Advanced Business Law
(BPP433/85)
OWNERS
2007 Winter Quarter
Week 7
Instructor: David Oliveiri
Advanced Business Law BPP 433
Learning Objectives
Who Are Owners/ “Owners”
Just What Legal Rules Apply to Forming and
Maintaining Relationships with Owners/
“Owners”?
Managerial Implications -- Constraints, Risks,
Opportunities
Advanced Business Law BPP 433
Who Are Owners?
Corporation as “Nexus” of Ownership
Rights…Or Claims Against Assets
Traditional Owners – Proprietors, Partners,
Stockholders
Quasi-Owners – Bondholders, Financial
Institutions, Suppliers, Other Creditors
Securities Laws (Plus Business Organizations
Law – BPP 432) Dictate Rights Relating to
Traditional Owners
Advanced Business Law BPP 433
Our Focus Today
THE PUBLICLY LISTED CORPORATION
SHAREHOLDERS
XYZ CORPORATION
BONDHOLDERS
BANKS
SUPPLIERS …
BUSINESS ORG.
BANKRUPTCY
UCC
Advanced Business Law BPP 433
CONTRACTS
…
SECURITIES
Essence of Publicly Listed Company
Ownership: A “Security”
What is a “Security”
Commonly, Stock … But
Advanced Business Law BPP 433
What Is A “Security
A farmer offers to sell
10 year “service
contracts” on sections
of his orange grove.
Under the contracts, a
buyer would be
entitled to the
proceeds of oranges
sold from the
designated section.
Are the “service
contracts” securities?
Advanced Business Law BPP 433
What Do The Federal
Securities Laws Say?
Section 2(a) of the Securities Act of ’33 provides that – “The term
‘security’ means any note, stock, treasury stock, security future,
bond, debenture, evidence of indebtedness, certificate of interest or
participation in any profit-sharing agreement, collateral-trust
certificate, pre-organization certificate or subscription, transferable
share, investment contract, voting-trust certificate, certificate of
deposit for a security, fractional undivided interest in oil, gas, or
other mineral rights, any put, call, straddle, option, or privilege on
any security, certificate of deposit, or group or index of securities
(including any interest therein or based on the value thereof), or any
put, call, straddle, option, or privilege entered into on a national
securities exchange relating to foreign currency, or, in general, any
interest or instrument commonly known as a "security", or any
certificate of interest or participation in, temporary or interim
certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any of the foregoing.”
Advanced Business Law BPP 433
Translated, Means…
Judicial Interpretation
All Types of Investment Schemes Requiring: (a)
Investment of Money; (b) Common Enterprise; (c)
Expectation of Profit; and (d) Solely From Efforts
of Others
Now, Back to Orange Groves…
Why Is This Important?
Advanced Business Law BPP 433
What Do We Mean By
“Securities Laws”
Securities Law Sources
Federal Law/Interstate (New Deal Origins)
– Securities Act of ’33 – Federal Statute
Definition of a Security
Registration/Issuance of Securities
Exempt Securities/Exempt Issue Transactions
Liability
– Securities Exchange Act of ’34 – Federal Statute
Market Conduct Rules/Disclosure/Information
Securities & Exchange Commission (SEC)
Rule-Making Authority
Other Pronouncements/Activities
State Securities Regulation
ST – Q1
Advanced Business Law BPP 433
Hierarchy (Review) of
Securities Law
Predominantly Federal Statutory and Regulatory
Law (Subject to Judicial Interpretive Role)
– US Constitution
– Federal Securities Statutes
– Rules/Regulations of SEC – Force of Law
– Policy/Interpretative Releases of SEC
SEC Staff Legal Bulletins
SEC Interpretative and No-Action Letters
SEC Telephone Interpretations
Advanced Business Law BPP 433
Management Considerations
Re: Securities Law
Advantages of Registration
(Going from Private-to-“Publicly Held” Firm)
Cashing In – “Monetizing” Business Value
Economical Way to Raise Money/Fund Growth
To Avoid Giving Away Control (Contrast Venture Capital
vs. Raising “Public” Money)
Create Liquidity (Tap a Public Market for Shares)
Prestige
Estate Planning
Executive Recruitment/Retention
Create Currency for Acquisitions
Advanced Business Law BPP 433
Management Considerations
Re: Securities Law
Tradeoffs: Disadvantages of Registration
Expense
Loss of Corporate
“Privacy”
Loss of Corporate
“Freedom”
Expectations
Advanced Business Law BPP 433
WSJ 8/2/06 – A
Specter Stalks the
Hospital Biz
“Taking a company
(HCA) private means
no longer having to
convince millions of
potential
shareholders of your
management
‘vision.’”
