Social,Ethical & Legal Discussion & Reflection – Week 14

 Need an at least 450+ words with no plagiarism and also attaching PowerPoints for your reference    

Reflect on the assigned readings for the week. Identify what you thought was the most important concept(s), method(s), term(s), and/or any other thing that you felt was worthy of your understanding.

Also, provide a graduate-level response to each of the following questions:

1. Summarize the required elements for the various business entities described in Chapter 17, providing examples of each and specifically describing the similarities and differences in each.

2. What factors would be considered when a director of a company makes a large trade of the company’s stock?

[It should be at least 450+ words and in APA format (including Times New Roman with font size 12 and double spaced). Post the actual body of your paper in the discussion thread then attach a Word version of the paper for APA review]

Chapter 17
Governance and Structure: Forms of Doing Business

Its Legal, Ethical, and
Global Environment

Marianne M. Jennings

Business
11th Ed.

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17-1
Comparison of Business Organizations
Form Formation Funding Management
Sole proprietorship

Partnership

Limited partnership

Corporation

S corporation or Subchapter S
Limited liability company (LLC)

Limited liability partnership No formal requirements

Articles of partnership

Filing of articles of partnership

Formal filing of articles of incorporation
Same as above (special IRS filings)
Formal filing – articles of organization

Filing of articles of limited liability partnership Individual provides funds
Capital contributions of partners
Capital contributions of general and limited partners
Debt (bonds)/equity (shareholders)
Same as above

Capital contributions of members

Capital contributions of partners Individual

All partners or delegated to one

General partner

Board of directors, officers and/or executive committee
Same as above

No centralized management; all members manage or delegate to one member
All partners or delegated to one

Click to edit Master text styles
Second level
Third level
Fourth level
Fifth level

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Form Transfer Control Taxes
Sole proprietorship

Partnership

Limited partnership
Corporation

S corporation or Subchapter S
Limited liability company (LLC)
Limited liability partnership No transfer

Transfer interest but not partner status

Same as partnership (except RULPA)
Shares (with reasonable restrictions) are easily transferred

Restrictions on transfer to comply with S corporation
No transfer without consent of the majority

No admission without consent of majority Individual pays on individual return
Partner takes profits and losses on individual return (flow-through)

Same as partnership
Corporation pays taxes; shareholders pay taxes on dividends
Shareholders pay taxes on profits; take losses
Flow-through treatment

Flow-through treatment

17-2
Comparison of Business Organizations

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Form Termination Liability
Sole proprietorship
Partnership

Limited partnership

Corporation

S corporation or
Subchapter S
Limited liability company (LLC)
Limited liability partnership Death; voluntary
Dissolution upon death; withdrawal of partner
Same as partnership

Dissolved only if limited in duration or shareholders vote to dissolve

Same as above

Dissolved upon death; bankruptcy

Dissolved upon death, bankruptcy Individual
Partners are personally liable

General partner is personally liable; limited partners liable to extent of contribution
No shareholder personal liability unless
Watered or
Corporate veil
Same as above

Limited liability – only liable to extent of capital contribution
Varies by state, but liability for acts of partners is limited in some way

17-3
Comparison of Business Organizations

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17-4
Sole Proprietorships
Formation
Done by an individual
May have a fictitious name
Example: Ralph Jones d/b/a Spuds Brewery
No formal requirements for formation
May have to publish d/b/a name

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17-5
Sole Proprietorships
Sources of Funding
Loans
Government help
Liability: Full Personal Liability of Owner
Tax Consequences
Owner claims all income and losses
No separate filing requirement
Management and Control
All assets with one person

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17-6
Transferability of Interest
Business can be sold − property, inventory, and goodwill
Owner will usually sign a non-compete agreement
Sole Proprietorships

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17-7
Governed by the Uniform Partnership Act (UPA)
Adopted in 49 states
In absence of a partnership agreement, UPA controls
Revised Uniform Partnership Act (1994)
Adopted in nine states
Partnerships

