Advanced Business Law BPP 433 O WNERS Advanced Business Law (BPP433/85) 2007 Winter Quarter Week 7 Instructor: David Oliveiri

Advanced Business Law BPP 433

OOWNERSWNERS

Advanced Business Law (BPP433/85)

2007 Winter Quarter

Week 7

Instructor: David Oliveiri


Learning Objectives

Who Are Owners/ “Owners”

Just What Legal Rules Apply to Forming and Maintaining Relationships with Owners/ “Owners”?

Managerial Implications -- Constraints, Risks, Opportunities


Who Are Owners?

Corporation as “Nexus” of Ownership Rights…Or Claims Against Assets

Traditional Owners – Proprietors, Partners, Stockholders

Quasi-Owners – Bondholders, Financial Institutions, Suppliers, Other Creditors

Securities Laws (Plus Business Organizations Law – BPP 432) Dictate Rights Relating to Traditional Owners


XYZ CORPORATION

SHAREHOLDERS

BONDHOLDERS

BANKS

SUPPLIERS …

……

Our Focus Today

THE PUBLICLY LISTED CORPORATION

SECURITIESBANKRUPTCY

CONTRACTS

UCC

BUSINESS ORG.


Essence of Publicly Listed Company Ownership: A “Security”

What is a “Security”

Commonly, Stock … But


What Is A “Security

A farmer offers to sell 10 year “service contracts” on sections of his orange grove. Under the contracts, a buyer would be entitled to the proceeds of oranges sold from the designated section.

Are the “service contracts” securities?


What Do The Federal Securities Laws Say?

Section 2(a) of the Securities Act of ’33 provides that – “The term ‘security’ means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”


Translated, Means…

Judicial Interpretation

All Types of Investment Schemes Requiring: (a) Investment of Money; (b) Common Enterprise; (c) Expectation of Profit; and (d) Solely From Efforts of Others

Now, Back to Orange Groves…

Why Is This Important?


What Do We Mean By “Securities Laws”

Securities Law Sources

Federal Law/Interstate (New Deal Origins) – Securities Act of ’33 – Federal Statute

Definition of a SecurityRegistration/Issuance of SecuritiesExempt Securities/Exempt Issue TransactionsLiability

– Securities Exchange Act of ’34 – Federal StatuteMarket Conduct Rules/Disclosure/InformationSecurities & Exchange Commission (SEC)Rule-Making AuthorityOther Pronouncements/Activities

State Securities Regulation

ST – Q1ST – Q1


Hierarchy (Review) of Securities Law

Predominantly Federal Statutory and Regulatory Law (Subject to Judicial Interpretive Role)

– US Constitution

– Federal Securities Statutes

– Rules/Regulations of SEC – Force of Law

– Policy/Interpretative Releases of SEC

SEC Staff Legal Bulletins

SEC Interpretative and No-Action Letters

SEC Telephone Interpretations


Management Considerations Re: Securities Law

Advantages of Registration (Going from Private-to-“Publicly Held” Firm)

Cashing In – “Monetizing” Business Value

Economical Way to Raise Money/Fund Growth

To Avoid Giving Away Control (Contrast Venture Capital vs. Raising “Public” Money)

Create Liquidity (Tap a Public Market for Shares)

Prestige

Estate Planning

Executive Recruitment/Retention

Create Currency for Acquisitions



Expense

Loss of Corporate “Privacy”

Loss of Corporate “Freedom”

Expectations

WSJ 8/2/06 – A Specter Stalks the Hospital Biz

“Taking a company (HCA) private means no longer having to convince millions of potential shareholders of your management ‘vision.’”

Tradeoffs: Disadvantages of Registration



Disadvantages of Registration

Expense

– Direct Expenses of Going PublicSecurities Firm Commission (10% of Issue Proceeds)Legal, Accounting, Printing ($300-$500K)SEC Filing Fees ($3K)

– Indirect Expenses of Going PublicReporting RequirementsCompliance Costs (Example: Proxy Rules)Cultivating Security Analyst RelationshipsShareholder Meetings

Disclosure of Information – When, What, Standards

Loss of Freedom -- Fiduciary to Shareholders, SOX, …

Income Expectations


Registration Timeline

Underwriter

No Offers

No Sales

Notice of Public Offering

Amend Filing

Assemble Sellers

Quiet Period• Tombstone Ad• Preliminary Prospectus

No Sales

Offering Effective

Written Offers withProspectus

Sales

Registration Filed Registration Effective

1 – 60 Days 60 – 120 Days 120 Days +


Common Constraints of Securities Laws

Regulating Manner of Registering Securities

Regulating Manner of Selling Securities

Proxy Regulation (Voting by Absent Shareholders)

Tender Offers – Filings/ Other Requirements of Tendering (Offering) $ For Listed Company Shares

Guiding Principle: Minimize Information / Transactions Costs

(But Not Necessarily Risks) of Buyers/ Owners


Registration and Liability Overview: The “ ‘33 Act ”

Registrationrequired

No registrationrequired

Yes

Yes

NoSecurity?

