Agency Law

Actual Authority - is created by manifestations from the principal to the agent

Express Actual Authority
Principal tells agent to book a hotel room for her
Agent has express actual authority to book the room
Implied Actual Authority
Principal tells agent to make travel arrangements for her
Agent has express actual authority to make travel travel arrangements, including incidental
authority to to what needs to be done to accomplish the assigned task (book flights, hotel, etc)
Apparent Authority - is created by manifestations from principal to third party
Principal manifests to third party that agent has authority to bind her
Inherent Authority
General partners have inherent authority to bind the partnership to contracts in the ordinary course
of business. If the partnership agreement states otherwise, it must inform third parties to avoid
liability via inherent authority of general partners.
Ratification
Principals ex post facto approval of an act by agent for which agent had no authority
Ratification is retroactive, giving effect to the act as if it were done by an agent acting with actual authority
Ratification must encompass the act in its entirety
Estoppel to Deny Existence of Agency Relationship

General Partnership
An association of two or more persons to carry on as owners of a business for profit.
Partnership Agreement
UPA/RUPA provide default rules
Partnership agreement can adjust the relationships (1) among partners and (2) between the partnership and
the partners
Partnership agreement cannot affect the rights of third parties
Liability
Individual partners have unlimited liability (joint and several) for partnership obligations
Transferability
A partner may assign his financial interest in the partnership, but may not transfer other interests such as
management rights, right to access partnership info, etc. without the consent of all other partners
Taxation
Flow-through taxation -- partnership income taxed at individual partners income tax
Altering Partner Ownership
Adding new partners requires the unanimous vote of existing partners unless the partnership agreement
provides otherwise
Expelling a partner is generally only permitted in circumstances specified in the partnership agreement
in limited circumstances, there is an inherent right to expel a partner by the unanimous vote of the
remaining partners (RUPA)
Fiduciary Duties
Partners owe a duty of loyalty and duty of care to the partnership and to the other partners
By agreement, partners may limit their fiduciary duties, but not abolish them completely (RUPA)
Agency
Each partners is an agent of the partnership for the purpose of its business
A statement of partnership authority may limit a partners authority, but is only effective if the third party with
whom the partner deals has notice of it
A partners act need not be taken for the benefit of the partnership for it to bind the partnership as long as
the act was part of the ordinary course of partnership business
Life Span
UPA -- partnership is dissolved automatically when a partner leaves or dies
RUPA -- Events Causing Dissolution and Winding Up
In an at-will partnership, a partner giving notice to the partnership of his express will to withdraw.
In a partnership for a definite term or particular undertaking:
within 90 days of a partners dissociation, at least half of the remaining partners agree to

dissolution and winding up

the express will of all of the partners to wind up
the expiration of the term or completion of the undertaking
The occurrence of an event agreed to in the partnership agreement to cause winding up
An event that makes continuation illegal
On application by a partner, a judicial determination that it is unreasonable for the partnership
business to continue
On application by a transferee of a partners interest, a judicial determination that it is equitable to
wind up the business
If the dissociation of a partner does not result in winding up, the a partnership must buy out the
dissociating partner -- he or his estate receives the value of his interest in the business, less any
damages caused by wrongful dissociation

Limited Partnership (LP)

Key Difference from General Partnership
Formation requires filing of a certificate of LP with the state
Liability -- limited partners are only personally liable for LP obligations up to the amount of their investment
Management -- general partners manage the business
Life Span -- withdrawal or change in limited partners does not interrupt the continuation of an LP
Transferability
GPs transfer must be approved by all partners
LPs interest is non-transferable unless partnership agreement allows free transferability, then the
entire interest may be freely transferable
Taxation
Option to choose taxation type
If publicly traded, taxed like a corporation

Limited Liability Company (LLC)

Formation
One or more persons form an LLC by filing articles of organization with the secretary of state
Liability
All LLC members have limited liability as long as the LLC was properly formed, members paid promised
capital contributions in full, and the LLC is not operating fraudulently
Tranferability
Members may transfer their financial interests in the LLC, but the transferee does not become a member
unless the other members consent or the operating agreement so provides
Taxation
LLC can elect flow-through or entity-level taxation
Life Span
Like a partnership, an LLC may be organized at will or for a term
Members may dissociate at any time and receive the value of their interests
DIssociation of a member does not terminate the LLC unless provided by agreement
Fiduciary Duties
By agreement, LLC members can limit the standard duty of loyalty, but they may not eliminate it entirely
Not all states allow for the waiver of fiduciary duties in an LLC
Agency
Member-managers are agents of the LLC and can bind it
Members who are not also managers cannot bind the LLC

