Corporations Flashcards
Rule 10B5
*Jeff Once Made Some Spicy Revolting Pork Rice
D liable for purchasing/selling stock based on inside information.
Rule 10B5 Approach
*Jeff Once Made Some Spicy Revolting Pork Rice
- Jurisdiction: Unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce or the mails, to employ any fraudulent or manipulative devices in connection with the purchase or sale of securities.
- Omission: Failure to disclose or a misstatement.
- Material: A substantial likelihood that its disclosure would have been considered significant by a reasonable investor.
- Scienter: Corporation’s reckless disregard for the applicable rules and regulations. Specific intent (to break law) not required.
- Standing: Broad definition of purchaser/seller including SEC, Corporate-Issuer.
- Reliance: Presumed if material (not necessary for an omission)
- Privity: None required.
- Remedies: Injunction/rescission/constructive trust/out-of-pocket damages.
- Who is the Defendant?
- Tipper: Providing insider information; exploiting information for personal gain (look for a direct/indirect benefit); was tip made for any improper purpose.
- Tippee: Receiving insider information; liable only if tipper breached a fiduciary duty, the tippee knew the duty was breached, and the tipper personally benefitted.
- Misappropriator: Obtaining corporate private information by other means, may be in breach of duty owed to source of information, though not in a position with a duty to disclose.
Rule 16B
*Jorge Is Such Pussy
Profits realized in connection with the purchase and sales within 6 months, of equity securities listed on a national stock exchange by an officer/director/or holders of more than 10% stock of the corporation are recoverable by the corporation.
Rule 16B Approach
*Jorge Is Such Pussy
- Jurisdiction: Corporation must be listed on the National Stock Exchange or have $10 million in assets and at least 500 shareholders. Periodic reports must be filed.
- Insider: Officer/Director who holds position at time of either purchase or sale. Holders of more than 10% at time of both purchase and sale.
- Short Swing Profit: Match lowest purchase price minus highest sale price times number of shares and only the gains are counted. Must take place within a period of less than 6 months.
- Purchase / Sale: Any acquisition or disposition of stock.
- Recovery
Piercing the Corporate Veil
Generally, shareholders, directors, and officers are not personally liable for the liabilities of the corporation. However, a court will pierce the corporate veil and hold shareholders personally liable when:
- Corporation Undercapitalized
- Alter Ego Theory
- Corporation Used To Commit Fraud
Corporate Undercapitalization
Corporation Undercapitalized: Undercapitalization of a corporation occurs where the corporation does not keep enough surplus cash on hand in order to pay the foreseeable liabilities of the corporation
Alter Ego Theory
Alter Ego Theory: A corporation acting as the alter ego of the shareholders will be found where the shareholders forgo the usual formalities of corporate status failure to keep the corporation’s assets separate from that of its shareholders, failure to keep proper accounting, self-dealing, etc
Corporations Used To Commit Fraud
Corporation Used To Commit Fraud: misrepresentation of a material fact known to be false with the intent to induce some action upon another where the other suffers damages
Derivative Suit
SH may bring suit on behalf of the corp. against management or a third party who has abridged a legal duty owed to the corp.
SH must:
- Demand on Directors to bring suit or redress the injury (unless futile)
- Demand on Shareholders to bring suit or redress the injury (unless wrongdoer owns the majority of shares)
- Own Stock at the time the claim arose
- Post a Bond
Duty of Due Care (Director’s Duty - Business Decisions)
Directors have a duty to act in good faith, in a manner in the best interests of the corporation, and with the care of a like person in similar circumstances. This requires they be reasonably informed. If they meet these elements, they are generally not liable for decisions that adversely affect the corporation.
- Liability (Breach)
- Injury and Causation
- Defenses
- Business Judgment Rule: Directors are not liable for losses from their business decisions if they result from a well-informed, independent, good faith decision.
Business Judgment Rule (BJR)
Protects directors only where the decision has been
(i) informed,
(ii) made in good faith,
(iii) made in the absence of a conflict of interest, and
(iv) had a reasonable basis.
Duty to Shareholders
Generally, shareholders do not owe a duty to other shareholders. However, a majority shareholder owes the duty to a minority shareholder not to use its majority share to discriminate against the minority shareholder and not to sell his shares to a prospective looter.
Duty of Loyalty (Director’s Duty - Conflicts of Interest)
Requires a director to act in good faith.
- Conflicts of Interest: Personal interest in a transaction with the corporation
- Burden of Proof on Plaintiff to show Conflict of Interest
- If Transaction Fair or Approved by a Majority Informed Disinterested Directors/Shares – Burden on Defendant
Duty of Loyalty (Director’s Duty - Conflicts of Interest) - Testable Issues
- Interested Director Transaction: A director is not permitted to engage as an interested party in a transaction, which essentially means that he may not sit on both sides of the transaction, or that the director may not engage in a transaction with one of his family members, unless he gets the approval of the majority of the disinterested board or its shareholders, or the transaction is substantively fair.
- Interlocking Directorates
- Corporate Opportunity Doctrine: A corporate opportunity exists if the corporation has an interest in opportunity, or the opportunity is in the corporation’s line of business. A director may only pursue a corporate opportunity if they first present it to the corporation and the board decides not to pursue the opportunity.
- Director/Creditor of Corporation
Officer Authority
Officers are agents of the corporation whose authority is controlled by the agency principles.
