Moral Salience: actions are inhrntly
wrong even if undtected & lft unpnshd
BoD duties: fiduciary:fin intrst, loyalty
&fair dealing: not own intrst, care:
rational dcsions, suprvsion: ethcs,
candor: inform all impt info. BoD
spend more time on Advisory than
Monitoring. Dirctrs rceivng most votes
win, rgrdls whthr thy rceive majrty of
votes (plurality). Majority: director
can fail to be elctd if ovr half of shrs
are withheld fr him. Cumulative: #
votes= #shrs held* #dirctrs to be elctd.
Dodd-Frank Act (USA) requires public
comp: provide shrhldrs, at least every
3 yrs, non-binding vote on cmpnsation
of CEO, CFO, and nxt 3 most highly
paid execs. Estblish policies that allow
up to 3 yr claw back of any exec
incentive compnsation awrded in evnt
of an acct resttement. W/ lrge shrhldrs
who owned atlst 3% of comp’s stock
continously for atlst 3 yrs to nominate
canddates for BoD, w/ canddates listed
on firm’s proxy stmt along the nminees
of mngt (proxy access ignored & comp
may offer it on voluntary basis)
Sarbanes-Oxley & Dodd-Frank Act: fin.
whistle blowing incntives, employee
providng orig info on internal fraud
act. that leads to an enfrcement action
of $1 mil or more may be entitled to 10
to 30% of the proceeds. OSC Office of
Whistleblower: monetary sanctions
and/or voluntary pmts of $1 mil or
more may be eligible for a financial
award of up to $5 mil
“Say-on-pay” UK: shrhldrs receive
annual remuneration reports, binding
forward-looking remuneration policy
that must be voted by the shrhldrs
evry 3 yrs. Australia: since 2011,
potent say-on-pay “two strikes” rule. If
25% of shrhldrs vote against
remuneration report at 2consec AGMs,
entire BoD may have to stand for re-
election within 3 mnths (spill meeting)
Belgium: 2012 required hold yearly
nonbinding SOP votes, if deviate fr best
practice, policy recomm to a binding
shrhldr vote. France: 2013 annual
nonbinding SOP vote. Germany: 2009
advisry nonbinding. Italy: binding SOP
of banks and insurance comp. 2012 all
comp but only binding for banks&insu.
Netherlnds: 1st one to intrdce bnding
vote on exec pay 2004. Swtzerlnd:
toughest SOP reg. annual bnding SOP
exec, ban golden parachutes & signing
bonuses, annual re-elections for
directors & threatening criminal
sanctions for non-compliance
Arms length: force related comps to
sell their goods, services, tangible and
intangible assets to one another at
market prices for tax purposes.
Keiretsu: assoc of comps formed
around a bank, cooperate w/each
other & own shares of each other’s
stock. Chaebol: interlockng ownership
Chinese comp issue 3 types shares:
State, foundr & emp, public (3 catgrs:
A,B,H) A: trade on Shanghai&Shenzhen
stckexchnge, Chinse ctzens, select
foreign inst. may buy but foreign
invstmnt is allowed. *A trades @prem.
B: Shanghai USD& Shenzhen stock
exchange HKD, can be owned by both
foreign & domestic. H: trade on
HongKong stckexchnge HKD, avail to
foreign invstrs but still rgulatd by
Chinse law. 2007 allwd mainlnd invtrs
in HK,no rstrctions who trade H.
China BoD: 2tiered BoD (5-19 mmbrs,
usually exec, not requird for emp rep)
& BoS (3 or more, atlst 1/3 emp rep.)
Guanxi: reltnshps. Mianzi: giving face,
showing respect. Renqing: favour
*It takes 2 bulls to satisfy a Bear. Short
sellers are called Contrarian, has
unlimtd LOSS (exact position of LONG)
3 complications w/ Short Sale: Divs,
Squeeze out when Bull decides to sell
his shares (no min/max time in how
long to stay short) & 150% margin req
must have 50% cash value in the
shares he short sold + proceeds fr sale
Bulls go long (buy) call options.
Bears go long (buy) put options
Crabby Bears go short call options.
Crabby Bulls go short put options
BEP call = k + prem paid
What price for someone to buy his/her
call? Intrinsic value = k – marketprice.
Time prem: diff btwn intrinsic &
market prem (OR prem?)
Holding period rate of return =
(profit / investment) x 100
*Why would one long call? think that
they know both the price direction &
timing of the share price change
Bear (buyer) of PUT has lmtd profit &
loss. Crabby bull (sold) put has lmtd
profit & loss. BEP put = k – prem paid,
tells the max profit for Put Buyer &
max loss for Put Writer.
*The higher the price of option, the
less the leverage potential.
