Critical Legal Thinking Case Study 4
Roger is a director of a major car manufacturer. This is one of the few remaining car companies yet to introduce a sport utility vehicle. Roger convinces the board to investigate forming a new division to design, build, and market a sport utility vehicle. Roger also convinces the board that the first sport utility vehicle that the division introduces should be the largest yet sold to the general public.
The board set up a committee to do some research, and this committee hired a marketing consulting firm. The committee and the consulting firm both had a few reservations about such a large vehicle, but the data showed that the market could most likely support it. After much discussion, the board of directors voted in favor of creating the new division and the huge sport utility vehicle as its first product. The vote was 9 to 6 in favor of the plan.
Shortly before this vehicle was introduced, there was a major oil supply disruption that caused the price of crude oil to nearly triple. Few purchasers were found for the huge new sport utility vehicle and the company lost considerable money.
A shareholder files suit against Roger claiming he violated his duty to the corporation by convincing the board to build and market the large SUV.
Discuss Roger’s duties as a director and any defenses he has to the lawsuit.
textbook – Managers and the Legal Environment: Strategies for Business by Constance E. Bagley (9Ed.).
Answer:
As a director of a major car manufacturer, Roger has a fiduciary duty to act in the best interests of the corporation and its shareholders. This includes a duty of care, which requires him to make informed decisions and exercise reasonable care, skill, and diligence in doing so. It also includes a duty of loyalty, which requires him to put the interests of the corporation ahead of his own and to avoid conflicts of interest.
In this case, Roger convinced the board to investigate forming a new division to design, build, and market a sport utility vehicle, and to introduce the largest SUV yet sold to the general public. The board set up a committee to do some research and hired a marketing consulting firm, which found that the market could most likely support such a vehicle. After much discussion, the board voted in favor of creating the new division and the huge SUV as its first product.
However, shortly before the vehicle was introduced, there was a major oil supply disruption that caused the price of crude oil to nearly triple. Few purchasers were found for the huge new sport utility vehicle, and the company lost considerable money.
A shareholder has filed a lawsuit against Roger, claiming that he violated his duty to the corporation by convincing the board to build and market the large SUV.
To defend against the lawsuit, Roger would need to argue that he acted in good faith and with due care in making the decision to create the new division and introduce the SUV. He could argue that he relied on the advice of the committee and the marketing consulting firm, which indicated that the market could support the vehicle. He could also argue that the oil supply disruption was unforeseeable and that the decision to create the SUV was made based on the information available at the time.
However, Roger could face challenges in defending against the lawsuit. The fact that the board vote was only 9 to 6 in favor of the plan could suggest that there were significant concerns about the decision. Additionally, the fact that the oil supply disruption occurred shortly before the vehicle was introduced could suggest that the decision to create the SUV was made without considering potential risks or contingencies.
Ultimately, whether Roger violated his duty to the corporation will depend on whether he acted with due care and loyalty in making the decision to create the new division and introduce the SUV, and whether he can demonstrate that he did so in the face of unforeseeable events such as the oil supply disruption.
