MGMT 180 – LAW & ETHICS
Corporations & Corporate Securities Law – Summer 2010
CORPORATIONS
A. Main Attribute:
1. Formalities required – state filings necessary (see below)
2. Limited Liability for all owners
3. Centralized management (owners don’t manage – directors &
officers do)
4. Ownership is freely transferable (creates “perpetual existence”)
5. Taxed as a separate entity (double taxation of income, losses do not
flow through to owners)
B. FORMATION
1. Legal Requirements:
a. Articles of Incorporation: Name, maximum shares, purpose,
incorporator
(1) If corporation exceeds purpose = Ultra Vires Act
(2) Filed in one state (“domestic corporation” in that state)
(3) Must register to do business in other states (as a “foreign
corporation”)
b. Additional Requirements – Organizational Meeting:
(1) Directors
(2) By Laws
(3) Issue Shares
(4) Appoint Officers (day to day managers)
2. Piercing the Corporate Veil: Law ignores the separateness of the
corporation and SH’s personally liable if any one of the following
occur:
a. Ignore Formalities
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b. Thin Capitalization
c. Commingling
C. MANAGEMENT: The SHAREHOLDERS:
1. Powers: Though they do not manage, they can vote on…
a. Elect or Remove Directors (cause not required for removal)
b. Amend By-Laws or Articles
c. Mergers, etc.
d. Dissolution
e. Major business change (e.g. sale of major asset)
2. Exercise of Powers: Must occur at meeting. Legal meeting
requires:
a. Annual (required) or Special (called by mgmt or 10% of SH’s).
b. Notice to (or waiver of notice by) all SH’s
c. Quorum (50% + 1 share)
d. Majority vote at the meeting
e. 1 share = 1 vote
f. May vote by Proxy (written, good for 11 months)
g. Voting Agreements are legal
3. Rights of SH:
a. Inspection: Requires notice & valid purpose
b. Preemptive:
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(1) Not automatic, must be in articles/by-laws
(2) Right of first refusal on newly issued stock (to preserve % of
shares owned by any existing SH)
c. Appraisal or Dissenters: Right to sell stock back to the
corporation at FMV where vote “no” on merger or other major
business change.
d. Dividends: Right to share in profits but only if Corporation can
afford based on Balance Sheet or Solvency Test.
4. Enforcement of Rights: SH can bring law suit
a. Direct Action: On behalf of Plaintiff - SH only
b. Class Action: On behalf of all SH’s
c. Derivative: Sue outside party on behalf of corporation
D. MANAGEMENT: The DIRECTORS & OFFICERS:
1. Distinguish DIRECTOR (general management) vs. OFFICER (day to
day management).
2. Powers:
a. General Management Power
b. Appoint Officers (NOTE: SH cannot appoint CEO)
c. Declare dividends (if affordable)
d. Amend By-Laws or Articles
e. Mergers, etc.
f. Dissolution
g. Major business change (e.g. sale of major asset)
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3. Exercise of Powers:
a. Meeting: by majority vote
b. Written Consent: unanimous
4. Rights: Inspection, Compensation, Indemnity,
5. Duties: Same as an AGENT: Fiduciary duties of LOYALTY, CARE
and OBEY.
6. Officers:
a.
b.
c.
d.
Run the day to day operations.
Appointed/removed by the Directors
Agents of the corporations
Same fiduciary duties as directors
E. FINANCING: Accomplished through issuance of securities
1. Debt Securities:
a. Attributes:
(1) Fixed rate of return
(2) Not dependent on corporate profits
(3) No voting power
b. Types:
(1) Bonds – secured, long term
(2) Debentures – unsecured, long term
(3) Notes – unsecured, short term (usually)
2. Equitable:
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a. Attributes…
(1) Dependent on corporate profitability
(2) Voting Rights
b. Consideration: Some states limit, but RMBCA says “any benefit”
c. Types:
(1) Preferred Shares…
(a) Preference on dividends and liquidation
(b) No voting
(c) Cumulative vs. Non Cumulative:
 Prior years unpaid dividends must be paid first to
Cumulative Preferred SH’s before current year’s
dividends are paid
 unpaid dividends from prior year become liability on
corporate books).
(2) Common Shares:
(a) Voting stock
(b) Last in line, but get the most if corporation is profitable
(c) Par Value: Some states have: minimum below which
stock may not be sold.
F. REORGANIZATIONS:
1. Requires Approval of Directors AND Shareholders usually.
2. Combinations:
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a. Merger: A + B = B or A + B = A
b. Consolidation: A + B = C
c. Acquisition: A buys B or B’s shares with money.
d. Stock Exchange: A buys B’s shares by issuing shares to B’s
SH’s.
e. NOTE: Acquisition or Stock Exchange doesn’t always require the
buying corporation’s SH approval (but target’s SH’s must
approve).
f. REQUIREMENTS:
(1) Merger/Consolidation: Majority vote of SH’s and directors of
both corporations.
(2) Acquisition: Usually only a majority vote of target corporation
only.
(3) Exchange: Usually a majority vote of target corporation
II. SECURITIES REGULATION:
A. Overview of the Acts:
1. Securities Act of1933: Focus on Initial Issuances
2. Securities Exchange Act of 1934: Focus on Later Re-Sales
3. Each act also has an Anti Fraud component.
4. It’s two Acts but really four separate laws:
1933  Reporting
 Anti-Fraud
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1934  Reporting
 Anti-Fraud
Remember: First in time (1933) deals with the First Issuance
Later in time (1934) deals with Later Resales
C. What is a security?
1. Elements: Investment, In a Group & 3rd Party Will Manage
2. Examples of Securities…
a.
b.
c.
d.
e.
