only to ratify. Litwin v. Allen
b) Breach of Duty of Care
Under the duty of care, a director, officer, or controlling shareholder is under a duty to disclose, and
be aware of all relevant facts reasonably available. Thus, a directors, officers, or controlling shareholders
failure to present a report to the board, or read the report presented, containing information material to
the issue at hand is a breach of the duty of care. This breach extends to the circumstance where the
president brings a share pricing report to the board, and only reads to a single price from the report to the
board, without disclosing that the reports suggests a range to share prices. The president breaches his
duty by non-disclosure, while the board breached their duty by not asking to see and read the report for
themselves.
c) Defense to Duty of Care
On challenge to a person for violating the Duty of Care, the director must show that she made a
reasonable investigation, read and understood all material information from the investigation, and that
her decision was reasonably based on the information available to her at the time she made the decision.
In other cases, she would have to show that she did not owe a duty to the victim (corporation,
director, shareholder), or that she was not negligent in monitoring the officer, or her negligence was not
the proximate cause of the injury (other intervening or superceding factors applied.)
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A freeze-out occurs where a majority shareholder uses her control in a close corporation to the
detriment of the minority shareholders. The goal is usually to force minority shareholders to sellout at a
lower price than the minority shareholders want for the their stock. Freeze-out tactics drive down the
worth of the corporation, as by executing over-priced transactions or salaries, or removing employees, or
officers from the corporation.
The squeezers (those who employ the freeze-out techniques) may refuse to declare dividends; they
may drain off the corporation's earnings in the form of exorbitant salaries and bonuses to the majority
shareholder-officers and perhaps to their relatives, or in the form of high rent by the corporation for
property leased from majority shareholders; they may deprive minority shareholders of corporate offices
and of employment by the company; they may cause the corporation to sell its assets at an inadequate
price to the majority shareholders. Donahue v. Rodd Electrotype.
e) Defense to Breach of Duty of Loyalty
(i) Business Judgment Rule
On challenge to a Director or Officer for violating the Duty of Loyalty, the defendant need only
show that the Business Judgment Rule applies, i.e., there was not gross negligence on her part.
(ii) Immunity
Alternatively, the director may assert “immunity,” by virtue that her act had approval of the
disinterested board of the directors, or disinterested shareholders. Immunity applies, if after disclosure, a
majority of disinterested directors or shareholders pre-approve the transaction, and the court won’t even
consider whether the transaction was fair since deciding corporate business is for the board to decide
(and the directors were disinterested and informed). Alternatively, there may have been ratification after
the fact where the disinterested directors or shareholders ratified the transaction after proper disclosure,
but pre-suit. Here, ratification would also immunize the transaction.
(iii) Shareholder Valid Business Purpose
Challenges to a majority shareholder come under the valid business purpose rational. If the
shareholder’s request, or act, had a valid business purpose, then the court will allow the transaction.
f) Remedies for Breach of Duty of Loyalty
(i) Public corporation
If a transaction was not fair to the corporation, and the board or shareholders did not approve, or
post-ratify the transaction, then the court may determine damages by (1) rescission, or reformation of the
contract in terms fair to the corporation, (2) with an accounting and disgorgement for the difference
between the fair price and the contract price, and (3) the salary earned. Punitive damages are unlikely
unless provided for by contract or statute.
(ii) Close corporation
If a transaction in a close corporation was not fair to minority shareholders, regardless of board
approval, the court may enjoin the board and award damages. As the minority shareholders would likely
want out, with an accounting (by injunction) and award of losses is likely. Punitive damages are unlikely
unless provided for by contract or statute.
3) Fiduciary Duty - Agency
a) Fiduciary Duty
Under fiduciary duty, the agent acts on behalf of the principal and the principal wants the agent to
act on his behalf. Directors and offices of the corporation owe fiduciary duty to the corporation and the
shareholders. Fiduciary duty is met if the director/ partner/ actor reasonably believes that the judgment
she’s making in the best interests of corporation. A general partner owns fiduciary to the limited partners
(USA Cafe). An emerging view (with some statutory teeth) is that controlling shareholders have a duty
to minority shareholders to not unfairly profit in share transactions with the corporation.
