ch. 22-1 © 2006 prentice hall the legal environment of business a critical thinking approach fourth...
TRANSCRIPT
Ch. 22-Ch. 22-11 © 2006 Prentice Hall© 2006 Prentice Hall
THETHE LEGALLEGAL ENVIRONMENTENVIRONMENT OFOF BUSINESSBUSINESS
A Critical Thinking ApproachA Critical Thinking ApproachA Critical Thinking ApproachA Critical Thinking ApproachFourth EditionFourth Edition
Nancy K. KubasekNancy K. Kubasek
Bartley A. BrennanBartley A. Brennan
M. Neil BrowneM. Neil Browne
Nancy K. KubasekNancy K. Kubasek
Bartley A. BrennanBartley A. Brennan
M. Neil BrowneM. Neil Browne
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-22
THE LEGAL ENVIRONMENT OF BUSINESS
CHAPTER 22CHAPTER 22
Rules Governing the Issuance Rules Governing the Issuance and Trading of Securitiesand Trading of Securities
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-33
THE LEGAL ENVIRONMENT OF BUSINESS
Securities RegulationSecurities RegulationDefinition: Securities are equity or debt Definition: Securities are equity or debt instruments: most often, stocks and bondsinstruments: most often, stocks and bonds
Useful as a means for financing modern Useful as a means for financing modern corporationscorporations
Problem: Securities values are easily Problem: Securities values are easily manipulated and transactions are subject manipulated and transactions are subject to fraudto fraud
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-44
THE LEGAL ENVIRONMENT OF BUSINESS
History of RegulationHistory of RegulationFirst efforts at the state level proved First efforts at the state level proved insufficientinsufficient
National economic crisis of 1930sNational economic crisis of 1930s
FederalFederal laws were needed to laws were needed to
Protect integrity of capital marketsProtect integrity of capital markets
Protect investorsProtect investors
Regulate brokers Regulate brokers
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-55
THE LEGAL ENVIRONMENT OF BUSINESS
The Securities and Exchange CommissionThe Securities and Exchange Commission
Goal: To require full disclosure so that Goal: To require full disclosure so that investors can make informed decisionsinvestors can make informed decisions
Method: Detailed requirements for Method: Detailed requirements for prospectus; registration; time tables for prospectus; registration; time tables for offering; and certain exemptions from the offering; and certain exemptions from the processprocess
Enforcement: Administrative action; Enforcement: Administrative action; injunction; criminal prosecutioninjunction; criminal prosecution
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-66
THE LEGAL ENVIRONMENT OF BUSINESS
The Sarbanes-Oxley Act of 2002The Sarbanes-Oxley Act of 2002Goal: To require CEOs and CFOs to certify Goal: To require CEOs and CFOs to certify financial reportsfinancial reports
New accounting regulationsNew accounting regulations
Criminal penaltiesCriminal penalties
25 years for fraud25 years for fraud
20 years for tampering with records20 years for tampering with records
Fines up to $5 millionFines up to $5 million
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-77
THE LEGAL ENVIRONMENT OF BUSINESS
The Securities Act of 1933The Securities Act of 1933Definition of “security” – very broadDefinition of “security” – very broad
The ‘Howey Test’The ‘Howey Test’ Common enterprise Common enterprise Reasonable expectation of profitsReasonable expectation of profits Derived solely from the efforts of othersDerived solely from the efforts of others
Regulates initial public offeringsRegulates initial public offerings
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-88
THE LEGAL ENVIRONMENT OF BUSINESS
The Registration ProcessThe Registration ProcessAll nonexempt securities must be registeredAll nonexempt securities must be registered
SEC does not guarantee the financial SEC does not guarantee the financial outcomeoutcome
Prefiling – no offers or salesPrefiling – no offers or sales
Waiting period – oral offers, but no salesWaiting period – oral offers, but no sales
‘‘Red Herring’ Red Herring’
Posteffective period – 20 daysPosteffective period – 20 days
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-99
THE LEGAL ENVIRONMENT OF BUSINESS
Registration – Special SituationsRegistration – Special SituationsShelf registration – registered but held for Shelf registration – registered but held for future salesfuture sales
Exemptions from registration:Exemptions from registration:
Private placementPrivate placement
IntrastateIntrastate
Small businessSmall business
Noninvestment companiesNoninvestment companies
Other exemptionsOther exemptions
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-1010
THE LEGAL ENVIRONMENT OF BUSINESS
Liability, Remedies, and DefensesLiability, Remedies, and DefensesPrivatePrivate cause of action for victims of cause of action for victims of
Misrepresentation in registration Misrepresentation in registration statement; failure to register; fraud in statement; failure to register; fraud in salesale
Defenses: ‘Due diligence’ Defenses: ‘Due diligence’
