The USA Corporations Law: Walt Dasney Company Case - Assignment Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Title : USA CORPORATIONS LAW Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx WORD COUNT: 4202 @2010 Question 1 In this case, a share holder of Walt Dasney Company (“Dasney”) challenges the board decision not to market the film under Dasney name and instead sold the rights to Udontnous who were the highest bidders for $20 million, the shareholder might not succeed based on Dodge v. Ford Motor Co. in the Dodge v. Ford Motor Co. It was held that the board of directors are responsible for making decisions concerning the declaration of dividends and not the stockholders. The stockholders can therefore not decide when to issue dividends in a company. In the Dansey case, it is the responsibility of the board of directors to decide what is best for the company. Although the shareholders felt that they were denied a chance to earn more dividends from the distribution of the film, the board of directors cited that the profits will be earned in the short term but turnish the name of the firm in the long run and lead to poor productivity (Henderson, 2007). Theisner thus does not breach the fiduciary duty of the shareholders since he is working to the interest of the firm and definitely to the interest of the stockbrokers. It was further ruled in the Dodge v. Ford Motor Co. case that the court had no reasons to interfere with the decision of the board unless it had gone against its stipulated powers. Under this grounds the court is not supposed to interfere with the boards decision since it had not abused its powers by deciding what it felt was best for the firm. The decision of Theisner, the CEO can not thus be interfered with by the court unless it was arrived at in bad faith, intentional neglect or abuse of power. The CEO was thus allowed to reject such an investment initiative because it was unreasonable for the company to make profits in the short run and suffer in the long run courtesy of a tarnished (Pinto & Branson, 2009). This court also in Hunter v. Roberts, Throp & Co., held that it was well recognised the directors according to the law had the mandate to declaire an issue for dividends of the earning of the firm. The court of equity is not allowed to interfere with management of the board unless the board is guilty of misdeeds in regard to the running of the firm. The CEO is acting in good faith and has not misused his mandates and thus the court will not be allowed to interfere with his decision (Henderson, 2007). Question 2.A. In this case in which Cartwright directors are blamed for breach of fiduciary duty for their decision to approve a loan transaction, Mavericks’ can only be considered in a court if they prove that the directors acted in bad faith to the company. They must also prove in the court that the directors acted against the powers accorded to them by theboard or the directors misused their powers as directors of the company. Since the votes of both the directors as well as the shareholders were casted in good faith, Mavericks have a burden to prove that the Cartwright directors acted in bad faith to the firm and did not bear good intents for the company. Although the financial situation of the company did not improve as expected even with the acquisition of the loan, Mavericks will be required to prove that the loan did more harm than good to the company at the same time, it was intention of Cartwright to create such a situation. They must prove that the company would have done better or fairly without the loan (Pinto & Branson, 2009). In the Dodge v. Ford Motor Co. it was held that the court should not interfere with the board of directors decision not to declare dividends in the company contrary to the shareholders wish. It is the responsibility of the board to determine the best time to declare dividends in the company and not the shareholders duty (Melissa, 1994). This implies that it is the responsibility of the directors to decide what is best for the firm. When the board of directors refused to declare dividend issuance in the firm, the courts should not interfere with the decision unless the board is guilty of intensional abuse of the powers accorded to them. The court will thus not interfere with the Cartwright decision to approve the $1million loan since as the directors of the company they are mandated to perform any action that they deem best for the progress of the company. It is not the responsibility of the Mavercks’ family who form part of the stockholders to decide whether to aprove the loan or not. The court will interfere with the decision if Mavericks can prove that the Cartwright directors were guilty of abuse powers of directors accorded to them or acted with bad intentions or were negligent on the ir part of duty expected from them. Failure to prove this will imply that the Mavericks are bound to lose in their suit. The Mavericks thus have a big burden to prove al these considering that there are several efforts that have been to sustain similar suit with the courts refusing to