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Topic 1: Product Design List and describe briefly the elements of Product Design. Select one and apply it to a product you would like to see created in the marketplace. Topic 2: Service Design List and describe briefly the elements of Service Design. Consider a service industry and create a short service blueprint, a series of events that has at least 5 steps. Then describe each step with a short paragraph under each step. Topic 3: VCA, RBV, and SWOT Analyses Discuss how you can use VCA, RBV, and SWOT analyses to gain a stronger sense of what might be a firm’s key building blocks are for a successful strategy. Choose a Fortune 1000 company to demonstrate these aforementioned analyses. Please remember to use APA citation (text and list references) to further validate your initial responses. Take time to review the responses of your classmates and provide your feedback. Topic 4: The concept of best practices is simple: Do not recreate the wheel. For this week's Discussion, please research and find an article relating to best practices that you find truly interesting. Find a company or situation that created a best practice that others follow, or find a best practice that was implemented and proved effective, efficient, and innovative. Answer the following questions relating to the article and your own experience with best practices: Please describe the background for the article you researched and explain why this particular best practice scenario appealed to you. What did you learn from the situation that you could apply to your own life? Best practices are for not only our professional lives, but our personal lives as well. Please describe a situation in your life that needed some type of improvement and, after observing someone else in a similar situation handle things differently, how you decided to implement your own best practice. Is this best practice still effective, or have you improved it? Second exam Continue Corporation …. (Read about this take over on page 1087 important ) The difference of public company and private company is that public company’s shares are freely transferable and everyone can buy the shares from public market . Merger of acquisiton - ( take over ) is the long process which is based on the decision of board of directors . Poison pill – deters hostile takeover attempts by threatening the raider and its shareholders with severe dilutions in the value of the shares they hold In the Paramount case – the acquired company is <Time> what decision did the directors of Time make , preservation , long term shareholders value, If directors make a decision based on their interest rather than company’s interest , they will violate business judgment rule and will be held liable for that If the company create a long run acquisition strategy and follow it that should be good in the court , in this case the time had long run strategy to expand their business . So they can accept the lower price but ...

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Topic 1: Product Design List and describe briefly the elements of Product Design. Select one and apply it to a product you would like to see created in the marketplace. Topic 2: Service Design List and describe briefly the elements of Service Design. Consider a service industry and create a short service blueprint, a series of events that has at least 5 steps. Then describe each step with a short paragraph under each step. Topic 3: VCA, RBV, and SWOT Analyses Discuss how you can use VCA, RBV, and SWOT analyses to gain a stronger sense of what might be a firm’s key building blocks are for a successful strategy. Choose a Fortune 1000 company to demonstrate these aforementioned analyses. Please remember to use APA citation (text and list references) to further validate your initial responses. Take time to review the responses of your classmates and provide your feedback. Topic 4: The concept of best practices is simple: Do not recreate the wheel. For this week's Discussion, please research and find an article relating to best practices that you find truly interesting. Find a company or situation that created a best practice that others follow, or find a best practice that was implemented and proved effective, efficient, and innovative.
Answer the following questions relating to the article and your own experience with best practices: Please describe the background for the article you researched and explain why this particular best practice scenario appealed to you. What did you learn from the situation that you could apply to your own life? Best practices are for not only our professional lives, but our personal lives as well. Please describe a situation in your life that needed some type of improvement and, after observing someone else in a similar situation handle things differently, how you decided to implement your own best practice. Is this best practice still effective, or have you improved it? Second exam Continue Corporation …. (Read about this take over on page 1087 important ) The difference of public company and private company is that public company’s shares are freely transferable and everyone can buy the shares from public market . Merger of acquisiton - ( take over ) is the long process which is based on the decision of board of directors . Poison pill – deters hostile takeover attempts by threatening the raider and its shareholders with severe dilutions in the value of the shares they hold In the Paramount case – the acquired company is <Time> what decision did the directors of Time make , preservation , long term shareholders value, If directors make a decision based on their interest rather than company’s interest , they will violate business judgment rule and will be held liable for that
If the company create a long run acquisition strategy and follow it that should be good in the court , in this case the time had long run strategy to expand their business . So they can accept the lower price but with long Run strategy . Tender offer - is the offer that is above the asking price ( premume price ) (Read page 1081 business judgment rule ) If there are : absent bad fait, fraud, or breach of fiduciary duty , the judgment of board of directors is conclusive ; three requirements …… reasonable investigation, rational basis , no conflict of interest (read page 1091 conflicting interest transaction ) Conflict of interest may arise when the directors or officers with a conflict of interest my prefer his own interest over those of the corporation . Under the MBCA corporation There is no conflict of interest when 1. The transaction has been approved by a majority of informed, disinterested directors , 2. The transaction has been approved by a majority of the shares held by informed, disinterested shareholders , or 3. The transaction is fair to corporation . Even if first two requirements are satisfied , the court will void the transaction if the third one is missing . Generally, unanimous approval of an interested person transaction by informed shareholders conclusively releases an interested director or officers from liability , even if transaction is unfair to the corporation. ( read page 1093 usurpation of a corporate opportunity lecture # 6 after 1hour 58min ) As a fiduciaries, directors and officers are liable to their
corporation for usurping ( stealing ) corporate opportunities . ( read page 1092 Sarbanes- Oxley ) after 2 hour 1 min Congress included in the Sarbanes – Oxley Act of 2002 a section generally prohibiting public companies from making loans to their directors or officers. But if the corporation is not a public company or if the loan is made to a nonexecutive , the SOA doesn’t prohibit the corporate loan . ( read page 1095 oppression of minority shareholders ( freeze out) ) after 2 hour 6 min oppression may occur when directors of close corporation who are also the majority shareholders pay themselves high salaries yet refuse to pay dividends or to hire minority shareholders as employees of the corporation. One method of oppression is freeze out - the article of merger says that only the shareholders of the new corporation will survive as shareholders of the surviving new corporation ; the shareholders of the old corporation will receive cash only . The special term for a freeze out of shareholders of publicly owned corporations is – Going private ( read page 1096 trading inside information ) Securities Regulation, the illegality of insider trading is already federal law under the Security Exchange Act ( read page 1098 directors and officers liability for torts and crimes ) The liability of the corporation. For torts, the vicarious liability rule of respondeat superior applies to corporations . Directors and officers are personally liable when they commit torts or crimes during the performance of their corporate duties. The directors or officers are usually not liable for the torts of employees of the corporation, since corporation not a director
or the officer, is the principle but if they authorizes the torts but not involved they will have criminal liability. (read page 1102 insurance and indemnification ) to encourage persons to become directors, corporation indemnify them for their outlays associate with defending lawsuit brought against them and paying judgments and settlements amount . it is the same as to purchase insurance to protect themselves against lawsuit. ( read page 1108 share. Meetings and conduct meeting just understand the concept) Conduct of meetings : to conduct business at shareholders’ meetings, a quorum aof outstanding shares must be represented at the meeting . If the approval of more than one class of shares is required, a quorum of each class of shares must be present . A Quorum is a majority of shares outstanding, unless a greater percentage is established in the article ( read page 1122 and 1123 dividends) there are two type of dividends : cash and share – look at the book ( read page 1124 share repurchases ) A corporation may also distribute its assets by repurchasing its shares from its shareholders , it can be either redemption or open market repurchase Review first exam on the march 25 lecture , multiple choice questions ( Iphone) Securities Definition The Howey test states that an investment contract is an
investment of money in a common enterprise with an expectation of profits solely from the efforts of others In order to satisfy the definition of securities it should me met to these three attributes If anyone violate HOWEY TEST ( security law ) the SEC will come after them some cases it will end up appearing in the jail . One of the violations is trading inside information : about the rate of securities and so on Basic and fundamental distinctions of 1933 and 1934 acts are that 1934 has ongoing reporting requirements ( all the time companies do ongoing reporting about their financial statements for exp. 10K is under 34 act and so on ), under the 1933 act it is when you issue the shares , so the inssuance of the shares subject to 1933 act . First time you sell your share to the public , that initial public offering is called IPO, so if you have an IPO you fall under 1933 act Important Materials also highlitied in the book starts page 1140 There are certain exemptions that companies will not only offers their securities for investors , but also state residents ( single investor) in this case the company has to go all of the steps that was described that they did for investors . And there is a specific rule ( page 1150 ) called 506 rule , which is not statue , it is a rule . that is saying that there are two requirements for selling securities : in the book Page 1150 rule 506 ) 1934 act is about financial reports , so 10q is quarterly financial statement , 10k is annual report, 8k is special events is not gonna affect financial report that investor should know
about that , 14A proxy statement . Employment law Employee at will – being employee you can leave the company any time unless you have specific contract with them not to leave the company in certain period of time and vise versa employer can fire you any time , so you can be fired and you can quit with no reason any time . But - if you are discriminated based on ; race , age, religion , gender , disability , ethnicity you are protected by law Under older worker protection act ( ADEA) prohibits employment discrimination against persons 40 years of age or older. Collective bargaining is a good system because you have a group negosiating or one entity negosiating on behalf of entire employee group where as each individual negosiating own her own that wont have that collective bargaining power . Business Ethics Kantian Ethics? Abiding by the rules applied to others in making decisions. The applicability of "do unto others as you would have them do unto you." All cases should be treated alike. Someone who believes that the principles of justice and moral duties are based on universal rules, and that the actor must abide by the same rules being applied to others, believes in which moral theory
Rawls's social justice theory includes which of the following? the belief that the moral rules should be determined by persons who have a "veil of ignorance" about their place or station in society The moral theory of ethical relativism can best be characterized by: the belief that a person must decide what course of action is proper based on that person's own set of beliefs or feelings the maximizing profits theory The theory of business social responsibility that holds that a business owes duties solely to produce the highest return for its shareholders is: A business that is concerned solely with the financial implications of alternate courses of action is applying which theory of the social responsibility of business? Rule of corporations When the board of directors opposed the tender offer , and shareholders of target company losses the opportunity to sell their shares with tender offer , they may use the directors but the court will not find directors liable for opposing the tender offer because the business judgment rule applies to a board’s decision to oppose a tender offer . But if directors actions indicate that they opposed the tender offer in order to preserve their jobs , they will be liable to the corporation. If directors make a decision based on their interest rather than company’s interest , they will violate business judgment rule and will be held liable for that Business judgment rule
If there are : absent bad fait, fraud, or breach of fiduciary duty , the judgment of board of directors is conclusive ; three requirements - …… reasonable investigation, rational basis , no conflict of interest Conflict of interest Conflict of interest may arise when the directors or officers with a conflict of interest my prefer his own interest over those of the corporation Generally, unanimous approval of an interested person transaction by informed shareholders conclusively releases an interested director or officer from liability even if transaction is unfair to the corporation. Usurpation of a corporate opportunity As a fiduciaries, directors and officers are liable to their corporation for usurping ( stealing ) corporate opportunities the Sarbanes – Oxley Act of 2002 Congress included in the Sarbanes – Oxley Act of 2002 a section generally prohibiting public companies from making loans to their directors or officers. But if the corporation is not a public company or if the loan is made to a nonexecutive , the SOA doesn’t prohibit the corporate loan . Oppression of minority shareholders ( freeze out) oppression may occur when directors of close corporation who are also the majority shareholders pay themselves high salaries yet refuse to pay dividends or to hire minority shareholders as employees of the corporation. One method of oppression is (private going) freeze out - the article of merger says that only the shareholders of the new corporation will survive as shareholders of the surviving new
corporation ; the shareholders of the old corporation will receive cash only . Trading inside information Securities Regulation, the illegality of insider trading is already federal law under the Security Exchange Act Directors and officers liability for torts and crimes The liability of the corporation. For torts, the vicarious liability rule of respondeat superior applies to corporations . Directors and officers are personally liable when they commit torts or crimes during the performance of their corporate duties. The directors or officers are usually not liable for the torts of employees of the corporation, since corporation not a director or the officer, is the principle but if they authorizes the torts but not involved they will have criminal liability. Rules of Security Definition The Howey test states that an investment contract is an investment of money in a common enterprise with an expectation of profits solely from the efforts of others In order to satisfy the definition of securities it should me met to these three attributes If anyone violate HOWEY TEST ( security law ) the SEC will come after them some cases it will end up appearing in the jail .
One of the violations is trading inside information : about the rate of securities and so on Basic and fundamental distinctions of 1933 and 1934 acts are that 1934 has ongoing reporting requirements ( all the time companies do ongoing reporting about their financial statements for exp. 10K is under 34 act and so on ), under the 1933 act it is when you issue the shares , so the inssuance of the shares subject to 1933 act . First time you sell your share to the public , that initial public offering is called IPO, so if you have an IPO you fall under 1933 act 1933 Act Under the 1933 Securities Act, a person responsible may be held liable for: 1. intentional fraud, 2. a material omission or misstatement 3. failure to file a registration statement or deliver a prospectus as required by law Section 5 of the 1933 Act states the basic rules regarding the timing, manner, and content of offers and sales . it creates three important periods of time in the life of a securities offering: 1. The pre –filling period , 2. The waiting period, 3. The post effective period Under the rule 506 , which part of securities act regulation D , investors must be qualified to purchase the securities. They have to be either accredited investors or unaccredited investors who has a knowledge and experience in financial and business matter. And they should sign an investment latter verifying that they are qualifying . Accredited – institutional investors , high level insider of issuer, . It can sell to an unlimited number of accredited
purchasers . Unaccredited – should be no more than 35 purchasers who have sufficient investment knowledge and experience Small offering exemptions Section 3(b) and 4(6) of the 1933 Act permit the SEC to exempt from registration any offering by an issuer not exceeding 5 million. State securities law may require registration , however. Rule 504 of registration D allows a nonpublic issuer to sell up to 1 million of securities in a 12-months period and avoid registration . it must be a nonpublic issuer under the Securities Exchange Act Rule 505 of registration D allows any issuer to sell up to 5$ million of securities in 12 months period and avoid registration. Liability for defective Registration statements Section 11 of the 1933 Act provides civil liabilities for damages when a 1933 Act registration statement on its effective date misstates or omits a material fact. If purchaser find any of these in the registration , the only thing that she or he has to prove is that the defendant is in one of classes of persons liable under section 11. Defendant can escape liability under section 11 by proving that the purchaser knew of the misstatement or omission when she purchased the security. Or defendant may raise due diligence defense . Most defendants must prove that after a reasonable investigation they had reasonable grounds to believe and did believe that the registration statement was true and contained no omissions of material fact .
1934 Act 1934 Act requires periodic discloser by issuers with publicly held equity securities. Three types of issuer must file such report 1. whose total assets exceed 10 million , and has at least 500 sec. holders 2. an issuer whose securities are traded on national securities exchange 3. An issuer who has made a registered offering of securities under the 1933 Act Proxy Solicitation Regulation The 1934 Act regulates the solicitation of proxies. Regulation 14 A requires any person soliciting proxies from holders of securities registered under 1943 Act to furnish each holder with proxy statement containing voting information . 1934 act rule 10b-5 violation( it is very important provision ) as know as intifraud provision requirements 1. misstatement or omission of Material fact 2. Materiality 3. Scienter 4. Other elements 5. Trading on inside information Recap - you have to show a material misstatements of omission of a material fact , you have to also show that there was a scienter ( intended to have a fraud or some kind of gross neglagens involved ), You have to show that there was an actual purchase or sells during the period of time when that misstatements and omissions happened, and eventually you have to show that you
relied on the misstatements of material fact that results to your loss. 10b-5 applies not just a financial statement , 10b-5 violation can also creates when CEO or high executive makes material misstatements through media Trading on inside information When does an insider breach the fiduciary duty of confidentiality 1. When the insider uses entrusted corporate information for his personal benefit 2. When the insiders discloses the entrusted corporate information to someone other than for corporate purposes and the insider receives a personal benefit. When does an insider not breach the fiduciary duty of confidentiality 1. when the insider discloses the entrusted corporate information to someone who needs the information for corporate purposes 2. when the insider doesn’t receive personal benefit by disclosing or using the entrusted corporate information 3. When corporation doesn’t have a proper business purpose for keeping the information confidential Regulation FD is different 10b-5 , 10b-5 is saying stuff that is with knowledge materially false or omitting so it is not 10b-5 anymore , it is not inside trading . it is trying to say hey I have got this extra information I am in a share with this big investor
,( it make sense you take care of your biggest customer ), but you can not do it , you cant selectively disclosed information to one group of share holders at the expense of the other . and why is that - if there is no regulation FD , The CEO can share the information with some group of shareholders but not with every shareholders which is against the law of security - that says everybody should be taking care of equally . if selective discloser took place intentionally , there is a remedy to fix it only if issuer must make public discloser at the same time within 24 hours . Foreign corrupt practices act If someone from any companies is bribing foreign government official that person fall within FCPA liability . The requirements : it has to be to a government official ( any employment of government) , the consequences are huge penalties even jail time . Bribe is something that is not facilitate payments . or anything that facilitating payments is not a bribe. Ethics and Social Responsibility of Business – Couldn’t find rules Rule of Employment
Employee at will – being employee you can leave the company any time unless you have specific contract with them not to leave the company in certain period of time and vise versa employer can fire you any time , so you can be fired and you can quit with no reason any time . But - if you are discriminated based on ; race , age, religion , gender , disability , ethnicity you are protected by law Protecting the health safety and well-being of workers and their families Workers’ compensation Compensation is that employee recover only for work related injuries . To be work related 1. the injury must be arise out of the employment , 2. And happen in course of employment . We need to prove only this two things . it has nothing to do with negligence . The employee will collect for all work-related injuries, and will not need to prove negligence on the part of the employer. Occupational Safety and health act The most important measure directly regulating workplace safety is the federal Occupational Safety and health act of 1970, With its general duty clause imposes a duty on employers to provide their employees with a workplace and jobs free form recognized hazards that may cause harm. Employers are subject to having their workplaces inspected under the Act. Even though the Act contains numerous specific safety standards, employers must also provide a work environment that is free from recognized hazards that could cause death or serious injury. Employers are required to post notices in the workplace informing workers of their rights under the Act.
