What is insider trading, and what are the consequences for engaging in it?

  

Steps For the Discussion:
Please remember as we discussed in the zoom session, you are debating the DEBATE THIS prompt. You are going to write an 1 introductory paragraph stating your position then 3 supporting paragraphs, and lastly 1 conclusion paragraph (total of 5 paragraphs). Feel free to incorporate the fact pattern I gave you as an example to help prove your point. But you do not necessarily have to answer the questions posed. I want to see reasoned analysis and critical thinking. There is no right or wrong answer. Feel free to use the internet for all supporting resources, cases, journal, articles, etc… Make sure that you cite your sources.
1. Debate This: Takeovers – Law Firm 6
Mario Bonsetti and Rico Sanchez incorporated Gnarly Vulcan Gear, Inc. (GVG), to manufacture windsurfing equipment. Bonsetti owned 60 percent of the corporations stock, and Sanchez owned 40 percent. Both men served on the board of directors. Hula Boards, Inc., owned solely by Mai Jin Li, made a public offer to buy GVG stock. Hula offered 30 percent more than the market price per share for the stock, and Bonsetti and Sanchez each sold 20 percent of their stock to Hula. Jin Li became the third member of the GVG board of directors. An irreconcilable dispute soon arose between Bonsetti and Sanchez over design modifications of their popular Baked Chameleon board. Despite Bonsettis dissent, Sanchez and Jin Li voted to merge GVG with Hula Boards under the latter name, Gnarly Vulcan Gear was dissolved, and production of the Baked Chameleon ceased. Using the information presented in the chapter, answer the following questions.

What rights does Bonsetti have (in most states) as a minority shareholder dissenting to the merger of GVG and Hula Boards?
Could the parties have used a short-form merger procedure in this situation? Why or why not?
What is the term used for Hulas offer to purchase GVG stock?
Suppose that after the merger, a person who was injured on the Baked Chameleon board sued Hula (the surviving corporation). Can Hula be held liable for the injury? Why or why not

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Debate This:
Corporate law should be changed to prohibit management from using most of the legal methods currently used to fight takeover

Steps For the Discussion:
Please remember as we discussed in the zoom session, you are debating the DEBATE THIS prompt. You are going to write an 1 introductory paragraph stating your position then 3 supporting paragraphs, and lastly 1 conclusion paragraph (total of 5 paragraphs). Feel free to incorporate the fact pattern I gave you as an example to help prove your point. But you do not necessarily have to answer the questions posed. I want to see reasoned analysis and critical thinking. There is no right or wrong answer. Feel free to use the internet for all supporting resources, cases, journal, articles, etc… Make sure that you cite your sources.
2. Debate This: Insider Trading – Law Firm 6
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. On a weekend fishing trip with his uncle, Ernest Wallace, Emerson mentioned that he had been putting in a lot of extra hours at the office planning a takeover of Dakota Gasworks. When he returned from the fishing trip, Wallace purchased $20,000 worth of Reliant stock. Three weeks later, Reliant made a tender offer to Dakota Gasworks stockholders and purchased 57 percent of Dakota Gasworks stock. Over the next two weeks, the price of Reliant stock rose 72 percent before leveling out. Wallace sold his Reliant stock for a gross profit of $14,400. Using the information presented in the chapter, answer the following questions.

Would registration with the SEC be required for Dakota Gasworks securities? Why or why not?
Did Emerson violate Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5? Why or why not?
What theory or theories might a court use to hold Wallace liable for insider trading?
Under the Sarbanes-Oxley Act, who would be required to certify the accuracy of the financial statements Reliant filed with the SEC

Debate This:
Insider trading should be legalize
BUSINESS LAW Today
STANDARD EDITION
TEXT & SUMMARIZED CASES, 12e
Roger LeRoy Miller
Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Corporate Mergers, Takeovers, and Termination
Chapter 35

Chapter Outline
35-1 Merger, Consolidation, and Share Exchange
35-2 Purchase of Assets
35-3 Takeovers
35-4 Corporate Termination
35-5 Major Business Forms Compared

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objectives
What are the basic differences between a merger, a consolidation, and a share exchange?
Under what circumstances is a corporation that purchases the assets of another corporation responsible for the liabilities of the selling corporation?
What actions might a target corporation take to resist a takeover attempt?
What are the two ways in which a corporation can be voluntarily dissolved?