disclaim jurisdiction but at the same time officially refusing to interefre (Melissa, 1994). According to Dodge v. Ford Motor Co.case, the directors decision was a fair attempt to expand the firm by providing more facilities to the firm through the re-investment of the profits into the firm. This decision could not be overulled or enjoined by the stockholders and thus remained. Similary, Cartwright directors had the intention of improving the financial position of the firm by approving the loan sought from their own funds. Ponderosa required extra funds to solve what was initially thought as a small or temporary money problem. Since both families had made efforts to seek for external sourcing without success, Cartwrright’s decision can thus be be termed as decision arrived at in good faith. In this case the court is bound to keep off unless Mavericks are able to disaprove all this. The fact that the votes were cast in good faith makes the Mavericks claim harder to prove (Melissa, 1994). Question 2.B. NO. There would be no difference if the lender was Ms Kitty, the mother of Cartwright board members and not the Cartwright directors. This is because Ms Kitty is not a board member is not a member of the board and secondly she would also be assisting the firm that had failed in getting an external source of funding. The decision to seek funds from Ms Kitty will be considered to be in good faith and intended to salvage the company from the financial standoff and thus take into consideration the interests of the shareholders. It will only be considered as a breach of fiduciary duty on the part of the Cartwright’s directors if it can be proved that the votes to approve such a loan were not in good faith and were done with malicious intents or personal interest (Birks, 2000). The failure of the company to recover from the temporary cash flow problem can not be used as the basis to prove breach of fiduciary duty unless the Mavericks can prove that the firm would have done better without the loan. According to Dodge v. Ford Motor Co.case, it is the duty of the board of directors to make major decisions concerning the running of a company. The courts are not allowed to interfere unless the plaintiff can prove a case of mismanagement of breach of fiduciary duty (Henderson, 2007). Question 3. Under the reasoning of Hollis v. Hill, Dharma’s claim on the grounds of violation of fiduciary duty is not likely to prevail though she is a minority shareholder of Montgomery Enterprises, Inc. (“ME”). In Hollis v. Hill case, the court was supposed to come up with a reasonable ruling due to lack state precedent decison. Dharma can only lay her claim on sacking on the grounds of oppression. According to Skierka v. Skierka Bros., Inc., Oppression in this case would be defined as any act performed by the majority shareholder that is burdersome, harsh and wrongful to the minority shareholder. It is clear violation of the standards of fair dealing and unfair play to any of the parties investing in a corporation. In O'NEAL &THOMPSON oppression was found on the basis of dissapointment on the side of the minority and failure to meet their expectations. Edward Montgomery acted contrary to Dharma’s expectations and she can therefore claim for oppression (Conaglen, 2005). The court can also rule out oppression in Dharma’s case. Hollis claimed that he was subjected to acts of diminution and ultimate termination of salary and lack of supply of financial information concerning the firm. Other acts he was subjected to included dismissal of his duties and withdrawal of employee benefits. In general workers who extremely affected by such officer and director actions may not claim oppression from the management of the company even if they are stockholders of the firm. Dharma is not an exception since she was dismissed by the CEO of the firm. Particular actions of the CEO will get different treatment especially where the company has a few shareholders including the CEO themselves. The judgment of whether an action is regarded as oppression depends on individual cases and in many cases the minority shareholder is on the receiving end. Close companies however provide several unique opportunities for abuse of minority shareholders which are found in public companies (Conaglen, 2005). In Hill v. Hollis case the district court determined that Hill was guilty of breaching his fiduciary duty and was authorized to buy-out all of Hollis’s shares. Dharma’s case is different in that unlike Hollis she was a minority shareholder and the company offered to purchase her shares in the company at $220 per share which were found to be ideal for the firm at that time. At one court in the case Nagy v. Riblet Products Corp., the court ruled that a fiduciary duty to every baggage handler on the basis that the individual is a worker who owns part of the stock in the United Airlines would put such firms in a very un-competitive position. This will even place them at the risk of collapsing. Dharma is thus not entitled to fiduciary duty based on this argument since fiduciary duty to every minority shareholder