Covered Call writer: short call & long
share, LOOKS LIKE SHORT PUT. But
you would lose money if share price
falls enough. Covering an option
reverses your opinion on what’s going
to happen in the market place.
Covered Put Writer: short put &
short share. You would cover if the
share price falls. But once you have
covered your put, you would now lose
if share price increases. **short shares
have to meet the 50% margin. LOOKS
LIKE SHORT CALL.
Portfolio Insurance/Protective Put:
long share & long put on same share.
Has Unlmtd Profit. It means all that can
be lost is the Put’s time prem + any loss
on the orig purchase less exercise price.
Straddle:lngcall&longput,same k,time
If share price rises above BEP long call,
unlimited profit. If share price falls,
MAX profit for straddle is BEP longPut.
Total LOSS is total prem paid.
Put Call Parity theorem: in Euro optns
Put = C – S + Ee^(-rt) OR = C – S +
(E/(1+EAR)^t)
Call = P + S - Ee^(-rt) OR = P + S -
(E/(1+EAR)^t)
S = C – P + Ee^(-rt) OR = C – P +
(E/(1+EAR)^t)
Ee^(-rt) or (E/(1+EAR)^t) = P – C + S
Positive is Long, Negative is Short.
+ Ee^(-rt)= invest PV of exercise price
in the bank, long cash (oppste is borrw
Sec 39(4) of Income Tax Act, taxpayer
can elect to have Cdn securities be
treated as capital trnsct. By filing T123.
-Applies to year of election & future
yrs and cannot be revoked. Factors to
be treated as income, 100% taxable:
freq trans, shrt periods of ownrshp,
some knwldge in secu mrkts, spclative
secu or no divs, financed primarily w/
margin or debt, taxpayer’s time spent
stdyng mrkts KAllwble Cap Loss:
carried back 3yrs or forward forever.
*CRA realizes cap gains on settlement
date (for most equities is 3 trading
days after trnsac) NOT the trnsctn date
*Short sale gain/loss is 100% taxable
but if filed T123 and made election,
will be considered capital transaction
Tax on Long Call: w/o exrcse, cap loss
= prem on yr of expry. w/ exrcse, prem
+ k = ACB for cap gain
Tax Short Call:ACB is 0, prem=capgain
If exrcse, prev rep capgain is 0, prem
added to Proceeds of Disposition = cap
gain/loss. Cap loss = proceeds of
disposition [(prem + k) or ACB] – cost
of acquiring share at current FMV
Right amt of compnsation to be paid is
MIN amt it takes to attract&retain ind
ESO: amer call options, no prem, alwys
atthemoney or slghtly outofmoney,
mat date often up to 10yrs not unusual
Has Vesting prd: accrues nonfrfeitable
rights. Emp owns right to option at end
Of vesting. If emp leaves comp, rights
forfeited. Once vestng has past, emp
owns option but not tradeable (cant
sold in sec mrkets). Avg prd is 4 yrs.
Tax ESO: when exrcse or allwed to sell
Tax benefit= what u paid for (k) – FMV
ACB ESO= actual purchs price + any
amt incl in income as taxable benefit
ESO taxddction like capgain: if shares
are common, time of grant ESO must
be at or outofmoney, arms length (not
own 10% or more of any class of shrs)
Nortel will pay $1M settlmnt w/ OSC
to cover investgtn costs. CEO Dunn
CFO Beatty & Controller Gollogly not
guilty. They extracted $12.8M bonus
but considered not illegal unless
manipulated books. CEO Roth emerged
w/ $100M stock option proceeds.
RSA: nontrnsferble & sbjct to forfeitre,
entire amt of vested stock as ordinary
income in yr of vestng based on FMV of
shares @ time of vesting. Sec 83(b):
report FMV of shares as ordnry income
on GRANT date not when they become
vested (capgains on sale of shares)
RSU: issue stock @ future vesting date,
can be in treasury issuance, market
purchase or phantom: all or portion of
bonus is converted to RSU, #of RSU =
(bonus amt/mrktprice of shre @grant)
IRR= (FV of cf/PV of cost)- 1
*Debtholders lose more than shrehldrs
gain fr thse acts. Net effect is reduction
in initial share price.
VL= Vu + PV (Int Tax Shield) – PV(Fin
Distrss) – PV(Agency cost of debt) +PV
(Agency cost of Debt)
Cost Synergy: econ of scale (produce
higher vol) & scope. Synergy bias:
underestimate cost & overestimate
benefits. Parenting bias: busi units to
cooperate, encourags mngers to
intrvne too much. Skills bias: mngers
assume know-hows. Upside bias: execs
concentrate on benefits of synrgy &
ignore drawbcks. Competition Act
1889: criminal offences (price fixing,
bid-rigging, resale price maintenance)
& noncriminal (Tribunal to review
mergers) Abuse of dominance
(monopoly):Dminnce of entity / joint
dominance by more than 1 entity,
must be an abuse of such dominance,
effect of preventing competition in
market. Market share of 35%. Group
of firms 60%. Criminal offences
Penalty up to $10M fine & up to 5yrs
prison Reasons to Acquire: efficiency
gains are elimination of duplication,
run more efficiently than existing
mngt. Operating losses: tax savings are
over & above what firm would save
using carrybck & carryfrward.
