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A security is a fungible, "negotiable instrument" representing financial value. Ebt securities may be called debentures, bonds, deposits, notes or commercial paper. A bond is a formal contract to repay borro"ed money "ith interest at fi#ed intervals.
A security is a fungible, "negotiable instrument" representing financial value. Ebt securities may be called debentures, bonds, deposits, notes or commercial paper. A bond is a formal contract to repay borro"ed money "ith interest at fi#ed intervals.
A security is a fungible, "negotiable instrument" representing financial value. Ebt securities may be called debentures, bonds, deposits, notes or commercial paper. A bond is a formal contract to repay borro"ed money "ith interest at fi#ed intervals.
>Corporations are financed by the issuance and sale of corporate securities. A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities and equity securities. ebt securities may be called debentures, bonds, deposits, notes or commercial paper depending on their maturity and certain other characteristics. !he holder of a debt security is typically entitled to the payment of principal and interest, together "ith other contractual rights under the terms of the issue, such as the right to receive certain information. ebt securities are generally issued for a fi#ed term and redeemable by the issuer at the end of that term. $ Stoc%s represent the right to participate in earning and the distribution of corporate assets& o"nership of a business firm. 'onds represent borro"ing by the firm (debt). > 'onds& A bond is a debt security, in "hich the authorized issuer o"es the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and*or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borro"ed money "ith interest at fi#ed intervals. !hus a bond is li%e a loan& the issuer is the borro"er (debtor), the holder is the lender (creditor), and the coupon is the interest. 'onds provide the borro"er "ith e#ternal funds to finance long$term investments, or, in the case of government bonds, to finance current e#penditure. Certificates of deposit (Cs) or commercial paper are considered to be money mar%et instruments and not bonds. 'onds must be repaid at fi#ed intervals over a period of time. !ypes of bonds issued are& $ ebenture bonds& !hose for "hich no specific assets of the corporation are pledged as bac%ing& they are bac%ed by the general credit rating of the corporation. $ +ortgage bonds& !hose "hich pledge specific property. $ Convertible bonds& !hey can be e#changed for a specified number of shares of stoc%. $ Callable bonds& A bond "hich the issuer has the right to redeem prior to its maturity date. ,hen issued, the bond "ill e#plain "hen it can be redeemed and "hat the price "ill be. -n most cases, the price "ill be slightly above the par value for the bond and "ill increase the earlier the bond is called. .enerally, callable bonds "ill carry something called call protection. !his means that there is some period of time during "hich the bond cannot be called. !hey are also called redeemable bond, opposite of irredeemable bond or non$callable bond. !he main cause of a call is a decline in interest rates. -f interest rates have declined since a company first issued the bonds, it "ill li%ely "ant to refinance this debt at a lo"er rate of interest. > An equity security is a share of equity interest in an entity such as the capital stoc% of a company, trust or partnership. !he most common form of equity interest is common stoc%, although preferred equity is also a form of capital stoc%. !he holder of an equity is a shareholder, o"ning a share, or fractional part of the issuer. /nli%e debt securities, "hich typically require regular payments (interest) to the holder, equity securities are not entitled to any payment. -n ban%ruptcy, they share only in the residual interest of the issuer after all obligations have been paid out to creditors. 0o"ever, equity generally entitles the holder to a pro rata portion of control of the company. 1quity also en2oys the right to profits and capital gain, "hereas holders of debt securities receive only interest and repayment of principal. > !ypes of stoc% issued by corporations include& - Common stock& -t represents the true o"nership of a corporation. -t provides a proportionate interest in the corporation regarding (i) control, (ii) earning, and (iii) net assets. - Preerred stock& !hey have rights or preferences over other classes of stoc%s. $ Cumu!ati"e #reerred stock: 3referred shares for "hich required dividends not paid in a given year must be paid in a subsequent year before any common$stoc% dividends can be paid. $ Partici#atin$ #reerred stock: 3referred shares entitling the o"ner to receive (i) the preferred$stoc% dividend and (ii) additional dividends after the corporation has paid dividends on common stoc%. - Con"erti%!e #reerred stock: !hey entitle the o"ner to convert their shares into a specified number of common shares either in the issuing corporation or in another one. - &edeema%!e'ca!!a%!e #reerred stock: -t is issued "ith the e#press condition that the issuing corporation has the right to repurchase the shares as specified. > -nterest on bonds must al"ays be paid, "hether or not profit has been earned, "hile stoc%s (common) do not have a fi#ed dividend rate. 'ondholders do not have voice or vote regarding control of the corporation, "hile stoc%holders can elect its board of directors. 'onds have a maturity date "hile stoc%s do not. !he claim of bondholders against the property of the corporation must be met before that of stoc%holders. Securities issued by a company 'onds Stoc%s ebt security 1quity security 3ayment of principal and interest (coupon) 4"nership rights& to participate in earnings and asset distribution 3ayment of principal at a maturity date 5o payment of principal or interest ebenture bonds6 mortgage bonds (bac%ed) S!4C7 Common stoc% 8epresents true o"nership of a corporation& control, earning, net assets 3referred stoc% 1ntitle to preferences over other classes of stoc% Cumulative preferred stoc% 3referred stoc% "hich entitles stoc% not paid one year to be paid the ne#t 3articipating preferred stoc% 1ntitle to preferred$stoc% dividends and additional dividends Convertible preferred stoc% 3referred stoc% convertible into a number of common shares 8edeemable*callable preferred stoc% !he issuing corporation may repurchase the shares '45S Convertible bonds 1#changeable for shares of stoc% at the option of the holder Callable bonds 8edeemable by issuer before maturity date Call protection& sets a period during "hich a bond cannot be redeemed *Legal Aspects of Capital >Concept of Capital& According to company la", capital can be defined as the contribution made by any person intending to become a member of, or to create, a company and "ho underta%es to bring into it any item of property, be it tangible or intangible, upon the constitution of the company. A second definition refers to a fi#ed amount stated in the company9s constitutional documents and in its financial statements. !here ar different vie"s on the legal nature of capital& A first vie" sees it as an abstract and static figure representing the monetary valuation of members9 contributions. Arguments against this vie" are (i) that it fails to emphasize the crucial function of capital as guarantee to creditors6 (ii) that capital doesn9t necessarily equal the value of contributions6 and (iii) that the temporal relationship bet"een capital and contribution is different& contributions are al"ays made after the amount of capital has been determined. A second nominal or abstract vie"& there9s a difference bet"een capital, "hich is a notional sum, abstract and static, and net "orth :patrimonio neto;, "hich is the difference bet"een the company9s resources and its debts. !he net "orth fluctuates, as is sub2ect to increases and reductions. Capital may be clearly depicted by considering its characters of adequacy (to net "orth) or inviolability, designed to preserve the company members9 position and creditors9 rights. A third position states that capital is capable of a dual characterization. <rom a nominal approach, it is seen as an abstract or static figure set out in the company9s constitutional documents and financial statements6 from a real perspective, it is seen as a portion of the net "orth and cannot be disposed of, for protection of members9 and interested third parties9 interests. Argentine scholars identify capital "ith its legal concept, i.e. nominal capital& capital is thus related to an accounting figure. efinitions of Capital = Contribution made