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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  corporation’s 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 Bonsetti’s 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.

  1. What rights does Bonsetti have (in most states) as a minority shareholder dissenting to the merger of GVG and Hula Boards?
  2. Could the parties have used a short-form merger procedure in this situation? Why or why not?
  3. What is the term used for Hula’s offer to purchase GVG stock?
  4. 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

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.

  1. Would registration with the SEC be required for Dakota Gasworks securities? Why or why not?
  2. Did Emerson violate Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5? Why or why not?
  3. What theory or theories might a court use to hold Wallace liable for insider trading?
  4. 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 seller’s liabilities.

When the sale transaction is actually a merger or consolidation of the two companies.

When the purchaser continues the seller’s 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 Example—The 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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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 issuer’s other securities

Corporation’s 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 Offerings—Regulation D

Rule 504: Noninvestment company offerings up to $5 million in any twelve-month period

Rule 506—Private 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 firm’s 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 Trading—Section 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 corporation’s 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 corporation’s accounting and financial reporting processes.

The Compensation Committee: Monitors and determines the compensation of the company’s 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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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 corporation’s 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 corporation’s 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 director’s 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 corporation’s 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 corporation’s 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 Shareholder’s 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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