Authority

Actual
Express
Apparent Inherent Ratification Estoppel
Implied
RTA s.2.01 RTA s.2.03
RSA 8A
(RTA Strikes)
RTA 4.01 RTA s2.05
P to A P to TP P ratifies A NO AGENT
Agent acts
reasonably on
Ps
manifestations
that P wants A
so to act.
Conduct,
words, or
implied by
conduct
Based on A's
reasonable
perception
Power held by
A to affect P
when TP rbly
believes A has
authority to act
based on Ps
manifestation
to TP
Sub Agent
RTA 1.04(8)
A of A to
conduct P's
business in
scope of A
authority
Look to past
conduct
"Such powers
are as
reasonably
necessary to
carry out the
duties
Undisclosed
Principal
Or
"Rogue" A
Disclosed
Principal
Agent & TP are
parties to
agree.
Liability of
Agent on K
R3rd s.6.03
Duty is on A to disclose P
Look to K to
clarify A's
authority
App Imp
Authority: put
agent in place
for TP to rbly
believe A has
auth.
P liable for A if A's
acts are within auth
usually confided in
an agent who
normally has that
auth (can K out)
Look for
undisclosed P
P gen. Undiscl.
RSA 161
RTA expands RSA
capture "Rogues
No act or app P
may be liable to TP
based on A if:
P is
intention
or
careless
of TP
belief
P is on
notice of
TP belief
and does
not try to
stop
Affirmance of prior
act done by A
Manifest
assent
that act
will affect
legal
relations
P acts to
justify rnbl
assumptn
of consent
A must be
acting ON P's
BEHALF!
IMPLIED
affirmance = P
conduct, P
must have
reason to
know
P must have
choice, cannot
be AFTER act
Undisclosed
Principal
Unidentified
Principal
A is NOT party
UNLESS
agree
otherwise
A IS party
UNLESS
agree
otherwise
A & TP ARE
party UNLESS
agree
otherwise
Nonagent Ind.
Contractor
Liability of P on
TP on Tort
Employee
Nonemplee
Agent
NOT Liable
NO CONTROL
UNLESS:
P NOT liable
unless:
P liable if
within scope of
employment
CONTROL
Not on Agency, on KIND of Ag
RTA 7.03(1)
Direct
RTA 7.07
Employee
RTA 7.08
Apparent A
Day-to-day control, distinct operation, custom, skill, tools, time,
compensation, party belief, business or not (7.07)
POLICY Control, esp ownership
and profits tends to infer agency
Labels don't matter
RSA 1.01 P must have control
Control over actual instrument
Respondeat superior as limit
7.07 - SCOPE:
Engaging in conduct subject
to P's control
Liability = if harm is
foreseeable from conduct of
EEs
7.07 - Intentional
Look at type of tort
P assert control
P negligent
Non-delegable
P volunteers to
take duty
Apparent
Authority
"Nuisance per
se
Incompt
Contractor OR
Financ. Incom.
