Business Law Study Set 14

Business

Quiz 40 :

Corporate Directors, Officers, and Shareholders

Quiz 40 :

Corporate Directors, Officers, and Shareholders

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Fiduciary Duty of Officers Designer Surfaces, Inc., supplied countertops to homeowners who shopped at stores such as Lowe's and Costco. The homeowners paid the store, which then contracted with Designer to fabricate and install the countertops. Designer bought materials from Arizona Tile, LLC, on an open account. Designer's only known corporate officers were Howard Berger and John McCarthy. Designer became insolvent and could not pay Arizona Tile for all the materials it had purchased, including materials for which Designer had already received payment from the retail stores. Arizona Tile sued Designer and won a default judgment, but the company had no funds. Arizona Tile then sued Berger and McCarthy personally for diverting company funds that Designer had received in trust for payment to Arizona Tile. Arizona Tile argued that the use of the funds for other purposes was a breach of fiduciary duty. Berger and McCarthy argued that corporate law imposed neither a fiduciary duty on corporate officers nor personal liability for breach of a duty to suppliers of materials. Which argument is more credible and why [ Arizona Tile, LLC v. Berger , 223 Ariz. 491, 224 P.3d 988 (Ariz.App. 2010)]
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Officers owe the same fiduciary duty to a corporation as the directors. This duty includes a duty of care, which means that the officer must act in good faith, use prudent judgment and act in the best interest of the corporation. Officers should also put the interests of the corporation in front of their own personal interests. Thus, the officers should be held to a fiduciary duty in this case.

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Conflicts of Interest Oxy Corp. is negotiating with the Wick Construction Co. for the renovation of the Oxy corporate headquarters. Wick, the owner of the Wick Construction Co., is also one of the five members of Oxy's board of directors. The contract terms are standard for this type of contract. Wick has previously informed two of the other directors of his interest in the construction company. Oxy's board approves the contract by a three-to-two vote, with Wick voting with the majority. Discuss whether this contract is binding on the corporation.
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A director can serve on board of more than one organization. when some transaction between two firms takes place and director is serving on both the firms the conflict of interest takes place.
Whenever there is conflict of interest, the director is required to disclose all the information regarding the nature of conflict. This is also known as full disclosure. They are required to disclose the facts regarding transaction. Also, they must abstain from voting. If the director does not abstain from voting, then contract formed after such voting can be voided.
In this case, it is clear that there were 5 directors on the board of company O including person W. However, W did not disclose the conflict of interest with company WI to all of them. He just disclosed it to other two directors only. Neither he abstained from voting.
Thus, it can be said that director violated the section 713 of corporation act and thus the contract is not binding on the corporation.

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Role of Directors The board of directors of Necanicum Investment Co., a property management corporation in Oregon, meets on a regular basis. Necanicum paid the directors $6,000 each in the third quarter of 2003. It did not report the payments as part of its payroll and did not pay unemployment tax on the payments. The Oregon Employment Department contended that the company owed $700 in unemployment taxes on the payments to the directors. Necanicum protested. The administrative law judge (ALJ) for the Employment Departmentheld that the company owed the taxes because directors fees are the same as wages for unemployment tax purposes. Necanicum appealed, but the court of appeals affirmed the ALJ's ruling. The company appealed again. Are payments to directors the same as wages for tax purposes Why or why not [ Necanicum Investment Co. v. Employment Department , 345 Or. 138, 190 P.3d 368 (2008)]
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No, they are not. Directors are not considered employees. In fact, in the past, directors were not even paid. However, now, directors can receive payment and benefits, but not in the same way a person who provides a service is remunerated. For instance, directors exercise a lot of control and cannot be hired and fired in the same way a regular employee can.