to become a member of a company, "ith the implied underta%ing of brining an item of property > <i#ed amount stated in the company?s constitutional documents and financial statements @ie"s of Capital = Abstract and static figure representing monetary valuation of members? contributions > 5otional, abstract, and static sum6 compared to 5et ,orth& difference bet"een resources and debts A& ual Characterization 5ominal approach& Abstract or static figure 8eal perspective& 3ortion of the net "orth "hich cannot be disposed of B& Argentine Scholars Accounting figure >3rinciples governing the legal concept of capital !hese are designed to preserve the productive resources ma%ing up the entity9s patrimony for a threefold purpose& it allo"s its business to carry on activities to satisfy its purposes6 it lets outsiders %no" of the true magnitude of the company9s assets6 it assures shareholders the preservation of the proportional equivalence bet"een their shares and the portion of capital they represent (this implies the use of preemptive rights). $-nviolability of capital& +embers9 contributions must be duly ascertained and fairly valued to preserve the value of capital, in order to protect members and creditors. !he capital amount, duly determined by valuation of specified considerations, is thus inviolable in the sense that it must be preserved for the purpose of protecting the company9s creditors and members. -nviolability further constitutes a principle of public policy incapable of being overridden by private agreement. 0o"ever, capital is actually capable of mutation and may accordingly be varied as a consequence of valid increases decided by relevant corporate organs and upon strict compliance "ith mandatory provisions to that effect. !he inviolability of capital requires valuation of non cash consideration and equivalence bet"een the value of contribution and nominal value of subscribed capital "hich prevents shares being issued belo" par. !he intangibility of capital also prevents members from collecting profits accrued during a relevant period "here losses incurred in previous accounting or economic periods have not yet been absorbed. -nviolability of capital is also reflected in legal provisions requiring that non cash contributions ("hich must be fully paid in upon subscription) may only consist of specified property capable of being foreclosed. $3roductive functions of capital& Capital constitutes the crucial element in the generation of the productive activity of the business concern (this is the economic potentiality of a business entity). Capital constitutes a collection of economic assets. Capital is directly related to the act or series of acts "hich the company proposes to carry on in accordance "ith its articles (to preserve its guarantee function). Capital must be proportionally related to the company9s activity in order to ensure proper assumption of economic ris%s and availability of assets in the event of e#ecution. !he company9s capital is li%ely to be determined "ith reference to multifarious factors& time, management strategies, internal corporate policies, e#ternal factors of the mar%et, ris% management and control, e#ercise of borro"ing po"ers, and investment policies. $5e" concept of enterprise& -t demands a responsible conduct from the company concerning the business it conducts, and requiring the entity a fair treatment in respect of its members, the community, and the environment. !he comple#ity of technology and capital mar%ets demands a moral duty from the entity. $8egistration authority and control& -n order to prevent undercapitalization, the 8egistrar of business organizations has po"er to ponder the eligibility of the initially stated capital amount. !he registering authority fairly intends to %eep the initial proportion bet"een capital and corporate ob2ects for the purpose of preventing companies from being undercapitalized, thereby defrauding third parties dealing "ith the entity as to the real magnitude of the company9s assets. >!ypes of undercapitalization& (i) 8eal& Company members fail to contribute assets necessary to accomplish the corporate ob2ects. (ii) 5ominal& Capital contributions by company o"ners fairly reflect the needed funds to carry out its ob2ects but any such considerations "ere given by means of a casual title other than a legal title as contributor. 8easons for undercapitalization are& business ris% avoidance and parent company9s assets hiding. !he adequacy of capital, in principle, can only be really pondered "hen the entity is in fact doing business. !he initial capital figure of a company upon constitution does not certainly reflect its adequacy to the business to be carried on account of the inherently ris%y nature of commercial transactions. !he control of legality by the 8egistrar is thus essential to contribute to the accuracy of the presumption of legality of registered documents. $.uarantee function of capital& /nder 1nglish la", "henever a creditor is afforded a payment priority over specified property of the debtor or a third person, a security interest has been created. Consensual security interests arise by "ay of agreement of the parties6 security interest that arises by operation of la" includes the common la" lien and a lien arising by operation of la". !he security function of corporate capital in limited liability structures must be analyzed in relation to the company9s economic solvency together "ith all relevant legal requirements contributing to its accuracy and enhancement, such as the transparency and publicity of accounting methods, "hich are crucial factors for determining the company9s credit and the prevention of real undercapitalization. 4ne advantage of guarantees is that 2udgment processes are avoided. >!he concept of capital& <rom a pragmatic approach to the concept of capital, there are a productive and a guarantee function to be born in mind. According to a modern approach, in addition to the initial static figure determined in the company9s constitutional documents, capital is formed by the subsequent economic resources capable of becoming part of the assets (capital increase). !he >>,CDA Argentine Act stated that financial records should be represented in constant currency& the nominal capital sum is hence yearly ad2usted in order to reflect its real value. /nder 1nglish company la" the amount of the authorized capital is in itself of no importance as an indication of credit"orthiness because the company9s capital "ill ultimately be determined "ith reference to its paid up capital (company9s real capital). <rom a realistic approach, capital must be defined "ith regard to the net economic resources underlying the formally stated capital amount. Capital is thus li%ely to comprise other items such as revaluation of assets (integral ad2ustment), share premiums, contributions of creditors that "ill become shares of stoc%, or irrevocable contributions to capital to be further capitalized upon capital increase. C45C13! 4< CA3-!AE 3ragmatic Approach !here are a productive and a guarantee function to be born in mind +odern Approach Capital is formed both by the figure determined in documents and subsequent economic resources 8ealistic Approach Capital must be defined regarding net economic resources underlying the formally stated capital amount >@aluation of Capital Contributions (property or underta%ings so contributed)& @aluation of capital contributions is relevant to determine the minimum value of the capital of a company on constitution6 to determine the share "hereby the contributor shall participate in the business and his consequent rights6 to fi# the initial limit of shareholder9s liability to"ards the company9s creditors. @aluation ensures the fair value and consequent adequacy bet"een nominal capital and the aggregate non cash assets representing it. <urther, it guarantees a fair and equitable equivalence bet"een payment for shares. !here are certain legal requirements governing contributions to capital& (i) +onetary valuation (of non$cash consideration) $/nder 1nglish Ea"& 3ayment for shares can be made in %ind. 1#cept for the case of public companies under the 1CA >DDF and for Eimited companies under the ACA, the parties9 valuation of non cash consideration "ill be accepted as conclusive. -t is possible that shares be "atered by agreeing to accept payment in property "hich is "orth less than the nominal value of the shares& the company "ould be issuing shares at a discount. 