Business Organizations
2010-2011 Lectures
PARTNERSHIPS,
CORPORATIONS
AND THE VARIANTS
PROF. BRUCE MCCANN
SPRING SEMESTER LECTURE 8
TENDER OFFERS & INSIDER TRADING
PP. 917-954
Virginia Bankshares v Sandberg
2
 1. Because of the weight given director opinions by
shareholders, statements of opinion (“we
recommend it because it is a fair price”) which are
misleading will support 14a action.
 2. But, before liability will lie, the proxy solicitation
must be an “essential link” to the corporate action
giving rise to the damage to the plaintiff.
 3. Where proxy solicitation is superfluous, no
liability will lie.
Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann
Shareholder’s Rights to Solicit Proxies
3
 SEC v Transamerica
 Proxy Rule x-14A-7 requires management to present a
shareholder proposal if
Shareholder gives reasonable notice to management
 Proposal is “proper subject” for action by shareholders

Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann
Shareholder Proxies 14(a)-8
4

If I have complied with the procedural requirements, on what other bases may a company rely to exclude my proposal?
Improper under state law: If the proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the
company's organization;

Violation of law: If the proposal would, if implemented, cause the company to violate any state, federal, or foreign law to which it is
subject;

Violation of proxy rules: If the proposal or supporting statement is contrary to any of the Commission's proxy rules, including Rule
14a-9, which prohibits materially false or misleading statements in proxy soliciting materials;

Personal grievance; special interest: If the proposal relates to the redress of a personal claim or grievance against the company or
any other person, or if it is designed to result in a benefit to you, or to further a personal interest, which is not shared by the other
shareholders at large;

Relevance: If the proposal relates to operations which account for less than 5 percent of the company's total assets at the end of its
most recent fiscal year, and for less than 5 percent of its net earning sand gross sales for its most recent fiscal year, and is not
otherwise significantly related to the company's business;

Absence of power/authority: If the company would lack the power or authority to implement the proposal;
Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann
14(a)-8 (Cont’d)
5

Management functions: If the proposal deals with a matter relating to the company's ordinary
business operations;

Relates to election: If the proposal relates to a nomination or an election for membership on the
company's board of directors or analogous governing body or a procedure for such nomination
or election;

Conflicts with company's proposal: If the proposal directly conflicts with one of the company's
own proposals to be submitted to shareholders at the same meeting.

Substantially implemented: If the company has already substantially implemented the
proposal;

Duplication: If the proposal substantially duplicates another proposal previously submitted to
the company by another proponent that will be included in the company's proxy materials for
the same meeting;
Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann
What is a Tender Offer?
6

S.E.C. v Carter Hawley Hale test:
Active and widespread solicitation of public shareholders
 Solicitation made for substantial percentage of issuer’s stock
 Offer to purchase at a premium over prevailing market
 Terms of offer inflexible
 Offer contingent on tender of certain number of shares
 Offer open only for limited period of time
 Offeree subjected to pressure to sell
 Public announcements of a purchasing program concerning the
target company precede or accompany rapid accumulation of
target’s stock.

Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann
Schreiber v Burlington Northern
 “manipulative acts or practices” as prohibited by
14(e) of the Securities Exchange Act require
MISREPRESENTATION OR NONDISCLOSURE.
 Purpose of the sections is solely to address
nondisclosure and misrepresentation to “level the
playing field.”
Lec. 10 Sem 2, pp 886-927 Corps
McCann
Prof.
CTS Corp v Dynamics Corp of America
8
 Indiana statute giving shareholders
a right to vote before tender offeror
would gain voting rights of stock it
might acquire through tender offer
of an Indiana corporation held
constitutional.
Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann
Insider Trading
9
The purchase or sale of
securities by one acting on
the basis of non-public
information
Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann
Rule 10b-5
10
 "Rule 10b-5: Employment of Manipulative and Deceptive
Practices":
 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, (a) To employ any device,
scheme, or artifice to defraud, (b) 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, in
the light of the circumstances under which they were
made, not misleading, or (c) To engage in any act,
practice, or course of business which operates or would
operate as a fraud or deceit upon any person, in
connection with the purchase or sale of any security."
Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann
The Essence of 10b-5
11
 Persons (insiders or not)
 Having material information not known to the
investing public (or others with whom the person is
dealing)
 Must disclose it prior to transacting or
 Must abstain from transaction until it is disclosed
Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann
Basic, Inc. v Levinson, 485 U.S. 224 (1988)
12
 There is no bright-line test for whether a fact would
be material within meaning of 10b-5.
 Where plaintiffs sold stock during the depressed
market created by company’s false statements that
no buyer was talking to them, “fraud on the market”
theory creates presumption (rebuttable) that buyer
acted in reliance on accuracy of correlation of market
price to value
 Where truth was not otherwise available to move the
market, reliance presumed
Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann
Material
13
 Information to which a reasonable investor
would attach importance in determining her
choice of action regarding a transaction
 A balancing:


How likely is it that the fact will actually come to fruition (i.e., a
merger; and
How significant will be the impact of the event in the totality of the
company’s operations?
Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann
Superintendent of Insurance of New York v.
Bankers Life
14
 The reach of 10b-5 is not limited to
sales in the securities markets of
registered stock.
 The Rule prohibits deceptive devices
and “contrivances” in the sale or
securities face-to-face or in the
markets.
Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann
The Reach of 10b-5
15
 http://news.findlaw.com/hdocs/docs/mstewart/sec
mspb60403cmp.html
Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann
Brown v Ivie
16
 A misrepresentation is “in connection
with” a sale or purchase if it “touches” a
transaction that “touches” the sale.
 Element is “flexible”
Lec. 9 Sem 2, pp 917-954 Corps
Prof. McCann