The Case of the Director Who Wore Too Many Hats Discussion

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?