Insider Trading & Review Flashcards
- Josephine Lawyer was a partner in the law firm of Smith & Abayeh, LLP. Buyer, Inc., a corporation registered in Delaware and traded on the New York Stock Exchange, hired Lawyer to provide advice about its planned hostile tender offer for Target, Inc., which was also registered in Delaware and traded on the New York Stock Exchange. Lawyer believed that Buyer would be acquiring Target for a very low price and that Buyer’s stock would therefore skyrocket after the acquisition was announced. Lawyer bought 10,000 shares of Buyer stock before the public knew about Buyer’s tender offer. When the tender offer was later announced, Buyer’s stock rose by 10% immediately. Lawyer is most likely:
A. Guilty of insider trading under the classic insider theory.
B. Guilty of insider trading under the temporary insider theory.
C. Guilty of insider trading under the misappropriation theory.
D. Not guilty of insider trading.
B. Guilty of insider trading under the temporary insider theory.
*temporary insider not misappropriation
- The CEO of Issuer, Inc. (a company traded on the New York Stock Exchange) received a report from the COO that said that Issuer would miss its quarterly profit projections by a wide margin. This information, when released, would surely hurt Issuer’s stock price. CEO promptly sold 10,000 shares of Issuer stock he had purchased years earlier. CEO had bought these shares for $10/share, and he sold them for $100/share. A few days later, CEO released the bad news to the market. Issuer’s stock price immediately sank from $100/share to $50/share. Investor had bought 100,000 shares of Issuer’s stock at a price of $100/share between the time CEO knew the bad news and the time CEO released the bad news to the market. How much can Investor recover from CEO in a private right of action under Section 20A of the 1934 Act?
A. At most $500,000.
B. At most $900,000.
C. At most $5,000,000.
D. Investor cannot recover. There is no private right of action for insider trading.
A. At most $500,000.
§20A Private Action: Anyone who is trading when an insider is transacting can personally sue for their loss
The defendant’s total exposure is limited, though, to the amount of gain (or loss avoided). Cap on total amount of damages that can be collected from insider
Here, insider sold 10,000 shares @ $10/share and sold for $100/share
investor bought 100,000 shares @ $100/ share
After secret bad news $50/share
The loss the insider avoided is only getting $50/share
$50/share X 100,000/shares
loss avoided= $500,000
- Chief was the CEO of Victim, Inc. (“Victim”), a corporation registered in Delaware and traded on the NASDAQ. While CEO, Chief engaged in the following transactions in Victim’s stock:
Date Buy/Sell # Shares Price/Share
1/1/17 Sell 100 $100
3/1/17 Buy 50 $110
4/1/17 Sell 75 $120
5/1/17 Buy 100 $130
When Victim’s board discovered these transactions, the directors voted to sue Chief to recover damages under §16(b). How much may Victim recover from Chief?
A. $3,500
B. $3,750
C. $500
D. $750
C. $500
Computation of Recovery
The “profits” under 16(b) are calculated in a way to maximize them – lowest price purchased, highest price sold, within the 6-month period.
the number of shares both bought and sold were 50
so 50 X 10= $500
- Which of the following is NOT an appropriate 16(b) defendant for the described transactions in Issuer, Inc.’s stock:
A. The CEO of Issuer bought 3,000 shares in Issuer on March 1st for $10/share, resigned as CEO on April 1st, then sold 3,000 shares in Issuer on May 1st for $15/share.
B. A director of Issuer bought 3,000 shares in Issuer on March 1st for $10/share, resigned as director of Issuer on April 1st, then sold 3,000 shares in Issuer on May 1st for $15/share.
C. A director of Issuer sold 3,000 shares in Issuer on March 1st for $15/share, resigned as director of Issuer on April 1st, then bought 3,000 shares in Issuer on May 1st for $10/share.
D. Investor, who before these trades owned no stock in Issuer, bought 13% of Issuer’s outstanding shares on March 1st for $10/share, then sold 2% of Issuer’s outstanding shares on May 1st for $15/share.
