In the case of common stocks, par value usually does not correspond to the market value of a stock, and a stated par value is of little significance.. Blue chip stocks are stocks traded
Trang 1for witty phrases made him highly quotable, but his inconsistent voting record left only an ambiguous mark on U.S law At age 43, he was among the youngest appointees to the Court, and at age 66 also one of the youngest justices
to retire
Born in Jackson, Michigan, on January 23,
1915, Stewart came from old money and a family steeped in law and politics Educated at University School, Hotchkiss, as well as at Yale, Cambridge, and Yale Law School, he earned his law degree from Yale in 1941 A stint on Wall Street followed He served in the U.S Navy duringWORLD WAR IIand returned to Ohio after the war After working for a large law firm in his
home state, Stewart briefly followed his father’s footsteps into politics JAMES GARFIELD Stewart had been mayor of Cincinnati and a justice of the Ohio Supreme Court Potter Stewart served
on the city council and as vice mayor, but he soon abandoned political life to build his own legal practice
In 1954 President Eisenhower appointed Stewart to the federal bench Stewart’s high profile in the Ohio bar made him an attractive candidate for the Sixth Circuit Court of Appeals, where he served for the next four years He was widely respected for his compe-tence and efficiency as an appellate judge, and Eisenhower returned to him in 1958 when a seat opened on the Supreme Court Although southern senators who disliked his embrace of
SCHOOL DESEGREGATION offered scattered opposi-tion to his appointment, the nominaopposi-tion easily succeeded
On the Supreme Court, Stewart was a moderate justice He was criticized for indeci-sion, chiefly because he was often the unpre-dictable swing vote in cases that pitted the Warren Court’s activist and judicial restraint blocs against each other Stewart, however, followed his instincts on the Court without obvious resort to ideology or doctrine To the question of whether he was liberal or conserva-tive, he replied,“I am a lawyer,” explaining that the labels had little value for him in the political sphere and even less in law Stewart’s approach
in his opinions is notable for its plain-edged pragmatism In one case, he wrote ofOBSCENITY, stating, “I know it when I see it” (Jacobellis v Ohio, 378 U.S 184, 84 S Ct 1676, 12 L Ed 2d
793[1964])
Potter Stewart 1915–1985
❖
1915 Born, Jackson, Mich.
1914–18 World War I
1939–45 World War II
◆
1941 Graduated from Yale Law School 1942–45 Served in U.S Navy
1950–53 Korean War
1950–53 Served on Cincinnati City Council
1954–58 Sat on the Sixth Circuit Court of Appeals
1961–73 Vietnam War
1962 Dissented in Engel v Vitale, which outlawed prayer in schools
1965 Dissented in Griswold v Connecticut
1985 Died, Hanover, N.H.
1976 Along with Powell and Stevens, wrote judgment allowing resumption of
capital punishment in Gregg v Georgia
1973 Joined majority in Roe v Wade
1958–81 Served as associate justice of the U.S Supreme Court
1968 Wrote majority opinion in Jones v Mayer
Potter Stewart.
PHOTOGRAPH BY CHASE
LTD COLLECTION OF
THE SUPREME COURT OF
THE UNITED STATES
378 STEWART, POTTER
Trang 2Stewart’s pragmatism did not allow for
subjectivity, however Although he regarded
Connecticut’s ban on the use of contraceptives
as “uncommonly silly,” he found the law
constitutional and dissented from the majority
in Griswold v Connecticut (381 U.S 479, 85 S
Ct 1678, 14 L Ed 2d [1965]) He agreed with
the majority’s expansion of a right to privacy in
the landmark ABORTION case, ROE V WADE, 410
U.S 113, 93 S Ct 705, 35 L Ed 2d 147 (1973),
but he also attacked the Court’s tendency to
invalidate any state law it found unwise
In the arena of civil rights and liberties,
Stewart’s moderate outlook clearly revealed
itself He sided with claimants in 52 percent of
these cases Among his most notable decisions
in favor of civil liberties was Jones v Alfred H
Mayer Co., 392 U.S 409, 88 S Ct 2186, 20 L
Ed 2d 1189 (1968), in which theWARREN COURT
upheld measures that protected African
Amer-icans against DISCRIMINATIONin housing
While on the Warren Court, Stewart
dissented in Engel v Vitale (1962) and Abington
Township v Schempp (1963), which struck
down enforced prayer and Bible readings in
public schools, respectively On the Burger
Court, Stewart joined the majority in Furman v
Georgia (1972), which declared mandatory death
sentences unconstitutional, and also in Gregg v
Georgia (1976), which upheld STATES’RIGHTS to
impose the death penalty in certain extreme
situations, such as when one individual
deliber-ately kills another
Stewart’s legacy on the Court defies easy
categorization At best, Stewart is remembered
for his pragmatism, and at worst for leaving a
less than cohesive body of opinions He retired
from the Court in 1981 and died in Hanover,
New Hampshire, on December 7, 1985
FURTHER READINGS
Amar, Vikram David 1999 “From Watergate to Ken Starr:
Potter Stewart ’s ‘Or of the Press’ a Quarter Century
Later ” Hastings Law Journal 50 (April).