S-Type Corporation
A type S corporation can choose to be treated for federal tax purposes as if it were a partnership.
The requirements for type S treatment:
no more than 75 shareholders
incorporation in the United States
only one class of stock
shareholders must be individuals, estates, or specified types of trusts
no shareholder may be a nonresident alien
may not be a life insurance company or certain other excluded businesses
all shareholders must agree to the type S election

Incorporation
Promoters Contracts
Promoter remains personally liable absent an adoption of the contract by the corporation and a novation
from the other contracting party releasing the promoter from liability
Corporation only becomes liable on a promoters contract if it adopts the contract
Adoption can occur formally by a BoD resolution or informally if the newly-formed corporation
performs obligations under the contract with knowledge of the contract terms
Adoption does not apply retroactively
Pre-Incorporation Agreements
A contract among proposed shareholders to develop a business as a corporation
Cease to be effective upon the formation of the corporation unless the parties indicate they intend otherwise
Secret Profit Rule (some jurisdictions)
A promoter cannot make a secret profit on his dealings with the corporation
If the promoter does not disclose to the corporation the profit he will make on the transaction, the profit can
be disgorged and returned to the corporation
Internal Affairs Doctrine (Vantagepoint)
The substantive law of the state of incorporation is the law that governs the corporations internal affairs
(matters peculiar to the relationship among or between the corporation and its current officers, directors, and
shareholders)

Capitalization
Types of Equity Securities
Authorised Stock -- the maximum number of shares the corporation can issue, set in the AoI
Issued Stock -- are shares that the corporation actually does sell
Outstanding Stock -- are shares that the corporation has issued and not reacquired
Treasury Stock -- are shares that the corporation has issued then reacquired
Acceptable Forms of Consideration for an Issuance (MBCA 6.21)
Money
Tangible or Intangible Property
Services already performed (most states allow services performed before the corporation was actually
formed)
Promissory Notes and Future Services (permissible in most states, NOT IN DELAWARE)
MBCA permits the corporation to place shares in escrow until the note is paid or the services
performed, and to cancel shares if there is a default
Amount of Consideration for and Issuance
Par Value -- a set minimum price below which stock cannot be issued
par value stock cannot be issued for less than par value
upon issuance, par value of stock issued is placed in stated capital account and cannot be used to
pay a distribution to shareholders
idea is to protect creditors -- not really effective/common any more
No Par Value -- no minimum price at which stock must be issued
BoD only needs to determine that the amount of consideration to be received is adequate
BoDs determination that amount of consideration is adequate is conclusive insofar as the
adequacy of consideration for the issuance of shares relates to whether the shares are validly
issued, fully paid, and non-assessable
No minimum issuance price for treasury stock

Duly Authorized
When the shares were issued, the corporation had sufficient shares authorized in its AoI to cover the
issuance
Validly Issued
The proper corporate body authorized and implemented the issuance
BoD in most corporations
Shareholders in a closely-held corporation if there are shareholder agreements giving them that
power
Shares were issued for the appropriate type and amount of consideration
Fully Paid
The consideration set by the BoD was actually paid/received by the company
Non-Assessable
The owner of the shares cannot be assessed for further payments
Watered Stock (Hanewald)
A shareholder is liable to corporate creditors to the extent his stock has not been paid for
Stock that is issued for consideration which is less than its par value, or, in the case of no par stock, its
agreed upon fair market value, but has nevertheless been designated as fully paid
Where the consideration is property or services, the good faith judgment of the BoD as to the value of the
consideration is presumed valid
The corporation or its creditors can recover the water -- the difference between the amount of
consideration received and the par value -- from directors who approved the issuance and the purchaser
Thin Incorporation & Subordination
The issue is whether putative loans to the corporation are actually capital contributions and should be
subordinated to other creditors claims.
Factors to Consider:
whether there were multiple shareholders or a single, controlling shareholder
whether the corporation was adequately funded (debt-to-equity ratio)
whether the loans were made at the formation of the corporation or afterward
whether the loans were made by shareholders proportional to ownership
whether the corporation formally authorized the contributions as loans
whether interest was paid
whether the corporation actively attempted to repay the loans

