This property, called collateral, is then held by either the debtor or the secured party to ensure against loss in the event the debtor cannot fulfill the obligations under the transacti
Trang 1limitations to apply in a section 1983 case, the Supreme Court has held that in the interests of national uniformity and predictability, all sec-tion 1983 claims shall be treated as tort claims for the recovery of personal injuries (Wilson v
Garcia, 471 U.S 261, 105 S Ct 1938, 85 L Ed
2d 254[1985]) If the state has various statutes
of limitations for different intentional torts, the Supreme Court mandates that the state’s general
or residualPERSONAL INJURYstatute of limitations should apply (Owens v Okure, 488 U.S 235,
109 S Ct 573, 102 L Ed 2d 594[1989])
When a state does not specifically recognize
a CAUSE OF ACTIONbrought under section 1983, courts look to analogous state laws to determine when the cause of action would accrue In Wallace v Kato, 549 U.S 384, 127 S.Ct 1091,
166 L.Ed.2d 973 (2007), an arrestee brought an action under section 1983, alleging that city police detectives had unlawfully arrested him
Illinois did not recognize unlawful arrest as a tort, so the Court looked to the state’s statute of limitations for FALSE IMPRISONMENT After con-cluding that the claim’s limitations period would have expired under state law, the Court ruled that the arrestee’s claim had expired
The Supreme Court has also held that state tolling statutes, which provide a plaintiff with an additional period of time in which to bring a lawsuit equal to the period of time in which the plaintiff was legally disabled, apply to section
1983 cases (Board of Regents v Tomanio, 446 U.S
478, 100 S Ct 1790, 64 L Ed 2d 440[1980])
Under section 1983, the statute of limitations does not begin to run until theCAUSE OF ACTION
accrues The cause of action accrues when“the plaintiff knows or has reason to know of the injury which is the basis of the action” (Cox v
Stanton, 529 F.2d 47 [4th Cir 1975]) However, in
EMPLOYMENT LAW cases, the Supreme Court has held that the cause of action accrues when the discriminatory act occurs (Delaware State College
v Ricks, 449 U.S 250, 101 S Ct 498, 66 L Ed 2d
431 [1980]) Thus, if an employee is being terminated for reasons that violate section 1983, the statute of limitations begins on the day that the employee learns of the termination, not when the termination actually begins (Chardon v
Fernandez, 454 U.S 6, 102 S Ct 28, 70 L Ed
2d 6[1981])
The legal rules ofRES JUDICATA(claim preclu-sion) and COLLATERAL ESTOPPEL (ISSUE PRECLUSION) apply to section 1983 claims This means that
federal courts must give state court judgments the same preclusive effect that the law of the state in which the judgment was rendered would give Plaintiffs need to be careful to raise all potential federal claims in cases brought in state court because they will not be allowed to bring those claims later in federal court after the state court has rendered a decision on the issues before it
A plaintiff may waive his or her right to sue under section 1983, but such a waiver may be deemed unenforceable if “the interest in its enforcement is outweighed in the circumstances
by aPUBLIC POLICYharmed by enforcement of the agreement” Town of Newton v Rumery, 480 U.S
386, 107 S Ct 1187, 94 L Ed 2d 405[1987] FURTHER READINGS
“Federal Courts—Prisoner Litigation—Eleventh Circuit Holds That a §1983 Action for DNA Access Is Not the Equivalent of a Habeas Corpus Petition ” 2003 Harvard Law Review 116 (June).
Hayman, Robert L 2002 Jurisprudence St Paul, Minn.: West Schwartz, Martin A., and John E Kirklin 2003 Section 1983 Litigation: Claims and Defenses 4th ed New York: Aspen Publishers.
Schwartz, Martin A., and George C Pratt 2009 Section 1983 Litigation: Jury Instructions 2d ed Austin, Tex.: Wolters Kluwer.
Young, Gary 2003 “9th Sees No Regulatory Relief in
§1983 ” National Law Journal (July 21).
CROSS REFERENCES Civil Rights; Remedy; Tort Law.
