Post on 31-Dec-2015
LS311 – Business Law ILS311 – Business Law I
Seminar Presentation
UNIT 9Business Organizations
Chapter 26: Corporate Directors, Officer, & Shareholders
Chapter 27: Investor Protection, Insider Trading, & Corporate Governance
Unit 9 Unit 9
• Three (3) items to complete in Unit 9. They are: – Unit 9 Written Assignment (40 points)– Unit 9 DB (20 points) – Unit 9 Case Study (20 points)
• Let’s discuss Chapter 26
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Chapter 26: Chapter 26: Role of Directors & OfficersRole of Directors & Officers
• Every corporation is governed by a board of directors.
• Individual directors are not agents of corporation, only the board itself can act as a “super-agent” and bind the corporation.
• A director can also be a shareholder, especially in closely-held corporations.
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Election and Compensation Election and Compensation of Directorsof Directors
• The number of directors is set forth in the articles of incorporation:– Directors are appointed at the first organizational
meeting– In closely held companies, directors are generally
the incorporators and/or the shareholders– Term of office is generally for one year– Director can be removed for cause
• In very large companies, directors can be compensated, and may be officers as well.
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Board of Directors’ MeetingsBoard of Directors’ Meetings
• Directors hold meetings pursuant to bylaws with recorded minutes
• Special meetings may be called with sufficient notice
• Meetings require QUORUM (minimum number of directors to conduct official corporate business, usually majority)
• Each director generally has one vote
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Rights of DirectorsRights of Directors
Directors have the right to:• Participate in corporate decisions and inspect
corporate books and records• Compensation (usually a nominal sum) and
indemnification. If a director is sued for acts as director, the corporation should guarantee reimbursement (indemnification) or purchase liability insurance to protect the board from personal liability
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• Officers serve at the pleasure of the Board of Directors but have fiduciary duties to company as well
• Their employment relationships are generally governed by contract law and employment law
• Officers may be terminated for cause
Corporate Officers and Corporate Officers and ExecutivesExecutives
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• Fiduciaries of corporation - ethical & legal duties
• Duty of Care – Act in good faith and in best interests of the corp.;
– Make informed and reasonable decisions; and
– Exercise reasonable supervision
• Duty of Loyalty– No conflict of interest
– No insider trading
• A dissenting director is rarely held liable
Duties and Liabilities of Duties and Liabilities of Directors and OfficersDirectors and Officers
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Business Judgment RuleBusiness Judgment Rule
• Immunizes a director or officer from liability from consequences of a business decision that turned sour
• Court will not require directors or officers to manage “in hindsight”
• As long as decision was reasonable, informed, made in good faith and in the best interests of the corporation, BJR will apply
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Role of ShareholdersRole of Shareholders
• Ownership of shares grants a shareholder an equitable ownership interest in a corporation.
• Shareholders generally have no right to manage the daily affairs of the corporation, but do so indirectly by electing directors.
• Shareholders are generally protected from personally liability by the corporate veil of limited liability.
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• Common shareholder - one vote per share
• Articles and bylaws can exclude or limit voting rights of certain classes of stock
• Quorum must be present
• Cumulative Voting allows minority shareholders to get a board member elected
Shareholder VotingShareholder Voting
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• To vote• To have a stock certificate• To purchase newly issued stock• To dividends, when declared by board• To inspect corporate records• To transfer shares, with some exceptions• To a proportionate share of corporate assets on
dissolution• To file suit on behalf of corporation
Rights of ShareholdersRights of Shareholders
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• Shareholders can sue a 3rd party on behalf of the corporation if the Directors fail or refuse to correct the wrong or injury.
• Directors may refuse to take action because they might personally be liable.
• Any damages recovered go to corporation’s treasury.
Shareholder’s Derivative SuitShareholder’s Derivative Suit
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• Shareholders are generally not liable for the contracts or torts of the corporation.
• If the corporation fails, shareholders cannot lose more than their investment, except when: – A shareholder hasn’t paid for stock pursuant to the
stock subscription agreement.– Shareholder buys “watered stock” which is below
the stock’s par value.
Liabilities of ShareholdersLiabilities of Shareholders
Chapter 27:Chapter 27:The Securities ActsThe Securities Acts
• In response to the stock market crash of 1929 and the Great Depression, Congress enacted two acts:– Securities Act of 1933– Securities Exchange Act of 1934
• Apply to public companies
• To structure and oversee the offering, selling, and trading of securities in ways that would protect investors
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Securities Act of 1933Securities Act of 1933
• Requires that investors receive information about securities offered for public sale
• Prohibits fraud in the sale of securities by requiring that securities be registered
• Registration includes information including– a description of properties and business,
– a description of the security to be offered for sale,
– information about management of the company, &
– financial statements certified by independent accountants
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Registration ProcessRegistration Process
• Registration statement does not become effective until approval by SEC.
