Legal Analysis of Insider Trading Claims Against Crammer, Exams of Business and Labour Law

Download Legal Analysis of Insider Trading Claims Against Crammer and more Exams Business and Labour Law in PDF only on Docsity! 789160 789160 Institution Harvard Law School Course / Session S15 Clark - Corporations Exam Mode OPEN LAPTOP NA Extegrity Exam4 > 15.3.15.0 Section All Page 1 of 20 __________________________________________________________________________________________ Institution Harvard Law School Course S15 Clark - Corporations Event NA Exam Mode OPEN LAPTOP Exam ID 789160 Count(s) Word(s) Char(s) Char(s) (WS) Section 1 1941 9263 11178 Section 2 790 3729 4514 Section 3 855 4131 4979 Section 4 552 2507 3055 Total 4138 19630 23726 789160 789160 Institution Harvard Law School Course / Session S15 Clark - Corporations Exam Mode OPEN LAPTOP NA Extegrity Exam4 > 15.3.15.0 Section All Page 2 of 20 __________________________________________________________________________________________ Answer-to-Question-_1_ Claims against Crammer: Crammer looks like he is going to be in some big trouble here (not surprising). He is vulnerable to a 10b-5/10b5-1 insider trading claim, brought by either private parties (SEA §20A) or the SEC (SEA §21A). He is also vulnerable to tippee and tipper liability and possibly under the misappropriation theory, as well as a Reg FD claim. There are also possible claims under Rule 14e-3 for trading on inside information about Tender Offers, an SEA § 16(b) “Short Swing profits” claim and a breach of his Duty of Loyalty. 10b-5/10b5-1: As a member the the SFC board, Crammer has a duty to disclose or abstain from trading when he hold material non-public information. In order to hold him liable it would need to be showing that he possessed material non-public information, traded on the basis of it and made profits or avoided losses. Here, the facts indicate that he had non- public info, notmanagement even the “top management” or “the other directors” knew about the importance of the toriander seeds (though buying non-security assets does not fall under 10b-5 or insider trading but this will be significant later) and SFC was “surprised” by WFC’s TO in march. Both of these pieces of information were likely material because there was a substantial likelihood that a reasonable investor would consider them to significantly alter the total mix of info available when making an investment decision (Basic). Mergers are high significant events in a corp’s life (Basic) 789160 789160 Institution Harvard Law School Course / Session S15 Clark - Corporations Exam Mode OPEN LAPTOP NA Extegrity Exam4 > 15.3.15.0 Section All Page 5 of 20 __________________________________________________________________________________________ seed, which would increase the value of the SFC itself and not because of the imminent tender offer from WFC but this would sink him on other claims and it wouldn’t save him here. WFC was “seriously planning a TO for SFC” (likely enough for substantial steps), Crammer was in possession of the info thanks to Deb, and he knew (be if he didn’t know he certainly had reason to know) as a director that this information was non-public because SFC was “surprised” by WFC’s TO. He also knew that this information was acquired indirectly from the issuer via Deb who had a fiduciary duty to WFC. As above, these claims could be brought under the private right of action or by the SEC with the same remedies available. SEA § 16(b): §16(b) is a strict, bright-line, prophylactic rule that requires the disgorgement of any profits made by any Officer, Director, or beneficial owner of securities in a corporation for the sale and purchase (in either order) of equity securities in a 6 month window. This claim can either be brought by the SEC or derivatively by the corporation. ~Derivative Suits~ Any SH would would like to being this claim would need to either make a demand (an be estopped from claiming futility (Grimes)) or proceed without a demand an claim that the demand was futile. If the SH makes the demand and it is accepted then the corp can either move forward with the claim itself or allow the SH to go forward. The former is almost ALWAYS the case so demands are usually not made. If the demand is rejected 789160 789160 Institution Harvard Law School Course / Session S15 Clark - Corporations Exam Mode OPEN LAPTOP NA Extegrity Exam4 > 15.3.15.0 Section All Page 6 of 20 __________________________________________________________________________________________ she would have to claim wrongful refusal by alleging particularized facts raisin reasonable doubt that the board acted independently or in due care. There is no discover, just the “tools at hand” like relevant corp records (DGCL §220(b)). The 16(a) filing with the SEC would help in this case. If no demand is made, much like wrongful refusal, the SH will have the burden to show futility using the “tools at hand” and alleging particularized facts showing that the board had financial or familial interests in the transaction, that the board was dominated by interested party (Grimes) or that the underlying transaction was not a product of valid business judgment (board was minimally informed/there was inadequate process). If either the ct finds futility or wrongful refusal the board can form a special litigation committee and appoint independent directors to it to look that the derivative claim. If they accept the claim it is much like it was accepted in the first place but if they reject it the DE cts use the two step Zapata test. They look first at the procedure, the SLC members are truly independent (not on the board at time of wrong doing or no familial/financial interest) and their investigation was adequate. If that works out, unlike in NY, the ct can substitute its own business judgment for that of the SLC and make a substantive inquiry of the dismissal. The ct rarely overturns a dismissal but it gives incredible