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Business Organizations Outline

A. Basic Business Org Forms 1. Sole Proprietorship a) Simplest form b) Results when a person has decided to run a business w/o incorporating it or forming an LLC c) No legal distinction between the business and the owner d) Generally should have separate bank accounts and accounting records but not required e) Owner must report taxable income on his personal tax return; taxes are not paid separately f) Can result in a smaller amount of taxes being paid overall Business is not a tax payer but the owner is Owner pays taxes for business in his personal tax return

g) The owner is liable for all expenses and creditor can come after owners personal accounts and possessions to collect on the debt h) Owner may get insurance to cover their business (e.g. it would cover a slip and fall accident) 2. The Partnership a) Has two or more owners b) Modern Law: a partnership is considered to be separate a separate from its owners c) Not a tax-paying entity-have to report an informational return to the IRS d) Referred to as flow thru or pass thru tax treatment: they do not pay taxes but their income (or loss) flows thru to the partners e) Each partner must pay taxes on their share of the income even if the partnership does not pay out any distributions Distribution- occurs when a business pays out some of its assets to its owners according to their percentage ownership in the business (dividend)

f) Partners are jointly and severally liable for the debts and obligations of the partnership g) Business does not need to be filed with the state govt- default form for a business with more than one owner (not listed as any other form of org) h) An entity separate from the partners i) See section 202 of RUPA j) MacArthur Co. v Stein The court ruled that Stein was a partner in Midland Roofing during the time that the expenses in question incurred so he was liable to pay the costs plus attorney fees Used Bender factors (need all 4) The parties must clearly manifest their intent Each party must contribute Each party must have a right of mutual control Parties must agree to share the profits k) Ingram v. Deere Texas revised partnership Act factors (dont need all 5) Receipt of a share of the profits Expression of an intent to be partners Sharing or agreeing to share: losses of the business & 3rd party liability claims Participation in control of the business Contributing or agreeing to contribute money or property l) RUPA is a set of default rules that will apply to a partnership only if that partnership has not adopted different rules in its partnership agreement m) There is not statute of frauds in RUPA n) Approaching a partnership law issue Ask whether the partnership agreement addresses the issue If not, find the applicable rule in RUPA If the agreement addresses the issues, ask whether the partnership agreement violates RUPA 103(b)

If not apply the agreement rule If so, find the applicable rule in RUPA

o) RUPA 103(b) provides restrictions on partnership agreements p) A partnership is a partner in the eyes of the law q) RUPA 203 states that property that is acquired by a partnership is the partnerships property r) RUPA 4019g) states that a partner may use or possess partnership property only on behalf of the partnership s) Partnership management One partner = one vote Course of business = majority Outside ordinary course = unanimous Admitting new partner = unanimous

t) A partnership agreement could delegate to one or more partners to make certain business decisions managing partners Eliminates the necessity to vote on certain matters See sections 401(f) and 401(j) Partners can be agents of the partnership

u) Fiduciary duties in a partnership Owed to other partners and the partnership Meinhard v. Salmon Salmon was guilty of a conscious purpose to defraud Salmon owes a duty of the finest loyalty (punctilio) He signed a new lease with another person while under an existing Lease with Meinhard (extension of the SMJ of the old lease) A partner may not appropriate to his own use a renewal of a lease though its terms are to begin at the end of the partnership RUPA 404 states that there are 2 fiduciary duties: loyalty and care (b) and (c) state what a partner is to refrain from doing

v) Sources of Partnership law

Partnership agreement Section 101(c) does not have to be in writing RUPA Case law

w) Liability issues in a partnership RUPA 305 Misapplied $ by a partner, the partnership is liable for the loss Loss or injury caused to a person Penalties for a wrongful act or omission or other actionable conduct RUPA 306 All partners are jointly and severally liable for all obligations of the partnership unless otherwise agreed by claimant or law A person admitted into a partnership is not liable for partnership obligations before they were admitted as a partner 306(b) An obligation arising under an LLP is solely the obligation of the partnership RUPA 307 A partnership may sue and be sued in the name of the partnership All partners can be named as defendants in a lawsuit (partners + partnership) A judgment against the partnership itself is not per se against the individual partners There has to be a judgment against a partner and the partnership to collect against the personal assets against a partner 307 (d)(1) exhaustion rule 307 (d)(5) Judgment creditor against that partner AND A judgment based on the same claim Debtor in bankruptcy

The partner has agreed that the creditor need not exhaust partnership assets x) Financial issues Partners do not get salaries 401(h) Profits are how partners collect money; profits and loss allocations 401(b) Partnership accounts 401 Charging order A lien against a partners economic interest y) Page v. Page At will or term partnership Partner freeze-outs Court determined that it was an at will partnership so D was able to leave the partnership as long as it was in good faith 3. Limited Liability Partnership (LLP) a) Revised Uniform Partnership Act (RUPA) section 306(c) An obligation of a partnership is solely the responsibility of the partnership A partner is not personally liable unless one of the partners is a tortfeasor b) In all other respects it is the same as a general partnership c) Creditors would go unpaid if there was a judgment against the partnership and there were no assets. Partners would not be responsible d) Every state recognizes LLPs but some states have a partial shield Partners are not liable for wrongful acts of other partners but they are personally liable for the acts of the partnership 4. The Corporation a) cast of characters is crowded Shareholders, directors, officers and other employees, promoters, incorporators, subsidiaries (and parents) and third parties b) RUPA- different statute than partnership c) The shareholders are called the owners but have little control

d) The shareholders annually elect the directors who run the business e) Shareholders are not agents of the corp. f) The directors could make all decisions for the company but they often delegate to other employees and officers g) Can form a corp. in any state even if its not your home state h) The great advantage is limited liability Shareholders are not personally liable for debts and obligations Greatest disadvantage is that shareholders stock would lose value if the corporation files bankruptcy i) MBCA (Model Business Corp. Act) j) Promoter A person who acts on behalf of the company before it is incorporated MBCA 2.04- liability for pre-incorporation transactions RKO v. Graziano Promoter is generally liable if it enters into a K with a 3rd party In this case there was a clause in the K that the promoters intended to release them from liability The courts held that the K was ambiguous and judged it harshly against the parties that made up the K So, the courts found that the promoter was personally liable despite the clause k) Piercing the Corporate Veil and Enterprise Liability The corporate veil protects the shareholders from the corporations debt If its pierced, one or more of the shareholders is being held personally liable for what is otherwise a corporation debt DeWitt truck brokers case Corp veil pierced when theres one shareholder who possesses majority of the stock Subsidiary as an alter ego of the parent corp. The parent and subsidiary have common directors or officers They have common business departments