SECURE
To assure the payment of a debt or the performance
of an obligation; to provide security
A debtor“secures” a creditor by giving him
or her a lien, mortgage, or other security to be used in case the debtor fails to make payment
SECURED CREDITOR
A category of favored creditor who holds some special legal assurance of payment of a debt owed to him or her, such as a type of mortgage or lien, as the result of a specific agreement to that effect The secured creditor, as distinguished from an unse-cured creditor, holds an advantage known as a
“security interest,” which it can assert in order to claim payment as needed The collateral tends to be valued at an amount sufficient to cover the debt, should collection ultimately become necessary The collateral tends to be valued at an amount sufficient to cover the debt, should col-lection ultimately become necessary Colcol-lection
Trang 2may occur by compelling a sale (e.g., at auction)
or by keeping or taking repossession of the
collateral in question, in the event of default of
payment In the event of bankruptcy, the
secured creditor enjoys the prospect of being
ahead of unsecured creditors in order of
payment (in case there are any assets with
which to pay the debts)
In order for the security interest to be fully
operational, it often must be “perfected,” or
registered formally with a governmental entity,
such as a financing statement filed publicly with
the office of the secretary of state in the
jurisdiction where the collateral is located The
effect of perfection is to put other potential
creditors on notice as to the secured creditor’s
position with regard to the particular assets In
most states, security interests are governed by
Article 9 of the Uniform Commercial Code
FURTHER READING
Hagedorn, Robert B 2007 Secured Transactions in a
Nutshell 4th ed St Paul, Minn.: West.
SECURED TRANSACTIONS
Secured transactions are business dealings that
grant a creditor a right in property owned or held
by a debtor to assure the payment of a debt or the
performance of some obligation
A secured transaction is a transaction that is
founded on a security agreement A security
agreement is a provision in a business
transac-tion in which the obligor, or debtor, in the
agreement gives to the creditor the right to own
property owned or held by the debtor This
property, called collateral, is then held by either
the debtor or the secured party to ensure against
loss in the event the debtor cannot fulfill the
obligations under the transaction
The purchase of a car through financing is an
example of a secured transaction The car
dealership or some other lender pays for the
vehicle in return for a promise from the buyer to
repay the loan with interest The buyer receives
the vehicle, but the lender retains the title to the
car as security against the risk that the buyer will
be unable to make the loan payments If the
buyer defaults on the payments, the lender,
called the secured party, may repossess the car to
recover losses from the default
If the same transaction was unsecured, the
buyer would receive the title to and possession
of the car, and the lender would receive only the
buyer’s promise to repay the loan If the buyer defaulted on the payments, the lender could sue the buyer, but the simple remedy of taking the property would not be available
A security interest may be transferred, or assigned, to a THIRD PARTY The party receiving the assignment becomes the secured party, and the original secured party no longer holds a claim to the collateral
The law of secured transactions varies little from state to state because all 50 states plus the District of Columbia and the U.S Virgin Islands have adopted Article 9, the secured transactions portion of theUNIFORM COMMERCIAL CODE(UCC)
The UCC is a set of model laws written by lawyers, professors, and other legal professionals
in the American Law Institute In 1999, the institute, in conjunction with the National Conference of Commissioners of Uniform State Laws (NCCUSL), drafted a revised Article 9, which was adopted uniformly on July 1, 2001
The revisions marked the first comprehensive overhaul of Article 9 since 1972 These revisions expand the scope of property and transactions governed by the UCC, clarify existing elements
of the article, and provide guidelines for dealing with technological developments, including software financing andELECTRONIC COMMERCE
Common Forms of Secured Transactions
Secured transactions come in many forms, but three types are most common for consumers:
pledges, CHATTEL mortgages, and conditional sales A pledge is the delivery of goods to the secured party as security for a debt or the performance of an act For example, assume that one person has borrowed $500 from another Assume further that the debtor gives
a piece of expensive jewelry to the creditor If the jewelry is to be returned to the debtor after the debt is repaid, and if the creditor has the right to take full ownership of the jewelry if the debtor does not pay the debt, the arrangement
is called a pledge
ACHATTEL MORTGAGEis like a pledge, but in a chattel mortgage transaction, the debtor is allowed to retain possession of the property that is put up as collateral If the debtor fails to repay the debt, the creditor may take ownership
of the property
A third type of secured transaction, the conditional sale, uses a purchase money security
Trang 3interest A purchase money security interest arises when a creditor lends money to a borrower, who uses the money to purchase a particular item To secure repayment of the loan, the creditor receives aLIENon, or claim to, the purchased item The lien gives the creditor a claim to the property that may be asserted if the borrower does not repay the loan
Common Forms of Collateral
Any property accepted as security by a creditor can serve as collateral, but generally collateral falls into one of five categories: consumer goods, equipment, farm products, inventory, and prop-erty on paper Consumer goods are items used primarily for personal, family, or household purposes Equipment consists of items of value used in business or governmental operations
Farm products are items such as crops, livestock,
or supplies used or produced in a farming operation Under the revised Article 9, agricul-tural liens can also be considered collateral
Inventory consists of goods held for sale or lease
or furnished under contracts of service, raw materials, works in process, materials used or consumed in a business, and goods held for sale
or lease or furnished under contracts of service