3rivate companies are protected from share "atering by sending the 8egistrar a 8eturn of Allotments document. !he share "atering ris% is avoided, in the conte#t of 1nglish public companies, by requiring non cash considerations to be independently valued by a person qualified to be appointed. $/nder Argentine Ea" (ACA, sections G= to GA)& Assets shall be assessed according to their mar%et price or by the appraisal of one or more e#pert valuers appointed by the registering authority. !he ACA provides that valuation of non cash consideration may be challenged by any shareholder alleging it to be detrimental to him, as "ell as by creditors in cases of equitable insolvency or ban%ruptcy6 2udicial valuation cannot be challenged. /nder section GA of the ACA, valuation of non$cash consideration for companies "ith a share capital must be approved by the 8egistrar and shall be ascertained according to mar%et values or by e#pert valuers. >/ndervaluation ("here the valued contribution e#ceeds subscribed capital)& /ndervaluated contributions are admissible under section GA of the ACA. !he shareholder may challenge the valuation "ithin five years follo"ing the date he gave it. !he shareholder "hose contribution has been undervalued may require a reduction of its value to one resulting from the valuation if shareholders representing three quarters of subscribed capital consent to any such reduction. >4vervaluation& -n case of overvaluation of non$cash consideration the contributor shall be required to pay the relevant balance. -n EEC9s, under section =GD of the ACA, members are 2ointly and severally liable to third parties for overvaluation of the contribution representing their share of interest in the company. @AE/A!-45 4< CA3-!AE C45!8-'/!-45S 8easons !o determine the minimum value of the capital of a company !o determine shares alloted to contributors !o determine related rights !o fi# the initial limit of shareholder?s liability 8equirements for capital contributions =) +onetary valuation of non$cash consideration !his avoids shares being "atered*issued at a discount due to overvaluation of contributions -n Argentina, valuation is assessed according to the mar%et price or by e#perts? appraisal >) Ascertainment A) Capability of being listed on inventory B) Susceptibility of being foreclosed G) ocumentary representation of intangible assets F) +ust not constitute any underta%ing to do "or% or perform services in the case of EECs and Argentine companies of persons H) !he contributor is presumed to transfer property of the assets raised (ii) Ascertainment (iii) Capability of being listed on inventory (iv) Susceptibility of being foreclosed (v) ocumentary representation of intangible assets (legal rights not constituting claims, legal claims, collection of legal rights)& -ntangible assets must be represented by documents for the sa%e of their individualization and conclusive evidence of e#istence. !hey must reflect the legality of the contributor9s entitlement6 they must be instrumented6 be capable of future gain6 must not constitute the sub2ect matter of a legal claim6 and represent nominal rights or values. (vi) -t must not constitute any underta%ing to do "or% or perform services in the case of EECs and companies of persons (under Argentine company la") (vii) !he contributor is presumed to transfer property of the assets raised. >Capital and assets& Capital (notional figure) must be differentiated from contributions representing the promise of the contributor6 assets it represents6 net "orth ("hich is the dynamic relation bet"een aggregate assets and aggregate liabilities). >Accounting implications of capital& -t "ould be true to refer to capital as potential liability of the company by considering its guarantee function to company9s creditors, or its restitution function (if any) to its o"ners on distribution of the assets of the company upon the entity being e#tinguished as such. >Capital constitution& subscribed shares and paid up shares (not yet allotted)6 outstanding shares (held by shareholders) and treasury shares (acquired by the company). N()OTIABL( INST&*+(NTS *C,a#ter -.: Basic conce#ts/ ne$otia%i!it0/ and transera%i!it0 >5egotiable instrument& A signed "riting that contains an unconditional promise or order to pay an e#act sum of money, either "hen demanded or at an e#act future time. >Article A of the /CC and its revision& -n =CCD a revised version of Article A "as issued for adoption by the states. ><unction of instruments& =) As a substitute for money6 >) as an e#tension of credit. -t is essential that the instrument be easily transferable "ithout danger of being uncollectible so that it operates practically. >!ypes of negotiable instruments& $Categories& drafts, chec%s, notes, certificates of deposit (C9s). $Classifications& orders to pay and promises to pay6 demand instruments (if it (i) states that it is payable on demand or at sight, or other"ise indicates that it is payable at the "ill of the holder, or (ii) does not state any time of payment) and time instruments (payable at a future time). >rafts& A bill of e#change or draft is an unconditional "ritten order that involves three parties. !he party creating the draft (the dra"er) orders another party (the dra"ee) to pay money, usually to a third party (the payee). A draft can be both a time draft and a sight draft, such a draft is payable at a stated time after sight. $!rade acceptances: !he seller of the goods is both the dra"er and the payee. ,hen the draft is dra"n by a seller on the buyer9s ban% for acceptance, it is called a ban%er9s acceptance. ... I I >Chec%s (type of draft)& !he "riter of the chec% is the dra"er, the ban% on "hich the chec% is dra"n is the dra"ee, and the person to "hom the chec% is payable is the payee. ,ith certain types of chec%s, such as cashier9s chec%s, the ban% is both the dra"er and the dra"ee. A teller9s check is a draft dra"n by one ban% on another ban%. !raveler9s chec%s require the purchaser9s authorized signature before becoming payable. >3romissory note& ,ritten promise made by one person (the ma%er of the promise to pay) to another (usually the payee). -t can be made payable at a definite time or on demand. A note that is secured by personal property is called a collateral note, because the property pledged as security for the satisfaction of the debt is called collateral. >Certificate of deposit& A C is issued "hen a party deposits money "ith a ban%, and the ban% promises to repay the money, "ith interest, on a certain date. !he ban% is the ma%er of the note, and the depositor is the payee. >8equirements for negotiability& $,ritten form& <ormal "ritten e#pression given certainty. !he "riting must be on a material that lends itself to permanence. !he "riting must also have portability. -f an instrument is not movable, it obviously cannot meet the requirement that it be freely transferable. $Signatures& 'y (i) the ma%er if it is a note or a certificate of deposit6 (ii) the dra"er if it is a draft or a chec%6 or (iii) an agent representing them. According to the /CC =$>D=(AC), a signature may include any symbol e#ecuted or adopted by a party "ith present intention to authenticate a "riting. A signature may be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including a trade or assumed name, or by a "ord, mar%, or symbol e#ecuted or adopted by a person "ith present intention to authenticate a "riting. 3arol evidence is admissible to identify the signer. $/nconditional promise or order to pay& -t must be included in the "riting on the face of a negotiable instrument. !he promise must be an affirmative (e#press) underta%ing. A C is e#ceptional in this respect. !he promise or order must be unconditional& it "ill be conditional if it states an e#press condition to payment, that the promise or order is sub2ect to or governed by another "riting, or that the rights or obligations "ith respect to the promise or order are stated in another "riting. ><ederal eposit -nsurance Corp. v. <.S.S.S& 3atricia9s and Ea @onne9s guaranties "ere not negotiable, because the note did not refer to the guaranties and the guaranties did not contain unconditional promises. $A fi#ed amount of money must be clearly stated& !o determine the value of the instrument. <i#ed amount means that the amount must be ascertainable from the face of the instrument. According to the /CC A$=DB(a), it must be payable in money. $3ayable on demand or at a definite time (/CC A$=DB(a)(>)). <actors to be born in mind& time of pay, obligations of secondary parties, statute of limitations, interest to calculate. >3ayable on demand& -nstruments payable on demand include those that contain the "ords payable at sight or payable upon presentment. -f no time for payment is specified and the person responsible for payment must pay on the instrument9s presentment, the instrument