OFFICERS are

AGENTS OF
CORPORATIONS

Authority

PRES has inh auth to

bind C for K

Actual

Apparent

Inherent

Ratification

Estoppel

RTA s.2.01

RTA s.2.03

RSA 8A
(RTA Strikes)

RTA 4.01

RTA s2.05

P to A

P to TP

P gen. Undiscl.

P ratifies A

NO AGENT

Power held by
A to affect P
when TP rbly
believes A has
authority to act
based on Ps
manifestation
to TP

P liable for A if As
acts are within auth
usually confided in
an agent who
normally has that
auth (can K out)

Affirmance of prior
act done by A

No act or app P
may be liable to TP
based on A if:

Express

Implied

Agent acts
reasonably on
Ps
manifestations
that P wants A
so to act.

App Imp
Authority: put
agent in place
for TP to rbly
believe A has
auth.

Conduct,
words, or
implied by
conduct

Based on As
reasonable
perception

R3rd s.6.03
Duty is on A to disclose P

Undisclosed
Principal
Or
Rogue A

P is
intention
or
careless
of TP
belief

P is on
notice of
TP belief
and does
not try to
stop

IMPLIED
affirmance = P
conduct, P
must have
reason to
know

Agent & TP are

parties to
agree.

P must have
choice, cannot
be AFTER act

Look for
undisclosed P

Such powers
are as
reasonably
necessary to
carry out the
duties

P acts to
justify rnbl
assumptn
of consent

A must be
acting ON Ps
BEHALF!

RSA 161

Sub Agent
RTA 1.04(8)
A of A to
conduct Ps
business in
scope of A
authority

Look to past
conduct

Manifest
assent
that act
will affect
legal
relations

RTA expands RSA

capture Rogues

Liability of P on
TP on Tort
Not on Agency, on KIND of Ag

Look to K to
clarify As
authority

Day-to-day control, distinct operation, custom, skill, tools, time,

compensation, party belief, business or not (7.07)

POLICY Control, esp ownership

and profits tends to infer agency
Labels dont matter
RSA 1.01 P must have control

Employee

Liability of
Agent on K
Undisclosed
Principal

A & TP ARE
party UNLESS
agree
otherwise

Unidentified
Principal

A IS party
UNLESS
agree
otherwise

P liable if
within scope of
employment
CONTROL
Disclosed
Principal

A is NOT party
UNLESS
agree
otherwise

Nonemplee
Agent
P NOT liable
unless:

Nonagent Ind.
Contractor

Respondeat superior as limit

NOT Liable
NO CONTROL
UNLESS:

P assert control
RTA 7.03(1)
Direct
RTA 7.07
Employee
RTA 7.08
Apparent A

P negligent
Non-delegable
P volunteers to
take duty
Apparent
Authority

Control over actual instrument

Nuisance per
se
Incompt
Contractor OR
Financ. Incom.
Nondelegable
duty

7.07 SCOPE:
Engaging in conduct subject
to Ps control
Liability = if harm is
foreseeable from conduct of
EEs

7.07 Intentional
Look at type of tort

Agents Duties
If Breach:
P MAY consent to
Conflict of Interest
8.01

Fiduciary
Duties

Disclose
MATERIAL
information

A must act in
good faith

Ps consent
must be
specific to act
or transaction

Deal fairly

Disgorge
profits to P

Waiver

Duty of Care
RTA 8.08, .09

Reasonable
Care 8.08

Worse than K
case b/c not
damages,
disgorge

W/in Scope &

Comply w/
Instructions
8.09

Good Conduct
catch-all 8.10
Loyalty
Personal
Benefit
8.02

Adverse
Dealings
8.03

Competing
8.04

Proprietary
Inform
8.05

Waiver

Waiver

Waiver

Waiver

When in
connection to
agency
relationship

May take steps

in preparation
to compete

Not use
property of P
for own or TP

Personal
Profits from
Position
Reading

Grabbing &
Leaving
Town &
Contry

Usurping
Business
Singer

Trade secured
through years
of bus. and
advertise, $$

Cannot communicate confidential information for A

or TPs benefit

Partnership
Duty

RUPA 404(b):
duty of loyalty,
inc approp of
partnership
opportunity

Punctilio of an
honor most
sensative
Meinhard

Partnership

101(6); assc of
2 or more as
co-owners, for
profit

101(10):
almost any
entity can be
partner

Unlimited liability, limit

transferability, single taxation,
limited access to capital,
informal, less regulation w/in
PS agreement, life limited to
partner

