Corporations Outline – Prof. Slain, Fall 1999

I.	The Corporate Entity
A.	Formation
1.	Characteristics of the modern corporation
a.	Created by the State
b.	Can own property
c.	Can sue and be sued
d.	Has continuity, will go on after all investors gone
e.	Investors have no personal liability for debts and investments of enterprise
f.	Investments not withdrawable until creditors paid off
g.	Interests are freely transferable
2.	NY BCL Art. 4, DE GCL Subch. I
3.	Formation Options
a.	Corporation: created by the state, is an entity, has continuity, no personal liability, is a taxpayer, centralized management, free transferability.
(1)	Subject to double taxation, though salaries are tax deductable.
(2)	Some businesses may desire this
(a)	Pay net income
(b)	Lower corp tax rate, third entity paying
b.	General Partnership: created by partners, aggregate of partners rather than separate legal entity, no continuity – though can contract for continuity, general and personal liability, tax pass through.
(1)	Each partner can bind the others
(2)	Tax structure: gains and losses spread across partners.
(3)	Easier to form because no filing requirement, members can unilaterally dissolve the partnership by leaving.
c.	Limited Partnership: created by the state, both limited and general partners, general partners have general and personal liability, limited partners have no personal liability (unless they participate in business).
(1)	Used as a financing option
(2)	Securities companies
(3)	Theatrical productions
d.	Limited Liability Company: created by the state, is an entity, no continuity (unless by agreement), no personal liability, tax pass through.
(1)	Bad because requires meticulous drafting to consider all possible outcomes, high transaction costs.
(2)	Preferred for small businesses: DE allows for 1 man businesses, good because don’t require agreements
(a)	Desire advantage of limited liability
(b)	Avoid disadvantage of double taxation: corp and shareholder both assessed tax on same income.
(i)	Important if want to take money out as dividends
(ii)	Required earnings = demanded return/(1-entity tax rate [0 in LLc])(1-individual tax rate)
(iii)	Salaries fall within reasonableness deduction, no deduction if investor not working in business.
(c)	Better once creditors have comfort level to extend debt
(3)	Good for joint ventures: already conducted elaborate negotiations, will typically desire pass through tax advantage.
e.	Sole Proprietorship: created by an indiv, not a legal entity, no continuity, responsible for debts and obligations, revenues are deductions (treated the same as indiv).  The way the majority of corps are formed.
(1)	Fictitious name law: in NY General Obligations Law, if doing business in other name have to register it, can be done retroactively.  No other permissions required.
4.	Certificate of Incorporation
a.	Name: NY BCL § 301, DE GCL § 102(a)(1)
(1)	Have to use terms indicated the business is a corp (inc., ass’n)
(2)	Restricts terms limited to gov’t. entities
(3)	State agencies grant permission for use
b.	Incorporators: NY BCL § 401, DE GCL § 101
(1)	In DE anyone can form, including another corp
(2)	In NY must be a natural person, aged 18 or over (no diff)
(3)	Only sign original docs, just a formality
c.	Purpose: NY BCL § 402(a)(2), DE § 102(a)(3)
(1)	“For any lawful purpose” – avoids ultra vires (beyond the corps powers) problems by not limiting possible purposes
(2)	Outside investors may require limitation of purpose in certificate of incorporation.
d.	Aggregate Number of Shares Issued: NY BCL § 402(a)(4), DE § 102(a)(4)
(1)	Corp. can’t issue shares beyond ceiling authorized in charter.
(2)	May specify the number of shares in each class and par value.
e.	Voting Rights: NY BCL § 402(a)(5), DE GCL § 102(a)(4)
(1)	Cert. of incorp must state number of shares of preferred stock, but characteristics of the shares are at the discretion of the board when they are issued.
(2)	Now possible to create and issue a class of preferred stock without a shareholders meeting.
f.	Duration: NY BCL § 402(a)(9), DE GCL § 102(b)(5)
(1)	If not specified it is perpetual.
g.	Liability Limitation: NY BCL § 402(b), DE GCL § 102(b)(6) and (7)
h.	Internal Housekeeping Rules: NY BCL § 402(c), DE GCL § 102(b)(1)
(1)	By-laws: specify the number of directors, number and title of officers, date of director and shareholder meetings.  A constitutional document, requires shareholder vote to amend
(2)	DE GCL § 102(b)(2): in haec verba not included in other state statutes and not used in DE
5.	Place of Incorporation
a.	Small Businesses: incorp in state of residence, but can incorp anywhere.  If choose to incorp in foreign state could have disadvantages
(1)	Doubles tax filings
(2)	No other advantage to being a foreign corp
b.	New Corporation: should incorp in DE
(1)	Up to date statute
(2)	Legal sophistication provides predictability
6.	Corporation Effective Date: NY GCL § 403, DE BCL § 103(c)(3) and (d)
a.	Corp. comes into existence on the filing date unless otherwise specified by the doc, not longer than 90 days after filing.
b.	Doctrine of De Facto Corporation: problem of determining the legal status of corp if docs filed but not accepted by the state.  Old body of law formed when states had elaborate protocols for forming corp.  
(1)	If defective incorporation but good faith attempt was made to incorporate by filing a certificate of incorporation, the incorporators will not be held personally liable for business debts incurred in the name of the corporation.
(2)	Timberline Equipment Co. v. Davenport, 1973 at 152: found D personally liable because his corp was not properly formed, disallowing de facto doctrine.
(3)	Residual life in doctrine: states require annual filing of public docs and may require local tax return.  Consequences of failing to file vary by state, could result in termination of charter.
(4)	The Model Act: intended to abolish de facto doctrine, states are split of whether it does this or not.
c.	Doctrine of Corporation by Estoppel: based on intention of the parties, i.e. if a creditor intended only to be able to recover from the corp, he will be limited to that form of recovery.  Provides a lower bar than de facto corporation doctrine and will be used when de facto corp doesn’t apply.  Used by the state in three instances
(1)	To stop a corp from denying its existence because it induced another to believe it was a corp to their detriment.
(2)	If corp confers benefit on another, and they refuse to pay on the grounds the corp does not exist.
(3)	If there is no corp, but person did business with them without knowing this, will be estopped from suing the indiv on the grounds that this remedy would not have been available if they were a corp.  (adopted in a few juris, not applied in Timberline)
7.	Liability
a.	Requires investment plus management of the corp.
b.	NY Rule: Agency Approach
(1)	if act on behalf of the corp as agent as if have actual or apparent authority, can bind corp.
(2)	The corp can sue the agent for breach of implied warranty of authority.
(3)	P has to sue both Ds, the agent and the corp in rank order.
8.	Choice of Law – Internal Affairs Doctrine
a.	McDermott, Inc. v. Lewis, 1987 in xerox: must rely on internal affairs doctrine in matters relating to the governance of a corp, this doctrine is determined by the laws of the state of incorp.  
(1)	Internal affairs doctrine: you should only have to look to one source to figure out corps internal affairs.  Pertains to matters peculiar to a corp: relations among shareholders, directors, officers.
(2)	Using laws of states other than the state of incorp would lead to chaos
b.	California applies its domestic law broadly, regardless of where state incorp.  Apply a three part test:
(1)	Determine what portion of property, payroll or sales are in CA
(2)	If the weighted average is more than 50% in CA and more than 50% of the voting shares are owned by CA residents then the provisions of CA statute apply.
(3)	Unless corp is listed on NYSE, CA exchange, or NASDAQ
B.	The Entity Idea
1.	Piercing the Corporate Veil: makes shareholders liable for corporate debt.
a.	Done very rarely, random body of law, regional (cts in west more willing to disregard the corp entity)
(1)	NY courts particularly reluctant to pierce corp veil
(2)	Particularly true in “drain-off” cases: Bartel v. Homeowner’s Coop, group formed to provide reasonable housing to coop owners, intended to operate at no profit.  Went broke, subs sued b/c thought was a legitimate business trying to make profit.
(3)	Other states have been more willing to pierce: Yacney v. Weiner, NJ, pierced the veil on the basis that the minimum expectation is that the business was trying to make money.
b.	United Paperworks Int’l. Union v. Penntech Papers, Inc., 1977 in xerox: Kennebec was signatory to CBA with union when it was a NY corp.  Downstream merger Kennebec becomes a ME corp.  Penntech organizes TP to do deal with Kennebec.  TP fires everyone at mill, union goes after Penntech for pension benefits.  But Penntech was not a signatory.  Can the court lift the Kennebec’s corp veil to go after Penntech?
(1)	Internal affairs doctrine did not apply since outside dispute with union.
(2)	Three part test to lift the veil (p. 618):
(a)	Instrumentality Test: Complete domination of finances, policy and business practice so that the corp entity had no separate mind, will or existence of its own. 
(i)	Not enuf here b/c Kennebec still independent + no fraud.  
(ii)	Though Penntech controlled TP, not enuf to show controlled Kennebec.
(b)	Fraud: Such control must have been used by D to commit fraud or wrong.  
(c)	Proximate Cause: The control and breach of duty must proximately cause the injury or unjust loss.
c.	Riddle v. Leuschner, 1959 in xerox: D were owners of two family businesses that comingled personal with business funds.  Dispensed with formalities, gave creditors reason to complain.  Ct found wife and son liable, not dad who held no shares in the corp.  The ct. lifted the corp veil based on a two part test (p. 508):
(1)	Instrumentality Test: That there be such unity of interest and ownership that the separate personalities of the corp and the indiv no longer exist.  (Four-prong test from Sea Land at 192)
(a)	the failure to maintain adequate corporate records or comply with corporate formalities
(b)	the commingling of funds or assets
(c)	undercapitalization: hard to determine other than retrospectively.  May be able to apply industry standards.  Generally not enough alone.
(d)	one corp treating the assets of another corp as its own
(2)	That if the acts are treated as those of the corp alone, an inequitable result would follow.
(3)	Slain disagrees with the result: the father was the true controller, the loans were a good faith effort to keep the business going, and it is standard for close corps to ignore formalities.
2.	Reverse Piercing
a.	Sea-Land Services, Inc. v. Pepper Source, 1991 at 191, 196: P wants to pierce the veil of D to get to owner and then “reverse pierce” to go after other corp entities he owns by claiming that they are his alter egos.  The court found that unity of interest existed.  But initially found that the second prong was not satisfied since P had not presented evidence of harm beyond his ability to collect a prior judgment.  P satisfied 2d prong on remand.  Examples of harm sufficient to supply nexus:
(1)	D used corp facades to avoid responsibilities to creditors
(2)	D or another corp will be unjustly enriched unless liability is shared.  Need direct relationship to harm.
3.	Horizontal Piercing (siblings)
a.	Walkovszky v. Carlton, 1966 at 165: P injured by taxidriver, wins but can’t recover from the driver, wants to include the employer who owns 20 corps (each holding 2 cabs w/min insurance).  P wants to collect judgment by suing the employer then horizontal piercing to get recovery from the sibling corps.  Can’t because employer has limited liability insurance, capping recovery at $10,000 as required by statute and there was no evidence of fraud.  D argues that liability should be aggregated across all cars to meet his recovery.
(1)	P arguing that D meets one of the qualifications for unity of interest because he is undercapitalized.  But really arguing that he is underinsured.
(2)	Tort v. Contract posture: didn’t choose to be in a relationship w/D so not able to investigate his financing, may make the court more willing to pierce in tort cases.  Here because of accident, but  public policy favors limited liability to spur business creation.
(3)	Argument here not for holding indiv liable, but rather for aggregating corps to allow recovery.
(a)	Burly’s concept of enterprise liability: once determine what “the business” is then assess liability.  More widely applied in bankruptcy area
C.	The Stockholder as Creditor
1.	Capital: money or other assets put into the business representing the owner’s investment.  Can be put into the business as a loan or as a stock investment.  Amount put in as stock certificates or loans is variable and tax driven.  Tend to be 50% stock, 50% loan.
(a)	If shareholder sells back his stock for what he paid the transaction will be recharacterized, disregarding the sale, as a dividend.  Dividends are includable in gross income and taxed between 31-39%, so lose this much on investment.
(b)	If put the money in as a loan, there is no gross income deduction or other tax consequences since there is no double taxation on interest as opposed to dividends.  But if deal was too thinly capitalized, may be recharacterized as a dividend.
2.	Absolute Priority Rule: creditors get paid before any distribution to shareholders.  This is the rule in liquidation.  Most preferred stock contracts provide a liquidation preference.  In bankruptcy have the relative priority rule.
3.	Subordination: usual remedy for situations where the corp is undercapitalized but kept alive by loans from its shareholders.  If corp fails, equity is subordinated to debt.  An equitable remedy for shareholder mismanagement or other disapproved conduct.  Functionally the same as recharacterizing the loans.
a.	Most subordination is contractual: banks want to ensure their loans are paid out first.
b.	Complete subordination: debtor’s money stays in until creditor is paid out, may be true for the principle or the interest depending on agreement.  Common in small business financing.
c.	Liquidation: senior v. junior debt.  Implied assignment of distributions that would normally go to junior holders, to senior holders until paid out.
(1)	holders of senior debt get double dividends: what they are entitled to and the distribution of the subordinated debt until they are paid out.
(2)	Preferred to capital contribution: get a share of the personal debt along with subordinated.  Won’t share equally in the assets.
d.	In re Mader’s Store for Men, 1977 in xerox: a state insolvency proceeding, similar to bankruptcy but without debt forgiveness.  Provided a three-prong test to determine if a shareholder loan should be subordinated on the capital contribution theory (p. 186).  Inequity enough to justify subordination exists when it is shown that a claim which is in reality a proprietary interest is seeking to compete on an equal basis with true creditor’s claims.  Held: D’s claims shouldn’t have been subordinated since inadequate capitalization didn’t kill the corp and there was no evidence that the loan was intended to be part of the permanent financial structure of the corp.
(1)	Claims are based upon what are denominated loans made to the corp by one or more stockholders in a position of control within the corp.
(2)	The circumstances, objectively analyzed, must be such as to indicate that the advance was not intended to be repaid in the ordinary course of the corp’s business, but rather was expected to remain as a permanent part of the corp’s financial structure.
(3)	The paid-in capital of the corp must have been unreasonably small in view of the nature and size of the business in which the corp was engaged.
(a)	Depends on if looking at the start of the business or when the loan was paid in.
(b)	Ct says look at the start of the business for evidence of initial undercapitalization, if inadequacy arises from losses, not counted as inadequacy for the purpose of making the loan. (p. 188)
(c)	Could argue that loan perpetuates an unsuccessful business, thus taking in new shareholders who might get screwed.
e.	Deep Rock Doctrine, Taylor v. Standard Gas & Electric Co, 1939 at 200: the cert of incorp provided that if preferred dividends went unpaid, voting control switched from common to preferred.  The sub, Deep Rock, was in bad shape and could not pay dividends, accepted a loan from Standard.  Corp went into bankruptcy with Standard as the largest creditor.  Held: the dividends declared were illegal as the loans had been made to keep control of the corp.  This conduct constituted serious mismanagement.  As a remedy, the ct. subordinated the loan.
4.	Inchoate Subordination: The subordinated obligation is not currently subordinated, interest and principle payable can be paid.  Not in play until the triggering event occurs, usually bankruptcy.
5.	Subordinated Debenture: commonly used in public financing.  A debenture is an unsecured obligation, IOU with no collateral, subordinated to a class of creditors (banks).
a.	Increases credit worthiness of the borrower.
b.	Higher interest rate to compensate for increased risk, which is tax deductible unlike dividends.
c.	Convertible into common: convertible subordinated debenture locks in shares of common at today’s price.  Can either use the debenture for common at a bargain or remain a creditor.