Jacobsen, Joel 2002 “Remembered Justice: The Backround,
Early Career and Judicial Appointments of Justice
Potter Stewart ” Akron Law Review 35 (winter).
Schwartz, Bernard 1990 The Ascent of Pragmatism: The
Burger Court in Action Reading, Mass.: Addison-Wesley.
vSTIMSON, HENRY LEWIS
Henry Lewis Stimson was a lawyer and a
distinguished public servant, occupying key
posts in the administrations of five presidents
between 1911 and 1945 AsSECRETARY OF STATE,
he sought disarmament, while as secretary of war he advocated the use of the atomic bomb against Japan inWORLD WAR II
Stimson was born on September 21, 1867,
in New York City He earned a bachelor’s degree from Yale in 1888, a master’s degree from Harvard University in 1889, and a bachelor of laws degree from Harvard in 1890
He was admitted to the New York bar in 1891 and joined the law firm headed by Elihu Root, a prominent attorney and influential figure in the
REPUBLICAN PARTY
In 1906 President THEODORE ROOSEVELT
appointed Stimson U.S attorney for the South-ern District of New York He left the post in
1909 to run as the Republican nominee for governor of New York Although he lost the
1910 election, his stock continued to rise
PresidentWILLIAM HOWARD TAFT named Stimson secretary of war in 1911, a position he held until the end of the Taft administration in 1913, when he returned to his New York law practice
As secretary of war, Stimson continued former secretary Elihu Root’s work in reorga-nizing the Army Following the outbreak of
WORLD WAR I, he adopted an active role in
Henry L Stimson.
LIBRARY OF CONGRESS
THE BOMBS DROPPED
ONHIROSHIMA AND
NAGASAKI ENDED THE WAR THEY ALSO MADE IT WHOLLY CLEAR THAT WE MUST NEVER HAVE ANOTHER WAR
—H ENRY L S TIMSON
STIMSON, HENRY LEWIS 379
Trang 3preparing the United States for the conflict.
Stimson enlisted in the Army in 1917 and served in France as an artillery officer, ulti-mately reaching the rank of colonel
Stimson did not reenter public service until
1927, when President CALVIN COOLIDGE named him governor of the Philippine Islands In 1929 President HERBERT HOOVER elevated Stimson to secretary of state, a position that put him on the world stage As secretary, Stimson sought to continue the policy of military disarmament, participating in the London Naval Conference
of 1930
Following the Japanese invasion of Man-churia in 1931, Stimson wrote a diplomatic note
to both China and Japan, informing them that the United States would not recognize territorial
or other changes made in violation of U.S
treaty rights The “Stimson Doctrine” was invoked as the rationale for successive economic embargoes against Japan during the 1930s
With the election of President FRANKLIN D
ROOSEVELT, a Democrat, in 1932, Stimson returned to his law practice and to private life
By the end of the 1930s, however, with the growing belligerence of Germany and Japan, Stimson emerged as an opponent of U.S
isolationist policies When World War II began
in 1939, Stimson became a leading member of the Committee to Defend America by Aiding the Allies, urging the U.S government to provide aid to Great Britain and France
President Roosevelt, who also sought to help the Allies, appointed Stimson secretary of war in
1940 By appointing a Republican to this key post, Roosevelt strengthened bipartisan support for his foreign policy Stimson remained secre-tary of war during World War II, heading an
Army of more than ten million, and he received praise for his quiet but firm administration of the war effort
In 1945, acting as chief presidential adviser
on atomic programs, Stimson directed the Manhattan Project, which resulted in the creation of the atomic bomb He recommended
to PresidentHARRY S.TRUMANthat atomic bombs
be dropped on Japanese cities of military importance Truman followed his advice, or-dering the bombings of Hiroshima and Naga-saki that brought a swift end to World War II Stimson defended his recommendation, arguing that the bombings ended the war quickly and therefore saved more lives than were lost Stimson left office in September 1945 He published his autobiography, On Active Service
in Peace and War, in 1948 He died on October
20, 1950, in Huntington, New York
FURTHER READINGS Hodgson, Godfrey 1992 The Colonel: The Life and Wars of Henry Stimson, 1867–1950 Boston: Northeastern Univ Press.