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5) Consolidated report
A “consolidated report” include information from all of the corporation’s subsidiaries. While the
assumption is that all companies are operating under the same circumstance, sometimes unique
circumstances have impact on the overall prospective financial status of the company. In that case, the
‘forward-looking’ statements do not have a basis for the projections they portend. These unique
circumstances also put the corporation on notice for the need to break that division’s activity report out
of the consolidated report. Thus, Caterpillar’s General counsel erred by knowing about the unique
situation in Brazil, but the MD&A did not disclose those conditions.
6) Omissions
An omission is actionable only where there is a duty of disclosure. There is a duty of disclosure only
where (1) the undisclosed information makes previous statements (i.e., forward-looking statements)
misleading, or (2) the corporation has (or would have) a reasonable belief that people are trading on
reliance of undisclosed information, or (3) incorrect rumors are attributed the issuer.
B) SEC §14(a) Proxy solicitations
1) Proxy solicitation requirements
a) Any request, express or implied, for a proxy
SEC Rule 14a-1 (17 CFR 240.14(a)-1) requires that a party’s solicitation of a shareholder’s proxy (to
vote her shares) must be first filed with the SEC (subject to the other requirements of the section) if the
solicitation is (i) any request for a proxy whether or not accompanied by or included in a form of proxy;
(ii) any request to execute or not to execute, or to revoke, a proxy; or (iii) the furnishing of a form of
proxy or other communication to security holders under circumstances reasonably calculated to result in
the procurement, withholding or revocation of a proxy. SEC Rule 14a-2(a) exempts solicitation
otherwise than on behalf of the registrant where the total number of persons solicited is not more than
ten. A request for the stockholders list gives a presumption that there is a continuous plan for a proxy
solicitation. (Gittlin).
b) Filing with the SEC 10 days before
SEC Rules 14a-3 and 14a-6 require that before making a solicitation, the solicitor file a proper proxy
statement with the SEC at least 10 days before soliciting shareholders, and provide the proxy statement
to all persons solicited with or before the solicitation.
c) Bold-face type, dating, identification of the matter, solicitations &
proponents
SEC Rules 14a-4 require that the solicitation, (1) indicate in bold-face type on whose behalf the
solicitation is made; (2) provide a specifically designated blank space for dating the proxy card; (3)
identify clearly and impartially each separate matter intended to be acted upon, regardless if related to or
conditioned on the approval of other matters, and (4) whether the solicitation was proposed by the
registrant or by shareholders. Undated or post-dated proxies are prohibited under Rule 14-10.
d) Prohibition of false or misleading statements
(i) Director and shareholder proposals
SEC Rule 14-9 prohibits false or misleading with respect to any material fact, or which omits to state
any material fact necessary in order to make the statements therein not false or misleading or necessary
to correct any statement in any earlier communication with respect to the solicitation of a proxy for the
same meeting or subject matter which has become false or misleading. Required disclosures include
conflicts of interest, the compensation given to the five highest-paid officers, and details of any major
change being voted upon.
(ii) Buy-out of minority shareholders in a public corporation is inactionable
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Minority shareholders do not have a cause of action where a supermajority shareholder executes a
buy-out with the approval of a disinterested board. While Rule 14a-9 is intended to prevent knowingly
false statements in proxy statements, disbelief of conclusory statements in a proxy solicitation is
inactionable where the shareholder’s position is insufficient to have mattered. Virginia Bankshares.
2) Requirements for prosecution
a) Any requirement failure
Any failure of a party under SEC Rule 14a is subject to prosecution. This could a failure to file when
required; a failure to timely file when required; a failure to include the proxy statement with or before
the proxy solicitation; a failure to properly, clearly, and impartially indicate the required information on
the solicitation; failure to provide for dating, or post-date a solicitation; or provide false, or misleading
material, or to omit material information.
b) Misleading failures
Rule 14a-9 provides examples of what, depending upon particular facts and circumstances, may be
misleading within the meaning of this section. (a) Predictions as to specific future market values; (b)
Material that directly or indirectly impugns character, integrity or personal reputation, or directly or
indirectly makes charges concerning improper, illegal or immoral conduct or associations, without
factual foundation; (c) Failure to so identify a proxy statement, form of proxy and other soliciting
material as to clearly distinguish it from the soliciting material of any other person or persons soliciting
for the same meeting or subject matter; (d) Claims made prior to a meeting regarding the results of a
solicitation.
