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Homework answers / question archive / longstanding customers have launched a boycott of Good Dairy products, and in general the company has come under heavy criticism by several consumer groups

longstanding customers have launched a boycott of Good Dairy products, and in general the company has come under heavy criticism by several consumer groups


longstanding customers have launched a boycott of Good Dairy products, and in general the company has come under heavy criticism by several consumer groups. It has all led to a severe drop in sales and profits. Good Dairy has a provision in its Articles (Certificate) of Incorporation consistent with section 102(b)(7) of the Delaware General Corporation Law eliminating the personal liability of directors for breach of fiduciary duty as directors. A large shareholder has commenced a derivative action in Delaware Chancery Court against the Good Dairy board of directors. The shareholder plaintiff alleges that in making the decision to authorize milk purchases from cows treated with hormones the directors breached their fiduciary duty because: (1) they did not act in good faith or in a manner they could possibly have believed was in the best interest of the corporation; and (2) their decision was ill-considered --made without adequate supporting evidence or the exercise of reasonable diligence to understand the likely negative consequences to the company from what they were doing. Lawyers for the board members are expected to argue that the case cannot stand because of the exculpatory provision in the articles, and that the business judgment rule protects the directors against liability anyway. They will request dismissal of the case on both grounds. How is the court likely to rule? In explaining your answer you may assume that demand by plaintiff shareholder on the board of directors is excused. QUESTION THREE (Ten Points Total with Two Subparts, 5 Points Each) Abel, Bobby, and Carmen are the sole shareholders and directors of Feet, Inc., a Delaware corporation. Feet, Inc. owns and operates retail shoe stores at numerous locations across the country. In addition to being a director of the company Abel is also a licensed real estate salesperson and is the sole director and shareholder of Summit Realty, Inc. ("Summit Realty"). At a recent meeting of the board of directors of Feet, Inc. the directors voted to enter into a contract with Summit Realty to find possible locations for new Feet, Inc. retail stores. The contract provides that if Summit Realty locates a suitable location for Feet, Inc. to purchase, Summit Realty would receive a usual and customary real estate broker's commission of six percent (6%) of the sale price when a transaction closed. Abel participated in the board meeting and voted for the contract with Summit Realty. Prior to the vote, Abel said to Bobby and Carmen: "You know, I own Summit Realty." The vote was 2-1, with Carmen voting against the contract and Abel and Bobby voting in favor. Summit Realty found a suitable location at a favorable price, and Feet, Inc. proceeded to purchase the location for a new store. The deal closed and Feet, Inc promptly paid the 6% commission to Summit Realty. Shortly after that Carmen died. Unhappy for various reasons, Carmen's heirs have challenged the Feet, Inc. - Summit Realty contract, claiming that it is void because Able owns Summit. They also want to sue Able for breach of fiduciary duty to recover the substantial commission Summit Realty was paid. Answer the following, explaining your answers: (1) Is the Feet, Inc. - Summit Realty contract void (or voidable)? (2) Is Abel liable for breach of fiduciary duty as a director of Feet, Inc.? QUESTION FOUR (10 Points) Amy, Bill, and Carol are young lawyers and good friends from their law school days. Three years ago they decided to buy a pizzeria with their savings. They formed a corporation called Ambica Pizza, Inc. and each contributed $10,000 in return for each receiving 100 shares of the corporation's common stock. They hired a manager to run the day-to-day business of Ambica. There are three seats on the board of directors and for the first two years they voted so that each of them was elected to the board. The corporation does not have cumulative voting. There is no formal voting agreement among Amy, Bill and Carol. The pizza business did well and Ambica paid substantial dividends to Amy, Bill and Carol in each of the first two years. At the end of the second year, Amy and Bill decided that because the business was going so well, instead of paying out profits as dividends they should use the money to buy another pizzeria. Carol was strongly opposed. She recently lost her law firm job and needed the dividend payments to meet living expenses. She also thought that the new pizzeria that Amy and Bill had in mind was a bad idea and would be a loser. At the annual meeting of shareholders at the beginning of the third year, Amy and Bill voted their