Securities Law & Antitrust Law

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Chapter 4

Business Ethics and Con�lict Management Business ethics has become one of the most important and timely topics for business students. Traditionally, business ethics was approached as a discussion of individual ethical philosophies. This is still important and will be part of this chapter. However, since the 1960s, business ethics has become an area of scholarly study within the business academy, a specialty worthy of research into the day-to-day issues faced by companies of all sizes as well as the individuals making crucial decisions that affect our whole economy. Business scandals prompt distrust of our profession, trigger government regulation, and can be so serious that some businesses do not survive them.

As a manager, you set standards for those who work for you, and employees look to you for guidance. As such, having an understanding of the connection between ethics and business law is crucial to your success. In this chapter, we will review the basics of ethical philosophy as it relates to business law, look at some of the important �indings scholars have discovered in the last 50 years of studying business ethics, and provide speci�ic suggestions for how to create an ethical corporate culture and how to make individual ethical decisions.

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4.1 Ethics and the Law By de�inition, law concerns itself with issues of right and wrong and the administration of justice. Those who help shape the law need valid ethical reference points to steer the law in the direction of the common good.

Philosophy of Ethics

Ethics is the branch of philosophy that is concerned with the study of morality. Ethical inquiry centers on concepts such as good and evil and right and wrong. Thousands of years of philosophical inquiry into the �ield of ethics have produced numerous con�licting theories by noted classical and contemporary philosophers. Not surprisingly, however, no consensus has emerged as to which theory is the most valid. While this may not be surprising, it is troubling, since law is closely tied to the fragile, ephemeral principles that are at the heart of ethics.

Legislators, judges, presidents, governors, and regular citizens who help to shape the law through their of�icial capacity or at the ballot box may not consciously engage in the study of ethics in shaping their views on what constitutes justice or how to best promote the common good. Nevertheless, most of us act in accordance with certain principles that we may commonly refer to as our values. Whether we acknowledge it or not, the guiding principles by which we steer our lives and which form the basis for our core ideas about right and wrong are an expression of our ethical philosophy. The names of the ethical systems we adhere to, and the notable philosophers who espouse them, are not as important as the views themselves, which help shape our government and mold our laws.

Philosophical Theories

The quest to discover ethical truths has led Western philosophers on some very different paths throughout the past 2,500 years. Law inevitably re�lects a society’s ethical views and values. Therefore, even a brief glimpse at some of the core principles that underlie various systems of ethics can be very useful. This study will enhance our understanding of the common thread of ethics that runs through every nation’s system of jurisprudence.

Ethical Absolutism

Ethical absolutism is an ethical philosophy with many diverse branches all tied in to the central idea that there are certain universal standards by which to measure morality. Under this philosophy, concepts such as good and evil, right and wrong, and justice have a separate objective existence that can be discovered and understood by human beings through philosophical inquiry and introspection. Right and wrong are concepts that stand on their own and do not change based on circumstances or on the outcome of a person’s actions. If stealing is wrong, then it is always wrong, regardless of the circumstances surrounding it. Thus, stealing is always morally wrong, whether it is done out of greed, for sport, or to feed a hungry child. Proponents of this broad branch of ethics represent a wide range of schools of thought that often include diametrically opposed worldviews.

Religious Fundamentalism

Like ethical absolutism, religious fundamentalism as a theory of ethics relies on the existence of certain immutable truths. Unlike ethical absolutism, however, which requires that these values be discovered through philosophical inquiry and introspection, ethical norms under religious fundamentalism can be found by studying the lives and writings of prophets or by consulting holy scriptures. Under this philosophy, living a moral life depends upon strict adherence to religious principles and values. Also, its proponents often view theocracy (a state governed by divinely revealed principles) as the most just form of government.

Utilitarianism

Utilitarianism has as its ethical basis the assignment of value to actions based on their outcome. Under utilitarianism, the ultimate good is de�ined as actions intended to bring about the greatest utility (or greatest good) for the greatest number of people. Thus, moral action under utilitarianism requires the constant evaluation of actions based on their intended result. Actions that bring about the greatest good to the greatest number of people are ethical, or good, whereas actions that fall short of that goal are unethical, or wrong. Put another way, utilitarianism does not recognize an intrinsic value to actions but rather assigns a positive or negative moral judgment to actions only in view of their intended consequences.

Deontology

Deontology is a duty-based ethical theory that focuses on individual rights and good intentions. In this school of thought, an act’s morality depends on the actor’s motive, and the only unconditionally good motive is duty. Therefore, for an act to be moral or good, it must be undertaken out of a sense of duty. Unlike utilitarianism, in deontology, the rights of the individual are very important and there are some things one should not do, even if they would bene�it a large number of people.

Ethical Relativism

Like utilitarianism, ethical relativism denies the existence of absolute moral values. Also known as situational ethics, this system of thought holds that moral judgments cannot be made in a vacuum. Unlike utilitarianism, however, the yardstick by which to measure the morality of an act is not the common good but rather the circumstances that surrounded the person committing an act at the time it was committed. It is a precept of this philosophy that a person’s actions cannot be judged other than by placing oneself in the same situation that the actor faced at that point in time. So, stealing to feed one’s

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hungry child, for example, is not necessarily wrong. On a societal level, ethical relativism acknowledges differences among cultures (cultural relativism) in the de�inition of right and wrong, which means that what is considered wrong or even hateful in one culture may be acceptable in another.

Nihilism

Nihilism is a philosophy that denies the existence of any ethical standards. Derived from the Latin word for nothing, nihilism originated as a German philosophical movement that was popularized in 19th-century Russia and that is central to the political philosophy of anarchists, who reject all centralized authority. In nihilism, we �ind the ultimate rejection of order, absolute codes of behavior, or the existence of any transcendent truths. Assuming that each individual’s will, guided by the individual’s conscience, can dictate what is right or wrong, then centralized government with its "arbitrary" laws and sanctions represents an illegitimate, oppressive restraint on individual freedom.

Virtue Ethics

Virtue ethics looks at the basic values one needs to develop to have a good moral character. We develop these traits by making personal commitments and practicing them in our lives. Some of the virtues we can encourage are honesty, truth, trust, tolerance, kindness, diligence, and self-restraint. We can learn as well as absorb these qualities from our parents, religion, and schools or consciously choose to strive to be virtuous persons. This philosophy has practical application in the business world because we can model, encourage, and reward these traits among our employees and within our companies.

Justice Ethics

Justice ethics is based on the concept of fairness. This theory is closely related to deontology and the rights of the individual. The U.S. legal system has a strong grounding in procedural justice and is focused on judicial process. Many of our constitutional rights protect the integrity of the legal process and ensure that all people are treated fairly in the courts. We also �ind this philosophy in the procedures and consistent rules that businesses create for their employees and other stakeholders. In a similar fashion, appellate judges decide cases that set precedents that apply to all of us. They must balance doing justice for the individuals involved in the case with the rami�ications of how decisions will affect future case law and society as a whole.

Ethics and Political Systems

The different ethical systems described above all have important political implications. Whether by design or by default, the ethical values held by political leaders and lawmakers invariably become a part of the political system and are re�lected in the legal system. Ethical systems have profoundly in�luenced both public policy and the politics of nations. For example, the in�luence of religious fundamentalism can readily be seen today in a number of countries, including the United States. Taken to their logical conclusion, absolutist ideals can be used to justify totalitarianism. If there are certain knowable, immutable truths that are valid for all time, then the only moral form of government, the argument goes, is one that educates (or indoctrinates) the people to recognize those truths and ensures that they conform to the moral conduct that those truths dictate. Ethical absolutism is also readily observable in its secular (or atheistic) form in 20th-century, nonreligious totalitarian regimes. Totalitarian regimes, be they Marxist, communist, or fascist in nature, are usually based on principles of ethical absolutism.

If totalitarian regimes are based on ethical absolutism or religious fundamentalism, it is clear that democratic systems lean toward nonfundamentalist ethical principles. The assumption that a variety of plausible views exists, even on essential ethical principles, is central to a democratic form of government. The principles of representative government and majority rule inevitably lead to the adoption of some type of moral relativism as the guiding ethical principle. The very notion that issues of great import are subject to debate and can ultimately be decided by a vote, and the democratic tolerance for opposing viewpoints, institutionalize a kind of ethical relativism. Laws are subject to change and do, in fact, undergo change slowly over time, re�lecting the changing values of their society. Individuals in democracies are free to reject ethical relativism, and many do. They can lobby their government for change, arguing for the adoption of their point of view. But a pluralistic democratic system that completely abandons ethical relativism cannot remain a democracy for long. Ultimately, questions of ethics come down to personal belief. The strength of a democracy rests in its ability to incorporate differing points of view and to obtain functional compromise on a host of issues.

Ethics and Legal Systems

It can be argued that the ethical principles of a society are re�lected even in the type of legal system it chooses. The civil law system that we �ind in most of Europe, with its detailed codes that carefully prescribe individual rights and responsibilities, its swift administration of justice, and its limited power of judicial interpretation, tends to reinforce an absolutist or deontological ethical philosophy. In effect, governments with such systems demand strict adherence to set codes of behavior and leave relatively little room for their citizens to deviate from the established norm.

Common law systems such as ours, on the other hand, leave the judiciary wide latitude for interpreting governmental edicts found in legislative enactments. Such systems provide a multilayered structure of appellate courts to further review trial courts’ application of the law, with the determinations of fact usually left to the interpretation of juries. (See also Chapter 1, The Civil Law and Common Law Traditions (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec1.1#sec1.1) .)

In short, the civil law leaves little room for arguing the validity or meaning of the law, while the common law allows great latitude to litigants to argue both. Criminal law is largely based on prohibiting and punishing antisocial behavior; as such, criminal law inevitably re�lects society’s ethical standards and attempts to discourage behavior that society deems immoral. (See Chapter 6 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch06#ch06) for further discussion.)

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The Sarbanes–Oxley Act of 2002 (SOX) was passed in response to the Enron scandal and other incidences of corporate misconduct.

4.2 The Regulatory Environment of Business The ethical accountability of business is one of the areas in which government has tried to legislate ethical conduct. These policies have been vigorously debated over the years. Many people today believe that businesses have a duty to society to act in a responsible manner and to work for the betterment of society as the price for being allowed to do business and make a pro�it. Others hold that the sole social responsibility of business is to obey the law and turn a pro�it for investors. Although the issue is by no means settled, the trend over time—especially since the mid-20th century—has been to increase the amount of government regulation of business, both at the federal and state levels. Primarily through the establishment of administrative agencies (see Chapter 5 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec5.3#sec5.3) ), federal and state governments have put in place far-reaching regulations to ensure that business is conducted responsibly. Notably, the federal government actively regulates business through antitrust laws, securities laws, and regulations (see Chapter 31 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch31#ch31) ); labor laws (see Chapter 21 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec21.3#sec21.3) ); tax incentives; and consumer protection. The federal government has responded to business scandals by passing regulatory legislation.

Sarbanes–Oxley Act of 2002

The Sarbanes–Oxley Act of 2002 (SOX) was passed by Congress in response to the Enron scandal and other corporate misconduct. The act holds CEOs and CFOs of U.S. public companies, international companies that have registered equity or debt securities with the Security and Exchange Commission, and all accounting �irms that provide auditing services to them personally liable for the accuracy of their �inancial reports. It also requires that companies have their internal control systems audited by an external auditor at the same time that their �inancial statements are being audited. The main goal of SOX is to instill in companies a culture of careful, responsible, and transparent �inancial reporting and corporate governance. That goal does come at a price, however. Since the passage of the bill, businesses have spent millions of dollars per year complying with the act’s strict accounting requirements. (For more on this law, see Chapter 31, Federal Securities and Antitrust Laws (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch31#ch31) .)

Most corporate law is state rather than federal. The regulation of privately held and close corporations is speci�ic to the states in which they are registered or doing business; thus, the standards may differ from state to state and from the federal rules in SOX. However, the SOX requirements can provide a model of good practice that exempt companies can use to create more transparent and accountable processes.

A Closer Look: The Enron Scandal

The downfall of energy giant Enron in 2001 led to the government enactment of sweeping legislation to regulate the accounting practices of business: the Sarbanes–Oxley Act of 2002. Operating in a newly deregulated energy industry, in the 1990s Enron had made enormous pro�its from trading electricity and natural gas resources to state utility companies. However, its increasingly unethical business culture created a complex web of subterfuges and deception.

In November 2001, Enron lost the vast majority of its $11 billion value. Investigated by the Securities and Exchange Commission, it was discovered that the �irm was hiding billions of dollars in debt under the cover of shell companies, from which its executives were pro�iting richly. The company routinely destroyed, altered, or fabricated �inancial documents to hide its true actions. The scandal also led to the dissolution of accounting �irm Arthur Andersen, one of the largest auditing �irms worldwide at that time, which was found guilty in federal court for its negligent oversight of Enron’s �inances. Several Enron company executives received jail sentences for their role in the scandal. The enactment of Sarbanes–Oxley was intended to require transparency from public companies and to prevent �inancial fraud from happening again on such a vast scale. According to the authors of The Smartest Guys in the Room, "The Enron scandal grew out of a steady accumulation of habits and values and actions that began years before and �inally spiraled out of control." For a description of the unfolding events, see the 2002 Time article "Enron: Who’s Accountable? (http://www.time.com/time/magazine/article/0,9171,1001636,00.html) "

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010

In 2010, unethical acts by business organizations again triggered new regulation. In response to the 2008 �inancial crisis, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act. This act was intended to increase oversight of the �inancial industry and prevent the types of risk- taking and deceptive practices (in subprime mortgage lending, for example) that were blamed for the failure of several large �inancial service �irms, the housing market collapse, and the subsequent recession. It also created a Consumer Financial Protection Bureau (CFPB) to enforce federal consumer protection laws. CFPB has a mandate to educate and inform consumers so they can understand the terms of the agreements they make with �inancial

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companies, such as credit card issuers. (For a brief, 16-page summary, see the U.S. Senate Banking Committee website (http://banking.senate.gov/public/_�iles/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf) .)

Dodd–Frank also strengthened federal protections for whistleblowers (many states have similar laws) and promised �inancial rewards for individuals who come forward with information about unlawful business acts. The act aims to protect workers who come forward with potentially incriminating information from retaliation and �iring.

International Business

Legislatures and the courts (both state and federal) have also addressed ethical concerns about U.S. companies doing business abroad that are trying to skirt U.S. regulations or evade taxes. Conduct that was once seen as acceptable, such as the bribery of foreign of�icials in the regular course of business in some foreign countries, can now bring criminal penalties. In 1977, in response to an international scandal involving U.S. companies bribing foreign of�icials to receive contracts, Congress passed the Foreign Corrupt Practices Act (FCPA). This act makes it unlawful for American companies to make payments to foreign governments and of�icials to assist in obtaining or retaining business. It has also been amended to make it so that foreign of�icials who facilitate these bribes in the United States can be held criminally liable. Companies have paid hundreds of thousands of dollars in �ines for violating this act—perhaps they consider this just another cost of doing business.