Family and medical leave act ( FMLA) In general this act covers those employed for at least 12 months, and for 1250 hours during those 12 months , by an employer employing 50 or more employees . Employees are covered when there is following reasons 1. Birth of child , 2. Adoption of child , 3.need care for a spouse with a serious health conditions, 4. Employee’s own serious health conditions Protecting Wages , pensions, and benefits Unemployment Compensation States of the condition the receipt of benefit on the recipient’s having worked for a covered employer for a specific time period and/or having earned a certain minimum income over such a period. People are ineligible for benefits if voluntarily quit , fired for bad conduct , fail to seek suitable new work . Employee Retirement Income Security Act ( ERISA ) ERISA doesn’t require employers to establish or fund pension plans or doesn’t set benefits levels. Instead, it tries to check abuses and to protect employees’ expectations that promised pension benefits will be paid. Besides this ERISA imposes other things also The Fair labor standards Act ( FLSA) FLSA regulates wages and hours by entitling covered employees to 1) A specified minimum wage whose amount changes over time , and 2) a time and half rate for work exceeding 40 hours
per week FLSA also forbids oppressive child labor by any employer engaged in interstate commerce , and also forbids interstate shipment of goods produced in an establishment where oppressive child labor occurs . Oppressive child labor includes : 1) below age of 14, 2) 14-15 , unless they work in occupation specifically approved by department of labor . 3) 16-17 particularly hazardous by the labor department . Collective bargaining is a good system because you have a group negotiation or one entity negotiation on behalf of entire employee group where as each individual negotiation own her own that wont have that collective bargaining power Protecting equal opportunity The equal pay act ( EPA) The equal pay act ( EPA) which forbids sex discrimination regarding pay, was a 1963 amendment to the FLSA. Unlike the FLSA , the EPA covers executive , administrative, and professional employees. The typical EPA case involves woman who claims that she has received lower pay than a male employee performing the equal work for the same employer. Equal work requirement is met : 1) Equal effort 2) equal skills , 3) Equal responsibility , 4) similar working conditions . Title 7 Title 7 of the 1964 Civil Rights Act prohibits discrimination based on Race, color, national origin, religion, sex . Even though the term “ sexual harassment” doesn’t appear in the text of Title 7, courts have long held that an employer may be liable if it allows its employees to be subjected to unwelcome sexual
advances, verbal or physical conduct of a sexual nature. Two types. 1) Quid Pro quo sexual harassment , in which a supervisor makes some express or implied linkage between an employee’s submission to sexually oriented behavior and a tangible job consequences. Employer liable under the Title 7 if harassment took place within the scope of their employment, otherwise it is Frolic. 2) Hostile environment harassment conduct is covered by Title 7 which prohibits the employer from allowing an employee to be subjected to unwelcome, sex-related behavior that can change the conditions of her employment and create an abusive work working environment. It can also be inappropriate comments by employees . Age is not covered by title 7 Title 7 covers all employers employing 15 or more employees and engaging in an industry affecting interstate commerce . Title 7 covers organizations , not individuals . How plaintiffs in Title 7 cases prove that their employer discriminated against them varies depending on the theory of discrimination. There are 4 different defenses against Title 7 : 1) Same decision defense 2) Bona fide seniority system , 3) The various “merit” defense , and 4) The BFOQ defense . The Age Discrimination in Employment Act (ADEA) Under older worker protection act ( ADEA) prohibits employment discrimination against persons 40 years of age or older. 1) engage in an industry affecting interstate commerce 2) at least 20 persons. Its procedures and remedies are the same as for Title 7 The Americans with Disability Act ( ADA) ADA prohibits discrimination against people who have disabilities . Its procedures and remedies are the same as for Title 7 . Under the Americans with Disabilities Act, an employer is required to provide reasonable accommodations to enable a disabled person to perform a job Protecting Employee privacy
Employee Polygraph protection Act The Employee Polygraph Protection Act of 1988 (EPPA) generally prevents employers from using lie detector tests, either for pre-employment screening or during the course of employment, with certain exemptions. Employers generally may not require or request any employee or job applicant to take a lie detector test, or discharge, discipline, or discriminate against an employee or job applicant for refusing to take a test or for exercising other rights under the Act. In addition, employers are required to display the EPPA poster in the workplace for their employees. Job security The Doctrine at employment at will – Breach of an Implied Covenant of Good Faith and Fair Dealing In wrongful dismissal cases based on an implied covenant of good faith and fair dealing, the discharged employee typically contends that the employer has indicated in various ways that the employee has job security and will be treated fairly. For example, long time employees who have consistently received favorable evaluations might claim that their length of service and positive performance reviews were signs that their job would be secure as long as they performed satisfactorily. From the case of SEC Vs. EDAWEDS SEC filed suet and claim under 33 act and 34 act. SEC saying you are violating both acts 1. in a form of issuance and 2. in the form of ongoing reporting , specifically you are engaged in a fraud and we gonna nail you antifraud previsions under 33 act section 5 ( page 1145 you
will have your IPO after being all of these satisfied - ) and under 34 act 10 b5 SEC mission is to protect overage investor and lower court found guilty bad guys but supreme court , based on the definition of security HOWEY test, says….. (read the case ) Does the fixed return constitute security . Is there a risk for investors Just the fact that it was a fix return is not enough it should satisfy the definition of security Howey test My brief Trial court said that there was an investment contract within the meaning of the federal securities laws and held Edwards to be liable for the damages because they had violated the registration requirements of section 5 of the Securities act of 1933 and antifraud previsions of the 1933 and 1934 securities act . Edwards and ETS appealed and the Appeal court said that since it was not corresponding to Howey test it was a contractual entitlement to the return than securities , so they didn’t violate the law of securities . SEC Asked the supreme court to review - supreme court states that an investment scheme promising a fix rate of return can be an “ investment contract” and thus a “ security” subject to the federal securities laws .
Rule of corporations When the board of directors opposed the tender offer , and shareholders of target company losses the opportunity
to sell their shares with tender offer , they may use the directors but the court will not find directors liable for opposing the tender offer because the business judgment rule applies to a
board’s decision to oppose a tender offer . But if directors actions indicate that they opposed the tender offer in order to preserve their jobs , they will be liable to
the corporation. If directors make a decision based on their interest rather than company’s interest , they will violate business judgment rule and will be held liable for that Business
judgment rule If there are : absent bad fait, fraud, or breach of fiduciary duty , the judgment of board of directors is conclusive ; three requirements -­‐ …… reasonable investigation, rational
basis , no conflict of interest Conflict of interest Conflict of interest may arise when the directors or officers with a conflict of interest my prefer his
own interest over those of the corporation Generally, unanimous approval of an interested person transaction by informed shareholders conclusively releases an interested director or officer from liability even if transaction is
unfair to the corporation. Usurpation of a corporate opportunity As a fiduciaries, directors and officers are liable to their corporation for usurping ( stealing ) corporate opportunities
the Sarbanes – Oxley Act of 2002 Congress included in the Sarbanes – Oxley Act of 2002 a section generally prohibiting public companies from making loans to their directors or officers.
But if the corporation is not a public company or if the loan is made to a nonexecutive , the SOA doesn’t prohibit the corporate loan . Oppression of
minority shareholders ( freeze out) oppression may occur when directors of close corporation who are also the majority shareholders pay themselves high salaries yet refuse to pay dividends or to hire minority
shareholders as employees of the corporation. One method of oppression is (private going) freeze out -­‐ the article of merger says that only the shareholders of the new corporation will
survive as shareholders of the surviving new corporation ; the shareholders of the old corporation will receive cash only . Trading inside information Securities Regulation, the illegality of insider trading
is already federal law under the Security Exchange Act Directors and officers liability for torts and crimes The
liability of the corporation. For torts, the vicarious liability rule of respondeat superior applies to corporations . Directors and officers are personally liable when they commit torts or crimes during the performance of their
corporate duties. The directors or officers are usually not liable for the torts of employees of the corporation, since corporation not a director or the officer, is the principle but if they
authorizes the torts but not involved they will have criminal liability. Rules of Security Definition The Howey test
states that an investment contract is an investment of money in a common enterprise with an expectation of profits solely from the efforts of others In order to satisfy the
definition of securities it should me met to these three attributes If anyone violate HOWEY TEST ( security law ) the SEC will come after them some cases it will end
up appearing in the jail . One of the violations is trading inside information : about the rate of securities and so on Basic and fundamental distinctions of 1933
and 1934 acts are that 1934 has ongoing reporting requirements ( all the time companies do ongoing reporting about their financial statements for exp. 10K is under 34 act and so on ),
under the 1933 act it is when you issue the shares , so the inssuance of the shares subject to 1933 act . First time you sell your share to the public , that
initial public offering is called IPO, so if you have an IPO you fall under 1933 act 1933 Act Under the 1933 Securities Act, a person responsible may be held liable for: 1. intentional fraud, 2. a material omission or misstatement 3. failure to file a registration statement or deliver a prospectus as required by law
Section 5 of the 1933 Act states the basic rules regarding the timing, manner, and content of offers and sales . it creates three important periods of time in
the life of a securities offering: 1. The pre –filling period , 2. The waiting period, 3. The post effective period Under the rule 506 , which part of securities act
regulation D , investors must be qualified to purchase the securities. They have to be either accredited investors or unaccredited investors who has a knowledge and experience in financial and business matter. And they
should sign an investment latter verifying that they are qualifying . Accredited – institutional investors , high level insider of issuer, . It can sell to an unlimited number of accredited
purchasers . Unaccredited – should be no more than 35 purchasers who have sufficient investment knowledge and experience Small offering exemptions Section 3(b) and 4(6) of
the 1933 Act permit the SEC to exempt from registration any offering by an issuer not exceeding 5 million. State securities law may require registration , however. Rule 504 of registration D
allows a nonpublic issuer to sell up to 1 million of securities in a 12-­‐months period and avoid registration . it must be a nonpublic issuer under the Securities Exchange Act Rule 505 of
registration D allows any issuer to sell up to 5$ million of securities in 12 months period and avoid registration. Liability for defective Registration statements Section 11 of the
1933 Act provides civil liabilities for damages when a 1933 Act registration statement on its effective date misstates or omits a material fact. If purchaser find any of these in the registration , the
only thing that she or he has to prove is that the defendant is in one of classes of persons liable under section 11. Defendant can escape liability under section 11
by proving that the purchaser knew of the misstatement or omission when she purchased the security. Or defendant may raise due diligence defense . Most defendants must prove that after a reasonable investigation
they had reasonable grounds to believe and did believe that the registration statement was true and contained no omissions of material fact .
1934 Act 1934 Act requires periodic discloser by issuers with publicly held equity securities. Three types of issuer must file such report 1. whose total assets exceed
10 million , and has at least 500 sec. holders 2. an issuer whose securities are traded on national securities exchange 3. An issuer who has made a registered offering of securities under the
1933 Act Proxy Solicitation Regulation
The 1934 Act regulates the solicitation of proxies. Regulation 14 A requires any person soliciting proxies from holders of securities registered under 1943 Act to furnish each holder with
proxy statement containing voting information . 1934 act rule 10b-­‐5 violation ( it is very important provision ) as know as intifraud provision requirements
1. misstatement or omission of Material fact 2. Materiality 3. Scienter 4. Other elements 5. Trading on inside information Recap -­‐ you have
to show a material misstatements of omission of a material fact , you have to also show that there was a scienter ( intended to have a fraud or some kind of gross
neglagens involved ), You have to show that there was an actual purchase or sells during the period of time when that misstatements and omissions happened, and eventually you have
to show that you relied on the misstatements of material fact that results to your loss. 10b-­‐5 applies not just a financial statement , 10b-­‐5 violation can
also creates when CEO or high executive makes material misstatements through media Trading on inside information
When does an insider breach the fiduciary duty of confidentiality 1. When the insider uses entrusted corporate information for his personal benefit 2. When the
insiders discloses the entrusted corporate information to someone other than for corporate purposes and the insider receives a personal benefit. When does
an insider not breach the fiduciary duty of confidentiality 1. when the insider discloses the entrusted corporate information to someone who needs the information for corporate purposes 2. when the insider doesn’t receive
personal benefit by disclosing or using the entrusted corporate information 3. When corporation doesn’t have a proper business purpose for keeping the information confidential
Regulation FD is different 10b-­‐5 , 10b-­‐5 is saying stuff that is with knowledge materially false or omitting so it is not 10b-­‐5 anymore , it is not inside trading . it
is trying to say hey I have got this extra information I am in a share with this big investor ,( it make sense you take care of your biggest customer ), but
you can not do it , you cant selectively disclosed information to one group of share holders at the expense of the other . and why is that -­‐ if there is no
regulation FD , The CEO can share the information with some group of shareholders but not with every shareholders which is against the law of security -­‐ that says everybody should be taking
care of equally . if selective discloser took place intentionally , there is a remedy to fix it only if issuer must make public discloser at the same time within 24 hours .
Foreign corrupt practices act If someone from any companies is bribing foreign government official that person fall within FCPA liability . The requirements : it has to be to a government
official ( any employment of government) , the consequences are huge penalties even jail time . Bribe is something that is not facilitate payments . or anything that facilitating payments is
not a bribe. Ethics and Social Responsibility of Business – Couldn’t find rules
Rule of Employment Employee at will – being employee you can leave the company any time unless you have specific contract with them not to leave the company in
certain period of time and vise versa employer can fire you any time , so you can be fired and you can quit with no reason any time . But -­‐
if you are discriminated based on ; race , age, religion , gender , disability , ethnicity you are protected by law Protecting the
health safety and well-­‐being of workers and their families Workers’ compensation Compensation is that employee recover only for work
related injuries . To be work related 1. the injury must be arise out of the employment , 2. And happen in course of employment . We need to prove only this two
things . it has nothing to do with negligence . The employee will collect for all work-­‐related injuries, and will not need to prove negligence on the part of the employer.
Occupational Safety and health act The most important measure directly regulating workplace safety is the federal Occupational
Safety and health act of 1970, With its general duty clause imposes a duty on employers to provide their employees with a workplace and jobs free form recognized hazards that may cause harm.
Employers are subject to having their workplaces inspected under the Act. Even though the Act contains numerous specific safety standards, employers must also provide a work environment that is free from
recognized hazards that could cause death or serious injury. Employers are required to post notices in the workplace informing workers of their rights under the Act.
