Wednesday, March 29, 2006




Howey test
1. Was there money paid?
2. Was there a common enterprise?
3. Was there a profit from the efforts of others?
(stock is always a security)


REGULATION A: If the public offering is not more than $5million then it is a "mini-offering" and exempt. Advertising acceptable.

REGULATION D: Regulation D provides that a series of safe harbors that issuers can use to come within the private placement exemption and avoid or reduce their required disclosure. For example, if an issuer raises no more than one million through securities, it generally may sell to an unlimited number of buyers without registering the securities. If it raises no more than five million, it may sell to 35 buyers(accredited investors) but no more. And, if it raises more than five million, it may sell to no more than 35 buyers and each buyer must pass a test of financial sophistication.'

Transaction by an issuer not involving any public offering are exempt. This applies to an offering to a relatively small number of private subscribers who are sufficiently experienced or informed so that the disclosure protections are not needed (They are able to fend for themselves)and are acquiring the shares as an investment rather than for resale to the public.

1. number of offerees and their relationship
2. number of units offered
3. size of the offering
4. manner of the offering.

accredited investor exemption..if everyone is accredited you are fine. "Insiders or persons with a million dollars of wealth or more" (rich, dumb peope)

Where the offering and sale is made entirely to residents of the same stated in which the issuer resides and is doing business, the issuer is exempt from registration.

If the registration statement, when it becomes effective, contains a misstatement or omission of material fact, any person acquiring the securities without knowledge thereof has an action for damages (the amount he or she lost on the investment)against various persons connected with the issuance.

1. any person may sue, but not if they knew of the omission or misstatement.
2. P need not prove fraud, just that material fact was omitted.
3. material means the average prudent investor would need it to make an intelligent informed decision
4. no scienter, no causation, no reliance: it is not necessary for P to prove that she relied on the misrepresentation or omission or that it caused the loss in value of the security. The fact that it is material is enough.
5. everyone who signs is liable: liability may extend to the corporation, it's directors and all persons who sign the registration statement.
6. defense: due diligence: issuer absolutely liable, others can avoid liability through due diligence
7. defense: reliance on experts: portions of the registration statement made on the reliance of experts okay if D believed it.


Any person may sue
Misrepresentation or omission of material fact
No scienter, no causation, no reliance
Everyone who signs is liable
Defense: due diligence and reliance on experts


Unlawful to make untrue statements in connection with purchase or sale of securities.


1. purchase or sale of security
2. using an instrumentality of interstate commerce
3. P is SEC or private P
4. misrepresentation of material fact
5. scienter-fault is required here: a. recklessness b. intent
6. causation
7. reliance a. presumption of reliance in omission cases b. fraud on the market theory with publicly traded securities and misrepresentation cases.
8. non-insider trading 10b-5 cases are easy to distinguish-no material nonpublic information is involved

The purchase and sale of corporate stock by a director, officer, or other insider raises issues of fiduciary responsibility.

Insiders (directors, officers, controlling shareholders and corporate employees) violate 10b and 10b5 by trading on the basis of material, nonpublic information obtained through their positions.

MISAPPROPRIATION: noninsiders who wrongfully acquire material nonpublic information.

The "misappropriation" theory holds that a person commits fraud in connection with a securities transaction and violates 10b and 10b5 when he misappropriates confidential information for securities trading purposes.


A person, not an insider, who trades on information received from an insider is a tippee and may be liable under rule 10b5 if
1. she received information through an insider who breached a fiduciary duty in giving the information and
2. the tippee knew or should have known of the breach breach of duty by insider

P should have performed due diligence: If P's reliance on a misrepresentation or omitted fact could have been prevented by his exercise of due diligence, recovery may be barred.

ordinary mismanagement: A breach of fiduciary duty not involving misrepresentation, nondisclosure or manipulation does not violate rule 10b5.


out of pocket damages: difference between price paid and actual value

benefit of the bargain: difference between current value of the stock and its value absent wrongful conduct

rescission: returns parties to the status quo before the transaction. For example, seller returns purchase price and gets back stock she sold.

restitution: measured by the value of waht the D gave up and the value of what D received.

injunction: The SEC often seeks injunctive relief accompanied with a request for disgorgement of profits and other payments that can be used as a fund for injured private parties.

criminal penalties: you can go to jail and get fined.