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17-8
Partnerships
Definition
An association of two or more persons to carry on as co-owners, a business for profit
Can include corporations and natural persons
Formation
Voluntary formation: By agreement
Draw up articles of partnership
Involuntary formation

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17-9
Information in Articles of Partnership
Minimum Requirements
Names of the partners
Name of the partnership
Nature of the partnership’s business
The time frame of operation
Amount of each partner’s capital contribution
Managerial powers of partners
Rights and duties of partners
Accounting procedures for partnership books and records
Methods for sharing profits and losses
Salaries (if any) of the partners
Causes and methods of dissolution
Distribution of property if the partnership is terminated
Suggested Provisions
Disability issues
Insurance coverage
Sale of interest
Divorce of one of the partners
Indemnity agreements
Noncompetition agreements
Leaves of absence

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17-10
Partnership Formation
Involuntary Formation: By Implication
Sharing of profits
Constitutes prima facie evidence that a partnership exists
Exceptions − rent, wages, annuity to widow or estate, payment for goodwill

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17-11
Partnership Formation
Case 17.1 Blumberg v. Ambrose (2015)
Was there a partnership created?
What were the signals between the two about their relationship?
What documentation existed?

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17-12
Partnership Formation
Involuntary Formation: Partnership by Estoppel (or Ostensible Partner)
Results when someone allows the inference to be made that he/she is a partner
Allowing name to be used to get a loan

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17-13
Partnership Funding
Sources of Funding
Capital contributions of partners
Loans by partners
Outside loans

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17-14
Partnership Liability
Mutual Principals and Agents
Partnership assets reachable by partnership creditors
Personal assets reachable by partnership creditors when partnership assets are exhausted
Case 17.2 Vrabel v. Acri (1952)
Why wasn’t Mr. Acri a defendant?
Is Ms. Acri liable for the injuries?

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17-15
Partnership
Tax Issues
Partnership does not pay taxes
Partnership files informational return
Partners report income and losses on their returns

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17-16
Partnership Control
Unless otherwise agreed, each has equal management authority
May delegate day-to-day authority to one partner
Each partner is mutual principal and agent of the others
Partnership Management

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17-17
Partnership Management
Borrowing − Done Routinely in Most Partnerships
Unanimous Consent Required for Confession of Judgment, Selling Goodwill, and Admission of Another Partner
No Compensation for Work Unless Agreed

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17-18
Fiduciary Duties
Mutual principals and agents
Each is to act in the best interests of the partnership
Partnership Property
Property contributed to the firm or purchased with partnership assets
Own property as tenants in partnership
Partnership Management

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17-19
Partnership Management
Transfers of Partners’ Interest
Partner’s interest is personal property
Can be pledged to creditors and transferred
Transferee does not become a partner

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17-20
Transfers of Partners’ Interest
Admission of new partner requires unanimous consent
Transferring partner is not relieved of liability
Some partnership agreements require partners to offer it first to remaining partners
Partnership Management

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17-21
Partnership Dissolution
One Partner No Longer Associated With the Partnership
Examples: Retirement, death
Can Just Be a Change in Structure or Can Proceed to Termination

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17-22
Dissolution Methods
By agreement
By operation of law: death of a partner, bankruptcy of partnership or partner
Court order
Termination
Assets are liquidated
Distribute in this order: outside creditors; partners’ advances (loans); capital contributions; profits
Partnership Dissolution

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17-23
Governed by Uniform Limited Partnership Act (ULPA)
Revised Uniform Limited Partnership Act (RULPA)
Recent revision adopted in nearly all states
Use ULPA or RULPA when no agreement
RULPA addresses the needs of the larger limited partnership
Limited Partnerships

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17-24
Structure
Must have at least one general partner
Must have at least one limited partner
Liability of limited partner is limited to capital contribution
Liability of general partner is unlimited
Formation
Must meet statutory requirements; if not met a general partnership may be created
L.P.’s: Formation

