LGS200 Study Guide – Final exam Spring 2017
• Business judgment rule:
o Insulates the board of directors from liabilities.
• Entrepreneurs / Importance of choosing the right business organization
o Entrepreneurs: a person who forms and operates a new business by himself or
• Securities Act of 1933 / purpose of laws:
o Prevent fraud in selling securities, require full and honest disclosure of
information to investors, regulates the issuance of securities by a corporation,
general or limited partnership, an unincorporated association, or an individual.
• SEC (Securities Exchange Commission):
o Federal administration agency empowered to administer federal securities laws.
o Adopts rules and regulations, investigates violations and brings enforcement
actions, and regulates activities of brokers and advisors.
• Sarbanes-Oxley Act / how it applies to securities analysts and investment banks:
o Erects a wall between investment bankers and securities analysts
o Supposed to bring more security to securities markets and eliminate conflicts of
interest in the industry.
• Short swing profits / trading:
o In section 16(b) of SOX
o Profits made by statutory insiders on trades that occur 6 months before
becoming an insider.
o Corporations may bring legal action to recover these short-swing profits.
• Insider trading (Sec. 10(b)(5):
o Prohibits insider trading – use of material nonpublic information to make a profit
by trading in securities of that company, can lead to prison.
• U.S. v. Baghat:
o Xbox stock – Baghat was found guilty of insider trading after his company
received the contract to build to Xbox and he bought stock after receiving the
blackout email and tipped off his friend to do the same.
• True insiders:
o Officers, board members, anyone with strong relationship with trading
• “Material” information:
o Would cause a reasonable person to want to buy or sell or believe the
information to be relevant to the price of the stock. • Due diligence / business judgment rule:
Agency and employment relationships
• Vicarious liability:
o Someone that works for you commits a tort and you can be liable if it’s
committed within the scope of the agency or while in the line and scope of
• Employer – independent contractors
o Principals employ persons who are not employees to perform certain tasks.
o Degree of control determines whether someone is an employee or an
• Respondeat superior
o “Let the master answer”
o The principal/employer may be vicariously liable to third persons for losses
negligently caused by the master’s servant.
• Principal – agent
o Formed by the Principal and agent
o Forms a fiduciary relationship – results in the manifestation of consent by one
person to another that the other shall act on his behalf and subject to his
control, and consent by the other so to act.
• Bosse v. Brinker dba Chili’s Restaurant:
o Teens who ran out of Chili’s
o No material evidence showed that Chili’s had employed the man who chased
them on their behalf
o The man was ruled to not be an employee of Chili’s
• Line and scope of employment:
o Defense, deep pocket will say they are not in this
o Principal liable for tortious conduct of agent acting within line and scope of
• Defenses for employer / principal:
o Worker is an independent contractor, not their employee
o Worker was not operating within the line and scope of employment at the time
of the incident.
• Frolic and detour
o Principal may not be liable, they were not in scope