incentives for the SLC to go through mountains of process. ~16(b)~ In either the derivative claim or one brought by the SEC, the plaintiff need only show that the defendant was a Director, officer or beneficial owner and that the purchase and sale occurred within the 6 month window. The Disgorgment is maximized by pairing 789160 789160 Institution Harvard Law School Course / Session S15 Clark - Corporations Exam Mode OPEN LAPTOP NA Extegrity Exam4 > 15.3.15.0 Section All Page 7 of 20 __________________________________________________________________________________________ the lowest purchase and highest sale. Here, the old stocks would not be liable but the profits for the 20k shares that were purchased on Feb. 17 would certainly be disgorged. Duty of Loyalty - Interested Director Transaction/Corp Opportunity Doctrine: Perhaps the most interesting claim, a derivative suit could be brought for Crammers breach of fiduciary duty of loyalty to SFC. When he purchased $300k in Toriander Seed it was an interested transaction. When he was trying to maximize his own profit he both usurped a corporate opportunity and had a conflict of interest, and possibly acted in bad faith (wasn’t trying to maximize value for the SHs). ~Corp Opportunity~ For the usurpation of the corporate opportunity, there is a balancing test. (1) Could the corp financially take advantage of the opportunity (here there is no problem, they owned the seeds), (2) was it in the corp line of business (this too is definite yes, they were already using this product and selling it to pharma corps would have been in the line of business), (3) Did the corp have reasonable expectancy (sure, selling your own assets at a huge profit if the opportunity comes along would be something the corp would expect), and (4) the defendant taking the opportunity will bring his interest in conflict with that of the corps interest (eBay) (yes, maximizing personal profits v. maximizing SH value). This looks like an open and shut case but there is the possibility of a safe harbor if they board was notified of Crammer taking the opportunity (Broz) as there was here, but we will talk about ratification below. 789160 789160 Institution Harvard Law School Course / Session S15 Clark - Corporations Exam Mode OPEN LAPTOP NA Extegrity Exam4 > 15.3.15.0 Section All Page 10 of 20 __________________________________________________________________________________________ ------------------------------------------- Answer-to-Question-_2_ Unocal: Defensive measures for unwanted Takeover attempts are reviewed under the conditional BJR standard of Unocal because of the “omnipresent specter” of boards acting in their own interests. Such defenses must have fiduciary outs (omnicare) and if they are a poison pill almost always must be redeemable (Moran). Defenses are also considered holistically under the Unocal test (unitrin). The first inquiry of unocal is if the board had the authority to bring these defenses into being. To determine this we look to statute, articles of incorporation and bylaws. In DE, most poison pill plans are fine as long as they are redeemable (Moran) but not dead- hand or no-hand SH rights plans (Quickturn; Carmody). The classified board is also likely okay because it was agreed to in the articles of incorporation. The next inquiry is whether the board was reasonable in belinging that the takeover was a threat to corp policy and effectiveness. They must show good faith and reasonable inestigaiton and any proof will be materailly enchanced if a majority of the board is independent (that would be nice to know) and even more so if the investigation was 789160 789160 Institution Harvard Law School Course / Session S15 Clark - Corporations Exam Mode OPEN LAPTOP NA Extegrity Exam4 > 15.3.15.0 Section All Page 11 of 20 __________________________________________________________________________________________ handed offer to an independent committee. Here there is no threat to long standing business stategy or interference with a long planned merger. There is also very little concern about the quality of consideration or that there is a front-loaded two step buyout that will hurt SHs who tender later. Perhaps when the TO was first made the board could claim that the SHs wouldmistakenly take the offer when the shares were worth more because the Toriander seeds true value was known but concern is gone now and the market has responded to this new information. At the very most there could be a claim that the threat was a conditional offer, requiring that the pill be redeemed but the whole point of the pill to get the parties to the table to negotiate and then to be redeemed. This miscontrues the point of the poison pill to call the conditioned redemption a threat to corp policy or effectiveness. They best claim is that the offer is inadequate because the intrisic value is greater but given what Pfizer is saying that looks shaky. If there is a threat (which looks tough here) the next inquiry is whether the board was reasnable, whether the defensive measires were proportional to the threat. The defensive measures cannot be draconian; preclusive or coercive (unitrin). As the threat was minimal the defensive measures must be minimal. The poison pill by itself wouldn’t be a big deal but combined with the board classificaiton this very likely preclusive. It makes it almost impossible for their to be TO which keeps the SHs from being able to take advantage of it and the SHs have no power to get a new board because they cannot call a special meeting and when the board does come up for reelection it can only replace 1/3 of them. Becuase of the preclusiveness of these measures the board will not get to BJR and 789160 789160 Institution Harvard Law School Course / Session S15 Clark - Corporations Exam Mode OPEN LAPTOP NA Extegrity Exam4 > 15.3.15.0 Section All Page 12 of 20 __________________________________________________________________________________________ the defenses will likely be enjoined. Revlon: There is an open question whether the Revlon duty is triggered here. There is only one Revlon duty and that is to maximize the SH value in the short term. It is only triggered when a corp embarks in a transaction that will result in the change of control (which includes a breakup of the corp) (lyondell). Here it is not clear that the board has embarked on a transaction but it is possible that once the TO went to $90 that the buyout was enevitable and therefore the change from a “fluid aggregate” of SHs to WFC as the controlling SH would be enough. Revlon is not a fully fleshed-out doctrine yet, it is a little mushy but the ultimate question is whther this is an end of life situation, a last chance to get the SHs a control premium and if the defenses fail Unocal then that very well could be the case here. Blasius: When defensive measures disenfranchise SHs there must be a compelling justification for using them. Here there doesn’t seems to be any such compelling reason and the classification of the board along with the inability of the SHs to use there only real remedy of replacing the board or selling their shares (because they can’t call a special meeting). This may be enough to trigger compelling justification review but it is unclear because of the fact that the classification and the lack of SH rights to call a special meeting are in the articles of confederation but it is possible to strike even that if 789160 789160 Institution Harvard Law School Course / Session S15 Clark - Corporations Exam Mode OPEN LAPTOP NA Extegrity Exam4 > 15.3.15.0 Section All Page 15 of 20 __________________________________________________________________________________________ necessarily a plus for these three because they will be the only managers. All around it looks like what would be best for these three is a limited liability company, a closely held corporation. It is in some senses the best of both worlds. It has the liability structure of the corp (no personal liability for corp debts or the acts of others in the corp...unless the corporate veil is pierced, which it shouldn’t be with good planning), the partnership like management structure where the three of them can work together. They are slightly more able to terminate but are also more durable than partnerships and have greater liquidity than full-fledged corporations. Legal Duties and Risks: Close corps have many of the same legal duties as partnerships. The duty of the utmost loyalty and good faith (Wilkes). The directors must be willing to work together. There is the risk that there will be disagreements about policy and how the corporation should be run. When that happens the actions of two (a majority here) will trump the privilege of the other whether or not it is the right plan. There will be concerns about voting shares or increasing the size of the corp. They mentioned that they would need to get more buses and hire more people if they need to grow but who will make this decision? What if there is a dead-lock (more difficult with three people than two but still). There is also the risk that the three of them will realize this is a bad plan and want to get out. They need to be willing to plan ahead for this. This can be difficult because at the beginning of these relationships everyone thinks they will get along forever and they may (unlikely but maybe). All the same, these things must be talked about and planned for. 789160 789160 Institution Harvard Law School Course / Session S15 Clark - Corporations Exam Mode OPEN LAPTOP NA Extegrity Exam4 > 15.3.15.0 Section All Page 16 of 20 __________________________________________________________________________________________ Planning Ahead: The important thing is to get counsel from professionals that specialize in limited liability corporations. Get their advice. In the meantime, the three of you should definitely work out exit strategies, election considerations and dispute resolution. Vote pooling agreements are acceptable (ringling) and such agreements can include the elections of each other for positions as both Directors and officers as long as there are fiduciary outs (Clark). Such an agreement might be a good idea. It will also be important to establish how the shares of the corporation will work. Will each share be vote or will each holder get a vote? Generally, pro rata voting is the norm that that is one thing to consider. Additionally, whether the problem be in not wanting to adhere to voting agreements made or any other dispute a resolution plan should be in place. Arbitration by a third party, negotiation, or the cts, whatever it is there should be a process. There must also be an agreement to abide by the authority of the resolutions worked out. Finally, exit strategies. Without some explicit agreement about what happens when one of you decides to leave or must leave (death, sickness, etc.) there will be chaos and self-serving instincts will reveal themselves. Leaving it up to the cts is risky and likely expensive (Brodie). It is also important to remember that the cts will never grant a remedy (or at least they will try really hard not to) that will put a partner in a better 789160 789160 Institution Harvard Law School Course / Session S15 Clark - Corporations Exam Mode OPEN LAPTOP NA Extegrity Exam4 > 15.3.15.0 Section All Page 17 of 20 __________________________________________________________________________________________ position than you would have been had the freeze-out or other problem not happened (Brodie). The kinds of agreement you should look to are buy-sell or other such agreements. This allows partners to exit the firm at a fair price without ripping off those that are staying. Also, i would incorporate in DE, they are pretty business savvy and their Limited Liability Company Act is pretty good to partnership interests (Haley). -------------------------------------------