(1) Agreement
b/t parties

(2) Written, not

needed

Notice
+
Opportunity

RUPA 103b3:
Cannot elim loyalty,
but can id certain
categories, if not
manifestly
unreasonable

201(a): PS is
distinct from
partners

RUPA is basis
default rules

(3) Coproperty not

determinative

(4) Share in
profits,
presumed,
UNLESS

(5) Share in
management
401(f)

Allows APPARENT AGENCY

(ordinary)

Partnership Windup

306(a): All
Ps j/s
liable for
all
liabilities

807(a):
after
creditors,
surplus to
PS by
rights to
distribution

308(e): if
not PSs w/
each
other, not
PSs to 3rd
parties

504(a)-(b): Creditor MAY get

judgment against P interest

305(a): PS is
liable for act of
Ps if act in
ordinary
course of
business

306(a): all Ps j/
s/l for all

wages

Late-Coming
Partners NOT
liable for
previous
incurred oblg

rent

RUPA
404(d):
PS must
discharge w/
obligation of
good faith &
fair dealing

Duty of Loyalty,
Care, Good Faith,
Inspection

Non-Waivable

(6) Partners
may be
creditors

(7) Look at
whos at risk at
dissolution

(8) Mgmt equal

rights for all Ps
unless PS Ag
says otherwise

401(j): Diff in mgmt, majority wins, if not

ordinary, must have consent of all Ps

debt
301(1): Each partner is agent
of all UNLESS (1) P does not
have authority, AND (2) TP
knows or should know P
doesnt have author

Interested party
cannot vote in
ratification of selfinterested
opportunity
Perreta v.
Prometh

Elim duty of loyalty

when poss, limit notice,
time period limit,
change PS
opportunity meaning

103(a) PS Ag may alter relations B/T Ps &

103(b) lists non-alter in PS Ag

Annuity/retire

Partnership By Estoppel

Debt service
Sale goodwill
or property

Partnership
Disassociation

P must show
express or
implied
holding out of
PS by D

Represent
was made by
D or person
alleged PS

Reason.
Reliance by
TP in good
faith

TP is harmed

Partnership Transfer
RUPA 601(3)
P may be
expelled as
terms of PS
Agr

RUPA 602b1:
Wrongful
expel ONLY
IF breach
express term
of PS Ag

PS FREEZEOUTS! P v. TP
305(c) & 401(c): PS is liable for
ordinary bus of P tort, must
indemnify P if in ordinary course

401(i):
All Ps must
consent to sell
PS interest

502 & 503:

PS has
personal
interest in prof
& losses &
distributions

501:
P is not coowner of PS
property,
cannot
transfer

Effect of PS by Estoppel

If D purports
to be PS and
TP relies, D is
liable to TP

IF MADE IN
PUBLIC
MANNER, D
as PSbE is
liable even if
doesnt know

If PS liability,
then that
PSbE is liable
as if P were
partner

Partnership
Disassociation
603(a)

Continuation of Business
Article 7

Dissolution & Wind Up

Article 8

602(a)
P may disass
any time, right
or wrong, by
express will

RUPA 701

(i) economic
purpose
frustrated

RUPA 801(5)

P may be creditor and P,

and may pursue own
interests - 404(d)

(ii) one P
engag in
conduct that
makes PS not
reasonably
conduct

(iii) no longer
reasonably
practicable to
contin PS
under PS Ag

FOR TERM
602(b)(2): if in
term:

Wind Up
Process

803c: person WU may dispose of and transfer

the assets
Kovacik Rule: Ps share in profits and losses
UNLESS one P is only skill & labor

(i) P withdraws by
express will

(ii) P expelled by
judicial determ.