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17-25
Must File Certificate of Limited Partnership
RULPA is Much Briefer and Adopted in Nearly All States
Corrections Can Be Filed By Limited Partners
L.P.’s: Formation

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17-26
L.P.’s: Formation
Formation – the RULPA Requires the Following Information for Formation of a Limited Partnership
Name − must contain the words “Limited Partnership”
Address of principal place of business
Name and address of statutory agent for services process
Business address of general partner
Latest date for dissolution of partnership

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17-27
Sources of Funding
Limited partners provide most of the financing
Limited partners can contribute services under RULPA
Loans are used − called advances when made by partners
Under RULPA, limited partners can use services already given as a contribution
L.P.’s: Funding

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17-28
Limited Partners Have Limited Liability, But Cannot Participate in Management
Under RULPA, Can Do the Following and Still Retain Limited Liability Status
Can be an employee
Can consult with and advise the general partner
Can act as a surety guarantor for the limited partnership
Can vote on amendments, dissolution, sale of property, and debt assumptions
L.P.’s: Liability

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17-29
Taxed the Same as General Partnerships
Partners Report Profits and Losses on Individual Returns
Limited Partners Get Direct Tax Benefits With Limited Liability
IRS Scrutinizes to be Certain it is a Partnership and Not a Corporation
L.P.’s: Tax Issues

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17-30
Partner Relationships: Management is Responsibility of General Partner
Profits and Distributions
Authority belongs to general partner to make decisions here
Profits and losses are allocated on the basis of capital contributions
RULPA requires agreement for splitting profits and losses to be in writing
L.P.’s: Profits

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17-31
Partner Authority
General partner has same authority as in general partnership
Can restrict by agreement
Consent of limited partners required for
Admitting a new general partner
Admitting a new limited partner (can give authority in the agreement)
Extraordinary transactions (selling assets)
Limited partners have right to inspect books and records
L.P.’s: Partner Authority

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17-32
Transfer of Interests Are Permitted
May have significant restrictions on transfer to prevent liability under federal securities laws
The more easily an interest can be transferred, the more likely the IRS is to label it a corporation
Transfer of a limited partner’s interest does not dissolve the partnership
Under RULPA, Assigning Limited Partner Can Be Given the Authority to Make the Assignee a Limited Partner
L.P.’s: Transferability

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17-33
RULPA Provides for the Following Means
Expiration of time period in agreement or event as provided in agreement
Unanimous written consent of all partners
By court order
Withdrawal of general partner
L.P.’s: Dissolution

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17-34
If Termination is Elected, Assets are Distributed as Follows
Outside creditors
Partners’ distributions
Return of capital contributions
Remainder split according to agreement
L.P.’s: Dissolution

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17-35
Characteristics of a Corporation
Unlimited duration
Free transferability of interest
Limited liability
Centralized management
Legal existence
Can hold legal title to property
Can sue and be sued
Corporations

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17-36
For Profit
Not For Profit
Domestic − in the State of Incorporation
Foreign − Everywhere Else
Government Corporations − Like FNMA
Professional Corporations − Limited Liability on Everything Except Professional Malpractice
Types of Corporations

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17-37
Close or Closely Held Corporations: Limited Number of Shareholders, Subject to Less Formality
Subchapter S or S Corporation
IRS election to be treated as partnership for tax purposes
Still have limited liability
Limits on size for this election
Types of Corporations

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17-38
Types of Corporations
The Law of Corporations: Model Business Corporation Act (MBCA)
Liberal statute
One-third of the states have adopted
Revised in 1984

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17-39
Must Comply With Statutory Requirements
Where to Incorporate
Status of state’s corporation laws
State tax laws
Ability to attract employees
Incentives
Corporate Formation

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17-40
File Articles of Incorporation
Name
Names and addresses of all incorporators
Capital structure of the corporation
Types of stock
Corporate Formation

