1. Identify what you thought was the most important concept(s), method(s), term(s), and/or any other thing that you felt was worthy of your understanding.
Also, provide a graduate-level response to each of the following questions:
a. Summarize the required elements for the various business entities described in Chapter 17, providing examples of each and specifically describing the similarities and differences in each.
b. What factors would be considered when a director of a company makes a large trade of the company’s stock?
post should be at least 450+ words and in APA format (including Times New Roman with font size 12 and double spaced).
Please refer to this textbox: Jennings, M. M. (2017). Business: Its Legal, Ethical, and Global Environment (11th ed.). Cengage Learning
Note : no plagiarism please
Marianne M. Jennings
BUSINESS
Its Legal, Ethical, and
Global Environment
11th Ed.
Chapter 18
Governance and Regulation:
Securities Law
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
History of Securities Law
• Initially Regulated at the State Level
• 1929 Stock Market Crash
Precipitated Federal Regulation
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-1
1933 Securities Act
• Primary Offerings
– A primary offering, or an initial public offering
(IPO), is a sale of securities by the business itself
• What is a Security?
– Investment in a common enterprise with profits
to come from the efforts of another (SEC v.
Howey)
• Includes stocks, bonds, warrants, debentures, votingtrust certificates, oil wells, and so forth
• Pension plans are not covered
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-2
1933 Securities Act
• Securities and Exchange Commission
– Administrative agency responsible for
regulating the sale of securities under
both the 1933 and 1934 Acts
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-3
1933 Act: Exempt Transactions
• Exempt Securities
– Securities issued by federal, state, county, or
municipal governments
– Commercial paper (less than nine months)
– Banks, savings and loans, religious and charitable
organization securities
•
•
•
•
Insurance Policies
Annuities
Common Carriers (ICC Regulates)
Stock Dividends and Splits
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-4
1933 Securities Act Transaction
Exemptions
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-5
1933 Act: Exempt Transactions
• Intrastate Offerings − Rule 147
– Issuer must be domestic business in state
where offering is made
– Offerees must all be residents of the
state
– Triple 80 requirements
– Transfer restrictions apply
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-6
1933 Act: Exempt Transactions
• Reg A Offering
– Shortcut method of registration
– Tier 1 Reg A – up to $20,000,000 total
offering
– Tier 2 Reg A – up to $50,000,000 total
offering
– No “bad actors†qualify for Reg A
offerings
– No transfer restrictions
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-7
1933 Act: Exempt Transactions
• Reg A Offerings
– General advertising is permitted
– “Test the waters†provisions to
determine whether there is a market for
the securities
– Some aggregation benefits if “qualified
investors†buy the shares
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-8
1933 Act: Exempt Transactions
• Reg D Offerings to “Accredited Investorsâ€Â
–
–
–
–
–
–
Bank
Private business development firm
Director, officer of issuer
Natural persons with net worth >$1million
Trusts with assets in excess of $5,000,000
Natural persons with annual income of $200,000300,000 /year
– Net worth in excess of $1,000,0000
– Dodd-Frank continues to make changes
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-9
1933 Act: Exempt Transactions
• Reg D JOBS Changes
– General ads permitted
– No changes on transfer restrictions
– Internet pooling funding if pools are
registered
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-10
1933 Act: Exempt Transactions
• Reg D Offerings
– 504 : $1million or less during 12 months
(up to $2,000,0000 under JOBS with
blue- sky registration)
– 505: up to $5 million with less than 35
unaccredited investors (up to $7.5 million
under JOBS with blue-sky)
– 506: no dollar cap, no limit on accredited
investors, unaccredited less than 35
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-11
1933 Act Exemptions
•
•
•
•
Crowd Funding Under JOBS
Up to $1,000,000 in 12 Months
Funding Portal Regulations
Investor Limitations (up to greater of
5% of annual income or $100,000)
• Some Financial Information Required
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-12
1933 Act: Exempt Transactions
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-13
1933 Securities Act
• What Must Be Filed − Documents and
Information for Registration
– Materials include
• Description of securities
• Audited financial statement
• List of assets
• Nature of business
• List of management and their shares
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-14
1933 Securities Act
• What Must Be Filed − Documents and
Information for Registration
– Before registration statement is effective
• Can run tombstone ad
• Can issue red herring (sample prospectus)
• Cannot make offers to sell
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-15
1933 Securities Act
• Violations of 1933 Act
– Section 11 Violations
• Civil liability for inaccurate information in
registration statement
– What is required for a violation?