Government Government remedies: Administrative remedies: Administrative action; letter of deficiency; injunction; action; letter of deficiency; injunction; criminal penaltiescriminal penalties
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-1111
THE LEGAL ENVIRONMENT OF BUSINESS
The Securities Exchance Act of 1934The Securities Exchance Act of 1934
Goal: Regulate those who run the Goal: Regulate those who run the industryindustry
Approach: Require issuers of securities Approach: Require issuers of securities to register with SEC and the exchangeto register with SEC and the exchange
Covers: Brokers and dealersCovers: Brokers and dealers
Method: Revocation or suspension of Method: Revocation or suspension of license; private or government suitlicense; private or government suit
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-1212
THE LEGAL ENVIRONMENT OF BUSINESS
Securities Investor Protection Act (SIPA)Securities Investor Protection Act (SIPA)
Indemnifies customers of insolvent brokerage Indemnifies customers of insolvent brokerage firmfirm
Collects funds from brokersCollects funds from brokers
Limit of protection: $500,000Limit of protection: $500,000
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-1313
THE LEGAL ENVIRONMENT OF BUSINESS
The Securities MarketsThe Securities MarketsExchanges: Exchanges: NYSENYSE
Over-the-Counter: Over-the-Counter: OTCOTC
Another set of regulations: Another set of regulations: NASDNASD
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-1414
THE LEGAL ENVIRONMENT OF BUSINESS
Proxy SolicitationsProxy SolicitationsFewer than 1 percent of shareholders Fewer than 1 percent of shareholders attend annual meetingattend annual meeting
Proxies used to elect directors and set Proxies used to elect directors and set policypolicy
Shareholder proposals: shareholder Shareholder proposals: shareholder democracydemocracy
Proxy contests: insurgents v. managementProxy contests: insurgents v. management
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-1515
THE LEGAL ENVIRONMENT OF BUSINESS
Tender Offers and Takeover BidsTender Offers and Takeover Bids
Tender offer: offer to Tender offer: offer to buy shares at premiumbuy shares at premium
Regulated by Exchange Regulated by Exchange Act Section 13 and 14Act Section 13 and 14
Hostile bid: offer is Hostile bid: offer is opposed by opposed by managementmanagement
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-1616
THE LEGAL ENVIRONMENT OF BUSINESS
Defenses to Hostile TakeoversDefenses to Hostile Takeovers
Golden Golden parachuteparachute
Poison pillPoison pill
GreenmailGreenmail
PorcupinePorcupine
Treasury Treasury shares to shares to friendly partiesfriendly parties
Shark repellantShark repellant
Scorched earthScorched earth
White knightWhite knight
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-1717
THE LEGAL ENVIRONMENT OF BUSINESS
Securities FraudSecurities Fraud
Section 10(b): antifraudSection 10(b): antifraud
Insider tradingInsider trading
Misstatement of corporationMisstatement of corporation
MismanagementMismanagement
Fraud-on-the-marketFraud-on-the-market
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-1818
THE LEGAL ENVIRONMENT OF BUSINESS
Insider TradingInsider Trading
INSIDERS:INSIDERS: Officers, Officers, directors; partners in directors; partners in brokerages; attorneys; brokerages; attorneys; underwriters and broker-underwriters and broker-dealers; financial reporters; dealers; financial reporters; printersprinters
Insider Trader Sanctions ActInsider Trader Sanctions Act (ITSA) provide treble damages, (ITSA) provide treble damages, other remediesother remedies
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-1919
THE LEGAL ENVIRONMENT OF BUSINESS
Misstatements of CorporationsMisstatements of Corporations
Covers: Statements by corporate Covers: Statements by corporate executivesexecutives
““In connection with purchase or In connection with purchase or sale of security”sale of security”
With With ““scienterscienter””
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-2020
THE LEGAL ENVIRONMENT OF BUSINESS
MismanagementMismanagement
Covers: Purchase or sale of stockCovers: Purchase or sale of stock
Fraud alleged by Fraud alleged by
Minority shareholders or in derivative Minority shareholders or in derivative suitssuits
Plaintiff is purchaser or sellerPlaintiff is purchaser or seller
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-2121
THE LEGAL ENVIRONMENT OF BUSINESS
Fraud-on-the-Market TheoryFraud-on-the-Market TheoryShareholders allege reliance on efficient marketShareholders allege reliance on efficient market
Distorted by fraudulent statements or Distorted by fraudulent statements or omissionsomissions
Causes market price to be set too highCauses market price to be set too high
To detriment of investors and in violation of To detriment of investors and in violation of 10(b)510(b)5
Upheld in Upheld in U.S. v. O’HaganU.S. v. O’Hagan
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-2222
THE LEGAL ENVIRONMENT OF BUSINESS
Liability and RemediesLiability and Remedies
Criminal penalties: SEC and U.S. Criminal penalties: SEC and U.S. Justice Dept. Justice Dept.