Family and medical leave act ( FMLA) In general this act covers those employed for at least 12 months, and for 1250 hours during
those 12 months , by an employer employing 50 or more employees . Employees are covered when there is following reasons 1. Birth of child , 2. Adoption of child , 3.need care
for a spouse with a serious health conditions, 4. Employee’s own serious health conditions
Protecting Wages , pensions, and benefits Unemployment Compensation States of the condition the receipt of
benefit on the recipient’s having worked for a covered employer for a specific time period and/or having earned a certain minimum income over such a period. People are ineligible for benefits if voluntarily quit
, fired for bad conduct , fail to seek suitable new work . Employee Retirement Income Security Act ( ERISA ) ERISA doesn’t require
employers to establish or fund pension plans or doesn’t set benefits levels. Instead, it tries to check abuses and to protect employees’ expectations that promised pension benefits will be paid. Besides this
ERISA imposes other things also The Fair labor standards Act ( FLSA) FLSA regulates wages and hours by entitling covered employees to
1) A specified minimum wage whose amount changes over time , and 2) a time and half rate for work exceeding 40 hours per week FLSA also forbids oppressive child labor by
any employer engaged in interstate commerce , and also forbids interstate shipment of goods produced in an establishment where oppressive child labor occurs . Oppressive child labor includes : 1) below age of 14,
2) 14-­‐15 , unless they work in occupation specifically approved by department of labor . 3) 16-­‐17 particularly hazardous by the labor department .
Collective bargaining is a good system because you have a group negotiation or one entity negotiation on behalf of entire employee group where as each individual negotiation own her
own that wont have that collective bargaining power Protecting equal opportunity The equal pay
act ( EPA) The equal pay act ( EPA) which forbids sex discrimination regarding pay, was a 1963 amendment to the FLSA. Unlike the FLSA , the EPA covers executive , administrative, and professional
employees. The typical EPA case involves woman who claims that she has received lower pay than a male employee performing the equal work for the same employer. Equal work requirement is met :
1) Equal effort 2) equal skills , 3) Equal responsibility , 4) similar working conditions .
Title 7 Title 7 of the 1964 Civil Rights Act prohibits discrimination based on Race, color, national origin, religion, sex . Even though the term “ sexual harassment”
doesn’t appear in the text of Title 7, courts have long held that an employer may be liable if it allows its employees to be subjected to unwelcome sexual advances, verbal or physical
conduct of a sexual nature. Two types. 1) Quid Pro quo sexual harassment , in which a supervisor makes some express or implied linkage between an employee’s submission to sexually oriented behavior and a
tangible job consequences. Employer liable under the Title 7 if harassment took place within the scope of their employment, otherwise it is Frolic. 2) Hostile environment harassment conduct is covered by Title 7 which
prohibits the employer from allowing an employee to be subjected to unwelcome, sex-­‐related behavior that can change the conditions of her employment and create an abusive work working environment. It can also be inappropriate
comments by employees . Age is not covered by title 7 Title 7 covers all employers employing 15 or more employees and engaging in an industry affecting interstate commerce
. Title 7 covers organizations , not individuals . How plaintiffs in Title 7 cases prove that their employer discriminated against them varies depending on the theory of discrimination. There are 4
different defenses against Title 7 : 1) Same decision defense 2) Bona fide seniority system , 3) The various “merit” defense , and 4) The BFOQ defense .
The Age Discrimination in Employment Act (ADEA) Under older worker protection act ( ADEA) prohibits employment discrimination against persons 40 years of age or older. 1) engage in an industry affecting interstate commerce 2) at least 20 persons. Its procedures and remedies are the same as for Title 7 The Americans with Disability Act ( ADA) ADA prohibits discrimination against people who have disabilities . Its procedures and remedies are the same as for Title 7 . Under the Americans with Disabilities Act, an employer is required to provide reasonable accommodations to enable a disabled person to perform a job
Protecting Employee privacy Employee Polygraph protection Act The Employee Polygraph Protection Act of 1988 (EPPA) generally prevents employers from using lie detector tests,
either for pre-­‐employment screening or during the course of employment, with certain exemptions. Employers generally may not require or request any employee or job applicant to take a lie detector test, or discharge, discipline,
or discriminate against an employee or job applicant for refusing to take a test or for exercising other rights under the Act. In addition, employers are required to display the EPPA
poster in the workplace for their employees. Job security The Doctrine at employment
at will – Breach of an Implied Covenant of Good Faith and Fair Dealing In wrongful dismissal cases based on an implied covenant of good faith and fair dealing, the
discharged employee typically contends that the employer has indicated in various ways that the employee has job security and will be treated fairly. For example, long time employees who have consistently received favorable
evaluations might claim that their length of service and positive performance reviews were signs that their job would be secure as long as they performed satisfactorily.
From the case of SEC Vs. EDAWEDS SEC filed suet and claim under 33 act and 34 act. SEC saying you are violating both acts 1. in
a form of issuance and 2. in the form of ongoing reporting , specifically you are engaged in a fraud and we gonna nail you antifraud previsions under 33 act section
5 ( page 1145 you will have your IPO after being all of these satisfied -­‐ ) and under 34 act 10 b5 SEC mission is to protect overage
investor and lower court found guilty bad guys but supreme court , based on the definition of security HOWEY test, says….. (read
the case ) Does the fixed return constitute security . Is there a risk for investors Just the fact that it was a fix return is not enough
it should satisfy the definition of security Howey test My brief Trial court said that there was an investment contract within
the meaning of the federal securities laws and held Edwards to be liable for the damages because they had violated the registration requirements of section 5 of the Securities act of 1933 and antifraud
previsions of the 1933 and 1934 securities act . Edwards and ETS appealed and the Appeal court said that since it was not corresponding to Howey test it was
a contractual entitlement to the return than securities , so they didn’t violate the law of securities . SEC Asked the supreme court to review -­‐ supreme court states that
an investment scheme promising a fix rate of return can be an “ investment contract” and thus a “ security” subject to the federal securities laws .
S corporation is a special type of close corporation. It is nearly treated like partnership for federal income tax. There is only 100 or fewer shareholder. Regulation for Profit Corporation: Corporation must complying with incorporation statues. Corporation may do business in many states but the relationship between corporation, shareholders and managers is regulated only by state of incorporation. Regulation of foreign and alien corporation Corporation is domestic corp. in the state that has granted its charter- it is foreign in all other states in which is doing business- and will be alien corp. in other country. Generally, state can impose its laws to foreign corp. if those laws don’t violate the constitution of USA, due process clause, and commerce clause Due process Clause: require corps to have sufficient contact with state before state exercise jurisdiction over the corporation. “when corporation veil itself of the protection of state’s law it should suffer any reasonable burden that the state imposed as a consequence of such a benefit. in other words foreign crop. Should be required to pay for the benefit that it receives from the states. Commerce clause: the power to regulate interstate commerce is given to federal government. The state has NO power to exclude
of to discriminate against foreign corp. that they are solely engage in interstate commerce. --- state may require foreign corp. doing interstate business in the state to imply the law if application of the law does not unduly burden interstate commerce. A state law regulating the activates if foreign corp. does not unduly burden interstate commerce if: 1- the law serves a legitimate state interest 2- the state has chosen the least burdensome means of promoting that interest 3- the legitimate state interest out weights the statute’s burden on interstate commerce. Doing business: to aid their determination of whether a state may constitutionally impose its laws on foreign corporation, courts traditionally use doing business concept. The court says foreign corporations are subject to follow state laws when they are doing business. Fiduciary duties- Directors and officers owe fiduciary duties to the corporation. They are the duties to act within the authority of the position and within the objectives and powers of the corporation, and to act with loyalty to the corporation. In order to determine demand futility, there must be reasonable doubt that directors are disinterested or independent, or that the transaction was the product of sound business judgment. Absent bad faith, fraud, or breach of fiduciary duty, the judgment of board of directors in conclusive. When directors and officers have complied with the business judgment rule, they are protected from liability to the corporation for their harmful decisions. (1081). Three requirements must be met for the business judgment rule to protect managers from liability: 1. The mangers must make an informed decision. 2.The managers may have no conflict of interest. 3. The managers must have a rational basis for believing that the decision is in the best interests of the corporation. Restructuring can be done by just the general partner but
converting would require consent from all owners. Partner to partner relationships have a fiduciary duty of the highest degree of loyalty; promoting mutual trust, confidence, and honesty as well as acting in good faith and fair dealing. Subject foreign corp. to be sue The international shoe minimum contact test must be met. Subjecting the corporation to suit cannot offend “traditional notion of fair play and substantial justice”. a court must weigh the corporation’s contacts with in the state against the inconvenience to the corporation of requiring it to defend a suit with in the state. Taxation A state may tax foreign corporation If such a taxation doesn’t violate the due process and commerce clause. Qualifying to do business Orders that require acceptance outside the state is not doing interstate business require qualification Isolated transaction – classified as not doing business for qualification- which is kind of business that will completed in 30 days and are unique in their business nature. (Christmas trees) Qualification requirements Qualification requirement for business that are doing interstate business for foreign corporation to apply for certificate of authority from secretary of state. Regulation of foreign corporation Piercing the corporate veil: the primary consequences of the piercing the corp. veil is that a corp. shareholders will lose their limited liability. Two requirement must exist for piercing the corp, veil 1- domination of corp. by shareholders 2- use that domination for Improper purposes. An improper purpose includes: defrauding creditors, circumventing a statute, or evading an existing obligation.”
Partnership: Duties: partners have fiduciary duty – mutual trust, confidence, and honest order. Duty to serve: undertake share of responsibility of running day to day operation -Silence partners: silent partners don’t have duty of serve but they have same liability to partnership debt as any other partners. – they merely contribute capital Duty of care: partners has duty of care – partners are not liable for loss of their honest errors – but they are liable for gross negligence, reckless conduct, international misconduct, or knowing violation of the law. Duty to Act within actual authority: partner has duty to not exceed the authority granted him by partnership agreement – partners are responsible for losses resulting from unauthorized transaction negotiated in the name of partnership. Duty of account: partners have duty to account for their use or disposal of partnership finds and partnership property as well as their receipt of any property benefit or profit without constant of other partners. Partnership property should be used for partnership purposes. Indemnified: when partner use personal acc. For purposes of partnership it is partners right to get a refund for that expense. Other duties: Confidentiality duty a partner must maintain the confidentiality of partnership information such as trade secret or a customer list. It means partner should not disclose the partnership info. Unless it is for benefit of the partnership. Interest are not transferable easily
LLC: LLC has no individual liability on LLC contracts| LLC may be member manage or manager manage; Mangers in manager manage LLC may be elected and removed by majority of members. Duties: Each member or manager has fiduciary duty of the LLC and its members; Members has limited ability to transfer rights; Members in LLC can transfer transferable interest to another person however transferee is not LLC member Member dissociate: Under RULLCA a partner has power to dissociate by withdrawing from LLC at any time. Dissociation are also caused by: members death, having a guardian appointed over her affairs, being adjudged legally in competed by court, being debtor in bankruptcy, being expelled by other member. Payment to a dissociate member: Under Rullca dissociate member has no right to force LLC to dissolve or liquidate- ; Dissociate member is not entitled to receive the value of interest until LLC dissolve. There is one exception if LLC at will and don’t to dissolve the LLC must buy his interest at fair value in 120 days from dissolved member. If LLC has term and not dissolved must continue its business and pay dissociated member value of interest within 120 days after LLC term. LLC Dissolution RULLCA has few events that that Automatically cause dissolution of the LLC: 1- juridical dissolution (event that making unlawful for the LLC business to continue) is requested by member or transferee of a member’s transferable interest 2- administrative dissolution (by secretary of state) Distribution of dissolved LLC First creditors – excess fund members contribution refund- excess fund give member fund for profit If LLC asset is not sufficient to refund creditors, creditors couldn’t claim for their funds due to Limited liability. but if
members didn’t pay their contribution to LLC creditors can sue the for that contribution amount “Nonmanaging members of a manager-managed LLC owe no fiduciary duty” “An LLC member has no individual liability on LLC contracts, unless she also signs LLC contracts in her personal capacity” Certificate of authority-If required to do intrastate business in a state, a foreign corporation must apply for a certificate of authority from the secretary of state, pay and application fee, maintain a registered office and a registered agent in the state, file an annual report with the secretary of state, and pay annual fee. Long-arm status- permits their courts to exercise (realize) jurisdiction under the decision of the International Shoe case. ??International Shoe case- in that case, Supreme Court ruled that a foreign corporation must have “certain minimum contracts” with the state such that asserting jurisdiction over the corporation does not offend “traditional notions of fair play and substantial justice.” General Statutes § 33-920 (a) provides: A foreign corporation, other than an insurance, surety or indemnity company, may not transact business in this state until it obtains a certificate of authority from the Secretary of the State. LLP & LLLP LLP: have General Partner & Limited partners General Partner: contribute capital in to the business, manage it, share in its profits, and possess unlimited liability for its obligation Limited partners: contribute capital, share profit, no management power, possess limited liability,
LLLP both general and limited partners have limited liability. In both LLP and LLLP allow partners to reduce their personal federal income tax liability by deducting limited partnership losses from their individual income tax return. General partners get grater tax shelter advantage than do limited partners. Losses of the business allocated to a general partner offset his income from any other source Losses of the business allocated to limited partners may be used to offset only income from other passive investment and only to extent limited partners are at risk, that is, to extent of their capital contribution to the limited partnership. Defective compliance with LLP statues: If a person attempting to create LLP and do not substantially comply with ULPA, limited partnership does not exist, therefore limited partnership will lose its limited liability and change the statues to unlimited liability. And in LLLP General partner will have unlimited liability if it was found defective. When a person believe that she is a limited partner but discover later that she has been designated a general partner or that the general partners have not filed a certificate of limited partnership” then “she may be liable as a general partner unless she in good faith believes she is a limited partner….. page 1018. 1. Causes a proper certificate of limited partnership to be filed with the secretary of state, or 2. Withdraws for future equity participation in the firm by filing a certificate declaring such withdrawal with the secretary of state. Rights and liabilities shared by General and limited partners: Under ULPA profits and losses are shared on the basis of the value of each partner’s capital contribution. Voting right: under ULPA there are only few actions that needs all the partner approval 1- amendment of the limited partnership agreement 2- amendment of limited partnership certificate 3-
sale or transfer of substantially all limited partnership assets outside of the ordinary course of the business – under ULPA limited partners have no voting right Admission of the new partner: under ULPA no new partner may be admitted unless all the partners have consented to the admission. – the limited partnership agreement may also provide the power or elect the new general partner in case of retirement or death of general partner. – in general ULPA does not grant much power to partners to expel the partner Pwer and right to withdraw: partners have the right to withdraw from limited partnership at any time. The Exception, however, limited partners have perpetual duration. As a result, ULPA gives the partners no right to withdraw. – under ULPA the withdrawing partner has no right to receive the value of her partnership interest means partner will not receive the value of his investment unless the limited partnership agreement provides for buyout his interest or limited partnership dissolve and liquidate. Often close corporations restrict transfer to ensure control. “Four categories of transfer restrictions: (1) rights of first refusal and option agreements, (2) buy-and-sell agreements, (3) consent restraints, and (4) provisions disqualifying purchasers.” Uses of Transfer Restrictions help a corporation and its “shareholders to maintain the balance of shareholder power in the corporation” by Buy-and-Sell agreements (1065). According to the book “Dissociated partners remain liable to partnership creditors for partnership liabilities incurred while there were partners,” unless novation occurs. “Novation occurs when two conditions are met: 1. The continuing partner release a dissociated partner form liability on a partnership debt, and 2. A partnership creditor releases the dissociated partner from liability on the same obligation” (999). Duty to Account states that “Partnership property should be
used for partnership purposes, not for a partner’s personal use” (976). The duty -Having Interest Adverse to Partnership- According the book “When a partner receives a secret profit, she has a conflict of interest, and there is a risk that she may prefer her own interests over those of the partnership” (975). According to the book “An agent has fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship.” According to a duty of loyalty “… an agent must subordinate his personal concerns by (1) avoiding conflicts of interest with the principal, and (2) not disclosing confidential information received from the principal.” Agent “may not act for both parties to a transaction without first disclosing the double role to, and obtaining the consent of, both parties” (Mallor, Barnes, Bowers, Langvardt, Page 922). “The faithless servant doctrine provides that an agent is obligated to be loyal to his employer and is prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties. To show a violation of the faithless servant doctrine, an employer must show (1) that the employee’s disloyal activity was related to the performance of his duties, and (2) that the disloyalty permeated the employee’s service in its most material and substantial part.” (Mallor, Barnes, Bowers, Langvardt, Page 925). One of the duties’ of loyalty is the duty of confidentiality. According the duty of confidentiality, an agent may not use principal’s confidential information for his/her purposes. This duty may also exist after the agency ends. private securities class action lawsuits
Utilitarian theory, assumes that people must consider the benefits and costs of their actions to everyone in society. Justice theory Rights theory, says that certain human rights are essential and must be respected by other people the major disclosure requirements of the federal securities laws. Based on securities law companies must disclose all material information to the investing public so that the public will have the necessary information to make investment decisions 1 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. Security 72) Why were the Securities Acts passed, given that ordinary contract law provides many remedies for persons who have been the victim of fraud, and other such crimes? Answer: One reason is to prevent the fraud in the first place through the liability provisions. A second is that many injured investors could not prove an ordinary fraud case, and many would not bother to file one because of the size of any potential recovery. Diff: 1 Topic: Liability Provisions of the Securities Exchange Act of 1934 Skill: Ethics and Policy 73) Is liability under Section 11 of the Securities Act of 1933 too broad? Should parties be liable even without scienter? Does the due diligence defense put too
much of the burden of proof on defendants? Answer: The result of Section 11 is that often the burden of proof is on the defendant to prove proper conduct. Where the proof is not available, the defendant will lose the suit. Diff: 1 Topic: Liability Provisions of the Securities Exchange Act of 1934 Skill: Ethics and Policy 74) Are the rules on short-swing profits under Section 16(b) of the Securities Exchange Act of 1934 too restrictive or not restrictive enough? Merely because one is a statutory insider, is it proper to limit his or her ability to make a profit on the company's stock? Alternatively, should the 6-month period be longer? What is the theory behind making the profits belong to the corporation? Answer: One rationale for the law is the difficulty of proving who had inside information at any particular time. The law assumes that the insiders do have inside information, a reasonable assumption. One idea behind the corporation having a claim to the profits is that the insiders should be devoting their efforts toward the long-term health of the company, not making profits in the short term buying and selling the company's stock. Diff: 2 Topic: Liability Provisions of the Securities Exchange Act of 1934 Skill: Ethics and Policy 75) For an investment contract, why is one of the requirements for the contract to be classified as
a security that the arrangement be one where the profits are made through the efforts of others? Answer: Where one must put her own efforts in to make a profit, such as a partner in a general partnership, one will investigate the opportunity more thoroughly. It is simply too easy to get investors to invest in a scam when the investor is promised great returns with no effort put in. Lastly, when one does the work herself, she has more control over the outcome. Diff: 2 Topic: Liability Provisions of the Securities Exchange Act of 1934 Skill: Ethics and Policy 2 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. 76) John operates a sailboat charter service in the U.S. Virgin Islands. He currently has a fleet of 10 boats and would like to have a larger fleet, but would have to obtain additional investors, which he does not want to do. He is considering having investors buy sailboats, which he would maintain and operate as part of his charter fleet. He would enter into a contract that would sell the boat to the investor and provide for the investor to pay John a monthly fee for the maintenance of the boat, and would provide for the sharing of profits between John and the investor. Discuss whether this investment is a security under the 1933 and 1934 Securities Acts.