(iii) P becomes
debtor in bankrupt.

(iv) P expelled or
disass b/c dissolv
or termination

Conflict w/ 401(b) proportionate shares

Amount = Capital Account (book) + avg prior 3
years profits/gains paid to GP
802(a) PS continues after dissol and
terminates when WU done fees split as in PS

Evaluate the HARM, who is

harmed?

Direct

Shareholder Suits

Liquidation
value, OR

807b: profits & losses from liquidation charged

to Ps accounts

Owen v Cohen: if P provides loan to PS,

presumed for term if pay of loan is out of
profits

AT WILL
601(1): notice
by P to withdr

BUYOUT:

SH

Derivative
(recovery goes to Corp)

C
Who would recover?

(1) SH files on behalf of injury to

corporation
(2) COA belongs to corp
(3) recovery to corp
(4) special pleading required 23.1

(1) personal action by SH for injury

of SH
(2) SH as individual
(3) recovery to P-SH

MBCA 7.41
Blasius Standard:
(1) P must show Bd acts with
effort to deny SH vote right
(2) Bd must provide compelling
justification

Revlon Duty:
Duty of Bd
changes on
liquidation
duty to max
value for SHs

Standing

MBCA 7.42
Demand Requirement
FRCP 23.1 Must
state desired result
in demand

Demand Sent
BD Accepts

Denial is
subject to
BJR

If SH loses
derivative suit
SH may
have to pick
up tab for D/O
and must pay
own fees

Demand Requirement
When Ds are
def in case

Written, specific demand

made upon C to take
suitable action (wrongdoers)
90 days have expired from
demand, OR demand
refused, OR 90 too long

Demand Futility (1 of 3)

If demand
made,
cannot
claim futility

Majority BoD conflicted int

Special Litigation Committee

(SLC) small comm of non-interest
BD members to review demand

NY

Auerbach standard

Presume BD acts with good

faith and promoting best int
of corp
Overturned w/ part. facts
showing bad faith, conf int,
AND breach of fid duty

SH fairly & adequately

represents interests of corp
in enforcing corp
Show by reason. Doubt
that BD cannot decide
demand w/ part. facts

Charged transaction not subject

to BJR BD no BJR

P-SH must
overturn
BJR to
pass denial

BUSINESS JUDGMENT
RULE

P was SH at time of act or

became through transfer of
SH who was at time

NY Rule: part facts

(2) fail to inform
(3) trans = BJR not
possible

Del: Majority BoD not indp by

domination or control (NY: not
informed themselves)

BD Denies

BD takes over the lawsuit

Some objective
determination of value
needed
Fair Market Value

807a-b: Creditors paid, then Ps

602(c)
Wrongful
disass = P
liable for
damages to
PS for disass

EXPULSION: if not
permitted in PS Ag, cannot
expel, can seek dissolve but
404d

(1) Voluntary Association

(2) Primacy of K PS Ag

Value based
on sale of bus
as going
concern w/o
disass P

Value at
windup is
greater of:

(1) SLC
member selc
process
review

(2) proced
used by SLC
to reach sub
review

(3) Substan
outcome
NOT
reviewed

Bd member experience with contested trans,

prior affilitations, completeness of inquiry, good
faith, no pro-forma/shallow investig, eminent
special counsel - but TAINTED BD can appoint
SLC members

Del

Del Rule: reas doubt (2) bd lacks indp

(3) trans not valid
exercise of BJR

Zapata standard
(1) Bd Indp &
good faith
(2) Bases
supp decision

(2) Ct applies
own indp BJ
whether to
dismiss

More substantive review into

decision & eliminates potential
structural bias subject to Summ
Judgment Standard Rule 56 look
at personal ties (Stanford Conspir)

Corporation
Basics

Effect of
Corporation

Agency Costs
Cost of Contracting

MB 3.01a & DG 101(a)