is payable on demand (/CC A$=DJ(a). >3ayable at a definite time (it cannot be an uncertain future time)& -f it states that it is payable& (i) on a specified date6 (ii) "ithin a definite period of time after sight or acceptance6 or (iii) on a date or time readily ascertainable at the time the promise or order is issued. ,hen an instrument is payable on or before a stated date, it is clearly payable at a definite time, although the ma%er has the option of paying before the stated maturity date. >5orthern 'an% v. 3efferoni 3izza Co& ,alter 3effer loaned K=>G,DDD to the 3efferoni 3izza Company. !he note included a clause that allo"ed the ma%er to renegotiate the terms of repayment at any time and then e#tend the time for repayment by up to eighty four months :indefinite time;. !he note "as not negotiable, because under the renegotiation clause, the note "as not payable at a definite time. >Acceleration clause& Allo"s a payee or another holder of a time instrument to demand payment of the entire amount due, "ith interest, if a certain event occurs. /nder the /CC, instruments that include acceleration clauses are negotiable regardless of the reasons for the accelerations, because (i) the e#act value of the instrument can be ascertained and (ii) the instrument "ill be payable on a specified date if the event allo"ing acceleration does not occur. >1#tension clause& -t allo"s the date of maturity to be e#tended into the future. !he interval of the e#tension must be specified. $3ayable to order or to bearer& !o assure an appropriate transfer, the instrument must be payable to order or to bearer at the time it is issued or first comes into the possession of the holder. >4rder instruments& !hey are payable to the order of an identified person or to an identified person or order. !he person specified must be named "ith certainty. >'earer :person possessing an instrument payable to bearer or indorsed in blan%; instruments& !hey do not designate a specific payee. ><actors not affecting negotiability& -nterpretation of ambiguous terms (art. A)& (i) !he fact that an instrument is undated does not affect its negotiability. (ii) 3ostdating or antedating an instrument does not affect negotiability. (iii) 0and"ritten terms out"eigh type"ritten and printed terms. (iv) ,ords out"eigh figures unless the "ords are ambiguous. (v) ,hen a particular interest rate is not specified but the instrument simply states "ith interest, the interest rate is the 2udgment rate of interest. (vi) A notation on a chec% that it is nonnegotiable or not governed by Article A has no effect on a chec%9s negotiability. !ransfer >!ransfer by assignment& A transfer by assignment to an assignee gives the assignee only those rights that the assignor possessed. Any defenses that can be raised against an assignor can normally be raised against the assignee. >!ransfer by negotiation& 5egotiation is the transfer of an instrument in such form that the transferee becomes a holder. A transfer by negotiation can ma%e it possible for a holder to receive more rights in the instrument than the prior possessor had. $5egotiating order instruments& -f the instrument is an order instrument, it is negotiated by delivery :tradicin; "ith any necessary indorsements :endosos;. $5egotiating bearer instruments& -f an instrument is payable to bearer, it is negotiated by delivery. $Converting order instruments to bearer instruments and vice versa& A chec% originally payable to cash but subsequently indorsed "ith the "ords 3ay to L must be negotiated as an order instrument, even though it "as previously a bearer paper. An instrument payable to the order of a named payee and indorsed in blan% becomes a bearer instrument. >-ndorsements& An indorsement is a signature "ith or "ithout additional "ords or statements, often "ritten on the bac% of the instrument itself. -ndorsements can be "ritten on a separate piece of paper (called allonge). $'lan% indorsements& -t specifies no particular indorsee and can consist of a mere signature. $Special indorsements& -t identifies the person to "hom the indorser intends to ma%e the instrument payable (it identifies the indorsee) $Mualified indorsements& An indorser "ho does not "ish to be liable on an instrument can use a qualified indorsement to disclaim this liability (guarantee of payment of the instrument). !he notation "ithout recourse is commonly used to create a qualified indorsement. !hese indorsements are often used by persons acting in a representative capacity. !hey can be accompanied by a special indorsement or a blan% indorsement. $8estrictive indorsements& !hey require indorsees to comply "ith certain instructions regarding the funds involved. >-ndorsements prohibiting further indorsement& -f the holder gives value, it has the same legal effect as a special indorsement. >Conditional indorsements& 3ayment depends on the occurrence of some event specified in the indorsement. A person paying or ta%ing for value an instrument can disregard the condition "ithout liability. >-ndorsements for deposit of collection& -t ma%es the indorsee a collecting agent of the indorser. !he indorsements 3ay any ban% or ban%er and <or deposit only have the effect of loc%ing the instrument into the ban% collection process. >Agency indorsement (trust indorsement :funciona como mandato;)& +ade to persons "ho are to hold or use the funds for the benefit of the indorser or a third party. !he result of a trust indorsement is that legal rights in the instrument are transferred to the original indorsee. !he fiduciary restrictions on the instrument do not reach beyond the original indorsee. Liability of the Parties 1very party, e#cept a 1ua!iied indorser, "ho signs a ne$otia%!e instrument is either #rimari!0 or secondari!0 !ia%!e for payment of that instrument "hen it comes due. 38-+A8N E-A'-E-!N& Primar0 !ia%i!it0 is unconditional. A person "ho is #rimari!0 !ia%!e is absolutely required to pay the instrument6 the !ia%i!it0 is immediate "hen the instrument is signed or issued and eecti"e "hen the instrument becomes due. 5o action by the ,o!der is required. +akers and acce#tors are #rimari!0 !ia%!e. S1C45A8N E-A'-E-!N& Secondar0 !ia%i!it0 is contingent, meaning that the #art0 "ill be !ia%!e only if the #art0 that is #rimari!0 !ia%!e dishonors the instrument. 3arties that are secondari!0 !ia%!e promise to pay only if the instrument is properly and timely presented, the instrument is dis,onored, and time!0 notice of dishonor is given. 2ra3ers and indorsers are secondari!0 !ia%!e. 3roper presentment& Presentment by a holder must be made to the #ro#er #erson, must be made in a #ro#er manner, and must be time!0. A drat must be presented for acce#tance "here the drat states so, "here the drat is payable else"here than at the residence or place of business of the dra3ee, and "here the date of #a0ment depends on #resentment, "here the draft is a foreign bill of e#change (draft), and "here death or ban%ruptcy of the dra"ee occurs. ishonor& An instrument is dis,onored "hen #resentment is #ro#er!0 and time!0 made and required acce#tance or #a0ment is reused or cannot be obtained "ithin the prescribed time. An instrument is also dis,onored "hen re1uired #resentment is e4cused (as in the case of dead ma%er) and the instrument is not properly accepted or paid. 3rotest& A #rotest is a certificate of dis,onor that states that a draft "as presented for #a0ment or acce#tance and has been dis,onored, and the reasons for such dishonor. Protest is no longer required but may still be used for drats dra"n or payable outside the /S. Indorsers "ho "rite demand and notice "aived or protest "aived are liable for payment "ithout subsequent #resentment or notice of dis,onor. 3roper 5otice& <or a party to be held liable on an instrument, it must be properly notiied of the dis,onor. 5otice may be given in any reasonable manner. Si$niicance o indorsements& -n addition to being necessary to negotiate order papers, t,e0 create o%!i$ations on t,e #art o indorsers. !hese obligations come in the form of im#!ied 3arranties and a contractua! #romise to #a0 su%se1uent ,o!ders o t,e instrument5 Warranties o indorsers An indorser 3,o recei"es consideration or an instrument makes i"e 3arranties to su%se1uent ,o!ders: 6) T,e indorser ,as $ood tit!e to instrument. (did not steal it or came into possession in an unla"ful manner). -) A!! si$natures are $enuine or aut,ori7ed. 8) T,e instrument ,as not %een materia!!0 a!tered 9) No deense o an0 #art0 a$ainst t,e indorser is $ood a$ainst t,e instrument5 A 1ua!iied indorser does not make t,is 3arrant05 :) T,e indorser ,as no kno3!ed$e o t,e %ankru#tc0 o t,e maker5 (@er en pOg. >= Contract of indorsers) Accomodation #arties: 4ne "ho signs an instrument in any capacity for the purpose of lending his or her name to another party to the instrument . !hus, an accommodation party "ho signs on the front of a promissory note belo" the signature of the ma%er assumes the same liability as the ma%er. 4ne "ho signs on the bac% of the instrument assumes the same liability as an indorser. An accommodation party is not liable to the party accommodated. !he party accommodated is liable to the accommodation party if the latter pays the instrument. +u!ti#!e #a0ees and missin$ indorsements I an instrument is #a0a%!e to eit,er o t3o #a0ees/ as in ;Pa0 to t,e order o 4 or 0<, the indorsement of only one of the payees is necessary to negotiate the instrument. ;Pa0 to t,e order o 4 AN2 0<, the indorsement of both payees is necessary to negotiate it. =or$ed or unaut,ori7ed indorsements An unauthorized signature or indorsement is one made "ithout actual, implied or apparent authority. ,ith three e#ceptions, and unless ratified, an unauthorized or forged signature does not serve as the signature of the person "hose name is signed. -t has no effect. -n addition, 3,en an instrument is #aid on a or$ed indorsement/ t,e tort o con"ersion takes #!ace. Conversion is the "rongful e#ercise of dominion and control over another9s personal property. !he three e#ceptions, designed primarily to promote negotiability& -mposters& ,hen an instrument is issued to an imposter on the false belief that the imposter is the payee, the indorsement by any person in the name of the payee is treated as an effective indorsement. !he rule places the loss on the one "ho is in the best position to prevent it. (the ma%er or dra"er) 5o interest intended& ,hen the ma%er or dra"er of an instrument intends the payee to have no interest in the instrument, an indorsement by any person in the name of the payee is effective. 3added payrolls& ,hen an agent or employee of the ma%er or dra"er pads the payroll by supplying the employer "ith fictitious names, an indorsement by any person in the name of each fictitious payee is effective. !his rule places the burden of preventing this type of fraud on the party "ho is in the best position to prevent it P either the dra"er or the ma%er. >+iscellaneous -ndorsement 3roblems& $!he payee or indorsee "hose name is misspelled can indorse "ith the misspelled name, the correct name, or both. !he usual practice is to indorse "ith the name as it appears on the instrument and follo" it by the correct name. $-f an instrument is made payable to t"o or more persons 2ointly, all of the payees9 indorsements are necessary for negotiation. -f an instrument payable to t"o or more persons does not clearly indicate "hether it is payable in the alternative or payable 2ointly, then the instrument is payable to the persons alternatively. >.eneral +otors Acceptance Corp. v. Abington Casualty -nsurance Co& Abington issued an insurance policy to Azevedo to cover his Qeep. .+AC held a security interest in Azevedo9s Qeep. !he car "as damaged and Abington issued a chec% payable 2ointly to the order of Azevedo and .+AC. ,here there are copayees, a negotiable instrument cannot be discharged by the actions of only one payee. /CC A$==D(d) e#pressly prohibits the discharge of an instrument e#cept by all the payees. $Chec%s& also payable to legal entities (authorized representatives shall negotiate them) and public officers. *C,a#ter ->: ?o!der in 2ue Course and 2eenses: >A holder normally is sub2ect to the same defenses that could be asserted against the transferor. A 0older in ue Course (0C) is a holder "ho ta%es the instrument free of most of the defenses and claims to "hich the transferor "as sub2ect. >8equirements for 0C status& $<irst requirement& !a%ing for value& An 0C must have given value for the instrument :/CC A$AD>(a) (>)(i), A$ADA;. Something of value must have been given in e#change of the instrument6 a holder "ho receives the instrument as a gift or inherits it is an ordinary one. A holder ta%es the instrument for value only to the e#tent that the promise has been performed (he must give value before and not after receiving the instrument). /nder /CC A$ADA(a), a holder can ta%e an instrument for value in one of five "ays& (i) 'y performing the promise for "hich the instrument "as issued or transferred. (ii) 'y acquiring a security interest or another lien in the instrument. (iii) 'y ta%ing an instrument in payment of, or as security for, an antecedent claim. (iv) 'y giving a negotiable instrument as payment ("hich instrument has value "hen being issued, not "hen the underlying obligation is finally paid). (v) 'y giving an irrevocable commitment as payment. RChec% deposits and "ithdra"als& A commercial ban% can become an 0C "hen honoring other ban%s9 chec%s for its o"n customers, "hen such chec%s are not paid by these other ban%s. AS7 S!1@15S$<-8S! 5A!-45AE 'A57 1LA+3E1 RSpecial situations& A holder may ta%e an instrument for value but still not be accorded 0C status. /nder /CC A$AD>(c), a holder has his rights limited to those of an ordinary holder in the follo"ing situations& (i) 3urchase at a 2udicial sale or acquisition by ta%ing under legal process6 (ii) Acquisition "hen ta%ing over an estate6 (iii) 3urchase as part of a bul% transfer. $Second requirement& !a%ing in good faith (honesty in fact and observance of reasonable commercial standards of fair dealing). !he purchaser$holder must have acted honestly in the process of acquiring the instrument. -t is not necessary that the transferor act in good faith. RAdamar of 5e" Qersey, -nc. v. Chase Eincoln <irst 'an%, 5.A& !homas stole t"o chec%s and used them in a casino (Adamar). Adamar too% them in good faith but the ban% prevented payment. !he court held that the casino satisfied the requirement and "as entitled to payment.> $!hird requirement& !a%ing it "ithout notice that it is a defective instrument (in the event it is). 5otice of a defect is given "hen the holder has actual %no"ledge of the defect or receiving it or having reason to %no" of the defect. !he holder must also have received the notice at a time and in a manner that gives a reasonable opportunity to act on it :/CC A$AD>(f);. R3ossible defects include& (i) !hat the instrument is overdue& a. emand instruments& !a%ing the instrument %no"ing that demand has been made or that it has been made at an unreasonable (CD days after the chec%9s date) length of time after its date. b. !ime instruments& !a%ing the instrument after its e#pressed due date. 4nly business days must be counted. -f a debt is to be paid in installments or through a series of notes, the ma%er9s default on any one installment or on any one note of the series "ill constitute notice of the instrument being overdue. (ii) !hat it has been dishonored& 3ayer refuses to pay. !a%ing an instrument "hich has been dishonored and %no"ing it is being in notice. (iii) An uncured default "ith respect to another instrument issued as part of the same series. (iv) !he instrument contains an unauthorized signature or has been altered. (v) !here is a defense against the instrument or a claim thereto& !hey must be apparent on the face of the instrument. a. -ncomplete instruments& Eac%ing an element of negotiability. +inor omissions do not affect the validity of the instrument. !hose incomplete instruments "hich have then been completed in an unauthorized manner "ithout the holder %no"ing are still enforceable by the 0C. b. -rregular instruments& @isible evidence of forgery of a ma%er9s or dra"er9s signature, or alterations to material elements of negotiable instruments "ill disqualify a purchaser from 0C status. c. @oidable obligations& -f the holder %no"s that the obligation under the instrument is voidable, he cannot be a 0C. 7no"ledge of one defense precludes a holder from asserting 0C status in regard to all other defenses. 