Common Law and Federal Securities Laws Flashcards
CL: Sale of Controlling SH Interest
BLL: Majority or controlling SH under fiduciary duty to exercise control for benefit of all SHs, including duty of due care and loyalty - fully disclose, act in good faith, transactions fair
-controlling SH cannot subject minority to detriment - in close corp, minority has right to have shares repurchased
CL: Sale of Controlling SH Interest: Includes
- Sale to looters - SH liable unless reasonable investigation
- Premium (disguised as corp assets)
- illegal sale of corp assets for personal benefit
- remedy - disgorgement of profits - Sale of corp office (premium)
- may not sell office for private gain
CL: Fraud: Affirmative Misrepresentation
BLL: Insiders (directors, officers, and controlling SHs) who trade on basis of affirmative misrep to trading partners are liable for CL fraud
CL: Fraud: Affirmative Misrepresentation: Elements
- Material misrep
- Scienter (knew it was false or acted with reckless disregard for the truth)
- Intent to induce reliance on the misrepresentation
- Justifiable reliance
- Causation
- Damages
CL: Fraud: Nondisclosure
GR: No CL duty to disclose by corp insider to an investor
CL: Fraud: Nondisclosure: Exceptions: 1) Privity
Face to face transactions between insider and buyer
CL: Fraud: Nondisclosure: Exceptions: 2) Special Facts Doctrine
Defn: Those a reasonable investor would consider important in making an investment decision
Standing: SH/Prospective SH (distinguished from Fed Securities Law)
Measure of Damages: as 10b-5: difference between price paid and value of stock a reasonable time after disclosure
10b-5
BLL: Federal Law: Unlawful for any person by use of any means/instrumentality of interstate commerce (ISC) to employ any scheme to defraud in connection with the purchase or sale of securities
10b-5: Elements
- Instrumentality of ISC/mail/phone
- if no ISC, CL Special Facts Doctrine
- Schemes to defraud
- Scienter
- Standing
- Reliance
- Remedies
10b-5: Elements: 2) Schemes to Defraud
Misrepresentation of Material Information
-Reasonable Investor Test: statement or omitted fact is material if there is a substantial likelihood its disclosure would have been considered significant by a reasonable investor (not forward-looking statements - safe harbor)
Failure to Disclose: Duty to disclose or abstain has been violated
Tipping: Pass along info for wrongful purpose
10b-5: Elements: 3) Scienter
- intent to deceive, manipulate, or defraud
- reckless disregard for truth
10b-5: Elements: 4) Standing
In connection with purchase or sale
- security
- debt
- unsecured - debenture
- secured - mortgage
- equity
- debt
- must BUY OR SELL (excludes potential purchasers & those who refrain
- exceptions: derivative suits & injunctive relief
OR Securities Exchange Commission (SEC)
10b-5: Elements: 5) Reliance
- if affirmative misrep, must prove reliance
- if omission or public misrep, reliance presumed
10b-5: Elements: 6) Remedies
- injunction
- recission
- constructive trust
- out-of-pocket (e.g. difference between what he sold at and FMV at disclosure)
*Must show Causation
10b-5: Tipping
Defn: Insider gives tip of inside info to someone who trades on basis of inside info
10b-5: Tipping: Liability of Tipper
Tipper liable if:
- passed inside info in BREACH of fiduciary duty to corp; AND
- improper purpose (any benefit, even if merely reputation)
*Note: proper to meet with tax atty
10b-5: Tipping: Liability of Tippee
- Tipper breached a duty
- Knew or should have known info was wrongfully passed
10b-5: Misappropriation Theory
It is a breach of fiduciary duty for ANYONE to misappropriate nonpublic information when
- D has a confidential relationship or owes a duty to the source; AND
- either
- D purchases or sells securities based on the information; AND
- D knowingly passes on the improper information
Remedy: same as 10b-5
10b-5: Inadvertent Discovery
No duty
- the disclosure had no wrongful purpose
- no tipper; so can’t be a tippee
16(b)
Defn: short swing profit requires surrender to corp of any profit realized by any corporate insider (director, officer, or 10% SH) for the purchase and sale OR sale and purchase of any equity within a 6 month period
-e.g. sell at $25 and then buy at $5; no scienter required
16(b): Elements
- Jurisdiction
- Insider
- SWP
- Purchase or Sale of Equities
16(b): Elements: 1) Jurisdiction
Publicly held corp
- listed on national stock exchange; OR
- 10 million in assets + 500 or more SHs
16(b): Elements: 2) Insider
- officer (either when bought or when sold)
- director (either when bought or when sold)
- 10% SH (BOTH when bought and when sold)
- only purchases and sale after 10% are counted
16(b): Elements: 3) SWP
purchase and sale within 6 months HIGHEST sales matched with LOWEST purchase