Purpose = lawful business

MBCA 8.01 C power in Bd,

supervises

Cost of Monitoring

MANAGER v.
SHAREHOLDER v.
DIRECTOR v. BUSINESS
FUTURE

8.03-04: Election of Directors

Residual Loss

10.03, 10.20: Amend bylaw or Art of

Incorporation

Corporate Name

11.04: Fundamental trans (merg)

Private

Publicly held
Big enterprise
More captz
Traded shares

Closely held
Smaller
Shares illiquid
Sm # of SHs
Like PSs
Mostly LLC now

Separation of Ownership & Control

Flexible capital structure

# shares authorized

Equity v. Debt

Incorp
Contracts

Office & registered agent

Name & address of incoporator

Terms
MBCA 2.02

Public

Shareholders:

Bonding

Corporation
Creation

Public v
Private

2.04 Promoter is j/s/l for Ks

pre-inc if knew Arts not filed

Director names

Authorized Shares

Outstanding Shares

Auth but Unissued

Treasury Stock

Book Value

Market Cap

2.04 Promoter liable if Art not

filed

Bylaw provisions
Limited liability of directors to SH

De Facto

Short-Form
Merger DGLC
253

Estoppel

Indemnification & other

Organizers:

Draft Articles of Incorp

Act
2.01

Cum/
Line
Voting

File with the Sec of State

Single Enterprise Theory

Piercing Corp Veil: 6.22 SH liable

for corporate action

Mere Instrumentality

Rest T s.324a: P
may be liable if TP
relies on

Direct Liability

Proxy Issues
RECORD SH

MBCA 7.01 Annual SH Mtg

MBCA 7.02 Special SH Mtg

Electoral & Issue

Proxy Fraud

Rule 14a-9

Excluding Proxy
Rule 14a-8
SH $2000 or 1%

SH Record
Inspection
DGCL 220

If SH fails to
satisfy elig
or violates
14a-8i

Prove
Essen link

Mgmt
excludes w/
burden filing
to SEC

SH must make proper

demand w/ prop. purpose

Includes
legal
rationale

Unity of interest in
ownership no diff
b/t Corp and SH

Generally same,
unity in ownership,
commingling,
holding as one,
same office, EEs

Adhering to fiction of
sep leads to (1)
FRAUD or (2)
injustice

No fraud permitted in proxy

statement (material)

Mgmt must
notify SH w/
option to
remedy

If SH wants SH list, burden

on mgmt to say why not

SEC
determ.

Undercapitalization

Commingling of
funds

Mix use of
assets

Must be more than liability more wrong

(i.e. tax fraud or personal expenses)

Election of Ds plurality of
votes cast

Require majority of OS SHs:

Mergers, Amend Charter, etc

(1) Must be policy issue quest

(2) C reimb only reasonable & proper expenses
(3) C can reimb incumb W/L
(4) C reimb Inc if win & SH ratify

Insurgents must win to be

reimbursed (not personal)

Split wheth reliance

needed OM-no, Mis-yes

No maint C
form or records

Common Ds and Os, common business depts, consol financial statements/

returns, parent finances sub, P incor S, grossly inadequate capital, P pays
salaries, S business only serves P, operations comb, business prac

MBCA 7.25 & DG 216:

Majority approval of SHs
(DG requires present)
(MBCA more for than ag)

Proxy Contest

Prove
material

Illinois Piercing Law

Parent liable for

action of subsidiary
but subs not resp for
other subs

Alter Ego

Risks = regulatory, legal, operational,

reputational, interest rate, market, political,
tech, governance, fortuitous

Single enterprise liability v. PCV = only corp

entity would be financially respons while in
SEL single SH personally liab

MBCA 6.22(b): SH NOT personally for

debts of corp

Limited
Liability

(2) would suffer

detriment if not a
corp

(3) acted as Corp

MBCA 6.22: SH NOT personally liable,

unless own act or conduct

(1) No SH approv needed

(2) Bd of parent approves
(3) Parent must own 90% of
each class of stock of sub
(4) minor SH entitled to jud
value