Nondelegable
duty
OFFICERS are
AGENTS OF
CORPORATIONS
PRES has inh auth to
bind C for K
Agent's Duties
Duty of Care
RTA 8.08, .09
Loyalty
W/in Scope &
Comply w/
Instructions
8.09
Reasonable
Care 8.08
Adverse
Dealings
8.03
Personal
Benefit
8.02
Proprietary
Inform
8.05
Competing
8.04
Personal
Profits from
Position
Reading
Grabbing &
Leaving
Town &
Contry
Usurping
Business
Singer
Fiduciary
Duties
Waiver
Waiver
Waiver Waiver Waiver
May take steps
in preparation
to compete
When in
connection to
agency
relationship
Not use
property of P
for own or TP
Cannot communicate confidential information for A
or TPs benefit
P MAY consent to
Conflict of Interest
8.01
A must act in
good faith
Disclose
MATERIAL
information
Deal fairly
P's consent
must be
specific to act
or transaction
If Breach:
Disgorge
profits to P
Worse than K
case b/c not
damages,
disgorge
Trade secured
through years
of bus. and
advertise, $$
Partnership
Unlimited liability, limit
transferability, single taxation,
limited access to capital,
informal, less regulation w/in
PS agreement, life limited to
partner
101(6); assc of
2 or more as
co-owners, for
profit
101(10):
almost any
entity can be
partner
201(a): PS is
distinct from
partners
RUPA is basis
default rules
Non-Waivable
Duty of Loyalty,
Care, Good Faith,
Inspection
(1) Agreement
b/t parties
(2) Written, not
needed
(3) Co-
property not
determinative
(4) Share in
profits,
presumed,
UNLESS
debt
wages
rent
Annuity/retire
Debt service
Sale goodwill
or property
(5) Share in
management
401(f)
(6) Partners
may be
creditors
Partnership Windup
306(a): All
Ps j/s
liable for
all
liabilities
308(e): if
not PSs w/
each
other, not
PSs to 3
rd

parties
807(a):
after
creditors,
surplus to
PS by
rights to
distribution
(7) Look at
who's at risk at
dissolution
301(1): Each partner is agent
of all UNLESS (1) P does not
have authority, AND (2) TP
knows or should know P
doesn't have author
Allows APPARENT AGENCY
(ordinary)
305(a): PS is
liable for act of
Ps if act in
ordinary
course of
business
306(a): all Ps j/
s/l for all
Late-Coming
Partners NOT
liable for
previous
incurred oblg
Partnership By Estoppel
P must show
express or
implied
holding out of
PS by D
Represent
was made by
D or person
alleged PS
Reason.
Reliance by
TP in good
faith
TP is harmed
Effect of PS by Estoppel
If D purports
to be PS and
TP relies, D is
liable to TP
IF MADE IN
PUBLIC
MANNER, D
as PSbE is
liable even if
doesn't know
If PS liability,
then that
PSbE is liable
as if P were
partner
Good Conduct
"catch-aII" 8.10
Partnership
Duty
RUPA 404(b):
duty of loyalty,
inc "approp of
partnership
opportunity
"Punctilio of an
honor most
sensative
Meinhard
Notice
+
Opportunity
RUPA 103b3:
Cannot elim loyalty,
but can id certain
categories, if not
manifestly
unreasonable
Elim duty of loyalty
when poss, limit notice,
time period limit,
change "PS
opportunity meaning
Interested party
cannot vote in
ratification of self-
interested
opportunity
Perreta v.
Prometh
RUPA
404(d):
PS must
discharge w/
obligation of
good faith &
fair dealing
Partnership
Disassociation
RUPA 601(3)
P may be
expelled as
terms of PS
Agr
RUPA 602b1:
Wrongful
expel ONLY
IF breach
express term
of PS Ag
Partnership Transfer
401(i):
All Ps must
consent to sell
PS interest
502 & 503:
PS has
personal
interest in prof
& losses &
distributions
501:
P is not co-
owner of PS
property,
cannot
transfer
504(a)-(b): Creditor MAY get
judgment against P interest
(8) Mgmt equal
rights for all Ps
unless PS Ag
says otherwise
401(j): Diff in mgmt, majority wins, if not
ordinary, must have consent of all Ps
PS FREEZEOUTS! - P v. TP
305(c) & 401(c): PS is liable for
ordinary bus of P tort, must
indemnify P if in ordinary course
103(a) PS Ag may alter relations B/T Ps &
103(b) lists non-alter in PS Ag
Partnership
Disassociation
603(a)
FOR TERM
602(b)(2): if in
term:
Owen v Cohen: if P provides loan to PS,
presumed "for term if pay of loan is out of
profits
Dissolution & Wind Up
Article 8
Continuation of Business
Article 7
602(a)
P may disass
any time, right
or wrong, by
express will
602(c)
Wrongful
disass = P
liable for
damages to
PS for disass
RUPA 801(5)
(i) economic
purpose
frustrated
(ii) one P
engag in
conduct that
makes PS not
reasonably
conduct
(iii) no longer
reasonably
practicable to
contin PS
under PS Ag
(i) P withdraws by
express will
(ii) P expelled by
judicial determ.