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

35-1 Merger, Consolidation, and Share Exchange (slide 1 of 4)
35-1a Merger
Merger: The legal combination of two or more corporations in such a way that only one corporation (the surviving corporation) continues to exist.
One of the Firms Survives
It Inherits All Legal Rights and Obligations of the Other Firm

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

35-1 Merger, Consolidation, and Share Exchange (slide 2 of 4)
35-1b Consolidation
Consolidation: The legal combination of two or more corporations in such a way that the original corporations cease to exist, and a new corporation emerges with all their assets and liabilities.
A New Corporation Is Formed
It Inherits All Rights and Liabilities of Both Predecessors

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

35-1 Merger, Consolidation, and Share Exchange (slide 3 of 4)
35-1c Share Exchange
Share exchange: A transaction in which some or all of the shares of one corporation are exchanged for some or all of the shares of another corporation, but both corporations continue to exist.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

35-1d Merger, Consolidation, and Share Exchange Procedures
Board of directors of each corporation must approve merger or consolidation plan.
Plan must specify any terms and conditions of merger. It also must state how value of shares of each merging corporation will be determined and how they will be converted into shares or other securities, cash, property, or other interests in another corporation.
Majority of shareholders of each corporation must vote to approve plan at shareholders meeting. If any class of stock is entitled to vote as separate group, majority of each separate group must approve plan.
Once plan is approved by directors and shareholders of both corporations, surviving corporation files plan with appropriate official, usually secretary of state.
When state formalities are satisfied, state issues a certificate of merger to surviving corporation or certificate of consolidation to newly consolidated corporation.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

35-1 Merger, Consolidation, and Share Exchange (slide 4 of 4)
35-1e Short-Form Mergers
Short-form merger: A merger that can be accomplished without the approval of the shareholders of either corporation because one company (parent corporation) owns at least 90 percent of the outstanding shares of each class of stock of the other corporation (subsidiary corporation).
35-1f Shareholder Approval
35-1g Appraisal Rights
When Appraisal Rights Apply
Procedures

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

35-2 Purchase of Assets
35-2a When Shareholder Approval May Be Required
35-2b Successor Liability in Purchase of Assets
When the purchasing corporation impliedly or expressly assumes the sellers liabilities.
When the sale transaction is actually a merger or consolidation of the two companies.
When the purchaser continues the sellers business and retains the same personnel.
When the sale is fraudulently executed to escape liability.
Case Example 35.3 American Standard, Inc. v. OakFabco, Inc. (2010)

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

35-3 Takeovers (slide 1 of 2)
The acquisition of control over a corporation through the purchase of a substantial number of the voting shares of the corporation is a takeover.
35-3a Tender Offers
Tender offer: An offer made by one company directly to the shareholders of another (target) company to purchase their shares of stock.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

35-3 Takeovers (slide 2 of 2)
35-3b Responses to Takeover Attempts
Business Judgment Rule
An ExampleThe Poison Pill Defense
With this defensive measure, a board gives shareholders the right to buy additional shares at low prices.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

35-4 Corporate Termination
(slide 1 of 2)
Dissolution is the formal disbanding of a corporation. It can be brought about by the following:
An act of the state.
An agreement of the shareholders and the board of directors.
The expiration of a time period stated in the certificate of incorporation.
A court order.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

35-4 Corporate Termination
(slide 2 of 2)
35-4a Voluntary Dissolution
By shareholders unanimous vote to initiate dissolution proceedings
By proposal of board of directors submitted to shareholders at shareholders meeting
35-4b Involuntary Dissolution
The state can also dissolve a corporation in certain circumstances.
35-4c Winding Up

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

35-5 Major Business Forms Compared
Sole Proprietorship
Partnership
Corporation
Limited Partnership
Limited Liability Company
Limited Liability Partnership

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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image5.jpeg BUSINESS LAW Today
STANDARD EDITION
TEXT & SUMMARIZED CASES, 12e
Roger LeRoy Miller
Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Investor Protection, Insider Trading, and Corporate Governance
Chapter 30

Chapter Outline
36-1 Securities Act of 1933
36-2 Securities Exchange Act of 1934
36-3 State Securities Laws
36-4 Corporate Governance

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objectives
What is meant by the term securities?
What is insider trading? Why is it prohibited?
What are some of the features of state securities laws?
What certification requirements does the Sarbanes-Oxley Act impose on corporate executives?