6.	Secured Claims: paid off first to the extent of the security (here land and building).
7.	Non-recourse obligation: only right to collect from the collateral that secures the debt.
8.	Recourse obligation: debt remains outstanding even if security is depleted.
9.	Asset distribution: results in claimants having varying degrees of recovery
a.	First Mortgage: based on land and building value
b.	Second Mortgage: based on remaining land and building value
c.	Preferred Claims: tax, cost of administering the estate, wages (NY BCL § 630 shareholders are liable for unpaid wages).  Wage claims preferred ahead of all except secured claims.
d.	Remaining claims: assets available/debts outstanding.  Apply to all claims, including those that are subordinated, though the senior debtors will be paid first.
(1)	Subrogation: transfer of rights of one creditor to another creditor.  May be contractual as in insurance policies.  
(2)	Problem of Circular Priority: A is sub to B, B is sub to C, C is sub to A.  Can avoid by contracting that any claim of the sub’s continues to be subordinated to the bank debt.
II.	Governance of the Corporation
A.	The Director’s Role
1.	Requirements
a.	Qualifications: as specified in cert. of incorp or by-laws (NY BCL § 701).  Must be at least 18 yrs. or older in NY.  Corp required to be managed by a board of directors unless certificate of incorporation provides otherwise.
b.	Number of Directors: Can be one or more people (NY BCL§ 702, DE GCL § 141(b)).  Number fixed in by-laws unless in certificate of incorporation.  NY requires 3 or more.
c.	Investment requirement: Don’t have to be a shareholder, unless provided for in cert of incorp.  (DE GCL § 141(b))
d.	Term: elected to hold office until the next annual meeting.  (NY BCL § 703, DE GCL § 141(b)).  Elections can be staggered by the certificate of incorporation or by-laws.  Diff classes can elect diff officers.  (NY BCL § 703/704, DE GCL § 141(d))
e.	Meeting Location: can be held anywhere, unless provided for in cert of incorp (NY BCL § 710, DE GCL § 141(g))
f.	Regular meetings: may be held without notice, special meetings require notice.  (NY BCL § 711(a)).  Required unless all directors consent to waive in writing.
g.	Quorum: a majority of board, unless provided for in cert of incorp.  Quorum may be fixed as low as 1/3 of the board.   (NY BCL § 707, DE GCL § 141(b)).  A greater quorum may be specified for particular business items.  (NY BCL § 709, DE GCL § 141(b))
h.	Executive committees: can be constituted having the same authority as the full board, subject to exceptions as specified.  (NY BCL § 712, DE GCL 141(c)(2))
2.	Fiduciary Duty/Standard of Care (personal liability)
a.	Continental Securities Co. v. Belmont, 1912 in xerox: P brought a derivative suit on behalf of the corp because board issued stock without consideration to NY mogul.
(1)	Derivative Suits: can be brought against any party to the disputed transaction.  The corp is the P, if there is a recovery it goes to corp.  P’s counsel is compensated out of recovery.  Most of these suits are settled, subject to judicial approval to ensure that interest of corp are protected.
(2)	Contemporaneous Ownership Rule: P must allege that he was a shareholder at the period involved in the complaint.
(3)	Board has a fiduciary duty not to act in their own interest but in the best interest of the corp.
(4)	Demand on board required v. excused: ct. said P could bring his suit although he had not gone to the board first to request action.  Board is indep of shareholders so demand is excused.
(5)	Ct. says the board is an agent of the corp, not agent of shareholders.  Shareholders have no authority to instruct directors except as provided by statute, their only remedy is to vote the board out or bring suit.
(a)	Board’s authority comes from the state, statutory
(b)	Once elected have independent power
b.	Francis v. United Jersey Bank, 1981 at 557: D is the executrix of the mother and former director and largest single shareholder of a closely held reinsurance corp.   The sons were making personal loans between themselves and the corp.  The financial statement made it clear the corp was in bad shape, but not shown to anyone.  Held, money management corps have a higher standard of care, D’s actions were the proximate cause of the bankruptcy, found her personally liable for negligence.  Defined the 
(1)	Affirmative duties of directors:
(a)	made some effort to see financial statements
(b)	have a basic knowledge of financial statements
(c)	consult with other responsible parties about her duties as a director
(2)	Note that NY 402(b)(c), DE 102(b)(7) allows directors to limit liability for damages from breach of fiduciary duty based on:
(a)	breach of duty of loyalty
(b)	lack of good faith/intent
(c)	transaction from which director receives personal benefit
3.	The Business Judgment Rule
a.	Joy v. North, 1983 in xerox: directors of bank finance building project that tanks.  The bank continues extending unsecured credit exceeding 10% of the bank’s total capital, above what is mandated by FDIC and Bank Examinors.  Bank ends up investing $6 mil and owning the building.  D tries to throw this suit out.
(1)	Double Derivative Suit: P’s complaint is against directors of Bank, but she is a shareholder of the parent corp of the bank.
(2)	2d Cir applies Conn. Law, but no law on fiduciary duty so has to create it.
(3)	Special Litigation Committee recommended suit be discontinued for outside D and settled for inside D.  Presented findings ex parte to the trial judge who issued a protective order.  This court reverses, rejects SLC reco, vacates protective order.
(a)	Originated with Lasker v. Burks.  Litigation committee decided litigation should not go forward.  S. Ct. said whether or not decision was binding was a matter of state law.  State found the logic compelling.
(b)	If derivative suit is brought, it is on behalf of the corp, the board gets to decide on matters involving the corp, though not on suits against the board.  Only used in demand excused cases.
(c)	But unsued board members can form the committee.  Led to suits against the entire board, though D can just elect new officers as here.
(4)	Evaluating Special Litigation Committee Judgments
(a)	NY Model: based on Auerbach, if committee is in tandem, procedurally sound, and appears indep, their decision is final.  Pays substantial deference to the committees business judgment.  Favored by dissent.
(b)	DE Model: Two part test.  First have to prove committee acted in good faith then court applies its own business discretion including the gains/losses in going forward and the distraction to business.  Less deferential to the board.  Favored by majority.  
(i)	Slain agrees that judges should be capable of making these determinations.
(ii)	Less deference likely paid here because money mgmt businesses are held to the trustee standard of care, higher obligation to protect the property.
(iii)	Generally don’t hold mgmt liable for bad calls.
(5)	Business Judgment Rule: if the process looks proper and in good faith, it must be accepted, otherwise would disrupt business
(a)	want to encourage risk taking in business, so want rules that remove mgmt responsibility for losses resulting from bad decisions
(b)	hold to a higher standard in clear no-win situations
4.	Competence
a.	Kamin v. American Express Co., 1976 at 592: directors purchased stock that lost a lot of money, now have to decide whether to distribute the stock to shareholders or sell it and report the loss.  If sell now have income tax deduction of $25 mil, results in income tax gain of $8 mil in cash to corp treasury.  They decide instead to declare a dividend to AMEX shareholders of dog stock.
(1)	Resulted in a spin-off: dog corp is free standing with same shareholders as AMEX.  Separates one operating co. from another, usually a tax-free transaction, but have to own for substantial period of time.
(2)	Distribution of the dividend generates taxable income to the shareholders, OK because getting a profit.
(3)	Mgmt argues that distribution allows reputational value of stock to remain stable because masking loss by not reporting it.  Enhances long-term value to the shareholders.  Disregards the efficient market hypothesis (below).
(4)	Board has duties to the corp and to the shareholders
(a)	can explain decision by benefit to the shareholders.  Corp not in such bad shape that payment to it would trump shareholder interests.
(b)	not a no-win situation, still protected by the business judgment rule.
b.	Efficient Market Hypothesis
(1)	S. Ct. held subject of judicial notice: unarguably true.
(2)	Three formulations
(a)	Weak Form: the relationship between the price of stock traded in an organized market at any moment and the price of that stock traded at a previous time is random.
(b)	Semi-Strong Form: the price of a publicly traded security at any time is right because it accurately impounds all available information relating to its value.  As a result, the price will not change until there is new information.
(i)	Slain believes this is true on a macro basis, but overpriced and bargain stocks do exist on a micro level.
(ii)	In Kamin, market knew DLJ was tanking, couldn’t have hurt share price.
(c)	Strong Form: Inside information will not help.  Performance of insiders vs. outsiders shows that insiders not always right, sometimes more conservative while overall market will hang on to a bad stock
B.	Stockholder’s Meetings and Role
1.	Statutory Provisions: every shareholder entitled to one vote for every share standing in his name on the record of shareholders, unless otherwise specified in the cert. of incorp., which cannot hold that shareholders have no rights to vote.  (NY BCL § 612(a), DE GCL § 212(a))
(1)	NY BCL § 501(a): the voting rights of classes of shares can be limited or excluded provided there is at least one class that has full voting rights.
(2)	DE GCL § 211(b): No statute similar to NY 501, comes close by providing that directors can be elected by written consent, could be interpreted that cert of incorp could be drafted to preclude shareholder voting, but courts won’t allow this.  Could create two classes of stock and only issue 1 share of common.
2.	Role
a.	Election of directors
(1)	this right is conferred by statute (DE 211, NY 602)
(2)	meet as provided in by-laws
b.	Removal of directors
(1)	Statutory: NY BCL § 706, any and all may be removed for cause.  DE GCL § 141(k), may be removed with or without cause.
a.	NY BCL § 803(a), DE GCL § 242(b)(1): now provides that the board has to vote before shareholders can initiate amendments of cert of incorp.  In the absence of a board recommendation, there is nothing for the shareholders to vote on.
b.	 Still true in NY and elsewhere that shareholders have inherent power to amend by-laws.
(2)	Auer v. Dressel, 1954 at 257: Unhappy shareholders want to adopt a precatory resolution (have no way of enforcing) praising the former Pres, remove 4 directors claiming misconduct, determine if behavior of the board was proper, and amend the cert of incorp to change quorum requirements.  Held, can verify shareholders, shareholders can adopt precatory resolutions, can amend cert of incorp, must be notice of charges and an opportunity to be heard at the shareholders meeting.
 (3)	Campbell v. Loews, Inc., 1957 at 260: held DE corp law provides that stockholders do have the power to remove directors for cause.  The directors sought to be removed must be given a reasonable opportunity to be heard by the shareholders on the charges made.
c.	Fundamental changes
(1)	amending cert of incorp/by-laws proposed by board
(2)	mergers
(3)	sale of all assets
(4)	liquidation of corp
3.	Voting Rights
a.	Statutory: sets the record date at no more than 60 days or less than 10 days before the meeting.  (NY BCL § 604(a), DE GCL § 213(a))
b.	Quorum: DE 216, NY 608 fixed by certificate of incorporation or by-laws but can not be less than 1/3 of shareholders entitled to vote.
c.	Shareholder action without meeting: can act outside of meeting if have approval in writing by the number of shares that would be required at the meeting.  (DE 228, 213(b) re: record date).  Helps raiders who acquire over ½ shares, can get corp to act without having to convince the board to call a special meeting.
d.	Publicly traded securities must comply with federal proxy rules
e.	Street Name: publicly traded securities issued in shareholder name to broker.  Broker needs guarantee of holder’s signature and right to make the transfer.  Potential for overvoting if shareholder revokes his proxy and broker votes more shares than he is holding in street name.
f.	Cede & Co.: Subsidiary of NYSE, holds all stock being held by brokers.  When transactions occur, notify Cede to execute by electronic transfer.  Cede creates omnibus proxy for firms, firms then get blank proxies to give to all shareholders.
g.	DRIP Plans: allows shareholders to use dividends to purchase addl shares, accumulate interest until sell, then get cert for addl shares.  Holder keeps shares in own name rather than Cede.
h.	Corporation Trust Co (CT System): handle paperwork of proxy votes and other filings.  Pre clears the filing process across states, files all docs simultaneously.
i.	Independent Election Corp of America: election inspectors, count ballots, determine proxy validity, rule on challenges, counts and certifies the votes.  Slain would give their decisions deference, cf. Carey.  (NY BCL §§ 610, 611, DE GCL § 231)
j.	Carey v. Penn Enterprises, Inc., 1989 in xerox: Carey making a tender offer for Penn.  Mgmt calls shareholders meeting to amend cert of incorp to double number of authorized shares, imposes 50% premium on Carey’s bid.  Mgmt sets record date and sends out proxies.  Mgmt wins vote, but included votes of trustee of the DRIP plan (Loriat), the record owner, by including them in proxies sent to the beneficial owners.  Held, only record owners are entitled to vote unless there is a valid proxy.  The DRIP plan was not a valid proxy.
4.	Shares owned by partnership: two proxies sent for the same shares, if partner’s votes are contradictory, the later vote trumps the first.
a.	Authority to vote: DE GCL § 231(d) and NY BCL § 611(b) provides that inspectors can consider other reliable info in determining the validity of votes where more votes are cast than are required.
(1)	Cabins discretion of inspectors
(2)	Can look at stock transfer records, proxies, envelopes
5.	Electronic Voting: DE GCL § 231(c) requires an identification system built in to affirm the identity of the person voting. (double check statute)
C.	Stockholder Voting, and Other Agreements
1.	Generally contracts to vote are valid and enforceable as long as consistent with statutory requirements, public policy, protection of minority interest, may be limited to 10 years in duration by state law.  (closely held corps) (DE GCL §§ 218(c), (d), 212(e), NY BCL §§ 620, 609(a), (f))
a.	Galler v. Galler, 1964 at 433: each brother owned half the family business, contracted that they would each sell 6 shares to an employee, amended by-laws to expand the board to four, quorum at three, required the shareholders to elect the brothers and their wives.  If one brother dies, the others agree to vote for the nominee.  Also distributed dividends, salary continuation, stock buyback to allow for estate/inheritance taxes and funeral expenses.  Lower court found the contract void because of undue duration and substantial disregard for corporation laws.  Held, the contract is valid.  In the absence of fraud or prejudice to minority interests or public policy, the right of stockholders to agree among themselves as to the manner in which their stock will be voted will be upheld without regard to the period of time.
b.	Reflects trend toward greater approval of such agreements.
2.	In close corps shareholders can unanimously agree to:
a.	Amend cert of incorp to have powers of the board
b.	Amend cert of incorp to restrict the board from exercising its normal business discretion.  (could override McQuade)
(i)	McQuade v. Stoneham & McGraw, 1934 at 425: all were directors, had agreement to vote their shares to elect directors.  McQuade loses vote because others abstained, charges others with violating the agreement.  Held, agreement was invalid because provided for governance of the corp, inconsistent with statutory requirements.  Prevents the board from governing the corp.
3.	Irrevocable Proxy: may solve these problems by making the agreement iron clad.
a.	NY BCL § 609(f)(5): a proxy which is entitled irrevocable and which states that it is irrevocable when it is held by a person designated under an agreement under 620(a).
b.	DE GCL § 212(e): a duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with interest sufficient in law to support an irrevocable power.
c.	DE GCL § 218(d): not deemed to invalidate any voting or other agreement among stockholders or any irrevocable proxy which is not otherwise illegal.
d.	Slain recommends giving family members preferred stock, income with no interest in the business, gets people of each others hair.
D.	Cumulative Voting
1.	Purpose: Provides board of director representation for minority interests.
2.	Cumulative voting is not proportional representation, in most applications it over-represents the minority, only requires 25% of shares.
3.	Statutory: Provides a shareholder is entitled to cast for the election of directors with respect to his shares multiplied by the number of directors to be elected, and that he may cast all of such votes for a single director or may distribute them among the number to be voted for, or any two or more of them, as he may see fit, which right, when exercised, shall be termed cumulative voting. (NY BCL § 618, DE GCL § 214)
4.	Exist only if cert of incorp provides for it, a minority of states require it by law.
a.	Very few public corps have cumulative voting.  Don’t know of corp with classified board and cumulative voting.
b.	No one has it voluntarily, no one wants dissident minority on the board
c.	Only OH and CA require it
5.	To determine the number of shares required to elect a given number of directors: 
X = (S x D/N+1) +1(N)
To determine how many directors A can elect given x number of shares
D = ((X-1)(N+1))/S
X = the number of shares required to elect a specified number of directors
D = specified number of directors
S = number of shares which are voted at an election of directors
N = total number of directors who will be elected
a.	when determining allocation assume rational accumulation on the other side
b.	don’t create ties among your own nominees
c.	provide in the by-laws that nobody is elected until all vacancies have been filled, otherwise the minority will lose its advantage.