(1) thought other

party was Corp

(2) had legal right

to do so

MBCA 2.06 adopt bylaws, incl

management terms
2.05 Elect directors, adopt by, app
officers, carry on business

After Incorp

Third Party:

(1) good faith

tried to incp

Section 27 allows Direct &

Deriv private COA

Negligence
is standard

Subject to
BJR if
excluded

Injunc
damages - reciss

Nonbinding
phrasing

Not nor bus

operations

Generally direct (loss vote)

but C can sue derivatively
Attorney fees
allowed
Intrude on
mgmt role

Insignificant/irrel proposals - >5% total

assets, net earn, and not sig to business
operations

For other, burden on SH,

unless req from foreign C
(for NY statute)

Intris fairness
not aff def when
material fact
omitted if in
proxy, & proxy
was essen link

Proper: (1) Subj intent to pursue

proper inter, (2) Obj std if prop pur.

Revolves around
elections

Personal
grievance

Pertains to partic
Board seat or
procedure

Improper: info for non-C purpose,

trolling for bus, harassment

Corporate
Fiduciary Duties

A Ds have obl using

BJR to maximize
income for benefit of all
persons having a stake
in welfare of corporate
entity v. Dodge

Standard of
Liability

Duty of Care

BJR

Stand of Conduct
(aspirational)
MBCA 8.30:
Good Faith
Reasonable Belief
Reasonable Care

Rebut presump that D

perform honestly & wellmeaning, decisions
rationally undertaken

DGCL 102b7 Art of Incp may

eliminate or limit DIR (not O)
pers liabl for breach of fiduciary
duty

(1) Shield Ds from PR

(2) Insul Bd decisions
Lack of GF (3), Waste,
Gross Negligence

MBCA 2.02(b)(4): Art of In may

limit liability of dir or SHs for
money damages for any action
taken [not interest, intl harm,
unlawful distrib, criminal act]

Overcoming

Weak: mrkt incorporates PAST

information

BJR is informed if directors

have informed themselves
prior to making decision of
material reas avail to them
Van Gorkam

Exculpation of DIR
(not officers)

Effect

Efficient Capital Market

Hypothesis (ECMH)

Overturning
BJR

Semi-Strong: mrkt
incorporates PAST &
CURRENT information
Strong: Mrkts incorporate all
information (even not public)

Care = Not in Good Faith:

(1) Fraud (2) Con of Interest
(3) Illegality
Waste:
Lack of rational purpose
Gross Negligence:
Lack of reason effort to inform

Stock Author

MBCA 6.40
Distributions to
SHs

MBCA 6.01 &

DGCL 151: must
say how much &
voting rights

Money or other
property to SHs
subject to BJR
Right to Fire Off

Board Reliance
DGCL 141(e): DIR may rely on compensation experts & may trust
decisions of mgmt, employees, legal counsel, bd committee, etc.

MBCA 8.30(e)-(f): Directors can rely on reps

made by mgmt, experts, counsel, comm, etc

Duty of Care:
Owed to Corp

Duty of Loyalty: Duty owed to the Corp to act with Good Faith & Reasonable Belief of acting in

Evaluate PROCESS

Particularized Showing Overturns BJR

Action:
Loss b/c of ill
advised or
negligence

Best Int of Corp ALL Ds liable UNLESS dissent in writing (or absent)

Inaction:
Unconsid failure of
Bd to act when act
would prevent loss

Process P Must Show:

Inatt to Mis-mgmt OR Mgmt abuse

Ds knew/
should
know of
wrongful
conduct

Bd took
no steps
in good
faith to
remedy

Flagrant
Diversion

Interested
Transactions

Executive
Compensation

Usurpation of
Corp Activity

Disclosure to
Shareholders

Essentially
stealing C
assets allows
C to sue for brh

D or O cause C
to enter deal
with personal
inter for D or O

When Os
salary > fair
mrkt value

D or O takes for
personal gain a
deal from C in
which prop int

Providing SHs
false or
deceptive info
to detriment

Inaction
was prox
cause of
the loss

To Defend
(1 of 3):
No
loyalty
prob in
fact
existed

Deliberate indifference & inaction in

face of duty to act is conduct clearly
disloyal to Corp. (not exclusive)
Must show CAUSE & LOSS

