Corporations and Business 2

Question 1

Duty of Care

Answer 1

No special duty rule – Not an expert rule
Reasonable person under similar circumstances
Acting “in a manner the director reasonably believes to be in the best interests of the corporation.”
* Duty to be Attentive to Corporate Business
* Duty to be reasonably informed, including duly deliberating
* Rational basis for decisions

Question 2

Duty to be Attentive to Corporate Business

Answer 2

Minimum Requirements:
Reading internal reports and summaries of the corporation’s activities.
Duty of reasonable investigation:
Includes an obligation to act reasonably based on the information discovered.
Purpose: To stay informed about the corporation’s activities, finances, and performance.

Question 3

Duty to be reasonably informed, including duly deliberating

Answer 3

More information than is needed to fulfill the duty to be attentive to corporate business.
Affirmative duty to learn more about the matters upon which the director will be voting.
Contextual: the “more” needed is enough so that the director can be reasonably informed enough to make a decision.
Duly Deliberating: Directors must actually discuss and consider the issues before them, instead of automatically approving matters without debate.

Question 4

Rational basis for decisions

Answer 4

Duty on Directors to be rational actors
Contextual – viewed at the time the decision was made
Decisions must be:
* Made in good faith,
* Based on reliable information, and
* There must be a rational basis for the decision made.

Question 5

Business judgment rule

Answer 5

A Rebuttable
Presumption of due care, which
Protection from personal liability for directors

Always analyze after the Duty of Due Care

Question 6

Duty of Loyalty

Answer 6

The nature of the duty of loyalty is fiduciary.
The duty of loyalty requires the officers, directors, and controlling shareholders of a corporation to act putting the interests of the corporation before their own interests

Question 7

Conflict of Interest

Answer 7

Practical Application of the Duty of Loyalty

Question 8

Ratification – Fairness Factors

Answer 8

First, Full disclosure by the director or officer seeking approval
Then, evaluate:
* Adequacy of the proposed consideration
* Corporation’s need to enter into the transaction
* Financial position of the corporation
* Availability of alternatives to the proposed transaction

Question 9

Effect of Ratification

Answer 9

Presumption of fairness and honesty
Party challenging a transaction bears the burden of proving that it was not fair and honest
Note: Fairness to the corporation is viewed at the time that the approval is sought.

Question 10

Duty to Disclose Information

Answer 10

Affirmative duty to disclose material facts relevant to a proposed transaction before the board
Applies even to disinterested directors and officers
Failing to disclose such material information is also a breach of the fiduciary’s duty of loyalty
Source of the information is irrelevant; any credible source will do, provided the information is materially relevant to a transaction before the board of directors

Question 11

Self-dealing

Answer 11

Defined: Where the officer or director has a personal interest in the transaction in which the corporation is involved.
Not Self-Dealing: Interests that are inside the corporation, that are aligned with those of the corporation.
Self-Dealing: Interests outside the corporation, that are aligned with the other company with which the officer or director’s corporation is doing business.

Question 12

Ratification by Directors - to resolve self-dealing

Answer 12

Only disinterested directors can ratify
Full disclosure by conflicted director
Four Fairness Factors:
* Adequacy of the proposed consideration,
* Corporation’s need to enter into the transaction,
* Financial position of the corporation
* Availability of alternatives to the proposed transaction.

Question 13

Corporate Opportunity Doctrine

Answer 13

Officers directors , and controlling shareholders must not take for themselves any business opportunity that could benefit the corporation.
See self-dealing

Question 14

Business Opportunity that could Benefit the Corporation

Answer 14

The corporation must be financially able to undertake the opportunity,
The opportunity must be within the corporation’s line of business, and
The corporation must have an interest or an expectancy in the opportunity.

Question 15

Disclose AND Decline

Answer 15

For a fiduciary to take advantage of a business opportunity for personal benefit, they must first:
Disclose the business opportunity to the board of directors of the corporation, and
The board of directors must decline to take the business opportunity for the corporation,

Question 16

Director’s Right to Inspect Corporate Books and Records

Answer 16

Directors’ Right to Inspect:
Near Absolute – NOT Absolute
Purpose of near absolute right to inspect: to enable the director to perform his or her duties intelligently
Within this scope, analysis is done on a case-by-case basis as to whether it is necessary in order for the director to perform his or her duties intelligently
Can only be denied to prevent abuse

Question 17

Shareholder’s Right to Inspect Corporate Books and Records

Answer 17

Shareholders’ Right to Inspect:
Limited to matters reasonably related to their interest as shareholders
including possible corporate wrongdoing
With a proper purpose, the corporation must provide access to all documents in the corporation’s possession, custody or control necessary to satisfy that proper purpose
A shareholder must be a stockholder of the corporation at the time of:
* the demand for inspection, and
* the transaction in question

