Rule 10b-5 Flashcards
Rule 10(b): Statutory Anti-Fraud Rule
It shall be unlawful for any person by the use of any means or instrumentality of interstate commerce or the mails, or any facility of any national securities exchange,, to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security, any manipulative or deceptive device in contravention of such rules and regulations as the Commission may prescribe necessary or appropriate (RULE 10B-5)
SEC Rule 10b-5
Unlawful for any person… by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person
in connection with the purchase or sale of any security
Examples of manipulation
(1) Wash sales: Manipulator enters a purchase order and a sale order at the same time through the same stockbroker- Ownership of the stock does not change but creates the appearance of activity in a security
(2) Matched Sales: Manipulator enters a purchase order with one stockbroker and a sale order, at the same time and at the same price, with a different broker
Elements to a 10b-5 claim
Jurisdictional nexus Transactional nexus Material misrepresentation or omission Reliance Causation Scienter
Jurisdictional Nexus
Someone using interstate commerce or mails
Transactional Nexus
Only purchasers or sellers have standing to sue
-Rule only applies to defendants who prohibited conduct in connection with the purchase or sale of any security
Material Misrepresentation or Omission
Plaintiff must show that a reasonable investor would consider the misstatement or omissions important. If a reasonable investor considers something important, that something will necessarily affect the price he or she will pay for the security
Reliance
It is a showing of the causal connection between a defendant’s misrepresentation and plaintiff’s injury
-Based on fraud on the market theory that market price of shares traded on well-developed markets reflects all publicly available information
What Plaintiff must show to show fraud on the market to trigger reliance
(1) alleged misrepresentation was publicly known; (2) and material; (3) the stock traded in a generally efficient market and (4) plaintiff traded the stock between the time the misrepresentation was made and when the truth was revealed.
Causation
Plaintiff must show that the misstatement caused the damage. We need a connection between the misrep/omission and the purchase/sale of the security.
Scienter
Plaintiff must show that the defendant acted with an intent to deceive, manipulate, or defraud. Reckless disregard of falsity of statement will satisfy this requirement too.
Options for Disgruntled SH
any minority shareholder dissatisfied with the terms of the offer can (1) reject the terms; (2) obtain an independent judicial appraisal of the value of her shares; (3) receive that value in cash instead of the consideration offered in the cash merger transaction.
(2) Injunction: : before the consummation of the deal, a dissenting shareholder can bring a lawsuit, seeking to have the transaction halted. Grounds include lack of authority [shareholder vote], lack of compliance with statutory requirements, fraud and/or abuse of power, violation of mandatory disclosure provisions under applicable federal securities laws
(3) Rescission: after the deal has been consummated, a dissenting shareholder can bring a lawsuit for rescission. The transaction must be voidable due to lack of authority, fraud or abuse of power. Or under §12, there is a one year put back to the seller for fraud in the sale of securities
Market out exception
no appraisal rights in a stock for stock merger if the corporation’s shares are traded on a public market before and after the merger; the disgruntled shareholders can cash out on their own, assuming the market price is a good approximation of “fair value”
Short Form Merger
Note: No SH approval is needed of either company.
(1) Parent corporation must own at least 90% of each class of stock of the subsidiary corporation
(2) BOD of parent corporation approves the merger
(3) Copy of articles of merger are filed with the secretary of state and mailed to each SH of the subsidiary corporation
(4) SHs must be given notice within 10 days of the effective date of the merger
(5) If you are a SH and you don’t like what is being done, you can vote no on merger and seek appraisal