Answer: An investment contract in which an investor expects to make a profit off the efforts of others is a security. Here, all the efforts are undertaken by John, thus this arrangement is likely a security. Diff: 2 Topic: Definition of a Security Skill: Factual Application 77) Wondercures, Inc. is a drug research and manufacturing firm. Wondercures is currently a privately held corporation. The owners of Wondercures believe that they could greatly increase the company's profitability with an infusion of new capital. This would have to come by issuing stock to additional investors. The owners of Wondercures believe that they would need about $20 million in order to carry out their expansion plans. Discuss the options available to Wondercures, and the advantages and disadvantages of each. Answer: A regular registration is expensive, but would be more attractive to investors because the stock acquired would not be subject to restrictions. Regulation A would not be available because it is limited to $5 million in a 12-month period. If Wondercures does 80 percent of its business in one state, it could qualify for the intrastate exemption, but would be restricted to issuing stock to investors in that state. Wondercures would not qualify for the small offering exemption. Wondercures could make use of a private placement. This would incur smaller transaction costs compared to a regular registration, but the stock would be restricted from resale. This would make the stock less appealing to many potential investors. Another disadvantage to
the private placement is that it can be offered to only 35 non- accredited investors. Diff: 3 Topic: Definition of a Security Skill: Factual Application 78) Mary wants to invest in some rental property near a major university. Mary approaches Sally and proposes that Sally invest half the down payment in an apartment complex. Mary would devote the majority of the efforts in managing the apartments. Sally would devote some time to managing the complex and would receive 30 percent of the profits. They plan to operate the complex as a partnership. Is Sally's investment in the apartment complex a security under the 1933 and 1934 Securities Acts? Answer: Because Sally is putting her own efforts into the enterprise and operating it as a general partnership, it would not be classified as a security. Diff: 2 Topic: Definition of a Security Skill: Factual Application 3 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. 79) Harmon, Inc. is a manufacturer of auto parts and wishes to issue new stock to raise capital. Harmon is incorporated and does all of its business in Indiana. Harmon would like to offer its stock regionally, but is flexible depending on the circumstances.
There are also several wealthy, sophisticated individuals who would like to purchase Harmon stock. Discuss the methods available to issue Harmon stock exempt from SEC registration. Answer: Harmon could use the intrastate offering exemption, but would be limited to selling to investors in Indiana. There is no dollar limit. Harmon could also use a private placement, which would also have no dollar limit, but the offering could be made only to a maximum of 35 unaccredited investors, although there is no limit on the number of accredited investors. Under rule 504, Harmon could issue up to $1 million in securities over a 12-month period, with no limit on the number of accredited or unaccredited investors. Diff: 3 Topic: Transactions Exempt from Registration Skill: Factual Application 80) Bluegrass Inc. is incorporated and does all of its business in the state of Kentucky. Bluegrass has planned to issue $5,000,000 in new stock. Bluegrass has 10 potential investors, nine of whom live in Kentucky, and one who lives in Ohio. Only one of these potential investors is accredited. Can Bluegrass qualify for any of the registration exemptions under the Securities Act of 1933? Answer: Bluegrass can qualify for a private placement. It is offering too much to qualify under Rule 504 and cannot qualify for the intrastate offering because of the investor in Ohio. Diff: 3 Topic: Transactions Exempt from Registration Skill: Factual Application
81) Smith and Company, CPAs, performed the audit work for a large corporation in connection with its registration statement. Smith and Company performed the work according to all appropriate professional standards, but the corporation had cleverly made the inventory look much greater than it actually was. Because the company did not have as much inventory as was indicated on the financial statements, the company was worth much less than it appeared to be. Smith and Company has been named in a lawsuit under Section 11 of the Securities Act of 1933. Even though Smith and Company properly performed the audit, and the fraud on the part of the corporation was such that it would not be uncovered by an audit, Smith and Company cannot prove any of this in court because all of its audit working papers and computer documentation was accidentally shredded. Discuss Smith and Company's legal situation. Answer: Under Section 11, a plaintiff needs to prove only that there was a material misstatement and that someone was injured as a result. The due diligence defense essentially places the burden of proof on Smith and Company, and even though Smith and Company did nothing wrong, it looks doubtful that they will prove their due diligence defense. Diff: 2 Topic: Liability Provisions of the Securities Act of 1933 Skill: Factual Application 4 Copyright © 2012 Pearson Education, Inc. Copyright © 2012
Pearson Education, Inc. 82) Jones is an appraiser who was hired by Monolith Corporation to appraise a number of its properties in connection with financial statements to be issued in connection with a registration statement. Because Monolith Corporation has a high turnover of investment real estate, Jones was hired again for help in preparing the annual financial statements for each of the next 2 years. It turns out that Jones was negligent in performance of all the appraisals that led to material misstatements on the financial statements of all years concerned. Jones did not know that the appraisals or financial statements were misstated. Discuss Jones' legal situation. Answer: Jones would be liable under Section 11 of the Securities Act of 1933. As an expert, he is subject to the act. Jones' negligence is sufficient for liability; intent, or scienter, need not be proven. Due diligence would be a defense, but Jones probably cannot prove it. Because of the lack of scienter, Jones would not be liable under Rule 10b-5 of the Securities Exchange Act of 1934. Diff: 3 Topic: The Securities Exchange Act of 1934 - Trading in Securities Skill: Factual Application 83) Mary is an assembly-line worker at a computer company. Mary becomes aware that an improvement is being made in the company's primary computer, which will significantly increase profits. Mary tells a friend to buy stock in the company. The friend does so and tells two
other persons to do the same. The Company's profits increase greatly, and all three who purchased stock sell at a great profit. Discuss the liability of the parties. Answer: Mary, as an insider tipper, is liable for the profits of all three purchasers, as is Mary's friend. The two remote tippees are liable for their own profits if they had inside information and knew or should have known that the information was not public. Diff: 2 Topic: Insider Trading Skill: Factual Application 84) Fred is an officer at Hill Corporation. Fred, with no inside information, sells 100 shares of Hill stock in May at $50, and in July he buys 250 shares at $40. Is Fred liable for short-swing profits? Answer: Fred is liable. Any purchase and sale can be matched, and here a $40 purchase and $50 sale occurred within 6 months of each other (of 100 shares), even though Fred could not have actually sold any of the $40 shares. Diff: 2 Topic: Short-Swing Profits Skill: Factual Application 5
Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. Corporation 72) In recent years shareholders have increasingly attempted to use shareholders' meetings as a forum to encourage corporations to operate in accordance with the views of one or some shareholders with respect to various policy issues. Common examples include environmental issues and human rights issues, especially for corporations with operations in other nations. Is this a proper forum for this particular type of activity? What are the arguments on each side of the issue? What other methods could these shareholders use to promote the viewpoints on these issues? Answer: In some cases these activities are successful in bringing about changes, as happened with some corporations in connection with overseas plants operating in "sweatshop" conditions. This is proper activity if one believes that corporations have obligations beyond simply earning the maximum profits for shareholders. Diff: 2 Skill: Ethics and Policy 73) Should shareholders encourage responsibility of corporations in which they invest, or should investors make those judgments by the choices of companies in which to invest? Which approach is more effective? Answer: There is no clear answer to whether corporate policies are more influenced by actions and views of current shareholders or by large numbers refusing
to invest in the corporation. Diff: 1 Skill: Ethics and Policy 74) If a corporation's shareholders are supposed to have ultimate control over the corporation, is it appropriate for management to get involved in proxy contests among shareholders? Under what circumstances is it most appropriate for management to get involved? Answer: In many cases, members of management are also shareholders, thus it would be difficult to preclude their involvement. Management is most appropriately involved when the issue is value to the shareholders, rather than management protection of its jobs. Diff: 2 Skill: Ethics and Policy 75) Many persons believe that it is too easy for corporations to take over other corporations, and point to the large reductions in workforces which frequently result following mergers. Should there be limits placed on the ability to lay off employees following a business combination? What are the advantages and disadvantages of limited regulation of merger activity? Answer: Many argue that mergers act as incentives for the management of a company to not become bloated, and that regulation will interfere with free market efficiency. Diff: 1 Skill: Ethics and Policy
6 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. 76) Maple Corporation wants to acquire Foodcity Corporation, a chain of supermarkets. Both corporations are publicly traded. Maple Corporation has some cash, but not a large amount, and it needs to have ample cash for its operations. How might Maple be able to acquire Foodcity? Answer: Maple could offer additional shares to the existing shareholders of Foodcity for their shares in a stock swap, merger, tender offer, or consolidation. Alternatively, Maple could borrow the money, possibly by issuing junk bonds in a leveraged buyout. Diff: 2 Topic: Mergers and Acquisitions Skill: Factual Application 77) Expansive Corporation made a tender offer of $65 per share to the shareholders of Hometown Corporation to acquire 75 percent, but no more than that, of the shares of Hometown. Because only 68 percent of the shares had been tendered in 30 days, Expansive offered $75 per share, and another 20 percent of the shares were tendered in 4 days. Expansive terminated the higher offer on the fifth day, paid $65 for all the shares tendered at that price, and paid $75 for some of the shares tendered at the higher price. Discuss Expansive's actions. Answer: Under the Williams Act, Expansive must keep the increased offer open at least 10 business days, pay the $75 price for all shares acquired, and acquire shares tendered on a pro rata
basis from all who tendered. Diff: 2 Topic: Mergers and Acquisitions Skill: Factual Application 78) Ramone is president of Rock Permanence, Inc. Flash in the Pan Corporation has just made a tender offer to the shareholders of Rock Permanence. Flash in the Pan is known for severe job cuts after takeovers, so Ramone and the other officers do the following: 1. They adopt contracts with provisions that the contracts will expire Flash in the Pan should acquire Rock Permanence. 2. They tell many shareholders that they will be hired if they do not accept the offer. Each of these shareholders is told to keep the arrangement secret and that they are one of only a select few who will be hired. 3. They distribute an article from a newspaper 2 years earlier that discussed the inept management of Flash in the Pan. They do not tell the shareholders that the publisher of the article had been successfully sued by Flash in the Pan because of false statements. 4. They send mailings to their shareholders calling the management of Flash in the Pan a "committee of the devil" and "shareholders' nightmare." Discuss the appropriateness of the four listed actions by management. Answer: There are many ways to fight a tender offer. No. 1 is probably acceptable so long as management reasonably believes these actions to be in the best interest of the corporation and its shareholders. No. 2 is not acceptable because it is fraudulent
and because it is probably not in the best interest of the corporation to hire so many people. No. 3 is at least misleading if not fraudulent. No. 4 is probably acceptable assuming that the terms used are considered to be opinions. Diff: 3 Topic: Fighting a Tender Offer Skill: Factual Application 7 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. Business Ethics 66) Beginning in about 1990, many credit card issuers began marketing more aggressively to college students on the basis that they have considerable future earning potential even though their current income is not very high. Prior to 1990, most credit card issuers required cosigners, who would typically be the students' parents. This has led to far more students incurring excessive debt. This has required some students to work longer hours while in college and to have more debt-related problems after getting out of college. Furthermore, employers are increasingly using credit information in the hiring selection process so that some students' debt problems adversely affect their ability to find a job. Evaluate the propriety of these marketing efforts. Answer: One question is who causes these problems. If the
cause is the cardholder's unwise decisions, then the issuer has done no wrong. But if the issuer is part of the cause, then the issuer might have violated the moral minimum theory because it has caused harm. Any such harm would be difficult to quantify. Utilitarianism would ask if the overall good increased from these credit cards. Diff: 2 Topic: Business Ethics and Social Responsibility of Business Skill: Ethics and Policy 67) A company is planning to promote its services heavily via telemarketing. The company has learned that the majority of those to be called are strongly opposed to receiving telemarketing calls. In addition, many of the persons who will be called are elderly who might decide to purchase the product even though they do not really need it or cannot afford it. Discuss the appropriateness of proceeding with this plan under the different theories of the social responsibility of business. Answer: The telemarketing plan is presumably aimed toward maximizing profits. Whether the plan meets the moral minimum would depend on whether the company is the cause of any harm due to unwanted telemarketing calls or elderly customers purchasing unneeded products. Under stakeholder interests, the company would need to consider the needs of its customers, many of whom might be better served by other marketing methods. Under corporate citizenship, being a good corporate citizen might include avoiding such marketing methods. Diff: 2
Topic: Business Ethics and Social Responsibility of Business Skill: Ethics and Policy 8 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. 68) Assume that a drug company has recently developed a new weight-loss drug that is available only by doctor's prescription. This drug has some significant side effects, but is quite effective for helping individuals lose weight. The drug is being heavily advertised directly to the public, resulting in large numbers of individuals contacting their doctors in order to get a prescription for the drug. Because of the side effects, this drug is intended only for persons who are severely overweight. Some of the advertising for this drug emphasizes the happiness and beauty that can result when one is slender, leading many doctors to over prescribe the drug. Discuss the drug company's actions in light of the theories of the social responsibility of business. Answer: The company's actions are presumably aimed at maximizing profits. It is likely that the moral minimum is being violated as there is likely injury that is not being compensated. The patients' needs are possibly not being addressed under the stakeholder interest theory, and the promotion of the "skinniness is godliness" belief might violate corporate citizenship. Diff: 2 Topic: Social Responsibility of Business
Skill: Ethics and Policy 69) The government has proposed demolishing 800 of 2,000 units in a low-income public housing project that has become crime-ridden and in poor repair. These 800 units will be replaced with 300 units, half of which will be for low-income families, and half for moderate- income families, resulting in fewer low-income housing units in total. Evaluate this proposal under utilitarianism. Answer: There might be more overall good if crime and other problems are reduced, but crime, as well as residents, might simply be displaced to other parts of the community. Other factors in evaluating what amounts to the overall good include the demand for low-income housing, other options for those displaced, and the current project vacancy rate, which would affect the actual numbers displaced. Diff: 2 Topic: Business Ethics Skill: Ethics and Policy 70) Compare and contrast the views held by Milton Friedman regarding the ethical responsibility of a corporate business to that of someone following the stakeholder interest theory of social responsibility. Answer: Milton Friedman asserted that in a free society, "There is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits as long as it stays within the rules of the game." To Friedman, following the "rules of the game" meant engaging in open and free competition without
deception and fraud. Someone who follows the stakeholder interest theory of social responsibility would say that, although a corporation does have an obligation to its shareholders, there are also others to whom the corporation or business owes an obligation. These others include employees, customers, suppliers, creditors, and the local community. Diff: 2 Topic: Social Responsibility of Business Skill: Ethics and Policy 9 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. Employment 61) Should there be a lower minimum wage for some workers, for example, workers under age 18? What are the arguments for and against a two-tier minimum wage? Answer: A lower minimum wage might be justified because of these workers' lack of experience. It also might allow workers to be employed who might otherwise be unable to find work. On the other hand, employers might choose to hire the younger workers at the expense of older workers who have families to support. Diff: 2 Skill: Ethics and Policy
62) The Employee Retirement Income Security Act does not require any employers to provide pension plans for their employees. Should this law be changed so that employers are required to provide at least some minimum pension plan to employees? Answer: The goal of ERISA is to ensure that any benefits promised to employees will, in fact, be paid when the employee is retired, and that employees are not otherwise misled about the benefits that they will receive. The marketplace should probably determine whether or not particular employers offer a pension plan. Diff: 2 Skill: Ethics and Policy 63) Should the law set the 40-hour workweek, given that many persons might choose to work longer hours but cannot because their employers do not want to pay overtime wages? In other words, many persons might be willing to work 45 or 50 hours a week at their regular wage rate, but cannot under the current law. This law also prevents a covered employee from working 50 hours one week and only 30 hours the other week of a 2-week pay period. Should employees be able to voluntarily work beyond the limits for regular pay if they so choose? Answer: The problem with allowing this is that employers could force employees to "choose" to work in excess of the limits without receiving the overtime pay. Diff: 2 Skill: Ethics and Policy 64) Debbie was the president and chief executive officer of RST corporation. Debbie was also a