A debate has also been taking place for years about the responsibility of American �irms that are selling products in foreign countries that cannot be sold in the United States (because it would violate health and safety regulations) but whose sale is not prohibited in foreign countries. This battle is likely to be fought largely in civil courts in the United States and abroad, as foreign nationals sue American companies for selling allegedly unsafe products. In the past, such claims have been made with regard to a wide range of products, including baby formula, pharmaceutical products, and pesticides. Thus, there is often a chasm between what is legal and what is right.

In an attempt to set a higher standard for the world’s businesses, the United Nations has created the U.N. Global Compact, a set of 10 principles to be voluntarily used by businesses to guide their global enterprises:

Support and respect the protection of internationally proclaimed human rights;

Ensure that businesses are not complicit in human rights abuses;

Uphold the freedom of association and the right to collective bargaining;

Work toward the elimination of forced and compulsory labor;

Work toward the abolition of child labor;

Eliminate discrimination in employment and occupation;

Support a precautionary approach to environmental challenges;

Undertake initiatives toward greater environmental responsibility;

Work toward the development and diffusion of environmentally friendly technologies; and

Resist corruption of all forms, including extortion and bribery.

Regulating From Within

In the wake of the many highly publicized corporate lapses of good ethical judgment by key players at companies such as WorldCom, Enron, and Arthur Andersen, companies rushed to implement codes of ethics, ethical training, and other processes. These measures were meant to help make employees more aware of ethical issues and provide them with practical tools for resolving potential ethical problems when they arise. While these were steps in the right direction, they cannot merely be public relations maneuvers or schemes to avoid litigation for poor risk management.

Perhaps the best way to ensure ethical conduct from corporate citizens is to hire, promote, and retain ethical leaders. The most effective training model for ethics in any company is to have its leaders—from boards of directors to line supervisors—model ethical behavior. In such a company, leaders consistently act ethically and make it clear that they expect the same of their subordinates. In an ideal company, individuals are not rewarded for unethical behavior that is pro�itable but reprimanded for ethical behavior that hurts the bottom line. People who work for these organizations will not only consistently act in an ethical manner but will likely feel positive about themselves and the company for which they work.

Often, the law reactively seeks to address well-publicized ethical lapses by imposing new and stiffer penalties for ethical violations and corporate mismanagement of corporate directors and of�icers. In turn, corporations struggle to implement processes to show their stakeholders that they are "doing something" about the problem. Instead, they might ask themselves the following questions:

Are existing policies or procedures encouraging unethical behavior in their employees?

Are they appropriately screening current and prospective employees for ethical competency and integrity?

Are employees who lie on their résumés �ired if the lie is discovered?

Is adherence to ethical standards a criterion evaluated during periodic performance reviews?

Can subordinates trust the word and motives of supervisors and executives at all levels?

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Are principled leaders, who take personal responsibility for the failure of those they lead and share credit for the success that others have made possible, promoted and retained? Do people at all levels feel valued for their contributions and proud to go to work every day?

If the answer to these and similar questions is no, then ethical training and implementation programs will be seen for what they are by employees and stakeholders in a company—mere window dressing.

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4.3 Social Responsibility of Businesses In the 1960s, when academia began to see business ethics as a separate topic worthy of study, the term corporate social responsibility was coined. The role of the organization as a corporate citizen that has great power to affect the whole of society became a serious topic for discussion.

Some scholars �irmly contend that the corporation’s one and only responsibility is to be a lawfully run, pro�itable business. This point of view has many good arguments. A pro�itable company provides valuable goods and services, jobs, tax revenues, and return on investments by shareholders and venture capitalists. A successful economy depends on thriving businesses. However, while this is true, some people feel it does not go far enough.

There is an old saying that "with great power comes great responsibility." Business in the United States is very powerful, and the decisions and actions of businesses have a great in�luence on society, so their responsibility goes further than just making a pro�it and doing what is legally required of them. Rather, corporations should use their wealth and power to take on voluntary roles to support social good. One way to be socially responsible is through charitable giving. Many arts and social programs in the United States are supported by funds from corporate sponsors. Some entrepreneurs see opportunities to solve social problems while nurturing a viable business venture. They are using their skills to start new companies and projects in which they can be innovative, creative, and socially responsible and make a good living at the same time. This is often referred to as "enlightened self-interest." For example, if you have a strong personal commitment to improving the environment, you might start a business that provides recycling for rural areas not covered by a municipal recycling program, thereby helping the environmental cause and making money at the same time. In his book Stirring It Up: How to Make Money and Save the World (Hyperion, 2008), Gary Hirshberg describes how he built a $300-million-per-year business (Stony�ield Farm) using environmentally sound practices to manufacture organic yogurt.

All businesses employ skilled individuals that can bene�it society in many ways. For example, an engineering �irm or a company that has many scientists on staff could give their employees release time to work with children in their local schools to interest them in science. An accounting �irm could volunteer time to audit the books of local nonpro�its. Many companies now pride themselves in their commitment to improving (or at least not harming) the environment through responsible business practices. Companies that contribute to their communities create goodwill and make their employees proud to work for them, which is a potent motivator.

Companies should approach planning for social responsibility like any other business strategy. Possible steps to achieve this goal are as follows:

Look at the core competencies of your organization and see what skills you have to offer;

Look for unmet needs in the community that your employees would be proud to be involved in;

Ask your employees for ideas and projects;

Find partners you can work with. For example, a TV station could launch a yearly coat drive and team up with a dry-cleaning company to provide clean, mended coats to people in need;

Assign someone the responsibility of implementing and following through. You may need to form a committee to make decisions and do planning;

Make a timeline, set goals, and determine a budget;

If charitable giving is what you feel would be best, set a �inancial limit and determine the criteria for distribution. For example, decide on a goal to fund special projects for the public schools;

Carry through with your plan;

Assess the success of your efforts; and

Make improvements if necessary.

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4.4 How to Create an Ethical Company: Lessons From the Field of Business Ethics

In the almost 50 years of studying business ethics, several important speci�ic lessons have been learned:

1. Ethical businesses are more successful. 2. It is crucial to have the commitment of the leadership of the company to create an ethical organization. 3. The values and ethics of the corporate culture from the top to the bottom of a company are vitally important and dif�icult to change. 4. It is important to hire good people, but that isn’t enough. Companies need to train people on how to handle the speci�ic issues that may arise in their work and how to think through dif�icult ethical choices. 5. Businesspeople need to be able to "voice their values" and be heard. 6. Ethics must be implemented like any other strategic business decision.

Let’s discuss these key principles in more detail.

Ethical Businesses Are More Successful

Although not all businesses practice ethical integrity, research shows that ethical businesses are more �inancially successful ("2010 World’s Most Ethical Companies," 2010, Ethisphere (http://ethisphere.com/past-wme-honorees/wme2010) ). A study of companies that had been consistently successful for more than 100 years revealed that greater than 80% of them shared some interesting common characteristics. They all had a highly focused strategy based on their reputation, concentrated on good relationships with customers, valued long-term employees, and held to strong core values that had been passed on through the years by the company’s leaders (TenHagen, 2008).

Many other reasons account for the success of ethical organizations:

A good reputation is crucial: All stakeholders, customers, suppliers, bankers, and others in the mercantile community need to trust a company and want to do business with it. For example, investors don’t want to invest in companies they cannot trust to handle their funds.

Employees want to be proud of where they work. Employee commitment and satisfaction are crucial for productivity.

An ethical workplace where people are making good decisions and clearly understand their job responsibilities increases ef�iciency in daily operations. In contrast, placing unrealistic expectations on employees may make them feel so pressured that they make bad decisions and cut corners. According to Fraedrich and Ferrell (1992, pp. 243–252), approximately 60% of the unethical behavior in companies is not motivated by personal greed but comes from pressure to reach business goals.

Ethical disasters large and small are costly to companies. Even the publicity of a minor ethical mistake can adversely affect share prices for up to six months. O. C. Ferrell, a respected scholar of business ethics, refers to "ethical tsunamis" that can damage a company as badly as any natural disaster can wreak havoc on a city. We have seen large, famous companies fail completely after an ethical disaster. Businesses that are found guilty of crimes often pay huge �ines and have their reputations permanently tarnished (Brewer, Chandler, & Ferrell, 2006).

Ethical thinking is strategic, holistic thinking: the ability to look at the big picture and determine consequences large and small. Ethical thinking requires planning, looking at alternatives, and making wise choices. It also thrives on awareness, analysis, and action, just like any other sound business decision making.

Creating an Ethical Corporate Culture

Corporate culture refers to the values, goals, and character of the organization. You learn these by osmosis—by being part of the organization, from your leaders and peers. We have all started a new job and worried whether we are dressed correctly and what we need to learn to �it in, know how things are done, and what to expect. We proceed to learn how to dress, behave, and communicate from being part of a group. The culture of a business enterprise is unique. A company’s character and goals may have been set up by its founders and are imbedded in the day-to-day life of the company. If one is lucky, it is an ethical culture, and in that case, all that is needed is to reinforce the existing culture or bring it up to date. However, if ethical problems are endemic to an organization, changing that established culture can be dif�icult and will take time and effort to achieve.

To create an ethical corporate culture, it is crucial to have the commitment of company leadership, which sets the direction and tone of the business. Strategic planning, overall goals, and commitment of resources are decided at the top. Further, leaders are the role models for their employees and the organization’s values. Boards of directors who hire CEOs are well served to look for individuals of good character who can do the kind of holistic thinking that is needed to make both good business decisions and ethical decisions. Being the best in business certainly requires making a pro�it, but it also requires making a commitment to all your stakeholders. An exemplary business is fair to its employees, pays its bills on time, makes useful and safe products, operates with transparency, and is a good neighbor and citizen.

Guidelines and Codes of Conduct

Leaders have the resources to implement the steps to create an ethical environment in their companies. They also know that companies and managers can be held liable for the illegal and unethical behavior of their employees. However, these guidelines and laws won’t be effective if they are just a super�icial

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way to create better public opinion and avoid legal �ines. Creating an ethical corporate culture takes a deeper commitment by leadership and must become part of the everyday thinking and action of the individuals throughout the organization.

In 1991, Congress passed the Federal Sentencing Guidelines (FSG), which encourage employers to adopt ethics and compliance programs. Because employers can be held liable for their employees’ conduct, the FSG gives organizations incentives to put into place organizational structures that build up ethical cultures. Its seven requirements are as follows:

1. The organization must develop and disseminate a code of conduct that communicates the required standards and risk areas. 2. High-ranking personnel who are known to abide by the law must have oversight of the program. 3. No one with a known tendency to engage in misconduct should be put in a position of authority. 4. A communications system for disseminating standards and procedures must be put in place. 5. Organizations must create a way for employees to report ethical issues without fear of retaliation. Monitoring and auditing systems to detect misconduct must also be developed. 6. If misconduct is detected, then the �irm must take appropriate and fair disciplinary action. 7. After misconduct has been discovered, the organization must take steps to prevent similar offenses in the future.

Companies that have implemented these voluntary guidelines can reduce their liability and penalties when one of their employees commits a crime. As a result, many companies have done at least the basics necessary to comply with them.

Many organizations have developed a code of conduct and a mission and value statement. A good value statement is speci�ic to your company, meaningful for your work, and something all your employees can aspire to achieve. However, creating it and posting it on your website or on the wall is not enough. This may meet the minimum standards of the FSG, but without a more active commitment, it will not be effective at creating a truly ethical corporate culture. These values must be a priority, modeled by managers, and integrated into the thinking and actions of the company. Deep-seated ethical goals should be included in the strategic planning of the company and measured like any other corporate goal for effectiveness. These general goals are important, but the company must also �ind practical ways to affect all employees and send this message to every corner of the enterprise.

Protecting Whistleblowers

The whistleblower provisions of Dodd–Frank have been criticized for encouraging individuals to go outside the organization before using the internal procedures to solve the problem. This gives companies even more incentive to make sure they are really listening to employees. Many companies are hiring independent contractors to act as ombudspersons who enable individuals to make anonymous reports of ethical violations without fear of reprisal. Again, this works only if it is done well with real follow-up on information and if anonymity is actually maintained.

Ethical "Risk Management"

One crucial �irst step toward instilling an ethical culture in an organization is identifying the speci�ic ethical risks your employees will be facing and developing a training program to directly address these risks. For example, a bank may have different ethical pitfalls than a company dealing largely in sales and marketing. A buyer may face different ethical questions than an engineer. The issues one faces in business may differ from those faced in everyday life. A person may be prepared to handle the ethical dilemmas in everyday life but not so much the dif�icult and complex issues that arise in a business setting. Hiring good people is a good start, but managers must also make sure that new hires have the tools to make decisions speci�ic to their work.

Cross-Cultural Business Ethics

Many American companies, large and small, are now doing business internationally. So they need to address the ethical and legal issues they will face doing business in other countries. Companies should not assume that the laws or codes of ethics that work well in the United States can simply be imposed on their expatriate employees and foreign subsidiaries. Creating realistic policies and procedures that are sensitive to the particular locales in which one is doing business is crucial. This doesn’t mean simply following the ethical standards of another country and jettisoning one’s own. Businesspeople must be careful to address the cultural standards in each country in a way that supports their own ethical commitments but does not offend others. Having clear guidelines protects employees and gives them solid guidance on how to address problems they encounter far from home.

Monitoring Ethics Policies

Lastly, it isn’t enough for companies to put policies into effect and assume they work. Like all business actions, they must go back and evaluate effectiveness, not once but regularly, and act to correct and improve what has been put into place. Some companies are even hiring independent specialists to do "ethics audits." For the truly committed company, these audits can give new insight from an impartial source.

How Managers Can Create an Ethical Environment

As a manager or future manager, you also have great input in creating an ethical environment for the people you supervise and work with. Although a manager’s company leadership is vitally important in this effort, you will have daily contact with the people you supervise. Managers hire, �ire, reward, discipline, train, and lead. You are the person who will be primarily responsible for the ethical decisions of your employees. Shared values that you want all your employees to possess might include honesty, respect, responsibility, fairness, kindness, compassion, commitment, and trustworthiness.

Hiring Good People

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Hiring good people is the �irst step in the process. When you advertise for an open position, be clear that you are looking for an individual with not just great business skills but also one possessing sound character. Clearly state the values you expect your employees to have. When interviewing, ask situational or hypothetical questions that may be ethically challenging. It will be important to see how the candidate responds. Check references and, if people are willing to tell you, don’t just �ind out about their job skills but also about their character.