Paper collateral consists of a writing that serves as evidence of a debtor’s rights in
PERSONAL PROPERTY Stocks and bonds are exam-ples of paper collateral Another common form
of paper collateral is CHATTEL PAPER Chattel paper is a writing that indicates that the holder
is owed money and has a security interest in valuable goods associated with the debt For example, assume that a car dealership has sold a car on financing to a buyer and has retained the title as security The dealership may then use the security agreement with the buyer as collateral for a loan of its own from the bank The revised Article 9 also recognizes “electronic chattel paper.” This allows for the validity of so-called electronic signatures, which Article 9 refers to as
“authenticated records.” The electronic screens
in some retail stores that allow customers to sign with a special stylus are thus just as valid as
a signature in ink on a paper document
Among the new areas governed by the revised Article 9 are commercial deposit accounts, promissory notes, and commercial tort claims Healthcare insurance receivables are also covered, which allows doctors and hospitals
to include claims against insurance companies
for services to their patients as part of the collateral they offer to healthcare lenders
The Formalities
To be valid, a secured transaction must contain
an express agreement between the debtor and the secured party The agreement must be in writing, must be signed by both parties, must describe the collateral, and must contain language indicating a grant of a security interest
to the creditor Furthermore, something of value must be given by one party to the other party This can be a binding commitment to extend credit, the satisfaction of an already existing claim, the delivery and acceptance of goods under a contract, or any other exchange
of value sufficient to create a contract Once these formalities have been completed, the security associated with the principal agreement
is said to attach Attachment simply means that the security side of the agreement is complete and legally enforceable
To completely secure a secured transaction,
or perfect the security, the secured party should file a financing statement with the local public records office, SECRETARY OF STATE, or other appropriate government body Perfecting the security makes the secured party’s claim official, puts the rest of the world on notice as to the creditor’s rights in the property, and gives the creditor the right to take advantage of special remedies in the event the debtor does not repay the loan A financing statement is a document that fully describes the secured transaction The
2000 amendments to Article 9 included a national financing statement form and designated the debtor’s location as the place to file against most tangible and intangible collateral A state may require the secured party to file a financing statement in addition to a copy of the agreement
In most states financing statements are effective only for a limited duration, such as five years ASECURED CREDITOR may extend the length of perfection by filing a continuation statement before the designated time period has expired If a secured creditor fails to continue the perfection, the security is not lost, but other creditors may claim the property The secured creditor may file another financing statement, but this would require another signature from the debtor
Amendments may be made to a financing statement A secured party may file a statement
Trang 4of release on some of the collateral once the
debtor has made payments equal in value to the
value of the released collateral If the
amend-ment adds collateral, the security for the new
collateral is effective from the date of the
amendment and not the date of the filing of
the original financing statement
One exception to the filing rule occurs when
the secured party has possession of the
collateral In this situation the creditor’s security
is complete once the parties have agreed to the
primary transaction Another exception is the
purchase money security interest in consumer
goods other than building fixtures and motor
vehicles The filing of a purchase money security
interest for such consumer goods is optional If
a secured party to a conditional sale does not
record or file the agreement, however, he may
lose the security if the buyer sells the goods to a
third party
Failure to perfect the security may have
drastic consequences for the secured party who
does not possess the collateral, although such
failure does not automatically mean that the
security will be lost If, however, another party
later stakes a claim to the collateral and files the
proper papers, the secured party may lose his or
her claim to the property because claims that
have been properly recorded or filed have
priority Thus a secured party is wise to file a
financing statement and other required
docu-ments to perfect the security and protect against
claims by other creditors of the debtor
Article 9 of the UCC is primarily concerned
with protecting the secured party’s right to the
collateral Many sections of Article 9 delineate
who has the first right to a debtor’s property if
multiple claims arise Precisely who has the first
right to the debtor’s property depends on a
number of factors, including whether the
security was perfected, who the other claimant
is, and the time that the claims arose
If a security interest has not been perfected,
the secured party’s claim to the collateral
property may be subordinate to any number
of creditors A person who has a lien on the
property takes before the secured party, as does
a person who has received a court order for
attachment of the property If a person buys the
collateral from the debtor while not knowing of
the security interest, the secured party loses the
property if the security was not perfected This
is true only if the buyer purchases the property
in the ordinary course of business from a person who is in the business of selling goods of that particular kind A pawnbroker, for example, is not such a seller because a pawnbroker will sell almost anything if the profit is worth the time and trouble
The identity of the buyer may influence the outcome of a dispute between a buyer of secured goods and the secured party Generally, a merchant, or a buyer who purchases property for a business, is held to a higher standard than a person who buys an item for personal use
