USA Corporations Law - Case Study Example

Question Barnes v. Ewing a. Barnes' Claim This review is based on the assumption that the Barnes family will file their claim in a Delaware courtof law. The Delaware corporations' law states that the directors of a company should not benefit themselves from the operations of the company. They owe a fiduciary duty to the shareholders to act in good faith and in honesty as far as self-dealings with the company are concerned. By claiming that Ewing has breached the fiduciary duty in approving the loan transaction, the Barnes family is claiming that the loan that the former granted to the company was in bad faith. In dealing with this case, the court will be applying the review of the Securities Litigation Uniform Standards Act of 1998 (Pillegi, 2007). The court will be more concerned on the breach of the fiduciary duty of disclosure. The court is likely to rule against the Barnes family (Marciano v. Nakash). The loan that the Ewing family made to the Ewing Corporation was valid and enforceable. The duty of disclosure requires that the directors disclose all the details that pertain to the transaction that is been carried out (Alexander, 2008). The disclosure is made to the board of directors and to the shareholders. Since the Ewing family did full disclosure of the material facts that involved the loan, including the terms of the loan and the deed of trust, it will be hard for the Barnes to prove that the fiduciary duty was breached (Pillegi, 2007). Furthermore, the shareholders approved the loan. This is despite the fact that the voting was done along family lines. It is beyond doubt that the voting of the directors and the shareholders was done in good faith. The burden of proof will be different for both parties of the dispute. The Barnes is required to prove that the Ewing directors breached the fiduciary duty in approving that loan. To do this, the Barnes family will be required to prove that the Ewing directors made some omissions when they were making the disclosure to the shareholders (Dunn, Toton, Hall & Albrecht, 2009). The Barnes family will find it hard to prove that the Ewing directors had no right to foreclosure the deed of the trust. But they may claim further that the Ewing directors understood the financial problems of the company and they were aware that the company might default on the loan. Despite this knowledge, the Ewing directors went ahead and approved the loan to the company (Greenberg & Kagan, 2009). On the other hand, the Ewing directors will be required to prove to the court that their action was based on good intentions to the company. This will be easy to prove since there is already prove that the company tried to obtain funding from external sources without any success. They will have to prove to the court that they did not try to take advantage of the financial troubles of the company to benefit themselves. The Ewing directors will also be required to prove to the courts that they were honest with their dealings with Ewing Oil Inc. this honesty will have to be proved by the fact that they did disclose the material details surrounding the transaction to the shareholders (Dunn et al, 2009). The shareholders went ahead and approved the loan, albeit along family lines. But the court will not be interested on the background of the shareholders. The important thing was that they did approve the loan. There is no proof that the shareholders were misinformed on anything or misled. The Ewing directors will also have to prove that they did not omit anything that was importance when they were doing the disclosure. The omission, if proved that it did exist, will show that the Ewing directors were acting on bad faith. The omission that they might have made was for example the one pertaining to the period within which they were supposed to foreclose on their loan. If the omission is proved to have influenced the direction that the shareholders took in voting, the Barnes family would have achieved the fete of proving that a fiduciary duty was breached. b. The Difference if the Lender was Ms. Ellie, an Outsider Regardless of the fact that Ms. Ellie is the mother of two of the Ewing directors, the case would have been different if she was the one that lend the company the money. It is important to note that Ms. Ellie is not a director. This been the case, there is no way that the Barnes family would have accused her of breaching the fiduciary duty. This duty does not extend to non-directors, under the Delaware corporations law, regardless of the relationship between the non-director and the directors (Myers, 2006). But still the Barnes family would have brought the breach of fiduciary duty on the Ewing directors, this time trying to connect the Ewing directors with the benefits that they would have accrued by the relationship between them and a lender to the company. The courts will likely rule that the debt of Ms. Ellie is enforceable, just like in the case of the Ewing director's debt. But this time, the case will not review the case from the perspective of directors, but rather from the perspective of an external debtor. The courts will not consider the relationship between Ms. Ellie and the two directors. Question 2: Dharma v. Montgomery Dharma will first have to prove that there was no legitimate business purpose for Montgomery to terminate her as an employee, and this she did. The claim that Montgomery violated the fiduciary duty between the two should be made on the basis of them been shareholders in the same corporation, rather than on the basis of an employee and employer. The claim that the fiduciary duty owed to Dharma by Montgomery, as the controlling shareholder, will prevail. According to Nevada statutes, a controlling shareholder cannot deprive a minority shareholder of his benefits as a shareholder by terminating the minority shareholder's employment or salary (Hollis v. Hill). According to Wilkes v. Springside Nursing Home Inc. this will amount to oppression of the minor shareholder (Morris, 2007). This is the case that is mainly referred to when the courts are dealing with issues of oppression to the minority shareholder. One of the correction measures