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17-41
Corporate Formation
File Articles of Incorporation
Classes of stock
Rights of shareholders
Voting rights
Statutory agent

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17-42
Incorporators
Idea people − also called promoters
Will be personally liable for contracts entered into before incorporation
Corporation can ratify contracts − promoter is secondarily liable
Corporation can enter into a novation with the third party − promoter or incorporator is released from liability
Corporate Formation

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17-43
Corporate Formation
Must Hold Initial Meeting After Incorporation
Elect new directors
Adopt bylaws (day-to-day procedures)
Issue stock
Ratify pre-incorporation contracts

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17-44
Capital and Sources of Corporate Funds
Debt Financing − The Bond Market
Short-term financing − loans from banks
Bond market
Benefits of debt financing
Interest is tax deductible
Debt holders get paid first
Limitation: too much debt renders corporation financially unstable
Corporate Capital

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17-45
Corporate Capital
Equity Financing − Shareholder
Common stock: has voting rights, receives dividends when paid
Preferred stock: receiver preference over common stock can be cumulative or noncumulative

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17-46
Liability Issues
Must make full payment for shares − if not, there is liability (water stock); not paying par value
Shareholders’ liability generally limited to amount of investment
If corporate veil is pierced, there is shareholder liability; means corporate immunity from liability is set aside
Corporate Liability

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17-47
Reason for Piercing the Veil
Inadequate capitalization − must put in enough money to meet the risks of doing business
Alter ego theory − separate nature of corporation is disregarded
No formalities − personal and corporate properties are mixed together
Ignoring corporate formalities − personal elections, meetings
Forming to perpetrate a fraud on creditors
Corporate Liability

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17-48
Piercing the Veil
Case 17.3 U.S. v. Bestfoods, Inc. (1998)
Is there a special CERCLA rule for piercing the corporate veil?
What must be shown to hold a parent liable for the action of a subsidiary?

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17-49
Corporation Pays Tax
Shareholders pay tax on dividend income
Subchapter S or S Corporation
Corporate liability protection with partnership tax status
Corporate Tax Issues

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17-50
Corporate Directors
Election of Directors
Elected by shareholders to make corporate policy
May operate by committee
Hire officers of corporation and set officers’ salaries
Director Liability
Protected by the Business Judgment Rule
Directors and Officers must act in good faith and with prudence to avoid personal liability
Can consult experts, but must study issues

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50

Control By Board of Officer Pay
Dodd-Frank Requirements on Independence of Compensation Committee and Pay Votes
Shareholder “say on pay” vote every three years
Independent compensation committee
Claw-back provisions in compensation for executives if there is fraud or other illegality
17-51

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17-52
Case 17.4 Brehm v. Eisner (2000)
Who made the decision to terminate Ovitz?
Was hiring Ovitz just a HUGE mistake?
Why is there no liability on the part of the directors?
Director Liability

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17-53
Corporate Liability
Officer Liability
Increasing personal liability
Increasing prosecutions
Particularly when environmental laws are violated

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17-54
Sarbanes-Oxley Act
Liability for Officers and Directors
Prohibitions on loans to officers
Code of ethics for financing reporting
Lawyer’s new duties to company and officers
Board Membership – majority must be independent

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17-55
Sarbanes-Oxley,
Dodd-Frank, and Boards
Majority of Independent Directors
Only Independent Directors on Audit and Compensation Committees
No Loans to Officers
Codes of Ethics for Financial Reporting
Legal Counsel’s Role
Must investigate issues raised
Must notify CEO of investigation
Must report material violations to CEO
Must go to independent directors if problem is not resolved

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17-56
Voting Shareholders
Elect the board
The Proxy
Vote on critical corporate issues
Pooling agreement
Voting trust
Shareholder Rights

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56

17-57
Shareholder Rights
Shareholders Have Right to Vote on Mergers, Consolidations, and Sale of All Assets, Not on Acquisition
Procedure
Board of Directors adopts resolution in favor of combination or sale
Resolution with notice of meeting sent to all shareholders
Shareholders vote on resolution at meeting