(iii) P becomes
debtor in bankrupt.
(iv) P expelled or
disass b/c dissolv
or termination
AT WILL
601(1): notice
by P to withdr
P may be creditor and P,
and may pursue own
interests - 404(d)
RUPA 701
Value at
windup is
greater of:
Liquidation
value, OR
Value based
on sale of bus
as going
concern w/o
disass P
(1) Voluntary Association
(2) Primacy of K PS Ag
EXPULSION: if not
permitted in PS Ag, cannot
expel, can seek dissolve but
404d
BUYOUT:
"Some objective
determination of value
needed
Fair Market Value
Wind Up
Process
807a-b: Creditors paid, then Ps
807b: profits & losses from liquidation charged
to Ps accounts
803c: person WU may dispose of and transfer
the assets
Kovacik Rule: Ps share in profits and losses
UNLESS one P is only skill & labor
Conflict w/ 401(b) proportionate shares
Amount = Capital Account (book) + avg prior 3
years profits/gains paid to GP
802(a) PS continues after dissol and
terminates when WU done fees split as in PS
Shareholder Suits
Direct
Derivative
(recovery goes to Corp)
(1) personal action by SH for injury
of SH
(2) SH as individual
(3) recovery to P-SH
(1) SH files on behalf of injury to
corporation
(2) COA belongs to corp
(3) recovery to corp
(4) special pleading required 23.1
Evaluate the HARM, who is
harmed?
Who would recover?
P was SH at time of act or
became through transfer of
SH who was at time
MBCA 7.41
SH fairly & adequately
represents interests of corp
in enforcing corp
MBCA 7.42
Demand Requirement
Written, specific demand
made upon C to take
suitable action (wrongdoers)
90 days have expired from
demand, OR demand
refused, OR 90 too long
FRCP 23.1 Must
state desired result
in demand
Demand Futility -
(1 of 3)
Majority BoD conflicted int
Del: Majority BoD not indp by
domination or control (NY: not
informed themselves)
Charged transaction not subject
to BJR BD no BJR
Show by reason. Doubt
that BD cannot decide
demand w/ part. facts
BD Accepts BD Denies
BD takes over the lawsuit
Denial is
subject to
BJR
P-SH must
overturn
BJR to
pass denial
If demand
made,
cannot
claim futility
BUSINESS JUDGMENT
RULE
Presume BD acts with good
faith and promoting best int
of corp
Overturned w/ part. facts
showing bad faith, conf int,
AND breach of fid duty
NY Rule: part facts
(2) fail to inform
(3) trans = BJR not
possible
Del Rule: reas doubt -
(2) bd lacks indp
(3) trans not valid
exercise of BJR
Special Litigation Committee
(SLC) small comm of non-interest
BD members to review demand
(1) SLC
member selc
process
review
(2) proced
used by SLC
to reach sub
review
(3) Substan
outcome
NOT
reviewed
Bd member experience with contested trans,
prior affilitations, completeness of inquiry, good
faith, no pro-forma/shallow investig, "eminent
special counsel - but TAINTED BD can appoint
SLC members
Auerbach standard Zapata standard
(1) Bd Indp &
good faith
(2) Bases
supp decision
(2) Ct applies
own "indp BJ
whether to
dismiss
More substantive review into
decision & eliminates potential
structural bias subject to Summ
Judgment Standard Rule 56 look
at personal ties (Stanford Conspir)
SH
C
Standing
NY Del
Demand Sent
Demand Requirement
Blasius Standard:
(1) P must show Bd acts with
effort to deny SH vote right
(2) Bd must provide "compelling
justification
Revlon Duty:
Duty of Bd
changes on
liquidation
duty to max
value for SHs
If SH loses
derivative suit
SH may
have to pick
up tab for D/O
and must pay
own fees
When Ds are
def in case
Public
Agency Costs
Cost of Contracting
Bonding
Cost of Monitoring
Residual Loss
Effect of
Corporation
MBCA 8.01 C power in Bd,
supervises
8.03-04: Election of Directors
Shareholders:
10.03, 10.20: Amend bylaw or Art of
Incorporation
11.04: Fundamental trans (merg)
Corporation
Basics
Public v
Private
Private
Publicly held
Big enterprise
More captz
Traded shares
Closely held
Smaller
Shares illiquid
Sm # of SHs
Like PSs
Mostly LLC now
Separation of Ownership & Control
Flexible capital structure
Equity v. Debt
Authorized Shares Outstanding Shares
Auth but Unissued Treasury Stock
Book Value Market Cap
Corporation
Creation
Terms
MBCA 2.02
# shares authorized
Corporate Name
Office & registered agent
Name & address of incoporator
Bylaw provisions
Director names
Limited liability of directors to SH
Indemnification & other
Act
2.01
File with the Sec of State
Draft Articles of Incorp
After Incorp
2.05 Elect directors, adopt by, app
officers, carry on business
MBCA 2.06 adopt bylaws, incl
management terms
Incorp
Contracts
2.04 Promoter is j/s/l for Ks
pre-inc if knew Arts not filed
2.04 Promoter liable if Art not
filed
De Facto Estoppel
Organizers:
(1) good faith
tried to incp
(2) had legal right
to do so
(3) acted as Corp
Third Party:
(1) thought other
party was Corp
(2) would suffer
detriment if not a
corp
MBCA 6.22: SH NOT personally liable,
unless own act or conduct
Limited
Liability
MBCA 6.22(b): SH NOT personally for
debts of corp
Piercing Corp Veil: 6.22 SH liable
for corporate action
Single enterprise liability v. PCV = only corp
entity would be financially respons while in
SEL single SH personally liab
Risks = regulatory, legal, operational,
reputational, interest rate, market, political,
tech, governance, fortuitous
Illinois Piercing Law Unity of interest in
ownership no diff
b/t Corp and SH
Adhering to fiction of
sep leads to (1)
FRAUD or (2)
injustice
No maint C
form or records
Commingling of
funds
Under-
capitalization
Mix use of
assets
Must be more than liability more "wrong
(i.e. tax fraud or personal expenses)
Single Enterprise Theory
Alter Ego
Parent liable for
action of subsidiary
but subs not resp for
other subs
Generally same,
unity in ownership,
commingling,
holding as one,
same office, EEs
Mere Instrumentality
Common Ds and Os, common business depts, consol financial statements/
returns, parent finances sub, P incor S, grossly inadequate capital, P pays
salaries, S business only serves P, operations comb, business prac
Direct Liability
Rest T s.324a: P
may be liable if TP
relies on
Short-Form
Merger DGLC
253
(1) No SH approv needed
(2) Bd of parent approves
(3) Parent must own 90% of
each class of stock of sub
(4) minor SH entitled to jud
value
Proxy Issues
RECORD SH
MBCA 7.01 Annual SH Mtg
MBCA 7.02 Special SH Mtg
MBCA 7.25 & DG 216:
Majority approval of SHs
(DG requires present)
(MBCA more for than ag)
Require majority of OS SHs:
Mergers, Amend Charter, etc
Election of Ds - plurality of
votes cast
Proxy Contest Electoral & Issue
Insurgents must win to be
reimbursed (not personal)
(1) Must be policy issue quest
(2) C reimb only reasonable & proper expenses
(3) C can reimb incumb W/L
(4) C reimb Inc if win & SH ratify
Proxy Fraud Rule 14a-9
No fraud permitted in proxy
statement (material)
Section 27 allows Direct &
Deriv private COA
Generally direct (loss vote)
but C can sue derivatively
Intris fairness
not aff def when
material fact
omitted if in
proxy, & proxy
was essen link
Prove
material
Prove
Essen link
Split wheth reliance
needed OM-no, Mis-yes
Injunc
damages - reciss
Attorney fees
allowed
Negligence
is standard
Excluding Proxy
Rule 14a-8
SH $2000 or 1%
If SH fails to
satisfy elig
or violates
14a-8i
Mgmt
excludes w/
burden filing
to SEC
Includes
legal
rationale
Mgmt must
notify SH w/
option to
remedy
SEC
determ.