They file consolidated financial statements and tax returns The parent finances the subsidiary The parent caused the incorporation of the subsidiary The subsidiary operates with grossly inadequate capital Parent pays the salaries and other expenses of the subsidiary Subsidiary receives no business except that given by a parent The parent uses the subsidiarys property as its own Daily operations are not kept separate Subsidiary doesnt observe the basic corporate formalities (keeping separate books and records) l) Enterprise liability (horizontal veil piercing) Similar to piercing the corp. veil E.g. a person hit by a cab driver tries to sue the cab co but they are insolvent; person finds out that there is only one SH and he owns 10 other cab corps that operates out of the same garage. Person can sue can sue all corps and the SH Pan Pacific Sash & Door Co Case

m) Board of directors MBCA 801(b) Has full power to run the company and make decisions May delegate the power to make decisions to other entities in the corp Board committees MBCA 8.25 Must be created by a majority of votes or whatevers in the by-laws Can exercise any power that the full board could exercise except in subsec (e) Usually created for a specific purpose Certain committees are required by stock exchange rules Officers and other employees Board Powers under MBCA 8.01 Unanimous written consent

Board meetings Regular vs. special Notice required for special meetings Quorum Majority of directors present must vote yes to take action (no proxies for directors) 5. Stock Basics a) Authorized shares b) Outstanding shares c) How can a corporation issues shares? Board approval Possible shareholder approval- MBCA 6.21(f)

6. Common stock a) Legal rights are the same from one company to another b) Get to elect directors c) Can be sold and it is transferable d) Can collect dividends (board decides who gets these) e) Residual owners of the company to receive money after company is dissolved f) Company does not have to buy back shares from you g) No right to force company to give you a job 7. Preferred Stock a) There get paid first during a liquidation b) There is participating and non-participating 8. Corporate distributions a) 6.40(c) limits on the company to pay dividends 9. Promoters a) Pre-incorporation K Liability of promoter Liability of corp Becomes liable when the corp adopts the K

If that happens the promoter is still on the K Promoter is released by a novation 10. The C Corporation a) double layer taxation- they are taxpayers If the corporation earns income its taxable at the corporate tax rate If the corp. then pays out dividends to the shareholders, the SH must report this on their personal tax return Dividends are not deductible from the corps taxable income

b) A way to lessen the burden of the double tax is to pay their employees a higher salary b/c the corp is entitled to a deduction for paying out reasonable salaries 11. The S Corporation a) Another way to avoid the double layer taxation b) Identical to C corps in every aspect except taxation c) S corps are not taxed on their income d) A flow-thru entity like partnerships; income is passed to the shareholders and they claim on their tax return e) IRS code 1361 sets certain restrictions May not have more than 100 shareholders May only have individuals, trusts, estates, and certain non-profits May only have US residents and resident aliens as shareholders May not have more than one class of stock Must be incorporated in the US

12. Limited Liability Company (LLC) a) LLC statutes vary widely from state to state b) Hybrid between a partnership and a corp c) Combine the limited liability of corps and the flow-through tax of partnerships d) The owners are called members e) Treated as a partnership for tax purposes if there are multiple members f) disregarded entity if there is only one member g) Member-managed: all members have power to make decisions (owners)

h) Manager-managed: managers are given decision-making authority to the extent specified in the operating agreement (resembles a corp) i) A filing must be made with a state govt Operating agreement Articles of organization

13. The Limited Partnership (LP) a) Have flow-thru tax tx b) General partners: advantage is control; disadvantage: liability c) Limited partners: no control and not held personally liable d) Typically there is one general partner and several limited partners e) An entity distinct from its partners f) A certificate of limited partnership must be filed with the state g) Two kinds of partners There must be at least one general partner and one limited partner passive investors General partner has control over the business; limited partners have none

h) The GP often is paid a fee for managing the LP i) Only the GP owes fiduciary duty, the LP does not j) If a GP disassociates, the LP might dissolve; however if an LP disassociates dissolution of the limited partnership will not dissolve k) Uniform Limited Partnership Act (ULPA) and RULPA Only 16 states have adopted this

14. The Limited Liability Limited Partnership (LLLP) a) An LP with a twist General partners will not be personally liable for the LLLPs obligations The LLLP is to the LP as the LLP is to the general partnership

b) Differences between an LP, LLP, and LLLP? What about LLC? 15. Professional entities a) Many states permit members of a learned profession to form LLCs b) They can also form professional corporations or professional LLCs Typically requires that all owners be licensed in that field

Personally liable for their own wrongful acts such as malpractice May shield an owner from liability for malpractice committed by other owners Will usually shield an owner from personal liability for other debts and obligations of the business such as rent

B. Sources of Bus Org Law 1. Bus law is primarily state law 2. Can choose any states law when forming a business 3. State law will govern the internal affairs of the entity (relations btwn the owner and the manager) 4. However, whatever state the business is actually situated in their law will govern if a customer or an employee sues (external matter) 5. Within a jurisdiction there is a hierarchy of laws: the constitution, statutes, & case law 6. Law is primarily statutory 7. Judges may overturn a statute only if it is unconstitutional 8. Federal law affecting bus orgs has to do with publicly traded corps & securities 9. Charter Documents a) Usually in partnership agreements b) In a corporations articles of corporations and bylaws c) LLC- articles of organization and its operating agreement d) LP- in the certificate of limited partnership and the LP agreement C. Responsibilities if Business Attorneys 1. The usual goal is to keep the client out of court 2. The way to judge a compliance attorney is by whether the company achieves compliance or at least avoids any fine or penalties 3. Transaction attorneys have to negotiate a good deal or avoid hidden pitfalls in a business transaction 4. A business attorney represents the entity and not the owners or managers D. Basics of Financial Statements 1. Generally Accepted Accounting and the Preparation of financial statements (GAAP) a) FASB develops financial accounting standards in the US

b) GAAP consists of a series of standards developed by the FASB c) Consistency is the most important in the GAAP d) The SEC requires that publicly traded companies follow GAAP 2. Balance Sheets a) Measures three categories of items Assets- things the business owns Liabilities- amount the business owns to 3rd parties Owners or shareholders equity- the diff btwn the 1st two

b) Assets = liabilities + owners equity c) 3 categories of assets Current assets- which will be converted into cash or used in the near future Certificates of Deposits (CDs) & money market accounts Marketable securities Accounts receivable Inventories Prepaid expenses Property, plant and equipment- tangible and long-lived assets Land, buildings and equipment Other assets- do not fit into either of the other 2 categories May include intangible items such as patents or trademarks d) The value of an asset on the balance sheet is probably not the assets FMV Tangible items with a long life are subject to depreciation Depreciation spreads the cost of a long-lived asset over its expected useful life e) Liabilities Amounts that the business must pay to 3rd parties or services that business must perform for them 2 categories of liabilities Current liabilities- expected to be paid in the near future; accounts payable, notes payable, bank loans