Train your new employees on the issues that are likely to come up in their job that may be ethically and legally challenging. This is an ongoing process. As you learn and read, pass your wisdom along and become a teacher and a supporter. Businesspeople tend to be very results oriented. One of the worst messages they can send to their employees is "Just get it done; I don’t care how." Instead, they must reward not just results but also process. It does matter how one gets the job done. Nothing is more demoralizing to employees than seeing someone of bad character rewarded. If managers reward good results achieved the wrong way, they are encouraging unethical behavior.

Applying Discipline

On the �lip side, business leaders must also apply appropriate sanctions for bad or illegal behavior. It is important that companies have clear procedures and policies to guide managers in the area of discipline. But it is equally important for managers to be very professional and consistent in applying these procedures and following the policies. Violating the code of ethics or conduct is just as serious as not having the skills for the job.

Setting the Tone

A manager can create a microculture within the larger culture of the organization. The tone you set for your employees and your example are extremely important. The old saying "Do as I say, not as I do" doesn’t work any better in the workplace than it does with children. Your employees will be taking their cues from you. Most people would prefer and feel most comfortable doing the ethical thing. Keep in mind that the majority of your employees will basically follow company policies or simply go along with what is happening in their work group. So the culture of the company and the culture you create for your employees both count.

Your employees need to feel comfortable coming to you with their most dif�icult problems. Keep your door open. Send the message "If there is a problem, I want to hear about it." Don’t just say it; back it up with your actions, which speak louder than words. If you have a tendency to "shoot the messenger," the messages will stop coming, or worse, will ambush you when you least expect it. Your employees need your input when faced with issues about which they are unsure. Hearing bad news in time to deal with it isn’t easy, but it is a lot easier than cleaning up the mess later. Even with the best training and preparation, you and your employees will face situations you have not anticipated. Something that is clearly wrong is easy to spot, but not all business decisions are black and white. These are the times that communication and discussion, gathering information with careful analysis of possible consequences, and considering business alternatives are essential. Here you can fall back on your values statement, training, and if necessary, your legal department to determine what is right and proceed accordingly.

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4.5 Ethical Con�lict Management Here is a broad de�inition of con�lict: "Con�lict is when we have a different idea than someone else." Often we may have a different idea of what is ethical than someone else. This becomes most dif�icult when someone in an organization is told to do something by a superior that the employee feels is wrong. This can happen in many circumstances. The CEO could be asked by the board of directors to do something he or she is not comfortable with, a manager may be asked by a superior, or a worker by a supervisor. Thus, we have the making of con�lict. The most commonly cited �igure is that managers spend up to 42% of their time resolving con�lict (Watson & Hoffman, 1996). For more on structured forms of legal con�lict resolution, such as ADR, negotiation, and arbitration, see Chapter 3 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch03#ch03) .

Conflict Can Be Positive

Many of us think of con�lict as negative and angry. However, con�lict is a fact of life, and how we handle it is the crucial part. Con�lict in an organization doesn’t always result from bad management; rather, it is often a sign that people care about what happens and are invested in ideas they believe to be worthwhile. Contrary to most of our �irst reactions, con�lict can even be positive. Con�lict can spark great conversations and stimulate our creativity. People with two or more different ideas can work together and often come up with a creative solution no one would have thought of individually. In business, we often work in teams, and being able to solve problems together can strengthen relationships. Ethical dilemmas solved through cooperation can help us learn and grow and be better equipped to handle the next problem that crops up.

Handled calmly, competently, and professionally, con�lict can be the seed of growth. However, handled badly, it can lead to poor communication and polarization within the workplace, decrease productivity, and damage people’s trust in one another. Unethical decisions that are forced on employees can propel them to leave for other jobs or even be �ired.

Principled Negotiation

One of the best ways to handle the discussion of con�lict is to use the skills of principled negotiation from Fisher and Ury’s classic book, Getting to Yes (2011). This method assumes that the vast majority of people with whom we negotiate also have a continuing relationship with us. The goals of principled negotiation are to improve, but at least not damage, relationships; reach a fair conclusion; and do this ef�iciently, without wasting time, money, or emotional energy.

Be Hard on the Problem but Soft on the People

The �irst step in principled negotiation is to be hard on the problem but soft on the people. An ethical question is a problem that needs to be worked on together to come up with an answer. This is not the time to blame or point �ingers. Working together to solve a problem, rather than approaching the problem as an adversarial situation with different sides, brings people together. This is the time to understand the other person’s point of view and to communicate clearly what each one sees as the problem.

De�ine Your Interests, Not Positions

The second step is to de�ine your interests, not positions. This is where you work to communicate your goals. What is the outcome you need in this situation? Fisher and Ury use the excellent example of two people sitting at a table in the library. One person gets up and opens the window by the table they are sitting at. The other person gets up and closes it. The librarian, sensing a problem, goes over to the table and asks what is going on. One person takes the position that he wants the window open, and the other says she wants it closed. The librarian, in order to discover their goals and their interests, asks each, "Why?" He says it is stuffy, and she says she doesn’t like a draft blowing on her. The librarian walks over to a nearby table and opens a window. She has solved the con�lict by looking at the goals they wanted to achieve and solved the problem with a solution neither had thought of. When dealing with con�lict, if you dig in your heels instead of looking at the goal you want to achieve, you don’t leave room to solve your problem.

Invent Options for Mutual Gain

The third step is to invent options for mutual gain. This is the time to look at all the different ways to reach your goals. If someone takes the position that the only way to make a pro�it is to cheat, that no doubt limits your options. By brainstorming and coming up with a variety of ethical ways to make a pro�it, you can look at alternatives and pick a better, more ethical way to handle something. Don’t sti�le your creativity and leave your values behind by assuming only one way to handle the situation.

Looking for mutual gain means starting your discussion by looking for shared interests. For example, you might say, "I know we both want what is best for our company" or, "Finding a good solution to this problem is going to help us all." Start out by practicing agreement rather than emphasizing areas of con�lict.

Use Objective Criteria

The fourth step in principled negotiation is to use objective criteria. Support your options with real data and information. Look at the pros and cons, the cost and bene�its. Employ the tools at hand, which include online resources, business and legal libraries, and statistical data, to reinforce your decisions.

Yield Only to Principle

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Fisher and Ury leave us with some �inal advice. Never yield to pressure but only to principle. Make your decisions based on real information and using your best values and character. In order to do this, be open to listen and be persuaded to do the right thing. Good ethical decisions, like all sound business decisions, come from careful thinking and planning and accurate information. Look at the possible consequences of different options and the whole picture of what is happening.

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4.6 Making Ethical Decisions In section 4.1 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec4.1#sec4.1) , Ethics and the Law, we discussed personal philosophies. Making good decisions also means knowing and understanding what makes us tick. We all have to consciously decide what kind of person we want to be. Living with the guilt and stress of acting unlawfully or unethically can take its toll, and most of us want to do the right thing and are happier being our best self.

Failing to Act

In a study done by Yale professor Mary Gentile, and as discussed in her book Giving Voice to Values (2010, p. 214), the author found a profound difference between people who chose to do the right thing and those who did not. The people who did the right thing weren’t smarter, stronger, or better businesspeople than those who did not choose the ethical course. The difference was in how they posed the question they needed to answer. The people who chose not to act asked, "What are the risks of doing something?" The people who made the ethical choice asked, "What are the risks of doing nothing?"

The people who acted by doing the ethical thing looked at the consequences of failing to act. They took a broad, holistic look at the possible consequences to their company and themselves instead of what might happen to them now. This way of approaching a problem �its well into our discussion of ethical thinking as good business and strategic thinking: We need to project the results of our decisions into the future and base our decisions on real facts and information that rest on our principles and values.

Many people look only at the immediate risks of a decision. The greatest fear of an employee may be the ultimate consequence of losing a job or facing retaliation. This is a serious and real fear because we all know that not all managers are open to discussion and not all companies act on the values to which they pay lip service. Here are some suggestions for approaching a superior about an ethical problem:

1. "I need to talk." 2. "I need your help." 3. "Can we work on this together?"

As discussed in section 4.1 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec4.1#sec4.1) , Ethical Con�lict Management, go into a discussion prepared with a good ethical and business argument. Have facts and �igures to support your concerns. Be ready with ethical alternatives that will allow you to reach the same goal. Be ready to be persuasive, not accusatory, and remain professional, calm, and con�ident.

Avoiding Liability

If you do something illegal in your workplace, you will be held individually responsible. (See also the discussion of respondeat superior in Chapter 21 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch21#ch21) , Establishing the Employment Relationship.) The law does not accept the defense of "But they told me to do it!" If you did the act and intended to do it, you will be held personally liable. Sometimes you have to say no. You must use your instincts and values to determine whether, in some situations, you just can’t do what is asked.

Giving Voice to Your Values

According to Gentile, you need to give voice to your values. This becomes easier with practice. Be open when interviewing for a job about your values, and make good character what you practice every day—not just on the day you need to talk to someone about a speci�ic problem. Be comfortable with yourself and treat value discussions like any other open conversation. You are much less likely to be asked to do something wrong if you live by your values every day. Be brave: You may have to make some hard choices to stay true to yourself.

We all make mistakes, but the great thing about being human is that we have choices. Sometimes we can’t change the past, but we can forgive ourselves, learn to live with the consequences, and strive to do better next time. It is never too late to be proud of the person you are. Doing the right thing is not always easy, but hopefully this chapter has given you some tools you can use both as a manager and an employee to reach ethical decisions.

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Key Terms

Click on each key term to see the de�inition.

anarchist (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A person who rebels against any authority, established order, or ruling power.

business ethics (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The application of moral codes or values to problems faced by companies or managers in their work.

civil law system (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Found in most of Europe, a form of government that includes detailed legal codes prescribing individual rights and responsibilities, swiftly administers justice, and limits the power of judicial interpretation. This system tends toward an absolutist or deontological ethical philosophy.

common law system (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A form of government that leaves the judiciary with latitude for interpreting the governmental edicts found in legislative enactments and provides a system of appellate courts to review trial courts’ application of the law; determinations of fact are usually left to juries. This system adapts to the local customs, traditions, and needs of a people.

Consumer Financial Protection Bureau (CFPB) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Agency created by the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 to enforce federal consumer protection laws. It also has a mandate to educate and inform consumers about terms of the agreements they make with �inancial companies.

corporate culture (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The values, goals, and character of an organization.

corporate social responsibility (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The role of the organization as a corporate citizen rather than merely a pro�it-making enterprise; the notion that corporations should use their wealth and power to take on voluntary roles to support social good.

criminal law (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An area of the legal system that tries to prohibit and punish antisocial behavior; it re�lects society’s ethical standards and attempts to discourage behavior that society deems immoral.

deontology (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A duty-based ethical theory that emphasizes individual rights and good intentions.

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Legislation that increased oversight of the �inancial industry and sought to prevent the types of risk-taking and deceptive practices that led to the 2008 �inancial crisis.

ethical absolutism (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An ethical philosophy tied in to the central idea that there are certain universal standards by which to measure morality and justice.

ethical philosophy (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

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7/9/2019 Print

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A set of beliefs about right and wrong that guides decision making both in individuals and in societies at large.

ethical relativism (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A system of thought that denies the existence of absolute moral values. Also known as "situational ethics."

ethics (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The branch of philosophy concerned with the study of morality.

Federal Sentencing Guidelines (FSG) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Voluntary parameters that companies can implement to reduce their liability and penalties if one of their employees commits a crime; the guidelines encourage employers to adopt ethics and compliance programs.

Foreign Corrupt Practices Act (FCPA) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An act that made it unlawful for American companies to make payments to foreign governments and of�icials to assist in obtaining or retaining business.

justice ethics (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A philosophical system based on the concept of fairness guiding actions.

nihilism (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Derived from the Latin word for nothing, a philosophy that denies the existence of any ethical standards.

principled negotiation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A system of principled business negotiation that aims to improve, and at least not damage, relationships; reach a fair conclusion; and avoid wasting time, money, or emotional energy.

religious fundamentalism (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A theory of ethics that relies on the existence of certain immutable truths. Ethical norms can be found by studying the lives and writings of prophets or by consulting holy scriptures.

Sarbanes–Oxley Act of 2002 (SOX) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Legislation passed by Congress in response to the Enron scandal. It makes CEOs and CFOs personally liable for the accuracy of their �inancial reports and requires that companies have their internal control systems audited by an external auditor at the same time that their �inancial statements are being audited. Its goal is to instill in companies a culture of careful, responsible, and transparent �inancial reporting and corporate governance.

utilitarianism (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The assignment of value to actions based upon their outcome. De�ines the ultimate good as actions to bring about the greatest utility (or greatest good) for the greatest number of people.

values (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Core, underlying, or guiding principles that form the basis for one’s ideas about right and wrong and are an expression of an ethical philosophy.

virtue ethics (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A philosophical theory that looks at the basic values one needs to develop to have a good moral character.

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whistleblowers (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Individuals who come forward with information about unlawful business acts. Both federal and many state laws protect these people from recriminations, retaliation, and �iring.

Chapter 4 Flashcards

Critical Thinking and Discussion Questions

1. How does ethical absolutism differ from utilitarianism?

2. "You cannot judge a man until you have walked a mile in his shoes" is a statement that is best linked to which philosophy of ethics?

3. What area of law most clearly involves a society’s effort to "legislate morality"? Do you believe this is an effective way to change behavior?

4. Where foreign countries do not yet regulate the safety of consumer products or the workplace, what ethical responsibility do U.S. companies working abroad have to their foreign customers and workers?

5. In your view, what is the best way for a company to promote ethical conduct among its employees?

6. Explain the steps of principled negotiation. What part of this process do you �ind most useful? What would be the hardest to do?

7. Some argue that government needs to increase its regulation of business for the good of society as a whole, while others believe that the marketplace is self-regulating and that government intervention through needless regulation places an unfair, costly burden on businesses generally and small businesses in particular. What role do you believe government regulation should play to ensure ethical conduct by businesses?

8. XYZ Pharmaceuticals develops a new drug that causes the abortion of female fetuses up to the �irst trimester of pregnancy but does not affect male fetuses. The drug has no known side effects for women who take it and seems perfectly safe to use. While awaiting FDA approval of the drug, a process that takes several years, the company receives very negative publicity, and numerous groups call for a boycott of the manufacturer. Because of the negative reaction to the drug by the general public, the manufacturer decides to scrap plans to produce the drug in the United States but wants to market it abroad in a number of countries, where it expects the drug to be well received. There is nothing in U.S. law or in the laws of the countries where it intends to market the drug to prevent its sale. Make an ethical argument either for or against the drug’s sale abroad. Justify your argument with sound reasoning.

a person who rebels against any authority, established order, or ruling power.

