Pg 53

Question 1

Do extraordinary transactions apply to 16B?

Answer 1

No, these are not considered to be a sale or purchase and these involve non-cash transactions like mergers, share exchanges, and exercising stock options. So if these things are involved, the subjective and pragmatic approach is used and the court asks if under the circumstances of this special transaction, the defendant might have had access to information when he traded. You don’t have to prove that insider information was used, just that it MIGHT have been used.

Question 2

If a director or an officer is delegated by the board of a corporation to serve on the board of another corporation, does the director or officer become an insider for that other corporation?

Answer 2

Yes, plus the first corporation itself becomes an insider.

Question 3

If a corporation bought a 15% stake in another corporation and they got to name someone to that other corporation’s board, so they name you, now what are the rules for you and the initial corporation?

Answer 3

– initial corporation: now considered an insider, so the six month rule applies. If the corporation breaks that, then the profits of the sale will be recovered by the second corporation.
– you: are also an insider so you are subject to those same rules

Question 4

What is the only exception to treating a corporation as an insider when they buy a large percentage of stake in another corporation?

Answer 4

If the board of the second corporation issuing the stock approves the transaction. So if the second corporation approved a sale by the first corporation of its stock in the second corporation, there is no presumption of unfairness.

Question 5

How are spouses of insiders and immediate family members treated with regard to 16B?

Answer 5

Spouses and immediate family members in the same household are treated as insiders for 16B. So the purchase of stock by one spouse and the sale of the same stock by another spouse within a six-month window is treated under 16B as having been done by the same person.

Question 6

How does 16B get enforced?

Answer 6

• the SEC files enforcement actions against insiders that don’t timely file the required disclosures, but in order to recover proceeds, there must be a private enforcement action.
  – corporations and individual shareholders can file private enforcement actions to recover the profits (individual shareholder: first must make a demand on the corporation to take action and if the corp doesn’t within 60 days, indiv can sue as long as he starts the action within two years of the bad transaction).

Question 7

Do transactions that are made by directors and officers before taking office fall under 16B?

Answer 7

No, but any that happened within six months after leaving office do

Question 8

What is the rule to determine profits under 16B?

Answer 8

Match the lowest purchase price with the highest sales price in the period. I.e.: Jan 5 - bought 100 shares for $25, Feb 5 - sold 100 shares for $75, March 5 - bought 100 shares for $60, April 5 - sold 100 shares for $50. Technically the profit is $1500 [lowest purchase price was $60 and highest sales price was $75, so that difference is $15 per share X 100 = $1500.

Easy way: list the price of purchases in one column and sales in another, then see what is the lowest and the highest.

Question 9

Is it possible under 16B to have to pay money for profit realized in the trade when you didn’t actually make money because you did a series of transactions?

Answer 9

Yes

Question 10

If an insider bought 400 shares in installments at different dates and then sold 50 within a six month period, under 16B what is he liable for?

Answer 10

Only the 50 because you’re only liable for things that you both purchased and sold in the six-month timeframe, so in this example there are no sales to match all of the purchases.

Question 11

Does strict liability apply to 16B?

Answer 11

Yes, because it doesn’t matter what motivated you to buy or sell or if it was just one day shy of the six month mark, at the purchase, you are strictly liable.

Question 12

What is a shareholder?

Answer 12

A corporation’s financial supporters that provide capital to the corporation through buying shares.

Question 13

How are shareholders different from bondholders and creditors?

Answer 13

The corporation is not required to repay anything to shareholders because shares are not a debt owed by the corporation, they are an ownership interest in the corporation.

Question 14

Who owns a corporation?

Answer 14

The shareholders together

Question 15

If a shareholder sells his stock, does he have any more rights or duties to the corporation?

Answer 15

No

Question 16

How do shareholders carry out their duties?

Answer 16

Collectively at annual shareholder meetings

Question 17

What are the duties of shareholders?

Answer 17

- amend the articles of incorporation
– authorize new classes of stock
– elect directors
– remove directors
– approve mergers, sales, splits, etc.

Question 18

What are the three classes of shareholder rights?

Answer 18

• ultimate control over the corporation
  – proprietary rights
  – remedial rights

Question 19

What does it mean that shareholders have the ultimate control over the corporation?

Answer 19

They have voting rights to elect and remove directors, to amend the articles of incorporation, the right to have the corporation managed honestly imprudently for the benefit of all shareholders, etc.

Question 20

What are shareholder proprietary rights?

Answer 20

The right to get dividends in proportion to your share of ownership, and the right to get assets when they are distributed, the right to equality and honesty of treatment by management, the right to be registered as a shareholder, as well as personal immunity from corporate debts and liabilities.

Question 21

What are the remedial rights of a shareholder?

Answer 21

These are the things that are available to a shareholder when something goes wrong with one of their rights, and they include:

• the right to information and inspection of corporate records
• the right to bring representative and derivative actions to assert the rights of the corporation
• common law equitable and statutory rights

Question 22

What are the duties of a director?

Answer 22

• duty of care: includes a general duty to be attentive to corporate business and the duty to be reasonably informed about matters coming before the board
  – duty of loyalty: includes not having any conflicts of interest and not taking corporate opportunities
  – business judgement rule

Question 23

Why do directors have the greatest locus of power?

Answer 23

Because most powers are exercised directly by directors or they can be.

Question 24

What are the rights of directors?

Answer 24

• collective rights together to vote for appointment and removal of officers
• timely notice of meetings
• voting rights to amend bylaws
• right of inspection