The US Corporations Law: Ewing Oil Inc Case - Essay Example

Question one Part a. The key facts of the case Ewing Oil, Inc. is a Delaware corporation with its principal place of business in Dallas, Texas. Board of directors The key legal facts The law states that the board of directors of a corporation should be consisting of 1 or more members and each member will be a natural person.( Francis G.X. Pileggi) In this case that has been met. The directors need not be stock holders of the company unless and until specified by certificate of incorporation or bylaws. The directors must be fully aware of the situation and that too with the material information reasonably available. Directors must act with due care in discharging of duties and it is in this background that the case has to be analyised.The company needed additional funds to overcome the temporary cash problem. The company could not meet the additional funds needed to overcome the financial situation. The proposal made was to take a secured loan of $ 1 million from the funds of Ewing directors.. The proposal was made by Ewing directors. There was full disclosure to the board about the terms of loan and deed of trust. There was valuation of land that has to be used for securing the loan. There was voting and five directors voted in favor of the loan. Two directors voted against the loan. The five directors who supported the loan were from the Ewing family and two were from the Barnes. The director must be acting in good interest of the company and there should be refraining of fraud, self dealing, and actions that serve to entrench the office. The directors must not be acting in personal or private motive. The directors must be independent when taking decisions and should be without outside influence. The directors should have taken the decision on the best interest of company and share holders and there should not be any bad faith that means more than bad judgment. Directors will not be acting in good faith if they are making material decision without adequate information and deliberation. The decisions can cause injury or loss to the company. The directors has been presented the full information into the circumstances on why the company has to seek loan, the failure to get the financial assistance from outside sources, and the reasons for going to get financial assistance from the same stock enhancement. The dominating stockholder should be on both sides of the agreement and it is on this area that there will be conflicts as majority of directors are from the same side. Majority of directors should be personally interested in the decision and there should be clear proof that duty of care was not done. In this case, there has been no personal interest in the decision making and that means the fair dealing in which how the transaction was initiated, structured and negotiated. The document that has to be taken is to ensure that every director has been allowed to vote and in this case, every document has been given that proves that there was fairness in the decision. The shareholders have been allowed to vote and that means there has been fairness on that count also. It is in this background that the case should be taken forward. The document that has to be presented will be that the shareholder meeting had all the information needed to take the decision independently. This can be understood by the sentence” full disclosure of all material facts was also made to the shareholders, and the shareholders voted 60% to 40% in favor of the loan transaction, the vote being divided along family lines”. b.There would have been more accountable if the fund that has been taken from any other source and that would have meant that if it was taken from a member who was outside the company. (John )But the problem is that the solution that has been proposed has been from the same family and that means the Ms. Ellie, who is not on the board herself, but is the mother of two of the Ewing board members .That can create the same situation if defaulting takes place and there will be accusation of fiduciary duty in getting the approval of directors. The situation would have been solved had if both the family members would have been involved in taking the loan .There was clear disclosure of facts but as it emerged the dominant family members and the minority family members were given the information. Question Two The act that can be attributed will be oppressive conduct directed against the minority right of the shareholders and this type of conduct can appear in many forms and in different factual situations.( Find Law) The oppressive conduct has been usually done with the act of sending the minor stock holder from the company and taking the rights from them in such a way that their shares will be bought back at lower price. That has not happened in this case and that has to be noted for. Here in this situation the minor shareholder has been terminated and that has meant there is no role for economic participation and this can be said as a step against participation in management.( Find Law) Here in this case Edward Montgomery is the clear major shareholder having more than 70% of the share and that has meant that dividend will be going mainly to this shareholder. The case that has to be filed comes under the shareholder oppression. The court will have to look the fact there is no protection that has been given by the company as it has been said that the employee will be terminated at any time without any reason. The Nevada corporate law will be determining the rights between Edward Montgomery and Dharma.( Find Law) There can be looking for other jurisdiction under these cases and thirty six states has held that it has been oppression of minority shareholders by controlling the shareholders by grounds of dissolution. The problem is that Nevada Corporation does not. There has been breach of duty in the sense that Dharma has been terminated of service not on legitimate business purpose. The question of duty of loyalty has to be looked after and it has been seen that Dharma has been trying to improve the business situation of the company. There has been a fiduciary duty that has existed between Dharma and Montgomery and it has to be proved that there was no treatment of shareholders as partners, the directors were not actually elected and there has been an analogy of oppressive acts that has been done by Montgomery. The key findings will be like this 1. ME board offers individual officers the opportunity to purchase stock in the company. However, there is no fixed policy with respect to when such opportunities might be offered, nor any established policy that such purchase of stock changes the officer’s at will status as an employee. 