7no"ledge that a fiduciary has "rongfully negotiated an instrument is sufficient notice of a claim against the instrument to preclude 0C status. (vi) -t is so irregular or incomplete as to call into question it authenticity. >0older through an 0C& A holder "ho acquires 0C rights by deriving his title from an 0C, under the Shelter 3rinciple (unless the transferee is engaged in fraud or illegality) :/CC A$>DA(b);. Eimitations to the shelter principle include persons "ho formerly held instruments and "ant to reacquire them from 0Cs. >/niversal defenses (real defenses)& !hese are valid against all holders. $<orgery& -t cannot bind the person "hose name is used unless that person ratifies the signature or is precluded (for its negligence) from denying it. !his defense can also be raised by a principal "hen one of his agents e#ceeds their authority. $<raud in the e#ecution (inception)& A person is deceived into signing a negotiable instrument. !his defense cannot be raised if a reasonable inquiry "ould have revealed the nature and terms of the instrument. R<ederal eposit -nsurance Corp. v. Culver& !he 8e#ford State 'an% loaned KGD,DDD to 7alliel. Culven received only KAD,DDD from him. !he ban% made Culven sign a note for the "hole amount and told him he "as only signing a receipt. ,hen the ban% failed, the -nsurance Corp. bought the note and sued Culven. efendant "as negligent in relying on the ban%9s representative9s assurance that the note "as only a receipt. $+aterial alteration& !hey include any change in the contract terms bet"een t"o parties& completing an instrument, adding "ords or numbers, changes, cutting off part of the pages, adding a clause. !o correct "rong information in total amounts does not imply an alteration. -f the alteration is readily apparent, then obviously the holder has notice of some defect or defense and therefore cannot be an 0C. $ischarge in ban%ruptcy& !he purpose of ban%ruptcy is to settle finally all of the insolvent party9s debts. $+inority (infancy), according to state la". $-llegality& ,hen the la" declares that an instrument is void because it has been e#ecuted in connection "ith illegal conduct. $+ental incapacity& Any instrument issued by a person ad2udicated mentally incompetent is null and void (voidance ab initio). $1#treme duress (immediate threat of force or violence). >3ersonal defenses& /sed to avoid payment to an ordinary holder of a negotiable instrument. $'reach of contract or breach of "arranty. $Eac% or failure of consideration. $<raud in the inducement (ordinary fraud)& A person "ho issues a negotiable instrument based on false statements by the other party "ill be able to avoid payment on that instrument. $-llegality& !he statute provides that an illegal transaction is voidable, the defense is personal. R7edzie and =DA rd Street Currency 1#change, -nc. v. 0odge& <rentess "as not a licensed plumber and received a chec% from 0odge. 'ut he did not do his 2ob6 he did cash the chec% at 7edzie, although 0odge stopped payment. -llinois9s la"s do not ma%e the contract "ith the unlicensed plumber void& hence the illegality defense cannot be raised.> $+ental incapacity& -f a ma%er or dra"er issues a negotiable instrument "hile mentally incompetent but before a formal court hearing has declared them to be so, the instrument is voidable. $ischarge by payment or cancellation. $/nauthorized completion of an incomplete instrument. $5ondelivery of the instrument. $4rdinary duress or undue influence rendering the contract voidable. ><ederal limitations on 0C rights& !o protect consumers, the <ederal !rade Commission (<!C) in =CHF issued 8ule BAA, "hich effectively abolished the 0C doctrine in consumer credit transactions. $8equirements of <!C rule BAA (relating to consumers9 credit transactions)& Attempts to prevent a situation in "hich a consumer is required to ma%e payment for a defective product to a third party. !he rule applies to any seller of goods or services "ho ta%es or receives a consumer credit contract. /nder rule BAA, these parties must include in the consumer credit contract a provision. -f such provision is not there, a consumer may remain unprotected. $1ffect of the rule (0C becomes a contract assignee)& <!C 8ule BAA allo"s a consumer "ho is party to a consumer credit transaction to bring any defense he has against the seller of a product against a subsequent holder as "ell. !here is a reduction of transferability& any 0C of the instrument is placed in the position of a contract assignee. B*SIN(SS O&)ANIZATIONS: A&)(NTINA Ar$entine !a3 on %usiness or$ani7ations and ot,er !e$a! entities !o form a business organization (sociedad comercial) in Argentina it is necessary to comply "ith one of the legal types recognized by the Argentine Companies Act =CGGD*H> (ACA). /nder sec. =, a rigid system is established& ShabrO sociedad comercial cuando dos o mOs personas en forma organizada, conorme a uno de !os ti#os #re"istos en esta !e0, se obliguen a realizar aportes para aplicarlos a la producciTn o intercambio de bienes o servicios participando de los beneficios y soportando las pUrdidas9 (ACA, sec. =). !o form a business organization under the ACA you need to comply "ith one of these types. !his contrasts "ith the Anglo$American system "hen "e analyze a similar definition of one type of business organization, namely 3artnerships& @an association o t3o or more #ersons to carr0 on as co-o3ners (Aoint tenants) o a %usiness or #roitB (/3A). !his definition proves a much more fle#ible system as regards the creation of business organizations and their recognition by the state. ,hether a 3artnership is considered a legal entity or not is traditionally a matter of debate, especially under /7 la" "hich lac%s a formal statutory provision stating such nature. /nder the 8/3A in the /SA, legal personality is formally recognized to such business organizations. /nder provisions of the Argentine Civil Code (ACC) other legal entities may be formed besides business organizations*associations. !hese are the follo"ing& 48.A5-VA!-45S Eegal entities of a private nature Sociedades 3artnerships governed by the Ar Civil Code (Sociedades civiles) 'usiness organizations Associations -ncorporated associations /nincorporated associations <undaciones Eegal entities of a public nature !he State -ndependent agencies (entidades autOrquicas) !he Catholic Church Eegal entities of a public nature are governed by public administrative la" "hile legal entities of a private nature are governed by private la" and deals basically "ith private persons. All of these, provided they comply "ith certain requirements that "e9ll mention later in each case, are regarded as legal entities. !his basically entails secondary liability of the members, as the organization as such is considered primarily liable. Some of these "ill have authorization of the state, "hich basically entails limited liability of the members. Eet9s see each particular case& Sociedades Ci"i!es (sec. =FBJ ACC et seq.) 3artnerships governed by the ACC have the follo"ing characteristics& =. As they are legal entities, its members have secondary liability (responsabilidad subsidiaria, los miembros gozan del Sbeneficio de e#cusiTn9, this means that personal liability only arises after the 2udgement creditor has e#ecuted the partnership9s assets) and unlimited, 2oint liability6 they are liable on an equal basis for the entity debts irrespective of the proportion of their original contributions (this fact that they ans"er only "ith their SporciTn viril9, as stated in sec. =HBH ACC, differentiates Ssociedades civiles9 from Ssociedades comerciales9 that also have unlimited liability). >. !hey are for$profit entities. A. !o be regarded as legal entities they need to be constituted by Sescritura pWblica9 (under sec. ==JB, subsec. A, ACC) :public deed;. 4ther"ise, they "ill be regarded as Ssociedades civiles irregulares9 ("hich are also Ssociedades de hecho9) deprived of legal personality (that9s "hy they are not included in the chart). !he liability of the members in this case "ill be primary and unlimited. Asociaciones 0 undaciones con autori7aciCn de! estado #ara uncionar (sec. AA ACC) espite the differences bet"een Sfundaciones9 ("hich can be constituted by one person, and even by a testamentary provision) and -ncorporated Associations, they both en2oy the same characteristics& =. As they are legal entities, its members have secondary liability. 'ut as they have been Sincorporated9, or authorized by the state, their members also en2oy limited liability. >. !hey are non$profit entities. Certain lucrative purposes, ho"ever, are almost al"ays present (e.g. <-<A, A<A). Sim#!es asociaciones ci"i!es o re!i$iosas (sec. BF ACC) !hese are /nincorporated Associations "ith the follo"ing characteristics& =. Eiability of the members is e#actly as that established for Ssociedades civiles9. Sec. BF ACC provides that the rules that govern Ssociedades civiles9 "ill also apply to this type of association by default. >. <or it to be considered a Ssimple asociaciTn9, and thus en2oy secondary liability of its members it is necessary that Sla constituciTn y designaciTn de autoridades se acredite por escritura pWblica o instrumento privado de autenticidad certificada por escribano pWblico9. 4ther"ise, they "ill not be regarded as legal entities and its members "ill be primarily and unlimitedly liable upon there not e#isting legal personality of the entity (for this reason they are not included in the chart). ,e can conclude that there are t"o types of legal entities that do not require authorization by the state& Ssociedades civiles9 and Ssimples asociaciones9. <or some scholars, the lac% of authorization by the state renders the organization a Ssu2eto de derecho9 but not a Spersona 2urXdica9. /nder la" =HH==, such distinction becomes outdated and denies the personality that the ACC, as amended, vests upon Ssociedades civiles9 and Ssimples asociaciones9. :!his is "hat +arcelo said but "hich doesn9t seem to apply to Ssimples asociaciones9. Sec BF ACC clearly states their nature as Ssu2etos de derecho9 as opposed to Spersonas 2urXdicas9. -n any case, - thin% the difference is more linguistic than practical;.