Long-term liabilities taxes payable and current portion of longterm debt f) Owners equity Paid-in capital: amount invested in the business Capital stock Additional paid-in capital : par-value for its stock Retained earnings- the diff btwn total amount of earnings since the business was established and the amount the business has paid out Whenever a business is dissolved, its assets must be used to pay creditors 1st Secured creditors(security interest in collateral) will usually have a higher priority 3. The Income Statement a) Measures a period of time and not a specific date like a balance sheet b) Reports 3 categories of info for this period: Revenues Expenses Salaries or wages Research & development expenses General & admin expenses Interest expenses Income or loss

c) Taxes are typically put on a separate line item on the income statement d) Will typically give an inaccurate picture of how much cash the business is generating or using May reflect expenses that do not require cash payments to 3rd parties May not reflect expenditures

4. Cash flow statements a) The purpose is to determine for the same period covered by the income statement how much cash the business generated or used 5. A publicly traded business must file with the SEC 4 financial statements per year

a) Unaudited financial statements for the 1st 3 quarters b) And an audited financial statement covering the entire year c) An audit is performed by an accounting firm consisting of CPAs d) Privately held businesses are not typically required to have an audited financial statement 6. Determining a businesses worth is difficult a) Stock market does a decent job determining the value of a share of the companys stock in a publicly traded corporation b) Private businesses are much more difficult to evaluate E. Agency Law 1. Agency law involves the relationship btwn at least two but usually three persons a) Principal- the person on whose behalf work or some task is being done b) Agent- the person doing work c) 3rd party- the person with whom the agent deals on behalf of the principal 2. Restatement (Third) of Agency 3. Forming an agency relationship a) Agency is a fiduciary relationship- owing a duty of loyalty and care b) Agent owed fiduciary duties to the principal; the agent is the fiduciary c) Each party must manifest assent to the relationship A simple nod may be enough to express consent

d) You need mutual assent, control, fiduciary duty 4. The agent must act on the behalf of the principal and not further his own interest 5. The Principals Contractual Liability to the third party a) An agent may bind a principal to a K in 4 ways: Actual authority (section 2.01) There has to be a manifestation verbal or otherwise where the agent believes that the principal wishes them to act Actual express authority Actual implied authority (something that is required to complete a task) Apparent authority (section 2.03) Power-up Position

Principal must make a manifestation 3rd party must be aware of the manifestation The 3rd party must reasonably believe that the agent is authorized to act on the principals behalf Estoppels (denying liability) Someone purporting to act but they may not have authority to do that Exceptions in 2.05- if the person changes position in reliance on purported act Ratification Turns what was previously an unauthorized act into an authorized act If a party ratifies a K or other transaction, it is agreeing to be bound by it- it is volitional You must consider how a person may ratify an act Express ratification Implied ratification Ratification must be done knowingly Section 4.06 requires that the person knows the material facts of the transaction Sections 4.03, 4.04 & 4.05 impose some limits on the effectiveness of a ratification Converting an unauthorized action into an authorized action 6. Parties bound on the K a) Undisclosed principle- exception The 3rd party may refuse to render performance to the principal 3rd party may avoid performing the K if they didnt know about the principle and would not have approved of working with this person if they knew about it and the principal is aware of the dislike Misrepresentation about existence of agency


rd

Elements: undisclosed principal; person would not want to deal with the principal and the agent knows about it; and there is a misrepresentation

b) The 3 party is normally bound to the principal on the K c) Is the agent bound in K If P is bound to TP d) Disclosed principle- agent is not liable to the 3rd party e) Unidentified principle- agent is liable to the 3rd party along with the principle f) Section 6.10- purporting to act like someone you are implying that you are acting on that persons behalf implied warranty of authority 7. Respondeat Superior a) An employer is subject to liability for torts committed by employees while acting within the scope of their employment b) An employee is within the scope of her employment when performing work assigned by the employer or engaging in a course of conduct subject to the employers control c) Master/employer and servant/employee- master is liable for torts that result in physical injury committed by servant in the scope of employment F. Partner Dissociation and Partnership Dissolution 1. Dissociation- when a partner ceases being a partner 2. Dissolution- when a partnership dissolves 3. Exceptions- RUPA 103(b)(6) and (7) 4. RUPA 601- provides a list of events that occur when a partnership is dissociated (dont worry about 8, 9, and 10 for purposes of this class) 5. RUPA 602 (b)- dissolving the partnership a) Partnership at will (1) b) Term or undertaking (2) Wrongful dissociation partner dissociates is liable for damages

6. Winding up- finishing unfinished business a) Pay off creditors b) Any amounts left over go to partners First zero out their partnership accounts

Leftovers are profits Shortfall is a lost

7. RUPA 801 events of dissolution ******* a) Section 1- express intent triggers disassociation b) 90 day period before dissolved- hypo: if one partner dissolves and within 90 days other partners want to dissolve, the partnership is dissolved (has to be the majority 8. Mere dissociation a) Article 7 applies b) Calculating amount owed to dissociated partner c) Lingering liability and authority RUPA 702 to 704 G. Fiduciary Duties in General 1. Generally, shareholders do not owe fiduciary duties to anyone 2. Officers are subsets of employees and they owe DOC 3. Directors owe their duties to the corp. and their main goal should be to maximize profitsand indirectly to the shareholders 4. Duty of Care a) MBCA 8.30 (directors duties) b) When a director doesnt something unwise c) DIFFERENT from Duty of loyalty d) Changed from a negligence standard to something different e) General standards of conduct f) Duty of care standard 5. Duty of Loyalty a) Directors put their own financial needs ahead of the corp b) some ways to breach the duty of loyalty interested director transactions usurping a corp opportunity look for what state you are in on final ALI Official capacity Corp resources test