Provides that corporations may recover profits realized by an owner of more than 10% of shares when that owner buys and sells stock within a six month period.

The elements are

1. Securities must be registered securities
2. must be stock or convertible stock
3. must have a purchase and sale or sale and purchase within a six month period
4. must be an officer, director or 10% shareholder
5. must have made a profit

important issues:

1.must have been an officer or director at either purchase or sale

2.10% shareholder immediately before purchase and immediately before sale

(check notes and 523)



A.Proxy rules

A PROXY authorizes another person to vote a shareholders' shares.

1. generally revocable
2. unless expressly stated and coupled with an interest in the shares themselves (explanation needed here)
3. the effective period is limited in time

B.proxy solicitation

Almost all shareholders of publicly held corporations vote by proxy. Solicitations of proxies are regulated by SEC rule 14(a) of the 1934 act.

requirement of full disclosure

The proxy rules require full and accurate disclosure of all pertinent facts.

C. shareholder proposals

must be an existing shareholder

a corp. may refuse IF

1.Not a proper subject:a corporation may refuse the shareholder proposal if it is not the proper subject for a shareholder action.

2.illegal proposal:If the shareholder proposal would cause the corporation to violate either state or federal law, the corporation need not include it.

3. false and misleading:If the shareholder proposal is misleading, the corporation can refuse to include it.

4. seeks redress of personal claim: If the shareholder proposal concerns the redress of a personal claim or grievance against the corporation or any other person, or is designed to to result in a benefit to the shareholder or further a personal interest that is not shared with other shareholders then the corp. need not include it.

5. Relates to operations accounting for less then 5% of the corporations total assets and is not otherwise significantly related to the corporations business. if there IS a significant relationship, then the proposal must be included.

6. Beyond the corporations' power to effectuate.

7. relates to ordinary business operations

8. is counter to a proposal submitted by the corporation at the very same meeting

9. is moot or duplicative

10. Deals with the same subject matter as a very unsuccesful prior proposal

11. Relates to specific amounts of cash or stock dividends


Access to shareholder lists:

A shareholder has the right to obtain a list of shareholders or to have her communication included with the corporate proxy materials.

A corporation can pay expenses of existing management, win or lose, as long as reasonable

a corporation can pay expenses of challengers only if they win, as long as reasonable and approved by shareholders


four methods

1. proxies
2. pooling agreements
3. voting trusts
4. statutory dissolution

proxies (this area unclear...needs more work)

pooling agreements:Voting or Pooling Agreement
A voting or pooling agreement is an agreement, preferably in writing, of two or more shareholders to vote their shares in a certain manner. The most common use of this agreement would be to pool voting strength for the election of directors.

Voting Trust
A voting trust is an agreement among the shareholders of the corporation. Under a voting trust, shareholders transfer their shares of stock to a trustee in exchange for voting trust certificates. The trustee votes the shares in the manner directed in the voting trust agreement. Voting trusts are often used to preserve control of the corporation.

statutory dissolution:(unclear...needs more work)


Often a controlling shareholder wishes to eliminate minority shareholders from any further participation in the corporate enterprise: There are three ways

1. sale of substantially all assets
2. merger
3. reverse stock splits

sale of substantially all assets: a sale of substantially all assets may be used to freeze out a minority shareholder by causing corporation c to sell it's assets to a controlling shareholder s or to the corp. s controls, for cash. The minority shareholders in c end up with stock in a corporation that holds only cash (and which is normally dissolved) while s ends up with one hundred per cent ownership of the corporate business.

mergers: Most merger statutes permit the surviving corporation in a merger to issue cash, rather than stock, in exchange for stock of the disappearing corporation. This creates another freeze-out technique. Assume that s is the shareholder of corporation c and owns all the stock of corporation d. S then arranges a "cash-out merger" of c into d, in which d issues cash rather than stock to c's minority shareholders. Here again, the minority shareholders in C end up with stock in a corporation that now holds only cash, and s ends up with all of the corporate business (see weinberger v. UOP)

reverse stock splits:Most statutes empower a corporation to involuntarily eliminate fractional shares (i.e. shareholders representing less than one full share) by paying any holder of fractional shares their value in cash. Under this technique, the corporation effects a reverse stock split by amending it's articles to drastically reduce the number of outstanding shares, and then pays off (and thereby ousts)the remaining shareholders who own fractional shares as a result of the reverse stock split.