Exempt security?

Exempt transaction?

Security registered?

False registration (Sect. 11) and antifraud provision

(Sect. 12(2)) apply

Antifraud provision(Sect. 17(a)) applies*

Unregistered sales(Sect. 12 (1)) applies

Yes

Yes

Yes

Yes

No

No

No

*Section 12(2) may apply to some of these issuance's.


Registration and Exemptions Under the “ ‘33 Act ”

Security

*Exempt Securities – Short-Term (<9 Months) Commercial Paper for Working Capital, Securities of NonProfit Charities, …

Nonexemptsecurity and transaction

Register

Unrestricted resales

Exempttransaction

Regulation A

Intrastatetransaction

Limitedoffers

Restrictedresales


Exemptsecurity*

Short-term Commercial

Paper

Other types



Exempt Transactions for Issuers Under the “ ‘33 Act ”

ExemptionPriceLimitation

InformationRequired

Limitations onPurchases Resales

Regulation A $5 million offering circular none unrestricted

Intrastate Rule147

none none intrastate only only to residentsbefore 9 months

Rule 506-- “PrivatePlacement”

none materialinformation tounaccreditedpurchasers

unlimitedaccredited; 35unaccredited

restricted

Rule 505 $5 million materialinformation tounaccreditedpurchasers

unlimitedaccredited; 35unaccredited

restricted

Rule 504 $1 million none none Restricted*

Section 4(6) $5 million none only accredited restricted

*Unrestricted if under State law, the issuance is either (1) registered or (2) exempted with sales only to accredited investors.

Offers

Limited


Disclosure Requirements Under “ ‘34 Act ”

Initialregistration

PeriodicReporting

InsiderReporting

Proxy Statement Tender Offer

Registrant Issuer ifregulated,publicly heldcompany

Issuer ifregulated,publicly heldcompany

Statutory insiders(directors,officers, andprincipalstockholders)

Issuer and otherpersons solicitingproxies

5 percentstockholder,tender offeror, orissuer

Information Nature ofbusinessFinancialstructureDirectors andexecutiveofficersFinancialstatements

Annual, quarterly,or current reportupdatinginformation ininitial registration

Initial statementof beneficialownership ofequity securitiesChanges inbeneficialownership

Details ofsolicitation Legalterms of proxyAnnual report (ifdirectors to beelected)

Identity andbackgroundTerms oftransaction Sourceof fundsIntentions

Initialregistration

PeriodicReporting

InsiderReporting

Proxy Statement Tender Offer


Initial registration PeriodicReporting

Insider Reporting Proxy Statement Tender Offer

Filing Date Within 120 daysafter becoming areportingcompany

Annual: within 90days after year’send Quarterly:within 45 daysafter quarter’s endCurrent: within 15days after anymaterial change

Within 10 days of(1) becoming astatutory insideror (2) the end of amonth in which achange inownership takesplace

10 days beforefinal proxystatement isdistributed

5 percentstockholder; within10 days afteracquiring more than5 percent of a classof registeredsecurities Tenderofferor: beforetender offer is madeIssuer: before offerto repurchase

Purpose ofDisclosure

Adequate andaccuratedisclosure ofmaterial factsregardingsecurities listed ona nationalexchange ortraded publiclyover the counter

Updateinformationcontained in initialregistration

Prevent unfair useof informationwhich may havebeen obtained bystatutory insider

Full disclosureof materialinformationFacilitation ofshareholderproposals

Adequate andaccurate disclosureof material factsOpportunity to reachuncoerced decision

Disclosure Requirements Under “ ‘34 Act ” (cont.)


Some More Constraints of Securities Laws

Insider Trading [Requirements: Possess Material Nonpublic Information + Make Trades Based on Information = Liability]

[Best Practices: Either disclose material nonpublic information to public, abstain from trading on the information until its public, or show that trades were made without regard to the insider information.]

False and Misleading Statements/ Withholding Information/ Selective Disclosure

[Best Practice: Use diligence in “fleshing out” bad news. Be pro-active, objective, disclose in a timely fashion. “Safe Harbor” for forward-looking statements, if identified as such and accompanied by cautions.]

Securities Firm Manipulation of MarketST – Q2

Section 10(b) of ’34 Act and SEC Rule 10b-5 – Manipulative and Deceptive Conduct


Who Are “Insiders”?

Traditional Insiders (Officers, Directors, Controlling Shareholders, Employees)

Temporary Insiders (Counsel, Accountants, Consultants, Investment Bankers)

Derivative Insiders -- “Tippees” (Relatives, Dinner Guests, … Printer?, Person on Bus?)