skydiving enthusiast. She often stated that skydiving showed the worth of a person more than any other activity. On weekends, Debbie and a group of RST executives would go skydiving. Mark had been hired as a junior executive several years ago, and had performed his job well. RST needed a new vice-president of marketing to fill a vacancy caused by retirement, and Mark thought he had a good chance to get that job. Debbie asked Mark to go skydiving with her group on Saturday. Mark did not want to go, but he thought that if he did not go, it would cost him this promotion. Most, but not all, of the other vice-presidents participated in these jumps. Mark jumped and was killed when his parachute failed to open. Beth, Mark's wife, sued to collect workers' compensation for the death of Mark. What was the result? Answer: The crucial test is whether the injury was work- related. The fact that this was a regular activity conducted with a group solely from RST Corporation would support a finding that it was work-related. On the other hand, this could be viewed as a voluntary activity conducted outside of work because no one was required to attend. One might want to know if any business was discussed or conducted on these days. 10 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. Diff: 2 Topic: Workers' Compensation Acts
Skill: Factual Application 65) Mary owns a medium-size distribution business with about 20 employees. Mary had an unusual management style and from time to time would throw items at her employees. Paul was working in the warehouse one hot summer day and accidentally gave a will-call customer the wrong goods. The customer came back to the office a short while later upon discovering the problem. Mary was in the office and asked who had filled his order. The customer described Paul, whereupon Mary went to the warehouse and threw a computer printout, with stock numbers and product descriptions, at Paul, yelling, "Use this, you idiot. Maybe you can do your job then!" Paul was startled, and by reflex turned to run after Mary, but slipped when he was barely under way. Paul's back was injured when the computer printout hit him, and he injured his leg when he slipped. What recourse does Paul have? Answer: Workers' compensation will cover Paul's injuries if they are work-related. Both injuries are probably work-related, and Paul could recover from workers' compensation. Because at least the first was intentionally caused by the employer, Paul could also sue Mary. Diff: 2 Topic: Workers' Compensation Acts Skill: Factual Application 66) The Bonzo Bike Accessory Company operates in a small commercial building in Davis, California. The company employs several people who make a variety of bicycle accessories. Mike Bonzo, the owner, has read carefully and knows that he is complying with all of the
specific applicable safety regulations. One day, an OSHA inspector arrives, inspects the workplace, and cites several dangerous conditions. There was not a single specific regulation violated for any of the dangerous conditions cited. Mike admits that four of the cited conditions were, in fact, dangerous, but still insists that he did not violate OSHA regulations. Discuss Michael's situation. Answer: Mike has a general duty to provide a workplace free of hazards in addition to meeting any specific safety regulations. Diff: 2 Topic: Occupational Safety and Health Act Skill: Factual Application 11 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. 67) Bob works in a large law firm with the title of paralegal. Bob had worked as a legal secretary for years, but was promoted to paralegal last year. The secretaries in the firm were paid on an hourly basis, and all time in excess of 40 hours per week was paid at one and a half times the hourly rate. Bob learned much in his years working in the residential real estate department of his law firm. In fact, he could draft most uncomplicated sale and purchase contracts and was doing this while still working as a secretary. He would frequently draft the contracts using forms, making changes and insertions where necessary, and merely
have the attorneys review them for any needed revisions. Bob was excited to hear about the promotion, but then was disappointed to learn that he would not be getting a raise, and that the duties of his job would not change much. Bob's hourly wage was converted to a weekly salary based on 40 hours at his prior wage. No overtime would be paid, which upset Bob because he had averaged about 20-25 hours of overtime per month, and always welcomed the opportunity to earn extra money. The law firm assured Bob that he would now be considered for a year-end bonus based on performance and contribution to the firm. The law firm became busier during the year, and Bob increasingly had to work overtime. He continued to do some drafting of contracts as well as most of the word processing for the real estate department. At the end of the year, the firm announced that profits were less than hoped for and that the maximum bonus would be $100, which Bob received. Does Bob have a claim to receive any additional compensation for his work during the year? Answer: Bob might have a promissory estoppel claim based on the promise that he would receive a bonus to make up for the loss of overtime pay. Bob might also have a claim under the Fair Labor Standards Act. It would depend on whether Bob truly was an exempt employee or whether the promotion and change to a salary basis of pay was merely an attempt to avoid paying overtime. Diff: 3 Topic: Fair Labor Standards Act Skill: Factual Application
68) Sam operates a small business with 12 employees. Sam says to his employees, "I'm not required to give you a pension plan, but I will do so. The plan is that if you stay employed with me until you reach age 65, I will give you a pension of $1,000 per year during retirement for each full year you have worked. Because I believe so strongly in this company, if I invest any money in the fund in advance, I will put half of it into stock of this company. If you leave before retirement, you don't get it. That way, you'll have more incentive to work hard and stay with the company." Comment on the legal aspects of this plan. Answer: Sam is correct that he need not provide a pension fund. But, if offering one, he must follow the provisions of the ERISA. This plan violates the vesting requirements, the funding requirements, and the restrictions on investing in the sponsoring company's stock. The plan is required to be in writing. Diff: 3 Topic: Employee Retirement Income Security Act Skill: Factual Application 12 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. 69) Many employers are making greater use of contract labor. For example, some firms now will provide a 500-person temporary contract sales force, which might be useful where a firm has a
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  • 1. Topic 1: Product Design List and describe briefly the elements of Product Design. Select one and apply it to a product you would like to see created in the marketplace. Topic 2: Service Design List and describe briefly the elements of Service Design. Consider a service industry and create a short service blueprint, a series of events that has at least 5 steps. Then describe each step with a short paragraph under each step. Topic 3: VCA, RBV, and SWOT Analyses Discuss how you can use VCA, RBV, and SWOT analyses to gain a stronger sense of what might be a firm’s key building blocks are for a successful strategy. Choose a Fortune 1000 company to demonstrate these aforementioned analyses. Please remember to use APA citation (text and list references) to further validate your initial responses. Take time to review the responses of your classmates and provide your feedback. Topic 4: The concept of best practices is simple: Do not recreate the wheel. For this week's Discussion, please research and find an article relating to best practices that you find truly interesting. Find a company or situation that created a best practice that others follow, or find a best practice that was implemented and proved effective, efficient, and innovative.
  • 2. Answer the following questions relating to the article and your own experience with best practices: Please describe the background for the article you researched and explain why this particular best practice scenario appealed to you. What did you learn from the situation that you could apply to your own life? Best practices are for not only our professional lives, but our personal lives as well. Please describe a situation in your life that needed some type of improvement and, after observing someone else in a similar situation handle things differently, how you decided to implement your own best practice. Is this best practice still effective, or have you improved it? Second exam Continue Corporation …. (Read about this take over on page 1087 important ) The difference of public company and private company is that public company’s shares are freely transferable and everyone can buy the shares from public market . Merger of acquisiton - ( take over ) is the long process which is based on the decision of board of directors . Poison pill – deters hostile takeover attempts by threatening the raider and its shareholders with severe dilutions in the value of the shares they hold In the Paramount case – the acquired company is <Time> what decision did the directors of Time make , preservation , long term shareholders value, If directors make a decision based on their interest rather than company’s interest , they will violate business judgment rule and will be held liable for that
  • 3. If the company create a long run acquisition strategy and follow it that should be good in the court , in this case the time had long run strategy to expand their business . So they can accept the lower price but with long Run strategy . Tender offer - is the offer that is above the asking price ( premume price ) (Read page 1081 business judgment rule ) If there are : absent bad fait, fraud, or breach of fiduciary duty , the judgment of board of directors is conclusive ; three requirements …… reasonable investigation, rational basis , no conflict of interest (read page 1091 conflicting interest transaction ) Conflict of interest may arise when the directors or officers with a conflict of interest my prefer his own interest over those of the corporation . Under the MBCA corporation There is no conflict of interest when 1. The transaction has been approved by a majority of informed, disinterested directors , 2. The transaction has been approved by a majority of the shares held by informed, disinterested shareholders , or 3. The transaction is fair to corporation . Even if first two requirements are satisfied , the court will void the transaction if the third one is missing . Generally, unanimous approval of an interested person transaction by informed shareholders conclusively releases an interested director or officers from liability , even if transaction is unfair to the corporation. ( read page 1093 usurpation of a corporate opportunity lecture # 6 after 1hour 58min ) As a fiduciaries, directors and officers are liable to their
  • 4. corporation for usurping ( stealing ) corporate opportunities . ( read page 1092 Sarbanes- Oxley ) after 2 hour 1 min Congress included in the Sarbanes – Oxley Act of 2002 a section generally prohibiting public companies from making loans to their directors or officers. But if the corporation is not a public company or if the loan is made to a nonexecutive , the SOA doesn’t prohibit the corporate loan . ( read page 1095 oppression of minority shareholders ( freeze out) ) after 2 hour 6 min oppression may occur when directors of close corporation who are also the majority shareholders pay themselves high salaries yet refuse to pay dividends or to hire minority shareholders as employees of the corporation. One method of oppression is freeze out - the article of merger says that only the shareholders of the new corporation will survive as shareholders of the surviving new corporation ; the shareholders of the old corporation will receive cash only . The special term for a freeze out of shareholders of publicly owned corporations is – Going private ( read page 1096 trading inside information ) Securities Regulation, the illegality of insider trading is already federal law under the Security Exchange Act ( read page 1098 directors and officers liability for torts and crimes ) The liability of the corporation. For torts, the vicarious liability rule of respondeat superior applies to corporations . Directors and officers are personally liable when they commit torts or crimes during the performance of their corporate duties. The directors or officers are usually not liable for the torts of employees of the corporation, since corporation not a director
  • 5. or the officer, is the principle but if they authorizes the torts but not involved they will have criminal liability. (read page 1102 insurance and indemnification ) to encourage persons to become directors, corporation indemnify them for their outlays associate with defending lawsuit brought against them and paying judgments and settlements amount . it is the same as to purchase insurance to protect themselves against lawsuit. ( read page 1108 share. Meetings and conduct meeting just understand the concept) Conduct of meetings : to conduct business at shareholders’ meetings, a quorum aof outstanding shares must be represented at the meeting . If the approval of more than one class of shares is required, a quorum of each class of shares must be present . A Quorum is a majority of shares outstanding, unless a greater percentage is established in the article ( read page 1122 and 1123 dividends) there are two type of dividends : cash and share – look at the book ( read page 1124 share repurchases ) A corporation may also distribute its assets by repurchasing its shares from its shareholders , it can be either redemption or open market repurchase Review first exam on the march 25 lecture , multiple choice questions ( Iphone) Securities Definition The Howey test states that an investment contract is an
  • 6. investment of money in a common enterprise with an expectation of profits solely from the efforts of others In order to satisfy the definition of securities it should me met to these three attributes If anyone violate HOWEY TEST ( security law ) the SEC will come after them some cases it will end up appearing in the jail . One of the violations is trading inside information : about the rate of securities and so on Basic and fundamental distinctions of 1933 and 1934 acts are that 1934 has ongoing reporting requirements ( all the time companies do ongoing reporting about their financial statements for exp. 10K is under 34 act and so on ), under the 1933 act it is when you issue the shares , so the inssuance of the shares subject to 1933 act . First time you sell your share to the public , that initial public offering is called IPO, so if you have an IPO you fall under 1933 act Important Materials also highlitied in the book starts page 1140 There are certain exemptions that companies will not only offers their securities for investors , but also state residents ( single investor) in this case the company has to go all of the steps that was described that they did for investors . And there is a specific rule ( page 1150 ) called 506 rule , which is not statue , it is a rule . that is saying that there are two requirements for selling securities : in the book Page 1150 rule 506 ) 1934 act is about financial reports , so 10q is quarterly financial statement , 10k is annual report, 8k is special events is not gonna affect financial report that investor should know
  • 7. about that , 14A proxy statement . Employment law Employee at will – being employee you can leave the company any time unless you have specific contract with them not to leave the company in certain period of time and vise versa employer can fire you any time , so you can be fired and you can quit with no reason any time . But - if you are discriminated based on ; race , age, religion , gender , disability , ethnicity you are protected by law Under older worker protection act ( ADEA) prohibits employment discrimination against persons 40 years of age or older. Collective bargaining is a good system because you have a group negosiating or one entity negosiating on behalf of entire employee group where as each individual negosiating own her own that wont have that collective bargaining power . Business Ethics Kantian Ethics? Abiding by the rules applied to others in making decisions. The applicability of "do unto others as you would have them do unto you." All cases should be treated alike. Someone who believes that the principles of justice and moral duties are based on universal rules, and that the actor must abide by the same rules being applied to others, believes in which moral theory
  • 8. Rawls's social justice theory includes which of the following? the belief that the moral rules should be determined by persons who have a "veil of ignorance" about their place or station in society The moral theory of ethical relativism can best be characterized by: the belief that a person must decide what course of action is proper based on that person's own set of beliefs or feelings the maximizing profits theory The theory of business social responsibility that holds that a business owes duties solely to produce the highest return for its shareholders is: A business that is concerned solely with the financial implications of alternate courses of action is applying which theory of the social responsibility of business? Rule of corporations When the board of directors opposed the tender offer , and shareholders of target company losses the opportunity to sell their shares with tender offer , they may use the directors but the court will not find directors liable for opposing the tender offer because the business judgment rule applies to a board’s decision to oppose a tender offer . But if directors actions indicate that they opposed the tender offer in order to preserve their jobs , they will be liable to the corporation. If directors make a decision based on their interest rather than company’s interest , they will violate business judgment rule and will be held liable for that Business judgment rule
  • 9. If there are : absent bad fait, fraud, or breach of fiduciary duty , the judgment of board of directors is conclusive ; three requirements - …… reasonable investigation, rational basis , no conflict of interest Conflict of interest Conflict of interest may arise when the directors or officers with a conflict of interest my prefer his own interest over those of the corporation Generally, unanimous approval of an interested person transaction by informed shareholders conclusively releases an interested director or officer from liability even if transaction is unfair to the corporation. Usurpation of a corporate opportunity As a fiduciaries, directors and officers are liable to their corporation for usurping ( stealing ) corporate opportunities the Sarbanes – Oxley Act of 2002 Congress included in the Sarbanes – Oxley Act of 2002 a section generally prohibiting public companies from making loans to their directors or officers. But if the corporation is not a public company or if the loan is made to a nonexecutive , the SOA doesn’t prohibit the corporate loan . Oppression of minority shareholders ( freeze out) oppression may occur when directors of close corporation who are also the majority shareholders pay themselves high salaries yet refuse to pay dividends or to hire minority shareholders as employees of the corporation. One method of oppression is (private going) freeze out - the article of merger says that only the shareholders of the new corporation will survive as shareholders of the surviving new
  • 10. corporation ; the shareholders of the old corporation will receive cash only . Trading inside information Securities Regulation, the illegality of insider trading is already federal law under the Security Exchange Act Directors and officers liability for torts and crimes The liability of the corporation. For torts, the vicarious liability rule of respondeat superior applies to corporations . Directors and officers are personally liable when they commit torts or crimes during the performance of their corporate duties. The directors or officers are usually not liable for the torts of employees of the corporation, since corporation not a director or the officer, is the principle but if they authorizes the torts but not involved they will have criminal liability. Rules of Security Definition The Howey test states that an investment contract is an investment of money in a common enterprise with an expectation of profits solely from the efforts of others In order to satisfy the definition of securities it should me met to these three attributes If anyone violate HOWEY TEST ( security law ) the SEC will come after them some cases it will end up appearing in the jail .