Schmitz, David F 2001 Henry L Stimson: The First Wise Man Wilmington, Del.: SR Books.
STIPULATION
An agreement between attorneys that concerns business before a court and is designed to simplify
or shorten litigation and save costs
During the course of a civil lawsuit, criminal proceeding, or any other type of litigation, the opposing attorneys may come to an agreement about certain facts and issues Such an agree-ment is called a stipulation Courts look with favor on stipulations because they save time and simplify the matters that must be resolved Stipulations are voluntary, however, and courts
Henry Lewis Stimson 1867–1950
❖
1861–65
U.S Civil War
1867 Born, New York City
◆
1890 Earned LL.B.
from Harvard University
1906–09 Served as U.S.
attorney for the Southern District of New York
1911–13 Served as secretary of war under Taft
1914–18 World War I
◆
1927 Appointed governor of the Philippine Islands
1929–32 Served as secretary of state under Hoover
◆
1931 Developed Stimson Doctrine, which refused to recognize Japanese territorial expansion in Manchuria
❖
1950 Died, Huntington, N.Y.
1939–45 World War II
◆ ◆
1945 Recommended that atomic bombs
be dropped on Japanese cities of military importance
1948 On Active
Service in Peace and War
published 1940–45 Served
as secretary of war under Roosevelt and Truman
380 STIPULATION
Trang 4may not require litigants to stipulate with the
other side A valid stipulation is binding only on
the parties who agree to it Courts are usually
bound by valid stipulations and are required to
enforce them
Parties may stipulate to any matter
con-cerning the rights or obligations of the parties
The litigants cannot, however, stipulate as to the
validity or constitutionality of a statute or as to
what the law is, because such issues must be
determined by the court
Stipulations may cover a variety of matters
Parties are permitted to make stipulations to
dismiss or discontinue an action, to prescribe
the issues to be tried, or to admit, exclude, or
withdraw evidence During a court proceeding,
attorneys often stipulate to allow copies of
papers to be admitted into evidence in lieu of
originals or to agree to the qualifications of a
witness The parties can also enter into
agree-ments concerning the testimony an absent
witness would give if he were present, and the
stipulated facts can be used in evidence Such
evidentiary devices are used to simplify and
expedite trials by dispensing with the need to
prove uncontested factual issues
Generally, parties to an action can stipulate as
to an agreed statement of facts on which to submit
their case to the court Stipulations of this nature
are encouraged by the courts A number of other
stipulations have been held to be valid, including
those that relate to attorneys’ fees and costs
A stipulation does not need to be in a
particular form, provided it is definite and
certain A number of statutes and court rules
provide that stipulations reached out of court
must be in writing to prevent fraudulent claims
of oral stipulation, circumvent disputes
con-cerning the terms of the stipulation, and relieve
the court of the burden of resolving such
disputes Though an oral stipulation in open
court is binding, a stipulation made in the
judge’s chamber must be in writing
STOCK
A stock is a security issued by a corporation that
represents an ownership right in the assets of the
corporation and a right to a proportionate share of
profits after payment of corporate liabilities and
obligations
Shares of stock are reflected in written
instruments known as stock certificates Each
share represents a standard unit of ownership in
a corporation Stock differs from consumer goods in that it is not used or consumed; it does not have any intrinsic value but merely represents a right in something else Neverthe-less, a stockholder is a real owner of a corporation’s property, which is held in the name of the corporation for the benefit of all its stockholders An owner of stock generally has the right to participate in the management of the corporation, usually through regularly scheduled stockholders’ (or shareholders’) meetings Stocks differ from other SECURITIES
such as notes and bonds, which are corporate obligations that do not represent an ownership interest in the corporation
The value of a share of stock depends upon the issuing corporation’s value, profitability, and future prospects The market price reflects what purchasers are willing to pay based on their evaluation of the company’s prospects
Two main categories of stock exist: com-mon and preferred An owner ofCOMMON STOCK
is typically entitled to participate and vote at stockholders’ meetings In addition to common stock, some corporate BYLAWSor charters allow for the issuance of PREFERRED STOCK If a corporation does not issue preferred stock, all
of its stock is common stock, entitling all holders to an equalPRO RATAdivision of profits
or net earnings, should the corporation choose
to distribute the earnings as dividends Pre-ferred stockholders are usually entitled to priority over holders of common stock should
a corporation liquidate