6.	Removal of directors
a.	Statutory: DE GCL 141(k)(2), if have classified board can only remove for cause unless the cert of incorp says otherwise.  If less than the entire board is to be removed, no director may be removed if the votes cast against such director’s  removal would be sufficient to elect such director if then cumulatively voted at an election of the entire board.
b.	Use the formula for cumulative voting to figure out how many shares it would take to elect 1 director if you were electing all 6.  If that number of votes is cast, it can block.  Gives minority veto against removing their guy.
c.	The statute is silent on whether or not the cert of incorp could authorize the board to remove directors.
d.	In NY shareholders can remove without cause if specified in the cert. of incorp.  (NY 706)
e.	Significance of Shareholder Removal Power: sharkproofing, when X takes over corp by acquiring controlling shares, he will want to remove unfriendly directors, this provides a defense against take over by providing removal only for cause.  In reality, unfriendly directors will become friendly or step aside.
III.	Issuing Securities and Paying Dividends
A.	Legal Capital and Dividends
1.	Authorized Capital Stock: must determine if duly authorized (cert of incorp), validly issued (proper board/filing procedures), and fully paid (proper minimum consideration received).
a.	Cert of Incorp: required to list the number of shares the corp is authorized to issue and if these are to be in more than one class, how many classes there are and the characteristics of the classes. (NY BCL § 402(a)(4), DE GCL § 102(a)(4))
b.	Par Value: sets a floor for the consideration which a corp must receive for the issuance of a share of stock.
(1)	Equitable Contribution Doctrine: all shareholders are entitled to buy shares on the same terms, absent express contrary terms.  This set the par value, what people expected to pay for the stock in the absence of a trading market.
(2)	In a trading market, more interested in the value of the stock today, price floats free from the par value.  Shareholders have become accustomed to paying for stock on the basis of the earnings of the business.  
(a)	Amount paid over par constitutes the capital contributed in excess of par.  (CCIP)
(3)	Watering Stock: occurs when par values are set high and shareholders exchange stock for property, bad if property worth less than anticipated.
(a)	True Value Rule: If property exchanged for stock and turned out to be worth less, the property was assessible.  The shareholder could demand an amount equal to the par value.
(b)	If the shares were sold to someone else, the new person was also subject to the property holder’s demand to pay up to par value.
(c)	Modern Rule: NY BCL § 628 provides that the shareholder is liable for the amount he agreed to pay for the stock but not less than the amount for which it permissibly could have been sold.  NY BCL § 504(c) provides that if the stock has a par value, it can be sold for this minimal amount.
(4)	Reduced par value to a nominal amount, shareholder only has to get value equal to par.  Solved assessibility problem.
(a)	In NY and DE, par value is a baseline in computations corps use to determine whether directors can distribute dividends to shareholders, and the amount.
(i)	Common Stock Value = par
(ii)	CCIP = excess of par
(b)	Corps are permitted to sell above par value.
(c)	Representation that corp has received value at least up to par.
(d)	DE is atypical, only state that contemplates the issuance of partially paid stock.  (DE GCL § 156)
c.	No Par Stock: permitted in every state but never caught on.
(1)	Statutes forbid corps from giving away shares of stocks without consideration.
(a)	CA abolished the concept of par and the rule that a corp must receive consideration for its stock.  Determined that this was an issue of fiduciary duty between shareholders and board, no need to regulate.
(b)	Slain thinks protection of shareholders and creditors by par value concept has public utility.
(2)	Statutes provided that the consideration received constituted a capital investment equivalent to par.  The split between common stock and CCIP will be based on the board’s discretion.
(3)	Original Issue Tax: a tax on the par value of shares.  Provided a strong motivation to have low pars.  But gave no par stock a hypothetical value for tax purposes of $100 per share, killed no par.
2.	Dividends
a.	Balance Sheet: snapshot of financial position at a moment in time.  Two sides have to balance, use Retained Earnings calculation to make this work.
(1)	Statement of Assets
(a)	Current Assets: cash or items that will become cash in the normal cycle of business, in less than one year (inventory, accts receivable.)
(b)	Fixed Assets: building, property.
(2)	Statement of Claims Against Assets
(a)	Creditor Claims
(i)	Current Liabilities: must be paid within one year of the balance sheet date.
(ii)	Long Term Liabilities: paid after current.
(b)	Shareholder Claims
(i)	Common Stock (Par value)
(ii)	Capital Contributed in Excess of Par (CCIP)
(iii)	Retained Earnings: the cumulative effect of loss and gains, anything left over is accumulated profit.  Balances assets/liabilities.
b.	Paying dividends
(1)	A corp cannot pay a dividend if it is insolvent or will be rendered insolvent.  (NY BCL § 510(a), DE GCL § 170(a)).
(a)	Insolvent in the equity sense: being unable to pay debts as they become due in the usual course of the debtor’s business.  (NY BCL § 102(8))
(i)	Not insolvent in the bankruptcy sense: liabilities exceed assets.
(b)	Wasting Assets Corps don’t have to take account of the shrink in the assets from dividend depletion. (NY BCL § 510 (b), DE GCL § 170(b)).
(2)	Net Assets - Stated Capital = Surplus: Dividends may be paid out of surplus only so that the net assets of the corp remaining shall at least equal the amount of its stated capital.   The purpose of this is to protect creditors.  (NY BCL § 510 (b), DE GCL § 170(a)).  
(a)	Surplus: excess of net assets over stated capital.  (NY BCL § 102(13).  If a corp sets its par value low it can increase its surplus.  Corp can’t impair its stated capital through dividend distribution.
(b)	Net Assets: the amount by which the total assets exceed the total liabilities.  Stated capital and surplus are not liabilities.  (NY BCL § 102(9))
(c)	Stated Capital
(i)	Par: the sum of the par value of all shares with par value that have been issued, 
(ii)	No Par: the amount of the consideration received for all no par shares, except such part of the consideration therefor as may have been allocated to surplus in a manner permitted by law, and 
(iii)	Such amounts not included in clauses (A) and (B) as have been transferred to stated capital, whether upon the distribution of shares or otherwise, minus all reductions from such sums as have been effected in a manner permitted by law.  (NY BCL § 102(12)) (doesn’t include CCIP)
-	determined by the cert of incorp, only directors and shareholders can amend.
-	directors and shareholders can reduce protection to creditors by reducing the par value of shares.  Rarely abused.
(3)	“Nimble Dividend” Statute: provides that if there is no surplus, the corp: (DE GCL § 170(a))
(a)	May provide a dividend out of net profits from the current and preceding fiscal year (current earnings).
(b)	Even if it may be impaired by declaring a dividend, can still do so if currently profitable.  But can’t impair preferred stocks preference on assets upon liquidation.
(4)	CA allows corps to pay dividends out of retained earnings or if assets are more than 120% of liabilities.  Give effect to Generally Accepted Accounting Principles (GAAP) in making determination.  (CA CC § 500(c))
c.	Valuing the Assets for dividend distribution: tension between fiduciary duty to shareholders and business judgment rule.
(1)	In DE § 170 applies to buyback of shares as well as dividend distribution, must come out of surplus.
(a)	Klang v. Smith Foods, 1997 at Supp. 269: shareholder wanted to enjoin the sale of the co on the basis that it had no surplus to buy back shares under GAAP principles.  Held, directors have reasonable latitude to depart from the balance sheet to calculate surplus, so long as they evaluate assets and liabilities in good faith, on the basis of acceptable data, by methods they reasonably believe reflect present values, and arrive at a determination of the surplus that is not so far off the mark as to constitute actual or constructive fraud.
(2)	In NY corps can determine their own standard for judging if have surplus.
(a)	Randall v. Bailey, 1940 at 1341: the corp went broke based on boards valuation.  Held, board can value the assets for the purpose of determining whether or not there is a surplus.  Protected by the business judgment rule.
(3)	Valuing by investment bank v. GAAP: GAAP uses hard business numbers, costs that have already been incurred.  I Bank valuation is inherently predictive.  Saying if this is right, this is what the assets will amount to in the future, based on this we find a surplus.   Leads to bankruptcy.
(a)	Model Business Corp Act provides that the board can value the assets by any means that seems reasonable under the circumstances, don’t have to apply GAAP.
(b)	US corps have historically paid very few dividends
d.	Decision to pay dividend at discretion of the board (business judgment rule)
(1)	In close corps more tax efficient ways to give shareholders income: salary gives pre-tax rather than after-tax dollars.
(a)	Smith v. Atlantic Properties, 1981 at 460: D had blocking veto power on a four-person board.  Business made money every year.  D wanted to reinvest in the business, others wanted to pay out dividends.  Held, D had a fiduciary duty to the corp to issue the dividend, disregard the blocking veto deal.  Rare case where board ordered to declare a dividend, usually defer to the business judgment rule.
(i)	IRS levied fines on the retained earnings.  Could have avoided by establishing reasonable business needs.  Intended to coerce the payment of a dividend.
(i)	Fiduciary duties of shareholders: similar to director, has duties to the corp and the minority shareholders.
(2)	Suit against board will probably succeed if:
(a)	Bad faith of board towards minority shareholders
(b)	Dividend in effect distributed to favored shareholders through salary.
(c)	Corp has liquid assets in excess of needs of business available for dividend distribution.  (Atlantic Properties)
(3)	In public corps, tax system works against shareholder demands for dividends. 
(a)	If shareholder receives dividend it is taxed to them as gross income at indiv rate (as high as 39%).
(b)	If corp keeps money and reinvests, can reinvest all of it, at corp rate.
(c)	Miller & Midigliani Theory: shareholders are indifferent about corps paying dividends because if the corp keeps the money and reinvests, the value of the shareholder’s shares goes up exactly by the amount of the dividend he didn’t get.  
(i)	If the value of the stock increases and the shareholder sells it, he is taxed at the lower capital gains rate, a much smaller tax bite.
(ii)	So better off with the corp keeping it as long as it reinvests it well.  Leaves corps with excess cash to invest either in their own businesses or other tender offer acquisitions.
B.	Issuing Stock
1.	Subscriptions: K between corp (or to be formed) and subscriber.
a.	Statutory: NY BCL § 503, DE GCL § 165, 166
b.	Subscriptions in writing are irrevocable, helps those trying to form a corp to have secure capital.  Today corps generally raise money through IPO after incorporation.
2.	Consideration
a.	Statutory: determined by board unless certificate provides shareholder determine.  The board’s decision is conclusive unless fraudulent.  Must be at least par value.  NY BCL § 504, DE GCL §§ 152, 153, DE Const. Art. IX § 3
b.	Consideration can consist of money, property (tangible or intangible), labor or services received by or performed for the corp in its formation or reorganization.  Generally must be fully paid and non-assessible.
c.	CA has no requirement that consideration be provided for its stock.
3.	Types of Stock
a.	Common Stock: the unlimited residual claim against the assets of the corp.  After all other claims have been paid out, anything left inures to the benefit of the stockholders.
b.	Rights Appurtenant to the stock: elect directors, vote on fundamental changes, receive dividends as they are declared by the board.  These rights can be divided among various classes of shareholders.
(1)	Notice: corp must put rights of stock on stock certificate or statement that corp will provide information on rights upon request.  (DE 151(f))
c.	Preferred Stock
(1)	Available for public and closely held corps: to ensure dividends and special voting rights, can become consideration for the deal.
(2)	Generally preferred as to dividends.
(3)	Participating Preferred: after the preferred has received its dividend, it is entitled to participate with the common in any further distribution.  Also applies to liquidation.
(a)	This is rare, usually only entitled to the preferred dividend.
(b)	Convertible participating preferred: security packaged up by a corp to raise funds, can be converted to common.
(c)	May be entitled to fiduciary duty of common: fiduciary duty runs in favor of those with residual equity, typically the common shareholders.  If preferred share in the residual in the same way, would likely receive the same duties.
(4)	Cumulative: when corp has preferred stock on which a dividend has accrued and has not been paid, it is accrued as a debt.  No one buys non-cumulative preferred, issued to claimants in bankruptcy reorganizations.
(a)	Does not become a debt until the board declares a dividend.
(b)	The amount the corp should have paid on the previous dividend is added to the dividend now due.
(c)	The board cannot pay dividends on any junior security until it pays the preferred.
(d)	If don’t declare preferred dividend for a year, in order to free up junior security to receive a dividend have to pay two periods to the preferred.  Barrier to paying on the common builds up.
(e)	Cumulative If Earned: if the corp has earnings out of which the preferred could have been paid, it accumulates.
(5)	Voting
(a)	Unusual to have full voting rights with common.  Cf. IL law prohibited the issuance of non-voting stock, so preferred had to be fully voting along with the common.
(i)	May have higher ratio of votes per share since worth more than common.
(ii)	If it votes, likely to be as a separate class.  
(b)	Limited Voting Rights: Every state confers voting rights on at least some stock where fundamental changes are concerned, regardless of if contractually non-voting.
(c)	Contingent voting rights: may acquire voting rights if it is unpaid for a substantial period of time.
(i)	Requirement for preferred stock listed on NYSE.
(ii)	Baron v. Allied Artists Pictures Corp., 1975 in xerox: cert. of incorp said as long as dividends on preferred unpaid for six quarters, the preferred have all the votes.  P is a common stock holder that wants to elect a new board that would pay the dividends.  Held, there is an implied condition subsequent to the right provided to elect a majority of the board, this right dies at the point where there is a surplus out of which a preferred dividend could be paid.  The determination of this point is subject to the business judgment rule, unless fraud or abuse of discretion is shown.
(iii)	Fiduciary duty of the preferred’s board must run to the common.  Once out of the crisis situation, get beyond the business judgment rule, if continue on would breach duty to common.
(6)	Redeemable Preferred Stocks (callable): plain vanilla preferred, limited as to dividends, non-voting, not convertible
(a)	Redemption: any class/series of stock may be made subject to redemption by corp or shareholders at their option or upon the happening of some event, as long as at least one series or class with full voting powers is not redeemable.  Corp can redeem in exchange for cash, property, rights, securities, at whatever rate/price is in certificate or resolution authorizing the shares (DE 151(b)).
(b)	Used by mgmt as an alternative to bonds:
(i)	Insulate shareholders from risk of unprofitability at loss of not taking as much a part if corp is profitable since dividends are limited.
(ii)	Value goes down as interest rate goes up.
(iii)	Corp gets cash infusion now, retain the right to redeem the stock.  Cheaper to use the money.
(c)	Liquidation preference: par value + accrued dividends.  Preferred rights as stated in certificate of incorporation or board resolution (DE 151(d)).
(d)	Rothschild Int’l. v. Liggett, 1983 in xerox: involved a tender offer with two types of prefs – 7% and $5.25.  The 7% originally had a liquidation value of $100 (par value).  The $5.25 preferred had a liquidation value of $114.  The tender offeror paying $70 over market for the $5.25 prefs because they have voting rights, while the 7% prefs do not.  P wants to get paid at least $100 for the 7% prefs b/c that’s what he was guaranteed upon liquidation and this is the functional equivalent of a liquidation.  Held, the liquidation must be of the whole corp, not just indiv interests.
(i)	DE Independent Legal Significance Doctrine: if there are multiple ways of doing something, the person doing it gets to choose which one, another party will not be heard to say that if you had chosen some other way, I would have had greater rights.
(ii)	Implied preferences: not favored by courts.  Preferred shareholders are closer to creditors than to common shareholders who are the beneficiaries of broadly stated fiduciary obligations.