  • 11. One of the violations is trading inside information : about the rate of securities and so on Basic and fundamental distinctions of 1933 and 1934 acts are that 1934 has ongoing reporting requirements ( all the time companies do ongoing reporting about their financial statements for exp. 10K is under 34 act and so on ), under the 1933 act it is when you issue the shares , so the inssuance of the shares subject to 1933 act . First time you sell your share to the public , that initial public offering is called IPO, so if you have an IPO you fall under 1933 act 1933 Act Under the 1933 Securities Act, a person responsible may be held liable for: 1. intentional fraud, 2. a material omission or misstatement 3. failure to file a registration statement or deliver a prospectus as required by law Section 5 of the 1933 Act states the basic rules regarding the timing, manner, and content of offers and sales . it creates three important periods of time in the life of a securities offering: 1. The pre –filling period , 2. The waiting period, 3. The post effective period Under the rule 506 , which part of securities act regulation D , investors must be qualified to purchase the securities. They have to be either accredited investors or unaccredited investors who has a knowledge and experience in financial and business matter. And they should sign an investment latter verifying that they are qualifying . Accredited – institutional investors , high level insider of issuer, . It can sell to an unlimited number of accredited
  • 12. purchasers . Unaccredited – should be no more than 35 purchasers who have sufficient investment knowledge and experience Small offering exemptions Section 3(b) and 4(6) of the 1933 Act permit the SEC to exempt from registration any offering by an issuer not exceeding 5 million. State securities law may require registration , however. Rule 504 of registration D allows a nonpublic issuer to sell up to 1 million of securities in a 12-months period and avoid registration . it must be a nonpublic issuer under the Securities Exchange Act Rule 505 of registration D allows any issuer to sell up to 5$ million of securities in 12 months period and avoid registration. Liability for defective Registration statements Section 11 of the 1933 Act provides civil liabilities for damages when a 1933 Act registration statement on its effective date misstates or omits a material fact. If purchaser find any of these in the registration , the only thing that she or he has to prove is that the defendant is in one of classes of persons liable under section 11. Defendant can escape liability under section 11 by proving that the purchaser knew of the misstatement or omission when she purchased the security. Or defendant may raise due diligence defense . Most defendants must prove that after a reasonable investigation they had reasonable grounds to believe and did believe that the registration statement was true and contained no omissions of material fact .
  • 13. 1934 Act 1934 Act requires periodic discloser by issuers with publicly held equity securities. Three types of issuer must file such report 1. whose total assets exceed 10 million , and has at least 500 sec. holders 2. an issuer whose securities are traded on national securities exchange 3. An issuer who has made a registered offering of securities under the 1933 Act Proxy Solicitation Regulation The 1934 Act regulates the solicitation of proxies. Regulation 14 A requires any person soliciting proxies from holders of securities registered under 1943 Act to furnish each holder with proxy statement containing voting information . 1934 act rule 10b-5 violation( it is very important provision ) as know as intifraud provision requirements 1. misstatement or omission of Material fact 2. Materiality 3. Scienter 4. Other elements 5. Trading on inside information Recap - you have to show a material misstatements of omission of a material fact , you have to also show that there was a scienter ( intended to have a fraud or some kind of gross neglagens involved ), You have to show that there was an actual purchase or sells during the period of time when that misstatements and omissions happened, and eventually you have to show that you
  • 14. relied on the misstatements of material fact that results to your loss. 10b-5 applies not just a financial statement , 10b-5 violation can also creates when CEO or high executive makes material misstatements through media Trading on inside information When does an insider breach the fiduciary duty of confidentiality 1. When the insider uses entrusted corporate information for his personal benefit 2. When the insiders discloses the entrusted corporate information to someone other than for corporate purposes and the insider receives a personal benefit. When does an insider not breach the fiduciary duty of confidentiality 1. when the insider discloses the entrusted corporate information to someone who needs the information for corporate purposes 2. when the insider doesn’t receive personal benefit by disclosing or using the entrusted corporate information 3. When corporation doesn’t have a proper business purpose for keeping the information confidential Regulation FD is different 10b-5 , 10b-5 is saying stuff that is with knowledge materially false or omitting so it is not 10b-5 anymore , it is not inside trading . it is trying to say hey I have got this extra information I am in a share with this big investor
  • 15. ,( it make sense you take care of your biggest customer ), but you can not do it , you cant selectively disclosed information to one group of share holders at the expense of the other . and why is that - if there is no regulation FD , The CEO can share the information with some group of shareholders but not with every shareholders which is against the law of security - that says everybody should be taking care of equally . if selective discloser took place intentionally , there is a remedy to fix it only if issuer must make public discloser at the same time within 24 hours . Foreign corrupt practices act If someone from any companies is bribing foreign government official that person fall within FCPA liability . The requirements : it has to be to a government official ( any employment of government) , the consequences are huge penalties even jail time . Bribe is something that is not facilitate payments . or anything that facilitating payments is not a bribe. Ethics and Social Responsibility of Business – Couldn’t find rules Rule of Employment
  • 16. Employee at will – being employee you can leave the company any time unless you have specific contract with them not to leave the company in certain period of time and vise versa employer can fire you any time , so you can be fired and you can quit with no reason any time . But - if you are discriminated based on ; race , age, religion , gender , disability , ethnicity you are protected by law Protecting the health safety and well-being of workers and their families Workers’ compensation Compensation is that employee recover only for work related injuries . To be work related 1. the injury must be arise out of the employment , 2. And happen in course of employment . We need to prove only this two things . it has nothing to do with negligence . The employee will collect for all work-related injuries, and will not need to prove negligence on the part of the employer. Occupational Safety and health act The most important measure directly regulating workplace safety is the federal Occupational Safety and health act of 1970, With its general duty clause imposes a duty on employers to provide their employees with a workplace and jobs free form recognized hazards that may cause harm. Employers are subject to having their workplaces inspected under the Act. Even though the Act contains numerous specific safety standards, employers must also provide a work environment that is free from recognized hazards that could cause death or serious injury. Employers are required to post notices in the workplace informing workers of their rights under the Act.
  • 17. Family and medical leave act ( FMLA) In general this act covers those employed for at least 12 months, and for 1250 hours during those 12 months , by an employer employing 50 or more employees . Employees are covered when there is following reasons 1. Birth of child , 2. Adoption of child , 3.need care for a spouse with a serious health conditions, 4. Employee’s own serious health conditions Protecting Wages , pensions, and benefits Unemployment Compensation States of the condition the receipt of benefit on the recipient’s having worked for a covered employer for a specific time period and/or having earned a certain minimum income over such a period. People are ineligible for benefits if voluntarily quit , fired for bad conduct , fail to seek suitable new work . Employee Retirement Income Security Act ( ERISA ) ERISA doesn’t require employers to establish or fund pension plans or doesn’t set benefits levels. Instead, it tries to check abuses and to protect employees’ expectations that promised pension benefits will be paid. Besides this ERISA imposes other things also The Fair labor standards Act ( FLSA) FLSA regulates wages and hours by entitling covered employees to 1) A specified minimum wage whose amount changes over time , and 2) a time and half rate for work exceeding 40 hours
  • 18. per week FLSA also forbids oppressive child labor by any employer engaged in interstate commerce , and also forbids interstate shipment of goods produced in an establishment where oppressive child labor occurs . Oppressive child labor includes : 1) below age of 14, 2) 14-15 , unless they work in occupation specifically approved by department of labor . 3) 16-17 particularly hazardous by the labor department . Collective bargaining is a good system because you have a group negotiation or one entity negotiation on behalf of entire employee group where as each individual negotiation own her own that wont have that collective bargaining power Protecting equal opportunity The equal pay act ( EPA) The equal pay act ( EPA) which forbids sex discrimination regarding pay, was a 1963 amendment to the FLSA. Unlike the FLSA , the EPA covers executive , administrative, and professional employees. The typical EPA case involves woman who claims that she has received lower pay than a male employee performing the equal work for the same employer. Equal work requirement is met : 1) Equal effort 2) equal skills , 3) Equal responsibility , 4) similar working conditions . Title 7 Title 7 of the 1964 Civil Rights Act prohibits discrimination based on Race, color, national origin, religion, sex . Even though the term “ sexual harassment” doesn’t appear in the text of Title 7, courts have long held that an employer may be liable if it allows its employees to be subjected to unwelcome sexual
  • 19. advances, verbal or physical conduct of a sexual nature. Two types. 1) Quid Pro quo sexual harassment , in which a supervisor makes some express or implied linkage between an employee’s submission to sexually oriented behavior and a tangible job consequences. Employer liable under the Title 7 if harassment took place within the scope of their employment, otherwise it is Frolic. 2) Hostile environment harassment conduct is covered by Title 7 which prohibits the employer from allowing an employee to be subjected to unwelcome, sex-related behavior that can change the conditions of her employment and create an abusive work working environment. It can also be inappropriate comments by employees . Age is not covered by title 7 Title 7 covers all employers employing 15 or more employees and engaging in an industry affecting interstate commerce . Title 7 covers organizations , not individuals . How plaintiffs in Title 7 cases prove that their employer discriminated against them varies depending on the theory of discrimination. There are 4 different defenses against Title 7 : 1) Same decision defense 2) Bona fide seniority system , 3) The various “merit” defense , and 4) The BFOQ defense . The Age Discrimination in Employment Act (ADEA) Under older worker protection act ( ADEA) prohibits employment discrimination against persons 40 years of age or older. 1) engage in an industry affecting interstate commerce 2) at least 20 persons. Its procedures and remedies are the same as for Title 7 The Americans with Disability Act ( ADA) ADA prohibits discrimination against people who have disabilities . Its procedures and remedies are the same as for Title 7 . Under the Americans with Disabilities Act, an employer is required to provide reasonable accommodations to enable a disabled person to perform a job Protecting Employee privacy
  • 20. Employee Polygraph protection Act The Employee Polygraph Protection Act of 1988 (EPPA) generally prevents employers from using lie detector tests, either for pre-employment screening or during the course of employment, with certain exemptions. Employers generally may not require or request any employee or job applicant to take a lie detector test, or discharge, discipline, or discriminate against an employee or job applicant for refusing to take a test or for exercising other rights under the Act. In addition, employers are required to display the EPPA poster in the workplace for their employees. Job security The Doctrine at employment at will – Breach of an Implied Covenant of Good Faith and Fair Dealing In wrongful dismissal cases based on an implied covenant of good faith and fair dealing, the discharged employee typically contends that the employer has indicated in various ways that the employee has job security and will be treated fairly. For example, long time employees who have consistently received favorable evaluations might claim that their length of service and positive performance reviews were signs that their job would be secure as long as they performed satisfactorily. From the case of SEC Vs. EDAWEDS SEC filed suet and claim under 33 act and 34 act. SEC saying you are violating both acts 1. in a form of issuance and 2. in the form of ongoing reporting , specifically you are engaged in a fraud and we gonna nail you antifraud previsions under 33 act section 5 ( page 1145 you
  • 21. will have your IPO after being all of these satisfied - ) and under 34 act 10 b5 SEC mission is to protect overage investor and lower court found guilty bad guys but supreme court , based on the definition of security HOWEY test, says….. (read the case ) Does the fixed return constitute security . Is there a risk for investors Just the fact that it was a fix return is not enough it should satisfy the definition of security Howey test My brief Trial court said that there was an investment contract within the meaning of the federal securities laws and held Edwards to be liable for the damages because they had violated the registration requirements of section 5 of the Securities act of 1933 and antifraud previsions of the 1933 and 1934 securities act . Edwards and ETS appealed and the Appeal court said that since it was not corresponding to Howey test it was a contractual entitlement to the return than securities , so they didn’t violate the law of securities . SEC Asked the supreme court to review - supreme court states that an investment scheme promising a fix rate of return can be an “ investment contract” and thus a “ security” subject to the federal securities laws .
  • 44. initial public offering is called IPO, so if you have an IPO you fall under 1933 act 1933 Act Under the 1933 Securities Act, a person responsible may be held liable for: 1. intentional fraud, 2. a material omission or misstatement 3. failure to file a registration statement or deliver a prospectus as required by law
  • 62. 1. misstatement or omission of Material fact 2. Materiality 3. Scienter 4. Other elements 5. Trading on inside information Recap -­‐ you have
  • 71.
  • 72.
  • 73.
  • 74.
  • 82. not a bribe. Ethics and Social Responsibility of Business – Couldn’t find rules
  • 117. The Age Discrimination in Employment Act (ADEA) Under older worker protection act ( ADEA) prohibits employment discrimination against persons 40 years of age or older. 1) engage in an industry affecting interstate commerce 2) at least 20 persons. Its procedures and remedies are the same as for Title 7 The Americans with Disability Act ( ADA) ADA prohibits discrimination against people who have disabilities . Its procedures and remedies are the same as for Title 7 . Under the Americans with Disabilities Act, an employer is required to provide reasonable accommodations to enable a disabled person to perform a job
  • 135. S corporation is a special type of close corporation. It is nearly treated like partnership for federal income tax. There is only 100 or fewer shareholder. Regulation for Profit Corporation: Corporation must complying with incorporation statues. Corporation may do business in many states but the relationship between corporation, shareholders and managers is regulated only by state of incorporation. Regulation of foreign and alien corporation Corporation is domestic corp. in the state that has granted its charter- it is foreign in all other states in which is doing business- and will be alien corp. in other country. Generally, state can impose its laws to foreign corp. if those laws don’t violate the constitution of USA, due process clause, and commerce clause Due process Clause: require corps to have sufficient contact with state before state exercise jurisdiction over the corporation. “when corporation veil itself of the protection of state’s law it should suffer any reasonable burden that the state imposed as a consequence of such a benefit. in other words foreign crop. Should be required to pay for the benefit that it receives from the states. Commerce clause: the power to regulate interstate commerce is given to federal government. The state has NO power to exclude
  • 136. of to discriminate against foreign corp. that they are solely engage in interstate commerce. --- state may require foreign corp. doing interstate business in the state to imply the law if application of the law does not unduly burden interstate commerce. A state law regulating the activates if foreign corp. does not unduly burden interstate commerce if: 1- the law serves a legitimate state interest 2- the state has chosen the least burdensome means of promoting that interest 3- the legitimate state interest out weights the statute’s burden on interstate commerce. Doing business: to aid their determination of whether a state may constitutionally impose its laws on foreign corporation, courts traditionally use doing business concept. The court says foreign corporations are subject to follow state laws when they are doing business. Fiduciary duties- Directors and officers owe fiduciary duties to the corporation. They are the duties to act within the authority of the position and within the objectives and powers of the corporation, and to act with loyalty to the corporation. In order to determine demand futility, there must be reasonable doubt that directors are disinterested or independent, or that the transaction was the product of sound business judgment. Absent bad faith, fraud, or breach of fiduciary duty, the judgment of board of directors in conclusive. When directors and officers have complied with the business judgment rule, they are protected from liability to the corporation for their harmful decisions. (1081). Three requirements must be met for the business judgment rule to protect managers from liability: 1. The mangers must make an informed decision. 2.The managers may have no conflict of interest. 3. The managers must have a rational basis for believing that the decision is in the best interests of the corporation. Restructuring can be done by just the general partner but
  • 137. converting would require consent from all owners. Partner to partner relationships have a fiduciary duty of the highest degree of loyalty; promoting mutual trust, confidence, and honesty as well as acting in good faith and fair dealing. Subject foreign corp. to be sue The international shoe minimum contact test must be met. Subjecting the corporation to suit cannot offend “traditional notion of fair play and substantial justice”. a court must weigh the corporation’s contacts with in the state against the inconvenience to the corporation of requiring it to defend a suit with in the state. Taxation A state may tax foreign corporation If such a taxation doesn’t violate the due process and commerce clause. Qualifying to do business Orders that require acceptance outside the state is not doing interstate business require qualification Isolated transaction – classified as not doing business for qualification- which is kind of business that will completed in 30 days and are unique in their business nature. (Christmas trees) Qualification requirements Qualification requirement for business that are doing interstate business for foreign corporation to apply for certificate of authority from secretary of state. Regulation of foreign corporation Piercing the corporate veil: the primary consequences of the piercing the corp. veil is that a corp. shareholders will lose their limited liability. Two requirement must exist for piercing the corp, veil 1- domination of corp. by shareholders 2- use that domination for Improper purposes. An improper purpose includes: defrauding creditors, circumventing a statute, or evading an existing obligation.”