• Failure to make full disclosure
• Registration statement contains a material
misstatement or omission
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-16
1933 Securities Act
• Violations of 1933 Act
– Who is liable for a violation?
• Officers
• Directors
• Anyone who signed registration statement
• Experts (lawyers, accountants, appraisers,
geologists)
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-17
1933 Securities Act
• Violations of 1933 Act
– Defenses for Section 11 violations
• Immaterial misstatement
• Investor knew of misstatement and bought
anyway
• Due diligence − acted with prudence and
had no reason to believe there was a
problem − not available to issuer
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-18
Due Diligence
• Case 18.1 Escott v. BarChris
Construction Corp. (1968)
– Did BarChris disclose all its debts?
– Were all of the misstatements or
omissions material?
– Who was held liable?
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-19
Violations of 1933 Act
• Penalties
– $10,000 and/or five years
– Injunctions to stop sales
– Civil suits
• Securities Litigation Reform Act of 1995
– Limits attorneys’ fees
– Addresses “professional plaintiffâ€Â
– Allows “safe harbor†protection for financial
predictions
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-20
Violations of 1933 Act
• Section 12 Violations
– Selling without registration (unless
exempt)
– Selling before the effective date
– False information in the prospectus −
same penalties as Section 11
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-21
1933 Securities Act
• Due Diligence and Sarbanes-Oxley
– Registration with Public Company
Accounting Oversight Board
– Auditor Independence
• Eliminates conflict of interest
• Prohibits e.g., bookkeeping, actuarial
services, internal audits, legal audits
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-22
PCAOB
•
•
•
•
•
•
•
•
•
Consists of Five Presidential Appointees
Nonprofit Organization
No More Than Two Members Who are CPAs
Will Develop Registration System for Public Accounting
Firms
Establish Rules to Ensure Quality, Ethics and Auditor
Independence
Will Inspect Firms to Determine Compliance With
Sarbanes-Oxley
Will Investigation Violations and Impose Discipline
Will Encourage High Standard in the Accounting Profession
Dodd-Frank Expands PCAOB’s Authority to Regulating
Analysts
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-23
SOX Auditor Conflicts
•
•
•
•
•
•
•
•
•
Bookkeeping
Information Systems
Appraisals
Actuarial Services
Management or Human Resources Services
Broker, Dealer Services
Legal Services
Expert Services
Other as PCAOB Dictates
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-24
SOX and Internal Controls
• Separate Certification of Internal
Controls By Someone Other Than
Auditor for Financial Reports
• CEO and CFO Certification of
Financial Reports
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-25
SOX and Analysts
• Addresses Intrafirm Conflicts of
Interests – Research and Selling Arms
of Investment Banks
• No Retaliation for Unfavorable
Reports
• Compensation and Supervision of
Analysts
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-26
1934 Securities Act
• Regulates Secondary Market
– The 1934 Act regulates securities and their
issuers once they are on the market
• Securities Registration
– All traded securities on exchanges must be
registered
– All securities of firms with over $10 million in
assets and 500 or more shareholders must be
registered
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-27
1934 Securities Act
• Periodic Filing
– Same firms − national stock exchange
and/or 500 or more shareholders and $10
million or more in assets
• 10-Q − quarterly financial report
• 10-K − annual report
• 8-K − unusual events, spin-offs
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-28
1934 Securities Act
• The Anti-Fraud Provision 10(b)
– Fraud or misrepresentation in the sale of
securities
– Applies to all firms (only requires
interstate commerce)
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-29
1934 Securities Act
• The Anti-Fraud Provision 10(b)
– Failure to give information or giving
overly pessimistic information results in
violation
• Examples: Failure to disclose pending
merger − Texas Gulf Sulphur’s failure to
disclose a rich mineral strike
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-30
1934 Securities Act
• The Anti-Fraud Provision 10(b)
– What should be disclosed?
• Pending takeovers
• Drops in quarterly earnings
• Pending large dividend
• Possible lawsuits
– When to disclose?