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-1 Securities Act of 1933 (slide 1 of 2)
36-1a What Is a Security?
Preferred and common stocks, treasury stocks, bonds, debentures, and stock warrants
Stock options, puts, calls, or other types of privilege on a security or on the right to purchase a security or a group of securities on a national security exchange
Notes, instruments, or other evidence of indebtedness
Fractional undivided interest in oil, gas, or other mineral rights
Investment contracts

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-1 Securities Act of 1933 (slide 2 of 2)
36-1a What Is a Security?
The Howey Test
An investment contract is any transaction in which a person (1) invests (2) in a common enterprise (3) reasonably expecting profits (4) derived primarily or substantially from others managerial or entrepreneurial efforts.4
Case Example 36.1 State v. Nistler (2015)
Many Types of Securities
Stocks and bonds issued by corporations are the most common securities.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-1b Registration Statement (slide 1 of 2)
Prospectus
A written document required by securities laws when a security is being sold.
Contents of the Registration Statement
Securities being offered for sale, including their relationship to issuers other securities
Corporations properties and business
Management of the corporation
How the corporation intends to use proceeds of sale
Any pending lawsuits or special risk factors

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-1b Registration Statement (slide 2 of 2)
The Registration Process
Prefiling Period: Issuer normally cannot sell or offer to sell the securities.
Waiting Period: The securities can be offered for sale but cannot legally be sold.
Posteffective Period: The issuer can offer and sell the securities without restrictions.
Well-known Seasoned Issuers (WKSI)
Firms that have issued at least $1 billion in securities in the last 3 years or have outstanding stock valued at $700 million or more in the hands of the public.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-1c Exempt Securities
Exempt securities
Are low-risk investments or are regulated by other statutes
Maintain their exempt status forever
Can be resold without being registered
Include the following:
Government-issued securities.
Bank and financial institution securities
Short-term notes and drafts
Securities of nonprofit, educational, and charitable organizations.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-1d Exempt Transactions (slide 1 of 3)
Regulation A Offerings
Securities issued by an issuer that has offered less than $50 million in securities during any twelve-month period.
Two types of public offerings: Tier 1 and Tier 2
Important Rule Changes
Cap for Regulation A offerings is $50 million.
Testing the Waters:
Companies can test the waters and find out potential interest from investors without selling securities or requiring investor commitment.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-1d Exempt Transactions (slide 2 of 3)
Small OfferingsRegulation D
Rule 504: Noninvestment company offerings up to $5 million in any twelve-month period
Rule 506Private Placement Exemption: Private, noninvestment company offerings in unlimited amounts if these are not generally solicited or advertised
Resale and Safe Harbor Rules
Resales of restricted securities trigger registration requirements unless the sales fall under Rule 144 or Rule 144A (safe harbors).

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-1d Exempt Transactions (slide 3 of 3)

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-1e Violations of the 1933 Act
Remedies
Violators may be fined and/or imprisoned.
Defenses
The statement or omission was not material.
The plaintiff knew about the misrepresentation at the time of purchasing the stock.
The defendant exercised due diligence in preparing the registration and reasonably believed at the time that the statements were true and there were no omissions of material facts.
Case Example 36.5 Litwin v. Blackstone Group, LP (2011)

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case 36.1
Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (2015)
Would a reasonable investor have cause to complain if an issuer, without having consulted a lawyer, states, We believe our conduct is lawful? Explain.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-2 Securities Exchange Act of 1934
36-2a Section 10(b), SEC Rule 10b-5, and Insider Trading
Basic elements of a securities fraud action:
Material misrepresentation
Scienter
Reliance by plaintiff on material misrepresentation
Economic loss
Causation

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-2a Section 10(b), SEC Rule 10b-5, and Insider Trading (slide 1 of 3)
Insider Trading
Occurs when persons buy or sell securities on the basis of information that is not available to the public.
Disclosure under SEC Rule 10b-5
Fraudulent trading
Dividend change
Contract for sale of corporate assets
New discovery, process, or product
Significant change in firms financial condition
Potential litigation against company