  • 138. Partnership: Duties: partners have fiduciary duty – mutual trust, confidence, and honest order. Duty to serve: undertake share of responsibility of running day to day operation -Silence partners: silent partners don’t have duty of serve but they have same liability to partnership debt as any other partners. – they merely contribute capital Duty of care: partners has duty of care – partners are not liable for loss of their honest errors – but they are liable for gross negligence, reckless conduct, international misconduct, or knowing violation of the law. Duty to Act within actual authority: partner has duty to not exceed the authority granted him by partnership agreement – partners are responsible for losses resulting from unauthorized transaction negotiated in the name of partnership. Duty of account: partners have duty to account for their use or disposal of partnership finds and partnership property as well as their receipt of any property benefit or profit without constant of other partners. Partnership property should be used for partnership purposes. Indemnified: when partner use personal acc. For purposes of partnership it is partners right to get a refund for that expense. Other duties: Confidentiality duty a partner must maintain the confidentiality of partnership information such as trade secret or a customer list. It means partner should not disclose the partnership info. Unless it is for benefit of the partnership. Interest are not transferable easily
  • 139. LLC: LLC has no individual liability on LLC contracts| LLC may be member manage or manager manage; Mangers in manager manage LLC may be elected and removed by majority of members. Duties: Each member or manager has fiduciary duty of the LLC and its members; Members has limited ability to transfer rights; Members in LLC can transfer transferable interest to another person however transferee is not LLC member Member dissociate: Under RULLCA a partner has power to dissociate by withdrawing from LLC at any time. Dissociation are also caused by: members death, having a guardian appointed over her affairs, being adjudged legally in competed by court, being debtor in bankruptcy, being expelled by other member. Payment to a dissociate member: Under Rullca dissociate member has no right to force LLC to dissolve or liquidate- ; Dissociate member is not entitled to receive the value of interest until LLC dissolve. There is one exception if LLC at will and don’t to dissolve the LLC must buy his interest at fair value in 120 days from dissolved member. If LLC has term and not dissolved must continue its business and pay dissociated member value of interest within 120 days after LLC term. LLC Dissolution RULLCA has few events that that Automatically cause dissolution of the LLC: 1- juridical dissolution (event that making unlawful for the LLC business to continue) is requested by member or transferee of a member’s transferable interest 2- administrative dissolution (by secretary of state) Distribution of dissolved LLC First creditors – excess fund members contribution refund- excess fund give member fund for profit If LLC asset is not sufficient to refund creditors, creditors couldn’t claim for their funds due to Limited liability. but if
  • 140. members didn’t pay their contribution to LLC creditors can sue the for that contribution amount “Nonmanaging members of a manager-managed LLC owe no fiduciary duty” “An LLC member has no individual liability on LLC contracts, unless she also signs LLC contracts in her personal capacity” Certificate of authority-If required to do intrastate business in a state, a foreign corporation must apply for a certificate of authority from the secretary of state, pay and application fee, maintain a registered office and a registered agent in the state, file an annual report with the secretary of state, and pay annual fee. Long-arm status- permits their courts to exercise (realize) jurisdiction under the decision of the International Shoe case. ??International Shoe case- in that case, Supreme Court ruled that a foreign corporation must have “certain minimum contracts” with the state such that asserting jurisdiction over the corporation does not offend “traditional notions of fair play and substantial justice.” General Statutes § 33-920 (a) provides: A foreign corporation, other than an insurance, surety or indemnity company, may not transact business in this state until it obtains a certificate of authority from the Secretary of the State. LLP & LLLP LLP: have General Partner & Limited partners General Partner: contribute capital in to the business, manage it, share in its profits, and possess unlimited liability for its obligation Limited partners: contribute capital, share profit, no management power, possess limited liability,
  • 141. LLLP both general and limited partners have limited liability. In both LLP and LLLP allow partners to reduce their personal federal income tax liability by deducting limited partnership losses from their individual income tax return. General partners get grater tax shelter advantage than do limited partners. Losses of the business allocated to a general partner offset his income from any other source Losses of the business allocated to limited partners may be used to offset only income from other passive investment and only to extent limited partners are at risk, that is, to extent of their capital contribution to the limited partnership. Defective compliance with LLP statues: If a person attempting to create LLP and do not substantially comply with ULPA, limited partnership does not exist, therefore limited partnership will lose its limited liability and change the statues to unlimited liability. And in LLLP General partner will have unlimited liability if it was found defective. When a person believe that she is a limited partner but discover later that she has been designated a general partner or that the general partners have not filed a certificate of limited partnership” then “she may be liable as a general partner unless she in good faith believes she is a limited partner….. page 1018. 1. Causes a proper certificate of limited partnership to be filed with the secretary of state, or 2. Withdraws for future equity participation in the firm by filing a certificate declaring such withdrawal with the secretary of state. Rights and liabilities shared by General and limited partners: Under ULPA profits and losses are shared on the basis of the value of each partner’s capital contribution. Voting right: under ULPA there are only few actions that needs all the partner approval 1- amendment of the limited partnership agreement 2- amendment of limited partnership certificate 3-
  • 142. sale or transfer of substantially all limited partnership assets outside of the ordinary course of the business – under ULPA limited partners have no voting right Admission of the new partner: under ULPA no new partner may be admitted unless all the partners have consented to the admission. – the limited partnership agreement may also provide the power or elect the new general partner in case of retirement or death of general partner. – in general ULPA does not grant much power to partners to expel the partner Pwer and right to withdraw: partners have the right to withdraw from limited partnership at any time. The Exception, however, limited partners have perpetual duration. As a result, ULPA gives the partners no right to withdraw. – under ULPA the withdrawing partner has no right to receive the value of her partnership interest means partner will not receive the value of his investment unless the limited partnership agreement provides for buyout his interest or limited partnership dissolve and liquidate. Often close corporations restrict transfer to ensure control. “Four categories of transfer restrictions: (1) rights of first refusal and option agreements, (2) buy-and-sell agreements, (3) consent restraints, and (4) provisions disqualifying purchasers.” Uses of Transfer Restrictions help a corporation and its “shareholders to maintain the balance of shareholder power in the corporation” by Buy-and-Sell agreements (1065). According to the book “Dissociated partners remain liable to partnership creditors for partnership liabilities incurred while there were partners,” unless novation occurs. “Novation occurs when two conditions are met: 1. The continuing partner release a dissociated partner form liability on a partnership debt, and 2. A partnership creditor releases the dissociated partner from liability on the same obligation” (999). Duty to Account states that “Partnership property should be
  • 143. used for partnership purposes, not for a partner’s personal use” (976). The duty -Having Interest Adverse to Partnership- According the book “When a partner receives a secret profit, she has a conflict of interest, and there is a risk that she may prefer her own interests over those of the partnership” (975). According to the book “An agent has fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship.” According to a duty of loyalty “… an agent must subordinate his personal concerns by (1) avoiding conflicts of interest with the principal, and (2) not disclosing confidential information received from the principal.” Agent “may not act for both parties to a transaction without first disclosing the double role to, and obtaining the consent of, both parties” (Mallor, Barnes, Bowers, Langvardt, Page 922). “The faithless servant doctrine provides that an agent is obligated to be loyal to his employer and is prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties. To show a violation of the faithless servant doctrine, an employer must show (1) that the employee’s disloyal activity was related to the performance of his duties, and (2) that the disloyalty permeated the employee’s service in its most material and substantial part.” (Mallor, Barnes, Bowers, Langvardt, Page 925). One of the duties’ of loyalty is the duty of confidentiality. According the duty of confidentiality, an agent may not use principal’s confidential information for his/her purposes. This duty may also exist after the agency ends. private securities class action lawsuits
  • 144. Utilitarian theory, assumes that people must consider the benefits and costs of their actions to everyone in society. Justice theory Rights theory, says that certain human rights are essential and must be respected by other people the major disclosure requirements of the federal securities laws. Based on securities law companies must disclose all material information to the investing public so that the public will have the necessary information to make investment decisions 1 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. Security 72) Why were the Securities Acts passed, given that ordinary contract law provides many remedies for persons who have been the victim of fraud, and other such crimes? Answer: One reason is to prevent the fraud in the first place through the liability provisions. A second is that many injured investors could not prove an ordinary fraud case, and many would not bother to file one because of the size of any potential recovery. Diff: 1 Topic: Liability Provisions of the Securities Exchange Act of 1934 Skill: Ethics and Policy 73) Is liability under Section 11 of the Securities Act of 1933 too broad? Should parties be liable even without scienter? Does the due diligence defense put too
  • 145. much of the burden of proof on defendants? Answer: The result of Section 11 is that often the burden of proof is on the defendant to prove proper conduct. Where the proof is not available, the defendant will lose the suit. Diff: 1 Topic: Liability Provisions of the Securities Exchange Act of 1934 Skill: Ethics and Policy 74) Are the rules on short-swing profits under Section 16(b) of the Securities Exchange Act of 1934 too restrictive or not restrictive enough? Merely because one is a statutory insider, is it proper to limit his or her ability to make a profit on the company's stock? Alternatively, should the 6-month period be longer? What is the theory behind making the profits belong to the corporation? Answer: One rationale for the law is the difficulty of proving who had inside information at any particular time. The law assumes that the insiders do have inside information, a reasonable assumption. One idea behind the corporation having a claim to the profits is that the insiders should be devoting their efforts toward the long-term health of the company, not making profits in the short term buying and selling the company's stock. Diff: 2 Topic: Liability Provisions of the Securities Exchange Act of 1934 Skill: Ethics and Policy 75) For an investment contract, why is one of the requirements for the contract to be classified as
  • 146. a security that the arrangement be one where the profits are made through the efforts of others? Answer: Where one must put her own efforts in to make a profit, such as a partner in a general partnership, one will investigate the opportunity more thoroughly. It is simply too easy to get investors to invest in a scam when the investor is promised great returns with no effort put in. Lastly, when one does the work herself, she has more control over the outcome. Diff: 2 Topic: Liability Provisions of the Securities Exchange Act of 1934 Skill: Ethics and Policy 2 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. 76) John operates a sailboat charter service in the U.S. Virgin Islands. He currently has a fleet of 10 boats and would like to have a larger fleet, but would have to obtain additional investors, which he does not want to do. He is considering having investors buy sailboats, which he would maintain and operate as part of his charter fleet. He would enter into a contract that would sell the boat to the investor and provide for the investor to pay John a monthly fee for the maintenance of the boat, and would provide for the sharing of profits between John and the investor. Discuss whether this investment is a security under the 1933 and 1934 Securities Acts.
  • 147. Answer: An investment contract in which an investor expects to make a profit off the efforts of others is a security. Here, all the efforts are undertaken by John, thus this arrangement is likely a security. Diff: 2 Topic: Definition of a Security Skill: Factual Application 77) Wondercures, Inc. is a drug research and manufacturing firm. Wondercures is currently a privately held corporation. The owners of Wondercures believe that they could greatly increase the company's profitability with an infusion of new capital. This would have to come by issuing stock to additional investors. The owners of Wondercures believe that they would need about $20 million in order to carry out their expansion plans. Discuss the options available to Wondercures, and the advantages and disadvantages of each. Answer: A regular registration is expensive, but would be more attractive to investors because the stock acquired would not be subject to restrictions. Regulation A would not be available because it is limited to $5 million in a 12-month period. If Wondercures does 80 percent of its business in one state, it could qualify for the intrastate exemption, but would be restricted to issuing stock to investors in that state. Wondercures would not qualify for the small offering exemption. Wondercures could make use of a private placement. This would incur smaller transaction costs compared to a regular registration, but the stock would be restricted from resale. This would make the stock less appealing to many potential investors. Another disadvantage to
  • 148. the private placement is that it can be offered to only 35 non- accredited investors. Diff: 3 Topic: Definition of a Security Skill: Factual Application 78) Mary wants to invest in some rental property near a major university. Mary approaches Sally and proposes that Sally invest half the down payment in an apartment complex. Mary would devote the majority of the efforts in managing the apartments. Sally would devote some time to managing the complex and would receive 30 percent of the profits. They plan to operate the complex as a partnership. Is Sally's investment in the apartment complex a security under the 1933 and 1934 Securities Acts? Answer: Because Sally is putting her own efforts into the enterprise and operating it as a general partnership, it would not be classified as a security. Diff: 2 Topic: Definition of a Security Skill: Factual Application 3 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. 79) Harmon, Inc. is a manufacturer of auto parts and wishes to issue new stock to raise capital. Harmon is incorporated and does all of its business in Indiana. Harmon would like to offer its stock regionally, but is flexible depending on the circumstances.