• Pre-Filing Period: issuer cannot offer or sell securities.
• Waiting Period: securities can be offered by not sold. 2005: Free-writing prospectus.
• Post-Effective Period: registration effective 20 days after approval.
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Violations of the 1933 ActViolations of the 1933 Act
• Intentional or negligent fraud of investors by misrepresenting or omitting material facts in the registration statement and/prospectus.
• Defenses: Statement left out was not material; Plaintiff knew about fraud and purchased stock; Registrant believed statements were true.
• Penalties:
– Criminal: up to 5 years in prison and $10,000 fine.
– Civil: damages, refund of investment, injunction.
Securities Exchange Act of 1934 Securities Exchange Act of 1934
• Created the Securities and Exchange Commission (SEC)
• Power to register, regulate, and oversee brokerage firms, transfer agents, clearing agencies, and securities self-regulatory organizations
• To give the investor confidence and prevent another collapse in the system
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Section 10(b) and Rule 10b(5) Section 10(b) and Rule 10b(5)
• Section 10(b) prohibits the use of any manipulative or deceptive device or contrivance in contravention of rules and regulations of SEC.
• Rule 10b(5) prohibits the commission of fraud in the connection with the purchase or sale of any security.
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• Advance information available to corporate officers and directors that can affect future value of stock.
• Insider information must be material
• Must be a fiduciary relationship for liability
Insider TradingInsider Trading
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Insider Reporting and Insider Reporting and Trading—Section 16(b)Trading—Section 16(b)
• Section 16(b)– Recapture by corporation of profits during
previous six months gained by insider trading.– Applies to stocks, warrants, options and
convertible securities.
• Proxy Statements, Section 14(a)– Whoever solicits a proxy must fully disclose all of
the facts and which shareholders must vote.
Sarbanes-Oxley Act of 2002Sarbanes-Oxley Act of 2002
• In response to the Enron fall in 2001, Congress enacted the Sarbanes-Oxley Act of 2002 (SOX).– To protect investors by improving the accuracy
and reliability of corporate disclosures,– To enhance corporate responsibility, – To end corporate and accounting fraud, and– To restore the image of stock purchases as
investments worth the risk.
• Requires documented internal controls
• Requires CEO and CFO certifications25
Unit 9 Written Assignment Unit 9 Written Assignment Chapter 27 Chapter 27
• Case Scenario: Dale Emerson served as the chief financial officer for Reliant Electric Company, a distributor of electricity serving portions of Montana and North Dakota. Reliant was in the final stages of planning a takeover of Dakota Gasworks, Inc. a natural gas distributor that operated solely within North Dakota. Emerson went on a weekend fishing trip with his uncle, Ernest Wallace.
• Emerson mentioned to Wallace that he had been putting in a lot of extra hours at the office planning a takeover of Dakota Gasworks. On returning from the fishing trip, Wallace met with a broker from Chambers Investments and purchased $20,000 of Reliant stock. Three weeks later, Reliant made a tender offer to Dakota Gasworks stockholders and purchased 57% of Dakota Gasworks stock. Over the next two weeks, the price of Reliant stock rose 72% before leveling out. Wallace then sold his Reliant stock for a gross profit of $14,400.
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Unit 9 Written AssignmentUnit 9 Written AssignmentChapter 27 Chapter 27
• For your Assignment answer the following questions:
1. Would registration with the SEC be required for Dakota Gasworks securities?
2. Did Emerson violate Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5?
3. What theory or theories might a court use to hold Wallace liable for insider trading?
4. Under the Sarbanes-Oxley Act of 2002, who would be required to certify the accuracy of financial statements filed with the SEC?
• Note: Your assignment must be in APA format, include a title page, the paper itself (the discussion) and a reference page
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Questions & RemindersQuestions & Reminders
• Questions on Unit 9 material?
• Remember to complete all Assignments
– Unit Self-Check Quiz (Not for a grade)
– Discussion (See Discussion Board Posting Requirements)
– Written Assignment
– Case Analysis
• Office Hours: Thursdays 7-9PM (ET)
• Have a great week!
• Good luck on the final!
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