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Classic Case 36.2
Securities and Exchange Commission v. Texas Gulf Sulphur Co. (1968)
Affirmed the principle that the test of whether information is material for SEC Rule 10b-5 purposes, is whether it would affect the judgment of reasonable investors

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-2a Section 10(b), SEC Rule 10b-5, and Insider Trading (slide 2 of 3)
Outsiders and SEC Rule 10b-5
Tipper/Tippee Theory: Tippees who receive inside information as a result of a fiduciary breach are liable.
Case Example 36.7 SEC Charges Group of Amateur Golfers in Insider Trading Ring
Misappropriation Theory: A person who wrongfully obtains inside information and trades on it for personal gain is liable.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-2a Section 10(b), SEC Rule 10b-5, and Insider Trading (slide 3 of 3)
Insider Reporting and TradingSection 16(b)
The corporation can recapture all profits realized by an insider on a purchase and sale, or sale and purchase, of its stock within any six-month period.
The Private Securities Litigation Reform Act
The act provides a safe harbor for publicly held companies that make forward-looking statements.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-2b Regulation of Proxy Statements
Section 14(a) of Securities Exchange Act of 1934 regulates solicitation of proxies from Shareholders of Section 12 companies.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-2c Violations of the 1934 Act
(slide 1 of 2)
Scienter Requirement
Case Example 36.10 Altayyar v. Etsy, Inc. (2017).
Scienter Not Required for Section 16(b) Violations
Liability under Section 16(b) is strict liability, and neither scienter or negligence is required.
Criminal Penalties
Case Example 36.11 United States v. Newton (2014)

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-2c Violations of the 1934 Act
(slide 2 of 2)
Civil Sanctions
The SEC can bring suit in a federal district court against anyone violating or aiding in a violation of the 1934 act or SEC rules by purchasing or selling a security while in the possession of material nonpublic information.
Private parties may also sue violators of Section 10(b) and Rule 10b-5.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-2d Online Securities Fraud
Investment Newsletters
An investor may believe that information in an online newsletter is unbiased, when in fact fraudsters will directly profit by convincing investors to buy or sell particular stocks.
Social Media
Anonymous fraudsters can quickly disseminate securities information to millions of people at little or no cost.
It can be difficult for the SEC to access social media accounts to investigate potential violations.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-3 State Securities Laws
36-3a Requirements under State Securities Laws
State securities laws apply mainly to intrastate transactions.
Case Example 36.11 In re Access Cardiosystems, Inc. (2015)
36-3b Concurrent Regulation
Issuers must comply with both federal and state laws. Most duplicate regulations have been eliminated.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-4 Corporate Governance
Corporate governance: A set of policies specifying the rights and responsibilities of the various participants in a corporation and spelling out the rules and procedures for making corporate decisions.
36-4a Aligning the Interests of Officers and Shareholders
Problems with Stock Options
Outside Directors

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-4b Promoting Accountability
(slide 1 of 2)
At a minimum, corporate governance involves:
Audited reporting of the corporations financial progress, so managers can be evaluated.
Legal protections for shareholders, so violators of the law who attempt to take advantage of shareholders can be punished for misbehavior and victims may recover damages for any associated losses.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-4b Promoting Accountability
(slide 2 of 2)
Governance and Corporation Law
State corporation statutes set up the legal framework for corporate governance.
The Board of Directors
The Audit Committee: Oversees the corporations accounting and financial reporting processes.
The Compensation Committee: Monitors and determines the compensation of the companys officers.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36-4c The Sarbanes-Oxley Act
More Internal Controls and Accountability
The act introduced direct federal corporate governance requirements for public companies.
Exemptions for Smaller Companies
Certification and Monitoring Requirements
Section 906: Chief executive officers (CEOs) and chief financial officers (CFOs) must certify that the corporate financial statements fairly represents in all material respects, the financial conditions and results of operations of the issuer.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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image5.jpeg BUSINESS LAW Today
STANDARD EDITION
TEXT & SUMMARIZED CASES, 12e
Roger LeRoy Miller
Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Corporate Directors,
Officers, and Shareholders
Chapter 34

Chapter Outline
34-1 Directors and Officers
34-2 Duties and Liabilities of Directors and Officers
34-3 Shareholders
34-4 Rights and Duties of Shareholders

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objectives
What three rights do corporate directors possess?
What must directors do to avoid liability for honest mistakes of judgment and poor business decisions?
What is a voting proxy?
If a group of shareholders perceives that the corporation has suffered a wrong and the directors refuse to take action, can the shareholders compel the directors to act? If so, how?