that the courts do advocate for is the buying of the shares of the minority shareholder on the price that was prevailing when the oppression started. This is deemed by the courts as a protection of the shareholder's investment in the company. Montgomery harmed Dharma as a shareholder by terminating her employment. The fact that he fired her on flimsy basis is a proof that he was oppressing his shareholder (Morris, 2007). These are the facts that Dharma is supposed to present before the court so that she can prove that she was been oppressed by Montgomery. But the fact that she was an employee-at-will is going to mar her efforts. This is because as an employee at will, the company holds the privilege of firing her whenever it wishes. The conditions of the firing are not stated clearly under this arrangement. When the employee is fired, he can opt to sell the shares that he has to the company on the going price at the time. Dharma was able to prove that her firing was not procedural. As such, she is under no obligation to sell her shares to Montgomery, regardless of the fact that Montgomery has offered to buy them at a favourable price. The firing and eventual offer to buy the shares will be viewed as an intimidation to the minor shareholder on the part of the controlling shareholder. Montgomery might be forced to retain Dharma as a minor shareholder in the company and give her back her position (Pillegi, 2007). Question 3: Diane Objections After dissenting on the board of directors' vote for the transaction, it is likely that Diane will try to raise some issues pertaining to the validity of the board's action. Her objection will first concern the issue of quorum, where she is likely to claim that the vote did not have a quorum to be valid (Myers, 2006). The second claim will be concerning the issue of notice that was given for the meeting. Her claims will be looked in the light of the corporation's laws of Delaware. The law provides that for the action of the board to be valid, a quorum has to be present in the meeting. This is the only way that the action will be legally effective and beyond reproach. Paragraph two of Delaware's general corporation law states that "a quorum is composed of the majority of the number of directors, unless it is otherwise provided for in the bylaws and certificate of incorporation" (Myers, 2006). This means that in the case of the Cheers board of directors, a quorum for any business should have been composed of more than three members. But the law goes further and states that "unless otherwise provided for in the certificate of corporation, the bylaws may provide that a third off the total members will compose a quorum" (Myers, 2006). For Cheers board of directors, the bylaws provide that a vote of two directors which is the third of the board is valid. Cheers is governed by the corporation's law, since it has not incorporated its certificate. The fact that Diane dissented does not invalidate the action of the board. As such, Diane has no grounds from which to object the action of the board. The law also provides that for any action of the board to be valid, the meeting should have been held after a reasonable notice was issued (Schmidt v. Farm Credit Svcs). Sam issued a reasonable notice to all members of the board, and there is no reason to believe that they failed to attend the meeting because they did not have enough notice. This means that Diane cannot contest the validity of the board's action from this angle (Alexander, 2008). 3b: Diane's Appraisal Rights Under Delaware General Corporation's Law, Diane is entitled to appraisal rights. She has to be given the fair value of her stock by the corporation, as a shareholder of one of the Delaware corporations that are merging. Section 263 of this law is the one that gives Diane this right. It states that a shareholder of a Delaware corporation is entitled to appraisal rights when a merger or a consolidation takes place between two domestic corporations. Section 262(b)(2)a states that if a shareholder was from a corporation that survived the merger, she is entitled to appraisal rights (Alexander, 2008). After the merger between Cheers and Chez Cosmo, Cheers will be the surviving corporation. Since Diane holds shares in this surviving corporation, she is entitled to the appraisal rights. Further, the shares of Diane are entitled to be appraised and reflect the actual rise of their value between the "steps of a two-step" merger. So, not only will Diane get the value of her shares back, but the shares will reflect their actual value after the merger, not before the merger (Cede & Co. v. Technicolor, Inc.). The Supreme Court overruled a lower court that had the opinion that the increase in value between the mergers will be excluded from the value of the shares. But the Supreme Court opined that this will amount to imposing all the risks associated with decreasing worth of minority shareholders while providing an opportunity for gain (Greenberg & Kagan, 2009). 3c: Diane's Fiduciary Claims Under Delaware General Corporations' Law, the running of the corporation is entrusted by the shareholders to the board of directors. These directors owe a fiduciary duty to the corporation and to the shareholders. The first fiduciary duty is that of loyalty. The second, and to which Diane will be alluding to, is that of care. It is expected under the laws of this state that the directors of any corporation will conduct their business in care to avoid any injuries to their corporation (Greenberg & Kagan, 2009). The extent of care that they should adopt is that which is attributed to an ordinary person who is prudent and careful and how the person would have conducted himself under the circumstances. There is a special procedure that the Delaware courts will usually adopt in determining whether the directors acted with care as they went about the affairs of the corporation. They will not look at the results of the decision or acts that were made. Rather, they will concentrate on the deliberations that led to the decision (Dunn et al, 2009). Were the deliberations taken in a careful manner, or were they rushed and made carelessly This was the direction that was taken by