C l i c k c a rd t o s e e t e r m 👆

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Chapter 31

Federal Securities and Antitrust Laws Now that you have studied corporations and are familiar with the concept of stock (see Chapter 30 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch30#ch30) ), this chapter turns to the study of some of the rules that govern the sale and purchase of such stock (also called securities) and the issuance of stock, as well as the preservation of free economic markets. The �irst half of this chapter examines the major laws governing securities and the stock exchanges, and the second half reviews the legislative efforts to keep competition fair and unfettered under antitrust laws.

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Listing and selling stock on public stock exchanges, such as the New York Stock Exchange, is heavily regulated by both federal and state governments.

31.1 Securities Laws The Securities Act of 1933 applies only to initial public offerings (IPOs). Issuance refers to listing the stock on a public stock exchange, such as the New York Stock Exchange, thereby making the stock available for purchase by anyone. Listing and selling stock on public stock exchanges is heavily regulated by both federal and state governments. In the aftermath of the stock market crash of 1929, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These landmark acts regulate the original issuance of securities and the subsequent trading of securities in the secondary markets, respectively. These acts, as amended, require companies to provide investors with accurate information about their �inances and set forth penalties for fraudulent and deceptive activities in the issuance and sale of securities. In these ways, the government seeks to keep the markets free from illegal and deceptive activities that might take advantage of the average investor on the street.

This federal law requires that securities be registered before being offered for sale for the �irst time. Registration means that the corporation that plans to sell the stock must �ile paperwork with the Securities and Exchange Commission (SEC), a federal agency that oversees public sales of securities. The paperwork that is �iled must meet the precise requirements of the law, whose purpose is to protect the public by requiring that companies �ile detailed information about their companies. In that way, initial investors can make an intelligent decision about whether or not to invest in the securities offered by the company. The act de�ines securities broadly to include a range of instruments such as stocks, bonds, debentures, evidence of indebtedness, voting trust certi�icates, investment contracts, and fractional undivided interests in oil, gas, or mineral rights. In SEC v. W. J. Howey Co. (328 U.S. 293), the U.S. Supreme Court held that an investment contract constitutes a security under the act. Affectionately called the "Howey test," an investment contract is de�ined as any transaction in which a person:

Invests

In a common enterprise

Reasonably expecting pro�its that are

Derived primarily or substantially from the managerial or entrepreneurial efforts of others.

Registration

Before any new security can be offered to the public through the mails or through any interstate commerce facility (such as a stock exchange or the Internet), the issuer must �ile a registration statement with the SEC. The registration statement must be written in plain language and include all of the following elements:

A description of the signi�icant provisions of the security offered for sale that includes the relationship between the security and other capital securities of the company;

A description of the company's properties and business;

A description of the company's management that includes information on the management's security holdings, compensation, and bene�its;

A �inancial statement certi�ied by an independent public accounting �irm; and

A description of pending lawsuits involving the company.

Before �iling for registration with the SEC (the pre�iling period), a company must avoid publicity about the new security and may not sell or offer to sell the security to anyone. Once the company �iles the registration statement with the SEC and its approval is pending (the waiting period), the company may still not sell the security, but may begin to offer it for sale through limited advertisements in ads that tell prospective investors where they may request a prospectus for the new security (see Figure 31.1 for a sample).

Figure 31.1: A sample prospectus

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At this point, a company may make available a preliminary prospectus to investors that does not include the price of the security. Once the SEC declares the registration effective and prospective buyers are given a �inal prospectus (the posteffective period), the company may �inally offer and sell the new security.

Securities Exempt From Registration

As noted previously, there are some limited exemptions to the requirement that new securities be registered with the SEC prior to their being offered to the public. According to the Securities Act of 1933, the following securities are exempt from registration:

All bank securities sold prior to July 27, 1933;

Commercial paper (such as checks, drafts, notes, and certi�icates of deposit) with a maturity date of not more than nine months;

Government-issued securities;

Securities issued by nonpro�it religious, charitable, educational, benevolent, or fraternal organizations;

Securities issued by a bank or savings and loan;

Securities issued by common carriers regulated by the Interstate Commerce Commission; and

An insurance policy or an annuity contract.

Under Rule 147, securities offered for sale solely in one state by a company that does at least 80% of its business in the state are also exempt from �iling. State securities regulations, however, may require the company to �ile with the SEC. Resale of these securities is also restricted to residents of the state for nine months following the initial sale. In addition to the intrastate sales and security exemptions noted above, the act allows several exemptions involving small securities offerings:

Rule 506 of Regulation D: Exempts private offerings to accredited investors (expert investors such as banks, executive of�icers, directors, and partners of the business issuing the security and wealthy investors) and limited offerings to not more than 35 nonaccredited investors (e.g., regular, nonexpert investors).

Rule 504 of Regulation D: Nonpublic issuers may sell up to $1 million of securities in a 12-month period to any purchaser. General advertising of the issue is permitted, as long as the dollar limit of the issue is not exceeded.

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Rule 505 of Regulation D: Any issuer may sell up to $5 million of securities in a 12-month period to fewer than 35 nonaccredited investors and to an unlimited number of accredited investors. However, general advertising of the issue is not permitted.

Regulation A: Any nonpublic issuer may sell up to $5 million of securities in a one-year period with no limit on the number of purchasers and no purchaser sophistication requirement. The offering circular is considered the disclosure document for such a �iling and must be �iled with the SEC, but registration of the offering itself is not required.

Securities purchased under Rules 504, 505, and 506 must generally be held for one year prior to resale, or the seller may be subject to penalties as an underwriter of an unregistered security.

Sanctions Under the Securities Act of 1933

Section 12(a)(2) of the Securities Act of 1933 prohibits misstatements or omissions of material fact in any written or oral communication in connection with the general distribution of any security by an issuer. Section 17(a) of the Securities Act of 1933 prohibits the use of any device or arti�ice to defraud, or the use of any untrue or misleading statement, in connection with the offer or sale of any security.

The act provides for civil and criminal sanctions for willful and negligent violations. It gives the SEC the power to investigate and bring civil enforcement proceedings under the act and allows the SEC to seek injunctive relief against violators of the act. Section 11 of the Securities Act of 1933 provides civil liability for damages when a registration statement misstates or omits a material fact on its effective date. A purchaser may �ile suit for damages caused by misstatement or omission. The purchaser does not have to prove reliance on the misstatement or omission in purchasing the securities or prove that the defendant negligently or intentionally misstated or omitted a material fact. However, a defendant can escape liability by proving that the purchaser knew of the misstatement or omission when the security was purchased. In addition, defendants can successfully assert the defense of due diligence and escape liability if they can establish that after a reasonable investigation, they had reasonable grounds to believe, and did believe, that the registration statement was true and contained no omission of material fact.

Section 24 of the Securities Act of 1933 provides for criminal liability for any person who willfully violates the act or its rules and regulations. Violators are subject to �ines of up to $10,000 and/or imprisonment for up to �ive years for each criminal violation of the act, which are prosecuted by the Department of Justice.

Securities Exchange Act of 1934

Unlike the disclosure requirements of the Securities Act of 1933, which apply only to the IPO of a security, the Securities Exchange Act of 1934 regulates the trading of securities after their original public offering. The act also regulates securities brokers, dealers, securities exchanges, and national securities associations. In addition, the act created the SEC and empowered it to enforce the securities laws under the 1933 and 1934 acts.

Scope

Under the Securities Exchange Act of 1934, companies whose securities are traded on any public securities exchange, and companies whose assets exceed $10 million whose stock is owned by 500 or more shareholders, are required to �ile information on an annual and quarterly basis with the SEC. Companies are also required to provide the SEC with noti�ication of material changes when they occur by means of a monthly report. The reported information is then made available to prospective investors and to the general public through the Electronic Data Gathering Analysis and Retrieval (EDGAR) database maintained by the SEC. EDGAR is available online at http://www.sec.gov/edgar.shtml (http://www.sec.gov/edgar.shtml) .

The act also requires company insiders (de�ined as corporate of�icers, directors, and anyone who controls 10% or more of any company's class of equity securities) to disclose their holdings and transactions in company securities. Proxy solicitations, which are attempts by a group of shareholders to garner votes from other shareholders on speci�ic issues, are also regulated under the act.

Violations of the Securities Exchange Act of 1934

Both civil and criminal sanctions are available under the act. These include the following:

Section 18 imposes liability on any person responsible for a false or misleading statement of a material fact in any �iling under the act. Anyone who relies on the false or misleading statement may sue for damages without the need to prove that the defendant was negligent in providing the false or misleading information to the SEC. However, a defendant may avoid liability by proving that the false or misleading information was provided in good faith.

Section 10(b) prohibits the use of manipulative or deceptive devices through misstatement or omission of a material fact in the sale of securities. A material fact can be de�ined as any information where there is substantial likelihood that a reasonable investor would consider it important in making the decision to purchase the security. A seller is not liable under section 10(b) unless he or she acts with scienter (the mental state embracing the intent to deceive, manipulate, or defraud). The prohibition is made applicable to all transactions in securities under Rule 10(b)(5), whether or not the securities need to be registered with the SEC under the 1933 or 1934 acts.

Section 32 provides criminal liability for violations of the act of up to $5 million in �ines and imprisonment for up to 20 years for willful violations of the act. Businesses may be �ined up to $25 million for violations of the act.

Sarbanes–Oxley: The Public Company Accounting Reform and Investor Protection Act of 2002

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One of the most important pieces of legislation with which you need to be familiar as a business manager is the Sarbanes–Oxley Act of 2002 (SOX). The highly publicized management and accounting scandals involving Enron, Tyco International, WorldCom, Arthur Andersen, and other companies in the recent past led Congress to adopt this law in 2002, with near unanimity in both the House of Representatives and the Senate. The legislation established new or enhanced standards for the boards of all U.S. publicly traded companies, their management, and all public accounting �irms. It imposed criminal penalties for certain violations of the act and charged the SEC with implementing rules for complying with the provisions of the act. SOX created a new agency: the Public Company Accounting Oversight Board (PCAOB), which it charged with the oversight, inspection, regulation, and disciplining of accounting �irms in their roles as auditors of public companies. Its website can be found here (http://pcaobus.org/Pages/default.aspx) .

Key provisions of the act include:

Section 906 requires chief executive of�icers (CEOs) and chief �inancial of�icers (CFOs) of most publicly traded companies to certify the accuracy of �inancial statements �iled with the SEC.

Section 302 requires both quarterly and annual statements to be certi�ied by the chief executive of�icer (CEO) and chief �inancial of�icer (CFO) of reporting companies as having been reviewed by a signing of�icer of the company and to contain no factual errors to the best knowledge of the signing of�icer. The signing of�icer must also certify the existence of an internal control system to identify all material information that must be reported by the company.

Section 806 provides protection for employees who report securities violations (whistleblower protection), preventing employers from �iring or taking other retaliatory action against such employees.

Enhanced penalties, including �ines of up to $5 million and/or up to 20 years in jail for criminal violations of the Section 906 certi�ication requirements.

For an interesting and comprehensive look at the Enron scandal, go to "Behind the Enron Scandal (http://www.time.com/time/specials/packages/0,28757,2021097,00.html) ". See Chapter 4 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch04#ch04) , Business Ethics, for more on this topic.

Securities Regulation by the States

Federal securities regulation does not preempt the states from also regulating the sale of securities within their borders. In cases where the issuance or sale of securities is not covered by the federal acts (such as in the case of intrastate offerings), states impose their own regulatory requirements on issuers under what are often referred to as blue sky laws. Every state has its own regulatory scheme covering the issuance and sale of securities. In most states, securities regulation is patterned after the federal acts.

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Microsoft vs. the Government

31.2 Federal Antitrust Law The integrity of our economic system depends not only on regulating the stock markets but also on maintaining a system that allows for free and fair competition. But the system can be undermined if companies are allowed to engage in anticompetitive practices that arti�icially manipulate prices, restrict the availability of products, or �ix prices by agreements that undermine basic market forces. While the states and the federal government both regulate and punish anticompetitive practices, it is the federal government that regulates anticompetitive practices that can impact interstate commerce, primarily through the Sherman Antitrust Act of 1890 and the Clayton Act of 1914 as amended. In this section, we will focus on these two acts and examine the basic tenets of federal antitrust law.

Sherman Antitrust Act of 1890

As noted above, the U.S. economy depends on a �luid exchange and needs unfettered and fair competition to �lourish. Trusts and monopolies are arrangements among competitors that destroy competition and regulate pricing. Thus, the courts have determined that trusts defeat competition and should be outlawed. The act also prohibits cartels, which involve the collusion of companies in the same industry to �ix prices. While restricted in the United States under the Sherman Antitrust Act, cartels are still allowed to some extent in Europe. For example, in 1999, Hoffman–La Roche pleaded guilty to a worldwide conspiracy involving international cartels to �ix the price of vitamins and paid a $500 million �ine.

Violations of the Sherman Act

Section 1 of the Sherman Antitrust Act (15 U.S.C. § 1), as amended, declares illegal every "contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations." Violation of the act is punishable as a felony and carries a maximum penalty of $10 million if the violator is a corporation and a maximum �ine of $350,000 and/or imprisonment of up to three years if the violator is an individual. Because contracts and conspiracies require the participation of two or more persons, Section 1 of the act applies only to concerted efforts by two or more persons or entities to restrain trade or commerce. (Section 3 of the act extends the same prohibition and penalties for conduct in restraint of trade affecting Washington, D.C., and U.S. territories.)

Section 2 of the act (15 U.S.C. § 2) makes it a felony to "monopolize . . . or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations." The maximum penalty for persons or corporations found guilty of violating Section 2 of the act is the same as for violations of Section 1: namely, a maximum �ine of $10 million for corporations and $350,000 and/or imprisonment for up to three years for individuals. Under this section, individual and concerted action to arti�icially create a monopoly is criminalized. Note that monopolies as such are not prohibited; rather, it is the effort to arti�icially create a monopoly by restraining trade that is criminalized.

To successfully prosecute individuals or companies for a conspiracy to monopolize, the prosecutor must establish that the defendants planned a course of action with the intent to destroy competition in order to create a monopoly and that they engaged in some overt act to carry out that plan.

In addition to the criminal penalties discussed above, Section 4 of the act (15 U.S.C. § 4) gives U.S. Attorneys, under the direction of the U.S. Attorney General, the power to obtain injunctive relief (such as cease and desist orders) in federal district courts against violators of the act.

The Sherman Act also provides civil penalties to individuals or companies harmed by those who violate the act that include treble damages (triple the amount of actual damages suffered by a plaintiff due to a defendant's violation of the act).

An individual or corporation may in theory create and maintain a monopoly as long as it is done without engaging in illegal anticompetitive activity. Thus, if an inventor were to invent an engine that runs on tap water, the inventor could patent the invention and be guaranteed a manufacturing monopoly for a period of 20 years from the date that the patent application was �iled, once the patent was issued. Likewise, if a corporation discovered a new process for genetically engineering a bacterium that ingests waste products and excretes crude oil, it could either patent the new organism or protect its manufacturing as a trade secret and thereby guarantee for itself a monopoly without violating the Sherman Antitrust Act (see Chapter 20 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch20#ch20) , Intellectual Property, for more on patents and trademarks). In other words, dominating a market by producing a superior product or service at a lower price than the competition does not violate the act.