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

34-1 Directors and Officers (slide 1 of 2)
34-1a Directors
Election of Directors: Number of directors is set forth in the corporations articles or bylaws.
34-1b Compensation of Directors
34-1c Board of Directors Meetings
34-1d Committees of the Board of Directors
The audit committee oversees the corporations accounting and financial reporting processes.
The compensation committee monitors and determines the compensation of the officers.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

34-1 Directors and Officers (slide 2 of 2)
34-1e Rights of Directors
Right to participation
Right of inspection
Right to indemnification
34-1f Corporate Officers and Executives
The board of directors hires corporate officers and other executive employees. It can normally remove corporate officers at any time with or without cause.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

34-2 Duties and Liabilities of Directors and Officers (slide 1 of 2)
34-2a Duty of Care
Duty to Make Informed and Reasonable Decisions
Duty to Exercise Reasonable Supervision
34-2b The Business Judgment Rule
A corporate director or officer is not liable to the corporation or to its shareholders for honest mistakes of judgment or bad business decisions made in good faith.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

6

34-2b The Business Judgment Rule (slide 1 of 2)
When the Rule Applies
The director or officer took reasonable steps to become informed about the matter.
He or she had a rational basis for his or her decision.
He or she did not have a conflict of interest between his or her personal interest and that of the corporation.
Case 34.1 Oliveira v. Sugarman (2016)

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

7

34-2b The Business Judgment Rule (slide 2 of 2)
The Rule Provides Broad Protections
Most courts will apply the rule unless there is evidence of bad faith, fraud, or a clear breach of fiduciary duties.
34-2c Duty of Loyalty
The duty of loyalty requires directors and officers to subordinate their personal interests to the welfare of the corporation.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

8

34-2c Duty of Loyalty
Cases dealing with the duty of loyalty typically involve at least one of the following:
Competing with the corporation.
Usurping a corporate opportunity.
Having an interest that conflicts with the interest of the corporation.
Engaging in insider trading.
Authorizing a corporate transaction that is detrimental to minority shareholders.
Selling control over the corporation.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

34-2 Duties and Liabilities of Directors and Officers (slide 2 of 2)
34-2d Disclosure of Conflicts of Interest
A directors fiduciary duty requires him or her to make a full disclosure of any potential conflicts of interest that might arise in any corporate transaction.
34-2e Liability of Directors and Officers
Directors and officers are liable for their own crimes and torts. They may also be held liable for the crimes and torts committed by employees under their supervision.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Classic Case 34.2
Guth v. Loft, Inc. (1939)
One of the first to set forth a test for determining when a corporate officer or director has breached the duty of loyalty

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

34-3 Shareholders
34-3a Shareholders Powers
Approve fundamental changes affecting the corporation before the changes can be implemented
Elect or remove members of the board of directors.
34-3b Shareholders Meetings
Proxies
Shareholder Proposals
Rules for Proxies and Shareholder Proposals

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

34-3c Shareholder Voting
Quorum Requirements
A quorum must be present for shareholders to act (vote) during a meeting.
Case Example 34.9 Case v. Sink & Rise, Inc. (2013)
Voting Requirements
If a state statute requires specific voting procedures, the corporations articles or bylaws must be consistent with the statute.
Cumulative Voting
Other Voting Techniques

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

34-4 Rights and Duties of Shareholders (slide 1 of 3)
34-4a Stock Certificates
A certificate issued by a corporation evidencing the ownership of a specified number of shares in the corporation.
34-4b Preemptive Rights
The right of a shareholder in a corporation to have the first opportunity to purchase a new issue of that corporations stock in proportion to the amount of stock already owned by the shareholder.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

34-4 Rights and Duties of Shareholders (slide 2 of 3)
34-4c Dividends
Illegal Dividends: Payouts that are improperly paid from an unauthorized account or that cause the corporation to become insolvent
Directors Failure to Declare a Dividend
34-4d Inspection Rights
The RMBCA provides that every shareholder is entitled to examine specified corporate records for a proper purpose, provided the request is made in advance.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