D. Investor, who before these trades owned no stock in Issuer, bought 13% of Issuer’s outstanding shares on March 1st for $10/share, then sold 2% of Issuer’s outstanding shares on May 1st for $15/share.
16-b: To bring suit, a person must be an owner of a security of the issuer at the time the suit is instituted. It is not necessary to have owned the security at the time of the short-swing trades.
It is also not necessary to own the security during the entire pendency of the action, but the plaintiff must maintain some continuing financial interest in the outcome of the litigation (such as owning securities of the issuer’s parent company).
Gollust v. Mendell (USSC 1991)
- Corporation, a Delaware corporation, manufactures and sells high-end cellular telephones. Corporation comes out with new versions of its telephones about once a year. When a new version comes out, customers frequently have to wait for several weeks before they can have one delivered. Some of Corporation’s employees have been sending out new phones to “special” customers, allowing them to bypass the waiting list, in exchange for bribes. This practice has become sufficiently wide-spread that it has doubled the waiting time for those customers who are not “special.” As a result, many customers have given up on Corporation’s phones and settled for its competitors’ (slightly inferior but quickly available) products. Corporation’s market share has sunk dramatically. A group of shareholders is now suing Corporation’s board of directors for failing to detect and stop employees’ practice of taking bribes in exchange for quicker deliveries of new products. The directors’ BEST defense to this legal claim is:
A. They were reasonably informed and therefore protected by the business judgment rule.
B. They themselves did not take bribes and so they are not interested in the questionable transactions.
C. The directors did not take an opportunity that belonged to the corporation.
D. Three years ago, they started requiring their employees to fill out a form every year answering the question, “Have you accepted any bribes this year in exchange for faster delivery of our new products?”
D. Three years ago, they started requiring their employees to fill out a form every year answering the question, “Have you accepted any bribes this year in exchange for faster delivery of our new products?”
- The CEO of Corporation, Inc., a Delaware corporation, is interested in buying some land Corporation owns. The CEO plans to develop the land into a hotel. The CEO submitted the transaction to Corporation’s board for its approval, fully disclosing her own conflict of interest. Which of the following members of Corporation’s board of directors is LEAST likely to have a conflict of interest that would prevent his or her vote from counting in approving this transaction?
A. Partner, who plans to provide 40% of the money necessary to buy and develop the land, in exchange for a 30% interest in the hotel.
B. Friend, CEO’s best friend since childhood, who has no financial ties to CEO or the proposed hotel and who was appointed to the board at CEO’s urging.
C. Brother, CEO’s younger brother, with whom CEO has never gotten along very well.
D. COO, the COO of Corporation who was hired by CEO and whose contract permits CEO to fire her at will.
C. Brother, CEO’s younger brother, with whom CEO has never gotten along very well.
- The directors of Corporation, Inc., a Delaware corporation, voted to pay themselves restricted stock units worth $1 million for one year’s work. None of the directors are employees of Corporation. The directors then submitted this plan to the shareholders for approval, fully disclosing the amount and value of the payments. There is no controlling shareholder, and none of the directors own more than a few thousand shares of stock (much less than 1%). A majority of the shareholders voted to approve the directors’ compensation. Subsequently, a disgruntled shareholder launched a derivative claim, arguing that the directors’ pay was excessive. This suit is most likely to:
A. Succeed, because the entire fairness test applies to nonemployee directors’ decisions to pay themselves.
B. Succeed, if the plaintiff can show that there are insufficient conditions attached to the directors’ pay to ensure that Corporation will receive the intended benefit from the directors’ work.
C. Succeed, because shareholder approval of a general compensation plan will not change the standard of review.
D. Fail, because $1 million is a fair price and the directors engaged in fair dealing by asking for shareholder approval.
B. Succeed, if the plaintiff can show that there are insufficient conditions attached to the directors’ pay to ensure that Corporation will receive the intended benefit from the directors’ work.
