Thanks in large part to your sage advice, sisters and general partners, Abigail and Bianca, and their third general partner, Charles, have successfully launched their surfwear business and have opened a very successful storefront in Los Angeles, California. They have successfully incorporated their business as Fantastically Innovative Surfing, Inc. and have run the corporation for almost five years now. They made more than $150,000 in net profit in year two, more than $500,000 in net profit in year three and more than 875,000 in net profit in year four.

In the beginning days of the company, this business was simply a side job for all three individuals. As their business has grown more successful, however, they have realized that their surfwear business could be huge, thanks to Abigail's sage business acumen, Bianca's innovative surfwear technology, and Charles' excellent experience and skills in sales and marketing. Abigail is currently the Chief Executive Officer (CEO), Bianca is currently the Chief Operating Officer (COO), and Charles is currently the Chief Marketing Officer (CMO); the three of them are currently the only directors on the Board of Directors of Fantastically Innovative Surfing, Inc.

Abigail has come to you with the following questions and concerns regarding Fantastically Innovative Surfing, Inc. Your responses to each of the following questions should be approximately one to two paragraphs. Present your best or most persuasive arguments or suggestions. You should substantiate your responses by providing any appropriate references to the cases, statutes, and model statutes that we are studying in our course; no outside references are required. You may feel free to incorporate additional facts and assumptions into the hypothetical scenario, as long as you clearly note them.

4. Three years after this shareholders' meeting, Abigail has returned to you with more questions and concerns. Now, the shareholders of the corporation consist of Abigail, Bianca, Charles, Ernest, Fernanda, and Grant. Abigail, Bianca, and Charles each own 1/4th of the corporation and the remaining 1/4th of the corporation was equally divided among Ernest, Fernanda, and Grant. All six also sit on the board; Abigail is still the Chief Executive Officer (CEO), Bianca is still the Chief Operating Officer (COO), and Charles is still the Chief Marketing Officer (CMO). By this time, the corporation has turned net profit of $5 million in the most recent fiscal year, and it is poised to double its profits in the upcoming year.

The corporation caught the eye of Surfs Up, Inc., a competitor, who approached Charles and offered $30 per share, valuing the corporation at $30 million. That same month, Bianca's aunt Hyacinth, a major shareholder in a large retail conglomerate, The Clothes Conglomerate, indicated that The Clothes Conglomerate would like to offer $35 per share, valuing the corporation at $35 million. Hyacinth texted to Bianca that the Clothes Conglomerate did not trust in Abigail's leadership, however, and that it would be "their little secret" that the Clothes Conglomerate would terminate Abigail as CEO after the acquisition and replace Abigail with Bianca, to whom they would give a $1 million bonus if the transaction was successful.

Both Bianca and Charles took their respective offers to the Board of Directors of the corporation. The Board of Directors hired a local financial analyst to weigh the competing offers. In the meantime, Surfs Up, Inc. increased its offer to $40 per share, and The Clothes Conglomerate promptly matched the offer. The financial analyst studied the question for a few days and recommended to the board to move forward with The Clothes Conglomerate, largely because they had more financial resources to grow the company. The financial analyst recommended that no additional offers be solicited, as both offers could go away soon. Ernest, Fernanda and Grant expressed that they were "extremely uncomfortable" with not soliciting other offers, as they believed that the corporation could be worth as much as $75 per share. During a contentious debate over which offer was better, Bianca (who knew Charles now preferred The Clothes Conglomerate already) pulled Ernest aside and indicated that if he voted in favor of The Clothes Conglomerate, he would allow Ernest and his extended family to live in her large house in Malibu rent free for a year. Bianca also indicated that The Clothes Conglomerate would have more resources to make the corporation more successful and that it would be detrimental to the corporation to have a 50-50 tie in the shareholder vote.

When the shareholders held a vote, Bianca, Charles and Ernest (voting 58.3% of the shares) voted to approve of moving forward with the Clothes Conglomerate acquisition, while Abigail, Fernanda, and Grant (voting 41.7% of the shares) voted in favor of moving forward with the Surfs Up, Inc. Acquisition.

Abigail, Fernanda, and Grant have initiated a shareholder derivative lawsuit.

A. What is a derivative lawsuit?

B. What issues do you think exist with respect to fiduciary duties?

C. Which party do you think will ultimately prevail, and why? company now do?

Answer rating: 100% (QA)

A A derivative lawsuit is a legal action brought by shareholders on behalf of a corporation against third parties typically officers directors or cont... View the full answer