(7)	Convertible: preferred may be convertible into common.  Benefit to preferred purchasers at the point where the market price of the common goes beyond the par value of the preferred.  Referred to as an equity kicker.  (DE 151(e))
(a)	If things don’t go well, hold the preferred and take the dividend.
(b)	If things do go well, common can be worth more than the preferred, have the opportunity to buy the common at a bargain.
(c)	If the preferred is convertible, it is always redeemable, because in fact no one ever takes the extra step of converting, just get paid out.
(d)	Preferred Coupon, effective interest rate.  May negate benefit of converting, if want market value of common can always sell preferred at a premium due to its higher dividend.  Common shareholders getting double dipped.
(i)	Holders of the preferred own the equivalent of 5 shares of common with a dividend of $8.
(iv)	EPS: earnings divided by cost per share. Principle determinant of market price of common stocks.  Divides the number of common shares actually outstanding plus the number of shares of common into which the preferred can be converted.
(v)	Reduces the EPS, thus reducing the market price of the common, while the holders of the preferred get a larger dividend, taking away from the dividend the common would otherwise get.
(8)	Convertible Redeemable Preferred
(a)	If give notice that in 60 days the preferred stock will be redeemed at its par, owners of the preferred will convert.
(b)	The point of making the convertible redeemable is that you can use it to compel conversion, otherwise would never convert.  Board has this power since their fiduciary duty runs to the common.
IV.	Fundamental Changes
A.	Charter Amendments
1.	The Reserved Power: States reserve to themselves when issuing the corp charter the power to revoke or amend.  (NY BCL 110, DE GCL 394; Trustees of Dartmoth College v. Woodward)
a.	Permits corps to be organized by charter.  Removes strict K rule that all parties had to agree before any changes could be made.
b.	McNulty v. W. & J. Sloan in xerox: Corp wanted to eliminate dividends that had accrued to the preferred but had not been declared.  NY State passed a corp law that allowed for this.  P claimed that the amendment was unconstitutional under the K clause and amounted to a taking under the 5th Amend.  Held, by virtue of its reserved power, the state is allowed to amend the charter of any corp.  There was no taking as the dividends had not yet been declared, therefore no concrete claim or debt.
(1)	Not clear why this is not property: if it is capable of being owned, it is property.  The court said that the fact that the dividend accrued doesn’t create a vested right.
(2)	1940’s case, many business had not reinvested or declared dividends for years, were in a position where any reinvestment would have to go to pay off the preferred first, this made them unable to pay off common, unattractive for investors.
(a)	Unable to declare bankruptcy because preferred accrued dividends are not a debt, couldn’t be wiped out.
(b)	Only hope was amendment, which provided for self-help corp reorg.
(c)	Slain notes that this is an incoherent body of law, the right to get rid of accrued dividends by amendment is allowed everywhere, while the right to the liquidation preference is restricted.
2.	Process (DE 242(a))
a.	Board Resolution
b.	Shareholders meeting
c.	Approval by a majority of the outstanding stock entitled to vote thereon and a majority of stock of each class entitled to vote as a class.
(1)	Even if stock is non-voting, will get a class vote.  The class vote is narrowly construed in DE, kicks in under 242(b) if there is some alteration of the stock K.
(a)	But if creating a class of preferred senior to the existing preferred and the existing preferred is non-voting, the mere fact that you are creating a new class with rights senior to this stock does not trigger a class right.
(b)	But if changing the special rights of the class it will get a vote, i.e. abolishing conversion rights.
(c)	Bowman v. Armour & Co., 1959 in xerox: Armour wanted to recapitalize.  Prior preferred had a par value of $100 w/6% coupon and voting rights (IL law required that all stock be voting).  Could be redeemed at $115 per share + accrued dividends, though there were none.  Corp wanted an amendment that would turn the prior preferred stock into a debt.  Held, can’t turn a shareholder in equity into a creditor, can’t go this far in amending certificate of incorporation.  Can alter the terms of the deal, but can’t change the fundamental nature of it.
(i)	Income debenture: interest paid only if the corp has earnings, if there are no earnings, the debt is cumulative and subordinated to other indebtedness.  Go from shareholder to creditor, could sue to be paid in the future.
(ii)	Preferred v. Income Debenture: NY and DE provide that it is possible to give debentures voting rights, they are tradable if enough people own them, get paid out first as creditor, same payout in the event of liquidation, same convertibility on common.  Preferred stock looks better than debt on balance sheet, but tax implications for debentures: can write off debt, can’t write off dividends (double taxation).  Cutting cost of money by writing it off.
(2)	Must first look at the total vote of all shareholders, then look at the classes that are entitled to vote as a class, if one of these is lacking, the amendment fails.
(a)	In DE, the common does not have a class vote, so only have to look at total vote and preferred class vote.
(b)	In NY, 804(a)(3) would give the common a class vote.
(c)	Warner Communications: cert of incorp gave preferred a class vote on amendments of cert of incorp, but didn’t mention mergers.  The corp entered into a merger, which was approved by the common who were entitled to vote.  The preferred protested because the merger significantly affected their rights and should have been treated as an amendment.  DE court relied on the DE Legal Significance Doctrine, held, since you didn’t mention mergers and mergers were foreseeable/possible under DE law, you are SOL.
(3)	Only 5 or 6 states provide for appraisal on significant charter amendments, NY is one of them.
d.	Amendment is filed and becomes effective.
B.	Merger and Sale of Assets
1.	Merger v. Consolidation: in merger A and B corp are folded together, one is designated as the surviving corp.  In a consolidation a new corp C is created, A and B fold into that.
a.	Slain says no substantive difference: may provide psychological benefits to employees but no technical legal reasons for choosing one of the other.
2.	Three modes of acquisition: A wants to acquire B
a.	Statutory Merger (A Type): two corps combined under state law.  A simple deal, just requires proper filings with the Sec of State to complete the deal by operation of law.  But assume liabilities the acquirer may be unaware of.  Many of these corps are non-reporting so may be unsure of financial liabilities.  Could restrict the deal to assume only the known “on-the-books” liabilities.
(1)	Surviving Corp: DE 251, NY 906(a), (b): arbitrary decision.  The surviving corp shall:
(a)	Consistent with its cert of incorp, have all right, immunities, properties real and personal shall vest in surviving corp without further acts.
(b)	Shall assume and be liable for all legal responsibilities of the disappearing corp.
(i)	Owns the assets as if it had originally acquired them.
(ii)	Owns obligations as though originally incurred them.
(iii)	Surviving corp substituted as a party to litigation by operation of law.
(2)	Protocol
(a)	Proposal: Must be proposed by the board pursuant to adoption of a merger or consolidation plan.   (NY 902(a), DE 251(b))
(b)	Notice: All shareholders are entitled to notice, whether or not they are entitled to vote.  (NY 903(a)(1), DE 251(c).
(c)	Voting rights: are contractual, typically only holders of the common, though other stock may have voting rights under the cert of incorp.  
(d)	Quorum: In 1998, NY moved to permit the merger to be approved by a simple majority, from 2/3, now in line with most states.  New rule only applies to corps formed after 1998 and those that have opted into it in their cert of incorp.
(e)	Class voting rights: provided for in NY 903(a)(2) if a class of outstanding stock would be affected by the merger, they have a class vote on it.  Non-voting stock will get a vote if would have had a vote in respect of the proposed changes, i.e. preferred disappearing or dividend being reduced.
(i)	Not provided in DE
(f)	Shareholders of disappearing corp: owners of securities in the disappearing corp received securities of the same kind in the surviving corp.  Not a necessary result.
(i)	Liquidation: could get cash, no relationship in the continuing business.  Provided for in all states.
(ii)	Can get preferred or bonds of the surviving corp.
(g)	Every state provides for appraisal rights in statutory mergers.
b.	Stock Acquisition (B Type): if A buys enough of B’s stock, B becomes subsidiary of A.  If A buys all of B’s stock, B becomes a wholly-owned subsidiary of A.  Effectively buys B corp as if had done a statutory merger.  Referred to as a practical merger.
(1)	Tax Free Reorganization: If the only consideration received by A in this deal is the assumption of liability and shares of B’s voting stock.  A has to take the voting stock of B and distribute it to its own shareholders in liquidation. Former shareholders of B corp are now shareholders of A corp.  B then disappears.
c.	Asset Acquisition (C Type): A acquires all or substantially all of B’s assets, basically acquiring B’s business.  A more difficult deal, liquidation of assets requires very specific protocols (land, airplanes, ships, vehicles, copyrights, contracts – all governed by very specific laws).  But allows acquirer to pick and choose what liabilities he wants to assume.
(1)	Process:
(a)	Proposal: Must be initiated by the board.  (NY 909(a)(1), DE 261).  If A corp decides to buy B corp for cash, the board of directors gets to decide as they determine how the corp spends its money, not the shareholders.
(i)	May need to authorize addl stock to complete the deal, this would require a shareholder vote.
(ii)	But if just issuing common stock, no shareholder meeting is required.  But NYSE has to approve the shares for listing on notice of issuance, otherwise NYSE will delist the existing shares.
(iii)	NYSE policy that if the newly issued shares have the potential for increasing the outstanding shares by more than 20%, a shareholder meeting must be held whether it is required by law or not.  A new source of law, similar policies on NASDQ and AMEX.  Based on fundamental change theory, if had done the same deal by statutory merger would have had the same requirements, ensuring that the shareholders rights are upheld.
(b)	Voting: no class vote provided with respect to a sale of assets.  (Same in NY and DE)
(i)	DE: simple majority contractually entitled to vote on the transaction.
(ii)	NY: a majority or 2/3 of those with contractual voting rights.
(c)	Appraisal Rights: generally no appraisal rights in asset acquisition.  Though 15 states provide for appraisal on sale of assets.
3.	Statutory Merger v. Stock Acquisition (practical merger): followed by disappearing corp liquidation give identical results – one corp merged into another and former shareholders of the disappearing corp are shareholders of the surviving corp.  But the two transactions are treated differently under state law.
a.	Pooling: tax free transaction, taking two corps and folding financial statements together.
(1)	Assuming Bs market value is higher than its book value, it is then selling at a higher cost to it and would prefer a tax free transaction.
(2)	If its tax free B can treat the transaction as a swap and get the value of the profit.
(3)	A tax free transaction may not be bad for A if he can account for it as a pooling rather than a purchase.
b.	Purchase: taxable, taking account of assets of B at their cost to A, not their cost to B.  Being sold at market value.  The following costs make the income for A corp lower than the income for B corp.
(1)	Good Will: the premium paid for a package of assets in excess of aggregate fair market value, buying the future profitability of the assets.  Fixed assets are increased to amortize good will.
(2)	Asset Depreciation: higher on a purchase basis. Any asset of the business with an eternal useful life (trademarks, precious metals), an expense written off over time, reduces the net income.
(3)	A corp would prefer this to be a taxable transaction: in a tax free transaction all of the asset quantifications go up, including depreciation which is a tax deduction.  Since A is taking over these expenses at its own higher costs for accounting purposes, would prefer to have them taxed.  Don’t want the taxable income to exceed the financial statement income.  Would prefer larger income tax deductions, lowers taxable income on financial statements.
(a)	Shareholders of A corp won’t like this because paying a tax for the difference in value.
(b)	A wants the transaction to be taxable so that he can get the value of the cost of depreciation over time.  If its tax free A can’t get the value for the higher cost paid to the B.
4.	De Facto Merger Doctrine
a.	Farris v. Glen Alden Corp, 1958 at 1157: List is acquiring GA, but List is selling all of its assets to GA, who will assume all of its liabilities.  List is going to liquidate and distribute GA shares to its shareholders.  As a formal matter, GA is acquiring List, as an economic matter, List is acquiring GA.  Held, if there is a fundamental change that has the same purpose as a merger, appraisal rights should be granted. Have to look at the character of the transaction, if it’s a merger in character, it’s a merger for purposes of PA law, have to give appraisal rights.  The simple way of doing this deal was a statutory merger, so regardless of the form used, the court will regard it as a statutory merger.
(1)	Process: There must be a shareholder meeting at List to approve the transaction because they are selling all of their assets, fundamental change.  (DE 271).  GA must also hold a shareholder meeting to amend the cert of incorp since they need to increase authorized stock to 3 mil shares.  Both were public corps so issued proxy statements to be voted at shareholder meetings.
(2)	Fundamental Change: criteria for regarding a purchase as a merger implicating appraisal rights:
(a)	The corp has changed its business.
(b)	Long-term debt has increased significantly.
(c)	Serious financial loss to shareholders (stock dilution, shrink in book value)
(3)	Aprosa Tax Doctrine: to get the value of the transaction, the company with the losses has to be the acquiror.  If it was the other way around, the acquiror might lose the value of the transaction because absorbed by the losses.  Not in play today.
b.	Hariton v. Arco Electronics, 1963 at 1154: Arco is selling assets, Loral is distributing Arco shares to its shareholders in liquidation.  Held, this is a de facto merger, but the reorganization was a legal path to the same end.  Held, based on the Delaware Independent Legal Significance Doctrine, there were two ways to do this deal, by either a statutory merger with appraisal rights or a sale of assets without appraisal rights.  The parties have their choice of which method to use.  Both methods have equal dignity.
(1)	There is no de facto merger doctrine in DE that would require appraisal rights to be granted where they otherwise would not be.
(2)	Not clear whether or not NY has a de facto merger doctrine.
C.	Small Mergers and Short Form Mergers
1.	Short Form Merger: a mechanism by which a parent corp can close out a sub by merging the sub into itself or another sub without shareholder approval from either corp.
a.	Wholly-owned sub: if the parent owns so much of the sub that it treats it as an extension of itself, and is not circumscribed in managing the sub, then there is no fundamental change and no need to vote.  
(1)	But if the parent is being merged into the sub then the parent shareholders get a vote because this is a fundamental change.
b.	Provided for in every state: NY 905 and DE 253 are typical, make the ownership of 90% of the stock of the sub a prereq for doing a short form merger.
c.	Notice
(1)	NY provides if the surviving corp is the parent, a copy of the merger must be given to each shareholders of the merged corps.  Just provides notice of a pending transaction, though there is nothing the 10% minority could do to oppose the transaction.  (NY 905(b))
(2)	DE just requires that notice be provided after the transaction that the shareholder’s stock has been converted into the parent or cashed out.
d.	Right of Appraisal: granted to the sub shareholders being merged in.
2.	Small Mergers: DE 251(f) provides that if the statutory merger will not increase the stock of the acquiring corp by more than 20% and if it does not alter the cert of incorp of the acquiring corp, then the transaction can be effected by the board of the acquiring corp without a shareholder vote.  (No NY analog)
a.	Conforms DE law to NYSE and NASDQ shareholder approval policy.  DE agrees that the 20% rule makes sense, chooses to apply it across the board.
3.	Appraisal: permits the transaction to go forward by allowing dissident shareholders to cash out.
a.	Historical the value was determined through a judicial proceeding.  Once the efficient market hypothesis came along, many believed just had to look at the quoted share price.  Now many states have taken away the right of appraisal for publicly traded securities.
(1)	Slain disagrees with this because the semi-strong form is not the truth.  Impossible to get the value of the stock at a point immediately before the deal is announced so the market unaffected price never happens.
b.	Exclusivity: If complaining about a merger where the shareholder has a right of appraisal, the shareholder could be heard independently of appraisal to claim that the transaction is fundamentally unfair and should not be allowed to go forward.
(1)	Most states have some statement that appraisal rights are exclusive.
(a)	DE Statute silent on the issue and the law is inconsistent.
(b)	NY 623(k), provides that enforcement by a shareholder of his right to receive payment for his shares shall exclude the other rights he has by virtue of this choice.  But this section shall not exclude the right of such shareholder to bring or maintain an appropriate action to obtain relief on the grounds that such corp action will be or is unlawful or fraudulent as to him.
