Module Four Review One of Two

Module Four Review One of TwoEmployment & Immigration Law -Chapter 22Investor Protection, Insider Trading & Corporate Governance -Chapter 26Insurance, Wills & Trusts -Chapter 29

Chapter 22Employment LawWhat is meant by employment at will? an employer or employee can terminate employment at any time so long that it does not violate federal or state employment law Explain 3 exceptions to the employment-at-will doctrine.Contract Theory: If a court decides that an implied contract existed, the employee that was fired could potentially seek action for breach of contract.Tort Theory: An employee could bring suit if their discharge was abusive or involved fraud.Public Policy: Occurs when an employee was fired for reasons that violate public policy, Ex. whistleblowing. Most commonly-used exception

Under the Fair Labor Standards Act (FLSA), in what type of work can a minor legally engage? 12-year olds - allowed to delivery newspapers, work for their parents and in the entertainment industry, and in some agricultural areas.

16-year olds - are not permitted to work in hazardous type jobs or any other job that could be detrimental to their well-being.

19-year olds - No job or hour restrictions.Under the FLSA, when must an employer pay an employee pay overtime? Exceptions?Non-exempt employees - Employers must pay overtime once the employee has worked more than 40 hours a week.

Exempt employees - do not receive overtime pay executive, administrative, and professional4th Amendment application to drug testing conducted by private employers.Government Action The Constitution applies to government action. Therefore, the acts of private companies and institutions do not invoke constitutional principles unless there is a statute involved.Then the statute would constitute government action and constitutional principals would be relevant.Intentional employment discrimination - prima facie case for employment discrimination?They are a member of a protected classThey applied for and were qualified for the jobThey were rejected by the employer; &The employer continued to seek applications after they were denied.Title VII of the Civil Rights Act prohibits employer discrimination what bases? Race, Color, National Origin, Religion, Gender

at any stage in employment.What must a plaintiff prove in a constructive discharge claimObjective proof on intolerable working conditionsThe employer knew or had reason to know the conditions and failed to correct them &The employers lack of correction was fueled by unlawful discrimination.When does quid pro quo harassment occur in the workplaceWhen a persons job, promotion, salary increases, benefits Are only available upon the exchange of sexual favorsEllerth-Faragher defenseThe employer took all reasonable care to (a) prevent and (b) promptly correct any sexual harassment behavior.

The employee or plaintiff unreasonably failed to take advantage of any preventive or corrective opportunities that were provided by the employer.

Employer liability under Title VII of the Civil Rights ActIf a plaintiff successfully proves discrimination, they could be:(1) reinstated, (2) receive lost wages, (3) receive retroactive promotions and (4) receive damages

Damages:Intentional discrimination - compensatory damagesMalice or reckless indifference - punitive damages Chapter 26Investor Protection, Insider Trading & Corporate Governance1. Under 2(1) of the Securities Act of 1933, summarize categories included in securitiesPreferred and common stocks, treasury stocks, bonds, debentures and stock warrants.

Stock options, or other types of privilege on a security or on the right to purchase a security or a group of securities in a national security exchange.

Notes, instruments, or other evidence of indebtedness including certificates of interest in a profit sharing agreement.

Fractional undivided interest in oil, gas or other mineral rights.

Investment contracts, which include interests in limited partnerships and other investment schemes.2. According to the Supreme Court, what are the 4 elements of an investment contract?An INVESTMENT CONTRACT is any transaction in which a person invests, in a common enterprise, reasonably expecting profits, derived primarily or substantially from others managerial efforts3. Summarize what must be fully described in a registration statement.The registration statement must be written in plain English and must fully describe the following:

Securities being offered for sale, including their relationship to the registrants other capital securities.Corporations properties and business, including a financial statement. Management of the corporation, including managerial compensation, stock options, pensions and other benefits.How the corporation intends to use the proceeds of the sale.Any pending lawsuits or risk factors.4. What is EDGAR, and what is its purpose?EDGAR stands for Electronic Data Gathering, Analysis and Retrieval.

