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The Case of the Director Who Wore Too Many Hats

Maria is one of 5 directors of Beta 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.

Maria buys, for $1,500, an option to purchase a tract of real estate called Blackacre, which is next to Beta’s home office, for $50,000. Maria forms a new corporation, Commercial Property, Inc., to hold the option. She then has Commercial Property buy Blackacre. As a director of Beta, Maria orders Beta 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, Maria has Commercial Property sell it to Beta, and loan the money to Beta for the purchase price at a 5% interest rate which is 2% below the market rate. Lakesha, a minority shareholder in Beta, formally complains to Beta’s board which takes no action.

The Trial

Lakesha files a suit against Maria on Beta’s behalf seeking to cancel the sale. Maria asks the Court to dismiss the lawsuit as Lakesha has no standing to bring the lawsuit.

Arguments At Trial

Maria’s attorney argues that Blackacre is necessary for Beta 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 Beta authorized the purchase which appeared to be in accordance with the Articles of Incorporation.

Lakesha’s attorney argues that the purchase of Blackacre should have been put to a vote of the shareholders of Beta as required by Beta’s Bylaws. Beta’s Board of Directors failed in its duty to make sure this sale was in the corporation’s best interest.

Questions to Decide

  1. What kind of suit will Lakesha file and what is its basis?
  2. Who are the Plaintiffs and who are the Defendants? Why?
  3. What are the defenses, if any, of Beta or Maria?
  4. Who will win the case and why?
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