- Cars, Inc. (“Cars”) is an automobile manufacturer registered in Delaware and publicly traded on NASDAQ. Cars’ board has eleven seats, including the company’s CEO and ten outside, independent directors. There is no controlling shareholder. Cars’ CEO hired his best friend from childhood as the company’s COO. The new COO had previously worked for a large but privately held software company. The CEO fully disclosed his friendship with the COO to the board, and the board approved the COO’s hiring and his compensation package. The COO’s compensation package provided that he would receive $4 million per year in cash and stock options each year of his five-year contract, but that if he were fired without “good cause,” he would receive the entire sum immediately, plus a $5 million “termination fee.” “Good cause” was defined as “conduct that puts the company in an ill light and that results in a criminal conviction with a jail term of not less than one year.” The COO was a disaster and was fired within six months of starting work. The board paid him for five years work and also paid him the $5 million termination fee. Cars has a 102(b)(7) provision that exempts directors from personal liability to the fullest extent permitted by Delaware law. Shareholders brought a derivative action against the board members for approving the COO’s compensation package. This suit is most likely to:
A. Fail, even if the directors were grossly negligent.
B. Fail, even if the directors purposefully harmed the company.
C. Succeed, because the directors breached their duty of care.
D. Succeed, because the directors breached their duty of good faith, a subset of the duty of loyalty.
A. Fail, even if the directors were grossly negligent.
grossly negligent is never enough…
C. is wrong because it implies the company failed the BJR which is very difficult… so suspicious
because of the 102(b)7 provision= NO duty of CARE liability
D is wrong bc no subjective bad faith.
- Shareholder, a small shareholder of a large, publicly traded Delaware corporation, has a strong derivative claim against the corporation’s directors for breach of their fiduciary duty of loyalty. Which of the following factors is MOST likely to prove effective in Shareholder’s claim for demand futility under Aronson?
A. The directors are all named defendants in the lawsuit.
B. The directors all approved the transaction being challenged.
C. The transaction being challenged would likely flunk the business judgment rule.
D. The directors were all appointed by the company’s majority shareholder, who is the primary defendant in the lawsuit.
C. The transaction being challenged would likely flunk the business judgment rule.
- Mary and Josephine are two of the five shareholders of a corporation registered in Delaware that has not elected to be treated as a closely-held corporation. They would like to enter into a binding arrangement to vote their shares together. As their lawyer, which of the following mechanisms should you advise them to AVOID if they want their arrangement to be legally binding?
A. An irrevocable proxy.
B. A shareholder pooling agreement.
C. A revocable proxy.
D. A voting trust.
C. A revocable proxy.
revocable proxy is not binding because it is revocable…
proxy relationship is an agency relationship
proxy’s are freely revocable unless, promising not to revoke to someone with interest in it…?
- Attorney represented a minority shareholder in a closely held corporation who had a strong claim against the majority shareholders for breach of their duty of loyalty to the corporation. Although the law would normally require the minority shareholder to bring this claim derivatively, Attorney wanted to persuade the court to permit her to bring the claim directly. Which of the following is the WEAKEST argument for permitting this claim to be bought directly?
A. Close corporations are more like partnerships, so their entity status deserves less deference than that of publicly traded corporations.
B. Any recovery in a derivative suit would go to the corporation, which is controlled by the majority shareholders (the wrongdoers).
C. The only parties with interests at stake are the two groups of shareholders.
D. In a close corporation, there are few shareholders so the risk of a multiplicity of suits based on the same grievance is much lower.
A. Close corporations are more like partnerships, so their entity status deserves less deference than that of publicly traded corporations.
-this is the worst answer because, in closely held corporations we treaty their entity status the same….
option B is always true…
C is a good argument
D is also true…
- Tennis, Inc. (“Tennis”) was a closely-held corporation registered in Massachusetts that manufactured and sold tennis equipment. Tennis had 300 shares outstanding that were owned in equal parts by three sisters: Anne, Bethany, and Clarice. The three shareholders entered into a share repurchase agreement that required the estate of any shareholder who died to sell the shareholder’s tennis shares to the corporation for $1/share. The agreement also provided that the three sisters would meet annually to adjust the price based on the corporation’s performance. They met in each of the first two years and doubled the repurchase price each time because the company was growing nicely. They did not meet the third year. Two months into the fourth year, Anne died tragically in a freak accident, leaving behind as her sole heir her four-year-old daughter, Denice. The trustee of Anne’s estate demanded more money for her Tennis shares, arguing that they were actually worth $10/share, far in excess of the $4/share sale price in the repurchase agreement. How should the court rule?