in the firm would to inconvenience in the operations of the firm and decrease the productivity of the firm (Pinto & Branson, 2009). The main issue in this case therefore is whether there is defined remedy or cause of action for oppression of minority shareholders in a firm. The Nevada dissolution statute does not permit dissolution on the basis of oppression of minority shareholder. A Nevada case (Clark v. Lubritz) attempting to prove the extension of fiduciary duty to include the shareholder oppression handled the business as a partnership because Clark and Lubritz treated their business as such. The court was thus bound to disagree with fiduciary duty on the part of Dharma since Montgomery Enterprises, Inc. (“ME”) was a corporation as opposed to a partneship. Under these circumstances it would be difficult for Dharma to prove a case of breach of fiduciary duty on the basis of oppression particularly now that she has been compensated and her shares bought at a reasonable market price (Conaglen, 2005). Question 4. A. In the Delaware law any two or more companies are allowed to merge into one company. The boards of individual companies wishing to merge will have a resolution approving the decision to merge. This resolution agreement has details concerning the terms and conditions of merger, the method of executing the process, details concerning amendments to the certificates of incorporation and the method of handling the shares. Under statutory merger, Diane is entitled to appraisal rights through the court. A shareholder who refuses to consent to a merger is entitled to appraisal rights of reasonable value of shares. Diane appraisal rights will not be affected since this is not a constituent corporation which affects appraisal rights in some in some instances. If both Diane and Woody had dissented, then the merger would have been stopped. But since only Diane was opposed to the merger then the board will be compelled to purchase her shares. After her shares are purchased, Diane will then cease to be a partner or shareholder of the company which will now be a merger. The appraisal rights state that any shareholder of a company that has merged and continuously holds the shares and has neither voted in support of the merger or consolidation, then this party is entitled to appraisal of the reasonable value of the shares. Appraisal rights are accorded to shares of any class or succession of stock of a constituent firm. Diane is thus entitled to appraisal rights and the board must thus purchase her shares in the merger (Melissa, 1994). 4.B. in this case the directors are liable for mismanagement and negligience. The damage caused to Cheer’s reputation that led to the disposal of the restaurant business was caused failure of the directors to monitor and implement internal controls just like other major food service providers did in the sector. The directors were instead focusing on franchising the operations of the reustaurants at the expense of the quality of foood supplied. This ended up to food poisoning which greatly damaged the reputation of the firm. The shareholders can succeed in the suit against the directors for mismanagement and negligence. The Cheers board never considered moitoring the quality of services provided by the restaurants although they had the ability and the means to do so (Melissa, 1994). In the League ball Club v. Wrigley case, the plaintiff, a minority shareholder of the defendant corporation, Chicago National League Ball club (Inc) alleges that the performance of the club has been dropping due to low attendance of the club’s home games. This was attributed to lack of installation of lights at Wrigley Field and Schedule. He thus accused the directors of the corporation for mismanagement and negligence. In this case the plaintiff claims that although the directors had funds that they could use to install the lights and the benefits of installing the lights out way the expenses. The board was just not interested in installing the lights leading to the losses incurred as a result of low fan turnout. Increased attendance would result to increased revenues and incomes. Cheers had the opportunity and ability to control and monitor the internal operations of the restaurants and thus prevent food poisoning incidences that led to the tainting of the reputation of the company. Had the directors focused on internal controls of the restaurants, the firm would have continued to generate more revenues and the investment of the new shareholders would not have been put at stake. In the SHLENSKY V. WRIGLEY case, the plaintiff claimed that the defendant failed to install the lights due to personal reasons and interests and not as a result of the welfare of the corporation. The defendant had the perception that baseball games were daytime sport as opposed to night time affair which he felt that it could lead to negative impacts on the surrounding. He openly admitted that he was not interested in whether the club benefits from the night attendance due to his concern for the surrounding (Melissa, 1994). In Cheer’s case, the