1. PARTNERSHIPS, CORPORATIONS AND THE VARIANTS PROF. BRUCE MCCANN SPRING SEMESTER LECTURE 8 TENDER OFFERS & INSIDER TRADING PP. 917-954 Business Organizations 2010-2011 Lectures

2. Virginia Bankshares v Sandberg Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann 1. Because of the weight given director opinions by shareholders, statements of opinion (“we recommend it because it is a fair price”) which are misleading will support 14a action. 2. But, before liability will lie, the proxy solicitation must be an “essential link” to the corporate action giving rise to the damage to the plaintiff. 3. Where proxy solicitation is superfluous, no liability will lie. 2

3. Shareholder’s Rights to Solicit Proxies Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann SEC v Transamerica  Proxy Rule x-14A-7 requires management to present a shareholder proposal if  Shareholder gives reasonable notice to management  Proposal is “proper subject” for action by shareholders 3

4. Shareholder Proxies 14(a)-8 Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann If I have complied with the procedural requirements, on what other bases may a company rely to exclude my proposal? Improper under state law: If the proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the company's organization; Violation of law: If the proposal would, if implemented, cause the company to violate any state, federal, or foreign law to which it is subject; Violation of proxy rules: If the proposal or supporting statement is contrary to any of the Commission's proxy rules, including Rule 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials;Rule 14a-9 Personal grievance; special interest: If the proposal relates to the redress of a personal claim or grievance against the company or any other person, or if it is designed to result in a benefit to you, or to further a personal interest, which is not shared by the other shareholders at large; Relevance: If the proposal relates to operations which account for less than 5 percent of the company's total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earning sand gross sales for its most recent fiscal year, and is not otherwise significantly related to the company's business; Absence of power/authority: If the company would lack the power or authority to implement the proposal; 4

5. 14(a)-8 (Cont’d) Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann Management functions: If the proposal deals with a matter relating to the company's ordinary business operations; Relates to election: If the proposal relates to a nomination or an election for membership on the company's board of directors or analogous governing body or a procedure for such nomination or election; Conflicts with company's proposal: If the proposal directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting. Substantially implemented: If the company has already substantially implemented the proposal; Duplication: If the proposal substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company's proxy materials for the same meeting; 5

6. What is a Tender Offer? Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann 6  S.E.C. v Carter Hawley Hale test:  Active and widespread solicitation of public shareholders  Solicitation made for substantial percentage of issuer’s stock  Offer to purchase at a premium over prevailing market  Terms of offer inflexible  Offer contingent on tender of certain number of shares  Offer open only for limited period of time  Offeree subjected to pressure to sell  Public announcements of a purchasing program concerning the target company precede or accompany rapid accumulation of target’s stock.

7. Schreiber v Burlington Northern Lec. 10 Sem 2, pp 886-927 Corps Prof. McCann “manipulative acts or practices” as prohibited by 14(e) of the Securities Exchange Act require MISREPRESENTATION OR NONDISCLOSURE. Purpose of the sections is solely to address nondisclosure and misrepresentation to “level the playing field.”

8. CTS Corp v Dynamics Corp of America Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann 8 Indiana statute giving shareholders a right to vote before tender offeror would gain voting rights of stock it might acquire through tender offer of an Indiana corporation held constitutional.

9. Insider Trading Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann 9 The purchase or sale of securities by one acting on the basis of non-public information

10. Rule 10b-5 Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann "Rule 10b-5: Employment of Manipulative and Deceptive Practices": It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 10

11. The Essence of 10b-5 Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann Persons (insiders or not) Having material information not known to the investing public (or others with whom the person is dealing) Must disclose it prior to transacting or Must abstain from transaction until it is disclosed 11

12. Basic, Inc. v Levinson, 485 U.S. 224 (1988) Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann 12 There is no bright-line test for whether a fact would be material within meaning of 10b-5. Where plaintiffs sold stock during the depressed market created by company’s false statements that no buyer was talking to them, “fraud on the market” theory creates presumption (rebuttable) that buyer acted in reliance on accuracy of correlation of market price to value Where truth was not otherwise available to move the market, reliance presumed

13. Material Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann Information to which a reasonable investor would attach importance in determining her choice of action regarding a transaction A balancing:  How likely is it that the fact will actually come to fruition (i.e., a merger; and  How significant will be the impact of the event in the totality of the company’s operations? 13

14. Superintendent of Insurance of New York v. Bankers Life Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann 14 The reach of 10b-5 is not limited to sales in the securities markets of registered stock. The Rule prohibits deceptive devices and “contrivances” in the sale or securities face-to-face or in the markets.

15. The Reach of 10b-5 Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann http://news.findlaw.com/hdocs/docs/mstewart/sec mspb60403cmp.html http://news.findlaw.com/hdocs/docs/mstewart/sec mspb60403cmp.html 15

16. Brown v Ivie Lec. 9 Sem 2, pp 917-954 Corps Prof. McCann 16 A misrepresentation is “in connection with” a sale or purchase if it “touches” a transaction that “touches” the sale. Element is “flexible”