Shareholder
Care/Action
SHs owe NO
fiduciary
duties to other
SHs

Trans
appd by
dis-int
Ds or
SHs

DGCL 144
Interested transaction not
voidable b/c of interest if
disclosed & appr by maj. of:
(1) Disinterested Directors
(2) SHs entitled to vote
(3) K or transaction is fair to C

If no rat by
disint SHs,
control SH
must prove
entire
fairness

(2) Interested
trans b/t
CORP &
CONTR SH

C is
finan.
able to
take
oppt

Examine who proposes the

deal terms, look at who
promotes (deception?), control
of votes, dominate discussion?

Mgmt uses
governing
structure to
divert power

Close Corp (35 or < SHs)

CONTROL SHs owe fid
duties to minority SHs

Embr opp
would
create
conf b/t D
& Corp
interest

Disclosure: removes
judicial oversight

Del Standard

BJR:
Burden
on P to
rebut
Bds act

IFT:
Maj get
ben +
exc min
+ at exp
of min

Majority must
have legitimate
business pur
If yes, minor
must show other
means poss.

Ct must
balance
legit bus
pur agst
practi of
prop alt

Close Freeze-Out

Min Veto

Spectrum of Bad Faith Loy to Care

Subj
intent to
harm

Gross
Negl w/o
intent

Idemnification
Del Code

DG 145(a) May indem D or O for suit expenses

brought by SH or TP (jud, fines, and setlm)
DG 145(b) suits brought by C, only indem atty fees
DG 145(c) MUST indem if succ on MERITS

If rat by
major of
minor SH, P
must show
unfairness

C has
int. or
expectc
y in
oppor

Entrechment

See next page

Del Standard:

Entire
Trans
was
fair

Review Entire Transaction

Ratification

Insider
Information

Corporate Opportunity

Interested
Conduct
(1) Interested
trans b/t
CORP and
DIRECTORS
= ratif by
disinterested
SHs then
subject to BJR

DGCL 141(a)
Bd has right of
oversee mgmt

DG 145(c) if lose, C MAY if 145a/b applies

DG 145(e) may ADVANCE, must return if not indem
DG 145(f) D & O may K for more coverage
Only if D/O acted in good faith my C
indemnify
Advance payments subject to
reasonable expenses

Derelict of
Duty
cons
disregard

Min w/ veto has fid duty to maj

MA Rule: Maj frustrates Mins

reason expectation of ben of own
Remedy: reason expect of min req
factual determination

Model Code
MB 8.51(a) Permissible indem if (1) good faith OR
(2) conduct which may/must be indem by C

Close Corp Ag
to Prevent

MB 8.51(c) termination of suit is not determinative

that D did not meet standard (settlements allowed)
MB 8.51(d)(1) C cannot indem if suit brought by C
UNLESS reas expens if D/O met standard

MB 7.30:
Voting Trust

MB 8.51(d)(2) C cannot indem if D/O liable for harm

in which D/O received financial benefit
MB 8.56 ADVANCE D/O yes, Off no if C brings or
bad faith, disloyalty, intentional crim conduct
MB 8.52 REQUIRED IND if D/O wholly successful
MB 8.53 D must provide (1) written aff of GF, (2)
promise to repay if not ent to mandatory indem
Remedy as specific perform. OR
recission OR strike votes (Ringling)

MB 7.31: Voting
Agreements
SH Ag CANNOT
bind Directors as D
UNLESS
(1) Close Corp
(2) Min nonpart no
object, AND (3)
terms = reasonab

Securities Act &

SEC Regulation

Basics

Cannot sell sec.

