Business law case study on corporation law

Business Law

a) Robert sold his shares to Susan, who had insider knowledge of the transaction. This transaction, being between two parties and not conducted through the stock exchange, is subject to contract law. Under contract law, a contract is enforceable even if the consideration is of poor value, which in this case it is at $2 per share for a $4 stock. However, the contract would be voidable if the contract was not negotiated in good faith. Susan not only had insider knowledge, but she misrepresented the condition of the asset that she was offering to buy. This would constitute a contract made in bad faith. As such, Robert's sale to Susan constitutes a voidable contract.

Howard's situation is more difficult. Howard sold to Foster, who had inside knowledge by way of Angela. Howard knew that the information he received from Angela was insider information that had not been disclosed. Under SEC rule 10b-5, Angela had a duty to the shareholders to abstain from misappropriating that information for trading purposes. This has been upheld by the Supreme Court in United States v. O'Hagan. In this case, however, the seller Foster had no fiduciary duty to the source of the information. The source of the information, Angela, could not have traded on the information. Foster could, a position upheld by the Supreme Court in Chiarella v. United States. Howard may have suffered from the actions of Foster, but unless the conversation including specific and deliberate fraudulent statements by Foster that contradicted his insider information, it is unlikely that Howard has any legal recourse.

b) Leo had a fiduciary duty to Hawke to protect the confidential information. Under 10b-5, he was obligated to abstain from misappropriating that information for trading purposes. Given that the Supreme Court has upheld this rule in United States v. O'Hagan, the SEC could successfully bring a lawsuit against Leo for damages in connection with his purchase of the shares.

Larry was not bound by fiduciary duty to Hawke. As such, the higher standard of Chiarella v. United States applies. While this 10b-5 rule applies to deliberate omission, Larry may or may not have known specifically about Leo's relationship with Hawke. Legally, however, the SEC still has recourse. The broker in the ImClone case, Peter Bacanovic, received a conviction for trading on Sam Waksal's inside information. The same legal standard is likely to apply to Larry as well, since he is a broker. There is a question as to whether this standard would apply to Foster in the case involving Howard, as he is less likely to have known that his omission constituted a fraud. For Howard, however, his position makes it evident that he knew he was committing a fraud and therefore the SEC could bring a lawsuit against him for damages relating to this trade,