A. For Denice, because the majority shareholders owe a fiduciary duty to the minority.
B. For Denice, because Bethany and Clarice breached the repurchase agreement by failing to meet during the third year.
C. For Bethany and Clarice, because repurchase agreements are enforceable even when the agreed upon price is patently unfair.
D. For Bethany and Clarice, because Anne had not contributed as much as they had to the company’s success.
C. For Bethany and Clarice, because repurchase agreements are enforceable even when the agreed upon price is patently unfair.
The validity of a share repurchase agreement does not turn on any “abstract notion of intrinsic fairness of price.” These agreements are frequently enforced even when the contract price is dramatically lower than fair market value.
- Clients approached Attorney and asked Attorney to explain the major features of limited liability companies that are registered in Delaware. Attorney made the following four statements. Which of the statements Attorney made is FALSE?
A. Limited liability companies can be taxed like partnerships.
B. Delaware law governs the vast majority of limited liability companies in the United States.
C. Limited liability companies offer liability protection at least as good as that available to shareholders in corporations.
D. Limited liability companies may be managed by their owners or by professional managers.
B. Delaware law governs the vast majority of limited liability companies in the United States.
Limited Liability Companies:
- business organization nirvana (best option)
- eligible for flow-through taxation (as long as NOT publicly traded)
- flexible organization (like partnership)
- limited liability for owners (possibly better than for shareholders in a corporation)
- member-managed or manger-managed
- Entrepreneur decided to form a corporation that would operate a retail store. Entrepreneur quickly found an ideal location for the store. Rather than risk losing this location to a competitor, Entrepreneur entered into a contract with Owner, who owned the location, to buy the land. Entrepreneur explained to Owner that the corporation did not yet exist. The purchase agreement therefore stated, “Incorporation Clause: It is the intention of Entrepreneur to incorporate. On condition that Entrepreneur has incorporated before the Closing Date, this purchase agreement shall be construed to have been made between the new corporation and Owner.” Entrepreneur and Owner signed this contract in their personal capacities. Entrepreneur properly filed the certificate of incorporation to form Store, Inc. a week later, several weeks before the closing date, and also paid all necessary incorporation fees. One week before closing, Entrepreneur decided that brick-and-mortar retail was dead, abandoned the idea of opening a store and refused to close on the transaction. Owner sued Entrepreneur personally for breach of contract. Which of the following is LEAST likely to be a legally permissible interpretation of the Incorporation Clause?
A. Promoter was binding himself to the contract, but once the corporation was formed, the corporation was to be bound and Promoter was to be released from liability.
B. Promoter was negotiating an option that the corporation could either accept or reject once it came into existence.
C. The corporation was bound, not Promoter.
D. Promoter was binding himself to the contract but hoped that once the corporation was formed, it would indemnify him against any liability.
C. The corporation was bound, not Promoter.
Standard Rule: When a promoter (founders) enters into a contract on behalf of a corporation that does not yet exist, the promoter is personally liable on the contract.
- Which of the following statements about appraisal rights in Delaware is FALSE?
A. They are considered compensation to shareholders for losing the right they once had to veto a merger regardless of the size of their ownership stake.
B. Dissenting shareholders may receive less money than they would have received in the merger.
C. Shareholders of publicly traded companies will be deprived of their appraisal rights when the consideration they receive for their shares is publicly traded stock.
D. Shareholders have appraisal rights every time they have the right to vote on a merger.
D. Shareholders have appraisal rights every time they have the right to vote on a merger.
- When the merger consideration is cash, the transaction qualifies as a small scale merger
- NO VOTING RIGHTS