(i)	So NY has exclusivity if the shareholder can prove personal harm, otherwise appraisal is an exclusive remedy.
(ii)	CA more strict, appraisal is an exclusive remedy except that ou can litigate the vote count.  True in PA, IN.
(2)	Bove v. Community Hotel Corp, 1969 in xerox: Community Hotel merging itself into a sub it formed for the purpose of doing the merger (downstream merger).  There was a substantial amount of accrued dividends in Community that would be converted into shares of common in the surviving corp, at a significant loss to the preferreds.  Since Community decided to do the deal by merger, only requires a 2/3 vote, but if had taken the same action by charter amendment would have required unanimous approval.  Such recaptalization was allowed under RI Statute.  (See McNulty v. Sloan above).  Held, RI could lawfully enact this statute under its reserved power and the corp has the right to choose any method it wants based on the Delaware indep legal significance doctrine.
(a)	P wants to avoid appraisal: not entitled to dividends until they are issued.  But since they do have the power of appraisal, the court has to decide if they have a right to intervene.
(b)	Needs to be able to say that there is something fundamentally unfair about the transaction.  Doesn’t think its fair that the common should receive 8% equity under the new charter.  But the corp wanted to reward the common because they had a class vote.
(i)	Court finds that unfairness was not proved, because not proposing liquidation.
(ii)	RI sidesteps the issue of exclusivity by finding that the deal was fair, means that the preferred only remedy is appraisal rather than equity.
c.	DE revised appraisal remedy to permit a class action among all parties seeking it.  (DE 262(h),(j)).  Provided a loser pays provision, which has been adopted universally.
(1)	Stops extortionist lawsuits.
(2)	Ends delaying tactics, motion practice which add addl litigation costs.
(3)	Resulted in more realistic demands from shareholders and offers from corps because don’t want to litigate unless certain of success.
4.	Valuation
a.	Delaware Block Method
Piemonte v. New Boston Corp, 1979 at 476: Garden Arena merging into New Boston Arena.  Garden Arena was 90% owned by a small group, though publicly reporting and listed, operationally a close corp.  Majority owners trying to effect a “freeze out” merger by merging the sub back into the parent.  Want to lose expense and restrictions from being a public corp.  Required to offer appraisal to minority shareholders.  Parties disagree over the lower court’s valuation.  The court gives the lower court judge broad discretion over the determination of the numbers.
(1)	Couldn’t do a short form merger b/c parent merging into sub, fundamental change requiring shareholder vote.
(2)	Delaware Block Method: values the corp then assigns relative weight to each value.  Criticized because it looks at an average over 5 years, not a methodology a business professional would use if considering purchasing the business.  Would look instead at projected future earnings, not the past.  Others find no empirical evidence that the value would come out differently if based on projection.  This method uses actual accounting numbers based on things that have already happened, some say more reliable.
(a)	Market Value: based on what the stock is selling at in the market.  Though here not a regularly traded stock, so perhaps insufficient evidence of true value, should treat as a close corps.
(i)	Reconstruction: derive market value from comparison with similar publicly traded stocks.
(ii)	Semi-strong form: the price of a publicly traded security accurately impounds all info relative to its market value.  But not true here because no one cared about this stock so very little info was available to be impounded into the value.
(iii)	Stock v. Business: not clear what is being valued, tilts toward valuing the stock rather than the business.
(b)	Earnings Capitalized: helps to determine the capital value of what is generating the earnings, the business.  The court used avg per share earnings over the past 5 years and applied a multiplier of 10.
(i)	Multiplier: valuing the stock over time, what will make the stock attractive to investors.  Here saying a 10 times multiplier, the business has to make 10% ROI to induce investor to buy.
(ii)	Slain found no rational relationship between the factors analyzed and the multiplier the judge used, plucked out of the air.
(iii)	Dividend Policy: Garden failed to declare dividends, court held that this was already taken into account in the market value.  (Miller, Midigliani Theory)
(c)	Net Assets:  Assets – Liabilities
(i)	Book Value: accounting quantification of assets minus liabilities.
(ii)	Good Will: found this was already taken into account.
(iii)	Liquidation value: will vary according to whether sold as a package or split up.  May exceed replacement cost since the package of assets is worth more than valuing them separately.
(3)	Value vs. Cost: Value lies in the future, cost lies in the past.  Value is inherently judgmental and methods that promise exactitude are illusory, assumptions can be wrong.
b.	The New Methodology
(1)	Early Cases
(a)	Singer v. Magnavox, DE: freeze out merger where the minority shareholders didn’t seek appraisal but later sued alleging a breach of a duty to them.  Held, it was a breach of duty to the minority to have cashed them out of the deal unless the deal had a business purpose other than getting rid of the minority.  P had a right to damages beyond the limitations of the appraisal system.
(i)	Became a new body of law, a tort without elements.
(ii)	Developed case law on what constitutes business purpose, narrowed to “actionable” business purpose.  Grew to include not having to deal with the minority.
(b)	Sterling v. Mayflower, DE: Held, the standard for the propriety of the controlling shareholders causing the corp to deal in a transaction is that of entire fairness, though this standard was not pinned down precisely.
(2)	Weinburger v. UOP, Inc., 1983 at 1189: a class action to set aside a merger which had been approved by a majority of shareholders and by a majority of the minority.  Held, Signal did not meet standard of complete disclosure so the approval of the minority was a non-event, would only be significant if there had been disclosure.
(a)	Under Weinburger, the “ectoplasmic” tort is no longer a remedy providing for broad appraisal.  Have liberalized the appraisal remedy so don’t need old tort of business purpose for mergers.
(i)	If only asking for the value of your stock, your only remedy is appraisal.
(ii)	If alleging fraud, recission, mismanagement, have to bring additional charges to get additional remedies.
(iii)	Brings DE remedy close to NY remedy, appraisal is exclusive unless you claim a additional harm, then can seek other remedies.
(b)	Burden of Proof: D says the effect of the approval by the majority of the minority simply shifted the burden of proof to P of showing that the transaction does not meet the standard of entire fairness.  
(c)	Standard of Entire Fairness: The S. Ct. says P first has to bring some evidence raising an issue as to entire fairness, then the burden of non-persuasion to prove that the transaction met this standard.  The court found this had a double aspect:
(i)	Inadequate disclosure: see below.
(ii)	Inadequate process: there was no emergency, should have provided adequate time for UOP to consider the deal
(d)	Complete disclosure: an element of proof of entire fairness.  D has to establish that there was complete disclosure to the disinterested shareholders.  If he can do this the burden will shift back to P.
(i)	Arlich and Chitea feasibility study suggested offering a higher price, not disclosed to other members of UOP board, only shared with members of Signal’s board.
(ii)	More suspicious because of controlling parties involvement in the transaction and insider investment bank rubber stamping.
(e)	Agent of two principles: A & C had fiduciary duties to Signal and to UOP since board members of both, led to conflicting loyalties, difficult to balance duties.  Should remove joint directors from these deals.
(i)	Outside board members could form a negotiating committee to complete the transaction, this has become a normative standard.
(f)	Appraisal: an expert testified that discounted cash flow would result in a higher value for the shares.   Held, valuation is the same as in an appraisal proceeding, determined by the Delaware block method.
(g)	Stock Market Exception: DE 262(b)(1) provides that if you own stock which is traded on an exchange, admitted to NASDQ, or held of record by 2,000 you don’t get appraisal.  Only applies if P is going to wind up with a marketable security at the end of the deal.  Didn’t apply in Weinburger because going to end up with cash.
5.	Dissolution
a.	Involuntary Dissolution: Generally limited to close corps.
(1)	In Re Redom and Neidorf, NY: family business operated by brother and sister that hated each other, both were directors and required signatories on the corp’s bank accts.  The sister wouldn’t sign checks for brother’s salary for 7 years.  Brother sued to dissolve the corp.  Held, the business is doing well, as long as it is we will not order dissolution.
(2)	Classic View: courts cannot order dissolution as long as the business is functioning, even if the minority are abused.
(3)	In re Kemp v. Beatley, Inc., 1984 at 529: brought by people who have bought a small amount of stock in a close corp with no contractual arrangement for cashing out.  There is no  market for these shares, the only possible buyer is the majority shareholder.  Relied on NY 1104, which permits shareholders to seek judicial decree ordering dissolution.  No analog in DE.  The power of the court to order dissolution is historic.
(a)	Purpose: to provide protection to the minority shareholder whose reasonable expectations in undertaking the venture have been frustrated and who has no adequate means of recovering his or her investment.
(b)	Requirement: that the minority shareholder’s own acts have not been made in bad faith and undertaken with a view toward forcing an involuntary dissolution.  Must be used as a last ditch effort.
(c)	Buyout: every order of dissolution must be conditioned upon permitting any shareholder of the corp to elect to purchase the complaining shareholder’s stock at fair value.  (NY 1118)
(i)	P here really held a zero coupon console, have an investment but will never recover the principle, income or interest.
(ii)	There has to be an exit strategy which should be a mandatory buy or sell.
(4)	Central States Life Insurance v. Davis, IL 1957: Corp formed in mid-1920s built hotel by railroad tracks.  Financed by common owned by the family and preferred stock sold to life insurance co.  The preferred stock was unpaid, but power never shifted to the preferred, the business steadily lost money.  The insurance co, holder of preferred sued seeking a decree of dissolution on the grounds that the business had failed.  Opposed by holders of the common because breaking even on a cash basis and paying family’s salaries.  Held, court refused to get involved, agreed that the business doesn’t make money or pay dividends but found that it could revive.
(a)	Business Failure: usually provides grounds for dissolution.
(5)	Exclusivity: not addressed by statute or jurisprudence, but if it was exclusive, there would be no grounds for coming to court to argue for it based on failure, should be an automatic remedy.  States are split on whether dissolution intended to be exclusive.
b.	Voluntary Dissolution – fundamental change
(6)	Procedure: board resolution recommending dissolution to shareholders, a shareholder majority vote, filing of a cert of dissolution with the Sec of State.  (DE 275)
(a)	May be authorized without action of the directors if all the stockholders entitled to vote consent in writing and a certificate of dissolution is filed with the Sec of State.  (DE 275(c), NY 1001)
(b)	Could also initiate the proposal as a piggyback on a mgmt proxy resolution under Rule 14a-8.
(7)	Wind up: a period of time allowed for corp to wind up business, manage claims and carry on litigation.
V.	Federal Corporation Law
A.	Federal Regulation of Proxy Solicitations
1.	State law: does not regulate the information that flows from corps to shareholders or provide that mgmt has a duty to provide information to shareholders.
a.	State Blue Sky Laws: comprehensive system of disclosure, typically minimal, locally administered, only applies at issuance of stock, not ongoing.  Provided merit regulation, had to establish to the administrator that business was a good idea.
b.	TX, CA, OH have sophisticated statutes
2.	NYSE requirements
a.	Requires corps that trade on the exchange to make balance sheets publicly available (not send out), income statements not required until 1920’s
b.	In 1920’s added requirement that statements be certified by an independent public accountant.
3.	Securities Act of 1933
a.	A full disclosure statute: though limited, provides that if co is selling securities to the public, has to go through an administration process to register
(1)	Requires a prospectus with an audited financial statement
(2)	Provides info about the issuer at the time the security goes public but becomes outdated once the security is sold.
b.	§§ 19A and B gives SEC absolute plenary power over accounting, doesn’t set accounting standards, but responsible for oversight and enforcement.
4.	Securities Exchange Act of 1934
a.	§ 4 Establishes the SEC
b.	§ 6 Requires registration, licensing of National Securities Exchanges.  Exchanges are given the authority to regulate their own members (self-regulatory organizations (SRO’s)).
c.	§ 7 Provides that Fed Reserve Board can set margin rules for trading securities.  The margin is the credit the broker provides to the buyer.  Aimed at preventing over extension resulting in excessive margin calls creating a negative chain reaction.
d.	§ 12 Registration requirements for securities.  In order for a corp to sell securities it must register by filing Form 10.  Consequences follow registration, see §§ 13, 14, and 16.
(1)	(a) and (b) only apply to corps with securities on Nat’l. Securities Exchange
(a)	common stock has to be registered if on exchange, preferred may not have to register if held by fewer than 500 shareholders.
(2)	(g) added in 1964, brings the OTC market into continuous disclosure system.  Also required by NASDQ.
(a)	Provides that corps with total assets exceeding $1 mil and securities held of record by 750+ shareholders have to register at end of the year.
(i)	But under § 12(h), the SEC has exempted corps from registering under 12(g) if on the last day of the fiscal year its assets don’t exceed $10 mil.
(ii)	Such corps are also exempt from continuous disclosure system.
(b)	(g)(1)(B) 500+ but less than 750 shareholders have an extra year to register.
(c)	Non-reporting pink sheet companies: fewer than 500 shareholders, intrastate businesses, not required to register under Sec. 12 or the ‘33 Act.
(3)	Debt Securities: don’t have to register under § 12, register under ‘33 Act.
e.	Continuous Disclosure System: § 13(a) describes necessary filings and reports
(1)	Form 10K: requires filing of annual report with an audited financial statement.
(2)	Form 10Q: requires filing of quarterly statements, not audited.
(3)	Form 8K: must be filed at the end of any month in which a required reporting event occurs
(a)	Acquired or disposed of major business
(b)	Bankruptcy
(c)	Default on a major contract
f.	§ 14 Proxies.  This statute does not forbid any conduct, just grants SEC authority to regulate this subject.
(1)	Covers securities registered pursuant to § 12.
(2)	There is no legal requirement to solicit proxies for meetings, not imposed by fed or state law.  But even if not soliciting proxies, under § 14(c) have to transmit to all holders of record info substantially equivalent to the info required if a solicitation were made. 
(3)	Regulation 14A.  Solicitation of Proxies
(a)	Rule 14a-1(f): The term proxy includes every proxy, consent or authorization within the meaning of § 14(a).  The consent or authorization may take the form of failure to object or dissent.
(b)	Rule 14a-1(l): The terms “solicit” and “solicitation” include any request for a proxy whether or not accompanied by or included in a form of proxy, any request to execute or to revoke a proxy, or the furnishing of a form of proxy to security holders under circumstances reasonably calculated to result in the procurement or revocation of a proxy.
(c)	Rule 14a-3: Info to be furnished to security holders.  Each person solicited must be furnished with a written proxy statement containing the info specified in Schedule 14A
(i)	14a-3(b) if the solicitation is made in anticipation of an annual meeting it must be accompanied by an annual report.
(ii)	14a-3(b)(1) the annual report must contain an audited financial statement and (5) management discussion and analysis (MD&A) and disclosures about market risks.  (required by Item 301 of Regulation S-K)
(d)	Rule 14a-4: Requirements as to Proxy.  Tells what issues known to mgmt are coming before the meeting.  Can withhold authority to vote in favor of mgmt initiatives but mgmt still needs the proxy to constitute a quorum.
(e)	Rule 14a-6:Filing Requirements.  Have to file 5 copies of the proxy statement with SEC 10 days before mailing.  Exception for routine business that does not include voting contests or auditor approval.
(i)	No requirement that you file with SEC before using proxy documents.
(ii)	If have problematic situation would furnish early  and make any changes they suggests.
(f)	Rule 14a-8: Shareholder Proposals
(i)	Proposal: recommendation or requirement that the corp or its board take action, which shareholder plans to present at a meeting.
(ii)	Eligibility: must have continuously held at least $2,000 in market value or 1% of the corp’s securities entitled to be voted for at least 1 year by the proposal date.
(iii)	(i)(5) Relevance: the board does not have to include the proposal if it relates to a matter that accounts for less than 5% of sales, profits or assets.