Question 18

Rule 10b-5 - Enforceability

Answer 18

Can be enforced by:
Civil enforcement action by the Securities Exchange Commission – No statute of limitations
Criminal charges by the U.S. Department of Justice – No statute of limitations
Civil litigation by private parties – Within 2 years from the discovery of the violation, but not more than 5 years after the violation is committed

Question 19

Rule 10b-5 - Actionable

Answer 19

Interstate Commerce: means or instrumentality of interstate commerce, or of the mails or of any facility of anynational securities exchange
Fraud
Materiality: The untrue statement or omission must be about the sort of information that a reasonable investor would consider significant in making an investment decision.
Scienter: the defendant’s specific knowledge that their statement or omission is untrue and their awareness of its likelihood of influencing investor behavior.
Standing: (1) completed sale/purchase; and (2) “in connection with”
Causation: Transaction causation and loss causation
Damages: Liquidated (i.e., able to be reduced to a specific dollar figure)

Question 20

Rule 10b-5 - Rule and elements

Answer 20

Rule 10b-5 prohibits officers and directors, directly or indirectly, from
(1) omitting to state a
(2) material fact necessary to make a statement not misleading, in light of the circumstances under
which the statement containing the omission was made, where
(3) the omission is made with scienter and
(4) in connection with the purchase or sale of securities. (misstatement “in connection with” buy/sell)

Question 21

Rule 10b-5 - Types of Liability

Answer 21

Primary Liability – primary participants
Secondary Liability
* aiders and abettors
* control persons

Question 22

Rule 10b-5 - Participants

Answer 22

Primary Participants
* Material misrepresentation, and * Material omission
- - - Substantial Factor – Was the defendant a substantial participant in making the material statement or material omission?
- - - Bright Line - The statement or omission must be attributed to the defendant or otherwise is identified as having been made by the defendant
* Committing a manipulative act

Question 23

Rule 10b-5 - Participants - Secondary

Answer 23

Aider and Abettor – Not a primary participant, BUT – Involved in the creation, distribution, or publication of a statement or omission that violates Rule 10b-5.
Control Person – Must have actually exercised general control over the activities or operations of a primary participant, AND – Must have had the power or ability to control the specific transaction or activity that led to the violation.

Question 24

Disclose or Abstain - Scienter

Answer 24

An insider who possesses material, non-public information must either:
(a) disclose that information before trading in that company’s stock; or
(b) if disclosure is not possible or it would be improper, abstain from trading in that company’s stock.

Scienter is required to violate Rule 10b-5, including the disclose or abstain rule.
The defendant is only liable for actions knowingly taken, for trades knowingly made while possessing material, non-public information.

Question 25

Rule 10b-5 - "Who" Less Close

Answer 25

Two Paths to Liability for Less Closely Connected Persons: Misappropriation Tippee Liability

Question 26

Tippee Liability

Answer 26

Tip – must be material, nonpublic information Tipper – must make the disclosure to a friend or relative of the tipper, or the tipper must expect to reap a pecuniary gain from the disclosure Tippee: must trade on the tip and profit from the trade, and must be aware that the tip was improper, and must either be a friend/relative, or be in a position to confer a pecuniary benefit on the tipper

Question 27

Misappropriation

Answer 27

If there is an expectation of confidentiality, whether express or implicit, then the applicability of the disclose or abstain rule will be triggered. Temporary or Functional Insider: * Assumes a Position of Trust * Rule 10b5-2: relationships/circumstances that impose a duty of trust and confidence * Agrees to keep confidential * History pattern or practice of sharing confidences * Spouse, parent, child or sibling * Limited/Contextual

Question 28

Section 16 - Statutory Insiders

Answer 28

Officers, Directors, and Beneficial owners of more than 10% of any class of equity security that is registered under the Securities Exchange Act.

Question 29

Section 16 - Presumption

Answer 29

If you have the sale and purchase of the same class of stock within a 6-month period, It creates an automatic presumption that the transaction involved the unfair use of inside information

Question 30

Section 16 - Relationships -- 17 CFR § 240.16a-1(e)

Answer 30

“The term immediate family shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall include adoptive relationships.”

Question 31

Proxy Registration

Answer 31

Any corporation can have proxies. Certain corporations must register their proxies: Corporations whose securities are traded on a national securities exchange. Corporations with at least $10,000,000 of assets and shares of a class held by more than 500 shareholders of record.

Question 32

Rule 14a-9 - Proxies

Answer 32

(a) No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.

Question 33

Materiality - for proxies

Answer 33

The Test for Materiality (for proxies): “Whether a reasonable person would attach importance to the misrepresented fact; rejected was the standard that the misrepresentation might influence investors.”