The overwhelming majority of suits against violators of the Sherman Act have come from private parties. For an example of a recent case involving the Sherman Act, see U.S. v. Microsoft (http://www.microsoft.com/en-us/news/download/legal/RemediesTrial/PubIntDeterm11-1.pdf) , Civil Action No. 98-1232.

Legal Standards

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The courts apply a "rule of reason" test, �irst announced by the U.S. Supreme Court in Standard Oil Co. v. United States (221 U.S. 1 (1911)), to determine whether speci�ic actions that may arguably result in restraint of trade under the act are illegal. Under the rule of reason test, conspiracies in restraint of trade are held to be illegal under the Sherman Act only if they constitute undue or unreasonable restraints of trade and unreasonable attempts to monopolize. Therefore, only contracts or actions that unduly restrict trade are deemed to violate the act.

Some types of agreements are so harmful to free competition that they are held to be per se violations of the Sherman Act and punishable in themselves without having to be examined for their reasonableness or potential restraint on commerce. Common examples of per se violations of the act include agreements among competitors to �ix prices or limit the availability of commodities, group boycotts in which groups of sellers refuse to deal with a speci�ic company or person, and agreements by competitors to carve out geographic areas in which they will not compete with one another. The following examples will illustrate:

Three book publishers conspire to �ix the price of e-books. This is a price-�ixing agreement and a per se violation of Section 1 of the Sherman Antitrust Act (for more information on the actual case, see "Settlements in e-book price-�ixing suit (http://www.upi.com/Business_News/2012/08/30/Settlements- in-e-book-price-�ixing-suit/UPI-12161346368728/) ".

Slick's Lube Works and Do-Em-Fast Oil Changes, two national competing chains specializing in oil changes and related automotive services, agree to divide areas of each state in which they do business so that only one of the companies does business in any given city or town in each state. This agreement, intended to lessen competition and increase the pro�itability of each franchise for both companies, is a per se violation of the act.

Three major food retailers, ABC Corp., DEF Corp., and GHI Corp., agree not to purchase produce from JKL Corp., a produce wholesaler, until JKL makes major price concessions to each company. This is an illegal boycott and a per se violation of the act.

Clayton Act of 1914

The Clayton Act modi�ies and strengthens the antitrust provisions of the Sherman Act in a number of signi�icant ways. We'll explore some of these next.

Prohibition on Price Discrimination

Section 2 of the Clayton Act (15 U.S.C. § 13) prohibits sellers from charging different competitive buyers different prices for "commodities of like grade and quality." Temporary price reductions are permitted if made in a good-faith effort to meet a competitor's price reductions. Different prices may also be charged to re�lect higher shipping costs when delivering commodities to buyers in different geographic areas. Quantity discounts are also allowable, provided they are available to all buyers who purchase similar quantities of goods. Giving and soliciting discriminatory pricing are punished equally under the act. Schools, colleges, universities, public libraries, churches, hospitals, and not-for-pro�it charitable institutions are not subject to the provisions of this section of the act. Violation of this section of the act is punishable by �ines of not more than $5,000 and/or imprisonment for not more than one year.

Prohibition on Sale and Lease Contracts That Prevent the Buyer From Purchasing Commodities From the Seller's Competitors

Section 3 of the Clayton Act (15 U.S.C. § 14) makes it illegal for sellers of commodities involved in commerce to enter into sale or lease contracts that restrict the ability of buyers to purchase the goods or services of the seller's competitors when the effect is to lessen competition or tend to create a monopoly in any line of commerce. The effect of this section is to prohibit exclusive dealing contracts and tie-in sales arrangements in which a buyer must agree to purchase one or more product lines as a precondition to being able to purchase what is typically a highly desirable product line with limited availability.

Antitrust Laws Inapplicable to Labor Organizations

Section 6 of the Clayton Act (15 U.S.C. § 17) exempts labor organizations from coverage under antitrust laws, stating that "[t]he labor of a human being is not a commodity or article of commerce" and that the lawful activities of unions cannot be "held or construed to be illegal combinations or conspiracies in restraint of trade, under the antitrust laws."

Acquisition by One Corporation of the Stock of Another

Section 7 of the Clayton Act (15 U.S.C. § 18) generally prohibits the acquisition of one company's stock by another company when "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." Corporations may, however, expand their operations through subsidiaries and purchase the stock of subsidiary companies when the effect is not to substantially lessen competition.

Premerger Noti�ication

Section 7A of the Clayton Act (15 U.S.C. § 18a) requires premerger noti�ication by the companies involved. Such notice must be given to the Federal Trade Commission (FTC) and the Assistant Attorney General in Charge of the Antitrust Division of the Department of Justice prior to the acquisition of voting securities when the acquisition would leave the acquirer with voting securities and aggregate assets in the company whose securities are being acquired of $200 million or more. In certain circumstances, the threshold amount is set at $50 million. The amounts are adjusted annually and, as of February 27, 2012, were raised to $272.8 million and $68.2 million, respectively. A waiting period of 30 days (15 days for cash tender offers) is imposed prior to the consummation of acquisitions requiring noti�ication of the FTC and Department of Justice, with the waiting period starting on the day that the noti�ication is received by the FTC. In 2011, AT&T attempted a merger with T-Mobile. The Justice Department sued under the act, claiming that the merger would constitute a violation of the antitrust laws, and in 2012 AT&T dropped its attempt at the acquisition. See "AT & T Ends $39 Million Bid for T- Mobile (http://dealbook.nytimes.com/2011/12/19/att-withdraws-39-bid-for-t-mobile/) ".

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Prohibition on Of�icers and Directors Serving Competing Companies

Section 8 of the Clayton Act (15 U.S.C. § 19) prohibits interlocking directorates and of�icers serving competing companies if both companies have aggregate capital, surplus, and undivided pro�its of $10 million or more each. (The amount is also adjusted annually by the FTC on September 30 and was $27.784 million as adjusted for 2012.) Directors and of�icers serving two companies that meet the minimum capital amount may still lawfully serve both companies as long as one of the following conditions is met:

1. The competitive sales of either company are less than $1,000,000 ($2,778,400 as adjusted for 2012);

2. The competitive sales of either corporation are less than 2% of that corporation's total sales; or

3. The competitive sales of each corporation are less than 4% of that corporation's total sales.

Directors and of�icers of banks, banking associations, and trust companies are exempt from the provisions of this section.

Violations of the Clayton Act

The Department of Justice through the Assistant Attorney General in Charge of the Antitrust Division, state attorneys general, and the FTC all have jurisdiction over violations of the act. The federal and state attorneys general may seek injunctive relief, such as cease and desist orders, in federal district courts. The act also provides treble damages and reasonable attorney's fee reimbursement in private actions against violators of the act. As with the Sherman Act, the overwhelming majority of suits against violators have come from private parties.

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Key Terms

Click on each key term to see the de�inition.

accredited investors (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Expert investors such as banks, executive of�icers, directors, and partners of the business issuing the security and wealthy investors.

blue sky laws (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

State laws that regulate the issuers and sellers of securities; often modeled after federal laws.

cartels (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prohibited by the Sherman Antitrust Act, cartels involve the collusion of companies in the same industry to �ix prices. While restricted in the United States, cartels are allowed to some extent in Europe.

cease and desist order (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A type of injunctive relief or court order wherein the person or entity must refrain from undertaking or continuing a certain type of conduct.

Clayton Act of 1914 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Act that modi�ies and strengthens the antitrust provisions of the Sherman Antitrust Act.

due diligence (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A level of care in which a business takes reasonable care to investigate all facts, repercussions, and legal and �inancial aspects of making a decision.

Electronic Data Gathering Analysis and Retrieval (EDGAR) database (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Electronic data gathering analysis and retrieval database maintained by the Securities and Exchange Commission.

exempt from registration (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Refers to securities that do not have to be registered with the Securities and Exchange Commission prior to becoming public offerings.

Federal Trade Commission (FTC) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The federal agency that has jurisdiction over business practices that are anticompetitive, deceptive, or unfair to consumers.

Howey test (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The test developed by the U.S. Supreme Court in SEC v. W. J. Howey Co. to determine whether paper (an investment contract) is in fact a security.

initial public offering (IPO) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The �irst time a stock is offered for sale on a stock exchange to the public.

insiders (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Corporate of�icers, directors, and anyone who controls 10% or more of any company's class of equity securities.

interlocking directorates (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

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7/9/2019 Print

https://content.ashford.edu/print/AUBUS670.12.2?sections=fm,ch04,sec4.1,sec4.2,sec4.3,sec4.4,sec4.5,sec4.6,ch04summary,ch31,sec31.1,sec31.… 27/47

Under the Clayton Act, an of�icer or director of one corporation is prohibited from serving as an of�icer or director of another competing corporation if each corporation has capital, surplus, and undivided pro�its aggregating to more than $10 million.

issuance (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Listing of stock on a public stock exchange, such as the New York Stock Exchange, thereby making the stock available for purchase by the public.

per se violations of the Sherman Act (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Types of agreements that are so harmful to free competition that they are punishable in themselves without having to be examined for their reasonableness or potential restraint on commerce.

posteffective period (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Period in which the SEC declares the registration effective and prospective buyers are given a �inal prospectus, after which the company may �inally offer and sell the new security.

pre�iling period (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Period before the �iling for registration with the Securities and Exchange Commission, when a company must avoid publicity about the new security and may not sell or offer to sell the security to anyone.

prospectus (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A booklet of information provided by a corporation for buyers to read so that they may determine whether the stock is a good investment.

proxy solicitation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prior to the annual meeting, a mailing to shareholders by the corporation giving each shareholder an option to vote on corporate matters via a proxy card, that is, giving their voting rights over to a group who will vote on the issues on their behalf rather than the shareholder voting individually.

Public Company Accounting Oversight Board (PCAOB) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A new agency created by the Sarbanes–Oxley Act of 2002, charged with the oversight, inspection, regulation, and disciplining of accounting �irms in their roles as auditors of public companies.

registration (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The �iling of paperwork with the Securities and Exchange Commission by a corporation that plans to sell stock.

registration statement (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Initial paperwork �iled with the Securities and Exchange Commission that must be approved by the SEC before stock can be issued.

Regulation A (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Any nonpublic issuer may sell up to $5 million of securities in a one-year period with no limit on the number of purchasers and no purchaser sophistication requirement.

Rule 147 of the Securities Act of 1933 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Securities offered for sale solely in one state by a company that does at least 80% of its business in the state are also exempt from �iling. State securities regulations, however, may require the company to �ile with the Securities and Exchange Commission.

Rule 504 of Regulation D (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Nonpublic issuers may sell up to $1 million of securities in a 12-month period to any purchaser.

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7/9/2019 Print

https://content.ashford.edu/print/AUBUS670.12.2?sections=fm,ch04,sec4.1,sec4.2,sec4.3,sec4.4,sec4.5,sec4.6,ch04summary,ch31,sec31.1,sec31.… 28/47

Rule 505 of Regulation D (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Any issuer may sell up to $5 million of securities in a 12-month period to fewer than 35 unaccredited investors and to an unlimited number of accredited investors.

Rule 506 of Regulation D (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Exempts private offerings to accredited investors and limited offerings to not more than 35 nonaccredited investors (e.g., regular, nonexpert investors).

"rule of reason" test (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A test employed by the courts to determine whether an action is a restraint of trade contracts or action unduly restrictive.

scienter (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The mental state embracing the intent to deceive, manipulate, or defraud.

Section 2 of the Clayton Act (15 U.S.C. § 13) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prohibits sellers from charging different competitive buyers different prices for "commodities of like grade and quality."

Section 3 of the Clayton Act (15 U.S.C. § 14) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Makes it illegal for sellers of commodities involved in commerce to enter into sale or lease contracts that restrict the ability of buyers to purchase the goods or services of the seller's competitors when the effect is to lessen competition or tend to create a monopoly in any line of commerce.

Section 6 of the Clayton Act (15 U.S.C. § 17) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Exempts labor organizations from coverage under antitrust laws.

Section 7 of the Clayton Act (15 U.S.C. § 18) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prohibits the acquisition of one company's stock by another company when "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly."

Section 7a of the Clayton Act (15 U.S.C. § 18a) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Requires noti�ication of the Federal Trade Commission and the Assistant Attorney General in charge of the Antitrust Division of the Department of Justice prior to the acquisition of voting securities when the acquisition would leave the acquirer with voting securities and aggregate assets in the company whose securities are being acquired of $200 million or more.

Section 8 of the Clayton Act (15 U.S.C. § 19) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prohibits interlocking directorates and of�icers serving competing companies if both companies have aggregate capital, surplus, and undivided pro�its of $10 million or more each.

Section 10(b) of the Securities Exchange Act of 1934 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prohibits the use of manipulative or deceptive devices through misstatement or omission of a material fact in the sale of securities.

Section 11 of the Securities Act of 1933 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Provides civil liability for damages when a registration statement misstates or omits a material fact on its effective date.

Section 12(a)(2) of the Securities Act of 1933 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

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7/9/2019 Print

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Prohibits misstatements or omissions of material fact in any written or oral communication in connection with the general distribution of any security by an issuer.

Section 17(a) of the Securities Act of 1933 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Prohibits the use of any device or arti�ice to defraud, or the use of any untrue or misleading statement, in connection with the offer or sale of any security.

Section 18 of the Securities Exchange Act of 1934 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Imposes liability on any person responsible for a false or misleading statement of a material fact in any �iling under the act.

Section 24 of the Securities Act of 1933 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Provides for criminal liability for any person who willfully violates the act or its rules and regulations. Violators are subject to �ines of up to $10,000 and/or imprisonment for up to �ive years for each criminal violation.

Section 32 of the Securities Exchange Act of 1934 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Provides criminal liability for willful violations of the act of up to $5 million in �ines and imprisonment for up to 20 years.

securities (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A range of instruments such as stocks, bonds, debentures, evidence of indebtedness, voting trust certi�icates, investment contracts, and fractional undivided interests in oil, gas, or mineral rights.

Securities Act of 1933 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Federal law governing initial public offerings (IPOs) of securities. Requires that investors receive �inancial and other signi�icant information concerning securities being offered for public sale; prohibits deceit, misrepresentations, and other fraud in the sale of securities.

Securities and Exchange Commission (SEC) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Federal agency that regulates the securities markets. Created by the Securities Exchange Act of 1934.