Merchants are more familiar with markets than are ordinary consumers, and they may be expected to know that a seller was insolvent and that the goods being sold were subject to claims from other parties In any case, if any buyer knows that another party has a security interest in the property at the time the buyer made the purchase, the secured party retains the first claim
to the property and may keep the property out of that buyer’s possession until the debt associated with the secured property is fully paid
If two parties have a security interest in the same property, the party who filed first takes first If the competing security interests are both unperfected, the party who was first to attach the property as collateral has priority
Other creditors of a debtor may have the first claim on secured property However, the federal government has priority in some instances for collection of federal tax liens
Most states have artisan’s lien statutes, which give servicers of property the right to hold the property in their possession as security for payment of the service bill If the bill remains unpaid, the servicer has priority even over a secured party who has perfected his or her interest Once a servicer or repairperson is paid for his services, he must release the goods to either their owner or the party with the security interest in the goods
If the debtor to a secured party defaults, the secured party who has failed to perfect the security interest may lose first claim to the secured property to a receiver or an assignee for the benefit of creditors A receiver is a party who
is appointed by theBANKRUPTCYcourt to manage the finances of the debtor for the benefit of the debtor’s creditors An assignee for the benefit of creditors is a person chosen by the debtor to manage all or substantially all of the debtor’s property and to distribute it to creditors
Trang 5A secured party who has perfected the security interest has priority over an assignee or a receiver, but even a secured party who has perfected may not receive all of the debt owed under a security agreement by a bankrupt debtor Federal bankruptcy laws are designed
to distribute the assets of an insolvent debtor in
a fair and RATABLE manner among all of the debtor’s creditors
Satisfaction of the Secured Debt
Once a secured debt is repaid in full, the secured party must, upon written request by the debtor, send a termination statement to the debtor and file a termination statement with all offices that hold the financing statement A termination statement serves as evidence that the debt has been paid in full If the debtor makes a written request for the termination statement, the creditor must send the statement within ten days of the date of the request Even if the debtor does not so request, the secured party must send a termination statement to offices that hold the financing statement within 30 days
of the satisfaction of the debt
Default
If a debtor defaults on his obligations under a secured transaction, the secured party may foreclose on the security interest FORECLOSURE
can be accomplished in different ways The secured party may calculate the amount of the debt owed and sue the debtor without taking possession of the property Alternatively, unless the parties have agreed otherwise, the secured party may take possession of the collateral property and either keep it or sell it In either case, if the value received by the secured party does not fully satisfy the debt, the secured party may sue the debtor for the deficiency
In most states a secured party may take possession of the collateral without judicial involvement if doing so can be accomplished without aBREACH OF THE PEACE For example, the secured party may repossess a vehicle if it is parked outdoors If, however, the agent of the secured party must break into a garage to repossess the vehicle, such action would be a breach of the peace because it would require breaking and entering, a criminal offense
If a consumer has defaulted on a secured transaction but has paid 60 percent or more on the debt, most states prohibit a secured party from taking the security and keeping the
windfall In such cases the secured party may either sue in court for the money outstanding or take the property and return part of the money
In other situations a secured party may be entitled to any excess value or income that results from the debtor’s default
The retention of collateral by a secured party after the debtor’s default is called STRICT FORECLOSURE If a secured party decides to keep collateral in satisfaction of a debt, the secured party must send written notice to the debtor In transactions involving collateral other than consumer goods, a secured party may be obliged to send notice of the strict foreclosure
to any other parties who have security in the collateral property If a party objects to the strict foreclosure, the secured party must sell or otherwise dispose of the collateral If no other party objects to the strict foreclosure, the secured party may keep the collateral
A secured party who sells or leases collateral after a debtor defaults may charge the debtor for reasonable expenses incurred in the sale or lease This charge can include attorneys’ fees and court costs The money made from a sale of collateral rarely satisfies a debt because such sales do not bring favorable prices If there is a surplus of money after the collateral is sold, all expenses are accounted for, and the sale or lease
is applied to the debt, other parties holding a security interest in the collateral must be paid with the surplus money
Unless the parties have agreed otherwise, a debtor who is in possession of the collateral and who has defaulted on the obligations in a secured transaction has the right to redeem the collateral before the secured party takes action
To avoid foreclosure of the security interest by the secured party, the debtor may pay the unpaid balance of the debt secured by the collateral, as well as any reasonable expenses incurred by the secured party in taking, holding, and preparing the foreclosure This does not mean the debtor must pay the entire amount of the debt; rather, the debtor must make those payments that are in default Some security agreements have an ACCELERATION CLAUSE that makes all payments due immediately upon default, but a court may hold that such a clause should not be enforced if the debtor has brought the payments up to date before the secured party has acted on the delinquency A secured party who violates default provisions
Trang 6may be liable to the debtor for losses resulting
from that conduct
FURTHER READINGS
Brook, James 2002 Secured Transactions: Examples and
Explanations 2d ed New York: Aspen Law & Business.