2. ME has fewer than 30 shareholders, all of whom work for the company or are related to Edward Montgomery. There is no public market for ME shares. These acts are typical that has been shielded from the business judgment rule and certain actions that has been done by Montgomery will have different implication as there is only thirty shareholders and Montgomery has been accounting for 70% of shares. The close corporation has presented many reasons for abuse and that means expectation of shareholders will be different from public corporation. The close corporation act will be putting fiduciary duty on Montgomery. Hills case has proved that Nevada does not list oppression among its bases for statutory dissolution under Nev. Rev. Stat. 78.650 does not preclude the existence of a fiduciary duty. Question Three A) There is no argument that goes against these as there has been no seemingly conflict in interstate action was taken by voting and after proper notice has been taken. It has been proved that the majority decision has been taken. The power to manage has been vested on the board of directors and it has not been vested on certain individuals and there has been no case of proxy voting. There has been 50% attendance only to the meeting but this can be said as an informal decision that has been or will be upheld in case of closely held corporations. The board action will not be subjected to the defense and this has been because that the majority has been reached in the correct manner. In short the directors have not breached the fiduciary duty to the shareholders. Diane will not be entitled for the right of appraisal since shares will be publicly traded; and since nature of shares is that of surviving corporation; that leaves the same without any right of appraisal. B) The creditor should be insolvent or nearly insolvent not to induce or assert direct breach of fiduciary duty claim against the directors. The key determinants would be to know that the decision to take over should be reviewed under the standard of the business judgment rule. There should be clear facts that Sam has been acting on interest of personal for the majority decision to be reviewed under the fairness standard and that can be said as more rigorous. There has to be fiduciary duty to the share holders and that to be reviewed also. A board decision not to pursue a merger opportunity is normally reviewed under the standard of the business judgment rule. However, where a plaintiff pleads sufficient facts to support a claim of director self-interest, then the decision could be reviewed under the more rigorous entire fairness standard. The board’s decision to pursue the merger should not be seen as a case of not having business judgement.The board can take strong presumption in its favor and the boards statutory authority has the power to advise the merger or takeover of the company and it also has the power to decline by majority. In this case, it has been proved that the majority wanted to have a merger or takeover. The board should have taken the decision in good faith pursuit of legitimate corporate interest and had taken the decision in not keeping any personal interest on it. The merger proposal has not been rejected by the board and that cannot be said as there were no financial motivations in not taking a merger. There has to be clear proof that the decision was taken more in personal interest rather than in keeping up the interest of the share holders. There could be allegation that sufficient time has not been spend on deliberating the merger proposal and that can be countered by the fact that each of the directors did not have conflicting interest on the idea as the questions were asked for clarification. There has been no case of common law fraud and also fraud in the case. In short there has been no breach of fiduciary duty as there has been discussion on the proposed merger and the proposal has been approved by a huge margin of five to one.( Evelyn Cruz Sroufe) There was no injury to the company that has been proved. The other major issue that has to be discussed is the liability of the directors.Delware has provisions that have limited the liability of directors and it has been seen that a corporation has been provided as indemnification to directors. There has been provision for certain bye law and charters that will determine the liability of the directors. The bye law has been changed by the Delaware Corporation and there by changing the protection of the directors in such a way that it has been improved. The directors who have been disinterested will not be facing any threat of personal liability in not attending the meeting. The long established practices have been to impose damages against directors that have been acting as self dealing and having conflict of interest. The Delaware corporation law has stated that directors could be still responsible for damage to breach of the duty of loyalty and that has involved conflict of interest. The act of omission that has not been done in good stead will invoke damages from all fronts and that has to be understood by the directors. The Delaware business has been managed by or under the direction of board of directors and the directors are supposed to have a fiduciary duty to the shareholders and the corporation.( Dave Broadwin) The shareholder under certain conditions can induce the breach of fiduciary duty and that has to be understood in detail. There will be also a derivative claim for the damage that has been caused to the corporation and the directors will not be holding any fiduciary duty to the creditors of the company. If the company gets insolvent, then the director will be having the fiduciary duty to involve the creditors. The shareholder equity will not be paid in full detail. The creditors has been trying to enforce the direct and derivative claim against the directors along with the contractual and non fiduciary claims. The solvent corporation when it has started getting into insolvency mode has been forcing the directors not to change the fiduciary duty to the shareholders and corporation by asking for business judgment. C) The case that will be raised against the company will be that the directors had not seeked or monitored the risk that the corporation was involving in by tarnishing the image of the company. The multiple red flags through the consultant were ignored and this has to be noted for. There has been subprime reputation loss due to this and it has committed waste by ignoring the consultant’s recommendations. The board of directors has to be made answered for the potential of personal liability for ignoring the fiduciary duty and Delaware law has no provision for bringing directors under the personal liability law for ignoring sound business judgment situations. There