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
57

17-58
Shareholder Rights
Dissenting Shareholders
Shareholders not voting in favor of the combination can force corporation to purchase their shares for cash – called appraisal rights
Corporation May Use Freeze-Out to Defeat Dissenters’ Rights

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
58

17-59
Shareholders Have Access to Books and Records
Under revised MBCA, no ownership requirements
Must have proper purpose
Generally Shares in a Corporation are Freely Transferable; However Sometimes Transfers are Restricted
Shareholder Rights

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
59

17-60
Shareholder Rights
Transfer Restrictions
Must be noted or referenced on stock certificates
Must serve a necessary purpose
Must be reasonable

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
17-61
Voluntary
Board resolution
Shareholder approval
Involuntary
Forced by court or state agency
Example: Fraud
Corporate Dissolution

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61

17-62
Limited Liability Companies
History: In Existence Internationally for Some Time
GMBH − Europe
Limitada − South America
LLC − U.S.
Nature
Aggregate organization
Liability shield
Income flows through

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62

17-63
Articles of Organization
Filed Centrally
Name Must Disclose Status – L.L.C. or LLC
LLC: Formation

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63

17-64
Funding: Members Contribute Capital
Liability
Members stand to lose capital contributions, but their personal assets are not subject to attachment
Case 17.5 Martin v. Freeman (2012)
What were the assets?
Is there personal liability?
Limited Liability Companies

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64

Limited Liability Companies
Tax Consequence
Income passes through to members
LLC does not pay taxes
17-65

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17-66
Management and Control
Operating Agreement − specifies voting rights
One member or an outside consultant can have operating authority delegated to him or her
Transferability of Interest
Interest can be transferred
Transferee does not become a member unless majority of remaining members approve
Limited Liability Companies

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66

17-67
Dissolution and Termination
Generally withdrawal, death or expulsion of members will dissolve company
Some states permit judicial dissolution
All states permit voluntary dissolution
Limited Liability Companies

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67

17-68
Formation: Must File To Create
Funding: Capital Contribution From Partners
Liability: Limited Liability For All
Tax Consequences: Tax Reporting Entity Not Tax Paying
Limited Liability Partnership

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68

17-69
Limited Liability Partnership
Management and Control
Partners can participate in management without personal liability for partnership debts
Transferability
Transfer must be restricted
Dissolution and Termination
Similar to Limited Partnership

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69

17-70
Joint Ventures Increasing
Joint ventures with countries themselves
Business structure varies
Example: Germany and differing board structures
International Issues

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70

Chapter 18
Governance and Regulation: Securities Law

Its Legal, Ethical, and
Global Environment

Marianne M. Jennings

Business
11th Ed.

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

0

18-1
Initially Regulated at the State Level
1929 Stock Market Crash Precipitated Federal Regulation
History of Securities Law

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1

18-2
Primary Offerings
A primary offering, or an initial public offering (IPO), is a sale of securities by the business itself
What is a Security?
Investment in a common enterprise with profits to come from the efforts of another (SEC v. Howey)
Includes stocks, bonds, warrants, debentures, voting-trust certificates, oil wells, and so forth
Pension plans are not covered
1933 Securities Act

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2

18-3
Securities and Exchange Commission
Administrative agency responsible for regulating the sale of securities under both the 1933 and 1934 Acts
1933 Securities Act

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3

18-4
Exempt Securities
Securities issued by federal, state, county, or municipal governments
Commercial paper (less than nine months)
Banks, savings and loans, religious and charitable organization securities
Insurance Policies
Annuities
Common Carriers (ICC Regulates)
Stock Dividends and Splits
1933 Act: Exempt Transactions

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4

18-5
1933 Securities Act Transaction Exemptions

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18-6
Intrastate Offerings − Rule 147
Issuer must be domestic business in state where offering is made
Offerees must all be residents of the state
Triple 80 requirements
Transfer restrictions apply
1933 Act: Exempt Transactions