Nonbinding
phrasing Subject to
BJR if
excluded
Insignificant/irrel proposals - >5% total
assets, net earn, and not sig to business
operations
Not nor bus
operations
Intrude on
mgmt role
Personal
grievance
Revolves around
elections
Pertains to partic
Board seat or
procedure
SH Record
Inspection
DGCL 220
SH must make proper
demand w/ prop. purpose
If SH wants SH list, burden
on mgmt to say why not
For other, burden on SH,
unless req from foreign C
(for NY statute)
Proper: (1) Subj intent to pursue
proper inter, (2) Obj std if prop pur.
Improper: info for non-C purpose,
trolling for bus, harassment
MB 3.01a & DG 101(a) -
Purpose = lawful business
MANAGER v.
SHAREHOLDER v.
DIRECTOR v. BUSINESS
FUTURE
Cum/
Line
Voting
Duty of Care BJR
Corporate
Fiduciary Duties
Standard of
Liability
Efficient Capital Market
Hypothesis (ECMH)
Lack of GF (3), Waste,
Gross Negligence
Stand of Conduct
(aspirational)
MBCA 8.30:
Good Faith
Reasonable Belief
Reasonable Care
MBCA 6.40
Distributions to
SHs
Money or other
property to SHs
subject to BJR
Weak: mrkt incorporates PAST
information
Semi-Strong: mrkt
incorporates PAST &
CURRENT information
A Ds have obl using
BJR to maximize
income for benefit of all
persons having a stake
in welfare of corporate
entity v. Dodge
Overturning
BJR
BJR is informed if directors
have informed themselves
prior to making decision of
material reas avail to them
Van Gorkam
MBCA 2.02(b)(4): Art of In may
limit liability of dir or SHs for
money damages for any action
taken [not interest, intl harm,
unlawful distrib, criminal act]
Duty of Care:
Owed to Corp
Action:
Loss b/c of ill
advised or
negligence
Inaction:
Unconsid failure of
Bd to act when act
would prevent loss
Evaluate PROCESS
Process P Must Show:
Inatt to Mis-mgmt OR Mgmt abuse
Ds knew/
should
know of
wrongful
conduct
Bd took
no steps
in good
faith to
remedy
Inaction
was prox
cause of
the loss
Duty of Loyalty: Duty owed to the Corp to act with Good Faith & Reasonable Belief of acting in
Best Int of Corp ALL Ds liable UNLESS dissent in writing (or absent)
Interested
Transactions
Usurpation of
Corp Activity
D or O cause C
to enter deal
with personal
inter for D or O
D or O takes for
personal gain a
deal from C in
which prop int
Particularized Showing Overturns BJR
No
loyalty
prob in
fact
existed
Trans
app'd by
dis-int
Ds or
SHs
"Entire
Trans
was
fair
Review "Entire Transaction"
Stock Author
MBCA 6.01 &
DGCL 151: must
say how much &
voting rights
Examine who proposes the
deal terms, look at who
promotes (deception?), control
of votes, dominate discussion?
Corporate Opportunity
Del Standard:
C is
finan.