(g)	Rule 14a-9: False or misleading statements
(vi)	LILCO, 1985, sued unrelated group that ran negative ad campaign in the midst of a proxy contest.  2d Cir. held that they might be perceived as engaging in a proxy solicitation, this is enough to be misleading.  Broadended the concept of solicitation.
(4)	Lovenheim v. Iroquois Brands, 1985 in xerox: P is a shareholder upset over the force feeding of geese.  Wants a statement on proxy condemning the practice and an investigation of corp’s practices. D complains that the subject doesn’t meet quantitative standards of 14a-8(i)(5).  P complains that the statute also contemplates matters “otherwise significantly related” to the business.  Held, P demonstrated likelihood of prevailing on the merits regarding the issue of whether his proposed resolution was “otherwise significantly related.”  Ethical and social significance of shareholder’s proposal warranted inclusion in the materials.
(a)	FN 14, SEC said it would not contest the exclusion in a No Action Letter (NAL).  Commits SEC to nothing, though it has never backed out of one.  But this does not bind the shareholder from filing a lawsuit.  The NAL is an ex parte proceeding so the decision would not be entitled to deference.
(b)	Mgmt tries to avoid these situations because doesn’t want to get into discussions it is ignorant about and don’t want to make publicly unpopular statements.
g.	§ 15 Registration and regulation of Brokers and Dealers.  Dealer acts as a principle in the transaction for his own account.  Broker acts as an agent in buyer’s account.
(1)	§ 15(d) brings corps registered under the 1933 Act and not covered by § 12 under the Continuous Disclosure Rules of § 13.
(2)	Congress legitimating SEC’s prior practice.
h.	§ 15A enacted to create National Ass’n of Securities Dealers (NASD) to regulate OTC market, all broker dealers joined, closed gap in § 17.
(1)	§ 15A(e)(1) provides that no member may deal with any non-member except at the same prices, commissions or fees (retail prices).  So if don’t join NASD, don’t get discount.
(2)	Most US securities traded in OTC market, benefit to dealer to trade in wholesale prices.
(3)	NASD computerized in 1964.  Provides similar information on OTC stocks as on NYSE.
i.	§ 17 registered broker-dealers who are members of national securities exchanges must provide annual financial statements.  Most deal in OTC market, so only a fraction subject to close scrutiny until 1964.
B.	Anti-Fraud Provisions
1.	Discontinuity between pervasive regulation and extremely narrow provisions for private enforcement.  Clear that Congress did not envision much litigation by private enforcement.
a.	§20 of ’33 Act Injunctions and Prosecution of Offenses and § 21 of ’34 Act give the SEC the broadest authority to litigate with anyone who has or is about to do something that is violative.
b.	§24 of ’33 Act Penalties and §32 of ’34 Act criminalizes willful violations, though rarely applied.
c.	§17 of ’33 Act: Fraudulent Interstate Transactions: It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly (1) to employ any device, scheme, or artifice to defraud…
(1)	Does not provide a provide right of action, if you engage in prohibited activity the Sec would use its enforcement powers under §20 of the ’33 Act to sue to enjoin.  Further if conduct was really egregious, would be prosecuted under §24 of the ’33 Act.
d.	§9 of ’34 Act: Prohibition Against Manipulation of Security Prices: (e) provides a private right of action, but there are no cases because the statute was drafted so narrowly that would require a strange set of facts to come within it.
(1)	(e) Any person who willfully participates in any act or transaction in violation of subsection (a), (b), or (c) of this section, shall be liable to any person who shall purchase or sell any security at a price which was affected by such act or transaction, and the person so injured may sue in law or in equity in any court of competent juris to recover…
e.	§10 Regulation of the Use of Manipulative and Deceptive Devices: same jurisdictional predicate as §17 of ’33 Act.
(1)	Short sell: selling a security you don’t own, borrowed from broker, the broker delivers the security and you pay him interest on the money lent to cover.  Have to eventually return the stock, want to return it for less than you paid.  Betting against the stock.
(a)	No general regulations governing this practice.
(b)	The uptick rule: can only make a short sale if the lass price of the security was an up price.
(2)	§10(b): unlawful to use or employ in connection with the sale of any security registered or not on any exchange (all stocks), any manipulative or deceptive device or contrivance…
(a)	On the day of enactment, no conduct is forbidden, just a grant of permission to prescribe rules.
f.	§18 of ’34 Act: Liability for Misleading Statements: Provides a private right of action for a person who purchased a security under false filings, but there are no cases.  Usually just added as a count in 10b5 cases.  Narrowly drafted.
C.	Enforcement – Express Actions
1.	Rule 10b-5.  Employment of Manipulative and Deceptive Devices: §17 of ’33 Act was limited to the sale of securities, this language made rules applicable to the purchase and sale of any security.
(a)	Drafted 3 years before the implementation of administrative procedures act.
(b)	Adopted, then no action taken, didn’t realize they were creating the possibility of private lawsuits.
2.	Rule 14a-9.  False or Misleading Statements: applies anti-fraud rules to proxy statements.  The proxy rules contained a note that said there was no private right of action for their violation.
D.	The Implied Actions
1.	Development
a.	Kardon v. National Gymsum, 1947: Purchase of corp from minority shareholders.  The minority sued.  Held, the conduct violated rule 10b5.  But the wrongful conduct was a tort.  Noted that §27 of ’34 Act provided a private right of action, though it was plainly not intended to have that effect.
(1)	§27.  Jurisdiction of Offenses and Suits: The district courts of the US and the US courts of any territory or other place subject to the juris of the US shall have exclusive juris of violations of this title or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this title….  Any suit or action to enforce any liability or duty created by this title or rules and regs may be brought in any such district…
b.	Rule 14a-9.  First activity in connection with implied rights in the proxy area.
(1)	There was no state law on the subject, analogized to a public election, have to wait for a new election to throw out the board.
(2)	Remedy available to shareholder if there was a violation of the proxy rules.  
(a)	§ 29 of ’34 Act.  Validity of Contracts: if directors provided a proxy on the basis of an untrue solicitation, the proxy is rendered void.  
(b)	Remedy: able to go to court to enjoin the voting of the invalid proxy.  Must sue before the vote to enjoin the use of the proxy at the meeting.
(3)	J.I. Case v. Dvorak: shareholders sued to enjoin the use of proxies, but did not request a temporary injunction since didn’t want to be liable for damages if lost.  S. Ct. held, private enforcement is a necessary compliment to SEC enforcement so there is a private right of action.  Though there was no authority for this.
(a)	Some argued that the S. Ct. was comfortable finding a private right of action under Rule 14a-9 because there was no conflicting state law on the subject.  
(b)	Predicted they would be less likely to find a private right under Rule 10b-5 since there was significant state law on the tort of deceit.  But the S. Ct. did find a private right under 10b-5 in Superintendent v. Insurance.
(4)	Mills v. Electric Auto Lite Co, 1970 in xerox: involves a proxy statement relating to the merger of two subs and a grandchild sub.  Electric Auto Lite is a reporting co, its shareholders are suing.  M, parent corp, owned ½ of the outstanding shares of EAL, but the required vote to approve the merger was 2/3.  Proxy statement claimed defective because didn’t inform the shareholders that EAL’s board was under the control of M.  7th Cir holds that if the merger was fair, doesn’t matter how the shareholder’s agreement was obtained.  S. Ct. concludes that even if shareholders may have voted for any fair deal, they might have voted against the deal for any number of reasons.
(a)	P waited until the last minute to suit so he could preserve his suit, he didn’t want the problem cured, which could have been done easily.
(b)	Transaction Causation: dist ct found that the outcome of the election could have been altered by the omission.
(c)	Tort of Deceit
(i)	Misrepresentation
(ii)	Materiality: not before the court but addressed anyway.  The defect is material if the information would have been considered by a reasonable shareholder to be important.  Material if the proxy solicitation was essential as a link in accomplishing the transaction.  Very low standard.
-	If corp solicited the proxies and they are defective the defect is material, doesn’t matter whether the proxies were actually needed to pass or not, there is a cause of action.  (VA Bankshares)
-	Materiality standard has not been revisited by the court.  Slain thinks it’s the vice of the whole body of law.
 (iii)	Reliance: no way to prove reliance on defective doc, court decided whether the votes were necessary, if they were then there was transaction causation.  Clear element of a 14a-9 case.
(iv)	Scienter: knowingly, purposive conduct, not inadvertent
(d)	Remedy: § 29 of ’34 Act.  Validity of Contracts provides that Ks entered into in violation of the statute are unenforceable, but the shareholders are not a party to the merger contract, so they can’t void it.  The courts have held that the K is not void, but voidable.
(i)	If don’t set aside the merger there are other remedies, could resort to monetary relief.
(ii)	Ct. held that P is entitled to attorney’s fees for the purpose of establishing that there was a violation, for the benefit of the corp, so must be paid by it.
(e)	Implications: decided that trivial missing cross-reference is a material defect giving rise to a cause of action.  If attorney can establish a violation on behalf of the class of shareholders, regardless of its economic significance, he is entitled to attorney’s fees.
(i)	Improved the quality of shareholder disclosures.
(ii)	Though drafting less interested in disclosure, more interested in defendability.  Damps down the level of candor.
-	SEC adopted rules in 1983 re: MD&A to reintroduce candor.  Note recent press about plain language initiatives at SEC.
c.	Rule 10b-5: huge increase in this litigation after Mills.
(1)	Birmbaum v. Steel Corp, 2d Cir., 1950’s: controlling shareholder in a public corp sold his stock to another corp at a high premium over market, during Korean war when steel was in short supply.  Held, there was no violation b/c Rule 10b-5 only deals with transactions that affect the securities markets, this was a private transaction, didn’t involve organized securities markets.
(a)	Also held that P lacked standing because he was neither a purchaser or seller of a security, just complaining that he was deprived of a chance to sell or purchase.
(2)	Superintendent v. Insurance: S. Ct. held in passing that it was well-settled that a private right of action existed under Rule 10b-5, expressly disapproved the first part of Birmbaum.  Held that Rule 10b-5 affects transactions in and out of securities markets.
2.	The Standing Requirement
a.	Blue Chip Stamps v. Manor Drug Stores, 1975 in Xerox: following an anti-trust violation, BC was ordered to reorg.  Resulted in a public offering of securities, which required registration under ’34 Act.  P were those that decided not to buy the stock due to a faulty prospectus claiming the corp was not in good shape.  They did not buy or sell the stock.  P allege a violation under Rule 10b-5.  D. Ct. held that they had no private right of action.  9th Cir. held that they did have a right of action.  S. Ct. upholds the second half of the Birmbaum Doctrine, that the purchaser/seller requirement is to be maintained.
(1)	Damages: P suing for lost profit from not buying the stock, exemplar and punis.  Ct. held that these are not allowable under §28 of ’34 Act, which provides that the only damages that are recoverable are actual.  Precludes the possibility of punis.
(2)	Purchaser/Seller Requirement: provides a paper trail and limits to a definable class, gets rid of frivolous lawsuits.  
(a)	But could prevent convertible preferred from bringing legitimate suit if fraudulently convinced not to convert, but they may still be able to bring a suit under common law fraud or misrepresentation.
b.	Virginia Bankshares v. Sandberg, 1991 at 347: a freeze-out merger of VB into its parent bank.  The parent had enough shares to approve the transaction without any proxies from outside shareholders.  VA was a reporting corp subject to proxy rules.  P sued claiming a defective proxy statement because claimed that the recommended price was fair.  P claimed the corp could sustain a much higher share price based on info in the proxy statement.  S. Ct. held a mere subjective disbelief by the directors in what they said would not be actionable.  But disbelief that communicates a factual base, which is inaccurate, is actionable.
(1)	§14(c) of ’34 Act: requires that information to support the transaction must be sent to shareholders even if there is no proxy solicitation, so might as well send proxies.
(a)	Procedural advantages: in the event of subsequent litigation, have the benefit of a transaction that was voted on favorably by a majority of the minority shareholders.  Shifts the entire burden of proof to P.
(2)	Standing: not questioned by lower courts b/c previous cases held that if proxies were solicited, whether needed or not, if info was defective, the shareholders had standing to sue.
(a)	S. Ct. held here that P did not have standing to sue because his votes were not required to effect the transaction.  Slain says profoundly stupid.
(i)	Proxy rules intended to protect corp governance, but voting is the least important part of the proxy process.  Most important to have accurate flow of info.
(ii)	Court saying if you don’t need their votes, doesn’t matter if you have lied to them.  Removes shareholder remedies.
(iii)	Holding not a result required by the statutory language.
3.	Scienter
a.	Ernst & Ernst v. Hochfelder, 1976 in xerox: Nay made up a fraudulent securities fund that his customers invested in, basically a pyramid scheme.  All were customers of the brokerage firm, but none of these transactions were listed on monthly statements.  100 customers had received confirmation of their transactions from E&E, none objected to statements of their accounts by pointing out that they also had money in escrow accounts.  P sued E&E claiming that they aided and abetted the fraudulent transactions in violation of Rule 10b-5 by failing to audit.  7th Cir. held that E&E was a negligent violator.  S. Ct. held, negligent conduct alone is not enough under Rule 10b-5, which contemplates purposive conduct.  Only applies to private parties.
(1)	Scienter: requires a conscious intent to defraud.  Have to understand that your act is material.
(a)	§10(b): court reverts back to the underlying rule, though part of it represents conduct that would not necessarily require scienter, the balance contemplates purposive conduct.  Decide to interpret the rule in a way that does not reach conduct not condone by the underlying statute, limits to purposive conduct.
(b)	Morgan Schifflin, OH: held that scienter just means conscious behavior, not sleepwalking.  If the communication turns out to be wrong and material, doesn’t matter that you didn’t understand that it was material.
(2)	System Failure: failed to note the internal mail rule, failure of internal controls, had it been correctly noted, E&E would have refused to deliver a clean opinion on the financial statements.  Would have delivered financials to SEC with expressed limitations, which would have put Midwest out of business.
(3)	Spectrum, 2d Cir.: held, a lawyer who negligently failed to learn his client was involved in a fraudulent securities transaction became a co principle in the fraud.  Circuits were divided about negligent violators: 9th held that negligence was enough, 7th agreed with them.
(4)	Aiding and Abetting: FN7 leaves open whether there was a cause of action, decide in a later case that there was not.
(5)	Recklessness: FN12 leaves open whether or not recklessness constitutes scienter, never been decided.
b.	Aaron v. SEC, 1945 in xerox: two employees of Aaron, a broker-dealer, made false statements regarding a Lawn-a-Mat in order to sell its stock.  A was the market maker for LAM and had incentive to drive the price.  An official of LAM called the supervisor to tell him of the false statements.  The super promised LAM that the false statements would stop, but took no affirmative steps to correct the problem.  SEC filed suit against A to seek injunctive relief under §17(a) of ’33 Act, §10(b) of ’34 Act, and Rule 10b-5.  D. Ct. found that D had intentionally failed to supervise his employees, satisfying scienter.  2d Cir declined to address scienter, but held that negligence was sufficient for an injunction action brought by the SEC.  S. Ct. revisits E&E for the proposition that scienter is required even for SEC initiated suits or injunctive actions, there can be no violation of Rule 10b-5 without scienter.
(1)	Private v. SEC Suits: Private suits are to compensate private parties.  SEC actions are to provide “maximum protection” to the investing public.
(2)	§17(a) of ’33 Act: S. Ct. holds that scienter is required for (1), but not (2) or (3).  (1) requires “device, scheme, or artifice,” an indication that scienter is required, intentional misconduct.  (2) and (3) base liability on “omission” which “operates or would operate” as fraud or deceit.
(a)	Note that language in (2) and (3) is the same as in E&E (§10(b)) where S. Ct. held it was not sufficient to create negligence liability.  Maybe give this more weight because it is a statute promulgated by Congress rather than a rule created by the SEC
(b)	Is there a private right of action under §17(a) of ’33 Act?  Prior to Aaron, seen as coterminous with §10(b), but after this there are different mens rea standards, makes the question more pressing.  It has not yet been resolved.