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6

18-7
Reg A Offering
Shortcut method of registration
Tier 1 Reg A – up to $20,000,000 total offering
Tier 2 Reg A – up to $50,000,000 total offering
No “bad actors” qualify for Reg A offerings
No transfer restrictions
1933 Act: Exempt Transactions

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7

1933 Act: Exempt Transactions
Reg A Offerings
General advertising is permitted
“Test the waters” provisions to determine whether there is a market for the securities
Some aggregation benefits if “qualified investors” buy the shares
18-8

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18-9
Reg D Offerings to “Accredited Investors”
Bank
Private business development firm
Director, officer of issuer
Natural persons with net worth >$1million
Trusts with assets in excess of $5,000,000
Natural persons with annual income of $200,000-300,000 /year
Net worth in excess of $1,000,0000
Dodd-Frank continues to make changes
1933 Act: Exempt Transactions

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9

1933 Act: Exempt Transactions
Reg D JOBS Changes
General ads permitted
No changes on transfer restrictions
Internet pooling funding if pools are registered
18-10

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18-11
Reg D Offerings
504 : $1million or less during 12 months (up to $2,000,0000 under JOBS with blue- sky registration)
505: up to $5 million with less than 35 unaccredited investors (up to $7.5 million under JOBS with blue-sky)
506: no dollar cap, no limit on accredited investors, unaccredited less than 35
1933 Act: Exempt Transactions

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11

1933 Act Exemptions
Crowd Funding Under JOBS
Up to $1,000,000 in 12 Months
Funding Portal Regulations
Investor Limitations (up to greater of 5% of annual income or $100,000)
Some Financial Information Required
18-12

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18-13
1933 Act: Exempt Transactions

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18-14
What Must Be Filed − Documents and Information for Registration
Materials include
Description of securities
Audited financial statement
List of assets
Nature of business
List of management and their shares
1933 Securities Act

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14

18-15
What Must Be Filed − Documents and Information for Registration
Before registration statement is effective
Can run tombstone ad
Can issue red herring (sample prospectus)
Cannot make offers to sell
1933 Securities Act

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15

18-16
Violations of 1933 Act
Section 11 Violations
Civil liability for inaccurate information in registration statement
What is required for a violation?
Failure to make full disclosure
Registration statement contains a material misstatement or omission
1933 Securities Act

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16

18-17
Violations of 1933 Act
Who is liable for a violation?
Officers
Directors
Anyone who signed registration statement
Experts (lawyers, accountants, appraisers, geologists)
1933 Securities Act

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17

18-18
Violations of 1933 Act
Defenses for Section 11 violations
Immaterial misstatement
Investor knew of misstatement and bought anyway
Due diligence − acted with prudence and had no reason to believe there was a problem − not available to issuer
1933 Securities Act

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18

18-19
Case 18.1 Escott v. BarChris Construction Corp. (1968)
Did BarChris disclose all its debts?
Were all of the misstatements or omissions material?
Who was held liable?
Due Diligence

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19

18-20
Penalties
$10,000 and/or five years
Injunctions to stop sales
Civil suits
Securities Litigation Reform Act of 1995
Limits attorneys’ fees
Addresses “professional plaintiff”
Allows “safe harbor” protection for financial predictions
Violations of 1933 Act

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20

18-21
Section 12 Violations
Selling without registration (unless exempt)
Selling before the effective date
False information in the prospectus − same penalties as Section 11
Violations of 1933 Act

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21

18-22
1933 Securities Act
Due Diligence and Sarbanes-Oxley
Registration with Public Company Accounting Oversight Board
Auditor Independence
Eliminates conflict of interest
Prohibits e.g., bookkeeping, actuarial services, internal audits, legal audits