• Once information becomes public
knowledge, insiders and tippees are free to
buy and sell the affected shares
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-31
1934 Securities Act
• Case 18.2 Siracusano v. Matrixx
Initiatives, Inc. (2011)
– What does the Court say the
misappropriation theory is?
– Could others have done research and
obtained the same information?
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-32
1934 Securities Act
• How Soon Can You Trade After
Corporate Disclosures?
– Must allow information to go public
– Texas Gulf Sulphur case and adequate
disclosure
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-33
1934 Securities Act
• Insiders, Tippees are All Responsible
Under 10(b)
• Case 18.3 United States v. Salman
(2015)
– Who had what information and how?
– How were the transactions set up?
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-34
1934 Act: Aiders and Abettors
• Stoneridge − Decision was Troublesome to
Investors and Regulators
• Third Parties Joined With the Company to
Dupe the Auditors About the Company’s
True Financial Picture
• Dodd-Frank Changes Their Immunity
Under 10(b); They Can Be Liable for
Knowing Participation in Dissemination of
False Information
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-35
1934 Securities Act
• The Anti-Fraud Provision 10(b)
– Standing to sue: must have been an actual sale
or purchaser to sue
– Mental state: need scienter – the intent to
defraud
– Penalties include $100,000 and up to 25 years
per violation
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-36
1934 Securities Act
• Dodd-Frank Provisions to Provide for
Whistleblowers Who Bring Financial
Fraud Issues to the SEC
• Can Collect Up to 30% of
Government Recovery From
Company
• “Up the Ladder†Issues and Attorneys
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-37
1934 Securities Act
• Section 16 − Insider Trading and
Short Swing Profits
– Applies to officers, directors, and 10
percent shareholders
– Liable to corporations for profits made
on sales and purchase or purchases and
sales during any six month period
– SEC matches highest sale with the
lowest purchase
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-38
Section 16 – Short Swing
Profits
May 1, 2017 − Director A buys 100 shares at $10 each
June 1, 2017 − Director A sells 100 shares at $6 each
July 1, 2017 − Director A buys 100 shares at $4 each
Profit of $200
Highest sale $600
Lowest purchase $400
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-39
1934 Securities Act
• Section 14 − Regulating Voting
Information
– Idea is to have full disclosure
– Proxy materials must be registered with
the SEC
• Who is soliciting
• How the materials will be sent
• Who is paying
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-40
1934 Securities Act
• Section 14 − Regulation of Voting
Materials
– Proxy materials must be registered with the
SEC
• How much has and will be spent
• Purpose of proxy − an annual meeting
– Shareholder proposal
• Management must include under Dodd-Frank if
subject matter is appropriate
• Can get list for solicitation, but management now
absorbs the expense so this is less likely
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-41
1934 Securities Act
• Section 14 − Regulation of Proxy Materials
– Shareholders and executive compensation
• Shareholders have right to advisory vote every
three years
• Compensation committees are now comprised of
independent directors
– Remedies for Section 14 violations
• Invalidate proxies
• Invalidate actions at meeting
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-42
Shareholder Rights
• Merger: A Combination of Two or
More Corporations in Which Only
One of the Original Corporations
Continues to Exist
• Consolidation: A Combination of
Two or More Corporation Into a New
Corporation
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-43
Mergers and Consolidations
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-44
Shareholder Rights
• Tender Offer: A Public Offer to
Shareholders of a Company to Purchase
Their Shares
• Takeovers: Obtaining Control of Company
Through Use of Tender Offer – May Be
Either Friendly or Hostile
• Acquisitions: Purchase of Asset (Not
Stock) of Another Company
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-45
Shareholder Rights
• Williams Act Requires Registration of
Tender Offer Statement
• Shareholders Have 7 Days To
Withdraw Shares
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-46
Shareholder Rights
• State Laws Affecting Tender Offers
– Focuses on corporate governance such
as dissenters’ rights
