b)Defenses (available in most, but not all jurisdictions):
1)Inability--If the corp is legally or financially unable to take the opportunity, then the dir generally may take advantage of it. (But the question of who caused the financial inability is quite relevant. Example: Irving Trust Co--the defense of inability was rejected).
2)Rejection, abandonment, or approval--then the fiduciary has a valid defense.
c)Remedies--constructive trust or damages--the fiduciary must account to the firm for all the profits he has made as a result of usurpation.
d)Definition of a Corporate Opportunity:
1)Line of business test--does the firm have fundamental knowledge, practical experience, and ability to pursue the opportunity? If yes, then it is within the firm’s line of business. It should be a natural fit, and not a mere desire by a firm to pursue the opportunity.
e)Application--Guth Rule and Corollary:
1)Guth rule (offered in corporate capacity)--if there is presented to O/D a business opportunity which the corp is (1)financially able to undertake, which is from its nature (2a) in the line of business and is of practical advantage to it OR (2b)is one in which the corp has an interest or reasonable expectancy (under an established corporate policy or plan), and, (3)by embracing the opportunity the self-interest of the dir will be brought into conflict with that of his corp, then officer or dir may NOT take the opportunity.
2)Guth corollary (a safe harbor; satisfy all provisions and dir can take)--if a business opportunity (1)comes to O/D in his individual capacity and (2) is not essential to the corp and is (3)one in which corp has no interest or expectancy, then the O/D can treat it as his own, IF he has not taken corporate resources to pursue the opportunity.
I)”Essential”--indispensably necessary to the continued viability of the firm;
ii)Individual or corporate? Look at O/D capacity to determine how offer was made
5.COMPETING WITH CORPORATION--such competition by a dir or officer may be a breach of fiduciary duty even when the competing business is not a corporate opportunity
6.COMPENSATION FOR SERVICES TO THE CORPORATION--the compensation plan must be duly authorized by the board, and its terms must be reasonable. Good faith and the BJR ordinarily protect disinterested dirs from liability to the corp for approving compensation.
a)Publicly Held Corporations--The SEC has authorized shs to make proposals about executive pay in management’s proxy statements. Further, the tax code now limits expense deductions for executive pay over $1mln, unless it is tied to the corp’s performance.
b)Past and Future Services--compensation for past services is generally invalid. Compensation for future services is proper if there is reasonable assurance that the corp will receive the benefit of the services.
VI.INSIDER TRADING--purchase or sale of securities by someone with access to material
nonpublic information. It may be illegal. It affects corps with more than $1 mln in total assets and with at least 500/750 shs.
a)Who may be hurt by insider trading:
1)Target shareholders--they sell too early;
2)Other arbitrageurs--they lose a portion of the gain that they make from honest effort
3)Other issuers--they lose confidence in the stock market
4)The acquiring company--insider trading drives up their cost of acquisition, since the target may adopt defensive measures otherwise not in place.
b)Possible Sources of Liability:
3)10b-5 misappropriation theory (O’Hagan);
4)Mail or wire fraud;
6)Statutory liability under 16(b)--insiders are forced to give their profits to the corp, if the y buy and sell securities within a 6-month period regardless of whether they are using insider info. (Need to know 2, 3, 6)
c)O’Hagan--insider trading violation where a partner in law firm took info rom his firm regarding the firm’s client’s plans for acquisition of Pillsbury and used that info to buy shares in Pillsbury
d)Penalties For Insider Trading--ITSA (Insider Trading Sanctions Act)--3 measures:
1)Out-of-pocket measure--if a sh buys a share for $10, while in fact it costs $9, his out-of-pocket expense is $1.
2)Causation-in-fact--because an insider engaged in insider trading, it caused a loss
3)Disgorgement--we look at D’s profit. ITSA measures the damage to sh by the amount of profit that D received from the transaction.
2)SEC civil penalties--treble damages; SEC may seek penalty capped by three times profit gained or loss avoided.