Database - material on initial public offerings, proxy statements, corporations annual reports and other documents that have been filed with the SEC.

Investors can access the database via the internet to obtain information that can be used to make investment decisions.

5. When is the registration of a security effective?The registration statement does not become effective until after it has been reviewed and approved by the SEC.

During the pre-filing period, the issuer normally cannot sell or offer to sell the securities.

Once registration statement is filed, a waiting period begins while the SEC reviews the registration statement for completeness.6. Describe a Regulation A offering. Why would a company use this type of offering?The issuer must file with the SEC a notice of the issue and an offering circular which must also be provided to investors before the sale.

Companies are allowed to test the waters for potential interest before preparing the offering circular. Testing the water allows the means to determine potential without actually selling any securities.

This is a much simpler and less expensive process than the procedures associated with full registration.7. Briefly describe the following Regulation D exemptions: Rule 504, Rule 505, & Rule 506.Rule 504 - used by most small businesses. Non-investment company offerings up to $1 million in any 12-month period are exempt.

Rule 505 - private non-investment company offerings up to $5 million in any 12-month period. The offer may be made to an unlimited number of accredited investors and up to 35 unaccredited investors. Accredited investors include banks insurance companies, investment companies, employment benefit plans.

Rule 506 - the private placement exemption; exempts transactions not involving any public offering. Issuer must believe that each unaccredited investor has sufficient knowledge or experience in financial matters to be capable of evaluating the investments merits and risks.8. Rule 144 exemption conditions. Why a safe harbor rule?Rule 144 exempts restricted securities from registration on resale if:

1. Adequate current public information about the issuer is available; &

2. Seller has owned the securities at least 6 months if the issuer is subject to the reporting requirements of the 1934 act; or one year if the issuer is not subject to 1934 Act reporting requirements; &

3. Securities are sold in certain limited amounts in unsolicited brokers transactions; &

4. SEC is notified of the resale.

Re-sales of restricted securities can trigger the registration requirements unless the party selling them complies with Rule 144 and 144A = safe harbors9. Remedies under of the Securities Act of 1933 for (a) criminal violations; and (b) civil violations.CRIMINAL VIOLATIONSFine up to $10,000 &/orImprisoned up to 5 yearsCIVIL ACTION Injunction to prevent furthers sales of the securities involved orAsk the court to grant other relief10. Summarize the three basic defenses to 1933 Act violations. The statement or omission was not material

Plaintiff knew about the misrepresentation at the time of purchasing the securities, or

Defendant (a) exercised due diligence in preparing the registration statement and (b) reasonably believed at the time that (i) the statements were true and (ii) there were no omissions of material facts.11. Differences between Securities Exchange Act of 1934 & Securities Act of 1933?1933 Act governs initial sales of stock by businesses. Designed to prohibit fraudOne-time disclosure law

1934 Act provides for the regulation and registration of securities exchanges, brokers, dealers and national securities associations.Continuous periodic disclosures Enables SEC to regulate subsequent trading12. What types of companies are subject to the Securities Exchange Act of 1934?Companies with assets in excess of $10 million and 500 or more shareholders.

Section 12 companies; required to register their securities under Section 12 of the 1934 Act.

13. What is prohibited by 10(b) of the Securities Exchange Act; applicability of the SEC Rule 10b-5?Section 10(b) prohibits the use of any manipulative or deceptive mechanism in violation of SEC rules and regulations.

SEC Rule 10b-5 applies to almost all trading of securities, whether organized exchanges, over-the-counter markets or private transactions. Just about any form of security is coveredIncluding notes, bonds, & agreements to form a corporation

14. List the examples of material facts that call for disclosure under Rule 10b-5.Fraudulent trading in the company stock by a broker-dealer

2. Dividend change

3. Contract for the sale of corporate assets

4. New discovery, a new process or a new product

5. Significant change in the firms financial condition

6. Potential litigation against the company15. Briefly describe the tippee/tipper theory of insider trading.Liability under Section 10(b) of the 1934 Act and SEC Rule 10b-5 extends to people who trade on insider information acquired indirectly.