• The Future of State Antitakeover
Statutes
– New state laws require extended waiting
period to takeover company without
consent of target company Board of
Directors
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-47
Shareholder Rights
• Proxy Regulations and Tender Offers
– Proxy solicitation is also governed by
SEC
– Proxy solicitation must be registered
with SEC
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-48
State and Federal Securities
Laws
• 1933 Act
– S1 – Registration statement
•
•
•
•
Financial information
Officers/directors
Prospectus
20-day effective date, deficiency letter
– Section 11 – Filing False Registration Statement
• Liability: Anyone named in prospectus or offering expert
materials for it
• Material, false statement; privity not required unless longer
than one year
• Defenses: due diligence; buyer’s knowledge
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-49
State and Federal Securities
Laws
• 1933 Act
– Section 12 – Failure to File; Selling
Before Effective Date; False Prospectus
• Material; false statement; privity required
• Defenses: due diligence; buyer’s
knowledge
– Penalties
• $10,000 and/or five years (criminal/civil
suit)
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-50
State and Federal Securities
Laws
• 1934 Act
– 10b – Securities Fraud
– Penalties – $1,000,000 and/or 25 years
– Section 14
• Proxy registration
• Compensation disclosure
– 500 or more shareholders with $5
million or more in assets or listed on
national exchange
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-51
State and Federal Securities
Laws
• 1934 Act
–
–
–
–
8K – Regular reporting at time of event
10K – Annual reports
10Q – Quarterly report
Foreign Corrupt Practices Act
• Financial reports
• Internal controls
• Applies to 1933 and 1934 act registrants
– Section 16A
• Officers, directors, 10% shareholders
• Sales registration
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-52
State Securities Laws
• Blue-Sky Laws
– State registration requirements
– Merit vs. disclosure standards
– Federally exempt securities may still
need to register at state level
• Can Follow a Merit Review Standard
– Securities reviewed for their merit must
be “fair, just, and equitableâ€Â
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-53
International Securities Issues
• Money Flows Freely Across Borders
– United States has most stock exchanges
– European Union has regulations on
disclosure
– Insider trading becoming more
vigorously regulated in other countries
– Only United States has proxy
disclosures
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
18-54
Marianne M. Jennings
BUSINESS
Its Legal, Ethical, and
Global Environment
11th Ed.
Chapter 17
Governance and Structure:
Forms of Doing Business
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publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
Comparison of Business
Organizations
Form
Formation
Funding
Management
Sole proprietorship
No formal requirements
Individual provides
funds
Individual
Partnership
Articles of partnership
Capital contributions of
partners
All partners or delegated to one
Limited partnership
Filing of articles of
partnership
Capital contributions of
general and limited
partners
General partner
Corporation
Formal filing of articles
of incorporation
Debt (bonds)/equity
(shareholders)
Board of directors, officers
and/or executive committee
S corporation or
Subchapter S
Same as above (special
IRS filings)
Same as above
Same as above
Limited liability
company (LLC)
Formal filing – articles
of organization
Capital contributions of
members
No centralized management; all
members manage or delegate to
one member
Limited liability
partnership
Filing of articles of
limited liability
partnership
Capital contributions of
partners
All partners or delegated to one
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-1
Comparison of Business
Organizations
Form
Transfer Control
Taxes
Sole proprietorship
No transfer
Individual pays on individual
return
Partnership
Transfer interest but not partner status
Partner takes profits and losses on
individual return (flow-through)
Limited partnership
Same as partnership (except RULPA)
Same as partnership
Corporation
Shares (with reasonable restrictions) are
easily transferred
Corporation pays taxes;
shareholders pay taxes on
dividends
S corporation or
Subchapter S
Restrictions on transfer to comply with S
corporation
Shareholders pay taxes on profits;
take losses
Limited liability
company (LLC)
No transfer without consent of the majority
Flow-through treatment
Limited liability
