Business Law Study Set 1

Business

Quiz 48 :

Management of Corporations

Quiz 48 :

Management of Corporations

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William Gurtler was president and a board member of Unichem Corp., which produced and sold chemical laundry products. While president of Unichem, he encouraged his plant manager to leave to join a rival business, which Gurtler was going to join in the near future. Moreover, Gurtler sold Unichem products to his son, G. B. Gurtler, at a figure substantially below their normal price and on credit even though G. B. had no credit history. Gurtler made the sales with full knowledge that G. B. was going to start a rival business. Also at that time, Gurtler was aware that his wife was soliciting Unichem employees to join the new Gurtler Chemical Co., and he helped her design Gurtler's label so that it would look like Unichem's. Gurtler guaranteed a $100,000 bank loan for the new Gurtler Chemical Co. with funds to be disbursed after he left Unichem. One month later, He became president of Gurtler Chemical Co. Unichem sued Gurtler for breach of fiduciary duty and for the loss of profits that resulted. Gurtler contended that his sales to G. B. guaranteed needed revenue to Unichem and constituted a sound business decision that should be applauded and that was protected under the business judgment rule. Decide. Are any ethical principles applicable to this case [ Unichem Corp. v. Gurtler , 498 N.E.2d 724 (Ill. App.)]
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The given case highlights the unethical practice of the president WG towards the organization U as follows:
• He was utilizing the position and the organization's resources so as to build his own rival organization
• Even though he has justifications which highlight the guaranteed revenue for the organization U, it cannot be considered as the valid justification since the organization ended up with losses in the end
• He and his family members were trying to convert the employees of U to join their company, which is considered to be the potential loss in terms of resources
• This practice has certainly harmed the business operations of the U and Mr. GW is liable for this, due to misutilization of his designator powers
• It has completely affected the operational cycle of the organization, in turn the profits and progressive growth of the organization

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Which of the following statements is correct regarding fiduciary duty
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A) The director's fiduciary duty to a corporation is not discharge just by stating he has a conflict of interest. His actions should harm the corporation in order to discharge him/her from fiduciary duty. Therefore, this statement is incorrect.
b) Director also owes fiduciary duty to a corporation. Therefore, this statement is incorrect.
c) It is assumed the promoter owes fiduciary duty to the corporation to be formed. Therefore, this statement is incorrect.
d) A majority shareholder would be in control of a corporation and thus would have fiduciary duty to act in best business interest of the corporation. Therefore, this statement is correct.

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Christy Pontiac, a corporation, was indicted for theft by swindle and forgery involving a GM cash rebate program. Hesli, a middle-management employee of Christy Pontiac, had forged the cash rebate applications for two cars so that the rebate money was paid to Christy Pontiac instead of its customers. When confronted by a customer who should have received a rebate, the president of the dealership attempted to negotiate a settlement. The president did not contact GM headquarters until after an investigation was begun by the state attorney general. Christy Pontiac argued that it could not be held responsible for a crime involving specific intent because only natural persons, as opposed to corporations, can form such intent. Decide. [State v Christy Pontiac-GMC, Inc., 354 NW2d 17 (Minn)]
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Refer to the case State v Christy Pontiac-GMC, Inc. to answer question as below:
Facts to this case
• A company forged an application to receive cash rebates for the company.
• The cash rebates were meant for the company's customers.
• The state attorney general brought a suit against the company.
Case Issue
The issue is whether corporations (which are not natural persons) can be held liable for crimes with specific intent.
Relevant Terms, Laws, and Cases
Specific Intent Crimes - is knowingly or intentionally committing a crime.
Analysis and Conclusion
Note that corporations can be held liable for criminal charges. For examples, see criminal cases against certain companies during the 2008 financial crisis. However, the defendant's argument is that companies can't intentionally commit a crime because they are not natural persons.
It doesn't matter whether the corporation is a real person or not as there were numerous cases where corporation are guilty with crimes dealing with specific intent. Citation of proofs required to show the corporation is guilty of a specific intent crime are
• An agent of a company acted in a criminal manner within the scope of his employment.
• The criminal action furthered the company's business interest.
• And these actions were "authorized, tolerated, or ratified" by the management.
These three conditions are met because i) fraud (criminal act) was used by the company's employee to obtain rebates for ii) the company (benefit to company) and iii) some of the management signed for these rebates (ratification or toleration). Thus, there was sufficient proof for specific intent crime by the corporation.