Applies to senior execs- opportunity closely related to corps type of business Guth test (Delaware) 7 factors Financial ability Line of business Placing yourself in the conflict with the company Whether youve used corp resources to take the opportunity competing with the corp

c) MBCA 8.60 to 8.63 Three questions Is the transaction a D.C.I.T. ? director is on both sides of the deal (if the director is a party or has a material financial interest or if a related person is a party to the transaction, if the director and the related person had a material financial interest) If so, how do you sanitize it? 8.62 (full disclosure) Whats the effect of sanitization? MBCA 8.62 qualified director approval MBCA 8.63 qualified shareholder approval (Vogelstein case- wasteful transaction) Fairness- fair dealing and fair price, business purpose d) Northeast Harbor Golf Club Director bought a golf course from under the corp Corp didnt have a problem with this until she started developing the land for something other than golf courses (not the same line of business) ME used ALI principles ALI principles- a director may not take advantage of a corp opportunity unless: Official capacity test (learned about the opportunity while working in the scope of the corp)

Disclosure concerning the conflict of interest Corporate resources test E.g. prior research done by the co that the director took advantage of to take the opportunity away from them The corp opportunity is rejected by the corp Rejection is fair to the corp Rejected in advance following disclosure Rejection is authorized in advance or ratified Corporate opportunity Any opportunity to engage in a business activity of which a director or senior exec become either: Circumstances that the person offering the opportunity expects it to be offered to the corp, or Through the use of corp info or property, if the person believed that the opportunity would be of interest to the corp e) Competition Agents shall not compete with their principle Use the ALI principles as a defense to directors competing with the co Directors and senior execs may not advance their pecuniary interests by engaging in competition with the corp unless Foreseeable harm is outweighed by the benefit The competition is authorized in advance or ratified following disclosure concerning the conflict of interest & the competition Competition is authorized in advance or ratified, following such disclosure by disinterested SH and the SHs action is not equivalent to a waste of corp assets 6. MBCA 6.02 a) A director must act in good faith and in a manner that she reasonably believes to be in the best interests of the corp.

b) When performing their duties, directors must use the care that a person in a like position would reasonably believe appropriate under similar circumstances c) Requires directors to disclose to other directors info that is relevant to their decision-making process or oversight function- unless a confidentiality obligation applies d) Directors can delegate tasks to other persons within the corp. 7. MBCA 8.31 Standards of Liability for Directors a) Some corps have provisions in their AOI that shield directors from monetary liability b) May provide a director protection if she is being sued with respect to a directors conflicting interest transaction c) P has a tough time suing a director d) The 5 choices (see Rules a-2) 8. Business judgment rule a) Ways to overcome this rule P could argue that the directors made an irrational or wasteful decision This focuses on the substance of the decision and not the directors motive Fraud, illegality or conflict of interest Gross negligence and not doing your research Not having been informed of all the info before making a decision

b) This rule presumes in favor of the actions of the directors in that a decision made by a loyal and informed board will not be overturned by the courts unless it cannot be attributed to any rational basis purpose c) P has the burden to rebut the rules presumption d) P has the burden of proving causation and damages in suits where they are seeking money damages from the directors e) Smith v. Van Gorkom Business judgment rule case P wins overcomes the rule (gross negligence standard)

9. Inaction by directors

a) Francis v. United Jersey Bank Mother is the director and being sued because her sons are misappropriating funds Mother was unaware but should have been

b) Barnes v. Andrews c) In re Caremark A breach of duty to exercise appropriate attention, as the court notes, is more difficult for Plaintiffs to prove than a breach of the duty of loyalty. Most decisions that would come under this duty will resemble many decisions shielded by the business judgment rule. H. Derivative Lawsuits (MBCA 7.44) 1. Who makes (major) litigation decisions? 2. Who owes the duties of care and loyalty to the corporation? 3. But, do we trust shareholders? 4. You have to make a demand in a model act state 5. The difference between this and a class action is that there has to be fair and adequate representation of the corporation to have standing not the people as in a CA 6. What is a derivative action? a) Harm to the corporation b) Cant say its a direct lawsuit just because your shares fell in value c) A shareholder becomes a plaintiff d) Any recovery goes to the corporation 7. Tooley v. DLJ a) The issue must turn solely on: Who suffered the alleged harm? Who would receive the benefit of any recovery?

8. Marks v. Akers (IBM case) a) Board is being a little too generous to themselves b) Aronson test (Delaware test) grounds for futility Reasonable belief that majority of directors were interested OR There was a valid exercise of business judgment

c) Court went with the Universal Test

d) New York test- grounds for futility A majority of the BOD is interested in the challenged transaction BOD did not fully inform themselves about the challenged transaction Challenged transaction was so egregious on its face that it could not have been the product of sound business judgment 9. Effects of Making demand a) More likely that the board will reject the demand (see MBCA 7.44) b) 7.44(d) provides that if P files the derivative lawsuit after her demand was rejected then her complaint shall allege with particularity facts establishing either: G

10. Special litigation committee a) Most likely make a motion to dismiss b) NY- acting in good faith and disinterest = grant motion c) DE- good faith, disinterest but the judge can use his own judgment whether to grant or dismiss 11. Auerbach v. Bennet a) Demand excused? b) Failed under NY rule (demand required) c) P files w/o filing a demand d) Corp forms a special litigation committee with 3 new members 12. Zapata Corp v. Maldonado (demand excused) a) All of the directors did something wrong b) DE law- doubt that a majority are disinterested so demand excused c) 2 new directors were placed on the special litigation committee and they move to dismiss d) Committee members are independent and seem to be acting in good faith e) The court uses its own independent business judgment to determine case and the court says that they would have let the lawsuit continue and not dismiss f) Demand excused- maybe we should be more suspicious of the board