Securities Exchange Act of 1934 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Created the Securities and Exchange Commission (SEC), which it empowers with broad authority over all aspects of the securities industry, including brokerage �irms and the various securities exchanges; oversees, identi�ies, and prohibits certain types of conduct in the markets; and empowers the SEC to require periodic reporting of information by companies with publicly traded securities.

Sherman Antitrust Act of 1890 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Federal law that prohibits monopolies or other devices that restrain free trade.

trusts and monopolies (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Arrangements among competitors that destroy competition and regulate pricing.

waiting period (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Once the company �iles the registration statement with the Securities and Exchange Commission and its approval is pending, the company may still not sell the security, but may begin to offer the security for sale through limited advertisements in ads that tell prospective investors where they may request a prospectus for the new security.

Chapter 31 Flashcards

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7/9/2019 Print

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Critical Thinking and Discussion Questions

1. Under the Securities Act of 1933, when must securities be registered with the SEC? What types of securities are covered under the 1933 act?

2. What is the de�inition of an investment contract under the Howey test?

3. What kinds of securities are exempt from registration under the 1933 act? What are the maximum penalties for violating the Securities Act of 1933?

4. What is the threshold for registering securities under the 1934 act and having to �ile periodic reports about these securities? What is the maximum criminal penalty available under the 1934 act?

5. What is the function of the Public Company Accounting Oversight Board (PCAOB) created by Sarbanes–Oxley? What is the maximum criminal penalty for violating the certi�ication requirements of Sarbanes–Oxley?

6. What are interlocking directorates? When are directors and of�icers of corporations forbidden from working for or serving on the boards of competitors?

7. Private University, a private nonpro�it educational institution located in California, decides to issue "Shares in Learning" certi�icates in a one-time offering to the public. These shares will be sold for $500 each and entitle the bearer to redeem each certi�icate for two undergraduate or one graduate college credit in any of its schools at any time in the future. The shares may also be resold without restriction by the initial purchaser. The offering will be made via the Internet.

a. Assuming that the "Shares in Learning" are securities for purposes of the Securities Act of 1933, will the issue need to be registered with the SEC under the act? Explain.

b. Assume that the "Shares in Learning" are issued by Private College, a proprietary for-pro�it institution licensed to do business in California. Will the securities need to be registered with the SEC if the college does business only in California, the securities are advertised and sold only to California residents via telephone solicitation, and 5 of the 500 current students are from out of state? Explain fully.

c. If State University is a proprietary, for-pro�it institution that does business in all 50 states and around the world by offering its degrees online, will the securities offering come under the 1933 act?

8. Carlos is the owner of a small business that specializes in refurbishing and selling used laptops for under $300 each. His business has been doing well, and he decides to expand his operation by purchasing 10 similar small businesses from around the country and consolidating them under his brand name of Under $300 Laptops, Inc.

a. Assuming that all the businesses purchased by Carlos were closely held corporations, that he purchased the entire voting shares for these, and that the total assets of each business were under $10 million, would these purchases require FTC noti�ication?

b. Given the niche market in which Carlos operates, if the acquisitions left him with 70% of the laptop refurbishing and resale market and if he had a 5% interest in that market prior to the acquisitions, is Carlos likely to be in violation of the Sherman or Clayton Act?

c. If Carlos provides used laptops to schools at cost, is Carlos guilty of illegal price discrimination under the Clayton Act?

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The Constitution of the United States of America Preamble

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

Article I

Section 1

All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.

Section 2

The House of Representatives shall be composed of Members chosen every second Year by the People of the several States, and the Electors in each State shall have the Quali�ications requisite for Electors of the most numerous Branch of the State Legislature.

No Person shall be a Representative who shall not have attained to the Age of twenty �ive Years, and been seven Years a Citizen of the United States, and who shall not, when elected, be an Inhabitant of that State in which he shall be chosen.

Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three �ifths of all other Persons. The actual Enumeration shall be made within three Years after the �irst Meeting of the Congress of the United States, and within every subsequent Term of ten Years, in such Manner as they shall by Law direct. The Number of Representatives shall not exceed one for every thirty Thousand, but each State shall have at Least one Representative; and until such enumeration shall be made, the State of New Hampshire shall be entitled to chuse three, Massachusetts eight, Rhode-Island and Providence Plantations one, Connecticut �ive, New-York six, New Jersey four, Pennsylvania eight, Delaware one, Maryland six, Virginia ten, North Carolina �ive, South Carolina �ive, and Georgia three.

When vacancies happen in the Representation from any State, the Executive Authority thereof shall issue Writs of Election to �ill such Vacancies.

The House of Representatives shall chuse their Speaker and other Of�icers; and shall have the sole Power of Impeachment.

Section 3

The Senate of the United States shall be composed of two Senators from each State, chosen by the Legislature thereof for six Years; and each Senator shall have one Vote.

Immediately after they shall be assembled in Consequence of the �irst Election, they shall be divided as equally as may be into three Classes. The Seats of the Senators of the �irst Class shall be vacated at the Expiration of the second Year, of the second Class at the Expiration of the fourth Year, and of the third Class at the Expiration of the sixth Year, so that one third may be chosen every second Year; and if Vacancies happen by Resignation, or otherwise, during the Recess of the Legislature of any State, the Executive thereof may make temporary Appointments until the next Meeting of the Legislature, which shall then �ill such Vacancies.

No Person shall be a Senator who shall not have attained to the Age of thirty Years, and been nine Years a Citizen of the United States, and who shall not, when elected, be an Inhabitant of that State for which he shall be chosen.

The Vice President of the United States shall be President of the Senate, but shall have no Vote, unless they be equally divided.

The Senate shall chuse their other Of�icers, and also a President pro tempore, in the Absence of the Vice President, or when he shall exercise the Of�ice of President of the United States.

The Senate shall have the sole Power to try all Impeachments. When sitting for that Purpose, they shall be on Oath or Af�irmation. When the President of the United States is tried, the Chief Justice shall preside: And no Person shall be convicted without the Concurrence of two thirds of the Members present.

Judgment in Cases of Impeachment shall not extend further than to removal from Of�ice, and disquali�ication to hold and enjoy any Of�ice of honor, Trust or Pro�it under the United States: but the Party convicted shall nevertheless be liable and subject to Indictment, Trial, Judgment and Punishment, according to Law.

Section 4

The Times, Places and Manner of holding Elections for Senators and Representatives, shall be prescribed in each State by the Legislature thereof; but the Congress may at any time by Law make or alter such Regulations, except as to the Places of chusing Senators.

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The Congress shall assemble at least once in every Year, and such Meeting shall be on the �irst Monday in December, unless they shall by Law appoint a different Day.

Section 5

Each House shall be the Judge of the Elections, Returns and Quali�ications of its own Members, and a Majority of each shall constitute a Quorum to do Business; but a smaller Number may adjourn from day to day, and may be authorized to compel the Attendance of absent Members, in such Manner, and under such Penalties as each House may provide.

Each House may determine the Rules of its Proceedings, punish its Members for disorderly Behaviour, and, with the Concurrence of two thirds, expel a Member.

Each House shall keep a Journal of its Proceedings, and from time to time publish the same, excepting such Parts as may in their Judgment require Secrecy; and the Yeas and Nays of the Members of either House on any question shall, at the Desire of one �ifth of those Present, be entered on the Journal.

Neither House, during the Session of Congress, shall, without the Consent of the other, adjourn for more than three days, nor to any other Place than that in which the two Houses shall be sitting.

Section 6

The Senators and Representatives shall receive a Compensation for their Services, to be ascertained by Law, and paid out of the Treasury of the United States. They shall in all Cases, except Treason, Felony and Breach of the Peace, be privileged from Arrest during their Attendance at the Session of their respective Houses, and in going to and returning from the same; and for any Speech or Debate in either House, they shall not be questioned in any other Place.

No Senator or Representative shall, during the Time for which he was elected, be appointed to any civil Of�ice under the Authority of the United States, which shall have been created, or the Emoluments whereof shall have been encreased during such time; and no Person holding any Of�ice under the United States, shall be a Member of either House during his Continuance in Of�ice.

Section 7

All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.

Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States: If he approve he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses shall be determined by yeas and Nays, and the Names of the Persons voting for and against the Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.

Every Order, Resolution, or Vote to which the Concurrence of the Senate and House of Representatives may be necessary (except on a question of Adjournment) shall be presented to the President of the United States; and before the Same shall take Effect, shall be approved by him, or being disapproved by him, shall be repassed by two thirds of the Senate and House of Representatives, according to the Rules and Limitations prescribed in the Case of a Bill.

Section 8

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow Money on the credit of the United States;

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

To coin Money, regulate the Value thereof, and of foreign Coin, and �ix the Standard of Weights and Measures;

To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;

To establish Post Of�ices and post Roads;

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;

To constitute Tribunals inferior to the supreme Court;

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To de�ine and punish Piracies and Felonies committed on the high Seas, and Offences against the Law of Nations;

To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water;

To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;

To provide and maintain a Navy;

To make Rules for the Government and Regulation of the land and naval Forces;

To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;

To provide for organizing, arming, and disciplining, the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Of�icers, and the Authority of training the Militia according to the discipline prescribed by Congress;

To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the Acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings;—And

To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Of�icer thereof.

Section 9

The Migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the Year one thousand eight hundred and eight, but a Tax or duty may be imposed on such Importation, not exceeding ten dollars for each Person.

The Privilege of the Writ of Habeas Corpus shall not be suspended, unless when in Cases of Rebellion or Invasion the public Safety may require it.

No Bill of Attainder or ex post facto Law shall be passed.

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.

No Tax or Duty shall be laid on Articles exported from any State.

No Preference shall be given by any Regulation of Commerce or Revenue to the Ports of one State over those of another; nor shall Vessels bound to, or from, one State, be obliged to enter, clear, or pay Duties in another.

No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

No Title of Nobility shall be granted by the United States: And no Person holding any Of�ice of Pro�it or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Of�ice, or Title, of any kind whatever, from any King, Prince, or foreign State.

Section 10

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.

No State shall, without the Consent of Congress, lay any Duty of Tonnage, keep Troops, or Ships of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.

Article II

Section 1

The executive Power shall be vested in a President of the United States of America. He shall hold his Of�ice during the Term of four Years, and, together with the Vice President, chosen for the same Term, be elected, as follows:

Each State shall appoint, in such Manner as the Legislature thereof may direct, a Number of Electors, equal to the whole Number of Senators and Representatives to which the State may be entitled in the Congress: but no Senator or Representative, or Person holding an Of�ice of Trust or Pro�it under the United States, shall be appointed an Elector.

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The Electors shall meet in their respective States, and vote by Ballot for two Persons, of whom one at least shall not be an Inhabitant of the same State with themselves. And they shall make a List of all the Persons voted for, and of the Number of Votes for each; which List they shall sign and certify, and transmit sealed to the Seat of the Government of the United States, directed to the President of the Senate. The President of the Senate shall, in the Presence of the Senate and House of Representatives, open all the Certi�icates, and the Votes shall then be counted. The Person having the greatest Number of Votes shall be the President, if such Number be a Majority of the whole Number of Electors appointed; and if there be more than one who have such Majority, and have an equal Number of Votes, then the House of Representatives shall immediately chuse by Ballot one of them for President; and if no Person have a Majority, then from the �ive highest on the List the said House shall in like Manner chuse the President. But in chusing the President, the Votes shall be taken by States, the Representation from each State having one Vote; A quorum for this purpose shall consist of a Member or Members from two thirds of the States, and a Majority of all the States shall be necessary to a Choice. In every Case, after the Choice of the President, the Person having the greatest Number of Votes of the Electors shall be the Vice President. But if there should remain two or more who have equal Votes, the Senate shall chuse from them by Ballot the Vice President.

The Congress may determine the Time of chusing the Electors, and the Day on which they shall give their Votes; which Day shall be the same throughout the United States.

No Person except a natural born Citizen, or a Citizen of the United States, at the time of the Adoption of this Constitution, shall be eligible to the Of�ice of President; neither shall any Person be eligible to that Of�ice who shall not have attained to the Age of thirty �ive Years, and been fourteen Years a Resident within the United States.

In Case of the Removal of the President from Of�ice, or of his Death, Resignation, or Inability to discharge the Powers and Duties of the said Of�ice, the Same shall devolve on the Vice President, and the Congress may by Law provide for the Case of Removal, Death, Resignation or Inability, both of the President and Vice President, declaring what Of�icer shall then act as President, and such Of�icer shall act accordingly, until the Disability be removed, or a President shall be elected.

The President shall, at stated Times, receive for his Services, a Compensation, which shall neither be increased nor diminished during the Period for which he shall have been elected, and he shall not receive within that Period any other Emolument from the United States, or any of them.

Before he enter on the Execution of his Of�ice, he shall take the following Oath or Af�irmation:—"I do solemnly swear (or af�irm) that I will faithfully execute the Of�ice of President of the United States, and will to the best of my Ability, preserve, protect and defend the Constitution of the United States."

Section 2

The President shall be Commander in Chief of the Army and Navy of the United States, and of the Militia of the several States, when called into the actual Service of the United States; he may require the Opinion, in writing, of the principal Of�icer in each of the executive Departments, upon any Subject relating to the Duties of their respective Of�ices, and he shall have Power to grant Reprieves and Pardons for Offences against the United States, except in Cases of Impeachment.

He shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur; and he shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Of�icers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Of�icers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

The President shall have Power to �ill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session.

Section 3

He shall from time to time give to the Congress Information of the State of the Union, and recommend to their Consideration such Measures as he shall judge necessary and expedient; he may, on extraordinary Occasions, convene both Houses, or either of them, and in Case of Disagreement between them, with Respect to the Time of Adjournment, he may adjourn them to such Time as he shall think proper; he shall receive Ambassadors and other public Ministers; he shall take Care that the Laws be faithfully executed, and shall Commission all the Of�icers of the United States.

Section 4

The President, Vice President and all civil Of�icers of the United States, shall be removed from Of�ice on Impeachment for, and Conviction of, Treason, Bribery, or other high Crimes and Misdemeanors.

Article III

Section 1

The judicial Power of the United States shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish. The Judges, both of the supreme and inferior Courts, shall hold their Of�ices during good Behaviour, and shall, at stated Times, receive for their Services a Compensation, which shall not be diminished during their Continuance in Of�ice.

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Section 2

The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority;—to all Cases affecting Ambassadors, other public Ministers and Consuls;— to all Cases of admiralty and maritime Jurisdiction;—to Controversies to which the United States shall be a Party;—to Controversies between two or more States;—between a State and Citizens of another State,—between Citizens of different States,—between Citizens of the same State claiming Lands under Grants of different States, and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects.

In all Cases affecting Ambassadors, other public Ministers and Consuls, and those in which a State shall be Party, the supreme Court shall have original Jurisdiction. In all the other Cases before mentioned, the supreme Court shall have appellate Jurisdiction, both as to Law and Fact, with such Exceptions, and under such Regulations as the Congress shall make.