Preferred stocks receive priority over com-mon stock with respect to the payment of dividends Holders of preferred stock are entitled to receive dividends at a fixed annual rate before any dividend is paid to the holders of common stock If the earnings to pay a dividend are more than sufficient to meet the fixed annual dividend for preferred stock, then the remainder of the earnings will be distributed to holders of common stock If the corporate earnings are insufficient, common stockholders will not receive a dividend In the alternative, a remainder may be distributed pro rata to both preferred and common classes of the stock In such a case, the preferred stock is said to
“participate” with the common stock
A preferredSTOCK DIVIDENDmay be cumula-tive or noncumulacumula-tive In the case of cumulacumula-tive
STOCK 381
Trang 5preferred stock, an unpaid dividend becomes a charge upon the profits of the next and succeeding years These accumulated and un-paid dividends must be un-paid to preferred stock-holders before common stockstock-holders receive any dividends Noncumulative preferred stock means that a corporation’s failure to earn or pay
a dividend in any given year extinguishes the obligation, and no debit is made against the succeeding years’ surpluses
Par value is the face or stated value of a share of stock In the case of common stocks, par value usually does not correspond to the market value of a stock, and a stated par value is
of little significance Par is important with respect to preferred stock, however, because it often signifies the dollar value upon which dividends are figured Stocks without an assigned stated value are called no par Some states have eliminated the concept of par value
Blue chip stocks are stocks traded on a securities exchange (listed stock) that have minimum risk due to the corporation’s finan-cial record Listed stock means a company has filed an application and registration statement with both the SECURITIES AND EXCHANGE COMMIS-SIONand a securities exchange The registration statement contains detailed information about the company to aid the public in evaluating the stock’s potential Floating stock is stock on the open market not yet purchased by the public
Growth stock is stock purchased for its perceived potential to appreciate in value, rather than for its dividend income.PENNY STOCKS are highly speculative stocks that usually cost under
a dollar per share
FURTHER READINGS Hazen, Thomas 2006 Securities Regulation in a Nutshell 9th
ed Eagen, Md.: West Group.
Palmiter, Allen 2005 Security Regulation 3d ed Boston:
Aspen.
Soderquist, Larry, and Theresa Gabaldon 2006 Securities Law: Concepts and Insights 3d ed Rochester, N.Y.:
Foundation Press.
CROSS REFERENCES Capital Stock; Common Stock; Corporations; Par; Pre-ferred; Securities; Stock Market.
STOCK DIVIDEND
A corporate distribution to shareholders declared out of profits, at the discretion of the directors of the corporation, which is paid in the form of
shares of stock, as opposed to money, and increases the number of shares
When a corporation declares a stock divi-dend, it adds undivided profits, which cannot
be used to pay dividends, to the capital invested
in the corporation, to reflect the additional shares it is issuing The stockholder’s increased number of shares represent the same propor-tion of the value of the company as the stockholder originally held (that is, the stock-holder owns the same percentage of the corporation as prior to the declaration of the stock dividend); however, the cash value of an individual share is not reduced
Shares issued as stock dividends are evi-dence that additional assets have been added to the capital The value of the shares of a corporation often, but not always, increases following a stock dividend A stock dividend is actually a part of corporation bookkeeping
A stock split is different from a stock dividend in that no adjustment is made to the capital; instead, the number of shares represent-ing the capital increase The cash value of an individual share, therefore, decreases in propor-tion to the size of the stock split
STOCK MARKET The stock market is composed of various organized stock exchanges and over-the-counter markets
The trading ofSECURITIES such as stocks and bonds is conducted in stock exchanges, which are grouped under the general term stock market The stock market is an important institution for capitalist countries because it encourages investment in corporate securities, providing capital for new businesses and income for investors In the 1990s, large num-bers of ordinary persons came to own stock through pension funds, deferred employee savings plans, investment clubs, or mutual funds
The New York Stock Exchange is the oldest (formed in 1792) and largest stock exchange in the United States, but other exchanges operate
in many major U.S cities The activities of the stock market are closely monitored by the federal SECURITIES AND EXCHANGE COMMISSION
(SEC) to prevent the manipulation of stock prices and other activities that lessen investor confidence
382 STOCK DIVIDEND
Trang 6Stock exchanges are private organizations
with a limited number of members Stock
brokerage houses generally cannot purchase
seats on an exchange Instead, a member of
the firm holds a seat personally In some cases
several partners of a brokerage house will be
members of an exchange The price of a seat