Preemptive Rights (MBCA 6.30)

Allow shareholder to maintain his percentage ownership by buying her proportionate interest of a new
issuance
3 Approaches in State Statutes:
the grant of preemptive rights is mandatory
preemptive rights are granted unless the AoI provides otherwise (opt-out)
preemptive rights are granted only if the AoI provides for them (opt-in) -- MBCA/CA/Majority
Five Common Statutory Restrictions
Preemptive rights:
generally do not apply between different classes of stock
attach to the issuance of treasury stock? (majority view is yes)
often dont apply to the issuance of stock originally authorized in the AoI and issued within
6 months of incorporation

generally do not attach to the issuance of shares not sold for money
generally do not apply to stock issued as employee compensation
It is impermissible for a corporation to abuse preemptive rights by offering shares at a price below fair value
when there is no legitimate business purpose and the the offering is calculated to force additional investment
(Katzawitz)

Share Transfer Restrictions (STRs) (MBCA 6.27)

Imposed in the AoI, bylaws, an agreement among shareholders, or an agreement between shareholders
and the corporation
Enforceability
STR does not affect shares issued before the STR was adopted unless the holders of the shares
agree
STR is enforceable against the shareholder
STR is enforceable against a transferee if it is noted conspicuously on the certificate
Valid Purposes
to maintain the status of the corporation when it is dependent on the number or identity of
shareholders,
to preserve exemptions under securities laws, or
any other reasonable purpose
Types of STR
grant corporation or others a right of first refusal
obligate corporation or others to acquire restricted shares
require approval of transfer, as long as not manifestly unreasonable
prohibit transfer to designated parties, as long as manifestly unreasonable

Bylaws
Defective Incorporation
De Facto Corporation (THIS DOCTRINE IS NO LONGER FOLLOWED)
Elements
there is a law under which the purported corporation could have been incorporated,
there was a good faith, colorable attempt to comply with that law, and
there was a use of corporate power in the honest belief that a corporation existed
De Facto corporation allows proprietors operating under the mistaken, good faith belief that they had formed
a corporation to avoid personal liability
Modern trend is not to recognize de facto corporation and opt for a bright-line certificate issuance rule of
corporate existence

Corporation by Estoppel (only applies in contract)

When two contracting parties are both operating under the mistaken belief that one is a de jure corporation,
they are estopped from later denying the existence of the corporation
Only applies in contract
Only applies when proprietors were acting in good faith, unaware of their failure to form a de jure corporation
Modern Trend -- bright-line certificate issuance rule, no de facto
Corporate existence begins when the AoI are filed and certified by secretary of state - conclusive proof
If persons assume to act as a corporation before the AoI have been filed, joint and several liability attaches

Functions & Authority of Shareholders

Role of Shareholders

Electing and Removing Directors

Shareholders may remove directors with or without cause unless AoI require cause
Amending Bylaws
Shareholders may amend or repeal bylaws
DELAWARE probably doesnt recognize shareholder power to change bylawys
Approving Fundamental Corporate Changes
AoI amendments, mergers, etc.
Once BoD approves, they send to shareholders for approval

Exercising Voting Rights

Shareholders must act as a group, either:
at a meeting, which satisfies the requirements for notice, quorum, and voting; or
by unanimous written consent.
Quorum
majority of the votes entitled to be cast must be present or represented
once a quorum is present, it is deemed present throughout the entire meeting
AoI may provide for a greater quorum requirement
Vote Requirements
Electing Director - all that is needed is a plurality
Routine Matters - majority of votes actually cast on the issue
Removing Directors - majority of shares entitled to vote
Fundamental Change - majority of shares entitled to vote
Cumulative Voting Rights (relevant only to director elections)
Opt-In -- cumulative voting only if provided in AoI
Shareholder gets to multiply number of shares owned times the number of directors to be elected
Staggering director elections (allowed if there are 9 or more directors in DE) reduces impact of cumulative
voting by reducing the number of directors being elected each year
Voting by Proxy
Voting Trusts
Shareholders transfer legal title of stock to a voting trustee, vesting in trustee the power to vote the shares
Original shareholders retain equitable/beneficial title to the shares
Trust agreement must be in writing
Time limit (often 10 years) on voting trusts
Courts will usually impose the statutory requirements if the deal has the essential characteristics of a voting
trust
Copy of agreement must be given to the corporation
Specifically enforceable
Voting/Pooling Agreements
Shareholders retain legal and equitable title, but agree to vote in a certain way
Model Act provides for specific enforcement if no enforcement mechanism is provided in the agreement
In states where specific performance is available to enforce voting/pooling agreements, there is no reason to
ever use a voting trust

Piercing the Corporate Veil

The corporate veil may be pierced when recognition of the corporation as a separate legal entity would "produce
injustices and inequitable consequences."
Factors Relevant in Piercing Cases
Commingling of funds and and other assets of the corporation with those of individual shareholders;
Diversion of corporate funds or assets to noncorporate uses;
Failure to maintain the corporate formalities;

An individual shareholder representing to persons outside the corporation that he is personally liable for the
debts or other obligations of the corporation;
Failure to maintain corporate minutes or adequate corporate records;
Identical equitable ownership in two entities;
Identity of the directors and officers of two entities who are responsible for supervision and management (a
partnership or sole proprietorship and a corporation owned and managed by the same parties);
Failure to adequately capitalize the corporation for the reasonable risks of the corporate undertaking;
Absence of separately held corporate assets;
Use of the corporation as a mere shell or conduit to operate a single venture of an individual or another
corporation;
Sole ownership of all the stock by one individual or members of a single family;
Use of the same office or business location by the corporation and its individual shareholder(s);
Employment of the same employees or attorney by the corporation and its shareholder(s);
Concealment or misrepresentation of the identity of the ownership, management, or financial interests in the
corporation;
Disregard of legal formalities and failure to maintain proper arms-length relationships among related
entities;
Use of a corporate entity as a conduit to procure labor, services or merchandise for another person or entity;
Formation and use of the corporation to assume the existing liabilities of another person or entity

Duty of Care
Who owes the duty to whom?
A corporations directors and officers owe a duty of care to the corporation
Those who manage the corporation owe fiduciary duties
What is the duty?
Fiduciaries must perform their functions with the care that an ordinarily prudent person would reasonably be
expected to exercise in a like position and under similar circumstances
When does the duty apply?
The duty of care applies to directors when becoming informed with their decision-making function or
devoting attention to their oversight function.
Causation
Plaintiff must show that defendants failure to meet the duty of care resulted in harm to the corporation
Majority/MBCA -- plaintiff must show proximate causation
Delaware -- once the plaintiff shows that the defendant breached his duty of care, the burden shifts to the
defendant to show that his actions were fair to the corporation
Duty to Monitor
BoD must implement systems to monitor operations (Caremark)
The level of detail that is appropriate for such a system is a question for business judgment, but there must
be a system and BoD must use it
Business Judgment Rule (BJR)
The business judgment rule is a presumption that in making a business decision, managers acted on an
informed basis, in good faith, and in the honest belief that the action was in the best interest of the company
Applies when there is no allegation of conflict of interest (i.e. duty of loyalty not implicated)
As long as business decisions are based upon reasonable information and are not irrational, managers
making them are not liable
Behavior that is not grossly negligent or reckless, or decisions with any rational business purpose satisfy the
business judgment rule
Applicability of the Business Judgment Rule
BJR only applies when managers have made conscious decisions

BJR may not apply to managers who are interested in the decision
BJR does not apply if the decision itself constitutes illegal conduct

Rationale of Business Judgment Rule

Shareholders voluntarily undertake the risk of bad business judgment
After-the-fact litigation is a poor device to evaluate business decisions
Potential profit often corresponds to potential risk, so it is in the shareholders interest that law not create
incentives for overly cautious corporate decisions
Mechanics of the Business Judgment Rule
BJR creates presumption that directors acted properly and upheld fiduciary duties
If the plaintiff overcomes that presumption, they still must show harm and causation
Because of the BJR, a court addressing a claim that a management decision breached they duty of care
focuses on the process, and not the substance of the decision

Duty of Loyalty
Who owes the duty?
Fiduciaries, maybe controlling shareholders in close corporations.
What is the duty?
The duty of loyalty requires managers to exercise their powers in the interests of the corporation, and not in
the managers own interest or in the interest of another person or organization.
Application of Duty of Loyalty?
Once the plaintiff shows the conflict of interest, the BJR does not apply and the burden shifts to the
defendant to show that he comported with the duty of loyalty
Defendant must establish that the transaction was fair and reasonable as to the corporation at the time it
was undertaken or show that another safe harbor applies
Courts consider process and substance in evaluating fairness

