Professional Documents
Culture Documents
Focus on:
Securities Act of 1933 (Securities Act or 33 Act) Securities Exchange Act of 1934 (Exchange Act or 34 Act)
Business formation Business separation (bust ups) Controlling and using material undisclosed information Private tender offers The contested transaction Insider trading
What is a Security?
Statutory Definitions
Securities Act, 2(a)(1) Exchange Act, 3(a)(10)
Thats a Security?
Unconventional, new and often novel investments can come within the definition of security Examples: chinchilla ranches earthworm farms whiskey warehouse receipts condominium rental pools
SEC v. Howey
Leading Case on Investment Contract Analysis
The Producers
A Securities Law Lesson
Characters
Max Bialystock: A Producer Leo Blum: An Accountant & Producer Hold Me, Touch Me et al : The Investors
Investment Purpose
For the Producers: Open and close the same day For the Investors: Companionship
Investment Result
Play is Smash Hit
Possibilities:
33Act: Sections 5 & 12 34 Act: Section 10(b) & Rule 10b-5
Registration of Securities
Every Sale of a Security Must Be Registered Under the 33 Act Unless the Security is an Exempt Security or it is Sold in an Exempt Transaction
Two Concepts
What is an offer? What is a sale?
Effect (contd)
Most reporting companies required to solicit proxies/consents under Section 14 Most reporting companies executive officers and directors report sales and purchases under Section 16
CEO & CFO certification of financial statements, disclosure controls and internal controls
Company & bidders for company are subject to tender offer rules under Sections 13(d) & 14(d)
Exchange
Customers Customers
OTC Trading
Trades
B/D
B/D
Customers
Customers
SEC Regulation
Registration required Oversight
Approval of rules
An Exchange as an SRO
Adopt and enforce rules and requirements for membership trading activities listing requirements for securities discipline and suspension
Regulation of Broker-Dealers
Who regulates?
Exchanges NASD (Now FINRA) SEC
Regulation by SEC
Registration Membership in NASD Direct regulation
Sec. 15 and applicable rules: Regulation of trading activities Regulation of financial strength (net capital rule) and provision of credit (margin rules)
Proxy Regulation
14(a) of 34 Act empowers SEC to adopt and enforce rules governing the solicitation of proxies for use at any shareholder meeting of public companies
SEC has adopted rules governing the entire proxy solicitation process
From setting the record date to the final count
Executive compensation
Detailed compensation disclosure, particularly for CEO, CFO & top three most highly compensated (NEOS)
CD&A (compensation disclosure & analysis) Compensation committee report
Corporate governance
Principal committees & who is on them
Current spotlight on Audit & Compensation Committees
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Leadership structure
Separation of CEO and Chairman Lead director & his/her role
Code of ethics
Securities ownership
Directors, officers and 5% owners All directors and officers as a group
Description & reasons for proposals (other than election of directors) Say on pay
At least once in three years shareholders are asked for advisory vote on compensation for NEOS
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Procedural requirements
Share ownership
At least $2,000 in market value of securities Held for at least 1 year And will continue to be held through the date of the shareholders meeting
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Deadline
Must be submitted at least 120 days prior to date last years proxy materials were sent out by company
Ex: 3/22/12 materials sent for 4/3/12 annual meeting, then shareholder proposal for 2013 annual meeting was due 11/23/12
Only one proposal allowed Length of proposal (including title, proposal and supporting statement) cannot exceed 500 words
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Exempt Transactions
Private Placements & Reg. D
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Statutory Elements
transactions by an issuer: doesnt include resales or secondary offerings
not involving a public offering: What is a public offering? Where defined?
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Cases and SEC Interpretations following Ralston Purina added following criteria
Offeree qualification (sophistication & ability to assume risk) Availability of information Manner of offering Absence of redistribution (restrictions on transfer)
Separates offerings by Size (small, medium and large) Number of participants Information to be supplied Nature (sophistication & wealth) of participants
Number of Investors
Rule 504: Unlimited Rule 505 & Rule 506: 35 plus unlimited accrediteds
Investor Qualification
Rule 504 & Rule 505: None Rule 506: Nonaccrediteds must be sophisticated, alone or with investor representative
Information Requirements
Rule 504: None specified Rule 505 & Rule 506: None required for accrediteds; specified financial and nonfinancial information for nonaccrediteds
Rule 505
Up to $5 million of securities 35 nonaccrediteds plus unlimited accrediteds
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Rule 506
No dollar limit 35 nonaccrediteds plus unlimited accrediteds Specified info. for nonaccrediteds only
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Materiality
TSC v. Northway formulation
An omitted fact is material if there is a substantial likelihood a reasonable investor would consider it important in deciding how to vote Would the omitted information altered the total mix of information that was available?
Basic v. Levinson
When does a future fact become material?
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Basic Formulation
Balance the probability a future event will occur against the impact of it occurring Sliding scale test
the bigger the impact, even a low probability of occurrence can lead to a materiality conclusion same event and probability can lead to different materiality conclusions for different parties
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Ex: Broker decides to steal clients funds and does it by liquidating the account and taking the proceeds.
