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Corporations – UBE Bar outline

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What is a corporation?
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A legal entity distinct from its owners, created by filing documents with the state.
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What is the legal significance of incorporating?
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A corporation is a separate legal person, enters into its own contracts, and is liable for its own torts. Share holders are not liable for corporate debts, only for share losses.
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What are two types of pre-incorporation contracts?
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Promoter and subscriber contracts.
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What is a promoter?
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A person acting on behalf of a corporation not yet formed
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When is a corporation liable for actions of the promoter?
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When it adopts the promoter’s pre-incorporation contract.
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How can a corporation adopt the promoter’s pre-incorporation contract
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Expressly by board of directors approval of the promoter contract, or implied when the corporation is aware of the promoter contract and accepts its benefits
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What happens to a promoter’s personal liability after formation?
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It continues until novation, and a re-incorporation agreement relieving the promoter of liability is treated as an offer of the corporation once formed.
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What duties does a promoter have?
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They are fiduciaries to each other, and must disclose personal profits when selling to the corporation, there is no secret personal gain allowed.
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What can the corporation recover if the promoter sells property to the corporation before he becomes a promoter?
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Corporation can recover profit only if it is sold the property above fair market value.
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What can the corporation recover if the promoter sells property to the corporation after becoming the promoter
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Any profit due to sale.
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What is a subscriber?
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A person who gives a written offer to buy stock before the corporation is formed, and is irrevocable for 6 months.
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What are the two requirements for de jure corporations?
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Articles of incorporation must be filed, bylaws are not required, but the board can adopt and amend them unless the articles reserve this right to the share holders.
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What must the articles of incorporation state?
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The maximum number of shares, the purpose of the corporation, the agent for the corporation, incorporators’ name and address, a name indicating a corporate status
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What are the two types of purposes?
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general, which is assumed perpetual unless there is a time limit, and specific, which bars ultra virus activity beyond the specific purpose.
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What may happen if ultra virus activity is found?
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Share holders can sue to enjoin the proposed ultra virus activity. The corporation can sue the officers and directors for approving UVA. The state can dissolve the corporation for committing UVA UVA may not eliminate corporate liability for the UVA.
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What are de facto corporations
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Organizations where the incorporators were acting in good faith to comply with formal requirements, and did not know that they failed to comply, and there is a statute under which they could have incorporated.
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What is some of the conduct of a de facto corporation?
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conducts business in corporate name and exercises corporate privileges.
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What if de facto incorporators knew they were not complying with formal corporate requirements?
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They are personally liable, and do not have corporate protection.
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What are the three theories for piercing the corporate veil?
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Alter ego, inadequate capitalization, and avoidance
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What is alter ego?
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When individuals treat corporate assets as their own, fail to observe corporate formalities, which result in injustice
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What is inadequate capitalization?
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When at the time of formation there is not enough unencumbered capital to cover prospective liability.
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What is avoidance?
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Avoidance is when the corporation attempts to avoid existing personal liability.
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What is the consequence of piercing the corporate veil?
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Individuals become liable for corporate obligations. Share holders active in operation of business become joint and severally liable.
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Who may pierce the corporate veil?
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Creditors.
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May a foreign corporation do business in another state?
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Yes, if they file a certificate of authority in the second state, which contains articles of incorporation information.
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May the corporation issue securities?
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Yes, the corporation can issue stocks/securities for consideration deemed adequate by the board of directors
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How is par value set?
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They may be specified in the articles of incorporation, must be used as a minimum price.
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What happens if a director authorizes par value for less than the minimum price?
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The director is liable to the corporation for breach of fiduciary duty.
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What is treasury stock?
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Stock that is previously issued and reacquired by the corporation, and may be resold for adequate consideration/par value
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What are preemptive rights?
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If articles of incorporation specify, existing share holders can maintain their percentage of ownership by purchasing the same percentage of new stock offered for cash.
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What are the two kinds of share holder meetings?
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Annual meetings and special meetings
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What are the requirements for an annual meeting?