Self-Dealing/Interested Director Transactions

Any transaction in which a fiduciary is on both sides
Any transaction to which the fiduciary:
is a party, or
in which he has a known material financial interest, or
in which a related person is a party of has a material financial interest
Material Financial Interest: one that reasonably would be expected to impair objectivity
Related Person: includes spouse, relative, spouses relative, person living with fiduciary, or entity controlled
by fiduciary
Safe Harbors -- statutes permit fiduciary to avoid having interested transaction set aside
fiduciary shows that transaction was fair to the corporation when entered (fair process and
substance)
after full disclosure, transaction was approved by disinterested directors
after full disclosure, transaction was approved by disinterested shareholders
If fiduciary shows disinterested director or shareholder approval, BJR applies
Corporate Opportunity Doctrine
Remedy

If fiduciary breaches her duty of loyalty by usurping a corporate opportunity, the corporation is
entitled to a constructive trust on the property usurped -- (1) if she still has the property, she must
sell it to the corporation at her cost, (2) if she has sold it at a profit, the corporation is entitled to
recover that profit.
Delaware Approach
For something to be a corporate opportunity:
the corporation must be financially able to exploit it,
it must be within the corporations business line,
the corporation must have an interest or expectancy in it, and
by taking the opportunity, the fiduciary puts herself in a position inimical to her duties to
the corporation.
If it is a corporation opportunity, the fiduciary breached his duty of loyalty and has a heavy burden
of showing that the transaction was fair and reasonable to the corporation (process and substance)
ALI Approach
A corporate opportunity is either:
something the fiduciary becomes aware of in connection with performance of her
corporate functions or through the use of company info/resources, or
something she becomes aware of in any capacity that is closely related to a business in
which the corporation is engaged or expects to engage.
Difference from DE -- corporations ability to pay is irrelevant in ALI test
Under the ALI Approach, if it is a corporate opportunity, the fiduciary has an absolute obligation to
first present it to the corporation and wait for the corporation to reject it before taking it herself.

Duties of Controlling Shareholders

-- Controlling Shareholders are those who hold enough stock to elect the majority of the managers
-- The traditional view held that shareholders of a corporation do now owe a duty to each other.
-- Controlling shareholders may owe a duty not to oppress minority shareholders or the corporation
-- Evaluating an Alleged Breach of Duty by Controlling Shareholders (Sinclair)
Is there self-dealing by the controlling shareholder?
there is self-dealing when the majority shareholder receives some benefit that the minority does not
If there is no self-dealing, then the business judgment rule applies and the minority must show that the
majority was guilty of gross or palpable overreaching
If there is self-dealing, then the burden shifts to the majority shareholder to show that the transaction was
fair, both procedurally and substantively

Shareholder Derivative Litigation

Derivative vs. Direct Claims
A derivative claim is one brought by the shareholders on behalf of the corporation.
A direct claim is one brought by the shareholders to vindicate their own rights.
Prerequisites for a Derivative Suit
1. Contemporaneous Ownership
The person bringing the derivative suit must have owned the stock when the claim arose or must have
received the stock by operation of law (e.g. divorce, inheritance) from someone who owned the stock when
the claim arose.
For a continuing wrong, California permits a shareholder to sue if he owned the stock during the alleged
wrong or any part thereof.
2. Adequacy of Representation
3. Demand Requirement
Delaware/Traditional Approach
Shareholders must either:
make a demand to the board of directors that the board pursue the lawsuit on the
corporation's behalf, or

demonstrate that making such a demand would be futile

to show that demand is futile, the shareholders must allege detailed facts
creating a reasonable doubt either that the directors were disinterested or that
the challenged act was the product of valid business judgment
a court should not apply the demand futility test when the board that would be
considering the demand did not make the decision that is being challenged by
the derivative suit. In these situations, the court should examine whether the
board that would be addressing the demand can impartially consider its merits
without being influenced by improper considerations.
Universal Demand Approach (MBCA)
Shareholders in a derivative suit must always demand that the board pursue the lawsuit