I. Closely Held Corporations 1. Typified by: a) A small number of stockholders (typically fewer than 10) b) No ready market for the corp stock Person may want to be my own boss Or stocks were inherited from a founder of the business

c) Substantial majority stockholder participation in the management, direction and operation of the corporation d) Has AOI, bylaws, etc 2. Planning 3. Donahue Case a) Equal opportunity rule- minority SH who is disadvantaged by majority SH; court says that it has to be fair b) Court held that stockholders in the close corp owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another 4. McQuade v. Stoneham a) Authority that requires the court to hold a K illegal and void if it precludes a BOD at the risk of incurring legal liability from changing officers salaries or policies or retaining individuals in office, except by consent of the contracting parties. 5. Wilkes v. Springside Nursing Home a) Nursing home case b) 4 men have equal shares in the co and are on the board and they all work there and get paid a salary c) Quinn and Wilkes dont get along b/c Quinn was buying property from the Co; Wilkes says that they are selling the property for too cheap d) The 3 directors take Wilkes off the salary roster and is not re-elected to the board; he still owns stock though e) Did D have a legitimate business purpose? If no, they lose. If yes, burden shifts to P (P has to show alternative means) 6. Advance Planning Ideas a) Employment agreements

b) Buy-sell agreements c) Other ideas 7. Oppression a) An alternative way to provide relief to an abused SH is MBCA 14.30 b) This statute provides that a court may order a corp to be dissolved if P can establish grounds for dissolution Directors have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent c) Judicial Dissolution of Kemp & Beatley, Inc When the majority SH of a close corp award de facto dividends to all SH except a class of minority SH, such a policy may constitute oppressive actions And serve as a basis for dissolving the corp As the stock of closely held corps generally is not readily salable, a minority SH at odds with management policies may be w/o either a voice in protecting their interests or reasonable means of withdrawing his investment Disappointment alone should not be equated with oppression Oppressive actions refer to conduct that substantially defeats the reasonable expectation held by minority SH in committing their capital to the particular enterprise A SH who reasonably expected that ownership in the corp would entitle him to a job, a share of corp earnings, a place in corp management or some other form of security, would be oppressed in a very real sense when others in the corp seek to defeat those expectations The Defendants knew or shouldve known P has to show that it is objectively reason Was this an important reason to join the corp (central purpose) Look at circumstances on a case-by-case basis

Courts have to determine if liquidation of the corp is the only feasible means to protect the complaining SH expectation of a fair return AND Whether dissolution is reasonably necessary Minority SH whose own acts give rise to complained-of oppression should be given no weight under the statutory protection

8. Deadlock a) Another basis for an order of dissolution under MBCA 14.30 b) Wollman v. Littman Irreconcilable differences even among an evenly divided board of directors does not necessarily mandate dissolution Court did not order dissolution of the corp in this case

9. Remedies under MBCA 14.30 a) Dissolution b) Buy out of Ps stock J. Controlling Shareholders 1. The concept of groups a) Status as a controlling SH could arise from ones own ownership of shares or from being part of a group whose members collectively own a controlling interest 2. If there was a SH who happened to own a majority of the outstanding shares (50% plus one share) then that person is a controlling SH 3. However, one can be considered a controlling SH with less than a majority of stock 4. Mechanics of SH Voting a) Unanimous written consent b) SH meeting Record date Notice Quorum Proxies

5. Counting SH votes a) Electing directors Straight (plurality) voting

Cumulative voting S= # of shares voting at the meeting D = total number of SHs elected at the meeting N = the number that you want to elect N * S/(D + 1) + 1 = x

Voting on other things More yes than no votes: MBCA 7.25(c) Supermajority provisions in articles: MBCA 7.27

b) SH voting agreements Ok for SH to enter into voting agreements Ringling Bros Case MBCA 7.31

6. The amount influence that the SH has on the BOD and/or the Corps business decisions is more important than the % of shares a) If a majority of the directors are not really independent from a SH then that SH is likely a controlling SH 7. Kahn v. Lynch Communications Systems a) Court held that a SH owes a fiduciary duty only if it owns a majority interest in or exercises control over the business affairs of the corp b) For a dominating relationship to exist in the absence of controlling stock ownership, a P must allege domination by a minority SH through actual control of corp conduct c) Have to show substantial domination 8. Duties of Controlling SH- Sinclair Oil Corp v. Levien a) Intrinsic fairness- involves a high degree of fairness and a shift in the burden of proof Application of the rule- one in which the parent has received a benefit to the exclusion and at the expense of the subsidiary b) Sinclair argue business judgment rule c) Court held that a parent owes a fiduciary duty to its subsidiary when there are parent-subsidiary dealings

d) However the standard will only be applied when the fiduciary duty is accompanied by self-dealing ( parent is on both sides of a transaction) e) Self-dealing occurs when the parent causes the subsidiary to act in such a way that the parent receives something from the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of and detriment to the minority stockholders of the subsidiary f) If intrinsic fairness applies, then the controlling SH will probably lose g) If the BJR applies then the controlling SH will probably win h) Apply either a BJR or an IFS i) Sanitized-? 9. Under DE law, if a self-dealing transaction involving a controlling SH is approved by disinterested directors or disinterested SH after full disclosure, the burden shifts to P but the standard remains entire fairness a) Even if controlling SH could prove that the transaction was approved by disinterested SH or directors, P could still attempt to prove that the transaction was not entirely fair b) Fair dealing or fair price would need to be absent to prove this

K. Business Acquisitions 1. Three ways for the Acquirer to buy the target a) Mergers All the assets and liabilities of the Target becomes assets and liabilities of the Acquirer by operation of law The Target ceases to exist The Targets SH (with the exception of dissenters) will end up with something very different than Target stock (cash or Acquirer stock) MBCA 11.07 The acquiring corp will survive The separate existence of the target corp will end All assets and other rights of the Target corp will belong to the AC All of the liabilities of the TC will be liabilities of the AC

The ACs AOI and bylaws are amended only to the extent stated in the plan of merger The TCs shares will be converted into the consideration set forth in the plan of merger except with respect to shares owned by persons who exercise dissenters rights Triangular merger Forward triangular merger- the AC creates a new subsidiary and then the TC merges into the subsidiary rather than the AC Reverse triangular merger- the subsidiary of the AC merges into the TC and the TC survives One reason to select this option is that sometimes the TC has govt permits or contracts that could be lost as a result of the merger (e.g. anti-assignment clauses) Due diligence Begins with the AC lawyers sending the TC a list of documents and other info they would like to examine The length depends on: what type of business the TC is and how detail-oriented the ACs lawyers are Plan of merger likely will provide: Each share of the AC that is outstanding immediately before the merger will remain unchanged Each share of the TC that is outstanding immediately before the merger will be converted into the merger consideration Each share of the merger subsidiary that is outstanding immediately before the merger will be converted into a share of the TCs stock Plan of merger must contain at minimum 5 things (MBCA 11.02(c)): The name of each corp (including name of surviving corp) The terms and conditions of the merger A description of how the shares of the TC will be converted into shares or other securities, etc

