Publicly Held Corps Outline – Lambert Spring 15
Business entity organized for profit
· Entity that pursue profit
· Consisting of more than one person
· Resources among people are managed via managerial fiat (command)
o There is a principal and agent(s)
· The allocation of authority is determined by a nexus of contracts
Entities differ in the contracts amongst the players
Hallmarks of Corporations
· Residual claimants
· Liability
o Limited to the assets of the corporation
· Creation
o Draft and file articles of incorporation
o State of incorporation
§ Who is agent?
§ # of stocks authorized
§ statement of purpose “any legal activity”
§ pay filing fee
Managerial Authority
· Ultimate authority lies with Board of Directors
o Inside director
§ CEO and chairman of the board
o § 141(a) Corporations can be managed by board of directors
· Shareholders
o Limited managerial authority
§ Can sue directors and officers
§ Elect directors
§ Voting power to remove directors
§ Right to vote on very limited policy matters
ú Mergers
ú Sales of potentially all the corporation’s assets
ú Amendments to articles of incorporation
ú Shareholders own the residual, they do not own the corporation
· Articles of incorporation
o create the corporation
· Bylaws
o Adopted after the incorporation
· Corporate governing instruments are interpreted by the plain meaning rule
o Is there an ambiguity?
o If so, court may consider extrinsic evidence
Fiduciary Duties
· Partnerships have unity of ownership and control
· Corporations have separation of ownership and control
o Owners have very little control
o Fiduciary duties are placed on controllers of corporations
· Duty of Good Faith
o Officer cannot make subjective bad faith decisions or
o Intentionally disregard a duty owed the corporation
o No subjective bad faith
§ Shows an intent to harm the corporation
o Gross dereliction of duty
§ Knowing there is a duty and intentionally/knowingly not filling that duty
o Lack of Due Care
§ Gross negligence but without malevolent intent
§ By itself it is not bad faith
· Duty of Care
o Procedural
§ An obligation to use reasonable care to become informed in making a decision
o Substantive
§ Make substantially reasonable decisions
§ Test
ú Obtain all material information reasonably available before making decisions
· Duty of Loyalty
o No self-dealing, conflicts of interest
o Decisions must be made solely in the interest of the shareholders
Business Judgment Rule
· In order to get the protection of the business judgment rule officer must
o Comply with Duty of Loyalty
o Comply with procedural Duty of Care
Enforcement of Duties
· Lawsuits by shareholders
o Direct
§ Shareholder directly injured
o Derivative
§ Defendant director/officer made a stupid/conflicted/uninformed decision that caused the corporation to lose value and the shareholder suffered a loss
§ There is a demand requirement prior to derivative suit being filed
SECURITIES
State of the law of incorporation controls internal affairs of corporations
Federal law governs publicly held corporations
What is a Security
· Securities Act
o Any note, stock, treasury stock, security feature, bond, debenture, investment contact, or in general, any interest or instrument commonly known as a security
· Investment Contract
o A contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter of a third party
o 3 Elements
1. a person invests his money
2. in a common enterprise (money is b
ummary)
ú something useful to the individual investor
· 2 Exemptions
o Exempt Securities
§ Never have to comply with disclosure requirements (very rare)
o Exempt transactions § 4
§ § 4(a)(1) Transactions by any person other than an issuer, underwriter or dealer
§ § 4(1)(2) transactions by any issuer not involving public offering
ú private placement
§ Factors to consider
ú Number of offerees and their relation to each other and the offerees (most important)
· Investment sophistication, and
· Access to the information that would be available in a registration statement
ú Number of units offered
ú Size of offering
ú Manner and means of offering
o Not involving issuer, underwriter or dealer § 4(1)
§ Purchased in exempt transactions and then resell securities to someone else
§ Underwriter
ú Anyone that purchases with an eye towards reselling
§ Rule 144 protection for investors
ú Hold publicly-traded stock for at least 6 months and then sale a limited number of shares, will not be considered an underwriter
· Civil liabilities §§ 11, 12
o § 11 creates liability for misrepresentation in a registration statement
§ Remedy
ú Damages
ú Normal damages
· What’s the price the investor paid and how much would he have paid had the truth been disclosed?
· Person who bought the stock gets the difference in the price paid for the stock and the sale price if he sold the stock, if hasn’t sold the stock gets the difference between the current price and the price paid
