Corporate Basics: A Few Points of “Corporate
Law”
·
Corporations are creations of state law but the buying and selling of
stock in corporations is regulated by federal securities law.
·
Corporations are incorporated under the laws of particular states and
are subject to the corporate laws of the state of their incorporation.
An entity incorporated in the State of Delaware is subject to Delaware
Corporate Law. The corporate law of a particular state will regulate a
corporation from cradle to grave. Corporate laws address shareholder
rights, the obligation of officers and directors, the obligations of
the corporation to the officers and directors, the obligations of the
officers and directors to shareholders, and the obligations of the
majority to the minority. State corporate law also addresses access to
information about the corporation, and when shareholders can bring
suits in the name of the corporation against those who have done
injury to the corporation. Such suits are known as derivative actions.
·
Corporations have no fixed life span. Once they are created, they
continue in perpetuity and are run by temporary caretakers. In the
case of publicly traded corporations, what these temporary caretakers
choose to tell the stock market about the corporation impacts the
price of the stock. Sometimes, the obligation to be candid about a
corporation's finances faces a test when corporate officers are
personally incentivized to tell the public that a corporation is doing
better than it really is. These personal incentives may come from
stock options, or bonuses that are in some way tied to or create an
incentive to elevate the price of stock.
·
Prior to the stock market crash of 1929, a few states promulgated
"blue sky laws" which regulated the sale of publicly-traded
securities. While such legislation was considered during the
presidency of Theodore Roosevelt, it was not until four years after
the stock market crash of 1929 that Congress took action. Through
legislation passed in 1933 and 1934, the federal government intervened
with legislation regulating securities transactions. The Exchange Acts
of 1933 and 1934 form the basis of securities litigation today. The
1933 Act, for example, contains two sections providing for damage
remedies for misrepresentation in connection with the sale of
securities.
·
The 1934 Act created the Securities and Exchange Commission which was
empowered to promulgate rules and regulations necessary to insure an
honest and transparent market. The general anti-fraud provision of the
1934 Act is contained in Section 10(b), which provides that it is
unlawful "to use or employ, in connection with the purchase or sale of
any security . . . any manipulative or deceptive device or contrivance
in contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest for the
protection of investors." 15 U.S.C. § 78j(b).
·
Probably the most well-known of the SEC's regulatory endeavors is Rule
10b-5 which was promulgated in 1942. Rule 10b-5 prohibits: "(1)
fraudulent devices and schemes, misstatements and omissions of
material facts, and (3) acts and practices which operate as a fraud or
deceit." In 1946, the Courts created an implied right of action for
private investors under Rule 10b-5. (See full text of Rule 10b-5 on
Page 4.)
__________________
1 Hazen, The Law of Securities Regulations, West Group (Fourth Edition
2002) at page 570
2 Kardon v. National Gypsum Co., 69 F Supp. 512 (E.D. Pa. 1946).
