Solutions Manual for The Legal

Solutions Manual for The Legal Environment of Business Text and Cases 12 th Edition By Frank Cross, Roger LeRoy Miller (All Chapters 1-28, 100% Original Verified, A+ Grade)

All Chapters Arranged Reverse: 28-1

This is the Only Original and Complete Solutions Manual for 12 th Edition, All Other Files in The Market are Fake/Old/Wrong Edition. 1 / 4

Solution and Answer Guide: Cross, The Legal Environment of Business, 2025, 9780357985700; Chapter 28: Investor Protection, Insider Trading, and Corporate Governance Solution and Answer Guide

CROSS, THE LEGAL ENVIRONMENT OF BUSINESS, 2025, 9780357985700; CHAPTER 28:

INVESTOR PROTECTION, INSIDER TRADING, AND CORPORATE GOVERNANCE

TABLE OF CONTENTS

Answers to Critical Thinking Questions in the Features............................................1 Digital Update—Critical Thinking..........................................................................................................1 Ethics Today—Critical Thinking.............................................................................................................1 Answers to Questions at the Ends of the Cases...........................................................2 Case 28.1—Critical Thinking..................................................................................................................2 Case 28.2—Legal Reasoning Questions..................................................................................................3 Case 28.3—Critical Thinking..................................................................................................................3 Answers to Questions in the Practice and Review Feature at the End of the Chapter .......................................................................................................................................4 Answer to Debate This Question in the Practice and Review Feature of the End of the Chapter....................................................................................................................5 Answers to Issue Spotters at the End of the Chapter..................................................5 Answers to Business Scenarios and Case Problems at the End of the Chapter .........5 Answers to Time-Limited Group Assignment Questions at the End of the Chapter 13

ANSWERS TO CRITICAL THINKING QUESTIONS IN THE

FEATURES

DIGITAL UPDATE—CRITICAL THINKING

1.What alternatives are there to crowdfunding for a start-up business?Answer: A start-up can obtain funding via loans from friends and family. Owners of start-ups often take out second mortgages on their homes to obtain financing. Start-ups can go to venture capitalists to request funding. Occasionally, start-ups can obtain bank financing. Usually, though, banks require that all members of the start-up sign personal guarantees for any funds loaned.

ETHICS TODAY—CRITICAL THINKING

1.Why has the most pressure concerning the composition of boards of directors come from large institutional investors, such as mutual funds?1 © 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 / 4

Solution and Answer Guide: Cross, The Legal Environment of Business, 2025, 9780357985700; Chapter 28: Investor Protection, Insider Trading, and Corporate Governance Answer: Clearly, the effectiveness of individual shareholders on the composition of boards of directors is slight. Therefore, if there is a movement toward having more women on boards of directors, for such a movement to succeed, many shareholders must be behind this effort. Mutual funds, for example, represent many shareholders. Hence, if mutual funds wish to encourage corporations to add more women to their boards of directors, those mutual funds will be more successful than individual shareholders.

ANSWERS TO QUESTIONS AT THE ENDS OF THE CASES

CASE 28.1—CRITICAL THINKING

1.Legal Environment. Scoville argued that Adpacks were not investment contracts because there was no guarantee that buyers would receive a return on their investment. Should the court have ruled in Scoville’s favor based on this argument? Explain.Answer: No. Very few investments guarantee a return. To qualify as an investment contract, the investor, or buyer, only has to have a reasonable expectation of profits. As long as a transaction satisfies the Howey test for an investment contract, it is immaterial whether the investment is speculative.Scoville argued that Adpacks were not investment contracts because Traffic Monsoon’s obligation to share its revenue was contingent on there being revenue to share with no guarantee this would happen.In fact, Traffic Monsoon’s website stated that there was no guarantee there would be revenue for Adpack buyers to share.But based on Scoville’s other representations, including the touted high rates of return, the Adpack buyers had a reasonable expectation of obtaining a share of Traffic Monsoon’s revenue. And this was enough to meet the requirements of the test set out in the Howey case (in which the investors were likewise not guaranteed a return on their investment).