has been typical duty of oversight claims that has been made by the directors of the company in the sense that the key recommendations were ignored. There has to be a case on the bad faith (Nowicki, Elizabeth) against the board with key facts containing the facts that the directors has acted with self interest and knowledge. There has been termination of employee who has made the key recommendations. The company did not have procedures to monitor the risk that will happen when there is damage to the reputation of the company and this has to be raised in the court. The act can be equated to wide spread criminal doing and there has to be step taken to ensure that proper claim will be met. (Eric)The company has breached the duty of loyalty by failing to act in good stead and this has to be understood in detail. The other big factor has been that there has been silence when there was obligation to disclose. The ability to speak out should arise by word rather than by contract and steps should be taken to correct measures. Question four a) There has to be clear guideline on the issue of merger and takeover and that been discussed clearly under the Delaware law. The tender offer has been the more viable option but the aim of SMC was to get the hold of the company through backdoor. The company wanted to take hold of the directors by bringing in two directors and that was lawful also under the constitution or the by law that has been approved by the company. The annual shareholders meet was the target and two Class I directors were up for election. There was also plan from the SMC to increase the size of the board by an additional four directors and to fill those positions with its nominees. The reason for this was the assumption that the election of two directors and additional four directors would give them the majority. It was a case of having an independent board that would meet the demands of the SMC and that was breach of fiduciary duty. It has been an idea of majority of the minority idea and that was not to be done. The tender offer would have attracted voting and that would have met the resentment of the shareholders and the company might have thought that it was a risk. B) The Delaware corporate law has stated in the section 141 of the General Corporation Law that the business of the corporation will be held under the direction of board of directors and vote of the majority of directors which has been present and that satisfy a quorum will have to be respected. The meeting has to be taking place and just because directors have been present does not ensure that the meeting has been done. A proper meeting will be having a date and proper agenda to be achieved and it was on this background that the meeting has been proposed. The meeting has been extended for one month and it has been alleged that there was wide spread campaign against the proposed takeover bid and the ethics followed by the takeover company. The right to vote is among the most fundamental rights of ownership of voting shares. The right of voting stock is inseparable from the right of ownership. Delaware corporation law has stated, that there will be importance of corporate democracy and shareholder elections in general terms. Before preceding the case, the main thing that has to be pondered over is that why did SMC go for injunction of postponing the election date? What were the reasons for trying to increase the number of board directors in the SMC Company? That means the petitioner has or should have a clear right of relief. The other main issue is that would a greater damage would have been done if the election was not postponed and that would have meant that SMC would have tried to control or take over the company through back side and that would have led to more trouble. The activity that has been sought from the side of SMC should have been reasonable and that was not the case. The internal affairs of the company are being led forward by the bye law and that has meant that there is no problem by changing the meeting and keeping at a date that was a month older than the proposed plan. There has been no problem in making advantage of the situation by changing the by law regarding the director as it was taken in the interest of the company. The directors were not acting in self interest. The Delaware case law has not stated or denied or categorically prohibited a board of directors from moving an annual meeting date once notice of that date has already been provided or planned as in the present case and it has to be understood in detail by SMC. The other part that SMC could ask for is the way directors acted improperly when Amore’s tried to manipulate the shareholders meeting and corporate election to make sure that the control of the corporation remained.( Charles W. Murdock) Because the Board’s moving the Meeting date amounts to little more than an effort to maintain domination over SMC operations. But in reality it can be safely concluded that SMC had done serious breach of duty in trying to use the election to gain control through bad means.( Charles W. Murdock) Reference Charles W. Murdock, Fairness and Good Faith as a Precept in the Law of Corporations and Other Business Organizations, viewed on July 29,2009,retireved from http://www.luc.edu/law/activities/publications/lljdocs/faclawsymp/murdock.pdf Dave Broadwin ,2009,Personal liability of directors under Delaware law ,retrieved from http://www.emergingenterprisecenterblog.com/2009/05/articles/startup-issues/personal-liability-of-directors-under-delaware-law/ on July 29,2009, Eric,2008,Shareholder Oppression Cause of Action--Legal Theory, retrieved from http://www.shareholderoppression.com/oppression_legal_theory on July 29,2009. Evelyn Cruz Sroufe,2009,Delaware Supreme Court: Corporate Officers Have Same Fiduciary Duties as Corporate Directors; Common Law Shareholder Ratification Clarified: Gantler v. Stephens, retrieved from http://www.perkinscoie.com/FCWSite/abc.aspx?url=news%2Fpubs_detail.aspx%3Fop%3Dupdates%26publication%3D2061%26pdf%3Dyes on July 29,2009 Find Law, “Hill vs. Hollis”, retrieved from http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=5th&navby=case&no=9920725cv0#N_4_ on July 29,2009 Francis G.X. Pillage ,2009,Delaware Corporate Law and Monetary Liability of Directors, retrieved from http://www.delawarelitigation.com/admin/trackback/136270 on July 29,2009 John,2008,Closely Held Business, retrieved from http://local.law.umn.edu/uploads/images/5246/MathesonMaler_Final.pdf on July 29,2009 Nowicki, Elizabeth, Director Inattention and Director Protection under Delaware General Corporation Law Section 102(B)(7): A Proposal for Legislative Reform(December 2, 2008). Delaware Journal of Corporate Law (DJCL), Vol. 33, No. 3, 2008. Read More