fluctuates depending on the state of the
economy, but seats on the New York Stock
Exchange have sold for more than $1 million
Some exchange members are specialists in
particular types of securities, while others act as
agents for other brokers A small number of
brokers who pay an annual fee but are not
members also have access to the trading floor
A stock exchange is essentially a marketplace
for stocks and bonds, with stockbrokers earning
small commissions on each transaction they
make Stocks that are handled by one or more
stock exchanges are called listed stocks For a
corporation’s stock to be listed on an exchange,
the company must meet certain exchange
requirements Each exchange has its own
criteria and standards, but in general a company
must show that it has sufficient capital and is in
sound financial condition Once a company is
listed, trading in its stock will be suspended if
the company’s financial condition deteriorates
to the point that it no longer meets the
exchange’s minimum requirements
When individuals wish to purchase a stock,
they place an order with a brokerage house The
BROKER gets a quotation or price and sends the
order to the firm’s representative on the floor of
the stock exchange The representative
negoti-ates the sale and notifies the brokerage house
Transactions happen rapidly, and each one is recorded on a computer system and sent immediately to an electronic ticker that displays stock information on a screen At one time this information was generally only available at stock brokerage houses, but the daily stock ticker is now available on television and through the Internet
New York Stock Exchange transactions may
be made in three ways A cash transaction requires payment and delivery of the stock
on the day of purchase A regular transaction requires payment and delivery of the stock by
The trading of stocks
on the stock market involves millions of shares per day and has a direct effect on the U.S economy As
a result, the stock market is closely regulated by the federal government.
AP IMAGES
Dow Jones Performance After Major U.S National Security Events
a
If the event occurred after the U.S market closed or on a non-trading day, the % change for day reflects the next trading day's activity.
ILLUSTRATION BY GGS CREATIVE RESOURCES REPRODUCED BY PERMISSION OF GALE, A PART OF CENGAGE LEARNING.
STOCK MARKET 383
Trang 7noon on the third day following a full business day Around 95 percent of stock is purchased under these terms Finally, purchase can be made through a seller’s option contract, which requires payment and delivery of the stock within any specified time not exceeding 60 days, though seven days is the most common period
All transactions not made in the stock exchanges take place in over-the-counter (OTC) trading An OTC transaction is not an auction on the stock exchange floor but a negotiation between a seller and a buyer Most sales of bonds occur in OTC trading as do most new issues of securities In the 1980s discount OTC brokerage firms appeared, offering lower commissions on stock transactions for investors who were willing to do more research on their own By the 1990s, these firms had proliferated
Dealers in OTC trading are not confined to large cities, as are stock exchanges, but can be found in many locations throughout the United States In 1971 these firms were linked to an electronic communications system and became the National Association of Securities Dealers Automated Quotations (NASDAQ) By the 1990s NASDAQ had become the second largest U.S stock market
During the late 1990s, a number of investors began engaging in a process called day trading, whereby investors would purchase stock shares and then attempt to sell them quickly thereafter when the prices rose The phenomenon corre-sponded with the development of stock trading over the Internet, which allowed individuals to trade stocks through their computers without the need for a stockbroker Many individuals who traded over the Internet also engaged in day trading Although day trading has some potential for success, analysts have warned that investments take time to develop in order
to be successful Statistics showed that only
10 percent of day traders maintained profitable results, and by the early 2000s, it had become clear that this type of trading would likely result
in losses for investors
The health of the U.S economy is typically measured by the stock market When stock prices rise and there is a bull market, U.S
business is assumed to be doing well When stock prices fall and there is a bear market, a downturn in business and the economy is assumed The stock market crash of 1929 was the signature event that triggered the Great
Depression of the 1930s The crash also led to the enactment of the Securities and Exchange Act of 1934, which created the SEC and federal government oversight of the stock market Even with government regulation of the stock market, plunges in the value of stocks have led to economic recessions In the early 1980s, the stock market took a dramatic plunge
in value It was not until the 1990s that the market jumped markedly higher, fueled by technology, software, and Internet stocks This Dot Com bubble burst in the early 2000s That and the SEPTEMBER 11TH TERRORIST ATTACKS in