Any amendments to the ACs AOI Any other provisions required by the laws under which any party to the merger is governed by Representations and warranties Promises about facts that the parties make to each other Covenants Promises that the parties make to each other about things that they will do and refrain from doing between the time that the merger agreement is signed and the merger occurs After the merger agreement and any related agreements have been negotiated, the next step is to get approval of the merger This is decided by the BOD and the SH If anyone on the board or SH does not approve the merger, then it doesnt go through The vote required for director approval of a merger is simply a majority of the directors who are present at the meeting Exception: MBCA 11.04(g) (small scale mergers) TC SH have to vote on the merger Merger has no effect on the ACs AOI (99.9%) No change to current outstanding shares of AC Stock merger- look under 6.21(f) which says that it is a BOD but if corp is exchanging for something other than $ and it exceeds 20%, SH approval is needed Exception: MBCA 11.05 (short form or parent-subsidiary) Domestic corp that holds at least 90% of the voting power does not need approval by SH or BOD for a merger Have to notify the subsidiary SH within 10 days if under (a) approval is not required

If a corp has more than one class of stock outstanding. The approval of each class may be required separately (11.04 (f))

b) Asset purchases The Acquirer (surviving corp) buys all or substantially all of the Targets (disappearing corp) assets and continues running the same business that the Target was running Tangible and intangible assets Target remains in existence Consideration paid goes to the Target itself and not the SH If the Target has sold all of its assets, it will usually dissolve shortly after DISADVANTAGE: requires more work in terms of transferring assets (transfer may need to occur one by one) ADVANTAGE: usually the buyer does not assume the sellers liabilities

c) Stock purchases Buy all outstanding stock or tender offer (invitation to tender shares) This is very simple if you buy from a small number of persons If there are thousands of SH, then the other methods may be necessary The Target remains in existence; becomes a subsidiary of the Acquirer second-step merger

2. Asset Sales a) Is SH approval needed to sell assets? Where do we draw the line between what needs to be approved and what doesnt? MBCA 12.01 and 12.02 SH approval is only necessary if after the asset sale the corp would not have a significant continuing business activity (SCBA) 25% of assets from previous year + (25% income or 25% revenues) This is not the only way to have a SCBA b) Katz v. Bregman

What is substantially all? The critical factor in determining the character of a sale of assets is generally considered not the amount of property sold but whether the sale is in fact an unusual transaction or one made in the regular course of business of the seller

3. Successor Liability a) If a technically asset transaction has the same effect as a merger, this has led some courts to treat the transaction as if it had actually been a merger thus making the buyer liable for the sellers unpaid liabilities b) Cargo Partner AG v. Albatrans, Inc De facto merger doctrine Applies only when a merger of corp entities is disguised as some other transaction AND that a necessary factor is continuity of ownership between the predecessor and successor entities NY law: A continuity of the selling corp (same management, personnel, assets and physical location) Continuity of stockholders (owners) *important A dissolution of the selling corp The assumption of liabilities by the purchaser Not all the elements are necessary to prove de facto

NY 4 common law exceptions than an asset purchaser is not liable for the sellers debt A buyer who formally assumes a sellers debts Transactions undertaken to defraud creditors A buyer who de facto merged with a seller A buyer that is a mere continuation of a seller

No continuity of ownership in this case so court determined that the asset purchase was not a merger

4. Dissenters Rights

a) Could vote against the merger b) Could sue your BOD for breaching its duty of care in negotiation and adopting the merger agreement (have to overcome the BJR) c) Sue for breach of duty of loyalty d) Assert dissenters rights (appraisal rights) if they are available A court determine the fair value of your shares e) Do you have dissenters rights? (MBCA 13.02) (a)(1) gives rights to vote on the merger (b)(1) takes rights away Publicly traded = no dissenters rights (b)(3) restores rights if taken away by (b)(1)

f) Procedures for asserting dissenters rights Under MBCA 13.20 the corp is required to notify SH that they have dissenters rights when it sends notice of the SH meeting A SH that wishes to assert dissenters rights must notify the corp BEFORE the vote is taken at the meeting A SH who votes in favor of the merger loses his dissenters rights If the merger occurs, the corp must send a notice to all SH who have perfected their dissenters rights within 10 days This notice requires that: Informs SH where to send stocks and the deadline to do so fair value of the shares At SHs request, corp will inform them about how many ppl have dissented and how many shares they own Inform the SH of the deadline for withdrawing her claim of dissenters rights If SH complies with the notice and does not withdraw her claim of dissenters rights, the corp must pay the SH the corps estimate of the fair value of the shares plus interest within 30 days

The corp is also required to inform the SH that she has the right to demand additional payment for her shares but if she does not do it within the deadline she will forfeit her right to do so(MBCA 13.26) If the SH is unhappy with the Corps fair value estimate, she has to notify the corp within 30 days If the parties dont settle within 60 days, the corp will have to petition the corp If it doesnt, the corp must pay the SH her estimate of the fair value less amounts it previously paid to her (MBCA 13.30) g) Fair Value Shares (MBCA 13.01(4))- value of the Corps shares determined: Immediately before the effect of the corp action to which the SH objects Using customary and current valuation concepts for similar businesses Without discounting for lack of marketability or minority status except if appropriate Many states use different techniques to value shares in dissenters rights proceedings h) Are dissenters rights exclusive? (MBCA 13.40) If SH do not have dissenters rights with respect to a merger, they may not challenge the legality of the merger unless one or more of the exceptions in subsection (b) applies If the SHs sole claim is that the price in the merger was inadequate, then asserting dissenters rights is the sole remedy SH can also seek rescissory damages

5. Tender Offers a) A limited-time offer to acquire a substantial amount of Target shares at a substantial premium over current market prices b) Hostile acquisition Proxy contest- an insurgent SH seeks to replace the current directors with different directors SH will solicit proxies from other SH to vote in favor of the insurgents board nominees

Soliciting proxies is an expensive process Proxy contests are rare c) Tender offer (another form of hostile acquisition)- an offeror offers to purchase a specified amount of target stock from TC if certain conditions are met d) It allows the Acquirer to bypass the Targets board and go directly to the SH e) Section 13(d) of the Securities Exchange Act of 1934 If AC acquires more than a certain amount (more than 5%) of Target Corp shares, it must file a schedule 13D with the SEC, target corp, and any stock exchanges on which the TC is listed f) Tender Offer Rules The tender offer will offer a price that is much higher than the current market price Section 14(d) of the SEA provides that any tender offer that would result in an offeror owning more than 5% of the equity securities of a publicly traded co FIRST-At the time that the tender offer commences, the offeror must file a document with the SEC called a schedule TO The tender offer must be publicized to the Targets SHs (e.g. newspaper) Offeror could mail the offering materials to the Target SHs or the Target could give the offeror a list of its SHs mailing addresses SECOND-Within 10 business days after the tender offer starts, the Target must file a schedule 14D-9 with the SEC (Targets management can present its opinion of the tender offer Self-tenders: a corp may make a tender offer for its own shares