3) Remedies
§27 (15 U.S.C.A. §§ 78n(a), 78aa) allows a shareholder a private cause of action under §14(a) with
remedies of injunction, rescission, and damages. Generally no attorney fees.
C) SEC §14(e)-3a Misappropriation
1) Elements
Misappropriation occurs when (1) a tender offer is in progress, (2) another person has information
material to the tender offer, (3) s/he know the material information is nonpublic, (4) s/he knows the
information came from a insider, and (5) s/he buys or sells any of the securities involved.
2) Presumption of fraudulent acquisition
As insiders have a duty under 10b-5 to abstain from disclosure while in possession of material,
nonpublic information obtained in a fiduciary relationship, courts presume that the third party
fraudulently acquired the information.
A fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities,
in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that
information. (O’Hagan)
D) SEC §10b Illegal Transactions
1) §10b-1 Manipulative or deceptive devices
Section 10b-1 prohibits the use of manipulative or deceptive activities relating to the sale or
purchase or securities. The key phrases are, “by the use of any means or instrumentality,” “in connection
with the purchase of sale of any security,” “any manipulative or deceptive device,” and “in the public
interest to for the protection of investors.” Not stating what has to be said is as serious as fraudulent
disclosures. A mere breach of fiduciary duty by a majority shareholder, without any deception,
misrepresentation, or nondisclosure, does not violate 10b.
The information must be material – Basic Inc. v. Levinson. The information must be truly non-
public, a substantial number of members of public must not know. Sec. 10b also applies to public sales
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of non-publicly traded stock. The is an implied private right of action under federal law can be brought
by harmed private person shareholder or corporation (must have bought/sold stock during the
approximate time), for civil damages.
An omitted fact is material if there is a substantial likelihood that a reasonable SH would consider it
important in deciding how to vote” (TSC Indus/Northway).
2) SEC §10b-5 Insider trading
Under the “equal access to the market theory,” all persons, insiders and outsiders, are statutorily and
strictly bound to not trade “on the basis” of information they would reasonably believe is derived from
insider knowledge. Section 10b-5 is a federal claim limited to publicly traded companies on national
exchanges, but is not limited to fraudulent disclosures. Rule 10b-5 is preemptive in that it eliminated
state laws relating to insider trading of multi-state corporations. A fraud under Rule 14 may lead to a
Rule 10b-5 violation
3) Strict liability with a small scienter element
a) Elements
The purpose of §10b is to catch fraud, not the mere possession of nonpublic market information
without a duty to disclose. A corporate insider’s duty arises “from (i) the existence of a relationship
affording access to inside information intended to be available only for a corporate purpose, and (ii) the
unfairness of allowing a corporate insider to take advantage of that information by trading without
disclosure.” Chiarella
Strictly, all that is necessary is that (1) the information came from, or derived from an insider of the
firm, and (2) a recipient (tippee) traded on that information. Thus, the source (director or officer), and
intermediaries (all tippers) who knew or should have known that tipper was breaching a fiduciary
obligation, are also guilty of passing the information. For the purposes of 10b-5, insiders are considered
to be persons who are directors, officers, or employees of the issuer, or is a person affiliated, and in a
confidential duty to the issuer, such as lawyers, bankers, CPA’s. One who stumbles upon the
information without having a fiduciary duty to the issuer is not liable.
b) Traditional vs. misappropriation theories
Under the traditional theory, a tipper can be liable even if he doesn’t personally benefit. All that is
necessary is if he intends to make a pecuniary gift to tippee. Under the misappropriation theory, an
outsider is liable if he steals the information and trades on it, or passes it on. The scienter element then
enters on such derivative actions. The tippee’s liability is derivative, so if the tipper is not guilty the
tippee not guilty. However, if the tipper is liable, the tippee won’t be liable he knew or should have
known that tipper was breaching a fiduciary obligation. A reckless disregard of the truth is interpretable
as scienter but aiding and abetting a person is not.