Dalton, Elizabeth 1986 “The Consequences of
Commer-cially Unreasonable Dispositions of Collateral: Haggis
Management, Inc v Turtle Management, Inc.” Utah Law
Review.
Epstein, David G., Steve H Nickles, and Edwin E Smith.
2003 Nine Questions: Secured Debt Deals in the 21st
Century St Paul, Minn.: Thomson/West.
Huffaker, John 2000 “Good News and Bad News: Revisions
to UCC Article 9 ” Texas Banking (August).
CROSS REFERENCES
Attachment; Bankruptcy; Collateral; Consumer Credit;
Express; Obligor; Security; Sales Law.
SECURITIES
Securities are evidence of a corporation’s debts or
property
Securities are documents that merely
repre-sent an interest or a right in something else; they
are not consumed or used in the same way as
traditional consumer goods Government
regula-tion of consumer goods attempts to protect
consumers from dangerous articles, misleading
advertising, or illegal pricing practices Securities
laws, by contrast, attempt to ensure that investors
have an informed, accurate idea of the type of
interest they are purchasing and its value
Types of securities include notes, stocks,
treasury stocks, bonds, debentures, certificates
of interest or participation in profit-sharing
agreements, collateral-trust certificates,
preorga-nization certificates or subscriptions, transferable
shares, investment contracts, voting-trust
certifi-cates, certificates of deposit for a security, and a
fractional undivided interest in gas, oil, or other
mineral rights Under certain circumstances,
interests in oil- and gas-drilling programs,
interests in partnerships, REAL ESTATE
CONDOMI-NIUMS AND COOPERATIVES, and farm animals and
land also have been found to be securities
Certain types of notes, such as a note secured
by a home mortgage or a note secured by
accounts receivable or other business assets, are
not securities
Both federal and state laws regulate
securi-ties Before 1929, companies could issue stock at
will Bogus corporations sold worthless stock;
other companies issued and sold large amounts
of stock without considering the effect of
unlimited issues on shareholders’ interests, the value of the stock, and ultimately the U.S
economy Federal securities law consists of a handful of laws passed between 1933 and 1940,
as well as legislation enacted in 1970 The federal laws stem from Congress’s power to regulate interstate commerce Therefore, the laws are generally limited to transactions involving transportation or communication using interstate commerce or the mail Federal laws are generally administered by theSECURITIES AND EXCHANGE COMMISSION (SEC), established
by the Securities Exchange Act of 1934 (15 U.S.C.A §§ 78a et seq.) Securities regulation focuses mainly on the market for common stocks The SARBANES-OXLEY ACT OF2002 (Public Company Accounting Reform and Investor Protection Act), Pub L 107-204, 116 Stat
745, makes securities FRAUD a serious federal crime and also increases the penalties for white-collar crimes In addition, it created an oversight board for the accounting profession
Securities are traded on markets Some, but not all, markets have a physical location The essence of a securities market is its formal or informal communications systems whereby buyers and sellers make their interests known and execute transactions These trading markets are susceptible to manipulative and deceptive practices, such as manipulation of prices or
“insider trading,” that is, gaining an advantage
on the basis of nonpublic information To prevent such fraudulent practices, all securities laws contain general antifraud provisions
Exchange markets, of which the New York Stock Exchange is the largest, have traditionally operated in a rigid manner by careful delinea-tion of numbers and qualificadelinea-tions of members and the specific functions members may perform Conversely, over-the-counter markets (OTC) are less structured and typically do not have a physical location
Based upon dollar volume, the bond market
is the largest Bonds are the debt instruments issued by federal, state, and local government, as well as corporations The bond market attracts mainly professional and institutional investors, rather than the general public In addition, many of these obligations are exempt from direct regulatory provisions of the federal securities laws and consequently usually receive little attention from SEC regulators However,
in the mid-1980s, a debacle occurred in theJUNK
Trang 7BOND market, which included INSIDER TRADING
charges (Junk bonds are highly risky bonds with
a high yield.) The scandal, which involved the investment firm of Drexel Burnham Lambert Inc and trader Michael R Milken, attracted much attention and a flurry of SEC enforce-ment activity
Securities Act of 1933
The first significant federal securities law was the Securities Act of 1933 (15 U.S.C.A §§ 77a
et seq.), passed in the wake of the great STOCK MARKET crash of 1929 This law is essentially a disclosure statute Although the 1933 act applies
by its terms to any sale by any person of any security, it contains a number of exemptions
The most important exemption involves securi-ties sold in certain kinds of transactions, including transactions by someone other than
an issuer, underwriter, or dealer In essence, this provision effectively exempts almost all second-ary trading, which involves securities bought and sold after their original issue Certain small offerings are also exempt
Although the objective of the 1933 act’s registration requirements is to enable a pro-spective purchaser to make a reasoned decision based on reliable information, this goal is not always accomplished For example, an issuer may be reluctant to divulge real weaknesses in
an operation and so may try to obfuscate some