Management Considerations
Re: Securities Law
Disadvantages of Registration
Expense
– Direct Expenses of Going Public
Securities Firm Commission (10% of Issue Proceeds)
Legal, Accounting, Printing ($300-$500K)
SEC Filing Fees ($3K)
– Indirect Expenses of Going Public
Reporting Requirements
Compliance Costs (Example: Proxy Rules)
Cultivating Security Analyst Relationships
Shareholder Meetings
Disclosure of Information – When, What, Standards
Loss of Freedom -- Fiduciary to Shareholders, SOX, …
Income Expectations
Advanced Business Law BPP 433
Registration Timeline
Amend Filing
Underwriter
Assemble Sellers
No Offers
No Sales
Notice of Public
Offering
1 – 60 Days
Advanced Business Law BPP 433
Quiet Period
• Tombstone Ad
• Preliminary
Prospectus
Offering
Effective
Written
Offers with
Prospectus
Sales
No Sales
Registration Filed
Registration
Effective
60 – 120 Days
120 Days +
Common Constraints of
Securities Laws
Guiding Principle: Minimize Information /
Transactions Costs
(But Not Necessarily Risks) of Buyers/ Owners
Regulating Manner of Registering Securities
Regulating Manner of Selling Securities
Proxy Regulation (Voting by Absent Shareholders)
Tender Offers – Filings/ Other Requirements of
Tendering (Offering) $ For Listed Company
Shares
Advanced Business Law BPP 433
Registration and Liability
Overview: The “ ‘33 Act ”
Security?
No
Yes
Yes
Yes
Antifraud provision
(Sect. 17(a)) applies*
Exempt security?
No registration
required
No
Yes
Exempt transaction?
Yes
No
Registration
required
False registration (Sect. 11)
and antifraud provision
(Sect. 12(2)) apply
Unregistered sales
(Sect. 12 (1)) applies
Yes
Security registered?
No
*Section 12(2) may apply to some of these issuance's.
Advanced Business Law BPP 433
Registration and Exemptions
Under the “ ‘33 Act ”
Security
Exempt
security*
Short-term
Commercial
Paper
Other
types
Unrestricted
resales
Advanced Business Law BPP 433
Nonexempt
security and
transaction
Register
Unrestricted
resales
Exempt
transaction
Regulation
A
Intrastate Limited
transaction offers
Unrestricted
resales
Restricted
resales
*Exempt Securities – Short-Term (<9 Months)
Commercial Paper for Working Capital, Securities of
NonProfit Charities, …
Exempt Transactions for
Issuers Under the “ ‘33 Act ”
Price
Limitation
Information
Required
$5 million
offering circular none
unrestricted
none
intrastate only
only to residents
before 9 months
material
information to
unaccredited
purchasers
unlimited
accredited; 35
unaccredited
restricted
Offers
Intrastate Rule none
147
Rule 506
none
-- “Private
Placement”
Limited
Rule 505
$5 million
material
information to
unaccredited
purchasers
unlimited
accredited; 35
unaccredited
restricted
Rule 504
$1 million
none
none
Restricted*
Section 4(6)
$5 million
none
only accredited restricted
Exemption
Regulation A
Limitations on
Purchases
Resales
*Unrestricted if under State law, the issuance is either (1)
registered or (2) exempted with sales only to accredited investors.