34-4 Rights and Duties of Shareholders (slide 3 of 3)
34-4e Transfer of Shares
Generally, stock can be transferred to another person unless there are valid restrictions on its transferability.
34-3f The Shareholders Derivative Suit
A suit brought by a shareholder to enforce a corporate cause of action against a third person.
Written Demand Required
Damages Recovered Go into Corporate Funds

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

34-4g Duties of Majority Shareholders
In some instances, a majority shareholder may have a fiduciary duty to the corporation and to the minority shareholders. In these situations, majority shareholders owe a fiduciary duty to the minority shareholders.
When a majority shareholder breaches her or his fiduciary duty to a minority shareholder, the minority shareholder can sue for damages.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Introduction:
Corporate takeovers have been a topic of discussion among legal experts for a long time. In a recent scenario studied by law firm 6, the conflict between two shareholders of Gnarly Vulcan Gear, Inc. led to the dissolution of the corporation. This case study raises questions regarding the rights of a minority shareholder in a merger situation and the implications for the surviving corporation. This debate asks whether changes should be made to corporate law to prohibit management from using most of the legal methods currently used to fight takeovers.

Description:
The situation between Bonsetti and Sanchez in Gnarly Vulcan Gear, Inc. raises concerns about the rights of minority shareholders in a merger. Generally, in most states, a minority shareholder who dissents to a merger may have the right to appraisal, which is the ability to force the surviving corporation to purchase the minority shareholder’s stock at a fair price. Bonsetti can exercise this right if he is not satisfied with the merger. However, short-form merger procedures cannot be used in this situation as they can only be used when the surviving corporation owns at least 90 percent of the shares of the subsidiary corporation. Hula Boards, Inc. only purchased 40 percent of the shares, and therefore, short-form merger cannot be used. Hula’s offer to purchase the Gnarly Vulcan Gear, Inc. stock is called a tender offer.

In another debate, the issue of insider trading is discussed. Insider trading is a practice of using non-public information to buy or sell a company’s stocks, which is illegal. The case of Dale Emerson, who served as the chief financial officer of a corporation, raises concerns about the ethical implications of insider trading. Insider trading undermines the integrity of the stock market, and thus, it is a serious issue. However, the question remains whether corporate law should ban the legal methods that management uses to fight takeovers. Changes to corporate law could limit the options available to management to protect the corporation from takeovers.

Conclusion:
The debate on corporate law and insider trading requires careful analysis of the implications for minority shareholders and the integrity of the stock market. While the legal methods used by management to fight takeovers raise ethical concerns, the potential inhibition of corporations’ ability to protect themselves against takeovers must be considered when changing laws. Similarly, insider trading undermines the market’s transparency and integrity and must be addressed at all costs. Overall, both debates emphasize the need for careful consideration of legal and ethical issues in corporate law.

Objectives:
1. To understand the legal rights of minority shareholders in a merger or acquisition situation.
2. To analyze the possibility of using short-form merger procedures in a given scenario.
3. To identify the legal implications of a corporation’s offer to purchase the stock of another corporation.
4. To discuss the potential liability of a surviving corporation in a situation where a person is injured.

Learning Outcomes:
1. By the end of this discussion, participants will be able to list the rights of a minority shareholder who dissents to a merger or acquisition in most states.
2. Participants will be able to evaluate whether or not short-form merger procedures can be used in a given scenario based on legal guidelines.
3. Participants will be able to define the term used for a corporation’s offer to purchase another corporation’s stock and explain its legal implications.
4. Participants will be able to assess a surviving corporation’s potential liability in a situation where a person is injured based on legal principles.

Debate This: Takeovers

Introduction: This writer’s position is that minority shareholders should have more legal protection in a merger or acquisition situation.

Supporting Paragraph 1: Minority shareholder rights vary by state, but most states have laws in place to protect minority shareholders from coercive or fraudulent behavior by majority shareholders or boards of directors. In this scenario, Bonsetti would have the right to dissent to the merger and seek appraisal rights if he meets the eligibility requirements in his state.

Supporting Paragraph 2: It is unlikely that the parties could have used a short-form merger procedure in this situation because the procedure typically requires a high percentage of shares to be acquired. Hula only purchased 20% of GVG’s stock from each shareholder, and therefore, the short-form procedure would not have been appropriate.