SEC ActionSEC Action
Private actions under 10-5 and 10(b)Private actions under 10-5 and 10(b)
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-2323
THE LEGAL ENVIRONMENT OF BUSINESS
Short-Swing ProfitsShort-Swing ProfitsCoverage: Director, officer, 10 percent ownerCoverage: Director, officer, 10 percent owner
Profits made in purchase and sale within 6-Profits made in purchase and sale within 6-month periodmonth period
Presumed to be based on insider informationPresumed to be based on insider information
Remedy: Return profits to corporationRemedy: Return profits to corporation
Standing: Shareholders, directors, and officersStanding: Shareholders, directors, and officers
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-2424
THE LEGAL ENVIRONMENT OF BUSINESS
Regulation of Investment CompaniesRegulation of Investment CompaniesAll investment companies must register All investment companies must register under Investment Company Act of 1940under Investment Company Act of 1940
National Securities Market Improvement Act National Securities Market Improvement Act preempted most state lawpreempted most state law
Required: Annual reports; holdings in bank Required: Annual reports; holdings in bank or exchange member, follow SEC rulesor exchange member, follow SEC rules
State securities laws still cover local issues State securities laws still cover local issues
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-2525
THE LEGAL ENVIRONMENT OF BUSINESS
State Securities LawsState Securities Laws
““Blue Sky” lawsBlue Sky” laws
Regulate securities in Regulate securities in intrastateintrastate commercecommerce
Similar to federal lawsSimilar to federal laws
Uniform Securities ActUniform Securities Act
National Securities Market Improvement National Securities Market Improvement ActAct
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-2626
THE LEGAL ENVIRONMENT OF BUSINESS
E-Commerce and Online SecuritiesE-Commerce and Online Securities
Internet effectively accelerates tradeInternet effectively accelerates trade
EDGAREDGAR
Cyber fraud a new problemCyber fraud a new problem
““Pump and dump” example of new types Pump and dump” example of new types of deceptionof deception
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-2727
THE LEGAL ENVIRONMENT OF BUSINESS
Global DimensionsGlobal DimensionsForeign Corrupt Practices Act of 1977 (FCPA)Foreign Corrupt Practices Act of 1977 (FCPA)
Makes bribes to foreign officials in order to Makes bribes to foreign officials in order to obtain contractsobtain contracts
Coverage: All U.S. citizens, agents, and Coverage: All U.S. citizens, agents, and accountants doing business worldwideaccountants doing business worldwide
Penalties: Fines and imprisonmentPenalties: Fines and imprisonment
Exempt: ‘Grease payments’ to low-level Exempt: ‘Grease payments’ to low-level functionariesfunctionaries
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-2828
THE LEGAL ENVIRONMENT OF BUSINESS
OECD Convention on AntibriberyOECD Convention on Antibribery
Convention signed by 34 countries in 1997Convention signed by 34 countries in 1997
Criminalizes briberyCriminalizes bribery
Eliminates tax deductions for bribesEliminates tax deductions for bribes
Requires disclosureRequires disclosure
Exempt: ‘Grease payments’ to low level Exempt: ‘Grease payments’ to low level functionaries functionaries
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-2929
THE LEGAL ENVIRONMENT OF BUSINESS
International Securities Enforcement International Securities Enforcement Cooperation Act of 1990Cooperation Act of 1990
Goal: Attack money laundering via Swiss banksGoal: Attack money laundering via Swiss banks
Method: Create procedures for tracing laundered Method: Create procedures for tracing laundered moneymoney
International Securities Enforcement Cooperation International Securities Enforcement Cooperation Act (ISECA)Act (ISECA)
Methods: Information exchange; protects Methods: Information exchange; protects confidentiality; administrative sanctions on confidentiality; administrative sanctions on violators; SEC investigative powers expanded violators; SEC investigative powers expanded worldwideworldwide
© 2006 Prentice Hall© 2006 Prentice Hall Ch. 22-Ch. 22-3030
THE LEGAL ENVIRONMENT OF BUSINESS
Foreign Securities Sold in U.S.Foreign Securities Sold in U.S.
Generally, similar SEC Generally, similar SEC registration/exemption rules applyregistration/exemption rules apply
Special rules: ‘Public interest’ exemption; Special rules: ‘Public interest’ exemption; recognition of information filed in issuer’s recognition of information filed in issuer’s home country; NASDAQ requirementshome country; NASDAQ requirements