Liquidity. Diversification: risk
reduction, debt capacity & borrowing
costs Intra-group loss planning: 2010
loss transfer system, entities within
related group can simply use one
another’s losses w/o having to shift
income/gain Canada: carry noncap
loss back 3yrs or forward 20yrs to use
against txble op income. CRA: disallow
tax savings if it can show principal
reason for takeover is tax avoidance.
EPS merged comp exceed EPS of stand
alone comps even NO ECON VALUE
Mcap targt/shre prce of acquiring =
#shrs to get. #of shrs to exchange =
#shrs to get/# shrs outstndng.
GGM P0 = [Div1/(r-g)]
Div1 = EPS1 * payout ratio
Payout ratio = 1- plowback ratio
g = ROE * plowback ratio
NO Grwth means r = EPS1/P0 and
EPS1/P0 is the inverse of P/E ratio,
provides an indicator of rate or return
that will be earned on a common share
*High growth can mean higher share
price evnthgh same #shares,NI,EPS
W/ Grwth r = (EPS1/P0) + g the highr
the P/E multiple, the lower r & greater
expectation markt has for future grwth
*Stock swap merger is +NPV if share
price of merged firm exceeds share
price of acquiring firm. Risk
arbitrageur: once takeover is
announced, speculate on outcme of
deal Tax: cash in full/partial triggers
an immdiate tax liab (capgain on price
paid to them minus price when they 1st
bought the share). If entire deal is by
exchngng biddr stock for target stock,
tax liab is deferred until target
shrhlders sell their new bidder shares.
Unocal: when board defnsive, to ensre
action not coercive/stop deal. Threat
to corp policy. Busi Judgmnt: court
will not review when board in good
faith, what prudnt person will do & in
best intrest of corp. Unocal vs Mesa: M
2 tiered tender offer $54 cash & then
$54 jnk bnds. $54 not fair price, force
shrholdrs to tndr. U selftendr if M gets
64M shres, buybck 49% shrs. M went
to court, Chancery said illgal but Dlwre
said BoD need enhncd duty. Rvln v. PP
poison pill (inadequate $45) was
reasnble but mrgr w/ FL dstryed
bidding contest. “change in control”
NI 62-104 & 62-203: all nonexmpt
takeover bids meet min req of more
than 50% of sec, min deposit of 105dys
(sbjct to shrtr min prd), extnsn prd of
min of 10dys aftr min tndr req are met
Lobster trap: targt firm prvsion prvnt
shrhldr w/ 10% cnvert to voting stock
Cdn: Cmptn Bureau mnpoly US:
antitrst Sherman Clayton Hart-Scott-
Rodino $60M needs aprvl. Toehld:
initial ownrshp that raider can use to
initiate tkvr atmpt. Impct of more
debt is it lowers shreprce. All shrhldrs
will tndr, raider has to invest usng own
money besides debt. Wealth trsnfr:
Adding prem results in giving some
value to extng shrhldr. Germny: pool
of shrhldr owning atlst 95% can
squeeze out minrty. UK: bidder w/
90% alrdy req to buyout rmng
shrhldrs. & Sec83 sell out: allows min
shrhldrs insist stakes to be bought US:
Dlwre Cd253 permits parent comp
own atlst 90% stock of subsdry to
merge w/ that sbsdry & pay off mnrty
shrhldrs w/ cash. Cdn: party making
tkovr bid has right to buy shrs of those
who did not tendr. To exrcse right,
purchsr’s bid must hve been accptd
w/n 120dys fol. date of tkeovr bid by
no less than 90% of shrs. CSA not only
snction thse who harm invstr or dmge
intgry but deter fin. miscndct. Rashida
Samji: BC ’03-12 afnty prmse 30% rtrn
33M fine, 10M dsgorge for 110M ponzi
Magee: ASC illgl dis. $2M, 600k prsnl
exp, $1.6M loss. Pnlties 200k,75k,50k
& dsgorge 893k. Wood BC mscnduct
by regstrants, pnlty 30K. Agueci OSC
illgl trdng, tipping. Schneider & Fowler
1st extrdition by CSA, ASC chargd thm
for trdng w/o rgstry, illgl dis.
British Cde of Best Prctces: bnchmrk
& Combined Cd. Prem for Cdn 11% to
40% for weak rgltd comp. Germny: 2
tiered BoD