the courts in deciding Michael Ovis v. Walt Disney. In Diane's claim, it is very obvious that the other directors breached their fiduciary duty which they owed to the shareholders of the corporation and the corporation itself. This is because in deliberating the issues of the decision, there was no care that was taken. There were very few questions that were asked during Sam's presentation. The directors failed in their duty by failing to take Sam to task so that the risks that will be associated with the purchase are identified. In fact, the few questions that were raised were from Diane herself. The other directors did not ask questions (Dunn et al, 2009). To aggravate the issue, the questions that were raised by Diane were brushed off by Sam. This is regardless of the fact that they were pertinent questions that were aimed at making the directors think deep about the matter. It can then be said that this directors breached the fiduciary duty of care that they owed the corporation and the shareholders. The directors have the liability of voting for and giving the green light for a purchase based on little or no information at all. The corporation may lose from the purchase if it goes bad. On the part of Sam, as a director and the chairman of the board he also failed on his fiduciary duty of care. He was on the rush to take a deal that he had thought little about (Alexander, 2008). He also breached his fiduciary duty of loyalty to the corporation. This is through his failure to disclose all the information that was surrounding the sale. He omitted some very crucial information that might have affected the voting of the board. He lied that he had negotiated with the client who is offering to buy the restaurant. But the truth is he did not engage in any negotiations. It was just that he did not like the restaurant personally. He was thus acting from personal convictions, and not for the well being of the corporation. 3d: The Claim of the Shareholders The shareholders have valid grounds to bring claims against the directors of their corporation. This is because these officers breached their fiduciary duty to the corporation and the shareholders. The claim can be compared with the famous In re Caremaker Int'l Inc. Derivative Litigation. In this case, Chancellor William Allen ruled that the directors of this company breached their fiduciary duties (Greenberg & Kagan, 2009). This they did by failing to carefully monitor the conduct of the officers that were serving under them. It is the duty of the board of directors to monitor the conduct of these officers so that it their acts do not ruin the company. This is the duty that the shareholders have entrusted to these directors. In another ruling in Graham v. Allis-Chalmers Manufacturing Company, the same duty of the directors was upheld. The Supreme Court ruled that it is the duty of the directors to put in place mechanisms that were aimed at detecting wrong conducts of their officers. Every corporation should implement such measures under the leadership of their directors. Those shareholders who are willing to take the directors to court for failing to act should prove that there was "a sustained and systematic failure for the board to exercise oversight" (Myers, 2006). This means that the shareholders can take the directors of this corporation to court on the claim that they failed on their fiduciary duty. The claim that the shareholders should stick to is derivative claim. This means that they will accuse the board of directors for bringing harm and injury to their corporation. The harm that was brought on the corporation was that of damaged reputation which led to financial crisis of the corporation. Gentile v. Rossette is the case that puts this duty into focus (Dunn et al, 2009). There is good chance that this claim will hold in court. This is because the directors were aware of the fact they are supposed to put measures in place that could have guided the organization from incurring such damage. As earlier indicated, it will be very important for the shareholders to prove that the directors engaged in systemic and sustained failure to install mechanisms for monitoring any wrongdoing on the part of their officers. To this end, the shareholders have more than enough evidence to sustain their claim. They can obtain the testimony of the consultant who recommended in a report tabled before the directors a mechanism that would have been effective in checking food damage (Morris, 2007). They will also have the ability to obtain the testimony of the junior manager who was fired for proposing these changes be implemented. In other words, the claim is water tight and the board of directors will have a hard time proving their innocence. Another facet that has to be present for the directors to be answerable to this claim is the direct link between their negligence and the injury and harm that was experienced by the corporation. The shareholders will need to prove that the actions of the directors were the direct cause of the negative reputation and the eventual financial crisis that the corporation incurred. This will also be very easy for the shareholders to accomplish. They will have the ability to prove that the food poisoning that led to the troubles of the company were as a result of the misconduct of the manager who the directors sacked after it emerged what she had been doing. The actions of this manger can be traced back to the directors (Pillegi, 2007). They were the ones who were supposed to monitor her actions and ensure that she did not break any of the laws. But they never did this. They left her alone and she abused the freedom that she was given by acting irresponsibly. By failing to monitor the actions of this manager, the directors effectively led to the harm that the corporation incurred. Question 4: A: SMC's Proxy Campaign SMC's actions can only be described as a form of unsolicited bid for takeover. When the board of directors of the target corporation is faced with such a scenario, they are allowed under Delaware statutes to adopt several measures in their response. The first is to change the bylaws of the corporation so that the corporation's defensive position is