(i)	17 is a negligence action, doesn’t cover those buying securities, only sellers.
(ii)	Lower courts have determined that there is no private right of action under §17(a) because would have the result of reading §§11 and 12 out of the ’33 Act, which provide protection for Ds: negligence actions with severe limitations on damages, short SOL, and requirement that P post security for cost of defense.
(3)	Burger Concurrence: found that there was scienter, but that there is little practical effect as injunctive relief is only granted for future occurrences.  If the conduct is inadvertent, no likelihood of further violations, so no injunction would issue in the absence of scienter.
(a)	SEC had been successful in getting injunctions on a mere showing of any violation of one of the acts, whether purposive or inadvertent, without any showing of intent of violation.  Dist. Cts took a different approach to injunctive relief following this opinion, tightened up a formerly lax standard.
4.	Materiality and Duty of Disclosure
a.	Basic v. Levinson, 1988 at 843: rumors circulated of Basic’s acquisition by Combustion.  Basic responded it was unaware of proceedings that would cause the rumors and was not negotiating with anyone.  But it was and admitted later.  Asked NYSE to stop trading in its stock, then announced acquisition deal with Combustion.  P are interim sellers that sold between the first denial and the later announcement.  D. Ct. certified then dismissed the class because found that negotiations were not material until a deal had been reached, based on 3d Cir formulation.  6th Cir reversed, holding that any statement that is untrue is material, certified the class found against D based on fraud on the market theory.  S. Ct. adopts standard of materiality developed in proxy cases, which requires a substantial likelihood that a reasonable investor would consider the information important.
(1)	Fraud on the Market Theory: presumption of reliance so indiv Ps need not prove it, based on fact that the material misinformation was publicly provided and presumably impounded in the price that people bought and sold.  Judicial notice of EMH semi-strong form.
(a)	Rebuttal of Presumption: S. Ct. emphasizes that D is free to rebut the presumption of reliance as to indiv Ps.
(b)	Class Certification: only feasible based on theory.  Indivs would have difficulty proving reliance.  Purchaser’s reliance is derivative and unprovable.  But purchasers rely on advice from advisors, Slain says better argument is that co misled advisors who then misled advisees.
(i)	If don’t certify, there will be no enforcement.
(ii)	Arbitration: Prudential Securities opt outs recovered 100% of their loss as opposed to 3-4% in class action.
(c)	Justice White: disagrees with EMH, notes that people often buy because they doubt the market has accurately characterized value.
(2)	Scienter: not disputed in this case, Basic wasn’t trying to defraud anyone, just trying to keep their info confidential.
(3)	Bright Line Materiality: 3d Cir approach that info is not material until the deal is closed.  Want to avoid shareholder confusion by providing too much info.  Negotiations require confidentiality.
(a)	S. Ct. agrees with this, but believes standard should be addressed by Congress, not the court.
(4)	Materiality based on truthfulness: S. Ct. says only applies to significant facts, rejecting 3d Cir approach regarding any untruthful statement.
(a)	Judge Friendly: materiality is significance minus likelihood.  As you drop down the continuum of significance, likelihood becomes a more significant factor.
(5)	Obligation to speak: Rule 10b-5 does not impose this obligation, but if you choose to speak your statements must be true and complete.  Only applies if you have said something that is not completely true or where you have made a statement on which you intended reliance in the future and during the period of reliance it ceases to be true.
(a)	Could deal with these issues by consistently saying “No Comment.”
(b)	SLCI Intl (4th Cir.): CEO on C-Span said the co was not for sale, but was in negotiations.  Lawsuit is filed.  Held, the statement did not rise to the level of materiality b/c it is not a real denial.  Slain would have thought Rule 10b-5 applied to denials of negotiations.
5.	Enforcement of Fiduciary Duties
a.	Santa Fe Industries v. Green, 1977 at 938: Santa Fe (parent) had accumulated stock of Kirby (sub) and owned 95%.  SF wanted to do a short form merger, informed minority shareholders within 10 days.  Hired Morgan Stanley to do an appraisal, valued stock at $125 p/shr.  Hired asset appraiser who valued assets at $640 p/shr.  Included info on both appraisals in statement sent to shareholders cashed out at $150 p/shr.  Held, if disclosure is complete and accurate, it is not actionable under Rules 10b-5 and 14a-9, complaints of fiduciary duty can be handled under state law.
(1)	State v. Fed Cts: after this case it was clear that fiduciary duty was an area for state court adjudication.
(2)	Q-Ratios: Professor Tobin’s (Yale) theory that compares the market price of traded securities as a general class with the replacement value of the underlying assets.  Equalized in 1965, collapsed in late 70’s when market price was 30% of replacement value.
(a)	Professor Lev (NYU): criticizes theory b/c doesn’t take into account all assets, only accounting assets.
b.	Affiliated Dukes Citizens (sp?): 10b-5 case involving complete non-disclosure of critical facts.  But 10b-5 imposes no disclosure obligations.  Have to rely on state fiduciary duty, which provides that an agent has a duty as a fiduciary to disclose to the principles.  This was not done, and the principle was severely disadvantaged in a securities trade and scienter was involved.  S. Ct. held, there is no way to prove reliance on non-disclosure, therefore in a non-disclosure case reliance will be assumed.
(1)	Didn’t lead to reliance being subsumed into materiality.
(2)	S. Ct. has refused every opportunity to raise the standard of materiality.  The court continues to insist that reliance is an element of every 10b-5 case.  Slain says this is sheer formalism.
E.	Regulation of Tender Offers
1.	Tender offers v. Proxy Contest: Proxy contest were largely unsuccessful even when mgmt doing a poor job b/c shareholders won’t oppose mgmt.  If mgmt is performing poorly and the stock is selling at a value lower than the underlying assets, then possible to get the stock at a bargain.  Better to offer to buy shares.
2.	Tender offer v. Statutory Merger: in 1980’s tender offer became a common alternative to statutory merger in friendly negotiated deals.  A faster transaction, even when statutory merger could be done as a cash buyout.
a.	Q-Ratio: drove this phenomenon, because shares of corp were selling way below the underlying value.  Corps didn’t want to do share swaps, because issuing additional shares would further dilute value.  Better to get cash and buy stock as an alternative.
(1)	In 1990’s share price increased to match underlying value, made more sense to use statutory mergers again because reasonably priced.
3.	Williams Act: amendments to ’34 Act, no substantive regulations, all process.  
a.	Purpose: Seeks to protect the shareholders of the target co, primarily a disclosure regulation.  Does not impose fiduciary duties of any kind, left to state law.
(1)	Piper v. Chris Craft, 1997 in xerox: Battle for control of Piper between CC, the original tender offeror, and Bangor Punta, the white knight.  Both sides accused the other of Williams Act violations.  Bangor Punta ended up owning Piper, so the former shareholders of Piper, target shareholders, are now shareholders of BP.  If CC is allowed to suit BP, the target shareholders will end up having to pay because this was a stock exchange offer rather than a cash offer.  Held, the purpose of the Williams Act is to create rights in and protect the shareholders of the target corp, they are the intended beneficiaries of this legislation.
b.	§13d: provides that a person acquiring 5% or more of an equity security registered under §12 of ’34 Act has to file a schedule 13D within 10 days after acquisition, copied to the issuer of the securities.
(1)	Prevents stealth acquisition by bidding up the price of stock in the market.
(2)	Bidder Information: identity, financing, side deals, purpose of acquisition, planned tender offers.
(3)	Group of persons can constitute a person under 13D(ii): this tends to inhibit cooperation among institutional investors in taking stands against mgmt, encouraged by SEC.
(a)	Rule 14a-2 amended to exclude from this rule discussions among investors if not trying to solicit proxies to free up institutional investors.
c.	§13e: provides that it is unlawful for an issuer of a security registered under §12 or any person controlling, controlled by or under common control with the issuer to purchase any equity security issued by it if such purchase is in contravention of SEC rules.
(1)	Rule 13e-4.  Tender Offers by Issuers: it shall be a fraudulent, deceptive or manipulative act or practice, in connection with an issuer tender offer, for an issuer or an affiliate of such issuer, in connection with an issuer tender offer to employ any device, scheme or artifice to defraud any person…
(2)	SEC v. Carter Hawley Hale, 1985 in xerox: Limited made an offer for 35% of CHH stock.  Within 6 days of the offer 40% of the stock had moved into arbitragers hands.  Pursuant to Rule 14e-2 management said that the tender offer was grossly inadequate, though it was 50% higher than the market value.  Completed a white squire transaction with GC, by selling them 22% of the stock.  CHH then went into the market and started buying stock without complying with Rule 13e-4.  The arbitragers sensed that the deal might not close and sold their stock to CHH.  Reduced outstanding stock, giving GC had a blocking position that killed the Limited’s offer.  SEC alleged violations of Rule 13e-4, claiming that CHH’s actions were a tender offer.  But was it?  9th Cir found that there was no tender offer.
(a)	Wellman 8-Factor Test: to determine if a tender offer has occurred, all 8 factors don’t have to be met.  Can be applied to third parties buying on behalf of the issuer.
(i)	Active and widespread solicitation of shareholders
(ii)	Solicitation for a substantial percentage of the issuer’s stock: ct said this factor linked to the first, can’t have this without it.
(iii)	Offered a premium over the market price: must look at the price at the time of purchase, not the pre-tender price.
(iv)	Whether the terms are firm or negotiable.
(v)	Whether the offer is contingent on tender of a fixed number of shares
(vi)	Whether the offer was open for a limited period of time.
(vii)	Whether the stockholders were subjected to substantial pressure to sell their shares: requires that there be a threat of the offer ending and specific price offered, must be pressure contemplated by the Williams Act.
(viii)Public announcements accompanying a large accumulation of stock.
d.	§14d and §14e are the heart of the regulation.
(1)	§14d(1) provides that it is unlawful to make a tender offer if afterwards the offeror would own more than 5% unless it is properly disclosed under §13d.  This applies only to securities registered under §12.
(2)	§14e, applies to all securities, but limited to tender offers.  Catches tender offers for debt securities that wouldn’t be included under §14d1.  Makes them subject to §14e’s antifraud provisions.
(a)	§14e: it shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders…
e.	Process of tender offer regulated by §14d1-8
(1)	§14(d)(2), provides that commencement occurs with any public communication that announces the target, approx amount of securities trying to acquire, approx price.  The bidder is required to submit a tender offer statement containing the same info as §13(d), must be hand delivered to the issuer on the day of commencement and filed with the SEC.
(2)	§14(d)(4), (5), (6), deal with dissemination of info to shareholders and requirements for publication.  Long and short form publication.  The bidder will be provided an opportunity to made a direct solicitation of shareholders.
(a)	The target must provide to the bidder: an up to date shareholders list and mail materials to its shareholders on behalf of the bidder.
(i)	Provides precise rules on the mailing process.
(ii)	Provides safe harbor to target from liability for anything contained in the mailing.
(iii)	Prevents target from adding any addl info to the mailing.
(iv)	Gives the target 3 days to decide what to do.
(b)	Withdrawal of pro ration in §14(d)(5), (6) superceded by §14(d)(7), (8)
(i)	§14(d)(7) The Best Price Rule: provides that shareholder has the right to withdraw the stock at any time prior to the point it has been purchased, which is not until the end of the tender offer.  Enhances competition among bidders to the benefit of the shareholders.  Gives every shareholder the advantage of a new higher price being tendered, also ensures that everyone who tenders gets the same price.
(ii)	§14(d)(8), provides that if more stock is tendered than desired, the bidder has to take it ratably from everyone that tendered.  If get twice as much as tendered, has to take 50% offered from everyone who tendered.   Takes away advantage for early tender.
(3)	Rule 14d-10.  Equal Treatment of Security Holders: The All Holders Rule, provides that the bidder must tender to all who hold a class of stock, can’t refuse to take from some.
(a)	Epstein v. MCA, 1995 in xerox: P are MCA shareholders that tendered their shares to Matushita at the tender offer price, while Wasserman and Sheinberg were offered higher payment, they charge a violation of the All Holder’s rule, Rule 14d-10.  Though entered into before the tender offer, the W and S deals do not close unless the tender offer is successful, if it is they get a premium price.  Not clear that §14(d)(7) provides a private right of action.  Held, P here fit 2d, 3d, and 4th C v. A factors, they were members of the class sought to be protected, protecting them is consistent with the purposes of the Williams Act, and pursuant to §27 of the ’34 Act fed cts have exclusive jurisdiction over suits to enforce rights under the act.  Further, if the ct declined jurisdiction, these P would have no remedy, that can’ t be what Congress intended.
(i)	Cort v. Ash Test: used to determine if a private right of action should be implied.
-	Legislative intent
-	Is P part of a class for whose special benefit the legislation was enacted
-	Would it be congruent with the purposes of the legislation to allow a private right of action
-	Is this the kind of issue traditionally left to state law
(ii)	Canon v. U of Chicago, 1979: Ct found that there was a private right of action under the civil rights act but Rehnquist concurrence said that this practice should end, except for legislation passed during the period when they were regularly implied.  In later cases rely more on congressional intent, Williams Act enacted in 1978, still subject to implied right under Cort v. Ash.
(4)	Rule 10b-13.  Prohibiting Other Purchases During Tender Offer or Exchange Offer.  Forbids buying beside the offer, can’t go out into the market to buy the stock during the tender offer.  Prevents side deals.
(5)	Rule 14e-1(a) provides that the tender offer must remain open for 20 days.  There are supplemental rules about increasing tender offer price and extending the offer period.
(6)	Rule 14e-2 provides that the target company must publish, send or give to security holders a statement disclosing its position on the tender offer, within 10 days from the date the tender offer is first published.
4.	Defenses to a Tender Offer: DE courts have held that all of these techniques are legitimate as long as they are used to get better offers for the shareholders of the target corps, not just to kill offers.
a.	White Knights: corp picked by the target co to make a competing tender offer at a higher price.
b.	White Squire: comes in and buys enough stock, in a single transaction, to give them a blocking position.
c.	Crown Jewel Lock-up: usually coupled with a white squire, take a valuable part of the business and agree to sell it to a friendly corp at a fraction of its actual value.  May violate state fiduciary duty laws.
d.	Classified Board of Directors: only elect 1/3 every year, the bidder would then own a majority of the stock but be unable to control the board.  Never works because unfriendly directors will become friendly or resign.
e.	Poison Pill: corp creates a class of rights issued to existing shareholders, provide that if a bidder not previously approved by the board buys a substantial ownership position, these rights will kick in and the existing shareholders can buy addl securities at a bargain rate.  Means the tender offeror has to pay more to get the same corp.
f.	Proxy disputes: some of these actions have led to proxy disputes by shareholders that want to make it easier for corps to be subject to tender offers.  Want to increase value to shareholders of the target corp.  Generally led by institutional investors (CALPERS, City of NY, State of NY).
(1)	Led to strange phenomenon of states enacting legislation to prevent tender offers, while having an economic interest in encouraging tender offers to increase the value of their institutional investments.
5.	Options for Defeated Tender Offerors: series of cases where they have tried to sue in their status as shareholders.  Cir cts have not allowed these suits, seen as clear attempt to circumvent Piper.
6.	Risk Arbitragers: buys the stock in the market that has increased as a result of the tender offer discounted by uncertainty.  He will buy it at the market price and tender to the bidder.  Takes the risk that the tender offer will never close.  
a.	If the tender offer doesn’t close: the market price of the security will drop below it pre-tender offer price.
b.	Mgmt: has difficulty convincing arbitragers not to tender to the bidder.  Puts the corp in play.
c.	Arbitragers can’t afford to be left holding the bag, don’t want to be shareholders, just in for the short term profits.  Hope that a third bidder will enter and increase the share price.