shares to elect themselves and, to Carol's surprise, their friend Don as directors. Carol nominated herself to be a director, but Amy and Bill voted against her, electing Don instead. Amy, Bill, and Don then voted to stop paying dividends and to buy the second pizzeria. Carol later confronted Bill: "You can't do this to me. I have no job. You know I need the money. I still own one-third of this company! We are all in this together. And by the way, buying another pizzeria at this time is just stupid." To which Bill responded: "Calm down Carol. Amy and I obviously have different ideas for the business now, and we say what happens. We think there will be great success by putting all profits back into the business for the foreseeable future. If you are hurting and want out Amy and I will each buy half of your shares for a total of $10,000, payable over five years in annual payments of $2,000. So you get out what you put in, or we will pay you $5,000 cash for your shares right now and be done. It's up to you.” Carol has some unkind words for Bill and Carol, adding: “Easy for you to say." 1) Does Carol have a basis for any legal action against Ambica, Amy and Bill? Explain. 2) At the time of the formation of the corporation, what might Carol have done to protect herself from the position in which she now finds herself? QUESTION FIVE (10 POINTS) Amy Amber is the sole owner of Amy's Antiques. Amy recently hired Betty Barnett to manage the store. She told Betty, "You can set prices and decide how to display items, but don't do anything else without my permission." QUESTION ONE (15 points total; 3 short answer subparts, five points each) Tess, Fran, and Taylor have formed a general partnership, "TFT," to engage in business providing home interior decorating services. Although they have a written partnership agreement, the agreement does not discuss division of profits or losses among the partners; nor does it discuss how the partnership will be managed. It does provide that the partnership will last for five years. The partners contributed cash as partnership capital as follows: Tess contributed $30,000; Fran contributed $45,000; and Taylor contributed $25,000. The Uniform Partnership Act (1997) (“UPA") applies in their state. Answer each of the following questions, explaining your answers and citing any UPA provisions that support your answers: (1) Last year the partnership made profits of $200,000. The partners decided to retain $50,000 in the partnership for future expansion, and distribute the remaining profits. How will the remaining $150,000 be divided among them? (2) Without the knowledge or consent of the other partners, Tess engaged the services of a marketing company to promote the partnership's business. Upon learning of this when the marketing company sends its initial bill for services, Fran and Taylor are not happy about what Tess did without telling them. They angrily tell Tess that she must pay the bill herself. Who is liable for payment of the marketing company's bill? Why? (3) Tess believes that it is important for TFT to diversify its business. She approaches Fran and Taylor with the idea of providing outdoor landscaping services in addition to their home interior decorating services. Fran agrees with Tess. But Taylor says no. He says that outdoor landscaping is not something they would be good at and is just not their thing." Taylor insists that they stick with their interior decorating services. The partners will vote on whether to expand their business. What result? Will TFT expand? Why or why not? QUESTION TWO (20 Points) Good Dairy, Inc. ("Good Dairy") is a Delaware corporation that manufactures and sells various dairy products. Since its founding ten years ago, Good Dairy has promoted its commitment to purchasing milk from dairy farmers who pledge not to administer hormones to their cows. Indeed, the company has run advertising campaigns over the years emphasizing its “clean and pure” milk supply, and has been recognized as a leader in the wall natural” dairy products industry. Last month, however, Good Dairy's board of directors concluded that there is no difference between milk from cows treated with hormones and milk from cows not treated with hormones. And milk from cows treated with hormones is less expensive. Accordingly, the board decided that the company would begin purchasing milk from farmers who administer hormones to their cows. The board made this decision after reviewing certain scientific evidence and hearing from farmers who treat cows with hormones. Board members did not speak with any Good Dairy customers or with any farmers who do not use hormones. The decision to purchase milk from cows treated with hormones has caused a firestorm of negative publicity for Good Dairy. Other scientists have challenged the research reports on which the board relied, Shortly after she was hired, Betty decided that some of the store's display cases needed to be replaced. On November 1, without telling Amy, Betty called Fred's Furniture