Advanced Business Law BPP 433
Disclosure Requirements
Under “ ‘34 Act ”
Registrant
Initial
registration
Periodic
Reporting
Insider
Reporting
Issuer if
regulated,
publicly held
company
Issuer if
regulated,
publicly held
company
Statutory insiders Issuer and other 5 percent
(directors,
persons soliciting stockholder,
officers, and
proxies
tender offeror, or
principal
issuer
stockholders)
Annual, quarterly,
or current report
updating
information in
initial registration
Initial statement
of beneficial
ownership of
equity securities
Changes in
beneficial
ownership
Information Nature of
business
Financial
structure
Directors and
executive
officers
Financial
statements
Advanced Business Law BPP 433
Proxy Statement Tender
Offer
Details of
solicitation Legal
terms of proxy
Annual report (if
directors to be
elected)
Identity and
background
Terms of
transaction Source
of funds
Intentions
Disclosure Requirements
Under “ ‘34 Act ” (cont.)
Initial registration Periodic
Reporting
Insider Reporting
Proxy Statement Tender
Offer
Filing Date
Within 120 days
after becoming a
reporting
company
Annual: within 90
days after year’s
end Quarterly:
within 45 days
after quarter’s end
Current: within 15
days after any
material change
Within 10 days of
(1) becoming a
statutory insider
or (2) the end of a
month in which a
change in
ownership takes
place
10 days before
final proxy
statement is
distributed
5 percent
stockholder; within
10 days after
acquiring more than
5 percent of a class
of registered
securities Tender
offeror: before
tender offer is made
Issuer: before offer
to repurchase
Purpose of
Disclosure
Adequate and
accurate
disclosure of
material facts
regarding
securities listed on
a national
exchange or
traded publicly
over the counter
Update
information
contained in initial
registration
Prevent unfair use
of information
which may have
been obtained by
statutory insider
Full disclosure
of material
information
Facilitation of
shareholder
proposals
Adequate and
accurate disclosure
of material facts
Opportunity to reach
uncoerced decision
Advanced Business Law BPP 433
Some More Constraints of
Securities Laws
Section 10(b) of ’34 Act and SEC Rule 10b-5 –
Manipulative and Deceptive Conduct
Insider Trading [Requirements: Possess Material Nonpublic Information
+ Make Trades Based on Information = Liability]
[Best Practices: Either disclose material nonpublic information to
public, abstain from trading on the information until its public, or show
that trades were made without regard to the insider information.]
False and Misleading Statements/ Withholding Information/ Selective
Disclosure
[Best Practice: Use diligence in “fleshing out” bad news. Be pro-active,
objective, disclose in a timely fashion. “Safe Harbor” for forwardlooking statements, if identified as such and accompanied by cautions.]
Securities Firm Manipulation of Market
Advanced Business Law BPP 433
ST – Q2
Who Are “Insiders”?
Traditional Insiders (Officers, Directors, Controlling
Shareholders, Employees)
Temporary Insiders (Counsel, Accountants, Consultants,
Investment Bankers)
Derivative Insiders -- “Tippees” (Relatives, Dinner Guests,
… Printer?, Person on Bus?)
[Requirement: Because tippee liability is “derived” from
insider the duty of tippees to disclose or abstain exists only
if inside tipper breached a fiduciary duty in disclosing the
information]
Advanced Business Law BPP 433
Insiders
(1) Insider has breached fiduciary duty by
disclosing information to tippee
Underwriters
Accountants
Tippees
Officers
Directors
Employees
Agents
Tippees
Lawyers
Consultants
(2) Tippee knows or should know that there
has been such a breach
Advanced Business Law BPP 433
Switching Gears:
Creditors as “Owners”
Bankruptcy Law – Dealing With Creditors
As Class, Under Financial Duress
For 12 months ending 6/30/06 -- 1,484,570 bankruptcy filings (9.3%); 31,562 business filings. Source: Administrative Office
of Courts.
Advanced Business Law BPP 433
Bankruptcy Law – Collective
vs. Individual Approach
Individualized Debt Collection
Outside Bankruptcy
Secured Creditors
– State Law, Generally (E.G., UCC Article 9)
– Individuals Pursuing Own Remedies; What If Other
Secured Creditors?
– What If Assets Don’t Pay Debt?