strengthened. This is the action that the Amore board responded with to the unsolicited bid by SMC. After the unsolicited bid is defeated, the bidder has several course of action that he can take under Delaware statutes. One of them is the tender offer (Pillegi, 2007). Here, the bidder presents his offer directly to the shareholders. This is done by launching a tender offer. But there is a major problem that is faced by those bidders who opt for this route. They might be faced with the uphill task of cashing out the minority shareholders if they do succeed in the takeover. The other option for the bidder is to use proxy contest to try and win control of the corporation. This is where the bidder concentrates on how to take over and control the board of the target corporation. The bid is to either gain the majority of the board slots or to get a minority representation in the same. There are other bidders who combine a tender offer with the proxy contest. This is when they are trying to avoid some hindrances like a protracted defensive measure by the target corporation (Myers, 2007). SMC, after the initial defeat in negotiated acquisition, opted for proxy contest campaign. It did not opt for tender offer regardless of the fact that this was another viable route that they could have exploited. One of the obvious explanations for this option is that they did not have the money to cash out the minority shareholders. This point is well illustrated by the fact they were unable to carry out an expensive media campaign like the Amore directors. But there are also some legal aspects that could have made this decision the only option for the SMC directors. Under Treas. Reg. Section 367 (a), the law sets out the conditions that must be met by a foreign company that acquires a local one through merger (Greenberg & Kagan, 2009). It is unlikely that the SMC Company would have been able to cash out the shareholders of the company who were local. This means that the below 50% membership of locals in the company that the law requires to recognize a foreign company will not have been attained. Therefore, SMC would not have enjoyed the benefits of this provision. B. SMC's Claims SMC's first Claim The first claim that SMC is levelling at Amore board of directors is that they postponed the election date by more than a month. They claim that it is postponement that cost them their much needed control of the company. For this claim to hold, it will be important for us to look at the legality or illegality of the board's decision under Delaware corporate law. Section 211 of the law provides that the meeting for stockholders may be held anywhere and anyhow that the board of directors deem fit (Greenberg & Kagan, 2009). What this means is that the board of directors holds the power to determine when the meeting will be held and how it will be held. The board of directors also determines the agenda of the meeting. The only instance that this cannot happen is when the incorporation's certificate of the corporation or the bylaws provides otherwise. Section 211(c) goes ahead to state that the failure of the directors to call such a meeting when it was designated to be held will not affect the business of the board. This means that the failure of the meeting to be held does not mean that the decisions that are made by the incumbent board are invalid. If the meeting is unable top go on as scheduled, the directors have the powers to convene it as soon as possible, when they deem it necessary (Morris, 2007). By failing to hold the elections at the designated time and date, the directors of Amore did not commit an offence. All they did was practice the powers that they enjoy under Delaware's legislation and under the incorporations act of their organization. SMC should realize that the Amore directors are under no obligation to hold the meeting at the designated date (Morris, 2007). SMC's Second Claim The second claim that SMC is making is that the action of Amore board denied them their voting rights. Section 212 of the laws provides that every shareholder is entitled to one vote, unless otherwise stated in the certificate of incorporation or the bylaws. There is no proof that SMC was denied to vote, so there is no way they can hold the Amore board to account with this claim. The SMC directors also claim that they were denied influence by the Amore board by the action of the latter to add two directors at a critical time. Under the certificate of incorporation, the board has wide discretionally powers to appoint professional that they are convinced are qualified to run the institution without the direct consent of the shareholders. This is a function that is carried out by the chairman of the board (Greenberg & Kagan, 2009). When Paulaski appointed these directors, he was exercising the powers that are conferred to him by the law. He was not doing anything illegal. But the SMC may counter these arguments by claiming that their timing makes them suspect. This may be the truth (Dunn et al, 2009). Amore will be hard pressed to prove that the actions were conducted out of good faith. It is important to note that they were conducted when there was elections around the corner and when it was also obvious that the leadership of the board was been contested by SMC. It will seem that Amore had an intention to influence the outcomes of the election. As much as this is true, it is a fact that the act of postponing the elections and appointing the directors was not out rightly illegal. It is just that Amore used the law to outmanoeuvre SMC smartly. References Alexander, K. F. (2008). Unsolicited Takeover Bids. 3rd ed. London: Basic Books, 234. Dunn, Y. J., Toton, J. F., Hall, C. X. & Albrecht, N. Z. (2009). American Corporate Law. 2nd ed. New Jersey: Prentice-Hall. 267-269. Greenberg, L. P. & Kagan, I. D. (2009). Amendments to Delaware Corporation Law. Pepper Hamilton Journal, April 22, 2009. 18. Morris, M. T. (2007). Mergers and Acquisitions in America. 3rd ed. Brooklyn: Mitchell & Foucault, 167-169. Myers, K. C. (2006). International Business in America. New York: McGraw-Hill, 286. Pileggi, N. O. (2007). Delaware Corporations Law. 2nd ed. New York: McGraw-Hill, 865. Read More