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