Directors' Motion to Dismiss and Special Litigation Committees

Delaware Approach
Demand Required Cases (i.e. one in which making the demand on the board wouldn't be futile)
courts will generally grant the board's motion to dismiss based upon an SLC recommendation
if demand was required, there was no conflict of interest and the corporate decision to dismiss the
suit is protected by the business judgment rule
Demand Futile/Excused Cases (Zapata) -- 2-Step Inquiry
Procedural: court reviews the independence and good faith of the SLC
the corporation has the burden of showing that the SLC members were independent of the
defendants, that the SLC undertook a reasonable investigation, and that the SLC had a
reasonable basis for its findings and recommendation
Substantive: assuming the procedure was proper, the court may still review the substance of the
SLC decision
the court may apply its own independent business judgment to determine whether the
case should be dismissed as not being in the best interest of the corporation
New York Approach
Demand Futile/Excused Cases
Procedural: court reviews the independence and good faith of the SLC
If the procedure was proper, the SLC's decision is protected by the business judgment rule

Model Act Approach

Court must dismiss if:
an appropriate group of "qualified" directors -- those with no material interest in the outcome of the
decision or close relation with anyone who has such an interest -- determines
in good faith after a reasonable inquiry that
the derivative suit is not in the best interest of the corporation

Indemnification and Insurance

Mandatory Indemnification
In most states (DE included), directors are entitled by statute to indemnification if they are successful on the
merits of their lawsuits.
Settlements
The person to be indemnified need not demonstrate his own good faith or that he was free from
wrongdoing, only that the claim asserted against him was without merit.
A settlement that is with prejudice and results in the dismissal of the case without any payment
or assumption of liability may be considered a "success" within the meaning of mandatory
indemnification statutes.
A settlement that is without prejudice to a claimant's right to assert further claims against an officer
is not a "success" within the meaning of mandatory indemnification statutes.

Insurance
SEC policy opposes indemnification for D&O claims arising from violations of the Securities Act
Under the Model Act, a corporation may purchase D&O insurance regardless of whether the corporation
would have the power to indemnify against such liabilities under the indemnification provisions.
Insurance coverage is generally limited to non-intentional acts (recklessness is borderline)

Federal Securities Law

Securities Act (1933)
Applies when a company offers or sells securities
A security is:
an investment of money or other valuable property
in a common enterprise
with an expectation of profits
coming primarily from the efforts of others
Exemptions: privately owned company, securities issued upon formation of a corporation
Requirements (if exceptions do not apply):
Registration Statement:
must be filed before a security may be offered
must be effective before a security may be sold
Prospectuses must be prepared and used

Exchange Act (1934)

Mandates the registration of securities in 2 situations:
when the securities are to be traded on a stock exchange
when the there are 500 or more shareholders of the class of securities and the issuer's assets exceed $10
million
By registering, an issuer becomes a reporting company

Tender Offer Rules (Exchange Act)

A person acquiring more than 5% of a class of securities registered under the Exchange Act must disclose
in public filings that fact and its related intentions within 10 days of the acquisition.
It is unlawful, unless filings are made and procedures followed, to make a tender offer for a registered equity
security if success of the offer would result in ownership of more than 5% of the class of securities
It is unlawful to make a tender offer for any kind of security on the basis of materially false or misleading
information
Proxy Regulation (Exchange Act 14)
Elements of the Private Right of Action
1. Statement or Omission that is Misleading as to a Material Fact
A fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important
in deciding how to vote
A conclusory statement of opinion may be materially misleading if (1) the person making the statement
disbelieved the opinion and (2) the opinion was not supported by fact.
2. Causation of Damages
Reliance on the misleading statement is presumed, the plaintiff need only show that the misstatement or
omission in the proxy statement was material and that the proxy solicitation was an essential step in the
transaction being challenged
There is no causation where the plaintiff is a minority shareholder whose votes were not required by law or
bylaw to complete the transaction.