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Larry Phillips was hired for a two-year period as executive secretary of the Montana Education Association (MEA). Six months later, he was fired. He then sued MEA for breach of contract and sued the directors and some of the other employees of MEA on the theory that they had caused MEA to break the contract with him and were therefore guilty of the tort of maliciously interfering with his contract with MEA. The evidence showed that the individual defendants, without malice, had induced the corporation to break the contract with Phillips but that this had been done to further the welfare of the corporation. Was MEA liable for breach of contract Were the individual defendants shielded from personal liability [Phillips v Montana Education Ass'n, 610 P2d 154 (Mont)]
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In 1996, Congress offered national banks the opportunity to become Subchapter S entities. Amboy Bancorporation was a small, highly profitable New Jersey Bank that was overcapitalized. Amboy's president and CEO utilized Bank Advisory Group, Inc. (BAG), to calculate the fair value of individual shares of Amboy stock. The board of directors approved a merger cash buy-out program designed to reduce the shareholder base to below the 75 qualified shareholders necessary to obtain Subchapter S status. BAG incorrectly applied a minority and marketability discount to its evaluation of the fair value of the stock, bringing it down from $110 per share to $70.13 per share. Casey and other shareholders who cashed out under the plan at $73 per share sued the board of directors individually for damages for approving such a flawed plan. Are directors personally liable when they act in reliance on a report by an outside expert whose advice is flawed If a public accounting firm or an attorney gave the flawed advice, would the directors be personally liable [Casey v Brennan, 344 NJ Super 83]
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Hamway and other minority shareholders brought an action against majority shareholders of Libbie Rehabilitation Center, Inc., including Frank Giannotti, CEO-director; Alex Grossman, president-director; Henry Miller, vice president- director; Ernest Dervishian, secretary and corporate attorney; and Lewis Cowardin, treasurer-director. The minority shareholders contended that the corporation paid excessive salaries to these director-officers and was wasting corporate assets. Prior to coming to Libbie, Giannotti had been a carpet and tile retailer, Grossman a pharmacist, Miller a real estate developer, Dervishian a lawyer, and Cowardin a jeweler. The evidence showed that the extent of their work for the corporation was very limited. For example, Cowardin, Libbie's finance officer, who was paid $78,121, demonstrated no knowledge of the Medicare and Medicaid programs, the principal source of Libbie's income. Although he claimed to have spent 20 to 25 hours a week on corporate duties, he reported on the tax return for his jewelry business that he spent 75 percent of his working time in that business. One expert witness of the plaintiff testified that the five men were performing the management functions of one individual. The director-officers contended that the business was making a profit and that all salaries were approved by a board of directors that had extensive business experience. Were the directors within their rights to elect themselves officers and set pay for themselves as they saw fit Did they violate any legal or ethical duty to their shareholders
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A director of a corporation cannot lend money to the corporation because that would create the danger of a conflict of interest between the director's status as a director and as a creditor. Appraise this statement.
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Discuss the power of a corporation president to employ a sales manager and to agree that the manager should be paid a stated amount per year plus a percentage of any increase in the dollar volume of sales that might take place
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Richard Grassgreen was executive vice president and then president and chief operating officer of Kinder-Care, Inc., the largest proprietary provider of child care in the country. The company was restructured in 1989 and changed its name to the Enstar Group, Inc. Between 1985 and 1990, while Grassgreen served as the corporation's investment manager, he invested millions of dollars of company money in junk bond deals with Michael Milken, and he secretly retained some $355,000 in commitment fees. When the corporation discovered this, Grassgreen repaid the corporation. It sued him to recover any compensation paid him over the five-year period during which the secret payments were made, some $5,197,663. Grassgreen defended that his conduct caused little, if any, damage to the corporation because the corporation did not lose any money on any of the investments for which he received personal fees. Decide. [Enstar Group, Inc., v Grassgreen, 812 F Supp 1562 (MD Ala)]