The Trial of all Crimes, except in Cases of Impeachment, shall be by Jury; and such Trial shall be held in the State where the said Crimes shall have been committed; but when not committed within any State, the Trial shall be at such Place or Places as the Congress may by Law have directed.

Section 3

Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort. No Person shall be convicted of Treason unless on the Testimony of two Witnesses to the same overt Act, or on Confession in open Court.

The Congress shall have Power to declare the Punishment of Treason, but no Attainder of Treason shall work Corruption of Blood, or Forfeiture except during the Life of the Person attainted.

Article IV

Section 1

Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State. And the Congress may by general Laws prescribe the Manner in which such Acts, Records and Proceedings shall be proved, and the Effect thereof.

Section 2

The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States.

A Person charged in any State with Treason, Felony, or other Crime, who shall �lee from Justice, and be found in another State, shall on Demand of the executive Authority of the State from which he �led, be delivered up, to be removed to the State having Jurisdiction of the Crime.

No Person held to Service or Labour in one State, under the Laws thereof, escaping into another, shall, in Consequence of any Law or Regulation therein, be discharged from such Service or Labour, but shall be delivered up on Claim of the Party to whom such Service or Labour may be due.

Section 3

New States may be admitted by the Congress into this Union; but no new State shall be formed or erected within the Jurisdiction of any other State; nor any State be formed by the Junction of two or more States, or Parts of States, without the Consent of the Legislatures of the States concerned as well as of the Congress.

The Congress shall have Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States; and nothing in this Constitution shall be so construed as to Prejudice any Claims of the United States, or of any particular State.

Section 4

The United States shall guarantee to every State in this Union a Republican Form of Government, and shall protect each of them against Invasion; and on Application of the Legislature, or of the Executive (when the Legislature cannot be convened), against domestic Violence.

Article V

The Congress, whenever two thirds of both Houses shall deem it necessary, shall propose Amendments to this Constitution, or, on the Application of the Legislatures of two thirds of the several States, shall call a Convention for proposing Amendments, which, in either Case, shall be valid to all Intents and Purposes, as Part of this Constitution, when rati�ied by the Legislatures of three fourths of the several States, or by Conventions in three fourths thereof, as the one or the other Mode of Rati�ication may be proposed by the Congress; Provided that no Amendment which may be made prior to the Year One thousand eight hundred and eight shall in any Manner affect the �irst and fourth Clauses in the Ninth Section of the �irst Article; and that no State, without its Consent, shall be deprived of its equal Suffrage in the Senate.

Article VI

All Debts contracted and Engagements entered into, before the Adoption of this Constitution, shall be as valid against the United States under this Constitution, as under the Confederation.

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This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

The Senators and Representatives before mentioned, and the Members of the several State Legislatures, and all executive and judicial Of�icers, both of the United States and of the several States, shall be bound by Oath or Af�irmation, to support this Constitution; but no religious Test shall ever be required as a Quali�ication to any Of�ice or public Trust under the United States.

Article VII

The Rati�ication of the Conventions of nine States, shall be suf�icient for the Establishment of this Constitution between the States so ratifying the Same.

The Word, "the," being interlined between the seventh and eighth Lines of the �irst Page, the Word "Thirty" being partly written on an Erazure in the �ifteenth Line of the �irst Page, The Words "is tried" being interlined between the thirty second and thirty third Lines of the �irst Page and the Word "the" being interlined between the forty third and forty fourth Lines of the second Page.

Attest William Jackson Secretary

done in Convention by the Unanimous Consent of the States present the Seventeenth Day of September in the Year of our Lord one thousand seven hundred and Eighty seven and of the Independance of the United States of America the Twelfth In witness whereof We have hereunto subscribed our Names.

Amendments

[The �irst 10 amendments are known as the "Bill of Rights."]

Amendment I

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

Amendment II

A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.

Amendment III

No Soldier shall, in time of peace be quartered in any house, without the consent of the Owner, nor in time of war, but in a manner to be prescribed by law.

Amendment IV

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or af�irmation, and particularly describing the place to be searched, and the persons or things to be seized.

Amendment V

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

Amendment VI

In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defence.

Amendment VII

In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.

Amendment VIII

Excessive bail shall not be required, nor excessive �ines imposed, nor cruel and unusual punishments in�licted.

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Amendment IX

The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.

Amendment X

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

AMENDMENT XI

Passed by Congress March 4, 1794. Rati�ied February 7, 1795.

Note: Article III, section 2, of the Constitution was modi�ied by amendment 11.

The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.

AMENDMENT XII

Passed by Congress December 9, 1803. Rati�ied June 15, 1804.

Note: A portion of Article II, section 1 of the Constitution was superseded by the 12th amendment.

The Electors shall meet in their respective states and vote by ballot for President and Vice-President, one of whom, at least, shall not be an inhabitant of the same state with themselves; they shall name in their ballots the person voted for as President, and in distinct ballots the person voted for as Vice-President, and they shall make distinct lists of all persons voted for as President, and of all persons voted for as Vice-President, and of the number of votes for each, which lists they shall sign and certify, and transmit sealed to the seat of the government of the United States, directed to the President of the Senate;— the President of the Senate shall, in the presence of the Senate and House of Representatives, open all the certi�icates and the votes shall then be counted;—The person having the greatest number of votes for President, shall be the President, if such number be a majority of the whole number of Electors appointed; and if no person have such majority, then from the persons having the highest numbers not exceeding three on the list of those voted for as President, the House of Representatives shall choose immediately, by ballot, the President. But in choosing the President, the votes shall be taken by states, the representation from each state having one vote; a quorum for this purpose shall consist of a member or members from two-thirds of the states, and a majority of all the states shall be necessary to a choice. [And if the House of Representatives shall not choose a President whenever the right of choice shall devolve upon them, before the fourth day of March next following, then the Vice-President shall act as President, as in case of the death or other constitutional disability of the President.—]* The person having the greatest number of votes as Vice-President, shall be the Vice-President, if such number be a majority of the whole number of Electors appointed, and if no person have a majority, then from the two highest numbers on the list, the Senate shall choose the Vice-President; a quorum for the purpose shall consist of two-thirds of the whole number of Senators, and a majority of the whole number shall be necessary to a choice. But no person constitutionally ineligible to the of�ice of President shall be eligible to that of Vice-President of the United States.

*Superseded by section 3 of the 20th amendment.

AMENDMENT XIII

Passed by Congress January 31, 1865. Rati�ied December 6, 1865.

Note: A portion of Article IV, section 2, of the Constitution was superseded by the 13th amendment.

Section 1

Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.

Section 2

Congress shall have power to enforce this article by appropriate legislation.

AMENDMENT XIV

Passed by Congress June 13, 1866. Rati�ied July 9, 1868.

Note: Article I, section 2, of the Constitution was modi�ied by section 2 of the 14th amendment.

Section 1

All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

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Section 2

Representatives shall be apportioned among the several States according to their respective numbers, counting the whole number of persons in each State, excluding Indians not taxed. But when the right to vote at any election for the choice of electors for President and Vice-President of the United States, Representatives in Congress, the Executive and Judicial of�icers of a State, or the members of the Legislature thereof, is denied to any of the male inhabitants of such State, being twenty-one years of age,* and citizens of the United States, or in any way abridged, except for participation in rebellion, or other crime, the basis of representation therein shall be reduced in the proportion which the number of such male citizens shall bear to the whole number of male citizens twenty-one years of age in such State.

Section 3

No person shall be a Senator or Representative in Congress, or elector of President and Vice-President, or hold any of�ice, civil or military, under the United States, or under any State, who, having previously taken an oath, as a member of Congress, or as an of�icer of the United States, or as a member of any State legislature, or as an executive or judicial of�icer of any State, to support the Constitution of the United States, shall have engaged in insurrection or rebellion against the same, or given aid or comfort to the enemies thereof. But Congress may by a vote of two-thirds of each House, remove such disability.

Section 4

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

Section 5

The Congress shall have the power to enforce, by appropriate legislation, the provisions of this article.

*Changed by section 1 of the 26th amendment.

AMENDMENT XV

Passed by Congress February 26, 1869. Rati�ied February 3, 1870.

Section 1

The right of citizens of the United States to vote shall not be denied or abridged by the United States or by any State on account of race, color, or previous condition of servitude—

Section 2

The Congress shall have the power to enforce this article by appropriate legislation.

AMENDMENT XVI

Passed by Congress July 2, 1909. Rati�ied February 3, 1913.

Note: Article I, section 9, of the Constitution was modi�ied by amendment 16.

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

AMENDMENT XVII

Passed by Congress May 13, 1912. Rati�ied April 8, 1913.

Note: Article I, section 3, of the Constitution was modi�ied by the 17th amendment.

The Senate of the United States shall be composed of two Senators from each State, elected by the people thereof, for six years; and each Senator shall have one vote. The electors in each State shall have the quali�ications requisite for electors of the most numerous branch of the State legislatures.

When vacancies happen in the representation of any State in the Senate, the executive authority of such State shall issue writs of election to �ill such vacancies: Provided, That the legislature of any State may empower the executive thereof to make temporary appointments until the people �ill the vacancies by election as the legislature may direct.

This amendment shall not be so construed as to affect the election or term of any Senator chosen before it becomes valid as part of the Constitution.

AMENDMENT XVIII

Passed by Congress December 18, 1917. Rati�ied January 16, 1919. Repealed by amendment 21.

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Section 1

After one year from the rati�ication of this article the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes is hereby prohibited.

Section 2

The Congress and the several States shall have concurrent power to enforce this article by appropriate legislation.

Section 3

This article shall be inoperative unless it shall have been rati�ied as an amendment to the Constitution by the legislatures of the several States, as provided in the Constitution, within seven years from the date of the submission hereof to the States by the Congress.

AMENDMENT XIX

Passed by Congress June 4, 1919. Rati�ied August 18, 1920.

The right of citizens of the United States to vote shall not be denied or abridged by the United States or by any State on account of sex.

Congress shall have power to enforce this article by appropriate legislation.

AMENDMENT XX

Passed by Congress March 2, 1932. Rati�ied January 23, 1933.

Note: Article I, section 4, of the Constitution was modi�ied by section 2 of this amendment. In addition, a portion of the 12th amendment was superseded by section 3.

Section 1

The terms of the President and the Vice President shall end at noon on the 20th day of January, and the terms of Senators and Representatives at noon on the 3d day of January, of the years in which such terms would have ended if this article had not been rati�ied; and the terms of their successors shall then begin.

Section 2

The Congress shall assemble at least once in every year, and such meeting shall begin at noon on the 3d day of January, unless they shall by law appoint a different day.

Section 3

If, at the time �ixed for the beginning of the term of the President, the President elect shall have died, the Vice President elect shall become President. If a President shall not have been chosen before the time �ixed for the beginning of his term, or if the President elect shall have failed to qualify, then the Vice President elect shall act as President until a President shall have quali�ied; and the Congress may by law provide for the case wherein neither a President elect nor a Vice President shall have quali�ied, declaring who shall then act as President, or the manner in which one who is to act shall be selected, and such person shall act accordingly until a President or Vice President shall have quali�ied.

Section 4

The Congress may by law provide for the case of the death of any of the persons from whom the House of Representatives may choose a President whenever the right of choice shall have devolved upon them, and for the case of the death of any of the persons from whom the Senate may choose a Vice President whenever the right of choice shall have devolved upon them.

Section 5

Sections 1 and 2 shall take effect on the 15th day of October following the rati�ication of this article.

Section 6

This article shall be inoperative unless it shall have been rati�ied as an amendment to the Constitution by the legislatures of three-fourths of the several States within seven years from the date of its submission.

AMENDMENT XXI

Passed by Congress February 20, 1933. Rati�ied December 5, 1933.

Section 1

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The eighteenth article of amendment to the Constitution of the United States is hereby repealed.

Section 2

The transportation or importation into any State, Territory, or Possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.

Section 3

This article shall be inoperative unless it shall have been rati�ied as an amendment to the Constitution by conventions in the several States, as provided in the Constitution, within seven years from the date of the submission hereof to the States by the Congress.

AMENDMENT XXII

Passed by Congress March 21, 1947. Rati�ied February 27, 1951.

Section 1

No person shall be elected to the of�ice of the President more than twice, and no person who has held the of�ice of President, or acted as President, for more than two years of a term to which some other person was elected President shall be elected to the of�ice of President more than once. But this Article shall not apply to any person holding the of�ice of President when this Article was proposed by Congress, and shall not prevent any person who may be holding the of�ice of President, or acting as President, during the term within which this Article becomes operative from holding the of�ice of President or acting as President during the remainder of such term.

Section 2

This article shall be inoperative unless it shall have been rati�ied as an amendment to the Constitution by the legislatures of three-fourths of the several States within seven years from the date of its submission to the States by the Congress.

AMENDMENT XXIII

Passed by Congress June 16, 1960. Rati�ied March 29, 1961.

Section 1

The District constituting the seat of Government of the United States shall appoint in such manner as Congress may direct:

A number of electors of President and Vice President equal to the whole number of Senators and Representatives in Congress to which the District would be entitled if it were a State, but in no event more than the least populous State; they shall be in addition to those appointed by the States, but they shall be considered, for the purposes of the election of President and Vice President, to be electors appointed by a State; and they shall meet in the District and perform such duties as provided by the twelfth article of amendment.

Section 2

The Congress shall have power to enforce this article by appropriate legislation.

AMENDMENT XXIV

Passed by Congress August 27, 1962. Rati�ied January 23, 1964.

Section 1

The right of citizens of the United States to vote in any primary or other election for President or Vice President, for electors for President or Vice President, or for Senator or Representative in Congress, shall not be denied or abridged by the United States or any State by reason of failure to pay poll tax or other tax.

Section 2

The Congress shall have power to enforce this article by appropriate legislation.

AMENDMENT XXV

Passed by Congress July 6, 1965. Rati�ied February 10, 1967.

Note: Article II, section 1, of the Constitution was affected by the 25th amendment.

Section 1

In case of the removal of the President from of�ice or of his death or resignation, the Vice President shall become President.

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Section 2

Whenever there is a vacancy in the of�ice of the Vice President, the President shall nominate a Vice President who shall take of�ice upon con�irmation by a majority vote of both Houses of Congress.

Section 3

Whenever the President transmits to the President pro tempore of the Senate and the Speaker of the House of Representatives his written declaration that he is unable to discharge the powers and duties of his of�ice, and until he transmits to them a written declaration to the contrary, such powers and duties shall be discharged by the Vice President as Acting President.

Section 4

Whenever the Vice President and a majority of either the principal of�icers of the executive departments or of such other body as Congress may by law provide, transmit to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his of�ice, the Vice President shall immediately assume the powers and duties of the of�ice as Acting President.