partnership
No admission without consent of majority
Flow-through treatment
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-2
Comparison of Business
Organizations
Form
Termination
Liability
Sole proprietorship
Death; voluntary
Individual
Partnership
Dissolution upon death;
withdrawal of partner
Partners are personally liable
Limited partnership
Same as partnership
General partner is personally liable;
limited partners liable to extent of
contribution
Corporation
Dissolved only if limited in
duration or shareholders vote to
dissolve
No shareholder personal liability
unless
(1) Watered or
(2) Corporate veil
S corporation or
Subchapter S
Same as above
Same as above
Limited liability company
(LLC)
Dissolved upon death; bankruptcy
Limited liability – only liable to
extent of capital contribution
Limited liability partnership
Dissolved upon death, bankruptcy
Varies by state, but liability for acts of
partners is limited in some way
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publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-3
Sole Proprietorships
• Formation
– Done by an individual
– May have a fictitious name
• Example: Ralph Jones d/b/a Spuds
Brewery
– No formal requirements for formation
– May have to publish d/b/a name
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publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-4
Sole Proprietorships
• Sources of Funding
– Loans
– Government help
• Liability: Full Personal Liability of Owner
• Tax Consequences
– Owner claims all income and losses
– No separate filing requirement
• Management and Control
– All assets with one person
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-5
Sole Proprietorships
• Transferability of Interest
– Business can be sold − property,
inventory, and goodwill
– Owner will usually sign a non-compete
agreement
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-6
Partnerships
• Governed by the Uniform Partnership
Act (UPA)
– Adopted in 49 states
– In absence of a partnership agreement,
UPA controls
– Revised Uniform Partnership Act (1994)
• Adopted in nine states
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-7
Partnerships
• Definition
– An association of two or more persons to carry
on as co-owners, a business for profit
– Can include corporations and natural persons
• Formation
– Voluntary formation: By agreement
• Draw up articles of partnership
– Involuntary formation→
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publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-8
Information in Articles of
Partnership
Minimum Requirements
1. Names of the partners
2. Name of the partnership
3. Nature of the partnership’s business
4. The time frame of operation
5. Amount of each partner’s capital
contribution
6. Managerial powers of partners
7. Rights and duties of partners
8. Accounting procedures for
partnership books and records
9. Methods for sharing profits and losses
10. Salaries (if any) of the partners
11. Causes and methods of dissolution
12. Distribution of property if the
partnership is terminated
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
Suggested Provisions
1. Disability issues
2. Insurance coverage
3. Sale of interest
4. Divorce of one of the
partners
5. Indemnity agreements
6. Noncompetition agreements
7. Leaves of absence
17-9
Partnership Formation
• Involuntary Formation: By
Implication
– Sharing of profits
– Constitutes prima facie evidence that a
partnership exists
– Exceptions − rent, wages, annuity to
widow or estate, payment for goodwill
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-10
Partnership Formation
• Case 17.1 Blumberg v. Ambrose
(2015)
– Was there a partnership created?
– What were the signals between the two
about their relationship?
– What documentation existed?
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-11
Partnership Formation
• Involuntary Formation: Partnership
by Estoppel (or Ostensible Partner)
– Results when someone allows the
inference to be made that he/she is a
partner
– Allowing name to be used to get a loan
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-12
Partnership Funding
• Sources of Funding
– Capital contributions of partners
– Loans by partners
– Outside loans
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-13
Partnership Liability
• Mutual Principals and Agents
– Partnership assets reachable by partnership
creditors
– Personal assets reachable by partnership
creditors when partnership assets are exhausted
• Case 17.2 Vrabel v. Acri (1952)
– Why wasn’t Mr. Acri a defendant?
– Is Ms. Acri liable for the injuries?