2.Economic. The return on an investment in an Adpack was not based on any underlying business activity.Instead, money from new investors was used to pay earlier investors. Is this a legitimate business model?Discuss.Answer: No. The Adpack business model—using money from new investors to generate returns for earlier investors—was likely to be established at trial as what is known as a Ponzi scheme. This sort of set-up is not legitimate because it is deceptive, generating a false appearance of profitability.The central characteristic of a Ponzi scheme is that returns are not based on any underlying business activity. Instead, as in this case, money from new investors is used to pay earlier investors. And often, as also appears to have occurred in this case, the money contributed by later investors generates artificially high dividends for the earlier investors. This may attract even more investors.Traffic Monsoon misrepresented the source of the revenue shared with Adpack investors. Although the company realized some income from its other advertising services, there was essentially no business activity generating the revenue shared with Adpack buyers except the amounts received from the sales of new Adpacks. This deception made the business illegitimate and likely that it would be established as a Ponzi scheme.2 © 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 / 4

Solution and Answer Guide: Cross, The Legal Environment of Business, 2025, 9780357985700; Chapter 28: Investor Protection, Insider Trading, and Corporate Governance

CASE 28.2—LEGAL REASONING QUESTIONS

1.What did the defendant’s “test the waters” communications involve?Answer: In this case, the actual “test the waters” communications were not specifically written.Rather, these communications that were not part of the prospectus (offering circular) simply did not contain sufficient cautionary language to warn potential investors that the rate of return to investing in the real estate investment offerings might not materialize as stated.

2.When might statements made about projections be actionable under federal security laws?Answer: These projections or statements of belief may become actionable when (1) the speaker does not actually believe the statement, (2) there is no reasonable basis for the statement, or (3) the speaker is aware of undisclosed facts tending seriously to undermine the statements’ accuracy.

3.What if the defendants had indicated that they projected a two percent internal rate of return (IRR). Would this lawsuit have proceeded?Answer: Probably not. A two percent internal rate of return is low by anyone’s standards, particularly for an investment that contains risk. Obviously, though, there would have been much less demand for such an investment when that market rate of return could be obtained by investing in less risky assets, such as certificates of deposits or even savings accounts.

CASE 28.3—CRITICAL THINKING

1.What If the Facts Were Different? Suppose that further drilling had revealed that there was not enough ore at this site to be mined commercially. Would the defendants still have been liable for violating SEC Rule 10b-5? Why or why not?Answer: Assuming all of the other circumstances are as they are stated in the case, the answer to this question is most probably yes, because the defendants’ trading was based on their possession of inside information of a material fact without its public disclosure, which is a violation of SEC Rule 10b-5.Depending on subsequent events in this hypothetical situation, however, there may not have been any injury for which a private party could recover (that is, the defendants might have lost money on their trading rather than profiting at the expense of uninformed stock sellers).

ANSWERS TO QUESTIONS IN THE PRACTICE AND

REVIEW FEATURE AT THE END OF THE CHAPTER

Dale Emerson served as the chief financial officer for Reliant Electric Company, a distributor of electricity serving portions of Montana and North Dakota. Reliant was in the final stages of planning a takeover of Dakota Gasworks, Inc., a natural gas distributor that operated solely within North Dakota. Emerson went on a weekend fishing trip with his uncle, Ernest Wallace. Emerson mentioned to Wallace that he had been putting in a lot of extra hours at the office planning a takeover of Dakota Gasworks. When he returned from the fishing trip, Wallace purchased $20,000 worth of Reliant stock. Three weeks later, Reliant made a tender offer to Dakota Gasworks stockholders and purchased 57 percent of Dakota Gasworks stock. Over the next two weeks, the price of Reliant stock rose 72 percent before leveling out. Wallace then sold his Reliant stock for a gross profit of $14,400. Using the information presented in the chapter, answer the following questions.

1.Would registration with the SEC be required for Dakota Gasworks securities? Why or why not?3 © 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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