Thereafter, when the President transmits to the President pro tempore of the Senate and the Speaker of the House of Representatives his written declaration that no inability exists, he shall resume the powers and duties of his of�ice unless the Vice President and a majority of either the principal of�icers of the executive department or of such other body as Congress may by law provide, transmit within four days to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his of�ice. Thereupon Congress shall decide the issue, assembling within forty-eight hours for that purpose if not in session. If the Congress, within twenty-one days after receipt of the latter written declaration, or, if Congress is not in session, within twenty-one days after Congress is required to assemble, determines by two-thirds vote of both Houses that the President is unable to discharge the powers and duties of his of�ice, the Vice President shall continue to discharge the same as Acting President; otherwise, the President shall resume the powers and duties of his of�ice.

AMENDMENT XXVI

Passed by Congress March 23, 1971. Rati�ied July 1, 1971.

Note: Amendment 14, section 2, of the Constitution was modi�ied by section 1 of the 26th amendment.

Section 1

The right of citizens of the United States, who are eighteen years of age or older, to vote shall not be denied or abridged by the United States or by any State on account of age.

Section 2

The Congress shall have power to enforce this article by appropriate legislation.

AMENDMENT XXVII

Originally proposed September 25, 1789. Rati�ied May 7, 1992.

No law, varying the compensation for the services of the Senators and Representatives, shall take effect, until an election of representatives shall have intervened.

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Cases Discussed Asahi Metal Industry v. Superior Court of California (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec2.2#box2.2b) —in personam jurisdiction

Asahi Metal Industry v. Superior Court of California, 480 U.S. 102 (1987)

Brame v. Western State Hosp. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec5.3#box5.3c) —workers' compensation

Brame v. Western State Hosp., 136 Wash. App. 740, 150 P.3d 637 (2007)

Burlington Industries v. Ellerth (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1c) —sexual harassment

Burlington Industries v. Ellerth, 524 U.S. 742 (1998)

Day et al. v. Stascavage et al. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec29.4#box29.4) —derivative action

Day et al. v. Stascavage et al., Colorado Court of Appeals

Christie v. Foremost (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec26.4#box26.4) —age discrimination

Christie v. Foremost Ins. Co., 785 F.2d 584 (7th Cir. 1986)

Dothard v. Rowlinson (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.1#box24.1b) —discrimination based on sex

Dothard v. Rowlinson, 433 U.S. 321 (1977)

Eckis v. Sea World (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec21.1#box21.1b) —employment relationship

Eckis v. Sea World, 64 Cal. App. 3d 1 (1976)

Grande v. Jennings (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec19.1#box19.1) —found property

Grande v. Jennings,_P.3d._ 2012, 635 Ariz. Adv. Rep. 19 (May 2012)

Griggs v. Duke Power Company (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec23.1#box23.1) —race discrimination

Griggs v. Duke Power Company, 401 U.S. 424 (1971)

Guijosa v. Wal-Mart Stores (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec7.3#box7.3) —shoplifting

Guijosa v. Wal-Mart Stores, 101 Wn. 777 (2000)

Harris v. Forklift Systems (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1b) —sexual harassment

Harris v. Forklift Systems, 510 U.S. 17 (1993)

Heart of Atlanta Motel, Inc. v. United States (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec22.1#box22.1a) —Civil Rights Act

Heart of Atlanta Motel, Inc. v. United States, 379 U.S. 241 (1964)

In re: Lane (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec18.4#box18.4) —credit counseling

In re: Lane, Slip Copy 2012 WL 1865448, Bkrtcy, N.D. Okla. (2012)

International Union, United Automobile, Aerospace & Agricultural Implement Workers of America, UAW, et al. v. Johnson Controls, Inc. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.2#box24.2a) —discrimination based on sex

International Union, United Automobile, Aerospace & Agricultural Implement Workers of America, UAW, et al. v. Johnson Controls, Inc., 499 U.S. 187 (1991)

Katzenbach v. McClung (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec22.1#box22.1b) —Affectation Doctrine

Katzenbach v. McClung, 379 U.S. 294 (1964)

Kohler v. Inter-Tel Technologies (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1d) —sexual harassment

Kohler v. Inter-Tel Technologies, 244 F.3d 1167, 1176 (9th Cir. 2001)

Malorney v. B&L Motor Freight, Inc. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec21.2#box21.2) —negligent hiring

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Malorney v. B&L Motor Freight, Inc., 146 Ill. App.3d 265, 496 N.E.2d 1086 (1986)

Meritor Savings Bank v. Vinson (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1a) —sexual harassment

Meritor Savings Bank v. Vinson, 477 U.S. 57 (1986)

Northern Assurance Company v. Lark et al. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec27.1#box27.1) —agent authority

Northern Assurance Company v. Lark et al., 845 F. Supp. 1301 (1993)

Price Waterhouse v. Hopkins (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.1#box24.1a) —discrimination based on sex

Price Waterhouse v. Hopkins, 490 U.S. 228 (1989)

Richman v. Workers' Compensation Board (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec5.3#box5.3a) —workers' compensation

Richman v. Workers' Compensation Board, 936 N.Y.S. 2d 722 (Jan. 2012)

Sánchez-Rodriguez v. AT&T Mobility Puerto Rico (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec26.1#box26.1) —religious discrimination

Sánchez-Rodriguez v. AT&T Mobility Puerto Rico, Inc., 673 F.3d 1 (1st Cir. 2012)

Schmidt v. Falls Dodge, Inc (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec5.3#box5.3b) .—workers' compensation

Schmidt v. Falls Dodge, Inc, N.Y.S. Ct. App. (2012)

Smith v. Greystone Alliance LLC (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec16.2#box16.2) —debt collection

Smith v. Greystone Alliance LLC, N.D. Ill. (2011)

U.S. v. Nosal (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec6.3#box6.3) —Computer Fraud and Abuse Act

U.S. v. Nosal, 676 F.3d 854, C.A.9 (Cal. 2012)

Wal-Mart Stores, Inc. v. Dukes (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.1#box24.1c) —discrimination based on sex

Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011)

Walkovszky v. Carlton (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec30.5#box30.5) —piercing the corporate veil

Walkovszky v. Carlton, Court of Appeals of New York, 18 N.Y.2d. 414 (1966)

Williamson v. Coastal Physician Services of Southeast, Inc. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec21.1#box21.1a) — employment relationship

Williamson v. Coastal Physician Services of Southeast, Inc. 251 Ga. App. 667, 554 S.E.2d 739 Ga. App. (2001)

Wilson v. Southwest Airlines Co. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.2#box24.2b) —discrimination based on sex

Wilson v. Southwest Airlines Co., 517 F. Supp. 292 (Tex. 1981)

World Wide Volksagen v. Woodson (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec2.2#box2.2a) —in personam jurisdiction

World Wide Volkswagen v. Woodson, 444 U.S. 286 (1980)

List of Cases Discussed, by Chapter

Chapter 2:

World Wide Volkswagen v. Woodson (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec2.2#box2.2a) —in personam jurisdiction

World Wide Volkswagen v. Woodson, 444 U.S. 286 (1980)

Asahi Metal Industry v. Superior Court of California (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec2.2#box2.2b) —in personam jurisdiction

Asahi Metal Industry v. Superior Court of California, 480 U.S. 102 (1987)

Chapter 5:

Richman v. Workers' Compensation Board (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec5.3#box5.3a) —workers' compensation

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Richman v. Workers' Compensation Board, 936 N.Y.S. 2d 722 (Jan. 2012)

Schmidt v. Falls Dodge, Inc (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec5.3#box5.3b) .—workers' compensation

Schmidt v. Falls Dodge, Inc, N.Y.S. Ct. App. (2012)

Brame v. Western State Hosp. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec5.3#box5.3c) —workers' compensation

Brame v. Western State Hosp., 136 Wash. App. 740, 150 P.3d 637 (2007)

Chapter 6:

U.S. v. Nosal (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec6.3#box6.3) —Computer Fraud and Abuse Act

U.S. v. Nosal, 676 F.3d 854, C.A.9 (Cal. 2012)

Chapter 7:

Guijosa v. Wal-Mart Stores (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec7.3#box7.3) —shoplifting

Guijosa v. Wal-Mart Stores, 101 Wn. 777 (2000)

Chapter 16:

Smith v. Greystone Alliance LLC (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec16.2#box16.2) —debt collection

Smith v. Greystone Alliance LLC, N.D. Ill. (2011)

Chapter 18:

In re: Lane (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec18.4#box18.4) —credit counseling

In re: Lane, Slip Copy 2012 WL 1865448, Bkrtcy, N.D. Okla. (2012)

Chapter 19:

Grande v. Jennings (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec19.1#box19.1) —found property

Grande v. Jennings,—-P.3d.—-, 2012, 635 Ariz. Adv. Rep. 19 (May 2012)

Chapter 21:

Williamson v. Coastal Physician Services of Southeast, Inc. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec21.1#box21.1a) — employment relationship

Williamson v. Coastal Physician Services of Southeast, Inc. 251 Ga. App. 667, 554 S.E.2d 739 Ga. App. (2001)

Eckis v. Sea World (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec21.1#box21.1b) —employment relationship

Eckis v. Sea World, 64 Cal. App. 3d 1 (1976)

Malorney v. B&L Motor Freight, Inc. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec21.2#box21.2) —negligent hiring

Malorney v. B&L Motor Freight, Inc., 146 Ill. App.3d 265, 496 N.E.2d 1086 (1986)

Chapter 22:

Heart of Atlanta Motel, Inc. v. United States (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec22.1#box22.1a) —Civil Rights Act

Heart of Atlanta Motel, Inc. v. United States, 379 U.S. 241 (1964)

Katzenbach v. McClung (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec22.1#box22.1b) —Affectation Doctrine

Katzenbach v. McClung, 379 U.S. 294 (1964)

Chapter 23:

Griggs v. Duke Power Company (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec23.1#box23.1) —race discrimination

Griggs v. Duke Power Company, 401 U.S. 424 (1971)

Chapter 24:

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Price Waterhouse v. Hopkins (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.1#box24.1a) —discrimination based on sex

Price Waterhouse v. Hopkins, 490 U.S. 228 (1989)

Dothard v. Rowlinson (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.1#box24.1b) —discrimination based on sex

Dothard v. Rowlinson, 433 U.S. 321 (1977)

Wal-Mart Stores, Inc. v. Dukes (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.1#box24.1c) —discrimination based on sex

Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011)

International Union, United Automobile, Aerospace & Agricultural Implement Workers of America, UAW, et al. v. Johnson Controls, Inc. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.2#box24.2a) —discrimination based on sex

International Union, United Automobile, Aerospace & Agricultural Implement Workers of America, UAW, et al. v. Johnson Controls, Inc., 499 U.S. 187 (1991)

Wilson v. Southwest Airlines Co. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec24.2#box24.2b) —discrimination based on sex

Wilson v. Southwest Airlines Co., 517 F. Supp. 292 (Tex. 1981)

Chapter 25:

Meritor Savings Bank v. Vinson (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1a) —sexual harassment

Meritor Savings Bank v. Vinson, 477 U.S. 57 (1986)

Harris v. Forklift Systems (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1b) —sexual harassment

Harris v. Forklift Systems, 510 U.S. 17 (1993)

Burlington Industries v. Ellerth (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1c) —sexual harassment

Burlington Industries v. Ellerth, 524 U.S. 742 (1998)

Kohler v. Inter-Tel Technologies (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec25.1#box25.1d) —sexual harassment

Kohler v. Inter-Tel Technologies, 244 F.3d 1167, 1176 (9th Cir. 2001)

Chapter 26:

Sánchez-Rodriguez v. AT&T Mobility Puerto Rico (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec26.1#box26.1) —religious discrimination

Sánchez-Rodriguez v. AT&T Mobility Puerto Rico, Inc., 673 F.3d 1 (1st Cir. 2012)

Christie v. Foremost (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec26.4#box26.4) —age discrimination

Christie v. Foremost Ins. Co., 785 F.2d 584 (7th Cir. 1986)

Chapter 27:

Northern Assurance Company v. Lark et al. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec27.1#box27.1) —agent authority

Northern Assurance Company v. Lark et al., 845 F. Supp. 1301 (1993)

Chapter 29:

Day et al. v. Stascavage et al. (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec29.4#box29.4) —derivative action

Day et al. v. Stascavage et al., Colorado Court of Appeals

Chapter 30:

Walkovszky v. Carlton (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec30.5#box30.5) —piercing the corporate veil

Walkovszky v. Carlton, Court of Appeals of New York, 18 N.Y.2d. 414 (1966)

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Timeline of Major Modern Legal Developments That Affect Modern Businesses

Sherman Antitrust Act of 1890

Industrial Insurance Act of 1911

Clayton Act of 1914, as amended

Uniform Partnership Act (UPA) and Revised Uniform Partnership Act (RUPA) (1914–1997)

Uniform Limited Partnership Act (ULPA) (original act, 1916; amended in 1976, 1985, and 2001)

Norris–La Guardia Act of 1932

Securities Act of 1933

Securities Exchange Act of 1934

National Labor Relations Act of 1935

Social Security Act (1935)

Federal Insurance Contributions Act (FICA) (1935)

Fair Labor Standards Act (1938)

Administrative Procedures Act (1946)

Labor Management Relations Act (1947)

Model Business Corporation Act (MBCA) (1950)

Internal Revenue Code of 1954

Labor Management Reporting and Disclosure Act (1959)

Equal Pay Act of 1963

Civil Rights Acts of 1964 (in particular, Title VII, which prohibits discrimination against protected classes)

Age Discrimination in Employment Act of 1967 (ADEA)

Occupational Safety and Health Act (1970)

Federal Copyright Act of 1976

Foreign Corrupt Practices Act (FCPA) of 1977

Electronic Funds Transfer Act (1978)

Consumer Credit Protection Act (1978)

Fair Debt Collection Practices Act (part of Consumer Credit Protection Act of 1978)

Pregnancy Discrimination Act of 1978

Immigration Reform and Control Act of 1986

Americans with Disabilities Act of 1990

Family and Medical Leave Act (FMLA) of 1993

North American Free Trade Agreement (NAFTA) treaty, approved in 1994

Computer Fraud and Abuse Act (18 U.S.C. § 1030) (1994 and 1996)

Model Partnership Act of 1997

No Electronic Theft Act of 1997

Digital Millennium Copyright Act of 1998

Anticybersquatting Consumer Protection Act (ACPA) of 1999

Uniform Electronic Transactions Act (1999)

USA PATRIOT Act (2001)

Sarbanes–Oxley (The Public Company Accounting Reform and Investor Protection Act) of 2002

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)

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Consumer Product Safety Act; the Consumer Product Safety Improvement Act, 2008

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010

Patient Protection and Affordable Care Act of 2010