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18-23
PCAOB
Consists of Five Presidential Appointees
Nonprofit Organization
No More Than Two Members Who are CPAs
Will Develop Registration System for Public Accounting Firms
Establish Rules to Ensure Quality, Ethics and Auditor Independence
Will Inspect Firms to Determine Compliance With Sarbanes-Oxley
Will Investigation Violations and Impose Discipline
Will Encourage High Standard in the Accounting Profession
Dodd-Frank Expands PCAOB’s Authority to Regulating Analysts

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18-24
SOX Auditor Conflicts
Bookkeeping
Information Systems
Appraisals
Actuarial Services
Management or Human Resources Services
Broker, Dealer Services
Legal Services
Expert Services
Other as PCAOB Dictates

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SOX and Internal Controls
Separate Certification of Internal Controls By Someone Other Than Auditor for Financial Reports
CEO and CFO Certification of Financial Reports
18-25

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SOX and Analysts
Addresses Intrafirm Conflicts of Interests – Research and Selling Arms of Investment Banks
No Retaliation for Unfavorable Reports
Compensation and Supervision of Analysts
18-26

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18-27
Regulates Secondary Market
The 1934 Act regulates securities and their issuers once they are on the market
Securities Registration
All traded securities on exchanges must be registered
All securities of firms with over $10 million in assets and 500 or more shareholders must be registered
1934 Securities Act

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27

18-28
Periodic Filing
Same firms − national stock exchange and/or 500 or more shareholders and $10 million or more in assets
10-Q − quarterly financial report
10-K − annual report
8-K − unusual events, spin-offs
1934 Securities Act

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28

18-29
The Anti-Fraud Provision 10(b)
Fraud or misrepresentation in the sale of securities
Applies to all firms (only requires interstate commerce)
1934 Securities Act

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29

18-30
The Anti-Fraud Provision 10(b)
Failure to give information or giving overly pessimistic information results in violation
Examples: Failure to disclose pending merger − Texas Gulf Sulphur’s failure to disclose a rich mineral strike
1934 Securities Act

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30

18-31
The Anti-Fraud Provision 10(b)
What should be disclosed?
Pending takeovers
Drops in quarterly earnings
Pending large dividend
Possible lawsuits
When to disclose?
Once information becomes public knowledge, insiders and tippees are free to buy and sell the affected shares
1934 Securities Act

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31

18-32
Case 18.2 Siracusano v. Matrixx Initiatives, Inc. (2011)
What does the Court say the misappropriation theory is?
Could others have done research and obtained the same information?
1934 Securities Act

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32

1934 Securities Act
How Soon Can You Trade After Corporate Disclosures?
Must allow information to go public
Texas Gulf Sulphur case and adequate disclosure
18-33

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1934 Securities Act
Insiders, Tippees are All Responsible Under 10(b)
Case 18.3 United States v. Salman (2015)
Who had what information and how?
How were the transactions set up?
18-34

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1934 Act: Aiders and Abettors
Stoneridge − Decision was Troublesome to Investors and Regulators
Third Parties Joined With the Company to Dupe the Auditors About the Company’s True Financial Picture
Dodd-Frank Changes Their Immunity Under 10(b); They Can Be Liable for Knowing Participation in Dissemination of False Information
18-35

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18-36
The Anti-Fraud Provision 10(b)
Standing to sue: must have been an actual sale or purchaser to sue
Mental state: need scienter – the intent to defraud
Penalties include $100,000 and up to 25 years per violation
1934 Securities Act

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36

1934 Securities Act
Dodd-Frank Provisions to Provide for Whistleblowers Who Bring Financial Fraud Issues to the SEC
Can Collect Up to 30% of Government Recovery From Company
“Up the Ladder” Issues and Attorneys
18-37

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18-38
Section 16 − Insider Trading and Short Swing Profits
Applies to officers, directors, and 10 percent shareholders
Liable to corporations for profits made on sales and purchase or purchases and sales during any six month period
SEC matches highest sale with the lowest purchase
1934 Securities Act