Result: 10b-5 applies. SEC v. Zandford, p.497, n. 5
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What is Reckless?
Highly unreasonable conduct Extreme departure from ordinary conduct Tantamount to intent to defraud
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Cant say plaintiff bought or sold on the basis of what he/she wasnt told
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But can say that a reasonable investor would have considered the omitted information to be important. Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972) p. 483, n.9
Reliance and class actions: When transactions arent face-to-face (maybe company isnt even a purchaser or seller), how do multiple plaintiffs (maybe thousands) show reliance?
Basic v. Levinson, p. 524 In class actions, reliance will be presumed if the misleading statements (misrepresentations or omissions) are material
A rebuttable presumption, however
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Efficient Market
Reliance on market requires an efficient market What is an efficient market?
Large weekly trading market Great number of analysts following the stock Existence of several market makers for the stock Company has solid record of earnings History of immediate price movement in response to company information
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Loss Causation
Plaintiff must show both
Link between alleged wrongdoing and plaintiffs purchase or sale (transaction causation or reliance), and Link between alleged wrongdoing and plaintiffs loss or damage (loss causation)
Ex: Company publishes profit projections for its oil & gas operations that cause plaintiff to invest. Projections dont pan out
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and stock price deteriorates. Cause for failure to meet projections and declining stock price the same falling prices for crude oil, world wide. Reliance (transactional causation) present, but no loss causation but for analysis: but for defendants misconduct, loss wouldnt have occurred
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Again, is it fraud?
Can there be fraud without a duty to speak?
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Chiarella
Under Rule 10b-5:
a purchaser of stock who has no duty to a prospective seller because he is neither an insider nor a fiduciary [has] no obligation to reveal material facts. liability is premised on a duty to disclose arising from a relationship of trust and confidence between parties to a transaction.
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Chiarella
(Contd)
Use of material undisclosed information by a purchaser is not fraud under 10(b) unless he was subject to an affirmative duty to disclose before trading.
No fraud without a duty to speak Mere possession of information does not create a duty to speak
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Limitations on Chiarella
Isnt helpful in analyzing responsibilities of issuers and traditional insiders Doesnt resolve status of tippees
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Dirks
Tippee case What duty is breached when tippee trades on material, undisclosed information?
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Answer in Dirks
Focus is on duty of tipper
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Dirks Formulation
If disclosure to tippee is a breach of tippers duty, and tippee knows it, then tippee is liable How do you know tipper is under a duty?
Look to some personal benefit to the tipper for the tip
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OHagan & the Misappropriation Theory Focus on the duty of the receiver, not the duty of the giver
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What is Misappropriation?
The use by a fiduciary of material, undisclosed information belonging to a principal, without disclosing such use to the principal
the duty is that owed to the principal, not the duty owed by the principal, and not the duty owed to the person with whom the trade is made
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Holding in case: Possession is not enough; information must be used in connection with a securities transaction
strong inference of use if trading occurs
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High Profile Convictions and Settlements Have Not Halted Insider Trading
Why Not?
Public not convinced it is bad? Lure of easy money? Blurring of line between legitimate analysis and insider trading?
Using a Middleman
Kluger (Lawyer) (Source of Info.) Robinson (Mort. Broker) (Middleman) Bauer (Investor) (Broker)
Tip
Profits
Tip
Profits
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Expert Network
Institutional Investor (Hedge Fund, Mutual Fund, Investment Advisor) Consulting Firm
Consultation
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Acquisition/disposition of material assets Changes in control of the company Other material events
Information reported to Disclosure Committee or person(s) responsible for making disclosure determinations
Is the information/event material? If so, can it be disclosed now? Must it be disclosed?
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Rule 10b5-1
Addresses the use vs. possession problem Insider can trade pursuant to a preexisting plan, when the trading decision and the timing of trades are out of insiders hands, even though insider has material, undisclosed information about the issuer
Cannot have such information at the time the plan is set up
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Acquisition Negotiations
Most acquisition negotiations take place in a highly structured environment of confidentiality & secrecy
Generally, no disclosure until a definitive agreement has been executed No deal until a final deal Restrict deal participants Use code names, offsite meeting places
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Acquisition Negotiations
Business reasons for confidentiality & secrecy
B doesnt want to attract other bidders T doesnt want to create uncertainty with customers, suppliers or employees B & T want to avoid speculation about uncertain events
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Acquisition Negotiations
Legal reasons for confidentiality & secrecy
Prevent improper trading by insiders & tippees (is Gordon Gecko listening?) Avoid need to correct company-sourced rumors (SEC view)
NYSE rule is broader. Company must confirm/correct/clarify rumors causing unusual market activity, regardless of source of rumors
Constant question: Has the transaction reached a point that disclosure is required?
A question of materiality
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Bulk of discussions centered on personnel issues Balance of terms of Merger Agreement to be negotiated
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9/15/04 - 10/26/04
Parties continue due diligence and negotiating terms (other than price) of Merger Agreement 10/26/04: Discussions at high level focus on price
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11/1/04 12/15/04
Deal is renegotiated As of 12/9, price was still open On 12/12, J&J approved deal; authorized Finance Committee to fix final terms Deal approved by J&J and Guidant on 12/15
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