.oing bac% to 'usiness 4rganizations (Sociedades Comerciales) there may be other hybrid situations to consider, namely Ssociedades no constituidas regularmente9 (under title -@ of the ACA). !hese include t"o cases& Sociedad de ,ec,o !hese organizations lac% instrumentality despite the fact that they comply "ith most features required for a Ssociedad9 to be such (for e#ample, the members evidence Saffectio societatis9, the "ill to associate and share efforts, profits and losses). !he members conduct business as if they "ere in fact associated in some manner. !he Ssociedades civiles irregulares9 mentioned above are the same as these Ssociedades de hecho9. Sociedad Irre$u!ar !hese organizations do comply "ith one of the legal types recognised by the ACA. !hey also comply "ith all the steps to"ards instrumentality but lac% the final filing thereof before the registering authority. 5either SSociedades de hecho9 nor SSociedades -rregulares9 are legal entities (they couldn9t be included in the chart). 'oth terms "ill evidence difficulties in translation as they are not e#actly the same as Spartnerships by estoppel9 or Sde facto corporations9. YArgentine 'usiness and Civil 4rganizationsY $ !he Argentine legal system in the matter of business and civil organizations is governed by the Argentine Companies Act =CGGD and the Argentine Civil Code. !he Argentine Companies Act establishes a rigid system by virtue of "hich one must choose one of the legal types of business organization in order to create one. (!his opposes to the Anglo$American system, "hich proves to be much more fle#ible as regards the creation and recognition of business organizations.) !he Argentine Civil Code also rules over other legal entities, "hich are& $ Eegal entities of a public nature (governed by public administrative la")& $ !he State $ -ndependent agencies $ !he Catholic Church $ Eegal entities of a private nature (governed by private la")& $ Sociedades Civiles (partnerships)& As they are legal entities (for "hich they must be organized by public deed), its members en2oy secondary, but unlimited, 2oint liability. !hey are for$profit entities. $ Asociaciones y <undaciones con AutorizaciTn del 1stado para <uncionar& !hey are non$profit entities. -ts members have secondary, limited liability. $ Simples asociaciones civiles y religiosas& -ts members bear secondary, limited, 2oint liability (only if it organized by public deed). !he lac% of authorization by the state renders the organization a Ssu2eto de derecho9 but not a Spersona 2urXdica9. $ /nder the Argentine Companies Act, "hen there is a problem in the organization of the business organization a Zsociedad no constituida regularmenteZ is said to e#ist. !hey can be either& $ Sociedades de hecho& !hey lac% an intrument evidencing their e#istence. $ Sociedades irregulares& !hey lac% the filing of their instruments "ith the government office. 5either one nor the other are legal entities.
1thics (Company Ea") Y1thics can be defined as the study of "hat constitutes right or "rong behavior. 'usiness ethics focuses on "hat constitutes right or "rong behavior in the business "orld and on ho" moral and ethical principles are applied by businesspersons to situations that arise in their daily activities in the "or%place. >4ne of the most effective "ays of setting a tone of ethical behavior "ithin an organization is to create an ethical code of conduct. A "ell$"ritten code of ethics e#plicitly states a company9s ethical priorities. 4ther components of ethics programs include a corporation9s ethics committee, ethical training programs, and internal audits to monitor compliance "ith applicable la"s and the company9s standards of ethical conduct. >!he Sarbanes$4#ley Act of >DD>& -t requires that companies set up confidential systems so that employees and others may raise red flags about suspected illegal or unethical auditing and accounting practices. ,eb$based reporting systems "ere set up. !hrough them, employees can contact 1thics point, "ith "hich they may report suspicious accounting practices, se#ual harassment, and other possibly unethical behavior. >!he 1nron Case& According to the rules of the <inancial Accounting Standards 'oard, energy traders could include in current earnings profits that they anticipated on energy contracts. 0erein lay the beginning of a type of accounting fudging that increased over time as the company struggled to improve its reported current earnings. 'y >DDD, GD[ of 1nron9s K=.Bbn of reported preta# profits consisted of anticipated future earnings on energy contracts. 'ecause 1nron9s managers received bonuses on "hether they met earning goals, they had an incentive to inflate the anticipated earnings on such contracts. -n this "ay, 1nron9s stoc% prices "ere really high, but 1nron "asn9t paying high ta#es. 4ff$the$boo% transactions& 1nron also created a comple# net"or% of subsidiaries that enabled it to move losses from the core company to the subsidiaries, "hich did not sho" up in 1nron9s boo%s. ,hen these "ere created, 1nron transferred assets to them, assigning a value to the assets that "as much greater that their actual mar%et value. Self$dealing& 1nron9s C14 frequently did business "ith companies o"ned by his children. RA company is guilty of coo%ing the boo%s "hen it %no"ingly includes incorrect information on its financial statements Pmanipulating e#penses and earnings to improve their earnings per share of stoc% (13S).> R,ith off$balance sheet accounting, a company didn9t have to include certain assets and liabilities in its balance sheet.> RSpecial purpose entities (S31)& 5e"ly created companies specifically created for certain purposes.> >Sarbanes$4#ley Act& !he legislation establishes ne" or improved standards for all /S public company boards, management, and public accounting firms. 8egarding auditors of public company financial statements the act requires auditor independence. !he act further establishes a ne" controlling agency& the 3ublic Company Accounting 4versight 'oard (3CA4') "hich is in charge of overseeing, regulating, and inspecting firms in their roles as auditors of public companies. >Section BDB directs the S1C to adopt rules requiring each annual report of a company to contain an internal control report "hich shall include a statement of management9s responsibility on financial reporting as "ell as an assessment of the effectiveness of said internal control structure as of the end of the most recent fiscal year. -t further requires the company9s auditor to attest and report on the adequacy of the company9s internal control over financial reporting. .ood internal controls may help companies deter fraudulent financial or accounting practices. >!he bill "as enacted as a reaction to a number of ma2or corporate and accounting scandals including those affecting 1nron, !yco -nternational, Adelphia, 3eregrine Systems and ,orldCom. SarbanesP4#ley contains == titles that describe specific mandates and requirements for financial reporting. !itle - consists of nine sections and establishes the 3ublic Company Accounting 4versight 'oard, to provide independent oversight of public accounting firms providing audit services (ZauditorsZ). -t also creates a central oversight board tas%ed "ith registering auditors, defining the specific processes and procedures for compliance audits. !itle -- consists of nine sections and establishes standards for e#ternal auditor independence, to limit conflicts of interest. !itle --- consists of eight sections and mandates that senior e#ecutives ta%e individual responsibility for the accuracy and completeness of corporate financial reports. !itle -@ requires internal controls for assuring the accuracy of financial reports and disclosures, and mandates both audits and reports on those controls. !itles @ is designed to help restore investor confidence in the reporting of securities analysts. -t defines the codes of conduct for securities analysts. !itle @- defines the