of the problems while complying in theory with the law In addition, complex financial infor-mation can be extremely difficult to explain in terms understandable to the average investor
Disclosure is accomplished by the registration
of security offerings In general, the law provides that no security may be offered or sold to the public unless it is registered with the SEC
Registration does not imply that the SEC approves of the issue but is intended to aid the public in making informed and educated deci-sions about purchasing a security The law delineates the procedures for registration and specifies the type of information that must be disclosed
The registration statement has two parts:
first, information that eventually forms the prospectus, and second, information, which does not need to be furnished to purchasers but is available for public inspection within SEC files Full disclosure includes management’s aims and goals; the number of shares the
company is selling; what the issuer intends to
do with the money; the company’s tax status; contingent plans if problems arise; legal stand-ing, such as pending lawsuits; income and expenses; and inherent risks of the enterprise
A registration statement is automatically effective 20 days after filing, and the issuer may then sell the registered securities to the public Nevertheless, if a statement on its face appears incomplete or inaccurate, the SEC may refuse to allow the statement to become effective A misstatement or omission of a material fact may result in the registration’s suspension Although the SEC rarely exercises these powers, it does not simply give cursory approval to registration statements The agency frequently issues“letters
of comment,” also known as “deficiency letters,” after reviewing registration documents The SEC uses this method to require or suggest changes or request additional information Most issuers are willing to cooperate because the SEC has the authority to permit a registra-tion statement to become effective less than
20 days after filing The SEC will usually accelerate the 20-day waiting period for a cooperative issuer
For many years an issuer was entitled only
to register securities that would be offered for sale immediately Since 1982, under certain circumstances an issuer has been permitted to register securities for a quick sale at a date up to two years in the future This process, known as shelf registration, enables companies that fre-quently offer debt securities to act quickly when interest rates are favorable
The 1933 act prohibits offers to sell or to buy before a registration is filed The SEC takes
a broad view of what constitutes an offer For example, the SEC takes the position that excessive or unusual publicity by the issuer about a business or the prospects of a particular industry may arouse such PUBLIC INTEREST that the publicity appears to be part of the selling effort
Offers but not sales are permitted, subject to certain restrictions, after a registration statement has been filed but before it is effective Oral offers are not restricted Written information may be disseminated to potential investors during the waiting period via a specially designed prelimi-nary prospectus Offers and sales may be made to anyone after the registration statement becomes
Trang 8effective A copy of the final prospectus usually
must be issued to the purchaser
The 1933 act provides for civil liability for
damages arising from misstatements or
omis-sions in the registration statement or for offers
made in violation of the law In addition, the
law provides for civil liability for misstatements
or omissions in any offer or sale of securities,
whether or not the security is registered Finally,
the general antifraud provision in the law
makes it unlawful to engage in fraudulent or
deceitful practices in connection with any offer
or sale of securities, whether or not they are
registered
In general, any person who acquires an
equity whose registration statement, at the time it
became effective, contained an“untrue statement
of a material fact or omitted to state a material
fact” may sue to recover the difference between
the price paid for the security (but not more than
thePUBLIC OFFERINGprice) and the price for which
it was disposed or (if it is still owned) its value at
the time of the lawsuit A purchaser must show
only that the registration statement contained a
material misstatement or omission and that he
or she lost money In many circumstances the
purchaser need not show that he or she relied on
the misstatement or omission or that a
prospec-tus was even received The SEC defines material
as information an average prudent investor
would reasonably need to know before
purchas-ing the security
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 addresses
many areas of securities law Issuers, subject to
certain exemptions, must register with the SEC
if they have a security traded on a national
exchange This requirement should not be
confused with the registration of an offering
under the 1933 act; the two laws are distinct
Securities registered under the 1933 act for a
public offering may also have to be registered
under the 1934 act
To provide the public with adequate
infor-mation about companies with publicly traded
stocks, issuers of securities registered under the
1934 act must file various reports with the SEC
Since 1964 this disclosure requirement has
applied not only to companies with securities
listed on national securities exchanges but also
to companies with more than 500 shareholders
and more than $5 million in assets False
or misleading statements in any documents required under the 1934 act may result in liability to persons who buy or sell securities in reliance on these statements