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Davis, a director of Active Corp., is entitled to:
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Absent a specific provision in its articles of incorporation, a corporation's board of directors has the power to do all of the following except:
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The majority shareholder and president of Dunaway Drug Stores, Inc., William B. Dunaway, was structuring and executing the sale of virtually all of the corporation's assets to Eckerd Drug Co. While doing this, he negotiated a side noncompete agreement with Eckerd, giving Dunaway $300,000 plus a company car in exchange for a covenant not to compete for three years. He simultaneously amended two corporate leases with Eckerd, thereby decreasing the value of the corporation's leasehold estates. The board of directors approved the asset sale. Minority shareholders brought a derivative action against William Dunaway, claiming breach of his fiduciary duty in negotiating the undisclosed noncompete agreement, which did not require him to perform any service for buyer Eckerd Drug. Did William Dunaway make sufficient disclosure about all of the negotiations of the asset sale to Eckerd Drug Did William Dunaway violate any fiduciary duty to the corporation Decide. [Dunaway v Parker, 453 SE2d 43 (Ga App)]
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Rudolph Redmont, the president of Abbott Thinlite Corp., left Abbott to run Circle Corp. in competition with his former employer. It was claimed that he diverted contracts from his former employer to his new one, having gained the advantage of specific information about the deals in progress while employed by Abbott. Abbott sued Redmont and Circle Corp. to recover lost profits. Redmont contended that all of the contracts in question were made after he left Abbott, at which time his fiduciary duty to Abbott had ceased. Decide. [Abbott Thinlite Corp. v Redmont, 475 F2d 85 (2d Cir)]
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Larry G. Snodgrass and Mark Swinnea owned equal interests in two business entities, ERI Consulting Engineers, Inc. (ERI), and Malmeba Company, Ltd., which they operated together for approximately 10 years. ERI manages asbestos abatement projects for contractors. It leased office space from Malmeba, their partnership that owned the building. Snodgrass and ERI purchased Swinnea's interest in ERI in 2001. ERI paid Swinnea $497,500 to redeem Swinnea's ERI stock, and Snodgrass transferred his halfinterest in Malmeba to Swinnea. ERI agreed to employ Swinnea for six years, and Swinnea agreed not to compete with ERI. At the same time, ERI agreed to continue leasing from Malmeba for six years. Unknown to Snodgrass, the wives of Swinnea and Chris Power, an ERI employee, had created a new company called Air Quality Associates a month before Swinnea and Snodgrass executed the buyout agreement. Air Quality Associates was created to perform mold abatement, but later engaged in asbestos abatement as a contractor even though neither wife had experience in the asbestos abatement field. Swinnea did not disclose the existence of Air Quality Associates to Snodgrass during the ERI buyout negotiations. Over a 33-month period Snodgrass suffered a total loss of profits of $178,000 for business lost to Swinnea. Was Swinnea free to outmaneuver Snodgrass in their buyout agreement as part of the competitive spirit of America Do owners have a fiduciary duty to each other in negotiating a buyout agreement with a noncompete clause Are Swinnea's action's so contrary to our public sense of justice and propriety to merit exemplary damages [ ERI Consulting Engineers, Inc. v. Swinnea, 318 S.W.3d 867 (Tex.); Swinnea v. ERI Consulting Engineers, 364 S.W.3d 421 (Tex. App.)
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Anthony Yee was the president of Waipahu Auto Exchange, a corporation. As part of his corporate duties, he arranged financing for the company. Federal Services Finance Corp. drew 12 checks payable to the order of Waipahu Auto Exchange. These were then indorsed by its president, "Waipahu Auto Exchange, Limited, by Anthony Yee, President," and were cashed at two different banks. Bishop National Bank of Hawaii, on which the checks were drawn, charged its depositor, Federal Services, with the amount of the checks. Federal Services then sued Bishop National Bank to restore to its account the amount of the 12 checks on the ground that Bishop National Bank had improperly made payment on the checks because Anthony Yee had no authority to cash them. Did Yee have authority to indorse and cash the checks [Federal Services Finance Corp. v Bishop Nat'l Bank of Hawaii, 190 F2d 442 (9th Cir)]