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Held annually, share holders receive notice of not less than 10 or more than 60 days before the meeting, there must be a quorum (majority of outstanding shares entitled to vote) unless the bylaws require more.
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What is required to call a special meeting?
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They are called by the board, the president, or a shareholder with 10% voting share.
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What takes place at a special meeting?
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Proposed or fundamental corporate changes occur.
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What notice is required for a special meeting?
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Notice containing the special purpose, and the meeting can only concern the special purpose.
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Which share holders are eligible to vote?
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Share holders that are eligible on the record date fixed by the board and no more than 70 days before the meeting.
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When is cumulative voting authorized?
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Only for election of directors, and is calculated by number of shares times the director seats, otherwise the directors are elected by plurality of 1 share 1 vote.
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What is voting by proxy?
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Voting in writing, signed by the record share holder, with the copy to the corporation secret, and authorizes another to vote for their shares.
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How long is a proxy valid for?
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For 11 months, but is freely revocable unless it says its not.
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What is class voting?
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If an amendment to the articles of incorporation will only affect 1 class of voters, they have the right to vote even if they would not otherwise have a right to vote on the issue.
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What is a voting trust?
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The pooling of shares together to increase share holder power.
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How is a voting trust created?
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When there is a delegation of voting power to a trustee for ten years, and is in writing filed with the corporation.
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What are share holder voting agreements?
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Written agreements that are enforceable with no time limit and no corporate filing requirements.
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What are directors?
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Persons responsible for the management of the corporation.
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What are the requirements for a director?
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The corporation has at least one, they are elected by the share holders, and the share holders can remove the directors before their term expires without cause.
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What are the requirements of a directors meeting?
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Must take place unless all directors agree not to have one in writing, there must be notice of the meeting set by bylaws, there is no proxy voting, and there must be a quorum.
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What is required before directors may take action on behalf of the corporation?
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When there is a notice of meeting, a quorum and majority vote or unanimous written consent.
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What are the duties of a director?
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Duty to manage (delegation of authority ok), duty of care, duty of loyalty
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What is a director’s duty of care?
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They must act in good faith as a prudent person, in the reasonably believed best interest of the corporation unless the articles of incorporation limit the director’s liability for breach of care.
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What is a director’s duty of loyalty?
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No unfair benefit to the detriment of the corporation or share holders unless there is a disclosure of the material facts and independent ratification by a majority of disinterested directors or share holders.
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What are the three ways a director can violate the duty of loyalty?
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Usurping opportunity from the corporation, self dealing that steals the benefit from the corporation
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What director liability may be limited by the articles of incorporation?
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Personal liability for money damages to the corporation or share holders for actions taken or failure to take action.
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What director liability may not be limited by the articles of incorporation?
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Personal liability for un-entitled financial benefit, intentionally harming the corporation or share holders, unlawful distributions, intentional criminal violations.
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What is the business judgment rule?
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The director is protected from liability if they acted in good faith, in care of ordinary RPP managing business, acting in the reasonably believed best interest of the corporation. There is a strong presumption of this, and there is no liability for innocent mistakes of business judgment.
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What are officer requirements for a corporation?
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There must be a president, secretary, treasurer, and they all serve as agents of the corporation and bind the corporation to authorized activity.
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Who may remove officers?
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Directors may remove officers at will, and the corporation is liable for any breach of an employment contract.
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What is the duty of an officer?
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Same duty of care and loyalty as directors, and must act in good faith best interest of the corporation as a RPP in a like position.
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May directors and officers seek indemnification from the corporation for costs?
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Yes, if the costs are on behalf of the corporation
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When is there mandatory indemnification of officers and directors?
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When prevailing in defending a case against the officer or director for reasonable fees and costs in the proceeding.
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When is there discretionary indemnification of officers and directors?
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When they acted in good faith and in best interest of the corporation, are not opposed to best interest of corporation, and are not unlawful.
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When is there no indemnification for officers and directors?