Shareholder Proposals
A shareholder may, if certain conditions are met, have a proposal included in the proxy statement
management sends to shareholders
The shareholder must have continuously held at least $2,000 in market value, or 1%, of the company's
securities entitled to be voted on the proposal at the meeting for at least one year by the date you submit the
proposal. You must continue to hold those securities through the date of the meeting.
Management may exclude shareholder proposals:
related to elections
that are illegal
that relate to companys ordinary business operations
conflicts with companys own proposal
that concern personal grievance

Insider Trading & Securities Fraud

Rule 10b-5
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate
commerce, or of the mails or of any facility of any national securities exchange,
to employ any device, scheme, or artifice to defraud;
to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make
the statements made not misleading; or
to engage in any act practice, or course of business which operates or would operate as a fraud of deceit
upon any person;
in connection with the purchase or sale of a security
Enforcement
SEC can seek civil penalties and injunctions
DOJ can pursue criminal prosecution
Individuals can sue if they bought or sold securities because of some bad act by the defendant (this is not a
derivative suit)

Elements of the 10b-5 Private Right of Action

1. Standing
Plaintiff classes in 10b-5 actions are limited to actual purchasers or sellers
2. Material Misrepresentation or Omission
a fact is material if there is a substantial likelihood that a reasonable investor would consider it important in
deciding whether to buy or sell securities
when the statements are about something that might happen -- use the Texas Gulf Sliding Scale Approach:
consider (1) the probability that the event will occur and (2) the magnitude of the possible event
3. Scienter
The plaintiff must show that the defendant had the intent to deceive, manipulate, or defraud or was reckless
to that end
4. In Connection with the Purchase or Sale of a Security
A nexus between the defendant's fraud and the securities transaction is required
The plaintiff need only establish that the transaction involving the purchase or sale "touch" the transaction
involving the defendant's fraud
5. Reliance ("but for" causation) -- plaintiff must demonstrate that he relied on the defendant's misrepresentation
Fraud on the Market Theory
Because misleading statements affect prices in the public markets, they constitute fraud on the
market and reliance is presumed
A defendant can rebut the presumption of reliance by:
showing that the misrepresentation did not lead to a distortion in price, or

showing that the plaintiff traded or would have traded despite knowing that the
misrepresentation was false

6. Economic Loss
The plaintiff must show that he suffered an economic loss.
7. Loss Causation
Plaintiff must show that the defendant's behavior actually caused the plaintiff's loss.
In fraud on the market cases, an inflated purchase price due to the defendant's fraud will not itself constitute
or proximately cause the relevant economic loss because there are too many intervening factors.
Insider Trading Under Federal Law (Rule 10b-5)
Failure to Disclose (Chiarella)
One who fails to disclose material information prior to the consummation of a transaction commits
fraud only when he is under a duty to disclose
Insiders and Fiduciaries have a duty to disclose
A purchaser of stock who has no duty to a prospective seller because he is neither an insider nor a
fiduciary has no obligation to reveal material facts
When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to
speak.
A duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic
market information
Misappropriation (Materia, OHagan)
One who misappropriates nonpublic information in breach of a fiduciary duty and trades on that
information to his own advantage violates Section 10(b) and Rule 10b-5
Tipper and Tippee Liability (Dirks)
A tipper is someone who passes along nonpublic information in breach of a duty to her corporation
and receives some benefit for doing so.
If the tip constituted a breach of the insiders fiduciary duty (whether the insider stood to benefit
from the disclosure), then the tippee is under an obligation to disclose or abstain
Aiding and Abetting Liability
There is no private cause of action for aiding and abetting violations of Rule 10b-5
SEC has power to bring actions for aiding and abetting violations of Rule 10b-5
DOJ has power to bring criminal actions for aiding and abetting violations of Rule 10b-5

Short-Swing Trading: Exchange Act Section 16

Section 16(a)
Each beneficial owner of more than 10% of any registered equity security, and each director and officer
of an issuer of such a security, must file reports with the SEC and relevant exchanges concerning their
holdings of all equity securities of such issuer and changes in such holdings
Section 16(b)
Any profit realized by any of the above persons (owner of 10% or more, directors and officers) on any
purchases, or sale and purchase, of any non-exempt security of such an issuer, within any period of less
than six months, shall inure to and be recoverable by the issuer (unless the security was acquired in good
faith in connection with a debt previously contracted)
To calculate profits in violation of 16(b), look at the lowest price in, highest price out within 6 months
locate a sale, look six months forward and six months back to find lowest purchase price
multi-share transactions may be split as needed for purposes of matching
any losses during the period are ignored
Section 16(c)
It is unlawful for any of the above persons to sell any non-exempt security of such an issuer if (a) the person
does not own the security or (b) if owning the security, does not deliver the security against the sale within
prescribed periods.