Understanding Securities Law and Corporate Governance
Concept of Security (Definition):
Common securities can be stocks, preferred stock. Definition: a ‘security’ in law refers to an investment or financial asset, like stocks or bonds, that you can buy and sell.
Forbidden Conducts (Code Inside Trading):
Intentionally defraud investors by making misrepresentations of material. Being negligent for not discovering a fraud (being negligent for not discovering a fraud means that someone didn’t pay enough attention or take proper care to catch or prevent a fraudulent activity). Insider trading (Insider trading occurs when someone buys or sells stocks or other securities based on non-public, material information about the company).
Short Swing Profit:
Short swing profit is when someone who works for a company buys the company’s stock and then sells it for a quick profit within a short time. ‘Short swing profit’ refers to gains made by corporate insiders from buying and selling (or selling and buying) their company’s stock within a six-month period. This practice is regulated by Section 16(b) of the Securities Exchange Act of 1934 in the United States to prevent insiders from profiting from their privileged access to company information. If an insider makes such profits, the company can legally recover them.
Unit 3: Bodies in Capital Companies:
Legal Bodies in Capital Companies:
- General / Shareholders’ Meeting
- Managing / Governing Body
Shareholders’ Meeting 1:
COMPETENCIES: Approve annual accounts, Nomination of the Managing / governing body, Approve amendments to By-Laws, Sell or acquire assets, Approve transformations.
Shareholders’ Meeting (II):
Types:
- Ordinary: before 6 months after the end of the fiscal year to approve annual accounts.
- Extraordinary: at any moment for any other matter
Calling:
- By the Managing / governing body
- By 5% of the shareholders
- The Ordinary by 1 shareholder if the Managing / governing body does not do it.
Shareholders’ Meeting (III):
ATTENDANCE, REPRESENTATION, VOTING. QUORUM: First call 25%, second call any percentage. Extraordinary cases 50% and 25%.
Majorities: LLC:
In general: 51% of the capital that is present if at least 1/3 of the capital is present. In extraordinary cases: Increase or reduction of capital: 51% of the capital Transformations: 2/3 of the capital.
JSC:
In general: 51% of the capital that is present. In extraordinary cases: 51% of the capital if 50% of the capital is present, 2/3 if 25% of the capital is present.
Agreements:
Should be put in written and have to be signed by the President and two shareholders. Can be challenged before 1 year after they have been approved if they go against the law, public order, by-laws or harm shareholders or third parties. Can be challenged by the managing/governing body, 1% of the capital, third parties affected.
Managing / Governing Body (I):
GOVERNING BODY-TYPES (Art. 210 Companies Act). Company administration may be entrusted to: Sole Director, Several Directors acting separately or jointly, Board of Directors.
Managing / Governing Body (II):
GOVERNING BODY-TYPES: Governing Bodies Joint Stock Companies (SA): Sole Director. Two Directors acting separately or jointly. Board of Directors (3 or more acting jointly).
Governing Bodies Limited Liability Companies (SL):
Sole Director, Two Directors acting separately or jointly, Three or more directors acting jointly (rules in the by-laws) Board of Directors (minimum of three and maximum of 12 members). The by-laws should establish the structure of the governing body and its representative powers.
Managing / Governing Body (IV):
APPOINTMENT OF DIRECTORS (Art. 214 Companies Act). General Rule: Directors are appointed by the SHAREHOLDERS’ MEETING. They do not need to be partners unless the by-laws say so. There are some prohibitions (mainly because of insolvency or public officials in activities related to their position). The appointed director must accept and the appointment has to be registered in the Mercantile Registry.
Directors Remuneration:
General Rule: Directors are not remunerated unless the by-laws state otherwise and establish the remuneration scheme. Maximum amount for directors remuneration must be approved by the SHAREHOLDERS’ MEETING. These rules do not apply to salaries or other compensation to directors for other functions in the company, only to the payment due to the condition of director.
Directors Duties and Liability:
DUTIES: Diligence, Loyalty. LIABILITY: Directors are liable for damages caused to the Company or its creditors due to acts contrary to law, bylaws or by negligence or misconduct. The liability extends to ‘de facto’ directors or top managers if they hold the powers of the Company.
Board of Directors:
At least three members (maximum of twelve in LLC´s). The by-laws may establish the number of board members or a minimum and a maximum (in which case the exact number is decided by the SHAREHOLDERS’ MEETING). Shareholders / Stakeholders have the right to ‘proportional representation’ according to their share of the Company’s capital. Power of the SHAREHOLDERS’ MEETING may be delegated to the Board (e.g. capital increase). The board may give powers to specific directors (Managing Directors) there must be a contract between the Company and the Director.
Meetings:
At least once every 3 months. QUORUM: 51% of its members. MAJORITY: 51% of members that are present. AGREEMENTS: Should be put in written and have to be signed by the President and the Secretary. Can be challenged before 30 days after they have been approved if they go against the law, public order, by-laws or harm shareholders. Can be challenged by any member of the managing/governing body, 1% of the capital.
Capital Increases:
Capital may be increased by creating new stakes/shares or by increasing par value of existing shares. It can be done either by new contributions (cash or non-cash) or using the company reserves. It must be approved by the SHAREHOLDERS’ MEETING and requires the vote of more than 50% of stakes for LLC’s and two thirds of the present shares that must be at least 25% (unless there are more than 50% of shares present, in which case an overall majority is enough). If capital is increased by increasing par value of existing stakes/shares, it must be approved unanimously unless it is fully charged to reserves. The Directors may be delegated with powers from the SHAREHOLDERS’ MEETING to increase capital. In general, existing partners/shareholders have pre-emptive right to acquire new shares or convertible bonds issued by cash. The right may be waived by the SHAREHOLDERS’ MEETING providing that certain guarantees are met. Capital increases must be done in public deed and registered in the Business Registry. In listed JSC’s the Securities Market Regulation is applicable.
Capital Reductions:
Capital reductions are less usual, they may take place to balance the company equity in case of losses, creating reserves, refund contributions or cancel outstanding contributions (in JSC’s). All shares must be treated equally. It must be publicly announced to protect creditors. If the reduction is because the company acquires its own shares/stakes, it must respect equal treatment and the same offer must be done to all partners/shareholders.