[Requirement: Because tippee liability is “derived” from insider the duty of tippees to disclose or abstain exists only if inside tipper breached a fiduciary duty in disclosing the information]


Insiders

OfficersDirectors

EmployeesAgents

(1) Insider has breached fiduciary duty by disclosing information to tippee

Tippees Tippees

UnderwritersAccountants

LawyersConsultants

(2) Tippee knows or should know that there has been such a breach


Switching Gears: Creditors as “Owners”

For 12 months ending 6/30/06 -- 1,484,570 bankruptcy filings (-9.3%); 31,562 business filings. Source: Administrative Office of Courts.

Bankruptcy Law – Dealing With Creditors As Class, Under Financial Duress


Bankruptcy Law – Collective vs. Individual Approach

Secured Creditors– State Law, Generally (E.G., UCC Article 9)

– Individuals Pursuing Own Remedies; What If Other Secured Creditors?

– What If Assets Don’t Pay Debt?

Unsecured Creditors [Query: Is there any relation between individualized

debt collection outside bankruptcy and Hardin’s “Tragedy of the Commons”?]

Individualized Debt Collection Outside Bankruptcy


Bankruptcy Law – Collective vs. Individual Approach

Chapter 7 – Individual/Corporate Debtor –Asset Liquidation

Chapter 11 – Corporate Restructuring (Partnerships, Also)

Chapter 13 – Wage Earner Plans

Bankruptcy Court Can Convert

Federal Bankruptcy Law as Collective (I.E., Pre-Emptive and Exclusive) Debt Collection Remedy

For 12 months ending 6/30/06 -- 1,484,570 bankruptcy filings (-9.3%); 1,164,815 Chapter 7 filings (21,857 business); 6,224 Chapter 11 filings; 360 Chapter 12 filings; 313,085 Chapter 13 filings. Source: Administrative Office of Courts.


Chapter 7 – Straight Bankruptcy – No Hope of Continuation

Commence – Filing – Voluntary or Involuntary Petition

Players– Debtor– Creditors (Must Prove Claims) – Bankruptcy Judge– Trustee (Elected By Creditors, Represents Bankrupt’s Estate -- Can Bring Actions, Protects Creditors)

Procedure– Automatic Stay (A Presumption)– Identify Claims/Property of Estate (Non-Exempt Assets)– Avoiding Powers of Trustee (e.g. Unperfected Security Interests)– “Fresh Start” For Individuals/ Dissolution for Corporations ST – Q 4-5

ST – Q3


Securedcreditors

Creditorswith priority

Unsecured creditorswho file claims

on time

Unsecured creditorswho file claims

tardily

Debtor receivesremaining assets

Collection and Distribution of the Debtor’s Estate

Debtor’s EstateAdministered by

Trustee

All of debtor’s nonexempt property

Voidablepreferences

Fraudulenttransfers

Statutoryliens

Property subject totrustee’s right as

a lien creditor


Copyright John Pritchett

Chapter 11 – Reorganization


Chapter 11 – Reorganization

[WSJ 2/16/01 – Quoting Harvey Miller, a partner in Weil, Gotschal and Manges – “Today, the companies ending up in Chapter 11 are not only overleveraged, but they have basic operational problems.”]

Players– Debtor-in-Possession (Corporation is not Dissolved!)– Creditors’ Committee– Bankruptcy Judge

Procedure– Automatic Stay– Identify Claims/Property of Estate– Plan of Reorganization (Within 120 Days of Filing – Voted On)

WSJ 2/13/06 – Judge to Rule on Northwest’s Bid to Void Labor Pacts


Comparison of Bankruptcy Proceedings

Chapter 7 Chapter 11 Chapter 12 Chapter 13

Objective Liquidation Reorganization Adjustment Adjustment

EligibleDebtors

Most debtors Most debtors,including railroads

Family farmerwho meets certaindebt limitations

Individual withregular incomewho meets certaindebt limitations

Type ofPetition

Voluntary orinvoluntary

Voluntary orinvoluntary

Voluntary Voluntary

Trustee Usually selectedby creditors;otherwiseappointed

Only if court ordersappointment forcause; creditors thenmay select trustee

Appointed Appointed


Bottom Lines; Q&A

Relationships With Owners/”Owners” Highly Regulated

Securities Laws Regulate Listed Companies + Dealings in “Securities” by Listed or Non-Listed Companies

Balance Publicly Traded Company Benefits vs. Costs (Direct Expense, Loss of Privacy, Restrictions on Freedom, Newfound Public Expectations)

Securities Laws Police and Facilitate Public Market for Shares by Regulating Deceptive and Manipulative Conduct

Federal Bankruptcy Law = Collective Debt Resolution Remedy

Documents

Advanced Business Law BPP 433 O WNERS Advanced Business Law (BPP433/85) 2007 Winter Quarter Week 7 Instructor: David Oliveiri