(7) Corporations: Fundamental Changes, Fed Securities, Dissolution Flashcards
Definition:
Fundamental Changes to a Corporation
A fundamental change includes a merger, consolidation, amendment of the articles of incorporation, sale of all or substantially all of the corporations assets or dissolution.
Rule:
Fundamental Changes to a Corporation
A fundamental change must be approved by a majority of the total votes entitled to be cast for the corporation not just a majority of votes present at the meeting.
Fundamental Changes to a Corporation - Special Meetings Rule
A corporation must hold a special meeting when a fundamental change is proposed. A special meeting requires notice to be mailed to the shareholders, which must include the reason for the meeting and the date, time and place of the meeting. Business that is not included in the notice cannot be discussed at the special meeting.
What does this rule do?
Rule 10b-5
Federal Securities Laws
Rule 10b-5 prohibits the use of any means or instrumentality of interstate commerce in any scheme to defraud, make material misrepresentations or omissions or in any other way to use fraud in the purchase or sale of securities.
How to prevails under:
Rule 10b-5
Federal Securities Laws
In order for a P to prevail under a Rule 10b-5 claim they must show the D (1) engaged in a fraudulent scheme or devise which was (2) relied upon (3) in connection with the purchase or sale of a security (4) acted with scienter (actual knowledge or recklessness) (5) used some means of interstate commerce AND (6) caused damages. Non-trading D’s can be liable if fraud based on misleading info can be proven.
Define “a fraudulent scheme or device:
Federal Securities Laws - Rule 10b-5
A fraudulent scheme or device includes: (a) misrepresentation of material fact or disseminating such information; (b) insider trading (trading securities on insider info); or (c) tipping (trading on material information received from an insider). A person who disseminates a material misstatement with intent to defraud (even though they are not the author) can still be found primarily liable under Rule 10b-5 on the basis of having engaged in a “fraudulent scheme”.
Define “Insider”
Federal Securities Laws - Rule 10b-5
An insider is a person that discloses non-public info that a reasonable trader would want to know before buying/selling stock or abstaining from trading. One who receives insider info is only liable if they know an insider is giving non-public info for an improper purpose.
Define “Material”
Federal Securities Laws - Rule 10b-5
Material is defined as a statement or omission that creates a substantial likelihood that a reasonable investor would consider it important.
Reliance is presumed if a material omission is made.
Applicable Plaintiff
Federal Securities Laws - Rule 10b-5
A plaintiff under Rule 10b-5 must be either the SEC or connected to the purchase or sale of the securities in issue.
Section 16(b)
Federal Securities Laws
Section 16(b) requires that a director, officer, or shareholder owning more than 10% of a corporation must surrender any profit realized to the corporation from the sale or purchase of equity securities within a 6-month period when the corporation (a) is publicly traded on a nation stock exchange or (b) has more than $10M in assets and at least 2K shareholders.
*Strict liability is imposed for any covered transaction.
*The corporation is entitled to recover the maximum difference between any sale and purchase price during the 6-month period.
Distribution of Corporate Assets
Dissolution
Upon dissolution, corporate asserts are converted to cash then distributed in the following order (1) outside creditors – promissory noteholder & those without equity interest in the corporation; (2) inside creditors – shareholders who made loans to the corporation; (3) the remaining assets are distributed to shareholders according to their share of ownership.
Equitable Subordination
Federal Securities Laws
In bankruptcy under equitable subordination all unsecured creditors (outside and inside creditors) will be treated the same and collect their debt from the corporation equally.
Deep Rock Exception
Federal Securities Laws - Equitable Subordination
Under the Deep Rock Doctrine, the claim of shareholders who make a loan to the corporation will be subordinated to the claims of outside creditors if (a) the corporation was undercapitalized or (b) if the shareholder acted wrongfully. (Subordinated means to treat as lesser)