2001 caused the New York Stock Exchange (NYSE) to close for a period of six days, the longest closing since 1933 On Monday, Sep-tember 17, the Dow Jones Industrial Average suffered its greatest point loss in history after the NYSE reopened following the attacks The U.S economy slumped after the attacks, and the stock market struggled
Scandals involving major U.S corporations had a similarly crippling effect on the stock market Several large companies were found to have misstated their earnings through faulty or fraudulent accounting practices In many of these cases, the companies overstated their profits, misleading their investors Companies involved in such scandals included Enron Corporation, WorldCom, Adelphia, and Xerox The scandal involving Enron also led to the conviction of accounting firm Arthur Andersen, L.L.P., for obstructing justice when the firm admitted to destroying thousands of Enron documents
The scandals have led to widespread mis-trust of the U.S corporate world The SEC issued new rules during 2002 and 2003 regard-ing accountregard-ing practices and conflicts of interest among corporate officers in response to the scandals The rules were designed to regain the trust of the public and investors following the scandals, yet the regulations did not ad-dress the next great stock market downturn in
2008 The subprime mortgage meltdown led to the failure of major U.S banks and investment firms The government loaned struggling banks hundreds of billions of dollars, but the stock market was shaken and prices plunged By
mid-2009 the market had recovered some of its lost value, but analysts predicted it would take time for the economy to recover from the most severe economic crisis since the 1930s
384 STOCK MARKET
Trang 8FURTHER READINGS
Hazen, Thomas, and David Ratner 2006 Securities
Regula-tions in a Nutshell 9th ed St Paul Minn.: West Group.
Western, David 2004 Booms, Bubbles, and Busts in the U.S.
Stock Market New York: Routledge.
Zandi, Mark 2008.Financial Shock: A 360-Degree Look at the
Subprime Mortgage Implosion, and How to Avoid the
Next Financial Crisis New York: FT Press.
CROSS REFERENCES
Common Stock; Preferred Stock; Securities; Securities and
Exchange Commission.
STOCK OPTION
A stock option is the right of corporate employees
to purchase company stock as a form on non-cash
compensation
Stock options are a regular part of
compen-sation for corporate executives but lower-level
employees may also have the right to purchase
company stock Employee stock options (ESOs)
are seen as an incentive for workers to make the
company more profitable Moreover, they are a
way to attract talented people when a small
company cannot compete with large companies
over large salaries Employees are informed that
they can purchase a certain amount of stock at a
price and during a time set by the employer
The exercise or strike price the company sets is
usually the current STOCK MARKET value The
employee purchases the stock in the hopes that
the price will rise over time, leading to periodic
sales of stock to generate income It is not
unusual for high-ranking executives to be
granted options for hundreds of thousands of
shares every year
The valuation of stock options is central to
their worth Executives obviously want the value
of the options as low as possible, so as to
maximize the spread between the grant price
and the market price that the stock eventually
attains Corporate executives and their
corpora-tions got into trouble in the mid-2000s over
retroactive stock options The difference
between the retroactive price and the current
stock price became an expense that could
reduce earnings and be TAXABLE INCOME to
the recipients Corporations turned to the
practice of backdating options The corporation
gave the options to the employee on one date,
but this specified grant date is chosen with
hindsight so as to minimize the price On the day
the employee received the options, the stock
price for that day exceeded the exercise price,
on the specified grant date, which means that the
options were immediately profitable This prac-tice maximized profit for the employees and took all the risk out of the transaction as well
Many corporations failed to disclose to shareholders the backdating of options Con-cealing this can inflate the company’s earnings
TheSECURITIES AND EXCHANGE COMMISSION(SEC) as well as corporate shareholders initiated legal action against corporations and the executives who benefited from backdating A good exam-ple of the amount of money involved in backdating is the case of William McGuire, chief executive of UnitedHealth Group
A shareholders’ lawsuit led to a 2009 settlement
in which the corporation paid $895 million, and McGuire paid $30 million to a settlement fund
McGuire also agreed to give up options to buy 3.68 million shares of UnitedHealth In a separate 2007 agreement with the SEC, McGuire paid a $468 million settlement that included a $7 million fine and reimbursement of four years of incentive- and equity-based compensation Uni-tedHealth was one of over 200 corporations that were investigated for backdating The results led many to restate their earnings
FURTHER READINGS Hazen, Thomas 2006 Securities Regulation in a Nutshell 9th
ed Eagan, Md.: West Group, 2006.