S1C?s authority to censure or bar securities professionals from practice. !itle @-- requires the Comptroller .eneral and the S1C to perform various studies and report their findings. Sarbanes$4#ley required the disclosure of all material off$balance sheet items. -t also required an S1C study and report to better understand the e#tent of usage of such instruments and "hether accounting principles adequately addressed these instruments. Section BDB requires management and the e#ternal auditor to report on the adequacy of the company?s internal control over financial reporting (-C<8). /nder this section, management is required to produce an Zinternal control reportZ as part of each annual 1#change Act report. security ________________________________________________________________________ An equity security is a share of equity interest in an entity such as the capital stock of a company, trust or partnership. The most common form of equity interest is common stock, although preferred equity is also a form of capital stock. The holder of an equity is a shareholder, owning a share, or fractional part of the issuer. nlike debt securities, which typically require regular payments !interest" to the holder, equity securities are not entitled to any payment. #n bankruptcy, they share only in the residual interest of the issuer after all obligations ha$e been paid out to creditors. %owe$er, equity generally entitles the holder to a pro rata portion of control of the company. &quity also en'oys the right to pro(ts and capital gain, whereas holders of debt securities recei$e only interest and repayment of principal. ________________________________________________________________________ ). #temi*ed catalog or list of tangible goods or property, or the intangible attributes or qualities. +. ,alue of materials and goods held by a (rm !)" to support production !raw materials, sub-assemblies, work in process", !+" for support acti$ities !repair, maintenance, consumables", or !." for sale or customer ser$ice !merchandise, (nished goods, spare parts". #t is often the largest item in the current assets category, and must be accurately counted and $alued at the end of each accounting period to determine a (rm/s pro(t or loss. 0irms whose in$entory items ha$e a large unit cost generally keep a day to day record of changes in in$entory !called perpetual in$entory method" to ensure accurate and on-going control. 0irms with in$entory items of small unit cost generally update their in$entory records at the end of an accounting period or when (nancial statements are prepared !called periodic in$entory method". The $alue of an in$entory depends on the $aluation method used, such as (rst-in, (rst-out !0#01" method or last-in, (rst-out !L#01" method. 2AAP require that in$entory should be $alued on the basis of either its cost price or its current market price whiche$er is lower of the two to pre$ent o$erstating of assets and earning due to sharp increase in the in$entory/s $alue in in3ationary periods. The optimum le$el of in$entory for a (rm is determined by in$entory analysis. 4alled also stock in trade, or 'ust stock. 5hat 6oes #n$entory 7ean8 The raw materials, work-in-process goods and completely (nished goods that are considered to be the portion of a business/s assets that are ready or will be ready for sale. #n$entory represents one of the most important assets that most businesses possess, because the turno$er of in$entory represents one of the primary sources of re$enue generation and subsequent earnings for the company/s shareholders9owners. #n$estopedia e:plains #n$entory Possessing a high amount of in$entory for long periods of time is not usually good for a business because of in$entory storage, obsolescence and spoilage costs. %owe$er, possessing too little in$entory isn/t good either, because the business runs the risk of losing out on potential sales and potential market share as well. #n$entory management forecasts and strategies, such as a 'ust-in-time in$entory system, can help minimi*e in$entory costs because goods are created or recei$ed as in$entory only when needed. __________________________________________________________________________________________ ______________________________________________________ ________________________________________________________________________ 5hat 6oes ;arbanes-1:ley Act 1f +<<+ - ;1= 7ean8 An act passed by .;. 4ongress in +<<+ to protect in$estors from the possibility of fraudulent accounting acti$ities by corporations. The ;arbanes-1:ley Act !;1=" mandated strict reforms to impro$e (nancial disclosures from corporations and pre$ent accounting fraud. ;1= was enacted in response to the accounting scandals in the early +<<<s. ;candals such as &nron, Tyco, and 5orld4om shook in$estor con(dence in (nancial statements and required an o$erhaul of regulatory standards. #n$estopedia e:plains ;arbanes-1:ley Act 1f +<<+ - ;1= The rules and enforcement policies outlined by the ;1= Act amend or supplement e:isting legislation dealing with security regulations. The two key pro$isions of the ;arbanes-1:ley Act are: ). ;ection .<+: A mandate that requires senior management to certify the accuracy of the reported (nancial statement +. ;ection ><>: A requirement that management and auditors establish internal controls and reporting methods on the adequacy of those controls. ;ection ><> had $ery costly implications for publicly traded companies as it is e:pensi$e to establish and maintain the required internal controls. The ;arbanes-1:ley Act The ;arbanes-1:ley Act of +<<+ is mandatory. ALL organi*ations, large and small, 7;T comply. This website is intended to assist and guide. #t pro$ides information, and identi(es resources, to help ensure successful audit, and management. 5hether you are entirely new to the ;arbanes-1:ley legislation, or whether you ha$e an established strategy, this portal should hopefully pro$e to be of substantial $alue #ntroduction The legislation came into force in +<<+ and introduced ma'or changes to the regulation of (nancial practice and corporate go$ernance. ?amed after ;enator Paul ;arbanes and @epresentati$e 7ichael 1:ley, who were its main architects, it also set a number of deadlines for compliance. The ;arbanes-1:ley Act is arranged into ele$en titles. As far as compliance is concerned, the most important sections within these are often considered to be .<+, ><), ><>, ><A, B<+ and A<C. An o$er-arching public company accounting board was also established by the act, which was introduced amidst a host of publicity. ;arbanes-1:ley 4ompliance 4ompliance with the legislation need not be a daunting task. Like e$ery other regulatory requirement, it should be addressed methodically, $ia proper analysis and study. Also like other regulatory requirements, some sections of the act are more pertinent to compliance than others. To assist those seeking to meet the demands of this act, the following pages co$er the key ;arbanes-1:ley sections: ;arbanes-1:ley Act ;ection .<+ This section is of course listed under Title ### of the act, and pertains to /4orporate @esponsibility for 0inancial @eports/. ;ummary of ;ection .<+ Periodic statutory (nancial reports are to include certi(cations that: D The signing oEcers ha$e re$iewed the report D The report does not contain any material untrue statements or material omission or be considered misleading D The (nancial statements and related information fairly present the (nancial condition and the results in all material respects D The signing oEcers are responsible for internal controls and ha$e e$aluated these internal controls within the pre$ious ninety days and ha$e reported on their (ndings D A list of all de(ciencies in the internal controls and information on any fraud that in$ol$es employees who are in$ol$ed with internal acti$ities D Any signi(cant changes in internal controls or related factors that could ha$e a negati$e impact on the internal controls 1rgani*ations may not attempt to a$oid these requirements by reincorporating their acti$ities or transferring their acti$ities outside of the nited ;tates ;arbanes-1:ley Act ;ection ><> This section is listed under Title #, of the act !&nhanced 0inancial 6isclosures", and pertains to /7anagement Assessment of #nternal 4ontrols/. ;ummary of ;ection ><> #ssuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for (nancial reporting. This statement shall also assess the eFecti$eness of such internal controls and procedures. The registered accounting (rm shall, in the same report, attest to and report on the assessment on the eFecti$eness of the internal control structure and procedures for (nancial reporting.