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Klinicki and Lundgren incorporated Berlinair, Inc., a closely held Oregon corporation. Lundgren was president and responsible for developing business. Klinicki served as vice president and director responsible for operations and maintenance. Klinicki owned one-third of the stock, and Lundgren controlled the rest. They both met with BFR, a consortium of Berlin travel agents, about contracting to operate some charter flights. After the initial meeting, all contracts with BFR were made by Lundgren, who learned that there was a good chance that the BFR contract would be available. He incorporated Air Berlin Charter Co. (ABC) and was its sole owner. He presented BFR with a contract proposal, and it awarded the contract to ABC. Although Lundgren was using Berlinair's working time and facilities, he managed to keep the negotiations a secret from Klinicki. When Klinicki discovered Lundgren's actions, he sued him for usurping a corporate opportunity for Berlinair. Lundgren contended that it was not a usurpation of corporate opportunity because Berlinair did not have the financial ability to undertake the contract with BFR. Decide. Are any ethical principles applicable to this case Consider the applicability of Chief Justice Cardozo's statement in Meinhard v Salmon, 164 NE 545 (NY 1928), concerning the level of conduct for fiduciaries: "A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctillo of an honor the most sensitive is then the standard of behavior...." [Klinicki v Lundgren, 695 P2d 906 (Or)]
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Danny Hill, the general manager of Southeastern Floor Covering Co., Inc. (SE), had full authority to run the business. His responsibilities included preparing and submitting bid proposals to general contractors for floor coverings and ceilings on construction projects. Hill prepared and submitted a bid for a job for Chata Construction Co. for asbestos encapsulation, ceramic tile, ceilings, carpets, and vinyl tile flooring. However, because SE was not licensed by the EPA, the asbestos work was withdrawn. In the past, SE had used Larry Barnes's company, which was EPA licensed, to do asbestos work under a subcontract agreement. Hill did not pursue a subcontract with Barnes for the Chata job. Rather, Hill and Barnes worked up a bid together and submitted it to Chata for the asbestos work. The bid was accepted, and Hill made $90,000 from the Chata job. Two years later, SE found out about Hill's role in the asbestos work done for Chata, and the corporation sued him for the lost profits. Hill argued that SE was not licensed by the EPA to do asbestos work and thus could not claim a lost corporate opportunity when it was not qualified to do the work. Decide. Are any ethical principles applicable to this case [Hill v Southeastern Floor Covering Co., 596 So2d 874 (Miss)]
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Shareholders of Bear Stearns sued the directors of the corporation for damages for violation of the directors' fiduciary duties in effecting a stockfor- stock merger with J. P. Morgan Chase for an implied value of $10 per share while the company's stock had previously reached a 15-month high of $160. On March 10, 2008, information began leaking into the market that Bear Stearns had a liquidity problem. On March 13, 2008, the company was forced to seek emergency financing from the Federal Reserve and J. P. Morgan Chase. By the weekend of March 14-16, the company could no longer operate without major financing. In an effort to preserve some shareholder value while averting the uncertainty of bankruptcy (where stockholders would likely receive nothing), and represented by teams of legal and financial experts and relying on their financial advisor Lazard Freres Co.'s opinion that the "exchange ratio is fair, from a financial point of view, to the shareholders," the board of directors approved the initial merger agreement. The shareholder plaintiffs contended that the ultimate $10 share price paid was inadequate and they presented their experts who vigorously dissected the board's decisions. What defense, if any, would you raise on behalf of the Bear Stearns board of directors [In re Bear Stearns Litigation, 870 NYS2d 709 (Sup 2008)]
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