Palmiter, Allen 2005 Security Regulation 3d ed Boston:
Aspen.
Soderquist, Larry, and Theresa Gabaldon 2006 Securities Law: Concepts and Insights 3d ed Rochester, N.Y.:
Foundation Press.
CROSS REFERENCES Capital Stock; Common Stock; Corporations; Par; Pre-ferred; Securities; Stock Market.
STOCK WARRANT
A certificate issued by a corporation that entitles the person holding it to buy a certain amount of stock in the corporation, usually at a specified time and price
A stock warrant differs from a stock option only in that an option is offered to employees and a warrant to the general public A warrant gives the person holding it a right to subscribe
to capital stock
STOCKHOLDER’S DERIVATIVE SUIT
A stockholder’s derivative suit is a legal action in which a shareholder of a corporation sues in the name of the corporation to enforce or defend
STOCKHOLDER’S DERIVATIVE SUIT 385
Trang 9a legal right because the corporation itself refuses to sue
A stockholder’s derivative suit is a type of
LITIGATIONbrought by one or more shareholders
to remedy or prevent a wrong to the publicly traded or closely held corporation In a deriva-tive suit, the PLAINTIFFshareholders do not sue
on aCAUSE OF ACTIONbelonging to themselves as individuals Instead, they sue in a representative capacity on a cause of action that belongs to the corporation but that for some reason the corporation is unwilling to pursue The real party in interest is the corporation, and the shareholders are suing on its behalf Most often, the actions of the corporation’s executives are
at issue For example, a shareholder could bring a derivative suit against an executive who allegedly used the corporation’s assets for personal gain
A derivative suit is different from a direct suit brought by a shareholder to enforce a claim based on the shareholder’s ownership of shares
These direct suits involve contractual or statu-tory rights of the shareholders, the shares themselves, or rights relating to the ownership
of shares Such direct suits include actions to recover dividends and to examine corporate books and records
The principal justification for permitting derivative suits is that they provide a means for shareholders to enforce claims of the corpora-tion against managing officers and directors of the corporation Officers and directors, who are
in control of the corporation, are unlikely to authorize the corporation to BRING SUITagainst themselves A derivative suit permits a share-holder to prosecute these claims in the name of the corporation Other justifications for deriva-tive litigation are that it prevents multiple lawsuits, ensures that all injured shareholders will benefit proportionally from the recovery, and protects creditors and preferred share-holders against diversion of corporate assets directly to shareholders
In a derivative suit, the shareholder is the nominal plaintiff, and the corporation is a nominal DEFENDANT, even though the corpora-tion usually recovers if the shareholder prevails
Nevertheless, derivative litigation is essentially three-sided because the defendants include the persons who are alleged to have caused harm to the corporation or who have personally profited from corporate action The claim of wrongdo-ing against these defendants is the central issue
in a derivative suit, and the interest of the corporation is usually adverse to these defen-dants Thus, individual defendants are usually represented by attorneys other than the attor-neys for the corporation The corporation may play different roles in a derivative suit It may be
an active party in the litigation, be entirely passive, or side with the individual defendants and argue that their conduct did not harm the corporation
Generally, the plaintiff shareholder is not required to have a large financial stake in the litigation As a result, the plaintiff’s attorney is often the principal mover in filing a derivative suit; the attorney locates a possible derivative claim and then finds an eligible shareholder to serve as plaintiff Consequently, the attorney may have a much more direct and substantial financial interest in the case and its outcome than the plaintiff shareholder who is a purely nominal participant in the litigation Because most derivative suits are taken on aCONTINGENT FEE basis, the plaintiff’s attorney will receive compensation only on the successful prosecu-tion of the suit or by its settlement Such a recovery is justified on the theory that it encourages meritorious shareholder suits Most derivative suits are settled and thus do not go to trial and appeal The lead attorney for the plaintiff usually determines whether a proposed settlement is acceptable The fee to
be paid to the lead attorney is usually negotiated
as part of the overall settlement of a derivative suit All aspects of the settlement are subject to
JUDICIAL REVIEWand approval, however
