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 Lavish’s 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 Lavish’s board which takes no action.
The Trial
Pablo files a suit against Sarah on Lavish’s 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
Sarah’s 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 Lavish’s Bylaws. Lavish’s Board of Directors failed in its duty to make sure this sale was in the corporation’s best interest.
Questions to Answer
- 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 need to be references from the textbook the text book link is Business Law and the Legal Environment | OER Commons
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