able to
take
oppt
C has
int. or
expectc
y in
oppor
Embr opp
would
create
conf b/t D
& Corp
interest
Disclosure: removes
judicial oversight
"Deliberate indifference & inaction in
face of duty to act is conduct clearly
disloyal to Corp. (not exclusive)
Idemnification
Right to Fire Off
DGCL 141(a)
Bd has right of
oversee mgmt
Only if D/O acted in good faith my C
indemnify
Shareholder
Care/Action
SHs owe NO
fiduciary
duties to other
SHs
CONTROL SHs owe fid
duties to minority SHs
Ratification
DGCL 144
Interested transaction not
voidable b/c of interest if
disclosed & appr by maj. of:
(1) Disinterested Directors
(2) SHs entitled to vote
(3) K or transaction is fair to C
(1) Interested
trans b/t
CORP and
DIRECTORS
= ratif by
disinterested
SHs then
subject to BJR
(2) Interested
trans b/t
CORP &
CONTR SH
If rat by
major of
minor SH, P
must show
unfairness
If no rat by
disint SHs,
control SH
must prove
"entire
fairness
Strong: Mrkts incorporate all
information (even not public)
Executive
Compensation
Flagrant
Diversion
Disclosure to
Shareholders
Insider
Information
Entrechment
Essentially
stealing C
assets allows
C to sue for brh
When Os
salary > fair
mrkt value
Providing SHs
false or
deceptive info
to detriment
See next page
Mgmt uses
governing
structure to
divert power
Rebut presump that D
perform honestly & well-
meaning, decisions
rationally undertaken
(1) Shield Ds from PR
(2) Insul Bd decisions Waste:
Lack of rational purpose
Care = Not in Good Faith:
(1) Fraud (2) Con of Interest
(3) Illegality
Gross Negligence:
Lack of reason effort to inform
DGCL 141(e): DIR may rely on compensation experts & may trust
decisions of mgmt, employees, legal counsel, bd committee, etc.
MBCA 8.30(e)-(f): Directors can rely on reps
made by mgmt, experts, counsel, comm, etc
Board Reliance
To Defend
(1 of 3):
Interested
Conduct
Subj
intent to
harm
Gross
Negl - w/o
intent
Derelict of
Duty -
cons
disregard
Spectrum of Bad Faith - Loy to Care
DGCL 102b7 Art of Incp may
eliminate or limit DIR (not O)
pers liabl for breach of fiduciary
duty
Exculpation of DIR
(not officers)
Effect
Overcoming
DG 145(a) - May indem D or O for suit expenses
brought by SH or TP (jud, fines, and setlm)
DG 145(b) - suits brought by C, only indem att'y fees
DG 145(c) - MUST indem if succ on MERITS
DG 145(c) - if lose, C MAY if 145a/b applies
DG 145(e) - may ADVANCE, must return if not indem
DG 145(f) - D & O may K for more coverage
MB 8.51(a) Permissible indem if (1) good faith OR
(2) conduct which may/must be indem by C
MB 8.51(c) termination of suit is not determinative
that D did not meet standard (settlements allowed)
MB 8.51(d)(1) C cannot indem if suit brought by C
UNLESS reas expens if D/O met standard
MB 8.51(d)(2) C cannot indem if D/O liable for harm
in which D/O received financial benefit
MB 8.56 - ADVANCE - D/O yes, Off no if C brings or
bad faith, disloyalty, intentional crim conduct
MB 8.52 - REQUIRED IND - if D/O wholly successful
MB 8.53 - D must provide (1) written aff of GF, (2)
promise to repay if not ent to mandatory indem
Advance payments subject to
reasonable expenses
Close Corp (35 or < SHs)
Majority must
have legitimate
business pur
If yes, minor
must show other
means poss.