Unsecured Creditors
[Query: Is there any relation between individualized
debt collection outside bankruptcy and Hardin’s
“Tragedy of the Commons”?]
Advanced Business Law BPP 433
Bankruptcy Law – Collective
vs. Individual Approach
Federal Bankruptcy Law as Collective
(I.E., Pre-Emptive and Exclusive) Debt Collection Remedy
Chapter 7 – Individual/Corporate Debtor –Asset Liquidation
Chapter 11 – Corporate Restructuring (Partnerships, Also)
Chapter 13 – Wage Earner Plans
Bankruptcy Court Can Convert
For 12 months ending 6/30/06 -- 1,484,570 bankruptcy filings (-9.3%);
1,164,815 Chapter 7 filings (21,857 business); 6,224 Chapter 11 filings;
360 Chapter 12 filings; 313,085 Chapter 13 filings. Source:
Administrative Office of Courts.
Advanced Business Law BPP 433
Chapter 7 – Straight Bankruptcy –
No Hope of Continuation
Commence – Filing – Voluntary or Involuntary Petition
Players
–
–
–
–
Debtor
Creditors (Must Prove Claims)
Bankruptcy Judge
Trustee (Elected By Creditors, Represents Bankrupt’s Estate -- Can
Bring Actions, Protects Creditors)
Procedure
–
–
–
–
ST – Q 4-5
Automatic Stay (A Presumption)
Identify Claims/Property of Estate (Non-Exempt Assets)
Avoiding Powers of Trustee (e.g. Unperfected Security Interests)
“Fresh Start” For Individuals/ Dissolution for Corporations
Advanced Business Law BPP 433
ST – Q3
Collection and Distribution
of the Debtor’s Estate
All of debtor’s
nonexempt property
Secured
creditors
Property subject to
trustee’s right as
a lien creditor
Creditors
with priority
Voidable
preferences
Debtor’s Estate
Administered by
Trustee
Unsecured creditors
who file claims
on time
Fraudulent
transfers
Unsecured creditors
who file claims
tardily
Statutory
liens
Debtor receives
remaining assets
Advanced Business Law BPP 433
Chapter 11 –
Reorganization
Copyright John Pritchett
Advanced Business Law BPP 433
Chapter 11 –
Reorganization
[WSJ 2/16/01 – Quoting Harvey Miller, a partner in Weil, Gotschal
and Manges – “Today, the companies ending up in Chapter 11 are
not only overleveraged, but they have basic operational problems.”]
Players
–
Debtor-in-Possession (Corporation is not Dissolved!)
–
Creditors’ Committee
–
Bankruptcy Judge
Procedure
–
Automatic Stay
–
Identify Claims/Property of Estate
–
Plan of Reorganization (Within 120 Days of Filing – Voted On)
WSJ 2/13/06 – Judge to Rule on Northwest’s Bid to Void Labor Pacts
Advanced Business Law BPP 433
Comparison of
Bankruptcy Proceedings
Chapter 7
Chapter 11
Chapter 12
Chapter 13
Objective Liquidation
Reorganization
Adjustment
Eligible
Debtors
Most debtors
Most debtors,
including
railroads
Family farmer
Individual with
who meets certain regular income
debt limitations who meets certain
debt limitations
Type of
Petition
Voluntary or
involuntary
Voluntary or
involuntary
Voluntary
Voluntary
Trustee
Usually selected
by creditors;
otherwise
appointed
Only if court orders Appointed
appointment for
cause; creditors then
may select trustee
Appointed
Advanced Business Law BPP 433
Adjustment
Bottom Lines; Q&A
Relationships With Owners/”Owners” Highly Regulated
Securities Laws Regulate Listed Companies + Dealings in
“Securities” by Listed or Non-Listed Companies
Balance Publicly Traded Company Benefits vs. Costs
(Direct Expense, Loss of Privacy, Restrictions on Freedom,
Newfound Public Expectations)
Securities Laws Police and Facilitate Public Market for
Shares by Regulating Deceptive and Manipulative Conduct
Federal Bankruptcy Law = Collective Debt Resolution
Remedy
Advanced Business Law BPP 433