Under the 1934 act, the SEC may revoke or suspend the registration of a security if after notice and opportunity for hearing it determines that the issuer has violated the 1934 act or any rules or regulations promulgated thereunder
Moreover, the 1934 act authorizes the SEC to suspend trading in any security for not more than ten days, or, with the approval of the president, to suspend trading in all securities for not more than 90 days, or to take other measures
to address a major market disturbance
Proxy Solicitation The 1934 act also regulates
PROXY solicitation, which is information that must be given to a corporation’s shareholders as a prerequisite to soliciting votes Prior to every shareholder meeting, a registered company must provide each stockholder with a proxy statement containing certain specified material, along with a form of proxy on which the security holder may indicate approval or disapproval of each proposal expected to be presented at the meeting
For securities registered in the names of brokers, banks, or other nominees, a company must inquire into the beneficial ownership of the securities and furnish sufficient copies of the proxy statement for distribution to all the beneficial owners
Copies of the proxy statement and form of proxy must be filed with the SEC when they are first mailed to security holders Under certain circumstances preliminary copies must be filed ten days before mailing Although a proxy statement does not become effective in the same way as a statement registered under the 1933 act, the SEC may comment on and require changes in the proxy statement before mailing Proxies for
an annual meeting calling for election of directors must include a report containing financial statements covering the previous two fiscal years
Special rules apply when a contest for election or removal of directors is scheduled
A security holder owning at least $1,000,
or 1 percent, of a corporation’s securities may present a proposal for action via the proxy statement Upon a shareholder’s timely notice
to the corporation, a statement of explanation is included with the proxy statement Security holders will have an opportunity to vote on the proposal on the proxy form The device is
Trang 9unpopular with management, but shareholders have used this provision to change or challenge management compensation, the conduct of annual meetings, shareholder voting rights, and issues involving DISCRIMINATION and pollu-tion in company operapollu-tions
A company that distributes a misleading proxy statement to its shareholders may incur liability to any person who purchases or sells its securities based on the misleading statement
The U.S Supreme Court has held that an omitted fact is material if a “substantial likelihood” exists that a reasonable shareholder would consider the information important in deciding how to vote Mere NEGLIGENCE is sufficient to permit recovery; no evil motive or reckless disregard need be shown Oftentimes,
an appropriate remedy might be a PRELIMINARY INJUNCTION requiring circulation of corrected materials; it may not be feasible to rescind a tainted transaction after voting Courts have, however, sometimes ordered a new election of directors, but such action must be in the best interests of all shareholders
Takeover Bids and Tender Offers Since the 1960s, increasing numbers of takeover bids and tender offers have resulted in bitter contests between the aggressor and the target of the bid
A corporate or individual aggressor might attempt to acquire controlling stock in a publicly held corporation in a number of ways: by buying
it outright for cash, by issuing its own securities in exchange, or by a combination of both methods
Stock may be acquired in private transactions, by purchases through brokers in the open market, or
by making a public offer to shareholders to tender their shares either for a fixed cash price or for
a package of securities from the corporation making the offer
Takeover bids that involve a public offer for securities of the aggressor company in exchange for shares of the targeted company require that the securities be registered under the 1933 act and that a prospectus be delivered to solicited shareholders For many years, however, cash tender offers had no SEC filing requirements
The WILLIAMS ACT of 1968 (15 U.S.C.A §§ 78l, 78m, 78n) amended many sections of the 1934 act to address problems with tender offers
Although most LITIGATION under the Williams Act is between contending parties, courts generally focus on whether the relief sought serves to protect public stockholders
Pursuant to the Williams Act, any person
or group who takes ownership of more than
5 percent of any class of specific registered securities must file a statement within ten days with the issuer of the securities, as well as with the SEC Required information includes the background of the person or group; the source
of funds used and the purpose of the acquisi-tion; the number of shares owned; and any relevant contracts, arrangements, or under-standings The issue of whether an acquisition has taken place, thereby triggering the filing requirement, has been the subject of litigation Courts have disagreed on this issue when confronted with a group of shareholders who
in the aggregate own more than 5 percent and who agree to act together for the purpose of affecting control of the company but who do not act to acquire any more shares
Restrictions also apply to persons making a
TENDER OFFERthat would result in ownership of more than 5 percent of a class of registered securities Such a person must first file with the SEC and furnish to each offeree a statement similar to that required of a person who has obtained more than 5 percent of registered stock A tender offer must be held open for
