Securities Regulation, Insider Trading and Fundamental Changes: every key term you need (+ practice quiz)
25 flashcard terms for Business Associations Topic 8, written to match the course framework. Study them here, then drill them as interactive flashcards, or test yourself with the 15-question quiz — free, no account needed.
The antifraud rule under the Securities Exchange Act forbidding any device to defraud, material misstatement or omission, or fraudulent practice in connection with the purchase or sale of any security.
Elements of a private 10b-5 action
A material misrepresentation or omission, scienter, a connection with a purchase or sale, reliance, economic loss, and loss causation linking the misstatement to the decline in value.
Materiality
Information is material if a reasonable investor would consider it important, or if it would significantly alter the total mix of available information, judged by probability and magnitude for contingent events.
Scienter
An intent to deceive, manipulate, or defraud; most circuits accept recklessness in the sense of an extreme departure from ordinary care that the defendant must have been aware of.
Basic v. Levinson
The Supreme Court decision adopting the probability-magnitude test for merger negotiations and endorsing the fraud on the market presumption of reliance for efficient markets.
Fraud on the market
A rebuttable presumption that an efficient market impounds public misstatements into price, so a buyer who traded at the market price is presumed to have relied on the falsehood.
Loss causation
The plaintiff must show the concealed truth, once revealed, caused the loss; a price drop from general market conditions or unrelated news will not support recovery.
Purchaser or seller standing
Under Blue Chip Stamps only actual purchasers or sellers may bring a private damages action, so an investor who merely refrained from trading has no federal claim.
Classical theory of insider trading
An insider who trades on material nonpublic information breaches a duty to the corporation's shareholders and must disclose or abstain from trading.
Chiarella
The Supreme Court decision reversing a printer's conviction and holding that trading on nonpublic information is not fraud absent a duty to speak arising from a relationship of trust.
Misappropriation theory
Liability attaches where a person trades on confidential information in breach of a duty owed to the source of that information, even though the source is not the traded company.
United States v. O'Hagan
The Supreme Court decision approving the misappropriation theory in the case of a lawyer who traded on a client's undisclosed tender offer plans.
Tipper liability
A tipper is liable where the disclosure breached a fiduciary duty and the tipper received a personal benefit, which may be reputational, pecuniary, or a gift to a trading friend or relative.
Tippee liability
A tippee inherits the tipper's duty only if the tippee knew or should have known that the information was disclosed in breach of duty for the tipper's personal benefit.
Dirks v. SEC
The Supreme Court decision creating the personal benefit test and clearing an analyst who received information from a whistleblowing insider exposing fraud rather than seeking gain.
Regulation FD
The rule requiring an issuer that selectively discloses material nonpublic information to securities professionals or holders to make simultaneous or prompt public disclosure.
Trading plan defense
A prearranged written plan adopted under Rule 10b5-1 while not aware of material nonpublic information gives insiders an affirmative defense for later trades made under it.
Short-swing profit recovery
Section 16(b) requires officers, directors, and holders of more than ten percent to disgorge profits from purchases and sales within six months, a strict rule needing no proof of misuse.
Section 11 liability
A registration statement containing a material misstatement exposes the issuer strictly, and directors, signers, underwriters, and experts subject to a due diligence defense.
Proxy fraud liability
Rule 14a-9 forbids materially false or misleading proxy solicitations, and a private action requires materiality plus a showing that the proxy was an essential link in the transaction.
Williams Act
The tender offer statute requiring disclosure by bidders and large block holders and imposing procedural rules on offers such as withdrawal rights and pro rata acceptance.
Unocal proportionality test
A board adopting takeover defenses must show reasonable grounds to believe a threat to corporate policy existed and that the response was reasonable in relation to that threat.
Revlon duties
Once a break-up or sale of control becomes inevitable, the board's role shifts to obtaining the best value reasonably available for shareholders in the immediate transaction.
Fundamental change approval
Mergers, sales of substantially all assets, charter amendments, and dissolution require board approval and then a shareholder vote, unlike ordinary business decisions.
Appraisal rights
A dissenting shareholder who follows the statutory steps may demand judicial determination of fair value in cash, excluding gains arising from the merger itself under most statutes.