Outsiders can be held liable for insider trading if they acquire inside information as a result of a corporate insiders breach of his/her fiduciary duty.

16. Case Ex.26.7 on p. 511. What action landed Patricia a guilty verdict for insider trading?MISAPPROPRIATION THEORY

An individual who wrongfully obtains inside information and uses it to trades for his/her own personal gain is held liable

Effectively Patricia stole information rightfully belonging to someone else17. What are swing profits? Explain why they are not allowed.Section 16b of the 1934 Act provides for the recapture by the corporation of all profits realized by an insider.

Insider = officers, directors and large stockholders; those owning at least 10% of equities, on any purchase (or sale and purchase) of the corporations stock within a 6 month period.

Does not matter if the insider uses insider information; all short swing profits must be returned to the corporation.18. List the criminal penalties for violations of 10(b) and Rule 10b-5.Individual fines up to $5 million, imprisonment for up to 20 years, or both.

If violator is a partnership or corporation the fine can be to $25 million.

19. How do state securities laws work with federal securities law? Complete Case Problem 26-1 on p. 520.Joseph is right.

Under Regulation A, securities issued by an issuer that has offered less than $5 million in securities in any 12-month period are exempt from registration.

The issue could also fall under Rule 504 of Regulation D, which exempts non-investment company offerings up to $1 million in any 12-month period.

Depending on whom the issue is offered to and how it is advertised, it may also be permitted to proceed unregistered under Regulation Ds Rule 505, which exempts offerings of up to $5 million in any 12-month period made to investors that include fewer than 35 unaccredited investors, as long as there is no general advertising or solicitation.

If a private offering, it could be exempt under Rule 506, regardless of the amount, provided each unaccredited investor was sufficiently knowledgeable or experienced.

The issue will, however, be subject to state securities legislation, unless it qualifies for exemption from state registration requirements.19. How do state securities laws work with federal securities law? Complete Case Problem 26-1 on p. 520. (contd)Typically, state laws have disclosure requirements and antifraud provisions patterned after Sect.10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

State laws provide for the registration or qualification of securities offered or issued for sale within the state with the appropriate state official.

Most state securities laws regulate securities brokers and dealers.

20. Define corporate governance. What is its purpose?Corporate governance: Relationship between a corporation and its shareholders. Policies or procedures that affect the way a corporation is directed or controlled. Decision-making structures that monitor employees to ensure they are acting for the benefit of the shareholders.

Corporate governance can include: Audited reporting of financial progress at the corporation, to evaluate managers Legal protections for shareholders, to punish violators21. Briefly describe the purposes of the Sarbanes-Oxley Act of 2002.Enacted by Congress after a series of corporate scandals. Addresses certain issues relating to corporate governance.

Attempts to increase corporate accountability by imposing harsh penalties for violations of securities laws. Requires the filing of certain financial and stock-transaction reports earlier than previously required.Chapter 29Insurance, Wills & Trusts1. Insurance Contract: an arrangement for transferring and allocating risk.Insurance company promises to pay the insured (or the insureds beneficiary) a sum of $$ upon on event.

The insured promises to pay premiums until that event occurs or as the contract states.

Insurance company is making predictions concerning potential loss based on certain factors.

Individual transfers risk to the insurance company.2. Summarize the following types of insurance: Casualty, Floater, Malpractice, and Title.CASUALTY INSURANCE: covers losses created by an insured who is held liable for injury or damage caused by the insured.FLOATER INSURANCE: covers property that is moveable so long as it stays within the boundaries stated in the contract.MALPRACTICE INSURANCE: Liability insurance that covers the negligent act of professionals. TITLE INSURANCE: protects against defects in that may exist in the title of real property, and pays losses resulting from defects.

