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The Case of the Director Who Wore Too Many Hats
Catalina is one of 5 directors of Zeta 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.
Catalina buys, for $1,500, an option to purchase a tract of real estate called Blackacre, which is next to Zeta’s home office, for $50,000. Catalina forms a new corporation, Commercial Property, Inc., to hold the option. She then has Commercial Property buy Blackacre. As a director of Zeta, Catalina orders Zeta 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, Catalina has Commercial Property sell it to Kappa, and loan the money to Kappa for the purchase price at a 5% interest rate which is 2% below the market rate. Jones, a minority shareholder in Kappa, formally complains to Kappa’s board which takes no action.
Jones files a suit against Catalina on Kappa’s behalf seeking to cancel the sale. Catalina asks the Court to dismiss the lawsuit as Jones has no standing to bring the lawsuit.
Arguments At Trial
Catalina’s attorney argues that Blackacre is necessary for Zeta 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 Zeta authorized the purchase which appeared to be in accordance with the Articles of Incorporation.
Jones’ attorney argues that the purchase of Blackacre should have been put to a vote of the shareholders of Zeta as required by Zeta’s Bylaws. Zeta’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 Jones file and what is its basis?
Who are the Plaintiffs and who are the Defendants? Why?
What are the defenses, if any, of Zeta or Catalina?
Who will win the case and why?