Derivative suits have proved controversial Corporations complain that most litigation is brought at the behest of entrepreneurial attorneys who first find a potential violation and then find a shareholder qualified to maintain the derivative suit Critics charge that the objective of these suits
is to obtain a settlement with the principal defendants and the corporation that provides the attorney with a generous fee In return for the attorney’s fee, the plaintiff goes away
Derivative suits involve shareholder enforce-ment of corporate obligations, which may intrude on the traditional management powers
of the board of directors Since the 1980s, boards
of directors have had considerable success in reasserting control over derivative litigation States have enacted laws that put a financial roadblock in the way of derivative actions
386 STOCKHOLDER’S DERIVATIVE SUIT
Trang 10A minority of states require that the plaintiff
make a demand on the shareholders, which
is very expensive, before a derivative suit is
filed The shareholder demand requirement
may be excused if the plaintiff can show
adequate reasons for not making the effort
Many states require certain plaintiff
share-holders in derivative suits to give the
corpora-tion security for reasonable expenses, including
attorneys’ fees, that the corporation or other
defendants may incur in connection with the
lawsuit Despite these efforts to restrain
deriva-tive actions, they have not prevented the filing
of doubtful claims by attorneys seeking a quick
settlement
Almost all states require the plaintiff to
allege and prove that he first made aGOOD FAITH
effort to obtain action by the corporation before
filing a derivative suit This good faith demand
requirement is contained in state corporation
laws and rules of court A typical provision is
Rule 23.1 of the Federal Rules of Procedure,
which states that the plaintiff’s complaint must
“allege with particularity the efforts, if any,
made by the plaintiff to obtain the action he
or she desires from the board of directors or
comparable authority and the reasons for his
or her failure to obtain the action or for not
making the effort.”
Plaintiffs have generally not made these
demands, however, and have instead sought to
convince the court that there were good reasons
for not doing so Much of this reluctance to
make a demand can be traced to changes in
the corporate law of Delaware in the 1980s
Delaware, which is the principal state of
incorporation for the vast majority of publicly
held corporations, empowers a corporation to appoint a litigation committee from its board of directors to review shareholder demands If the litigation committee finds no merit in a demand, it can decide that the suit should not
be pursued, and the court must accept the committee’s decision and dismiss the case The development of the litigation committee has expedited the disposition of many doubtful derivative claims and possibly some meritorious ones as well
FURTHER READINGS Hamilton, Robert 2000 The Law of Corporations in a Nutshell St Paul Minn.: West Group.
Hazen, Thomas, and David Ratner 2006 Securities Regula-tions in a Nutshell 9th ed St Paul Minn.: West Group.
Yates, Robbie G 2002 “An Analysis of Shareholder Derivative Suits in Closely Held Corporations ” Brigham Young Univ Law Review (winter).
CROSS REFERENCE Derivative Action.
STOMACH PUMPING CASE See ROCHIN V.CALIFORNIA
vSTONE, HARLAN FISKE Harlan Fiske Stone served as associate justice of the U.S Supreme Court from 1925 to 1941 and
as chief justice from 1941 to 1946 A believer in judicial restraint, he was also a defender ofCIVIL RIGHTSand civil liberties Stone was often a lone dissenter in the 1920s and 1930s when con-servatives, who dominated the Court, struck down state and federal legislation that sought to regulate business and working conditions
Harlan Fiske Stone 1872–1946
❖
1872 Born,
Chesterfield,
N.H.
1898 Graduated from Columbia Law School
1944 Smith v.
Allwright struck
down white primaries;
Korematsu v United States upheld
constitutionality of Japanese internment camps
1924 Appointed U.S attorney general; appointed J Edgar Hoover head of the Bureau of Investigation
1914–18 World War I
1946 Died, Washington, D.C.
1902 Became professor of law at Columbia
1939–45 World War II
1900
❖
1910–23 Dean of Columbia Law School
◆
1936 Wrote dissent in
United States v Butler
1925 Initiated first U.S Senate confirmation hearings for federal court appointments
1925–41 Served as associate justice of the U.S Supreme Court
1938 Footnote in United
States v Carolene Products Company became basis for
“strict scrutiny” test
◆ ◆◆
1940 Wrote lone dissent in Minersville School District v Gobitis
1941–45 Served as chief justice of the U.S Supreme Court
1943 West Virginia State Board of Education v Barnette overruled Gobitis decision
STONE, HARLAN FISKE 387