Stocks (equity securities)
Bonds/debentures/notes (debt securities)
Investment contracts
Limited partnership interests
Collateral Trust Certificates
III. 1933 ACT:
A. What is a First Issuance?
1. First time stock is sold to the public
2. HYPO: IBM issues 3 million to Merrill Lynch on Monday.
--- First Issuance? NO
3. It’s really the first sale to “the little guy” (general public)
4. Who is NOT THE GENERAL PUBLIC:




Brokers/Dealers
Directors of Corp.
Officers of Corp.
SH owning > 10% (Insider)
}
} These folks know what’s
} going on!!!
}
B. REPORTING REQUIREMENTS:
----|----------------------|-----------------------|---------------------------|---Registration
tombstone ad
red herring SEC
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Statement <-------------------- 20 days ----------------------> Approval
1. Registration Statement: Big ole document in two parts:
a. Part One: Prospectus (any written offer to sell securities)
b. Part Two: Information About the Investment, including…
 Audited financials
 Insider info. (directors, officers, 10%+ SH’s, attorney, CPA)
 Business purpose
 Capital structure
 If they ask, pick “d” – all of the above. 
c. Shelf Registrations allowed for big companies.
2. Twenty Day Waiting Period: SEC has 20 days to approve
a. During this time, can’t offer to sell nor sell securities.
b. However, issuer CAN announce the opportunity by way of
STOP.
S – Summary Prospectus (small companies)
T – Tombstone Ad – contains brief info of upcoming
opportunity
O – Oral Offers are ok.
P –Preliminary Prospectus : Red Ink warning
sometimes this is called a Red Herring
3. Approval: As to form, not content – SEC merely verifies the
required information is there, not that it’s right. Failure to respond
in 20 days = SEC approval.
NOTE: WRONG ANSWERS on Exam:
 SEC approval means it’s a wise investment
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 SEC approval means all the info. is correct.
4. Prospectus: After approval, issuer can issue Prospectus and
advertise opportunity/solicit buyers.
5. Blue Sky Laws: State have their own rules which must also be
complied with (whether or not SEC qualified or exempt issuance).
C. EXEMPTIONS: Registration N/A if offer/sale EXEMPT:
1. Exempt Securities: Never, Ever have to Register (5 categories)
If your are clean, your securities are exempt. You are clean if you:
S – Stock splits, stock dividends, stock exchanges (FREE)
C – Charities
R – Railroads
U – Units of Government
B – Banks
2. Exempt Transactions: Four Basic Areas…(SEE THE CHART)
a. Intrastate: Sale of securities exclusively withing a
state, with no re-sale to non-residents
within 9 months – Otherwise, no limitations!
b. Small Private: Reg D, Rule 504: Up to $ 1,000,000 (pvt.)
This amount is considered pidly now (law
changed). So, also no restrictions!!
c. Large Private: TWO TYPES: Limited (Reg D, Rule 505)
and Unlimited (Reg D, Rule 506):
 505: $ 5,000,000 MAX
 506: Unlimited
For both of these Restricted Advertising and
Restricted Resale
Also, limited to 35 Non-Accredited investors
(Accredited = sophisticated Fat Cats)
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(Non-Accredited = poor stupid people)
Finally, extensive disclosures – audited bal. sheets
d. Small Offering: Reg A: Up to $ 5,000,000 (pvt. or public)
This may be private or public, so more info. required.
Some disclosure req’d (circular–few years financials)
3. Exam will try to sucker you in with 35 investor rule….
remember its nonaccredited only and it only
applies to Large Private (more than $ 1,000,000)
4. Can I just sell $ 999,999 every Monday? NO - All issuances
within 12 month period counted as 1 issuance.
5. Regulation D: Must notify SEC within 15 days of first sale.
6. Remember “D” is for Detective, a Private Detective.
D. ANTI-FRAUD PROVISIONS: Thou shalt not ever lie, cheat, mislead,
etc. in the issuance/sale of securities. ALL TRANSACTIONS are covered here,
no matter how small or to whom made.
IV. 1934 ACT:
A. Requires reports from certain “widely traded” companies….
1. Traded on National Stock Exchange
- OR -
2. >$ 10,000,000 in assets and 500+ stockholders
B. Reports Required by corporation (issuer) AND by insiders themselves.
1. 10K – Annual Report: Includes audited financial statements
2. 10Q – Periodic Reports: Remember Q = Quarterly
(UNAUDITED)
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3. 8K – Updates: Within 15 days of major changes between reports.
C. Requires Proxy Solicitations to be filed with SEC & contain disclosures.
D. Tender Offers: Takeover offer
1. Required when buyer owns 5% or will own 5% from the tender
offer
2. Certain disclosures: Disclose funding, stock ownership & future
plan to SH’s solicited and to the SEC.
E. 10(b)5: Anti Fraud provisions requires reporting of insider trading and
return to the company of short swing profits.
1. Insider Trading: Buy/sell by 10%+ SH, directors, officers,
attorneys,etc.
-- It is not illegal for insider to buy/sell, but it is illegal to use
secret information
2. Short Swing Profits: By insider, w/in 6 month period, must return
to Corporation.
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