PrattCo is a corporation.  It has been developing a new textile inspection system that promises to revolutionize the market if it can be made to work.  PrattCo has three million shares of Class A common authorized.  All three million shares of the Class A Common are currently issued and outstanding.  The Class A Common shares are currently trading at $25 a share on a recognized market.

PrattCo has two immediate problems.  First, it needs a new CEO with the expertise and drive to get the new system working and to expand PrattCo's operations.  Second, PrattCo needs at least $75 million to finance the development of the new system and the expansion of its operations.

The PrattCo board offered Leslie the job of PrattCo's president and CEO.  Leslie's salary requirements are modest, but as part of her compensation Leslie wants to receive options for 100,000 shares of Class A Common at $25 a share, with the right to exercise the options phased over a three-year period.

Brenda has offered to invest $75 million in PrattCo in return for three million shares of Class A Common at $25 per share, but she wants her Class A Common shares to be different from the existing Class A Common. Brenda wants her shares to have a preference such that any dividends would be allocated first to Brenda's Class A Common shares up to $2 per share per annum, then to the other Class A Common shares up to $2 per share per annum, and then to all Class A Common shares equally.

William currently owns 30% of the Class A Common stock. William was an inside candidate for the position of president and CEO and is bitter that Leslie was offered the job. William also disagrees with the $75 million capital infusion from Brenda.  William wants to license the new system to third-party manufacturers rather than have PrattCo expand its own operations.

William objects that: (1) the grant of the proposed stock options to Leslie is illegal; (2) the sale to Brenda of the Class A Common shares with preferential rights is illegal; (3) if the sale to Brenda can be legally accomplished, it requires William's consent; and (4) even if the grant to Leslie and the sale to Brenda can be made, William would have the right to purchase shares equal to 30% of the stock issued to both Leslie and Brenda.

PrattCo's articles of incorporation state that "the corporation elects to have preemptive rights."  Assume the board and stockholders of the remaining 70% of Class A Common will vote to hire Leslie, to grant her the options requested, and to accept Brenda's financing proposal.  Also assume William has sufficient financial resources to exercise any stock purchase rights he may have.

Are each of William's four objections to PrattCo's plans valid and, if so, what steps could PrattCo take to avoid these objections? Explain.

Answer rating: 100% (QA)

Williams objections can be examined as follows 1 Illegality of Stock Options to Leslie Williams clai... View the full answer