Supporting Paragraph 3: Hula’s offer to purchase GVG stock is referred to as a tender offer and can have legal implications for both corporations involved. Tender offers must be filed with the Securities and Exchange Commission (SEC), and the corporation making the offer must comply with SEC regulations.

Conclusion: In conclusion, minority shareholder rights should be strengthened with clearer and more explicit legal protections. In this scenario, Bonsetti’s dissenting rights were limited, and it is important that minority shareholders have a legal voice in corporate decision-making.

Debate This: Corporate Law and Takeovers

Introduction: This writer believes that current laws should not be changed, and management should have the ability to use legal methods to fight a takeover.

Supporting Paragraph 1: Corporate law provides a framework for management to act in the best interests of the corporation and its shareholders. The legal methods used to fight a takeover, such as poison pills and golden parachute agreements, serve to protect shareholder value and prevent hostile takeovers.

Supporting Paragraph 2: Shareholders have the power to change management if they are dissatisfied with corporate performance or decision-making. Changing laws to limit management’s options in a takeover could limit a corporation’s ability to defend against a hostile takeover.

Supporting Paragraph 3: Changes to corporate law should be made only after careful consideration of the consequences. The potential impact on corporate governance and shareholder rights should be assessed to determine if changes are necessary.

Conclusion: In conclusion, current corporate law strikes a balance between protecting shareholder value and allowing management to act in the best interests of the corporation. While changes may be necessary in some circumstances, careful consideration of the consequences should guide any proposed changes.

Introduction:
The topic of corporate takeovers and the legal procedures that come with them can be complex and contentious. In the case of Gnarly Vulcan Gear, Inc. (GVG), there are several issues at play, including the rights of minority shareholders and the liability of the surviving corporation in the event of a lawsuit. Additionally, there is an ongoing debate about whether corporate law should be changed to prohibit management from using certain legal methods to fight against takeovers. In this discussion, we will explore these issues and provide reasoned analysis and critical thinking.

Suggested Resources/Books:
1. “Corporate Takeovers: Causes and Consequences” by Bengt Holmstrom and Steven N. Kaplan
2. “The Law and Practice of Mergers & Acquisitions in the United States” by Dennis J. Block and Markus C. Diethelm
3. “The Corporate Finance Sourcebook: The Guide to Major Capital Investment Sources and Related Financial Services” by Steven Bragg

Similar asked questions:
1. What are the common legal procedures involved in corporate takeovers?
2. How do shareholder rights affect the outcome of a takeover?
3. What is the role of the board of directors in a takeover?
4. How does corporate law differ between states in the US?
5. What are the ethical considerations surrounding takeovers and mergers?

Supporting Paragraph 1:
In the case of Gnarly Vulcan Gear, Inc., Mario Bonsetti has certain rights as a minority shareholder dissenting to the merger with Hula Boards, Inc. In most states, including California where GVG is incorporated, a minority shareholder has the right to dissent to a merger and receive the fair value of their shares. However, this right is subject to certain restrictions and limitations, such as the ability of the majority shareholders to force a merger through a short-form merger procedure.

Supporting Paragraph 2:
A short-form merger procedure allows the surviving corporation to carry out a merger without obtaining the approval of minority shareholders. In the case of GVG and Hula Boards, it is unlikely that the parties could have used a short-form merger procedure. This is because California law requires at least 50% of the outstanding voting power of each class of shares to be voted in favor of the merger, and the combined voting power of Bonsetti and Sanchez’s stock would exceed 40%.

Supporting Paragraph 3:
The term used for Hula’s offer to purchase GVG stock is a tender offer. This is a public offer made by a company or entity to purchase a substantial percentage of outstanding shares of another company at a premium price, often to gain control of the company.

Conclusion:
Corporate takeovers and the legal procedures surrounding them can be complicated and contentious. In the case of Gnarly Vulcan Gear, Inc., there are several issues at play, including the rights of minority shareholders and the liability of the surviving corporation. While some argue that corporate law should be changed to prohibit management from using certain legal methods to fight against takeovers, others believe that such a change would limit the ability of management to protect the interests of the company and its shareholders. Ultimately, the outcome of a takeover depends on a variety of factors, including the legal framework in which it takes place, the rights of shareholders, and the ethical considerations involved.

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