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Corporations > Common Law and Federal Securities Laws > Flashcards

Common Law and Federal Securities Laws Flashcards

1
Q

CL: Sale of Controlling SH Interest

A

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

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2
Q

CL: Sale of Controlling SH Interest: Includes

A
  1. Sale to looters - SH liable unless reasonable investigation
  2. Premium (disguised as corp assets)
    - illegal sale of corp assets for personal benefit
    - remedy - disgorgement of profits
  3. Sale of corp office (premium)
    - may not sell office for private gain
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3
Q

CL: Fraud: Affirmative Misrepresentation

A

BLL: Insiders (directors, officers, and controlling SHs) who trade on basis of affirmative misrep to trading partners are liable for CL fraud

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4
Q

CL: Fraud: Affirmative Misrepresentation: Elements

A
  1. Material misrep
  2. Scienter (knew it was false or acted with reckless disregard for the truth)
  3. Intent to induce reliance on the misrepresentation
  4. Justifiable reliance
  5. Causation
  6. Damages
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5
Q

CL: Fraud: Nondisclosure

A

GR: No CL duty to disclose by corp insider to an investor

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6
Q

CL: Fraud: Nondisclosure: Exceptions: 1) Privity

A

Face to face transactions between insider and buyer

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7
Q

CL: Fraud: Nondisclosure: Exceptions: 2) Special Facts Doctrine

A

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

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8
Q

10b-5

A

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

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9
Q

10b-5: Elements

A
  1. Instrumentality of ISC/mail/phone
    • if no ISC, CL Special Facts Doctrine
  2. Schemes to defraud
  3. Scienter
  4. Standing
  5. Reliance
  6. Remedies
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10
Q

10b-5: Elements: 2) Schemes to Defraud

A

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

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11
Q

10b-5: Elements: 3) Scienter

A
  • intent to deceive, manipulate, or defraud

- reckless disregard for truth

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12
Q

10b-5: Elements: 4) Standing

A

In connection with purchase or sale

  • security
    • debt
      • unsecured - debenture
      • secured - mortgage
    • equity
  • must BUY OR SELL (excludes potential purchasers & those who refrain
    • exceptions: derivative suits & injunctive relief

OR Securities Exchange Commission (SEC)

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13
Q

10b-5: Elements: 5) Reliance

A
  • if affirmative misrep, must prove reliance

- if omission or public misrep, reliance presumed

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14
Q

10b-5: Elements: 6) Remedies

A
  • injunction
  • recission
  • constructive trust
  • out-of-pocket (e.g. difference between what he sold at and FMV at disclosure)

*Must show Causation

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15
Q

10b-5: Tipping

A

Defn: Insider gives tip of inside info to someone who trades on basis of inside info

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16
Q

10b-5: Tipping: Liability of Tipper

A

Tipper liable if:

  1. passed inside info in BREACH of fiduciary duty to corp; AND
  2. improper purpose (any benefit, even if merely reputation)

*Note: proper to meet with tax atty

17
Q

10b-5: Tipping: Liability of Tippee

A
  • Tipper breached a duty

- Knew or should have known info was wrongfully passed

18
Q

10b-5: Misappropriation Theory

A

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

19
Q

10b-5: Inadvertent Discovery

A

No duty

  • the disclosure had no wrongful purpose
  • no tipper; so can’t be a tippee
20
Q

16(b)

A

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

21
Q

16(b): Elements

A
  1. Jurisdiction
  2. Insider
  3. SWP
  4. Purchase or Sale of Equities
22
Q

16(b): Elements: 1) Jurisdiction

A

Publicly held corp

  • listed on national stock exchange; OR
  • 10 million in assets + 500 or more SHs
23
Q

16(b): Elements: 2) Insider

A
  • 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
24
Q

16(b): Elements: 3) SWP

A

purchase and sale within 6 months HIGHEST sales matched with LOWEST purchase

25
Q

16(b): Elements: 4) Purchase or Sale of Equities

A

Equities includes:

  • options
  • warrants
  • stock -preferred and common
  • mergers
26
Q

16(b): Recovery

A

limited to corp; but SH can sure derivatively

27
Q

16(b): Remedy

A

Match highest sale price against lowest purchase price for any 6-month period

28
Q

16(b): Defense

A

None

  • strict liability
  • no fraud required
29
Q

Underwriting

A
  • process by which a securities dealer takes stock from a corp issuer and arranges for its sale to public
  • subject to same strict regulations and anti-fraud prohibition as the issuer (10b-5)
  • full disclosure of compensation with the issuer is required

Corporations (6 decks)

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