c) Private right of action
Birnbaum held that private plaintiffs in Rule 10b-5 cases are limited to actual purchasers or sellers of
the securities. The "fraud on the market" theory is rebuttable presumption that the actor is liable per se
for the misleading or deceitful, but the defendant can rebut the presumption by proving the have bought
or sold anyway, the statement was immaterial, or the statement did not have an impact on the market
price of the stock.
d) Statute of Limitation
Two years after discovery of facts constituting the violation, or five years after the violation.
The SOX version is that a complaint must be filed within 1 year after the discovery of the facts
constituting the cause of action and within 3 yrs after the cause of action occurred.
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1) PSLRA '95
a) Certification
PSLRA required lead plaintiffs to file sworn certifications stating that (1) they have reviewed the
complaints, (2) they did not purchase stock at the direction of counsel in order to qualify as class
representatives, and (3) that they will not accept any payment for serving as class representatives.
Lead attorney's fees are capped at a "reasonable percentage" of the amount of damages and interest
actually paid to the class. PSLRA was intended to stem perceived damage from “strike suits,” i.e., class
actions filed not on merits of case, but by plaintiffs and counsel filing suit after a significant change in
stock price.
b) PSLRA Safe Harbor
Statements that qualify for the safe harbor cannot give rise to private liability if either of two tests is
met. First, no private liability may be imposed for forward-looking statements made without actual
knowledge that the statements were false or misleading. Second, no private liability may be imposed if
the forward-looking statement is identified as such when made and is accompanied by meaningful
cautionary language identifying important factors that could prevent the statement from becoming
accurate.
c) Aftermath
After PSLRA, plaintiffs filed parallel suits in state and federal courts, which doubled issuer’s
problems, rather than reducing as Congress intended PLSRA to do.
2) SLUSA '98
SLUSA preempts any state claim that meets four prerequisites. The lawsuit must be: (1) a "covered
class action"; (2) based on state law; (3) in which the plaintiff has alleged either a "misrepresentation or
omission of a material fact" or "any manipulative or deceptive device or contrivance;" (4) "in connection
with the purchase or sale of a covered security." If the complaint does not allege misrepresentation,
fraud, or omission of a material fact, then SLUSA does not apply. (MDCM) Nor would SLUSA apply
where suit is filed in the issuer’s home state, since local federal courts have jurisdiction where the issue
is (1) federal law (SMJ), and (2) in the defendant’s home state (PJ).
3) Delaware “carve-out,
[SEA §16(d)(1), 15 U.S.C. §§ 77p(d)(1), 78bb(f)(3)(A)]
The Delaware carve-out exception only requires that the case be filed in the state of incorporation of
the corporation. (Gibson). The Delaware “carve-out,” contains two prongs.
Subsection (A) preserves state jurisdiction for breach of fiduciary duty claims arising from
transactions taking place between the issuer and its security holders. These include: (i) repurchases of
securities by the issuer from its security holders, i.e., "buy-backs"; (ii) reorganizations, such as the
exchange by the issuer of one class of securities for another; and (iii) offerings of additional securities
solely to existing shareholders, i.e., "rights offerings."
Subsection (B) preserves state jurisdiction for breach of fiduciary duty claims arising from an
issuer's recommendation, position, or other communication concerning three other types of corporate
transactions: (i) mergers and other corporate transactions requiring shareholder approval; (ii) tender
offers; and (iii) situations where majority shareholders force minority shareholders to relinquish their
shares, i.e., "freeze-outs."
Both prongs extend to misstatements made by affiliates, so issuers cannot insulate themselves from
liability by directing misleading disclosure through its parent, subsidiary, controlling shareholder, or an
underwriter. Both provisions are limited to actions "based upon the statutory or common law of the State
in which the issuer is incorporated or organized."
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