directors also had other interests. They focused on franchising the retaurant business at the expense of foreseeing the quality controls in the operations of the firm. They can thus be accused of mismanagement and negligence on their part. Although courts are not alowed to interfere with the decisions made by the board of directors of a firm unless the board is not functioning to the interest of the firm, it can be proved that Cheers board did not act to the interest of the firm. The consequences that led to the damage of the Cheers reputation beyond salvageable levels are a concreate prove that the directors did not aact to the interest of the firm. Focusing too mmuch on expansion while ignoring the quality of the services provided can be regarded as acting for a reason or reasons unrelated to the interest of the firm. Their failure to control the quality of the services provided by the restaurants constitute mismanagement of the firm and waste of corporate resources since the reputation of the firm is a significant asset of the firm. The directors thus failed to exercise reasonable care in regard to the operations of the company. In the SHLENSKY V. WRIGLEY case, it was held that the board had no case to answer. The court found that the board could not be held liable for mismanagement since the plaintiff was unable to prove whether other corporations made substantial profits from the night games. It was not also possible to prove whether the firm would make more profits by following other firm’s operational strategies. The case of the Cheers directors is different in that it can be proved that firm failed as a result of the failure of the board to control the quality its internal operations. The success of other restaurants is enough prove that had the board monitored the control of its internal controls, then Cheers would be a success (Melissa, 1994). Question 5.A. YES. There is a tactical reason under the Delaware statutes as to why SMC opted to respond with proxy campaign in order to obtain the control of Amore. The unocal test is used to assess whether a board of directors has adhered to its fiduciary obligations to the company as well as the shareholders. The court of equity also takes into consideration the conditional offer provided is within the mandates of the board. In the case of SMC had to satisfy the court that the board’s decision to reject the $20 per share was not arrived at in consideration to the interest of the shareholders and the company. This way the board will fail the unocal test and will declare its decision invalid and void and thus a breach of fiduciary obligations of the firm and the shareholders. Proving this can be difficult and thus SMC opted to employ the proxy campaign. The proxy campaign is advantageous in that once a party has control over the board, then the party literary has control over the whole firm since all proposals made by the party will go through. Use the proxy campaign is also a beter method of gaining control of a company since it prevents a situation where the board raises the value of the shares unreasonably (Hicks, 2001). Question 5.B. SMC had expressed its interest to take over Amore in a merger transaction for $20 per share through a formal letter sent to Amores borad of directors. After the Amore board rejected the offer made, SMS responded with a proxy campaign to take over Amore. Paulaski Amore’s CEO and chairman of the board claimed that if SMS was allowed to take over Amore and control its stock then SMS expansion strategies would bring down Amore (Pinto & Branson, 2009). The Claim that SMC lost in its efforts to expand the board by four members and select its four extra nominees due to Amore decision to postpone the election and thus enable the Amore board time to campaign against their proposal is valid. The decision by the Amore board to enact new laws that alowed them to increase the number of directors to seven and appoint extra members is invalid and void. This is a decision intended to frustrate SMC efforts to have a control of the board while enhancing the management’s influence in the board. Even though the board claimed that it acted on the interests of the firm and the shareholders, their decision to amend the laws in their favor consitutited a breach of the relationship between the board and the shareholders (Hicks, 2001). This relationship is safeguarded by the courts of equity and thus SMC can file a valid suit in the courts. In the Blasius v. ATLAS case, Atlas board added the board by tow new members as a response to Blausis intent to take control of the board by expanding the board by eight members and proceed to nominate its candidates for the positions. The action taken by Atlas board was considered invalid and void on the basis of violating the relationship between the board and the shareholders. The action was considered to be selfish and carried out with the intention of preventing Blausis from creating a new majority in the board. Based on this argument, Amore decision would be considered invalid and void and thus legible for prosecution in the courts of equity (Hicks, 2001). SMC had sought to have the control of Amore since it believed that Amore was not performing to its full potential. It cited that the current board was not as effective as it should have been. By amending the laws in order to increase the number of board members and postponing the election date, Amore board clearly showed that it feared that SMC would have control of the board at the following election and possibly prove the current management was not competent to run the affairs of Amore. The action of increasing the board members by two positions indicated that the main motivation of doing that was to prevent the creation of a new majority in the body. In the Atlas v. Blausis case, it was held that the board was not acting to the interest of the firm but was rather motivated by selfish interest to retain the control of the company (Weinrib, 1975). Similarly, Amore’s board was motivated by selfish interest to retain the control of the board. Just like the Schnell v. Chris Craft Industries, this would constitute a violation of duty. SMC would thus succeed in a suit against Amore in a court of equity based on this argument. In Atlas v. Blasius case, it was concluded that the board’s decision were based on self interest due to the threat posed by Blasius’s proposal in taking control of the firm. Amore’s board likewise acted in a good faith move to safeguard its interests for fear that letting the firm into SMC’s control would lead to a downfall of the firm (Hicks, 2001). In REVLON, INC. V. MACANDREWS & FORBES HOLDINGS, INC. case, the Court of Chancery barred any other transfer of assets move and proceeded to order a cancellation of fee provisions of earlier agreement. In the case, it was held that the Revlon directors had violated their duty of loyalty by failing to maximize the sale price of the firm for the shareholders. This was after making concessions to Forstmann in regard to their liability to the note holders. In the Amore’s case, the board failed to maximize the shareholder’s stock at first by rejecting the offer of $20 per share of the share’s that were trading at an average of $10-$15 per share. Amore board can thus be considered to have violated the duty of loyalty by rejecting such an offer. In deciding such a case, a court first assesses the conveniences created against the possible risk that such a move may put a firm into. The final responsibility of controlling the activities and affairs of a business lies with board of directors. In executing their mandates, the board has fiduciary duties of care and loyalty to the company and its stockholders according to Guth v. Loft, Inc. this applies even when the board is pursuing crucial matters such as mergers or takeovers. Although the business judgment rule comes into play in decisions of the board concerning issues such as takeover threats, the standards in which they are based that is, care, loyalty and independence must first be fulfilled. In Amore’s case, the board should fulfil the principles of care, loyalty and independence in all their major decisions including decisions on takeover threats. The board failed to exercise care and loyalty by violating the duty of loyalty (Hicks, 2001). The Amore board’s decision to reject, SMC’ offer of $20 per share can be justified on the basis that the price was below the firm’s intrinsic value. The Revlon board approved a Rights Plan to thwart Pantry Pride to buy the Revlon’s shares at $45 per share on the grounds that they were below the firm’s intrinsic value. The board claimed that Pantry Pride had sought funds from a place in order to buy Revlon at a cheap price and then resell it to make profits. SMC is thus required to prove that this is not the case in a court of equity should it file a suit. The board will be found to have acted on good faith should an investigation reveal such an intention with SMC. Since SMC did not raise its price for the shares but instead resulted to other measure in order to have control of Amore, then it can be concluded that they had no such intentions (Hicks, 2001). . Bibliography Birks, P., 2000,‘The Content of Fiduciary Obligation’ 34 Israel Law Journal 3; (2002) 16 Trust Law International 34 Pinto, A. R. & Branson, D. M., 2009, Understanding Corporate Law (3rd ed.), (LexisNexis), UK. Conaglen, M., 2005, ‘The Nature and Function of Fiduciary Loyalty’ (2005) 121 Law Quarterly Review 452 – 480 Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668. (Mich. 1919), Equity-Linked Investors, LP v. Adams, 705 A.2d 1040, 1054 (Del. Ch. 1997) Henderson, M. T., 2007. "Everything Old is New Again: Lessons from Dodge v. Ford Motor Company". Social Science Research Network. Retrieved on 9th July from Hicks, A. 2001, ‘The Trustee Act 2000 and the Modern Meaning of 'Investment’ (2001) 15 (4) Trust Law International 203 Melissa M. K. 1994, Corporate Takeover Defenses After QVC: Can Target Boards Prevent Hostile Tender Offers Without Breaching Their Fiduciary Duties?, 26 Loy. U. Chi. L.J. 29, 33 Weinrib. E.J., 1975, ‘The Fiduciary Obligation’ 25(1) University of Toronto Law Journal 1 – 22 Read More