6. Weinberger v. UOP a) Self-dealing entire or intrinsic fairness (standard of review) Has to show fair dealing and fair price b) UOP gets all of Signals shares and signal gets $21/share c) Feasibility study done by Signal president who was also a board member of UOP and comes up with $20-21 but the range was up to $24 but Signal only offered UOP $21

d) Signal owes fiduciary duty to UOP UOPs directors using UOP info but not sharing it with UOP Full disclosure is needed Signal loses case

e) Are dissenters rights exclusive? MBCA 13.40 In DE dissenters rights are a SH-plaintiffs exclusive remedy , unless fraud or other exceptions are present It appears that if the SHs sole claim is that the price in the merger was inadequate, then asserting dissenters rights is the sole remedy; otherwise appraisal may not be exclusive If asserting dissenters rights is not the SHs sole remedy, she may attempt to recover rescissory damages (can be greater than the FV of her shares at the time of the merger)

7. Dissolution of a Corporation (voluntary) a) A way in which a corp ceases to exist b) SH and BOD vote on this c) Winding up Corp finishes uncompleted work Creditors get paid first Liquidates assets that it does not intend to distribute in kind to its SH Final step: to determine how these remaining assets will be divided among the SH Must file articles of dissolution with the state govt It must sell or dispose of assets Debts must be discharged, take steps to bar a debt or apply to a court for a determination of the amount (this is a complicated issue) d) Reasons to dissolve Corp sold all of its assets and is just sitting on a ton of cash

Corps business is losing money and appears to be a dead end (e.g. pay phone and typewriter business) MBCA 14.01 through 14.09 (voluntary dissolutions) First step: obtain the requisite approval (MBCA 14.02) Once approved, the corp remains in existence but may not carry on any business (with the exception of winding up & liquidation)

e) MBCA 14.06 Concerns known claims (barring claims) A claim that the corp is aware that it owes and that is not subject to any contingencies Send notice to the creditor and the creditor has to respond within 120 days or theyre barred from collecting the debt If there is rejection of the claim, the creditor has 90 days to sue f) MBCA 14.07 (barring claims) Concerns other claims (all claims that cannot be considered known claims) Such claims may be barred if the corp publishes a newspaper notice and meets the other conditions of that section for barring such unknown claims (constructive notice) (d) non-barred claim can be enforced against the company to the extent that they still have assets; SHs are required to pay pro rata amount to the creditor (b/c the money has already been given to them but it shouldve gone to the creditor 1st ) g) MBCA 14.09 Provides that directors have a duty to discharge or make reasonable provision for debts before allowing distributions to be made to SH Official comment: if the directors breach this duty, their liability should be mediated through the corp L. The Securities Act 1. What is a Security? a) See section 2(a)(1) of the Securities Act

b) Note: section 2(a)(1) provides that any interest or instrument commonly known as a security will be considered a security to account for new financial products c) Stock is not always a security but usually safe to assume that it is United Housing Foundation v. Forman- court rejects any suggestion that just because something is called stock that it must be considered a security transaction (an exception) d) Investment contracts Left for the courts to interpret because there is no clear definition Howey test (Securities & Exchange Commission v. WJ Howey) An investment of money In a common enterprise With the expectation of profits Solely from efforts of others (ppl other than the investor) All 4 parts of the Howey test must be satisfied for something to be an investment K Securities & Exchange Commission v. Edwards Issue: whether a moneymaking scheme is excluded from the term investment contract simply b/c the scheme offered a contractual entitlement to a fixed, rather than a variable, return? Congress purpose in enacting the securities laws was to regulate investments in whatever form they are made and by whatever name they are called Deals with the 4th element: profits must come solely from the efforts of others A promise of a fixed return does not preclude a scheme from being an investment K Holding: the fact that investors have bargained for a return on their investment does not mean that the return is not also expected to come solely from the efforts of others- thus this is an investment K and subject to fed securities laws money = anything that has value

investment = opposite of consumption common enterprise horizontal formulation (all courts accept)- requires multiple investors who are similarly situated (similarly affected by the success or failure of the enterprise) Vertical test (some courts accept this)- must show a link between the investors fortunes and the promoter of the program or a 3rd party

expectation of profits two types Capital appreciation (the hope that security will rise) Participation in earnings resulting from the use of investors funds

solely doesnt really mean solely Koscot held- the critical inquiry is whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise

2. Popular Exemptions from Registration a) Exempt securities- those that are exempt from having to be registered with the SEC prior to sale b) Exempt transactions- securities that are sold in an offering that complies with certain requirements need not be registered w/the SEC before they are offered and sold in that offering c) Sec 4(2) private offerings Provides that securities need not be registered with the SEC when they are sold in transactions by an issuer not involving any public offering Four important factors The manner of the offering Must be found thru some private methods The eligibility of the purchasers Each offeree and not just actual purchasers must be sophisticated in investing matters to some degree

Purchasers can meet this standard either by themselves or with the assistance of a purchaser rep The info provided to purchasers The absence of non-exempt re-sales by the initial purchasers Private offering= securities sold in a private offering need not be registered with the SEC Safe harbor Refers to an SEC rule that may be used to ensure compliance with a statute Compliance with the rule is optional but if the issuer complies with the rule, then it conclusively be deemed to have complied with the statute SEC v. Ralston Purina ****** To determine the distinction btwn public and private in any particular contexts, it is essential to examine the circumstances under which the distinction is sought to be established and to consider the purposes sought to be achieved by such distinction The applicability of sec 4(2) should turn on whether the particular class of persons affected needs the protection of the Act An offering to those who are shown to be able to fend for themselves is a transaction not involving any public offering The exemption question turns on the knowledge of the offerees The offerees in a sec 4(2) offering must be able to fend for themselves Held: the focus of inquiry should be on the need of the offerees for the protection afforded by registration. The employees did not have all of the necessary info so they needed protection 3. Regulation D a) Consists of rules 501 thru 508 b) Rule 505- provides an exemption from registration where an issuer may sell a max of $5 million in securities in a 12 month period