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-14
Partnership
• Tax Issues
– Partnership does not pay taxes
– Partnership files informational return
– Partners report income and losses on
their returns
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-15
Partnership Management
• Partnership Control
– Unless otherwise agreed, each has equal
management authority
– May delegate day-to-day authority to
one partner
– Each partner is mutual principal and
agent of the others
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-16
Partnership Management
• Borrowing − Done Routinely in Most
Partnerships
• Unanimous Consent Required for
Confession of Judgment, Selling
Goodwill, and Admission of Another
Partner
• No Compensation for Work Unless
Agreed
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-17
Partnership Management
• Fiduciary Duties
– Mutual principals and agents
– Each is to act in the best interests of the
partnership
• Partnership Property
– Property contributed to the firm or
purchased with partnership assets
– Own property as tenants in partnership
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-18
Partnership Management
• Transfers of Partners’ Interest
– Partner’s interest is personal property
– Can be pledged to creditors and
transferred
– Transferee does not become a partner
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-19
Partnership Management
• Transfers of Partners’ Interest
– Admission of new partner requires
unanimous consent
– Transferring partner is not relieved of
liability
– Some partnership agreements require
partners to offer it first to remaining
partners
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-20
Partnership Dissolution
• One Partner No Longer Associated
With the Partnership
– Examples: Retirement, death
• Can Just Be a Change in Structure or
Can Proceed to Termination
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-21
Partnership Dissolution
• Dissolution Methods
– By agreement
– By operation of law: death of a partner,
bankruptcy of partnership or partner
– Court order
• Termination
– Assets are liquidated
– Distribute in this order: outside creditors;
partners’ advances (loans); capital
contributions; profits
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-22
Limited Partnerships
• Governed by Uniform Limited Partnership
Act (ULPA)
• Revised Uniform Limited Partnership Act
(RULPA)
– Recent revision adopted in nearly all states
– Use ULPA or RULPA when no agreement
– RULPA addresses the needs of the larger
limited partnership
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-23
L.P.’s: Formation
• Structure
– Must have at least one general partner
– Must have at least one limited partner
– Liability of limited partner is limited to capital
contribution
– Liability of general partner is unlimited
• Formation
– Must meet statutory requirements; if not met a general
partnership may be created
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-24
L.P.’s: Formation
• Must File Certificate of Limited
Partnership
• RULPA is Much Briefer and Adopted
in Nearly All States
• Corrections Can Be Filed By Limited
Partners
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-25
L.P.’s: Formation
• Formation – the RULPA Requires the
Following Information for Formation of a
Limited Partnership
– Name − must contain the words “Limited
Partnershipâ€Â
– Address of principal place of business
– Name and address of statutory agent for
services process
– Business address of general partner
– Latest date for dissolution of partnership
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-26
L.P.’s: Funding
• Sources of Funding
– Limited partners provide most of the financing
– Limited partners can contribute services under
RULPA
– Loans are used − called advances when made
by partners
– Under RULPA, limited partners can use
services already given as a contribution
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-27
L.P.’s: Liability
• Limited Partners Have Limited Liability,
But Cannot Participate in Management
• Under RULPA, Can Do the Following and
Still Retain Limited Liability Status
– Can be an employee
– Can consult with and advise the general partner
– Can act as a surety guarantor for the limited
partnership
– Can vote on amendments, dissolution, sale of
property, and debt assumptions
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-28
L.P.’s: Tax Issues
• Taxed the Same as General
Partnerships
• Partners Report Profits and Losses on
Individual Returns
• Limited Partners Get Direct Tax
Benefits With Limited Liability
• IRS Scrutinizes to be Certain it is a
Partnership and Not a Corporation
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-29
L.P.’s: Profits
• Partner Relationships: Management is
Responsibility of General Partner
• Profits and Distributions
– Authority belongs to general partner to make
decisions here
– Profits and losses are allocated on the basis of
capital contributions
– RULPA requires agreement for splitting
profits and losses to be in writing
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-30
L.P.’s: Partner Authority
• Partner Authority
– General partner has same authority as in
general partnership
– Can restrict by agreement
– Consent of limited partners required for
• Admitting a new general partner
• Admitting a new limited partner (can give
authority in the agreement)
• Extraordinary transactions (selling assets)
– Limited partners have right to inspect books
and records
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-31
L.P.’s: Transferability
• Transfer of Interests Are Permitted
– May have significant restrictions on transfer to prevent
liability under federal securities laws
– The more easily an interest can be transferred, the
more likely the IRS is to label it a corporation
– Transfer of a limited partner’s interest does not
dissolve the partnership
• Under RULPA, Assigning Limited Partner Can
Be Given the Authority to Make the Assignee a
Limited Partner
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
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distributed with a certain product or service or otherwise on a password-protected website
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17-32
L.P.’s: Dissolution
• RULPA Provides for the Following
Means
– Expiration of time period in agreement
or event as provided in agreement
– Unanimous written consent of all
partners
– By court order
– Withdrawal of general partner
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
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distributed with a certain product or service or otherwise on a password-protected website