1. may be similiar to partnership duty
2. may be some lesser fiduciary duty



Statutory mergers:
1. one corporation merges into another
2. the surviving corporation succeeds to all rights, liabilities and assets of the disappearing corporation
3. the board of each corporation must approve
4. Generally speaking the shareholders must approve as well.

The exception is a 'short-form' merger.

many statutes provide special rules for approval of a merger between a parent and a subsidiary when the parent owns the majority of shares in the subsidiary.

Another exception is a "small merger". Some statutes provide that approval by the shareholders of the survivor corporation is not required if the voting stock of the survivor issued to effect the merger does not consitute more than a certain percentage (usually one sixth) of the outstanding shares of voting stock.

appraisal or dissenters' rights may be permitted:

exception: short-form mergers
exception: publicy traded and widely held stock (why..unclear here)


conventional type: acquiror forms subsidiary and target merges into subsidiary

reverse triangular merger: acquiror forms subsidiary, subsidiary merges into target

board approval is required with triangular mergers:
sometimes triangular mergers may avoid shareholder voting and appraisal rights.
(how?...unclear here)


One corporation buys the assets, but not the liabilities of another

board approval necessary

shareholder approval necessary

exception: sale in the ordinary course of business

Shareholders may not get appraisal rights (why not?...may?)


Governed by state statutes
must dissent from transaction
must follow proper procedure
Shareholders have the right to have corporation purchase at fair market value.


Restrictions on stock transfers and mandatory buy-sell agreements are often used in close corporations to control who can become business associates and or to insure that the stockholder will be able to recover his investment if he decides to sell his stock. The restrictions may appear in the articles or bylaws, or in an agreement to which the corporation is a party. The validity of stock transfer restrictions in general are upheld if reasonable and adopted for a lawful purpose. in general, preventing outsiders from obtaining ownership and maintaining the proportionate interests of shareholders is considered valid purposes for such restrictions.

I. restrictions

there are two types: the first option and consent restriction.

a. first option

the first option obliges the shareholder to offer shares first to the corporation or other shareholders before they may be sold to outsiders. The option may be triggered by a proposed sale or transfer, by death, bankruptcy, termination of employment or other specified events. Options may be successive (first to corp. then to shareholders) and may allow some shareholders to buy more than their proportionate share if others do not exercise their options. It is important that the agreement specify whether the selling shareholder can vote his stock on the question of corporate repurchase of his shares. It is also important that the price at which the option is to be exercised is capable of ascertainment; otherwise the agreement may be held unenforceable because of lack of definiteness.

b. consent restrictions

Consent restrictions require a shareholder wishing to sell his stock to give notice to the directors and /or the other shareholders and to receive their approval. In some states, these agreements are presumptively invalied, while in others they are enforceable so long as consent is not unreasonably withheld.

2. mandatory buy-sell agreement.

A mandatory buy-sell agreement is the flip side of a transfer provision, as it requires the offeree-shareholders or the corporation to buy the stock upon the triggering event (i.e. death, disability, termination of employment, or proposed sale). Such agreements, usually funded by a life insurance policy on each stockholder, have the advantage of assuring the purchaser, which is especially important in an illiquid estate.

An agreement may provide for the corporation to buy the shares, or may allow the other shareholders to buy proportionally. Again, provision should be made for fixing the value of the stock- this may be a set price or book value at the time of the buy-out or may be determined by a procedure such as capitalization of earnings, or appraisal by an outside party.


The existence of a restriction on transfer or mandatory buy-sell agreement must be noted conspicuously on the share certificates or it is not binding on a subsequent transferee who is without notice of it.


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