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38

18-39
Section 16 – Short Swing Profits
May 1, 2017 − Director A buys 100 shares at $10 each
June 1, 2017 − Director A sells 100 shares at $6 each
July 1, 2017 − Director A buys 100 shares at $4 each

Profit of $200
Highest sale $600
Lowest purchase $400

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
18-40
Section 14 − Regulating Voting Information
Idea is to have full disclosure
Proxy materials must be registered with the SEC
Who is soliciting
How the materials will be sent
Who is paying
1934 Securities Act

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
40

18-41
Section 14 − Regulation of Voting Materials
Proxy materials must be registered with the SEC
How much has and will be spent
Purpose of proxy − an annual meeting
Shareholder proposal
Management must include under Dodd-Frank if subject matter is appropriate
Can get list for solicitation, but management now absorbs the expense so this is less likely
1934 Securities Act

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41

18-42
Section 14 − Regulation of Proxy Materials
Shareholders and executive compensation
Shareholders have right to advisory vote every three years
Compensation committees are now comprised of independent directors
Remedies for Section 14 violations
Invalidate proxies
Invalidate actions at meeting
1934 Securities Act

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
42

18-43
Merger: A Combination of Two or More Corporations in Which Only One of the Original Corporations Continues to Exist
Consolidation: A Combination of Two or More Corporation Into a New Corporation
Shareholder Rights

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43

18-44
Mergers and Consolidations

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18-45
Tender Offer: A Public Offer to Shareholders of a Company to Purchase Their Shares
Takeovers: Obtaining Control of Company Through Use of Tender Offer – May Be Either Friendly or Hostile
Acquisitions: Purchase of Asset (Not Stock) of Another Company
Shareholder Rights

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45

18-46
Williams Act Requires Registration of Tender Offer Statement
Shareholders Have 7 Days To Withdraw Shares
Shareholder Rights

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46

18-47
State Laws Affecting Tender Offers
Focuses on corporate governance such as dissenters’ rights
The Future of State Antitakeover Statutes
New state laws require extended waiting period to takeover company without consent of target company Board of Directors
Shareholder Rights

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47

18-48
Proxy Regulations and Tender Offers
Proxy solicitation is also governed by SEC
Proxy solicitation must be registered with SEC
Shareholder Rights

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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State and Federal Securities Laws
1933 Act
S1 – Registration statement
Financial information
Officers/directors
Prospectus
20-day effective date, deficiency letter
Section 11 – Filing False Registration Statement
Liability: Anyone named in prospectus or offering expert materials for it
Material, false statement; privity not required unless longer than one year
Defenses: due diligence; buyer’s knowledge

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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State and Federal Securities Laws
1933 Act
Section 12 – Failure to File; Selling Before Effective Date; False Prospectus
Material; false statement; privity required
Defenses: due diligence; buyer’s knowledge
Penalties
$10,000 and/or five years (criminal/civil suit)

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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State and Federal Securities Laws
1934 Act
10b – Securities Fraud
Penalties – $1,000,000 and/or 25 years
Section 14
Proxy registration
Compensation disclosure
500 or more shareholders with $5 million or more in assets or listed on national exchange

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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State and Federal Securities Laws
1934 Act
8K – Regular reporting at time of event
10K – Annual reports
10Q – Quarterly report
Foreign Corrupt Practices Act
Financial reports
Internal controls
Applies to 1933 and 1934 act registrants
Section 16A
Officers, directors, 10% shareholders
Sales registration

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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State Securities Laws
Blue-Sky Laws
State registration requirements
Merit vs. disclosure standards
Federally exempt securities may still need to register at state level
Can Follow a Merit Review Standard
Securities reviewed for their merit must be “fair, just, and equitable”

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Money Flows Freely Across Borders
United States has most stock exchanges
European Union has regulations on disclosure
Insider trading becoming more vigorously regulated in other countries
Only United States has proxy disclosures
International Securities Issues

©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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