Conflict Discussion Questions
Question Description
I’m studying and need help with a Business Law question to help me learn.
The Case of the Director Who Wore Too Many Hats
Maria is one of 5 directors of Beta 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.
Maria buys, for $1,500, an option to purchase a tract of real estate called Blackacre, which is next to Beta’s home office, for $50,000. Maria forms a new corporation, Commercial Property, Inc., to hold the option. She then has Commercial Property buy Blackacre. As a director of Beta, Maria orders Beta 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 Blackacre for $100,000, Maria has Commercial Property sell it to Beta, and loan the money to Beta for the purchase price at a 5% interest rate which is 2% below the market rate. Lakesha, a minority shareholder in Beta, formally complains to Beta’s board which takes no action.
The Trial
Lakesha files a suit against Maria on Beta’s behalf seeking to cancel the sale. Maria asks the Court to dismiss the lawsuit as Lakesha has no standing to bring the lawsuit.
Arguments At Trial
Maria’s attorney argues that Blackacre is necessary for Beta 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 Beta authorized the purchase which appeared to be in accordance with the Articles of Incorporation.
Lakesha’s attorney argues that the purchase of Blackacre should have been put to a vote of the shareholders of Beta as required by Beta’s Bylaws. Beta’s Board of Directors failed in its duty to make sure this sale was in the corporation’s best interest.
Questions to Decide
- What kind of suit will Lakesha file and what is its basis?
- Who are the Plaintiffs and who are the Defendants? Why?
- What are the defenses, if any, of Beta or Maria?
- Who will win the case and why?
Answer:
- Lakesha is likely to file a derivative suit on behalf of Beta Investments Corporation against Maria, as a director and majority shareholder of Beta Investments Corporation. The basis of the suit would be that Maria breached her fiduciary duty as a director of Beta Investments Corporation by using her position to purchase the real estate through Commercial Property, Inc. and then sell it to Beta Investments Corporation for a profit, without proper authorization and at a price that was not in the best interest of Beta Investments Corporation.
- The Plaintiff in this case is Lakesha, acting on behalf of Beta Investments Corporation, and the Defendant is Maria. Lakesha is bringing the lawsuit as a shareholder of Beta Investments Corporation, alleging that the actions of Maria, as a director of the corporation, have caused harm to the corporation and its shareholders.
- Beta Investments Corporation may argue that it acted in accordance with the Articles of Incorporation and that the Board of Directors was authorized to make the purchase of Blackacre. Maria may argue that the purchase was in the best interest of Beta Investments Corporation and necessary for its expansion and potential increase in profits.
- The outcome of this case will depend on the specific facts and circumstances of the situation and the application of relevant law. However, if the Court finds that Maria breached her fiduciary duty as a director of Beta Investments Corporation, and that the purchase of Blackacre was not in the best interest of the corporation and its shareholders, then Lakesha may be successful in cancelling the sale. On the other hand, if the Court finds that the purchase was authorized and in the best interest of the corporation, then Maria may win the case.
