Business Law - Corporations

Business Law - Corporations
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Question 1
Did Switzer trade illegally in this matter?
Please discuss all of the issues contained within this essay. Discuss insider information, the ramifications, the reliance issues, etc.
According to Gu and Li (2012), insider information refers to the non-public confidential fact about the condition or plans of a publicly traded company, which might provide a financial advantage when it is used in selling or buying shares of the company’s stock. Mr. Platt, a director of the Phoenix Corporation, reveals confidential information regarding his plans to liquidate or sell the Corporation. Moreover, he goes ahead and even talks about a number of companies that are bidding to buy the Corporation. Apparently, Mr. Platt failed in his duty to maintain confidentiality about his knowledge of the company’s critical information by speaking too loud about it. Barry Switzer had overheard Mr. Platt’s statements on liquidating the company, and he clearly used that information in his decision to purchase the Phoenix Corporation shares even though the information had not been publicly disclosed. Therefore, Barry Switzer was using insider information in deciding to buy Phoenix shares with the hope of gaining financial advantage in the future. Mr. Switzer traded illegally concerning that matter, and this compromises the vital conditions of a capital market. Philip (2001), points out that an individual is liable of insider trading when acting on privileged knowledge in order to make a profit.
Philip states that a corporate insider is a person who has access to information that has not yet been released to the public, and that person is expected to uphold a fiduciary duty not only to the corporation, but to its shareholders as well. Moreover, the insider has the obligation to preserve in confidence the possession of the nonpublic material information (2001). Although there are various forms of legal insider trading, what Mr. Switzer was doing constitutes an illegal insider trading activity. This is because it affects other investors of Phoenix Corporation. Mr. Switzer’s decision was influenced by the possession of the company’s confidential information that had not yet been publicly disclosed. He relied upon this information in deciding to buy the company shares. His actions amount to insider trading which is illegal. What makes this kind of trade unlawful is that the knowledge Mr. Switzer possesses is not available to other investors of the corporation, and he relies on that knowledge to try to obtain an unfair advantage over the other investors.
Gu and Li report that the use of non-public information to make a trade violates transparency, since transparency is the basis of a capital market. In a transparent capital market, information is always disseminated in a way such that, every market participant receives it at a more or less the same time (2012). In this case, however, one investor, Mr. Switzer gains advantage over the others by acquiring skill (based on awareness) in interpreting and analyzing the information that he had overheard from Mr. Platt. He then uses the non-public information to trade and buy shares at Phoenix Corporation. In so doing, he gains an advantage over the rest of the interested public. This is an unfair trading, and it disrupts the proper functioning of the stock market. If the law allowed insider trading, disadvantaged investors would greatly lose confidence in trading with the company’s stock and would not invest in the company any more (Gu & Li, 2012).
Mr. Switzer may claim that he is not guilty of insider trading, because he simply overheard Mr. Platt talking about liquidating Phoenix Corporation and revealing confidential corporate information. However, Philip (2001) asserts that going ahead and making a trade based on what was overheard constitutes violating the law even if the information was overheard innocently. Philip continues to assert that according to the law, when a neighbor overhears someone talking about a company’s confidential information, he or she becomes an insider and therefore, has an obligation and fiduciary duty to confidentiality from when he/she possesses the nonpublic material information. Information is considered as material, if its release has the potential of affecting the stock price of the company (2001). Mr. Platt and his wife did not attempt to profit from their insider knowledge, and they therefore, are not necessarily legally responsible of insider trading. However, they may be in violation of their confidentiality.
There are several ramifications or consequences of insider trading. The first one is that it leads to betrayal of the trust a company has with its investors since the officers of the corporation are expected to act in the best interest of the shareholders. Many shareholders suffer because they miss out on value and are unable to a make profit. Exposing confidential information that the shareholders are not privy to for financial gain significantly affects the shareholders’ trust with the company. Moreover, it will be hard for a corporation to regain the trust of its shareholders when its officers trade illegally (Gu & Li, 2012). Another ramification is that if capital markets are perceived as being tainted by insider trading, the average people who might be potential investors in the stock market will avoid it altogether. The general ramifications include destroying the efficiency of the capital market, eroding investor confidence and the perception of unfairness, which leads to disinvestment. Illegal insider trading takes advantage of chance not skill thereby threatening confidence of investors in the capital market. As much as it has serious drawbacks, Philip (2001) states that illegal insider trading might benefit the market, for instance, when it accelerates the speed at which new information is used to alter the price of the stock, hence bringing the price to its proper level more quickly.
Question 2
The solicitation of proxies is regulated by the SEC as a result of the Securities Exchange Act of 1934. Section 14 of the SEC covers proxy rules and solicitation. Would you please identify which corporations are covered by Section 14, and generally, what the requirements are for Section 14. 10points
Section 14 covers corporations such as banks, brokerage companies, limited companies and corporations whose shares are traded at the stock market, that is, publicly listed companies. Section 14(a) of Securities Exchange Act (SEA) of 1934 prohibits a shareholder from soliciting or creating proxies in a way that violates the federal security rules, and it includes the rules that were subsequently enacted by the Security Exchange Commission (SEC). Section 14’s proxy disclosure requirements require corporations to send proxy statements to shareholders before a vote, and these proxy statements provide information on any proxy appointments that take place in an upcoming vote. In certain types of votes however, for instance accounting decisions or shareholder proposals, prior to sending this statement to shareholders, the corporation is required to present it to the SEC and allow it to make changes as well as comments. There is also the requirement of form DEF 14A or definitive proxy statement under Section 14(a) of the Securities Exchange Act (SEA) of 1934. The form is filed with the SEC whenever a definitive proxy statement is issued to the shareholders, and it helps the SEC to ensure that the rights of shareholders are upheld (Security Exchange Commission, 2012).
Voting for directors varies from state to state and in some cases from corporation to corporation. Could you please discuss the requirements, if at all, that is necessary to run for director and the various methods of voting. That is, whether or not certain corporations vote by straight vote or by cumulative vote. Please identify the two ways and distinguish them.10 points
Most, if not all corporations have a board of directors, that has full power and authority in managing the corporation. Voting for directors vary from state to state and also varies between corporations. The main director qualifications in some states for instance require that the director must be a shareholder at the company and should be residing in that state (Minars, 2003). Some corporations have director qualifications in their articles or bylaws, for instance with regard to age or academic qualifications. The main voting methods used in electing directors are cumulative voting and straight voting. Under straight voting, every shareholder votes the number of shares she/he owns for each of the two candidates. The person that owns a majority of the shares can elect the company’s entire board of directors (Minars, 2003). Cumulative voting on the other hand, is a voting procedure that is intended to give some control to the company’s minority shareholders. According to this voting procedure, the number of votes that one has is equivalent to the number of her/his shares a...