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17-33
L.P.’s: Dissolution
• If Termination is Elected, Assets are
Distributed as Follows
– Outside creditors
– Partners’ distributions
– Return of capital contributions
– Remainder split according to agreement
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
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17-34
Corporations
• Characteristics of a Corporation
– Unlimited duration
– Free transferability of interest
– Limited liability
– Centralized management
– Legal existence
• Can hold legal title to property
• Can sue and be sued
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17-35
Types of Corporations
•
•
•
•
•
•
For Profit
Not For Profit
Domestic − in the State of Incorporation
Foreign − Everywhere Else
Government Corporations − Like FNMA
Professional Corporations − Limited
Liability on Everything Except Professional
Malpractice
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publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-36
Types of Corporations
• Close or Closely Held Corporations:
Limited Number of Shareholders,
Subject to Less Formality
• Subchapter S or S Corporation
– IRS election to be treated as partnership
for tax purposes
– Still have limited liability
– Limits on size for this election
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-37
Types of Corporations
• The Law of Corporations: Model
Business Corporation Act (MBCA)
– Liberal statute
– One-third of the states have adopted
– Revised in 1984
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
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17-38
Corporate Formation
• Must Comply With Statutory
Requirements
• Where to Incorporate
– Status of state’s corporation laws
– State tax laws
– Ability to attract employees
– Incentives
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
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17-39
Corporate Formation
• File Articles of Incorporation
– Name
– Names and addresses of all
incorporators
– Capital structure of the corporation
– Types of stock
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
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17-40
Corporate Formation
• File Articles of Incorporation
– Classes of stock
– Rights of shareholders
– Voting rights
– Statutory agent
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publicly accessible website, in whole or in part, except for use as permitted in a license
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17-41
Corporate Formation
• Incorporators
– Idea people − also called promoters
– Will be personally liable for contracts entered
into before incorporation
– Corporation can ratify contracts − promoter is
secondarily liable
– Corporation can enter into a novation with the
third party − promoter or incorporator is
released from liability
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
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17-42
Corporate Formation
• Must Hold Initial Meeting After
Incorporation
– Elect new directors
– Adopt bylaws (day-to-day procedures)
– Issue stock
– Ratify pre-incorporation contracts
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publicly accessible website, in whole or in part, except for use as permitted in a license
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17-43
Corporate Capital
• Capital and Sources of Corporate Funds
– Debt Financing − The Bond Market
– Short-term financing − loans from banks
– Bond market
– Benefits of debt financing
• Interest is tax deductible
• Debt holders get paid first
– Limitation: too much debt renders corporation
financially unstable
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
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distributed with a certain product or service or otherwise on a password-protected website
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17-44
Corporate Capital
• Equity Financing − Shareholder
– Common stock: has voting rights,
receives dividends when paid
– Preferred stock: receiver preference over
common stock can be cumulative or
noncumulative
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
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17-45
Corporate Liability
• Liability Issues
– Must make full payment for shares − if
not, there is liability (water stock); not
paying par value
– Shareholders’ liability generally limited
to amount of investment
– If corporate veil is pierced, there is
shareholder liability; means corporate
immunity from liability is set aside
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
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17-46
Corporate Liability
• Reason for Piercing the Veil
– Inadequate capitalization − must put in enough
money to meet the risks of doing business
– Alter ego theory − separate nature of
corporation is disregarded
– No formalities − personal and corporate
properties are mixed together
– Ignoring corporate formalities − personal
elections, meetings
– Forming to perpetrate a fraud on creditors
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-47
Piercing the Veil
• Case 17.3 U.S. v. Bestfoods, Inc.
(1998)
– Is there a special CERCLA rule for
piercing the corporate veil?
– What must be shown to hold a parent
liable for the action of a subsidiary?
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
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17-48
Corporate Tax Issues
• Corporation Pays Tax
– Shareholders pay tax on dividend
income
• Subchapter S or S Corporation
– Corporate liability protection with
partnership tax status
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
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17-49
Corporate Directors
• Election of Directors
– Elected by shareholders to make corporate policy
– May operate by committee
– Hire officers of corporation and set officers’ salaries
• Director Liability
– Protected by the Business Judgment Rule
– Directors and Officers must act in good faith and with
prudence to avoid personal liability
– Can consult experts, but must study issues
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-50
Control By Board of Officer
Pay
• Dodd-Frank Requirements on
Independence of Compensation Committee
and Pay Votes
– Shareholder “say on pay†vote every three
years
– Independent compensation committee
– Claw-back provisions in compensation for
executives if there is fraud or other illegality
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-51
Director Liability
• Case 17.4 Brehm v. Eisner (2000)
– Who made the decision to terminate
Ovitz?