20 days; a change in the terms holds an offer open at least ten more days In addition, the offer must be made to all holders of the class of securities sought, and a uniform price must be paid to all tendering shareholders A share-holder may withdraw tendered shares at any time while the tender offer remains open Moreover, if the person making the offer seeks fewer than all outstanding shares and the response is oversubscribed, shares will be taken
up on aPRO RATAbasis
The 1934 act also requires every person who directly or indirectly owns more than 10 percent
of a class of registered equity securities, and every officer and director of every company with a class of equity securities registered under that section, to file a report with the SEC at the time he acquires the status, and at the end of any month in which he acquires or disposes of these securities This provision is designed to prevent short-swing profits, earned when an individual with inside information engages in short-term trading
Antifraud Provisions One impetus for enact-ment of the 1934 act was the damage caused by pools, which were a device used to run up the
Trang 10prices of securities on an exchange The pool
would engage in a series of well-timed
transac-tions, designed solely to manipulate the market
price of a security Once prices were high, the
members of the pool unloaded their holdings
just before the price dropped The 1934 act
contains specific provisions prohibiting a variety
of manipulative activities with respect to
exchange-listed securities It also contains a
catchall section giving the SEC the power to
promulgate rules to prohibit any“manipulative
or deceptive device or contrivance” with respect
to any security Although isolated instances of
manipulation still exist, the provisions manage
to prevent widespread problems
Section 10(b) of the 1934 act contains a
broadly worded provision permitting the SEC to
promulgate rules and regulations to protect the
public and investors by prohibiting
manipula-tive or decepmanipula-tive devices or contrivances via the
mails or other means of interstate commerce
The SEC has promulgated a rule, known as rule
10b-5, that has been invoked in countless SEC
proceedings The rule states:
It shall be unlawful for any person,
directly or indirectly, by use of any means or
instrumentality of interstate commerce, or of
the mails, or of any facility of any national
securities exchange, (1) to employ any
device, scheme, or artifice to DEFRAUD, (2)
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 light of circumstances under which
they were made, not misleading, or (3) 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
In the 1960s and early 1970s, the courts
broadly interpreted rule 10b-5 For example, the
rule was applied to impose liability for negligent
misrepresentations and for breach of FIDUCIARY
duty by corporate management and to hold
directors, lawyers, accountants, and
underwri-ters liable for their failure to prevent
wrongdo-ing by others Beginnwrongdo-ing in 1975, the U.S
Supreme Court sharply curtailed this broad
reading Doubt exists as to the continued
viability of the decisions in some of the prior
cases Nevertheless, although rule 10b-5 does
not address civil liability for a violation, since
1946 courts have recognized an implied private
RIGHT OF ACTION in rule 10b-5 cases, and the
Supreme Court has acknowledged this implied right (Superintendent v Bankers Life, 404 U.S 6,
30 L Ed 2d 128, 92 S Ct 165[1971])
Rule 10b-5 applies to any purchase or sale,
by any person, of any security There are no exemptions: it applies to registered or unregis-tered securities, publicly held or closely held companies, and any kind of entity that issues securities, including federal, state, and local government securities
Clauses 1 and 3 of rule 10b-5 use the terms fraud and deceit Fraud or deceit must occur “in connection with” a purchase or sale but need not relate to the terms of the transaction For example, in Superintendent v Bankers Life, the U.S Supreme Court found a violation of rule 10b-5 when a group obtained control of an insurance company then sold certain securities and misappropriated the proceeds for their own benefit In another case a publicly held corporation made misstatements in a press release Even though the company was not engaged at that time in buying or selling its own shares, a U.S court of appeals ruled that the statements were made “in connection with”
purchases and sales being made by shareholders
on the open market
Insider Trading Rule 10b-5 protects against insider trading, which is a purchase or sale by a person or persons with access to information not available to those with whom they deal or to traders generally Originally, the prohibition against insider trading dealt with purchases by corporations or their officers without disclosure
of material, favorable corporate information
Beginning in the early 1960s, the SEC broad-ened the scope of the rule The rule now operates as a general prohibition against any trading on inside information in anonymous stock exchange transactions, in addition to traditional face-to-face proceedings For exam-ple, in In re Cady, Roberts & Co., 40 S.E.C 907 (1961), a partner in a brokerage firm learned from the director of a corporation that it intended to cut its dividend Before the news was generally disseminated, the broker placed orders to sell the stock of some of his customers In another case officers and employ-ees of an oil company made large purchases of company stock after learning that exploratory drilling on some company property looked extremely promising (SEC v Texas Gulf Sulphur, 401 F 2d 833 [2d Cir 1968]) In these