THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch The Legal Environment of Business A Critical Thinking Approach 5 th Edition Nancy K. Kubasek Bartley A. Brennan M. Neil Browne

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch THE LEGAL ENVIRONMENT OF BUSINESS CHAPTER 22 Rules Governing the Issuance and Trading of Securities

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Securities Regulation Definition: Securities are equity or debt instruments and are most often stocks and bonds  Useful as a means for financing modern corporations Problem: Securities values are easily manipulated and transactions are subject to fraud

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch History of Regulation  First efforts at the state level proved insufficient  National economic crisis of 1930s Federal laws were needed to  Protect integrity of capital markets  Protect investors  Regulate brokers

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch The Securities and Exchange Commission Goal: To require full disclosure so that investors can make informed decisions Method: Detailed requirements for prospectus, registration, time tables for offering, and certain exemptions from the process Enforcement: Administrative action, injunction, criminal prosecution

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Bear Stearns Bailout  85 year old investment banking firm was heading for insolvency and planned to file bankruptcy  Federal regulators  Urged sale of Bear to J.P. Morgan  Agreed to funding  Nationwide credit crunch  Response differed  Investors  Employees  Government officials  Political actors

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch The Sarbanes-Oxley Act of 2002 Goal: To require CEOs and CFOs to certify financial reports  New accounting regulations  Criminal penalties  25 years for fraud  20 years for tampering with records  Fines up to $5 million

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Securities Act of 1933 Purpose: full disclosure on new issue of securities.  Definition of security is very broad  Howey Test for interpreting “security”:  Common enterprise  Reasonable expectation of profit  Profits derived solely from the effort of others  Regulates initial public offerings

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch  All nonexempt securities must be registered  Disclosure  SEC does not guarantee the financial outcome  Prefiling – no offers or sales  Waiting period – oral offers, but no sales  ‘Red Herring’  Posteffective period – 20 days  Communications The Registration Process

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Registration: Special situations  Shelf registration – registered but held for future sales  Exemptions from registration:  Private placement  Intrastate  Small business  Noninvestment companies  Other exemptions  Resale restrictions

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Liability, Remedies and Defenses  Private cause of action for victims of  misrepresentation in registration statement;  failure to register;  fraud in sale  Defenses: ‘Due diligence’  Government remedies:  administrative action;  letter of deficiency;  injunction;  criminal penalties

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch The Securities Exchance Act of 1934 Goal: Regulate those who run the industry Disclosure: of compensation Approach: Require issuers of securities to register with SEC and the exchange Covers: Brokers and dealers Method: Revocation or suspension of license; private or government suit

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Securities Investor Protection Act (SIPA)  Indemnifies customers of insolvent brokerage firm  Collects funds from brokers  Limit of protection: $500,000

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch The Securities Markets  Exchanges: NYSE and regional exchanges  Over-the-Counter: OTC  Another set of regulations: NASD

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Proxy Solicitations  Fewer than 1 percent of shareholders attend annual meeting  Proxies used to elect directors and set policy  Shareholder proposals: shareholder democracy  Proxy contests: insurgents v. management

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Tender Offers and Takeover Bids  Tender offer: offer to buy shares at premium  Regulated by Exchange Act Section 13 and 14  Hostile bid: offer is opposed by management

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Defenses to Hostile Takeovers  Golden parachute  Poison pill  Greenmail  Porcupine  Treasury shares to friendly parties  Shark repellant  Scorched Earth  White knight

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Securities Fraud  Section 10(b): antifraud  Insider trading  Misstatement of corporation  Mismanagement  Fraud-on-the-market

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Insider Trading and Section 10(b) of the Securities Act Insiders: Officers; directors; partners in brokerages; attorneys; underwriters and broker- dealers; financial reporters; printers

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Misstatements of Corporations and Section 10(b)  Covers: Statements by corporate executives  “In connection with purchase or sale of security”  With “scienter”

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Corporate Mismanagement and Section10(b)  Covers: Purchase or sale of stock  Fraud alleged by  Minority shareholders in class action  or in derivative suits  Plaintiff is purchaser or seller

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Fraud-on-the-Market Theory  Shareholders allege reliance on efficient market  Distorted by fraudulent statements or omissions  Causes market price to be set too high  To detriment of investors and in violation of 10(b)5

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Liability and Remedies  Criminal penalties: SEC and U.S. Justice Dept.  SEC Action  Private actions under 10-5 and 10(b)

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Short-Swing Profits  Coverage: Director, officer, 10 percent owner  Profits made in purchase and sale within 6-month period  Presumed to be based on insider information  Remedy: Return profits to corporation  Standing: Shareholders, directors, and officers

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch State Securities Laws  “Blue Sky” laws  Regulate securities in intrastate commerce  Similar to federal laws  Uniform Securities Act  National Securities Market Improvement Act

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch E-Commerce and online securities  Internet effectively accelerates trade  EDGAR  Cyber fraud a new problem  Example: “Pump and Dump”

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Global Dimensions  Foreign Corrupt Practices Act of 1977 (FCPA)  Makes bribes to foreign officials in order to obtain contracts  Coverage: All U.S. citizens, agents, and accountants doing business worldwide  Penalties: Fines and imprisonment  Exempt: ‘Grease payments’ to low-level functionaries

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch OECD Convention on Antibribery  Convention signed by 34 countries in 1997  Criminalizes bribery  Eliminates tax deductions for bribes  Requires disclosure  Exempt: ‘Grease payments’ to low level functionaries

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch International Securities Enforcement Cooperation Act of 1990  Goal: Attack money laundering via Swiss banks  Create procedures for tracing laundered money  International Securities Enforcement Cooperation Act (ISECA)  Methods:  Information exchange;  protects confidentiality;  administrative sanctions on violators;  SEC investigative powers expanded worldwide

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Foreign Securities Sold in U.S.  Generally, similar SEC registration/exemption rules apply  Special rules:  ‘Public interest’ exemption;  Recognition of information filed in issuer’s home country;  NASDAQ requirements  Regulation S

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall