Brief Fact Summary. Glickman promised his controlling stock and failed to informing directors, failed to disclose relevant information in the registration statements and transferred considerable amounts of money from Franchard Corp. (Defendant) to one of his wholly owned corporations.
Synopsis of Rule of Law. An issuer must inform investors of the quality of management, seeing as it is a crucial component in making an informed investment decision, and therefore, a material fact.
Issue. Should management quality be disclosed in registration statements because it is a material fact?
Held. (Cary, Chairman) Yes. In order for registration statements to comply with the securities act, consequential facts, such as management quality, must be disclosed.Â Management quality is a vital element to make an intelligent investment decision. It is accompanied by the requirement that the issuer disclose managements past business experiences, financial statuses, conflicts of interest with company insiders that may hinder their loyalty to the corporation, payment or proposed payment to management, and substantial transactions between members of the corporation holding more than 10% of its shares. Information on Glickman’s activities is significant to stock holders because (1) they reveal his compromised financial situation, (2) integrity is integral to an informed investment decision, (3) seeing as Franchard is operated on a cash flow basis, Glickman’s need for money is his motive to maintain high prices and distribution rates for the A stocks and (4) the possible loss of control due to the stock pledges is important since it was Glickman’s reputation and control of Franchard that fueled the investment. Congressional determination was that an issuer should not pass losses to investors, even when the statement was prepared carefully. While a stop order would usually be issued in a case like this, making sure past and present stockholders receive a copy of this opinion will suffice, seeing as Glickman has departed, transferred his B shares to management /registrants and Franchard stockholders received a publication containing the true facts.
Discussion. Registration statements must include the following additional situations: restrictions on disposition of earned surplus, risks inherent in the business, recent drop in business capacity, recent regulations imposed by the government that may affect the business, litigations; whether pending or threatened (including securities), patent conflicts, anticipated new business, competitors, and companies without earning history must report their operating plans for one year. As required by the SEC, the preliminary prospectus must now include: an estimated offering price and how one arrived at that price, underwriting commission and number of shares offered.