– Was hiring Ovitz just a HUGE mistake?
– Why is there no liability on the part of
the directors?
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-52
Corporate Liability
• Officer Liability
– Increasing personal liability
– Increasing prosecutions
– Particularly when environmental laws
are violated
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-53
Sarbanes-Oxley Act
• Liability for Officers and Directors
– Prohibitions on loans to officers
– Code of ethics for financing reporting
– Lawyer’s new duties to company and
officers
– Board Membership – majority must be
independent
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-54
Sarbanes-Oxley,
Dodd-Frank, and Boards
• Majority of Independent Directors
• Only Independent Directors on Audit and
Compensation Committees
• No Loans to Officers
• Codes of Ethics for Financial Reporting
• Legal Counsel’s Role
–
–
–
–
Must investigate issues raised
Must notify CEO of investigation
Must report material violations to CEO
Must go to independent directors if problem is not
resolved
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-55
Shareholder Rights
• Voting Shareholders
– Elect the board
– The Proxy
– Vote on critical corporate issues
– Pooling agreement
– Voting trust
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-56
Shareholder Rights
• Shareholders Have Right to Vote on
Mergers, Consolidations, and Sale of All
Assets, Not on Acquisition
• Procedure
– Board of Directors adopts resolution in favor
of combination or sale
– Resolution with notice of meeting sent to all
shareholders
– Shareholders vote on resolution at meeting
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-57
Shareholder Rights
• Dissenting Shareholders
– Shareholders not voting in favor of the
combination can force corporation to
purchase their shares for cash – called
appraisal rights
• Corporation May Use Freeze-Out to
Defeat Dissenters’ Rights
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-58
Shareholder Rights
• Shareholders Have Access to Books
and Records
– Under revised MBCA, no ownership
requirements
– Must have proper purpose
• Generally Shares in a Corporation are
Freely Transferable; However
Sometimes Transfers are Restricted
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-59
Shareholder Rights
• Transfer Restrictions
– Must be noted or referenced on stock
certificates
– Must serve a necessary purpose
– Must be reasonable
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-60
Corporate Dissolution
• Voluntary
– Board resolution
– Shareholder approval
• Involuntary
– Forced by court or state agency
– Example: Fraud
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-61
Limited Liability Companies
• History: In Existence Internationally for
Some Time
– GMBH − Europe
– Limitada − South America
– LLC − U.S.
• Nature
– Aggregate organization
– Liability shield
– Income flows through
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-62
LLC: Formation
• Articles of Organization
• Filed Centrally
• Name Must Disclose Status – L.L.C.
or LLC
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-63
Limited Liability Companies
• Funding: Members Contribute Capital
• Liability
– Members stand to lose capital
contributions, but their personal assets
are not subject to attachment
• Case 17.5 Martin v. Freeman (2012)
– What were the assets?
– Is there personal liability?
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-64
Limited Liability Companies
• Tax Consequence
– Income passes through to members
– LLC does not pay taxes
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-65
Limited Liability Companies
• Management and Control
– Operating Agreement − specifies voting rights
– One member or an outside consultant can have
operating authority delegated to him or her
• Transferability of Interest
– Interest can be transferred
– Transferee does not become a member unless
majority of remaining members approve
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-66
Limited Liability Companies
• Dissolution and Termination
– Generally withdrawal, death or
expulsion of members will dissolve
company
– Some states permit judicial dissolution
– All states permit voluntary dissolution
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-67
Limited Liability Partnership
• Formation: Must File To Create
• Funding: Capital Contribution From
Partners
• Liability: Limited Liability For All
• Tax Consequences: Tax Reporting
Entity Not Tax Paying
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-68
Limited Liability Partnership
• Management and Control
– Partners can participate in management
without personal liability for partnership
debts
• Transferability
– Transfer must be restricted
• Dissolution and Termination
– Similar to Limited Partnership
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-69
International Issues
• Joint Ventures Increasing
– Joint ventures with countries themselves
– Business structure varies
• Example: Germany and differing board
structures
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a
publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website
or school-approved learning management system for classroom use.
17-70
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