A.COMMON LAW--under the majority rule, there was no duty to disclose to the shs inside info affecting the value of shares. Therefore, the protection of investors was very weak.
a)For lability to exist there should be:
1)At least fraud or deceit upon purchasers;
2)May also be a device or scheme;
3)May also be an implied misrepresentation.
b)Two Elements (relationship and unfairness):
1)Relationship--existence of a relationship giving access, directly or indirectly, to information intended to be available for a corporate purpose and no other.
I)Insiders include at least officers, dirs, controlling shs (In re Cady Roberts)
ii)Persons charged with confidentiality by contractual or fiduciary relationship
2)Unfairness--inherent unfairness that results when a party takes advantage of such information knowing it is unavailable to person with whom he is dealing.
B.SECURITIES EXCHANGE ACT OF 1934--IN GENERAL--the act superseded common law. Section 12 of the Act requires registration of any security traded on a national exchange, or any equity security (held by 500 or more persons) of a corp with assets exceeding $5 million.
C.SECTION 10(B) AND RULE 10B-5--section 10(b) prohibits any manipulation or deception in the purchase or sale of any security, whether or not it’s registered. Rule 10b-5 prohibits the use of the mails or other instrumentality of interstate commerce to defraud, misrepresent, or omit a material fact in connection with a purchase or sale of any security.
1.COVERED CONDUCT--rule 10b-5 applies to nondisclosure by dirs or officers, as well as to misrepresentations. It applies not only to insider trading but also to any person who makes a misrepresentation in connection with a purchase or sale of stock.
2.COVERED SECURITIES--rule 10b-5 applies to the purchase or sale of any security, registered or unregistered. a jurisdictional limitation requires that the violation must involve the use of some instrumentality of interstate commerce.
3.WHO CAN BRING SUIT UNDER 10B-5--private plaintiffs and the SEC. Private plaintiffs must be either purchasers or sellers of security.
4.MATERIALITY--for rule 10b-5 to apply, the information misrepresented or omitted must be material (i.e., a reasonable sh would consider it important in deciding whether to buy or to sell).
5.FAULT REQUIRED (SCIENTER)--a defendant is not liable under rule 10b-5 if he was without fault or merely negligent. The scienter requirement is satisfied by recklessness or an intent to deceive, mislead, or convey a false impression. Scienter is also required for injunctive relief.
1)D knew the hazard and proceeded nonetheless (subjective test);
2)D proceeded despite what a reasonable person would perceive (objective test);
b)Recklessness Under PSLRA:
1)Knowing conduct-- yields jointly and severally liable;
2)Non-knowing conduct (e.g., recklessness)--yields fair share (proportionate liability), found in accordance with special interrogatories.
6.CAUSATION AND RELIANCE--a plaintiff must prove that violation caused a loss (i.e., he must establish reliance on the wrongful statement or omission). However, in omission cases, there is a rebuttable presumption of reliance once materiality is established.
a)Fraud On The Market--where securities are traded on a well-developed market (rather than in a face-to-face transaction), reliance on a misrepresentation may be shown by alleging reliance on the integrity of the market.
b)Face-to-Face Misrepresentations--a plaintiff can show actual reliance in these cases by showing that the misrepresentation was material, testifying that he relied upon it, and showing that he traded soon after misrepresentation.
7.WHEN NONDISCLOSURE CONSTITUTES a VIOLATION
a)Mere Possession of Material Information--generally, nondisclosure of material, nonpublic information violates rule 10b-5 only when there is a duty to disclose independent of rule 10b-5
b)Insider Trading--insiders (dirs, officers, controlling shs and corporate employees) violate rule 10b-5 by trading on the basis of material, nonpublic info obtained through their positions. They have a duty to disclose before trading.
c)Misappropriation--the liability of noninsiders who wrongfully acquire (misappropriate) material nonpublic info has not been ruled upon by the US Supreme Court, although some lower level federal courts have imposed criminal liability.