3. When does an insurable interest exist for real and personal property?When the insured person has a pecuniary benefit in the property & (2) its destruction would cause a financial loss4. Why would misstatements in an application for insurance become a cause for voiding the insurance policy?The insurance company bases its risk factors and determines whether or not to offer coverage using the content of those statements.5. Briefly summarize the following types of clauses: Antilapse, Arbitration, & Incontestability.ANTILAPSE CLAUSES: a safety net for insured persons if they miss or pay late. Instead of canceling coverage, this clause offers a grace period to pay the over-due payment(s).

ARBITRATION CLAUSES: If a dispute were to arise that it would be settled through arbitration.

INCONTESTABILITY CLAUSES: After a policy has been in effect for a certain length of time, the insurer cannot contest any statements made on the insureds application.

6. Defenses an insurance company can make against payment, not included in general contract law.If the insurance company can show that the policy stemmed from fraud or misrepresentation. If the insurance company discovers that the insured did not actually have any insurable interest.If actions occurred that are against public policy or are illegal.7. What is a Last Will & Testament & what is its purpose?A will is the final declaration stating how a person (testator) wants his/her property distributed upon their death.Purposes:Distribute real property, personal property and $$Appoint guardians for minor children and incapacitated adults Appoint personal representatives to settle affairs of the testatorCreate testamentary trust for minor children8. Testator vs. Executor/Personal RepresentativeTestator is the person who creates the will

Executor or Personal Representative (PR) is the person named in the will to carry out the wishes of the testator

The testator can revise his/her Will, the PR cannot.The PR has a fiduciary duty to carry out the testators wishes under the Will.9. Describe the following types of gifts left in a will: Specific, General and Residual.SPECIFIC BEQUESTS: Exact property that can easily be distinguished from the rest of the deceased property,.Ex. Wedding ring, antique trunk.

GENERAL BEQUESTS: Use less restrictive terms and usually refer to money.

RESIDUAL BEQUESTS: Refer to all remaining assets.

10. List the necessary requirements for a valid will.Capacity: Age and mind. Testator must have proper capacity at the time the will was signed; True Intentions: Will must truly represent the intention of the testator in the transfer and distribution of his/her estate.Writing: Normally must be in writing; can be typed or handwritten. Signature: Testators signature must be on the will.Witnesses: Witnesses must be present to verify that the testator actually signed the will , had intent and capacity. (MD requires 2).Publication: By the testator to witnesses that the document is his/her Last Will & Testament.

11. Briefly describe the ways in which a will may be revoked.Physical Act. Burning, tearing or obliterating it.

Subsequent Writing. Wholly or partially revokes the will with a writing by the testator that either amends (codicil) or revokes the previous will.

Operation of Law. Marriage, divorce, or annulment or birth of a child can amend or revoke.12. What is a trust and what are its essential elements?A trust is an arrangement where property is transferred from one person to a trustee who will administer trust assets to another party for their benefit. Can be made for any purpose. Elements.Designated beneficiary or beneficiariesDesignated trusteeSufficiently identified fund to enable title to pass to the trusteeActual delivery by the settlor or grantor to the trustee with intention of passing title

13. What is the purpose of a spendthrift trust?A restrictive trust that prevents the beneficiary(ies) from being careless with the trust assets.

Some legislative provisions prohibit creditors from attaching to trusts.

Ex. If Grantor creates a trust for Child with a spendthrift provision, and Child gets into credit card debt, the credit card companies cannot go after the trust assets to settle the debt.

14. What is a trustee? Briefly describe the duties and powers of a trustee.A trustee is the person or entity holding and protecting the trust property. Trustee powers are usually set forth in the trust itself.

Trustees:Must act with honesty, good faith, and prudence in preserving and administering the trust;Must act only in exclusive interest of the beneficiary; Must keep accurately clear records on accounts and make them available to the beneficiary; Must keep personal assets separate; Must pay to an income beneficiary the proper amount at the appropriate intervals; and Must preserve trust assets.