Ct must
balance
legit bus
pur agst
practi of
prop alt
Del Standard
BJR:
Burden
on P to
rebut
Bds act
IFT:
Maj get
ben +
exc min
+ at exp
of min
Close Freeze-Out
MA Rule: Maj frustrates Min's
reason expectation of ben of own
Remedy: reason expect of min req
factual determination
Min w/ veto has fid duty to maj
Min Veto
Model Code
Del Code
Close Corp Ag
to Prevent
MB 7.30:
Voting Trust
MB 7.31: Voting
Agreements
SH Ag CANNOT
bind Directors as D
UNLESS
(1) Close Corp
(2) Min nonpart no
object, AND (3)
terms = reasonab Remedy as specific perform. OR
recission OR strike votes (Ringling)
Must show CAUSE & LOSS
Securities Act &
SEC Regulation
Basics
Will generally include if
control rights are not
possible and capital is
basis for invest
Attrib of Stock
1933 Act s. 11
SA 2(a)(1) - defines security
(1) right to divid &
profit
(2) negotiability
(3) ab to pledge/
hypothecate
(4) voting rights
(5) capacity to
appreciate in value
Any contract where investment in
common enterprise purposed on
expectation of profit by work of TP
"Profit soley on efforts of
promoter or TP
Look to passivity & control
Atrib of LLC
(1) contracted
allocation of prof, not
share
(2) membership not
freely alienable
(3) Mems cld pledge
econ int but not
control rights
1933 Process Cannot sell sec. register
Offer but no sale
SEC Review: adq of
disclosure, not merits
Registration Statement
= Effective
Sales allowed &
prospectus must be
delivered
Liabilities
1933 Act
s.12(a)(1)
1933 Act
s.12(a)(2)
Private Rights of
Action
Fraud in regis statement
No req of reliance or cause
Due diligence defense
Strt liab for ill offers/sales
Recission remedy
Fraud in prospectus or oral
sales communication
1934 s. 10(b), Rule 10b-5
Rule 14a & proxy rules
Exemptions from
Registration
1934 Act s. 4
Rule 14a & proxy rules
Private placements & trans done by other
than person, issuer, or dealer
Small, limited offerings
Private
Placement
Test
Number of
offerees &
relation to
issuer
Number
of units
offered
Size
of
offering
Manner
of
offering
Total # offered,
sophistication,
access to info
Materiality:
nfo an "avg prudent investor ought reason. Have before purchasing
No liab if (1) reason investigation, (2) reason to believe, (3) did
believe that when regis became effective statements were true
Cannot claim ignorance
Unlawful for person to
use instru thru mail or
commerce to
Use or employ deception in
sale of publicly traded secur
to bypass SEC rules
Employ device, scheme, or artiface to
defraud
Make untrue statement of material fact
or omit material fact to justify
misleading statements
Engage in any act or business which
operates as fraud or deceit upon another
in connection to sale of security
Min recklessness
required
Only purchasers or
buyers have standing
Silence not
actionable
Causation & Reliance required element
Fraud on the Market
Theory:
Price of stock in
public depends on
material information
available
Loss
Causation:
Fraud causes
the LOSS
Horizontal D
Trans
Causation:
Fraud caused
the investment
Material
Misrepresent
(fraud/deceit)
Scienter
(recklessness or
wrongful mind)
Connection to
sale of security
Reliance
Economic
Loss
Loss
Causation
Manipulations
Wash sale
Matched sale
Sarbanes Oxley:
Transactions
Procedures - Sturct
S. 304 CEO/CFO comp
deduct when finan misst
S. 306 no exec trades
when EE cant trade
S. 404 no loans to
company executives
S. 404 annual internal
control reports
S. 406 code of ethics for
senior officers
S. 407 financial expertise
of audit comm members
S. 301 audit comm req w/
specified composition
options included
Prove with expert
analysis
Basic - trans cause West - loss cause Dura - prove loss
Insider Trading
1934 s.16(b)
Os, Ds, and 10% SH
if possess material
inside info, must
disclose or not trade
Only if Material balance b/t
prob that event will occur and
magnitude of event in light of
totality of company activity
Must be in CONNECTION
with sale & must be insider
(actual or temp fiduciary)
Emphasis on
equal access to
information
Tipee
Derivative: Tipee assumes
FID Duty of SH if (1) tipper
breached fid duty to share
info & (2) tipee knows/
should know of breach
Misappropriate Theory
Misapp confid info for secur
trade in breach owed
1934 Section 16(a)
Short-Swing Profits
Directly or indirectly owner GR
THAN 10% any class of any
equity (t cross 10% no count)
Director or officer of issuer
either purchase or sale
Any profit realized from any
purchase or sale w/in any period
of less than 6 months = disgorge
Strict Liab
Only stock &
convertible debt
not all securities
like 10b-5
SHs can sue
derivatively
Match lowest pur
$ w/ highest sales
$ w/in 6 mo.
Options = strike
+ premium