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CASE PROBLEM WITH SAMPLE ANSWER: Duties of Directors and Officers. First Niles Financial, Inc., is a company whose sole business is to own and operate a bank, Home Federal Savings and Loan Association of Niles, Ohio. First Niles's directors included bank officers William Stephens, Daniel Csontos, and Lawrence Safarek; James Kramer, president of an air-conditioning company that serviced the bank; and Ralph Zuzolo, whose law firm served the bank and whose title company participated in most of its real estate deals. First Niles's board put the bank up for sale and received three bids. Farmers National Bank Corp. stated that it would not retain the board. Cortland Bancorp indicated that it would terminate the directors but consider them for future service. First Financial Corp. said nothing about the directors. The board did not pursue Farmers' offer, failed to timely respond to Cortland's request, and rejected First Financial's bid. Leonard Gantler and other First Niles shareholders fled a suit in a Delaware state court against Stephens and the others. What duties do directors and officers owe to a corporation and its shareholders How might those duties have been breached here Discuss. [ Gantler v. Stephens, 965 A.2d 695 (Del.Sup.Ct. 2009)]
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Rights of Shareholders Lucia has acquired one share of common stock of a multimillion-dollar corporation with more than 500,000 shareholders. Lucia's ownership interest is so small that she is not sure what her rights are as a shareholder. For example, she wants to know whether this one share entitles her to (1) attend and vote at shareholders' meetings, (2) inspect the corporate books, and (3) receive yearly dividends. Discuss Lucia's rights in these three matters.
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Duties of Majority Shareholders Steve and Marie Venturini were involved in the operation of Steve's Sizzling Steakhouse in Carlstadt, New Jersey, from the day their parents opened it in the 1930s. By the 1980s, Steve, Marie, and her husband Joe were running it. The business was a corporation with Steve and Marie each owning half of the stock. Steve died in 2001, leaving his stock in equal shares to his sons Steve and Gregg Son Steve had never worked there. Gregg had done occasional maintenance work until his father's death. Despite their lack of participation, the sons were paid more than $750 per week each. In 2002, Marie's son Blaise, who had obtained a college degree in restaurant management while working part-time at the steakhouse, took over its management. When his cousins became threatening, he denied them access to the business and its books. Marie refused Gregg and Steve's offer of about $1.4 million for her stock in the restaurant, and they refused her offer of about $800,000 for theirs. They filed a suit in a New Jersey state court against her, claiming, among other things, a breach of fiduciary duty. Should the court order the aunt to buy out the nephews or the nephews to buy out the aunt, or neither Why [ Venturini v. Steve's Steakhouse, Inc., ___ N.J.Super. ___, ___ A.2d ___ (Ch.Div. 2006)]
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Preemptive Rights Superal Corp. authorized 100,000 shares and issued all of them during its first six months in operation. Avril purchased 10,000 of the shares (10 percent). Later, Superal reacquired 10,000 of the shares it originally issued. With shareholder approval, Superal has now amended its articles so as to authorize and issue another 100,000 shares. It has also, by a resolution of the board of directors, made plans to reissue the 10,000 shares of treasury stock (the shares reacquired by the corporation). The corporate articles do not include a provision dealing with shareholders' preemptive rights. Because of her ownership of 10 percent of Superal, Avril claims that she has the preemptive right to purchase 10,000 shares of the new issue and 1,000 shares of the stock being reissued. Discuss her claims.
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A QUESTION OF ETHICS: Duties of Directors and Officers. New Orleans Paddlewheels, Inc. (NOP), is a Louisiana corporation formed in 1982 when fames Smith, Sr., and Warren Reuther were its only shareholders, with each holding 50 percent of the stock. NOP is part of a sprawling enterprise of tourism and hospitality companies in New Orleans. The positions on the board of each company were split equally between the Smith and Reuther families. At Smith's request, his son James Smith, Jr. (JES), became involved in the businesses. In 1999, NOP's board elected JES as president, to be in charge of day-to-day operations, and Reuther is chief executive officer (CEO), to be in charge of marketing and development. Over the next few years, animosity developed between Reuther and JES. In October 2001, JES terminated Reuther as CEO and denied him access to the offices and books of NOP and the other companies, literally changing the locks on the doors. At the next meetings of the boards of NOP and the overall enterprise, deadlock ensued, with the directors voting along family lines on every issue. Complaining that the meetings were a "waste of time," JES began to run the entire enterprise by taking advantage of an unequal balance of power on the companies' executive committees. In NOP's subsequent bankruptcy proceeding, Reuther filed a motion for the appointment of a trustee to formulate a plan for the firm's reorganization, alleging , among other things, misconduct by NOP's management. [ In re New Orleans Paddlewheels, Inc., 350 Bankr. 667 (E.D.La. 2006)] (a) Was Reuther legally entitled to have access to the books and records of NOP and the other companies JES maintained, among other things, that NOP's books were "a mess." Was JES's denial of that access unethical Why or why not (b) How would you describe JES's attempt to gain control of NOP and the other companies Were his actions devious and self-serving in the pursuit of personal gain or legitimate and reasonable in the pursuit of a business goal Discuss.
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Fiduciary Duties and Liabilities Harry Hoaas and Larry Griffiths were shareholders in Grand Casino, Inc., which owned and operated a casino in Watertown, South Dakota Griffiths owned 51 percent of the stock and Hoaas 49 percent. Hoaas managed the casino, which Griffiths typically visited once a week. At the end of 1997, an accounting showed that the cash on hand was less than the amount posted in the casino's books. Later, more shortfalls were discovered. In October 1999, Griffiths did a complete audit. Hoaas was unable to account for $135,500 in missing cash. Griffiths then kept all of the casino's most recent profits, including Hoaas's $9,447.20 share, and, without telling Hoaas, sold the casino for $100,000 and kept all of the proceeds. Hoaas filed a suit in a South Dakota state court against Griffiths, asserting, among other things, a breach of fiduciary duty. Griffiths countered with evidence of Hoaas's misappropriation of corporate cash. What duties did these parties owe each other Did either Griffiths or Hoaas, or both of them, breach those duties How should their dispute be resolved How should their finances be reconciled Explain. [ Hoaas v. Griffiths , 2006 SD 27, 714 N.W.2d 61 (2006)]
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QUESTION WITH SAMPLE ANSWER: Liability of Directors. AstroStar, Inc., has approximately five hundred shareholders. Its board of directors consists of three members (Eckhart, Dolan, and Macero). At a regular board meeting, the board selects Galiard as president of the corporation by a two-to-one vote, with Eckhart dissenting. The minutes of the meeting do not register Eckhart's dissenting vote. Later, an audit reveals that Galiard is a former convict and has embezzled $500,000 from the corporation that is not covered by insurance. Can the corporation hold directors Eckhart, Dolan, and Macero personally liable Discuss.
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Assuming that the shareholder's accusations were true, what could he have done to prevent the case from being dismissed
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Given that the shareholder was suing the directors and not a third party (an outsider to the corporation), was it fair to him to require that he first demand that the directors undertake the suit Why or why not
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