7.	Leveraged Buyouts (LBOs): mgmt either caused the corp to make a tender offer for its own shares or formed a separate entity to make a tender offer for the shares which are later redeemed.  At the end of the transaction all of the corp stock has been redeemed except the shares owned by mgmt.
a.	Financing: corps borrowed from commercial lenders and mortgaged assets.  Common stock equity being bought out by purchases of high yield debt (junk bonds).
b.	Motivation: Corps end up insolvent because they have vastly more debt than they could pay if they were to liquidate.  Forces mgmt to keep the corp running to satisfy the debt.  If mgmt is successful there will be increased equity in their stock that could be used in a public offering.
c.	Junk Bonds: drove this frenzy.  Milken convinced investors that the risk was not as high as had been assumed.  Mgmt had increased funds because of the vigor of the stock market, had to look for ways to invest or spend, led to tender offer proliferation.
(1)	Prior to 1986, investors followed the Miller & Midigliani Theory, preferring to leave dividends with the corp to invest.
(2)	Tax Reform Act of 1986: corp rate became higher than the indiv tax rate for the first time, and abolished the long-term capital gains rate, taxed like ordinary income.  Resulted in shareholders wanting current income from their investments, preferred to get this from interest rather than dividends, since not taxable.  Made it more attractive to convert equity into debt, the exact effect of an LBO.
(3)	In 1990, raised indiv tax rates and lowered corp rates, reversed consumer preference back to Miller & Midigliani norm.  Killed LBO’s.
F.	Insider Trading on Non-Public Information
1.	1934 Act § 16(a): every person who is directly or indirectly the beneficiary of more than 10% of securities registered under §12, or who is a director or officer of such security, shall file, at the time of registration of such security on a national exchange or by the effective date of a registration statement filed pursuant to §12(g), or within 10 days after he becomes such beneficial owner, etc, a statement with SEC of the amount of ALL EQUITY SECURITIES of such issuer of which he is a beneficial owner.  At the end of every month thereafter, if there has been a change in such ownership during the month, shall files with the SEC and the appropriate exchange a statement indicating ownership and changes that have occurred.
a.	Reportable Securities: come within the system by being an owner of 10% or an officer, but once under the system, have to report equity position in all securities of the issuer, not just those registered under §12.
b.	Reportable Changes: if give 100 shares away and buy 100 shares, the net has not changed but these are two reportable transactions.
c.	SEC Auditor Requirements: must express an opinion on whether the corp was policing these reports.  Started criminally prosecuting for non-compliance.
2.	1934 Act § 16 (b): For the purpose of preventing the unfair use of info which may have been obtained by such beneficial owner, director or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer within any period of less than 6 months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention n the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding 6 months.
a.	Purpose: to stem short term trading causing extreme market fluctuations.  Not a broad ban against trading on inside information.
b.	Effect: statute operates automatically, people have been held liable who have no access to insider info.  Actual access to and use of insider info is irrelevant.  The transactions do not have to be illegal for the profit to be recapturable by the issuer.
(1)	Possible to have a recapturable profit within a loss: just take any purchase and go 6 months in either direction to find a sale at a higher price.  If find one, there is a profit.  If find a sale, look for a purchase at a lower price.
c.	For the benefit of the Corp: Provides that if the corp does not sue, the shareholders will.
d.	Contemporaneous Ownership Rule: does not apply here, anyone can bring this suit, even those with no stake in the corp. can buy one share of stock after find profit and sue.
(1)	16(b) Bar: clerk calls corp counsel to alert them of the profit, if they don’t sue, the clerk buys one share of stock and brings a derivative suit on behalf of the corp.  Streamlined now, don’t bother to act on behalf of a client.  Easy litigation since there are no defenses.  
(a)	Slain thinks this is a great rule because provides a system of enforcement that cost the taxpayers nothing and is 100% effective.
e.	§ 16 (b) v. Rule 10b-5
(1)	Type of Security Covered
(a)	16b: any equity security of an issuer which has a class of securities registered under §12, includes securities listed on exchanges and all equity securities of issuers that meet the §12(g) standard.  Any security issued is covered by 16b and can be used for calculating the recoverable amount.  Classic case is a corp with lots of officers with low access to inside info, who have no idea that 16b applies to them.
(b)	Rule 10b-5: also any equity security, doesn’t have to be registered under §12.  Classic case involves the sale of the stock of a closely held corp.  
(2)	Persons Liable
(a)	16b: only those that have to report ownership positions under 16a.  Narrowly drafted.
(b)	Rule 10b-5: anyone can violate this rule.
(3)	Violative Transactions
(a)	16b: these transactions are not illegal.
(b)	Rule 10b-5: these transactions are illegal and can be criminally prosecuted.
(4)	Who can be a plaintiff
(a)	16b: only the issuer of the securities or a shareholder suing on its behalf in a derivative suit.
(b)	Rule 10b-5: limited to purchaser or seller.
3.	1934 Act §§ 20A, 21A; Rule 10b-5, Rule 14e-3
a.	Cady Roberts, 40 SEC 907: publicly traded corp, board member heard bad news at a meeting, left and called his office directing them to sell all of his shares and those in customer accounts with discretionary power.  SEC brought proceedings against his firm alleging violations of Rule 10b-5.  Found he was in violation, shocked observers because most thought the rule was limited to broker-dealers.
b.	SEC v. Texas Gulf Sulfur, 1968 at 822: geological team in Canada discovered favorable evidence of mineral deposits.  Began buying land so they could mine ore.  Wanted to keep discovery secret so it could buy the surrounding property.  At headquarters in NY, the few in the know began buying stock calls.  Those who knew of the digging were also granted options by the options committee, who were ignorant of the dig.  Rumors began to circulate, the CEO drafts a press statement saying that the reports are exaggerated.  Promises that when conclusive evidence becomes available he will report it.  SEC brings charges for violation of Rule 10b-5, an injunction proceeding seeking disgorgement of the profit from the insider trading, which will be turned over to the corp.  2d Cir held, the press release was in violation of Rule 10b-5, though clearly no scienter, the info was material.  
(1)	Materiality: is significance discounted by likelihood (Judge Friendly, Basic).  As get closer to the announcement, materiality increases.  But looked at the beginning, the likelihood that the test core would not be successful was high so didn’t meet the standard of materiality.
(a)	Judge Waterman: believed that since the test core was unreasonably good, it should have been material.  Balances probability against anticipated magnitude, also looks at insider’s reaction to the info.  Held, the info is material if it would be of interest to a trader in the securities markets.  Further pushing down the materiality standard.
(2)	Stock calls: option to buy a security trading as a separate security at an option price, at a premium over the market price.  Guessing about when the market will become aware of the news, want call expiration after this date. 
(3)	Classes effected by insider trading:
(a)	Institutional investors: use stock calls to raise money on large stock holdings, if the option expires unexercised they collect the premium.
(b)	The Corporation itself: if issuing options to employees under plans since options are exercisable at prices set without reference to the events covered by the inside info.  Perhaps a less offensive injury.
(c)	Those whose stock was bought by insiders: their injury is not have equivalent info, which the corp had no obligation to provide.  Not clear that they are really worst off since part of an organized market.
(d)	Those that chose not to buy the stock don’t have standing, not a purchaser or seller.
(4)	Perfect Information: Notion that as a matter of law, everyone who trades in the securities market is entitled to have all the same info as everyone else.  No way to operationalize this rule, SEC back off of it.
(5)	Liability: not limited to directors and officers, pertains to anyone with inside info could be junior employees and outside contractors. 
(6)	Disclose or Abstain.  No suggestion that Rule 10b-5 imposes an absolute duty of disclosure.  Can keep the info secret if have a business reason for doing so, but then can’t use info for trading.
c.	Chiarella v. US, 1980 at 884: D works in financial printers office on docs for tender offers.  Figured out from clues in the docs, which cos were subjects of tender offers, made modest trades based on this info.  SEC charged him with 17 counts of violating 10b.  D appealed, claiming that he was not misleading because he was under no duty to disclose.  2d Cir defined D as a market insider, referring to a draft of the securities code, held, he has the same duties as an insider of the corp. S. Ct. reverses, held, for common law fraud to be actionable must have a duty to disclose.
(1)	Duty to Disclose: TGS employees had a fiduciary duty to their shareholders.  Chiarella had no such duty because the info he had didn’t come from the corp.
(a)	Duty to Employer: though Chiarella had no duty to corp or shareholders he may have had a duty to his employer who may have a duty to the tender offeror based on the misappropriation theory.
(b)	Rule 10b-5: does not create a duty to disclose.   
(c)	Parity of Information Rule: The duty to disclose or abstain is premised upon a duty to disclose arising from a relationship of trust and confidence between D and the party doing the trade.  Can’t trade without disclosing material info.  Rejected by the court.
(2)	Piggybacking: 2d Cir concerned that Ds actions could harm the tender offeror by increasing the market price of the shares.
d.	Dirks v. SEC, 1983 at 896: Equity Funding was stock life insurance co, sold whole life policies and invested the equity on behalf of its clients.  EF created fictitious policies and sold those to reinsurance corps for an amount equivalent to several years of premium payments.  An insider had tried to bring attention to the fraud but no one would listen.  He brought the story to Dirks who told the SEC, WSJ but they wouldn’t listen either.  Dirks then told his clients to get out of the stock.  The sell-off that resulted caused an investigation, that ended the fraud.  Dirks accused by SEC of violating 17(a) of ’33 Act and 10b-5 because he tipped his clients.  S. Ct. avoided finding Dirks guilty.  Held, he was a tippee and could only be liable under Rule 10b-5 if his tipper was a violator.  The insider here wasn’t seeking any advantage, so no inherited duty to Dirks as tippee.
(1)	Tippee v. Tipper Liability: The tipper must have inside info and provide it with the intent of personal advantage.
(2)	Blackmun Dissent: assumes that goal of securities markets is perfect info.  Therefore Secrist was wrong because he was giving away his employer’s valuable info.  Implied that EF had a right to keep its fraud a secret.
(3)	Implications: SEC saying that after Dirk’s detected the fraud, he could not advise his customers to get out of the stock.  But this is his business, to find things out for his customers.  If create a disincentive for investigation, defeat the function of the securities analyst and undermine the securities markets generally.
e.	US v. Chestman, 1991 in xerox: Waldbaums listed on NYSE but under control of the family who owned more than ½ of the stock.  Negotiating takeover with A&P as a cash tender offer.  As a first step, Ira was going to sell his shares to A&P prior to the tender offer.  He told his sister, she told her daughter, she told her husband, he tells his broker.  Chestman, the broker, buys shares for his own accounts, and client’s accounts including the husband.  SEC investigates, the husband becomes a witness against C.  C is indicted for violation of rule 10b-5 and 14e-3.  2d Cir panel reverses the conviction. 2d Cir enbanc reinstates the 14e and Rule 14e-3 convictions.  He is guilty of trading on nonpublic info because 14e-3 doesn’t require fiduciary duty, but not guilty on 10b-5 which does.
(1)	§14e: last sentence added as an afterthought pursuant to this, the SEC adopted Rule 14e-3. Hard to get from the precise language of 14e to rule 14e3a. The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonable designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative.
(a)	Rule 14e-3.  Transactions in Securities on the Basis of Material, Nonpublic Information in the Context of Tender Offers: it shall constitute a fraudulent, deceptive or manipulative act or practice within the meaning of §14e for any person who is in possession of material information relating to such tender offer which information he knows or has reason to know is nonpublic and which he knows or has reason to know has been acquired directly or indirectly…to purchase or sell or cause to be purchased or sold any of such securities, …, unless within a reasonable time prior to any purchase or sale such information and its source are publicly disclosed by press release or otherwise.
(i)	Requires disclosure to the person trading in the stock.
(ii)	Slain less concerned about ambiguity of 14e3a because it is cabined by the narrowness of the tender offer environment.
(b)	SEC exceeded rule making authority: 14e is broader than the balance of the Williams Act, covers all tender offers not just those under 12g.  C charges that the rule is overly broad because it doesn’t matter whether fiduciary duty exists or not.
(i)	SEC is empowered to create rules that implement the policy of statutes.  Entitled to interpretive deference as long as the court doesn’t think the interpretation is wrong.
(c)	Mahoney dissent: in the absence of a duty free of the burden to disclose.   Finds that 14e-3 goes beyond Chiarella, adopting the parity of info rule, anyone who knows info, violates the rule by non-disclosure.
(2)	Rule 10b-5: C’s violation depends on the husband’s violation.  Have to litigate whether or not the husband is guilty, though he is not before the court.
(a)	Misappropriation Theory: trading on info misappropriated from an insider in breach of fiduciary duty, though the duty is not necessarily to the shareholders but to the person from whom the info has been taken.
(i)	Husband-Wife: found no fiduciary duty between spouses, need an express confidentiality agreement.  If find a duty, criminalizing this behavior.
(ii)	Criminalization: requires willful conduct, hard to find on the basis of a familial relationship.  Judge Miner fears that if this is the rule, family won’t speak for fear of incurring a duty.
(iii)	Slain more concerned about open-endedness here: misappropriation not defined anywhere, no requirement that this conduct constitute common law theft, lack of precision of state fiduciary duty rules as applied to agency.
(b)	Winters dissent: arguing that the nonpublic info belongs to the corp, it has a property right in it, when someone uses it to trade it is a theft.
f.	US v. O’Hagan, 1997 at supp 175: Grand Met was preparing a tender offer for Pillsbury, hired Dorsey.  O is a partner that was not on the case, bought calls on Pillsbury stock.  Dorsey ended representation, but tender offer closed.  SEC indicted O’Hagan, convicted in a jury trial.  8th Cir reversed bunking the misappropriation theory on the grounds that the SEC had exceeded its authority.  S. Ct. reversed.
(1)	Rule 10b-5 Misappropriation Theory: committing a fraud on the person that gave you the info.  Not a violation if he informs the person he is taking the info from, since no duty violation.
(a)	Carpenter Case: WSJ “Heard on the Street” author trades in anticipation of the column.  Prosecuted under Misappropriation theory on the basis that the info he misappropriated belonged to the WSJ, he deprived them of their exclusive right to the info.
(b)	Public Utility: questionable, creates a duty to inform the owner of the info rather than protect investors in the stock.  Criminalizing amorphous behavior.
(i)	Justice Thomas’ Dissent: misappropriation theory is unsound because it lacks sufficient connection to the purchase or sale of a security. The breach of duty is not connected to the harm trying to prevent.  The rules are intended to protect investors.
(2)	Rule 14e-3: Duty to Disclose or Abstain: Finds the rule is OK because it acts as a prophylactic of fraudulent acts and it was reasonably designed to do so.
g.	1934 Act § 20A. Liability to Contemporaneous Traders for Insider Trading: (a) Private rights of action based on contemporaneous trading.  Any person who violates any provision of this title or the rules or regulations thereunder by purchasing or selling a security while in possession of material, nonpublic info shall be liable in an action in any court of competent juris to any person who, contemporaneously with the purchase or sale of securities that is the subject of such violation, has purchased or sold securities of the same class.
(1)	Purpose: to allow private suits for violation of insider trading.
(2)	Effect: doesn’t add anything substantively to the restrictions on insider trading.  Provides that the inside trader is liable to the whole class of counterparties who purchased when he was selling or sold when he was buying.  Makes these types of suits more attractive for class action lawyers.
h.	1934 Act § 21A.  Civil Penalties for Insider Trading: (a) authority to impose civil penalties.  Provides that the SEC may bring an action in US dist ct to seek civil penalties to be paid by the person who committed the violations or the person who at the time of the violation directly or indirectly controlled the person that committed the violation.
(1)	Provides a treble damages penalty, treble profit gained or loss avoided goes to the SEC.  Slain thinks this additional rule was unnecessary as a deterrent.