1933 Process

Offer but no sale

SEC Review: adq of
disclosure, not merits

register

SA 2(a)(1) defines security

Will generally include if
control rights are not
possible and capital is
basis for invest

Profit soley on efforts of

promoter or TP

Any contract where investment in

common enterprise purposed on
expectation of profit by work of TP

Sales allowed &

prospectus must be
delivered

Look to passivity & control

Attrib of Stock

Atrib of LLC

(1) right to divid &

profit
(2) negotiability
(3) ab to pledge/
hypothecate
(4) voting rights
(5) capacity to
appreciate in value

(1) contracted
allocation of prof, not
share
(2) membership not
freely alienable
(3) Mems cld pledge
econ int but not
control rights

Private
Placement
Test

Number of
offerees &
relation to
issuer

Number
of units
offered

Size
of
offering

Registration Statement
= Effective

Manner
of
offering

Total # offered,
sophistication,
access to info

Liabilities
Materiality:
Info an avg prudent investor ought reason. Have before purchasing

Fraud in regis statement

1933 Act s. 11

No req of reliance or cause

No liab if (1) reason investigation, (2) reason to believe, (3) did
believe that when regis became effective statements were true

Due diligence defense

Strt liab for ill offers/sales

1933 Act
s.12(a)(1)

Basic trans cause

Manipulations
Recission remedy

Cannot claim ignorance

West loss cause

Dura prove loss

Wash sale

options included
Matched sale

1933 Act
s.12(a)(2)

Fraud in prospectus or oral

sales communication
Unlawful for person to
use instru thru mail or
commerce to

1934 s. 10(b), Rule 10b-5

Private Rights of
Action

Material
Misrepresent
(fraud/deceit)

Exemptions from
Registration

Insider Trading
1934 s.16(b)

Scienter
(recklessness or
wrongful mind)

Connection to
sale of security

Make untrue statement of material fact

or omit material fact to justify
misleading statements

Min recklessness
required

Engage in any act or business which

operates as fraud or deceit upon another
in connection to sale of security

Only purchasers or
buyers have standing

Reliance

Economic
Loss

Loss
Causation

Causation & Reliance required element

Private placements & trans done by other
than person, issuer, or dealer

1934 Act s. 4

Trans
Causation:
Fraud caused
the investment

Small, limited offerings

S. 304 CEO/CFO comp

deduct when finan misst

S. 306 no exec trades

when EE cant trade

S. 404 no loans to
company executives

S. 404 annual internal

control reports

S. 406 code of ethics for

senior officers

S. 407 financial expertise

of audit comm members

Os, Ds, and 10% SH

if possess material
inside info, must
disclose or not trade

Only if Material balance b/t

prob that event will occur and
magnitude of event in light of
totality of company activity

Misappropriate Theory

1934 Section 16(a)

Short-Swing Profits

Silence not
actionable

Rule 14a & proxy rules

Rule 14a & proxy rules

Sarbanes Oxley:
Transactions
Procedures - Sturct

Use or employ deception in

sale of publicly traded secur
to bypass SEC rules

Employ device, scheme, or artiface to

defraud

Prove with expert

analysis
S. 301 audit comm req w/
specified composition

Emphasis on
equal access to
information

Tipee

Derivative: Tipee assumes

FID Duty of SH if (1) tipper
breached fid duty to share
info & (2) tipee knows/
should know of breach

Misapp confid info for secur

trade in breach owed

Directly or indirectly owner GR

THAN 10% any class of any
equity (t cross 10% no count)
Director or officer of issuer
either purchase or sale

Must be in CONNECTION
with sale & must be insider
(actual or temp fiduciary)

Loss
Causation:
Fraud causes
the LOSS
Horizontal D

Fraud on the Market

Theory:
Price of stock in
public depends on
material information
available

Any profit realized from any

purchase or sale w/in any period
of less than 6 months = disgorge

Strict Liab

Only stock &

convertible debt
not all securities
like 10b-5

Match lowest pur

$ w/ highest sales
$ w/in 6 mo.
SHs can sue
derivatively

Options = strike
+ premium