1. Business And Its Legal Environment (Mgmt 246) Professor Charles H. Smith Antitrust and Securities Law (“the second” Chapter 21 and Chapter 28) Spring 2010

2. Introduction to Antitrust Law Sherman Act enacted in 1890 as part of “trust busting” effort by Congress. Sherman Act’s underlying premise is United States’ economy is based on free market capitalism which is governed by the “invisible hand” (Adam Smith, no relation) and not wrongful conduct of those doing business. We will cover two main parts of the Sherman Act – Section 1 – prohibits any contracts, conspiracies or combinations in restraint of trade; needs two or more people and/or companies acting together. – Section 2 – prohibits monopolies; action by one person or company only.

3. Section 1 of the Sherman Act Violations of Section 1 involve some sort of agreement/conspiracy between two or more people/businesses – action that is merely concurrent or otherwise coincidental does not violate Section 1. Violations of Section 1 can be horizontal (among competitors) or vertical (among seller and buyer); four levels of the typical economic model are manufacturers, wholesalers, retailers and consumers. Per se rule (similar to strict liability) usually applied in Section 1 cases except for vertical price-fixing cases (“rule of reason”).

4. Section 1 of the Sherman Act cont. Examples of Section 1 violations – Price-fixing Horizontal Vertical – Market division Horizontal only – Group boycotts Horizontal only – Tying arrangements Vertical only

5. Section 2 of the Sherman Act Analysis re whether business is a “monopoly” has two elements – 1 st – “structural analysis” re relevant product and/or geographic market determines whether defendant’s market share is too high (usually at least 65% of relevant market); decision re relevant market will often be conclusive re whether monopoly exists. – 2 nd – did defendant do something wrong to obtain high market share; often shown by Section 1 violation or some other violation of federal or state law.

6. Introduction to Securities Law Securities law pertains to a “security” only – “An interest in a business; this can take many forms, but should include an investment in a common enterprise with a reasonable expectation of profit derived from the work of others.” Securities Exchange Commission (SEC) is the federal agency regulating securities transactions. Two federal statutes – enacted in response to 1929 stock market crash – are the primary sources of securities law – Securities Act of 1933. – Securities Exchange Act of 1934.

7. Securities Act of 1933 Requires disclosure of information through filing of registration statement with SEC before issuance of securities; prohibits fraud (misrepresentation) and deceit (omission). Defenses – due diligence (reasonable belief in truth and completeness of registration statement; available to any defendant except issuer); fraud or deceit not material; stock purchaser knew of fraud or deceit but purchased stock anyway; all grounded in common law fraud. Violation can result in civil and criminal penalties.

8. Securities Exchange Act of 1934 Focus on Section 10(b) and related Rule 10b-5, which prohibit insider trading of stock due to improper influence on securities transactions re stock already on market. Traditionally, insider trading interpreted to prohibit sale or purchase of stock based on inside information (nonpublic corporate information) known by corporate insider (any corporate officer, director or employee with access to nonpublic corporate information; can be anyone from corporate officer or director to secretary or file clerk). Recent interpretations include tipper/tippee liability and misappropriation liability (see next slide). Violation can result in civil and criminal penalties.

9. Tipper/Tippee and Misappropriation Liability Theories Tipper/tippee liability – Tipper is corporate insider with nonpublic (inside) corporate information who gives it to tippee, person who sells or buys stock based on such inside information. – Example – Martha Stewart case. Misappropriation liability – Corporate outsider is entrusted with inside information and buys or sells stock based on such inside information. – Theory is that the outsider misappropriates inside information for own profit. – Examples – attorney with outside law firm who is representing company in lawsuit or merger negotiations, CPA with outside accounting firm who is performing independent audit of company.