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When they obtain an improper benefit.
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What are the two kinds of share holder suits?
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Derivative suits and direct actions.
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What are the requirements of derivative suits?
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actions by share holders asserting corporate rights. They must have contemporaneous stock ownership when the claim arose, demand action by the share holders to directors is rejected 90 days before suit.
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When will derivative suits be dismissed?
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By corporate motion showing the directors have a good faith belief that the suit is not in the interests of the corporation.
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What are direct share holder actions?
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Breach of duty to share holders by directors or officers. Look to who suffered damages and who the duty ran to.
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Do share holders have a right to dividends?
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Yes, but the directors decide when they are issued.
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What if insolvency results from the dividend?
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The board is personally liable for the unlawful distribution, but has a defense of good faith reliance on financial officer’s representations.
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What is the priority of dividend distribution?
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Preferred shares, preferred participating shares (two bites), preferred cumulative shares (two bites + dividends from previous years even if no dividend was previously offered), and common shares (preferred cum and part take second time w.common shares).
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What is a closely held corporation?
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Where share holder agreement eliminates the need for corporate formalities, and there are reasonable share transfer restrictions (no public trading)
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What is a professional corporation?
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Where the name designates it as such, the share holders must be licensed professionals, and are personally liable for their own malpractice, but not the malpractice of others in the corporation.
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What is a fundamental corporate change?
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Where there is a fundamental, not ministerial, change to the articles of incorporation or the corporate structure, or where there is a sale of a substantial portion of the corporation’s assets. Includes mergers, consolidation, and dissolution.
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What are the required steps for fundamental corporate changes?
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Resolution of the board in a valid meeting.
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What notice is required for fundamental corporate changes?
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Of the special meeting.
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What approval is required for fundamental corporate changes?
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By a majority of the shares entitled to vote, and a majority of any voting group adversely effected by the change.
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What notice is required for fundamental corporate changes?
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Notice to the state of the articles of merger.
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What is a short form merger?
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Where no share holder approval is required because a parent corporation owns 90% of a subsidiary
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How does a share holder’s right of appraisal arise?
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Written notice of objection before the vote, and intent to demand payment, a vote against the proposed changes, a written demand to be bought out, and if share holder and corporation can’t agree on a fair value, the court can appoint an expert for a binding appraisal.
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What are three common securities regulation claims?
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Fraud, 10b, Short swing trading profits 16b, and insider trading
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What is fraud?
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An intent to deceive with a material misrepresentation or misappropriation of material non public information in connection with the actual purchase or sale of securities.
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What is material non public information?
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trading tipping on the insider information.
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What is a short swing trading profit?
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An officer, director or 10% share holder buys/sells shares within a six month period for profit, the corporation can recover all profits from the sale of shares.
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What corporations are subject to short swing profit trading rules?
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Corporations large enough to report to the SEC, which have at least 500 share holders and at least $10 million in assets.
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What is insider trading?
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Breach of a duty of trust or confidence to the issuer, share holder, source of confidence by trading on insider information.
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Who is liable for insider trading?
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insiders, tippers, tippees, misappropriators of information.
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What is the Sarbanes Oxley act?
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A law requiring the CEO and CFO to certify based on knowledge that reports to the SEC do not contain material misrepresentations or omissions, and fairly present the financial position of the corporation, with no willful certification of false reports. Criminal liability.
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Which corporations does Sarbanes Oxley apply to?
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Corporations required to report to the SEC, with 500 or more share holders, and $10 million or more in assets.
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What are two results of Sarbanes Oxley violations?
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No benefits during falsehoods and no benefits during black outs
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What is the result of no benefits during falsehoods?
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The corporation/directors/ or a derivative share holder action may recover the officer’s profits made while trading shares within twelve months after the false report is filed and recover incentive-based compensation from that time.
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What is the ban on benefiting during black outs?
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directors and executive officers may not purchase or sell company’s stock during the period when persons participating in the company’s pension plan are not allowed to sell company stock.