May only sell to a max of 35 people (accredited = wealth) Issuer can sell securities to a max of 35 non-accredited investors and a theoretically unlimited number of accredited investors Cant use if officers, directors etc have been in legal trouble (bad boy disqualification provisions) Purchasers must be provided with info specified in rule 502(b) May not use any form of general advertising or general solicitation to reach investors Investors will receive restricted securities Issuer has to file a Form D with the SEC within 15 days after the 1st sale

c) Rule 506 Same requirements as Rule 505 However any issuer may use 506 (including those subject to bad boy provisions) There is no dollar limitation as in 505 Each purchaser who is not an accredited investor alone or with a rep has to have knowledge and experience in finance and business matters d) Rule 504 Can only sell $1 million of securities in a 12 month period (public offering) Some issuers may not use rule 504 (public companies, investment companies and certain development stage companies) The issuer is not required to disclose any particular info to investors (even non-accredited investors) There is no limit on the number of investors (do not need to be accredited or sophisticated in any way) Ordinarily prohibits the use of general advertising or solicitation and ordinarily results in investors receiving restricted securities; however 3 exceptions: See 504(b)(1)

4. The Intrastate exemption a) part of an issue b) Must be a resident of the same state (see sec 3(a)(11)- one year is a good rule of thumb c) Residence requires domicile (intent to stay) d) If the issuer is a corp, it must be incorporated in the same state in which all of the offerees reside e) Must be doing business within the state Refers to money-making activities (e.g manufacturing widgets) Predominant amount of its business activities have to be in the state of the securities offering f) Safe harbor- Rule 147 (4 requirements of doing business) Issuer derives at least 80% of its gross revenue from the state At least 80% of its assets in the state (at the end of most recent semiannual period) The issuers intends to and does use at least 80% of the proceeds from the securities offering in connection with the operation of a business or real property, the purchase of real property located in, or the rendering of services within the state The issuers principal office is located in the state principal residence is enough to establish residency Bright line rule for how much time must pass before securities are deemed to come to rest in the state Resales are 9 months- after 9 months can be made out of state Both sec 3(a)(11) and rule 147 are a bit dangerous because compliance with the exemption is not completely within the issuers control 5. Integration a) The issuer conducts two or more securities offerings simultaneously or close together in time b) The SEC treats these as being one security offering

c) Five factors in considering whether two or more offerings should be integrated (not all factors are necessary) Are the offerings part of a single plan of financing? Do the offerings involve issuance of the same class of securities? Are the offerings made at or about the same time? Is the same type of consideration to be received? Are the offerings made for the same general purpose?

M. Insider Trading 1. Rule 10b-5 a) The statute itself does not make anything illegal; it only makes the violation of SEC rules promulgated to section 10(b) illegal b) Rule applied to any security c) Requires the use of jurisdictional means- the use of any means or instrumentality of interstate commerce, or of the mails or of any national securities exchange 2. Rule 10b5-1 3. Rule 10b5-2 (misappropriation theory) a) You violate this rule by trading securities on the basis of material nonpublic info that you learned from a source you owe a duty of trust and confidence b) OHagan case (misappropriation) If a person secretly uses info from an outside source to your benefit, you are in violation of 10b-5 Pillsbury case If you have special facts, its fine to sell your shares (common law) Has to be a Face-to-face interaction to violate common law There was not a face-to-face meeting in this case, so there was no violation 4. Insider trading under Rule 10b-5 a) The Cady-Roberts Case c) Agassi case- state law (you can get away with murder if only state law applies)

Broker and on the BOD and finds out that the board is going to start paying less dividends During the board meeting break, called his friend to tell him about the dividends before the bad news comes out; friend sells shares Why did he know the info? Because he was a director (classic insider) a position with the company that give you info that is only supposed to be used for corp purposes not personal info

Important to know what your position is with the company

b) Someone needs to use interstate commerce in the fact pattern (constitutional purposes) c) Material info also needs to be in the fact pattern (would this affect a reasonable investors decision to buy or sell) magnitude vs. potential d) Non-public (fact pattern) e) Someone needs to buy or sell a security (fact pattern) f) The Texas Gulf Sulphur Case Doesnt meet the 5th element so not violating 10b-5 (they werent buying a security; they were buying land) Had knowledge of a potential mineral strike so they go out and buy their own share at $18 Minerals were found so stock went up to $37 Balance magnitude vs. potential There was material info in this case so violated 10b-5 (stocks doubled)

5. Modern Insider Trading Law a) Three types of Rule 10b-5 insider trading cases Classic insider trading- owes Cady-Roberts duties to a company tipper-tippee liability- someone owes Cady-Roberts duties and they give info to someone else; person has to gain a personal benefit to be a tipper Misappropriation (outsider trading)- owe duty of trust or confidence to a source Chiarella v. US

Issue: whether a person who learns from the confidential documents of one corp violates sec 10(b) of the SEA of 1934 if he fails to disclose the impending takeover before trading in the target companys securities This case concerns the legal effect of the petitioners silence Petitioners use of info was not a fraud under sec 10(b) unless he was subject to an affirmative duty to disclose it before trading b) Dirks Case Tipper case A tippee owes a fiduciary duty to shareholders if the tippee received material nonpublic information from an insider that breached his fiduciary duty by disclosing the information, and the tippee knows of the breach Have to do a 10b-5 analysis Secrist is not a tipper- SC says that in order to be a tipper you have to have cady-roberts duties and then breach those duties (did not get a personal benefit) If the tippee knows or should know that they are receiving an improper tip, they are in violation A tippee cant be convicted w/o a tipper Footnote 14- you can have temporary classic insider trader- not in this case because he doesnt work for Pillsbury (no cady-roberts duties) Tippee? No (there was no tipper) Misappropriation theory Court held: An outsider who misappropriates confidential information to personally benefit violates Section:10(b) because there is deception in connection with the purchase or sale of a security Duty of trust or confidence owed to his law firm 6. Short-Swing Profits Under Section 16(b)

c) OHagan Case (Pillsbury case)

a) Unlike 10b-5 it is completely irrelevant whether the person who was engaged in the securities trade possessed material nonpublic info at the time b) There are no defenses against 16(b) c) Only applies to equity securities of publicly traded companies d) Only applies to officers, directors, or 10% SH e) 6 month time period of both buying and selling matched f) Only applies where two or more matched transactions produce a profit g) Things to look for on FINAL Stock is being traded in a PUBLIC company Determine who is buying or selling Determine if there are two or more opposite way transactions that occurred within 6 months of each other Determine if transactions resulted in a profit (refers to any profit) Making a chart is helpful (specifically for the buy and sells)