  • 149. There are also several wealthy, sophisticated individuals who would like to purchase Harmon stock. Discuss the methods available to issue Harmon stock exempt from SEC registration. Answer: Harmon could use the intrastate offering exemption, but would be limited to selling to investors in Indiana. There is no dollar limit. Harmon could also use a private placement, which would also have no dollar limit, but the offering could be made only to a maximum of 35 unaccredited investors, although there is no limit on the number of accredited investors. Under rule 504, Harmon could issue up to $1 million in securities over a 12-month period, with no limit on the number of accredited or unaccredited investors. Diff: 3 Topic: Transactions Exempt from Registration Skill: Factual Application 80) Bluegrass Inc. is incorporated and does all of its business in the state of Kentucky. Bluegrass has planned to issue $5,000,000 in new stock. Bluegrass has 10 potential investors, nine of whom live in Kentucky, and one who lives in Ohio. Only one of these potential investors is accredited. Can Bluegrass qualify for any of the registration exemptions under the Securities Act of 1933? Answer: Bluegrass can qualify for a private placement. It is offering too much to qualify under Rule 504 and cannot qualify for the intrastate offering because of the investor in Ohio. Diff: 3 Topic: Transactions Exempt from Registration Skill: Factual Application
  • 150. 81) Smith and Company, CPAs, performed the audit work for a large corporation in connection with its registration statement. Smith and Company performed the work according to all appropriate professional standards, but the corporation had cleverly made the inventory look much greater than it actually was. Because the company did not have as much inventory as was indicated on the financial statements, the company was worth much less than it appeared to be. Smith and Company has been named in a lawsuit under Section 11 of the Securities Act of 1933. Even though Smith and Company properly performed the audit, and the fraud on the part of the corporation was such that it would not be uncovered by an audit, Smith and Company cannot prove any of this in court because all of its audit working papers and computer documentation was accidentally shredded. Discuss Smith and Company's legal situation. Answer: Under Section 11, a plaintiff needs to prove only that there was a material misstatement and that someone was injured as a result. The due diligence defense essentially places the burden of proof on Smith and Company, and even though Smith and Company did nothing wrong, it looks doubtful that they will prove their due diligence defense. Diff: 2 Topic: Liability Provisions of the Securities Act of 1933 Skill: Factual Application 4 Copyright © 2012 Pearson Education, Inc. Copyright © 2012
  • 151. Pearson Education, Inc. 82) Jones is an appraiser who was hired by Monolith Corporation to appraise a number of its properties in connection with financial statements to be issued in connection with a registration statement. Because Monolith Corporation has a high turnover of investment real estate, Jones was hired again for help in preparing the annual financial statements for each of the next 2 years. It turns out that Jones was negligent in performance of all the appraisals that led to material misstatements on the financial statements of all years concerned. Jones did not know that the appraisals or financial statements were misstated. Discuss Jones' legal situation. Answer: Jones would be liable under Section 11 of the Securities Act of 1933. As an expert, he is subject to the act. Jones' negligence is sufficient for liability; intent, or scienter, need not be proven. Due diligence would be a defense, but Jones probably cannot prove it. Because of the lack of scienter, Jones would not be liable under Rule 10b-5 of the Securities Exchange Act of 1934. Diff: 3 Topic: The Securities Exchange Act of 1934 - Trading in Securities Skill: Factual Application 83) Mary is an assembly-line worker at a computer company. Mary becomes aware that an improvement is being made in the company's primary computer, which will significantly increase profits. Mary tells a friend to buy stock in the company. The friend does so and tells two
  • 152. other persons to do the same. The Company's profits increase greatly, and all three who purchased stock sell at a great profit. Discuss the liability of the parties. Answer: Mary, as an insider tipper, is liable for the profits of all three purchasers, as is Mary's friend. The two remote tippees are liable for their own profits if they had inside information and knew or should have known that the information was not public. Diff: 2 Topic: Insider Trading Skill: Factual Application 84) Fred is an officer at Hill Corporation. Fred, with no inside information, sells 100 shares of Hill stock in May at $50, and in July he buys 250 shares at $40. Is Fred liable for short-swing profits? Answer: Fred is liable. Any purchase and sale can be matched, and here a $40 purchase and $50 sale occurred within 6 months of each other (of 100 shares), even though Fred could not have actually sold any of the $40 shares. Diff: 2 Topic: Short-Swing Profits Skill: Factual Application 5
  • 153. Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. Corporation 72) In recent years shareholders have increasingly attempted to use shareholders' meetings as a forum to encourage corporations to operate in accordance with the views of one or some shareholders with respect to various policy issues. Common examples include environmental issues and human rights issues, especially for corporations with operations in other nations. Is this a proper forum for this particular type of activity? What are the arguments on each side of the issue? What other methods could these shareholders use to promote the viewpoints on these issues? Answer: In some cases these activities are successful in bringing about changes, as happened with some corporations in connection with overseas plants operating in "sweatshop" conditions. This is proper activity if one believes that corporations have obligations beyond simply earning the maximum profits for shareholders. Diff: 2 Skill: Ethics and Policy 73) Should shareholders encourage responsibility of corporations in which they invest, or should investors make those judgments by the choices of companies in which to invest? Which approach is more effective? Answer: There is no clear answer to whether corporate policies are more influenced by actions and views of current shareholders or by large numbers refusing
  • 154. to invest in the corporation. Diff: 1 Skill: Ethics and Policy 74) If a corporation's shareholders are supposed to have ultimate control over the corporation, is it appropriate for management to get involved in proxy contests among shareholders? Under what circumstances is it most appropriate for management to get involved? Answer: In many cases, members of management are also shareholders, thus it would be difficult to preclude their involvement. Management is most appropriately involved when the issue is value to the shareholders, rather than management protection of its jobs. Diff: 2 Skill: Ethics and Policy 75) Many persons believe that it is too easy for corporations to take over other corporations, and point to the large reductions in workforces which frequently result following mergers. Should there be limits placed on the ability to lay off employees following a business combination? What are the advantages and disadvantages of limited regulation of merger activity? Answer: Many argue that mergers act as incentives for the management of a company to not become bloated, and that regulation will interfere with free market efficiency. Diff: 1 Skill: Ethics and Policy
  • 155. 6 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. 76) Maple Corporation wants to acquire Foodcity Corporation, a chain of supermarkets. Both corporations are publicly traded. Maple Corporation has some cash, but not a large amount, and it needs to have ample cash for its operations. How might Maple be able to acquire Foodcity? Answer: Maple could offer additional shares to the existing shareholders of Foodcity for their shares in a stock swap, merger, tender offer, or consolidation. Alternatively, Maple could borrow the money, possibly by issuing junk bonds in a leveraged buyout. Diff: 2 Topic: Mergers and Acquisitions Skill: Factual Application 77) Expansive Corporation made a tender offer of $65 per share to the shareholders of Hometown Corporation to acquire 75 percent, but no more than that, of the shares of Hometown. Because only 68 percent of the shares had been tendered in 30 days, Expansive offered $75 per share, and another 20 percent of the shares were tendered in 4 days. Expansive terminated the higher offer on the fifth day, paid $65 for all the shares tendered at that price, and paid $75 for some of the shares tendered at the higher price. Discuss Expansive's actions. Answer: Under the Williams Act, Expansive must keep the increased offer open at least 10 business days, pay the $75 price for all shares acquired, and acquire shares tendered on a pro rata
  • 156. basis from all who tendered. Diff: 2 Topic: Mergers and Acquisitions Skill: Factual Application 78) Ramone is president of Rock Permanence, Inc. Flash in the Pan Corporation has just made a tender offer to the shareholders of Rock Permanence. Flash in the Pan is known for severe job cuts after takeovers, so Ramone and the other officers do the following: 1. They adopt contracts with provisions that the contracts will expire Flash in the Pan should acquire Rock Permanence. 2. They tell many shareholders that they will be hired if they do not accept the offer. Each of these shareholders is told to keep the arrangement secret and that they are one of only a select few who will be hired. 3. They distribute an article from a newspaper 2 years earlier that discussed the inept management of Flash in the Pan. They do not tell the shareholders that the publisher of the article had been successfully sued by Flash in the Pan because of false statements. 4. They send mailings to their shareholders calling the management of Flash in the Pan a "committee of the devil" and "shareholders' nightmare." Discuss the appropriateness of the four listed actions by management. Answer: There are many ways to fight a tender offer. No. 1 is probably acceptable so long as management reasonably believes these actions to be in the best interest of the corporation and its shareholders. No. 2 is not acceptable because it is fraudulent
  • 157. and because it is probably not in the best interest of the corporation to hire so many people. No. 3 is at least misleading if not fraudulent. No. 4 is probably acceptable assuming that the terms used are considered to be opinions. Diff: 3 Topic: Fighting a Tender Offer Skill: Factual Application 7 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. Business Ethics 66) Beginning in about 1990, many credit card issuers began marketing more aggressively to college students on the basis that they have considerable future earning potential even though their current income is not very high. Prior to 1990, most credit card issuers required cosigners, who would typically be the students' parents. This has led to far more students incurring excessive debt. This has required some students to work longer hours while in college and to have more debt-related problems after getting out of college. Furthermore, employers are increasingly using credit information in the hiring selection process so that some students' debt problems adversely affect their ability to find a job. Evaluate the propriety of these marketing efforts. Answer: One question is who causes these problems. If the
  • 158. cause is the cardholder's unwise decisions, then the issuer has done no wrong. But if the issuer is part of the cause, then the issuer might have violated the moral minimum theory because it has caused harm. Any such harm would be difficult to quantify. Utilitarianism would ask if the overall good increased from these credit cards. Diff: 2 Topic: Business Ethics and Social Responsibility of Business Skill: Ethics and Policy 67) A company is planning to promote its services heavily via telemarketing. The company has learned that the majority of those to be called are strongly opposed to receiving telemarketing calls. In addition, many of the persons who will be called are elderly who might decide to purchase the product even though they do not really need it or cannot afford it. Discuss the appropriateness of proceeding with this plan under the different theories of the social responsibility of business. Answer: The telemarketing plan is presumably aimed toward maximizing profits. Whether the plan meets the moral minimum would depend on whether the company is the cause of any harm due to unwanted telemarketing calls or elderly customers purchasing unneeded products. Under stakeholder interests, the company would need to consider the needs of its customers, many of whom might be better served by other marketing methods. Under corporate citizenship, being a good corporate citizen might include avoiding such marketing methods. Diff: 2
  • 159. Topic: Business Ethics and Social Responsibility of Business Skill: Ethics and Policy 8 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. 68) Assume that a drug company has recently developed a new weight-loss drug that is available only by doctor's prescription. This drug has some significant side effects, but is quite effective for helping individuals lose weight. The drug is being heavily advertised directly to the public, resulting in large numbers of individuals contacting their doctors in order to get a prescription for the drug. Because of the side effects, this drug is intended only for persons who are severely overweight. Some of the advertising for this drug emphasizes the happiness and beauty that can result when one is slender, leading many doctors to over prescribe the drug. Discuss the drug company's actions in light of the theories of the social responsibility of business. Answer: The company's actions are presumably aimed at maximizing profits. It is likely that the moral minimum is being violated as there is likely injury that is not being compensated. The patients' needs are possibly not being addressed under the stakeholder interest theory, and the promotion of the "skinniness is godliness" belief might violate corporate citizenship. Diff: 2 Topic: Social Responsibility of Business
  • 160. Skill: Ethics and Policy 69) The government has proposed demolishing 800 of 2,000 units in a low-income public housing project that has become crime-ridden and in poor repair. These 800 units will be replaced with 300 units, half of which will be for low-income families, and half for moderate- income families, resulting in fewer low-income housing units in total. Evaluate this proposal under utilitarianism. Answer: There might be more overall good if crime and other problems are reduced, but crime, as well as residents, might simply be displaced to other parts of the community. Other factors in evaluating what amounts to the overall good include the demand for low-income housing, other options for those displaced, and the current project vacancy rate, which would affect the actual numbers displaced. Diff: 2 Topic: Business Ethics Skill: Ethics and Policy 70) Compare and contrast the views held by Milton Friedman regarding the ethical responsibility of a corporate business to that of someone following the stakeholder interest theory of social responsibility. Answer: Milton Friedman asserted that in a free society, "There is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits as long as it stays within the rules of the game." To Friedman, following the "rules of the game" meant engaging in open and free competition without
  • 161. deception and fraud. Someone who follows the stakeholder interest theory of social responsibility would say that, although a corporation does have an obligation to its shareholders, there are also others to whom the corporation or business owes an obligation. These others include employees, customers, suppliers, creditors, and the local community. Diff: 2 Topic: Social Responsibility of Business Skill: Ethics and Policy 9 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. Employment 61) Should there be a lower minimum wage for some workers, for example, workers under age 18? What are the arguments for and against a two-tier minimum wage? Answer: A lower minimum wage might be justified because of these workers' lack of experience. It also might allow workers to be employed who might otherwise be unable to find work. On the other hand, employers might choose to hire the younger workers at the expense of older workers who have families to support. Diff: 2 Skill: Ethics and Policy
  • 162. 62) The Employee Retirement Income Security Act does not require any employers to provide pension plans for their employees. Should this law be changed so that employers are required to provide at least some minimum pension plan to employees? Answer: The goal of ERISA is to ensure that any benefits promised to employees will, in fact, be paid when the employee is retired, and that employees are not otherwise misled about the benefits that they will receive. The marketplace should probably determine whether or not particular employers offer a pension plan. Diff: 2 Skill: Ethics and Policy 63) Should the law set the 40-hour workweek, given that many persons might choose to work longer hours but cannot because their employers do not want to pay overtime wages? In other words, many persons might be willing to work 45 or 50 hours a week at their regular wage rate, but cannot under the current law. This law also prevents a covered employee from working 50 hours one week and only 30 hours the other week of a 2-week pay period. Should employees be able to voluntarily work beyond the limits for regular pay if they so choose? Answer: The problem with allowing this is that employers could force employees to "choose" to work in excess of the limits without receiving the overtime pay. Diff: 2 Skill: Ethics and Policy 64) Debbie was the president and chief executive officer of RST corporation. Debbie was also a
  • 163. skydiving enthusiast. She often stated that skydiving showed the worth of a person more than any other activity. On weekends, Debbie and a group of RST executives would go skydiving. Mark had been hired as a junior executive several years ago, and had performed his job well. RST needed a new vice-president of marketing to fill a vacancy caused by retirement, and Mark thought he had a good chance to get that job. Debbie asked Mark to go skydiving with her group on Saturday. Mark did not want to go, but he thought that if he did not go, it would cost him this promotion. Most, but not all, of the other vice-presidents participated in these jumps. Mark jumped and was killed when his parachute failed to open. Beth, Mark's wife, sued to collect workers' compensation for the death of Mark. What was the result? Answer: The crucial test is whether the injury was work- related. The fact that this was a regular activity conducted with a group solely from RST Corporation would support a finding that it was work-related. On the other hand, this could be viewed as a voluntary activity conducted outside of work because no one was required to attend. One might want to know if any business was discussed or conducted on these days. 10 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. Diff: 2 Topic: Workers' Compensation Acts
  • 164. Skill: Factual Application 65) Mary owns a medium-size distribution business with about 20 employees. Mary had an unusual management style and from time to time would throw items at her employees. Paul was working in the warehouse one hot summer day and accidentally gave a will-call customer the wrong goods. The customer came back to the office a short while later upon discovering the problem. Mary was in the office and asked who had filled his order. The customer described Paul, whereupon Mary went to the warehouse and threw a computer printout, with stock numbers and product descriptions, at Paul, yelling, "Use this, you idiot. Maybe you can do your job then!" Paul was startled, and by reflex turned to run after Mary, but slipped when he was barely under way. Paul's back was injured when the computer printout hit him, and he injured his leg when he slipped. What recourse does Paul have? Answer: Workers' compensation will cover Paul's injuries if they are work-related. Both injuries are probably work-related, and Paul could recover from workers' compensation. Because at least the first was intentionally caused by the employer, Paul could also sue Mary. Diff: 2 Topic: Workers' Compensation Acts Skill: Factual Application 66) The Bonzo Bike Accessory Company operates in a small commercial building in Davis, California. The company employs several people who make a variety of bicycle accessories. Mike Bonzo, the owner, has read carefully and knows that he is complying with all of the
  • 165. specific applicable safety regulations. One day, an OSHA inspector arrives, inspects the workplace, and cites several dangerous conditions. There was not a single specific regulation violated for any of the dangerous conditions cited. Mike admits that four of the cited conditions were, in fact, dangerous, but still insists that he did not violate OSHA regulations. Discuss Michael's situation. Answer: Mike has a general duty to provide a workplace free of hazards in addition to meeting any specific safety regulations. Diff: 2 Topic: Occupational Safety and Health Act Skill: Factual Application 11 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. 67) Bob works in a large law firm with the title of paralegal. Bob had worked as a legal secretary for years, but was promoted to paralegal last year. The secretaries in the firm were paid on an hourly basis, and all time in excess of 40 hours per week was paid at one and a half times the hourly rate. Bob learned much in his years working in the residential real estate department of his law firm. In fact, he could draft most uncomplicated sale and purchase contracts and was doing this while still working as a secretary. He would frequently draft the contracts using forms, making changes and insertions where necessary, and merely
  • 166. have the attorneys review them for any needed revisions. Bob was excited to hear about the promotion, but then was disappointed to learn that he would not be getting a raise, and that the duties of his job would not change much. Bob's hourly wage was converted to a weekly salary based on 40 hours at his prior wage. No overtime would be paid, which upset Bob because he had averaged about 20-25 hours of overtime per month, and always welcomed the opportunity to earn extra money. The law firm assured Bob that he would now be considered for a year-end bonus based on performance and contribution to the firm. The law firm became busier during the year, and Bob increasingly had to work overtime. He continued to do some drafting of contracts as well as most of the word processing for the real estate department. At the end of the year, the firm announced that profits were less than hoped for and that the maximum bonus would be $100, which Bob received. Does Bob have a claim to receive any additional compensation for his work during the year? Answer: Bob might have a promissory estoppel claim based on the promise that he would receive a bonus to make up for the loss of overtime pay. Bob might also have a claim under the Fair Labor Standards Act. It would depend on whether Bob truly was an exempt employee or whether the promotion and change to a salary basis of pay was merely an attempt to avoid paying overtime. Diff: 3 Topic: Fair Labor Standards Act Skill: Factual Application
  • 167. 68) Sam operates a small business with 12 employees. Sam says to his employees, "I'm not required to give you a pension plan, but I will do so. The plan is that if you stay employed with me until you reach age 65, I will give you a pension of $1,000 per year during retirement for each full year you have worked. Because I believe so strongly in this company, if I invest any money in the fund in advance, I will put half of it into stock of this company. If you leave before retirement, you don't get it. That way, you'll have more incentive to work hard and stay with the company." Comment on the legal aspects of this plan. Answer: Sam is correct that he need not provide a pension fund. But, if offering one, he must follow the provisions of the ERISA. This plan violates the vesting requirements, the funding requirements, and the restrictions on investing in the sponsoring company's stock. The plan is required to be in writing. Diff: 3 Topic: Employee Retirement Income Security Act Skill: Factual Application 12 Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. 69) Many employers are making greater use of contract labor. For example, some firms now will provide a 500-person temporary contract sales force, which might be useful where a firm has a