Overview
The Case of the Director Who Wore Too Many Hats
Lilah is one of 5 directors of Executive 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.
Lilah buys, for $1,500, an option to purchase a tract of real estate called Ocean Air, which is next to Executive's home office, for $50,000. Lilah forms a new corporation, Central Property, Inc., to hold the option. She then has Central Property buy Ocean Air. As a director of Executive, Lilah orders Executive to authorize its real estate agent to negotiate the purchase of the land from Central Property for $100,000. After a successful negotiation for the purchase of Ocean Air for $100,000, Sarah has Central Property sell it to Executive, and loan the money to Executive for the purchase price at a 5% interest rate which is 2% below the market rate. Paulo, a minority shareholder in Executive, formally complains to Executive’s board which takes no action.
The Trial
Paulo files a suit against Lilah on Executive's behalf seeking to cancel the sale. Lilah asks the Court to dismiss the lawsuit as Paulo has no standing to bring the lawsuit.
Arguments At Trial
Lilah’s attorney argues that Ocean Air is necessary for Executive 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 Executive authorized the purchase which appeared to be in accordance with the Articles of Incorporation.
Paulo’s attorney argues that the purchase of Ocean Air should have been put to a vote of the shareholders of Executive as required by Executive’s Bylaws. Executive’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 Paulo file and what is its basis?
- Who are the Plaintiffs and who are the Defendants? Why?
- What are the defenses, if any, of Executive or Lilah?
- Who will win the case and why?