and ordered five new display cases, each one costing $500.00. On November 3, Fred Mertz, the owner of Fred's Furniture, called Amy's Antiques. Amy answered the telephone and identified herself as the owner. Fred said, “Hi Amy. I just want to verify that those new display cases you ordered should be medium oak color.” Amy, who was busy with customers and wasn't paying attention, said, "I'm really busy. Call back later and talk to Betty, my general manager.” Fred called Betty later and Betty verified the color choice. When Fred's Furniture delivered the new display cases, Amy was angry. She called Fred to ask what was going on. “I didn't order any display cases." Fred responded: “Well, your manager Amy did." Amy said nobody had authority to order anything. She refused to accept the display cases and told Fred that she will not pay for them. Fred says he will sue Amy if she does not pay. Amy then confronted Betty: “You weren't supposed to do anything like that without my permission," she told Betty. Is Amy liable to Fred's Furniture for the purchase? Discuss. QUESTION SIX (20 Points) Nancy Harris was the president of the Northeast Harbor Golf Club, Inc. (in a state that has adopted the Model Business Corporation Act) from 2000 until she was terminated in 2020. The Golf Club's only major asset was a golf course, and some land surrounding the golf course. The Club had a board of directors that was responsible for making or approving significant business or policy decisions. The board had occasionally discussed the possibility of developing some of the land owned by the club not used for the golf course as a way to raise money. As club president Nancy Harris had in the past said that she was generally in favor of some “tasteful” development of the land around the club, but the board of directors had never really endorsed the idea. In 2015 it came to Harris' attention that certain property the Johnson property-- not owned by the Club but which was located near several of the fairways on the golf course was for sale. When she learned this, Harris decided to purchase the property in her own name at the asking price of $50,000. She did not disclose her plans to purchase the property to the club's board prior to the purchase. She did, however, inform the board at the August 2015 annual meeting that she had purchased the Johnson property; that she intended to hold it in her own name; that she had no plans to develop the property; and that the Club would be “protected.” The board took no action in response to the Harris purchase. In 2017 Harris learned that some additional land close to the golf course was available for purchase. Harris purchased that land as well. She told the Club's board that she had purchased the land, and that she had no present plans to develop it, but that she thought it would be nice to have some houses there. Again, the board took no action as a result of Harris' purchase. The Club would likely have been unable to purchase any of the land purchased by Harris. The Club continually experienced financial difficulties and always operated at a loss. But the Club had occasionally engaged in successful fundraising in "capital campaigns" for particular projects and improvements. While she was still president of the Club, and without saying anything to the board, Harris proceeded to divide all of the land she purchased into 40 sublots on which she would build houses. When the Club board of directors learned of this Harris was immediately fired. The board then brought a lawsuit against her. Board members stated that they had relied on Harris' past statements that she did not intend to develop the land near the golf course. In their lawsuit the board alleged that Harris had violated her fiduciary duty to act in the best interests of the corporation by purchasing the land without providing notice and an opportunity to the board to purchase it and by dividing up the land for housing development. They claim that she usurped a corporate opportunity by purchasing and developing the land surrounding the Club. They want to collect damages from Harris for the money Harris expects to make from building and selling houses on the properties. In her own defense Harris will argue that not only did she not usurp any corporate opportunity, but that the board ratified her action anyway. You are the judge. Is Harris liable for breach of fiduciary duty? Explain. BONUS QUESTION (Optional - Five Points) Guardian, Inc. is incorporated in a state that has adopted the Model Business Corporation Act (2016). Its articles include the following sentence: “The corporation elects to have preemptive rights." Guardian currently has 100,000 shares outstanding. Peter Quill owns 10,000 of those shares. Guardian needs to raise money, so it has decided to sell 200,000 additional shares to the general public for a price of $15.00 per share. Discuss what rights, if any, Peter has with respect to Guardian's sale of shares.

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