PerfectCustomPapers | The Case of the Director Who Wore Too Many Hats

The Case of the Director Who Wore Too Many Hats

Sarah is one of 5 directors of Lavish Investments Corporation. She is also a majority shareholder holding both common and preferred stock. Her stock with voting rights amounts to 47% of all stock issued with voting rights.

Sarah buys, for $1,500, an option to purchase a tract of real estate called Blueacre, which is next to Lavishs home office, for $50,000. Sarah forms a new corporation, Commercial Property, Inc., to hold the option. She then has Commercial Property buy Blueacre. As a director of Lavish, Sarah orders Lavish to authorize its real estate agent to negotiate the purchase of the land from Commercial Property for $100,000. After a successful negotiation for the purchase of Blueacre for $100,000, Sarah has Commercial Property sell it to Lavish, and loan the money to Lavish for the purchase price at a 5% interest rate which is 2% below the market rate. Pablo, a minority shareholder in Lavish, formally complains to Lavishs board which takes no action.

The Trial

Pablo files a suit against Sarah on Lavishs behalf seeking to cancel the sale. Sarah asks the Court to dismiss the lawsuit as Pablo has no standing to bring the lawsuit.

Arguments At Trial

Sarahs attorney argues that Blueacre is necessary for Lavish as it will allow them to expand their offices and production plant thus increasing the net worth and potential profits to the shareholders. Further, the Board of Directors of Lavish authorized the purchase which appeared to be in accordance with the Articles of Incorporation.

Pablo attorney argues that the purchase of Blueacre should have been put to a vote of the shareholders of Lavish as required by Lavishs Bylaws. Lavishs Board of Directors failed in its duty to make sure this sale was in the corporations best interest.

Questions to Decide

What kind of suit will Pablo file and what is its basis?
Who are the Plaintiffs and who are the Defendants? Why?
What are the defenses, if any, of Lavish or Sarah?
Who will win the case and why?
There must be at least one reference to chapter/section in a students discussion.

Sample Answer

Nature of the Suit and Its Basis

Pablo is likely to file a derivative suit on behalf of Lavish Investments Corporation. This type of suit allows a shareholder to bring a claim on behalf of the corporation to redress a wrong that the corporation itself has failed or refused to pursue. The basis of Pablo’s suit is that Sarah, as a director of Lavish, breached her fiduciary duties by using her position to benefit herself at the expense of the corporation.

Plaintiffs and Defendants

The plaintiff in this case is Lavish Investments Corporation, represented by Pablo as a shareholder. The defendants are Sarah and Commercial Property, Inc.

Full Answer Section

Defenses of Lavish or Sarah

Sarah might argue the following defenses:

Business Judgment Rule: This doctrine protects directors from liability for their decisions made in good faith and with reasonable care. Sarah could argue that the purchase of Blueacre was a reasonable business decision and that she acted in good faith.
Informed Consent: Sarah might claim that the board of directors gave informed consent to the transaction, meaning they had sufficient information to make a sound judgment.

Predicting the Outcome

The outcome of the case will depend on several factors, including the specific provisions of Lavish’s articles of incorporation and bylaws, the evidence presented at trial, and the applicable state law. However, based on the information provided, it is likely that Pablo will win the case.

Reasoning:

Shareholder Approval: The requirement for shareholder approval of the transaction is a key issue. If Lavish’s bylaws mandate shareholder approval for such a significant transaction, and Sarah failed to obtain that approval, she has breached her fiduciary duty.
Conflict of Interest: Sarah’s personal interest in Commercial Property creates a conflict of interest. Even if she acted in good faith, the transaction may still be voidable if it was not fair to Lavish.

Reference:

Chapter 7: Directors’ Duties and Liabilities in Business Law: Text and Cases by Stephen A. Diamond, Roger LeRoy Miller, and Frank B. Cross. This chapter discusses the fiduciary duties of directors, including the duty of loyalty and the duty of care.

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