You represent Carol, who is the director of Baby Hawkins ("BH"), a North Carolina incporated business that sells educational toys for children under the age of 5 (five). Carol is also the Vice President of BH and owns 10% of its of shares.

Donald is the chairperson of BH's Board of Directors ("BOD") and its Chief Executive Officer; he owns 55% of BH's shares. The other directors are: Modine (Donald's sister) who is BH's secretary & treasurer and who owns 2% of BH's shares; Francine, who is a professor at East Carolina University (teaching anatomy and physiology) and owns 3% of BH's shares; and Sandra, who is the senior partner of Sandra & Sanford (a North Carolina based law firm, which owns 25% of BH's shares). The other 5% of BH's shares are divided unevenly among 30 different shareholders.

Carol telephones you from her office. She says that 10 (ten) minutes ago, Donald told her to meet him and Modine in BH's conference room in 30 (thirty) minutes, and that Modine is now telephoning Francine and Sandra to request their presence at this meeting.

Carol says she then overheard Donald tell Modine that the main purpose of this meeting will be for Donald to get corporate approval of a plan that Donald came up with in a dream last night: Donald wants BH to immediately being manufacturing and marketing "Gut Buddies," six-inch-tall anatomically-correct plastic models of men and women, whose bones and internal organs can be removed. Donald will propose that BH hire Francine as a consultant for $50,000.00 to help develop the models so that their bones and organs are as realistic-looking as possibleor, if Francine would prefer, Donald will propose that BH donate the $50,000.00 to the East Carolina University Medical School's Nose Institute, which Francine directs.

Finally, Carol overheard Donald tell Modine that Donald will also propose that BH buy back half of Donald's shares for $200,000.00 so that Donald can buy the land next to BH's corporate headquarters. Donald plans to have a house built on that land for himself and Francine since (in Donald's words) "even though we aren't married, Francine and I are sleeping under the same roof most nights anyway."

What is/are the biggest problem(s) in this fact situation? What duties are being violated? How about corporate governance? Does the BJR come into play? How? What would you advise Carol? Who will win and who will lose?

b) "Roofin McNeel is planning to start a home roofing business in Greenville, North Carolina. He plans to start modestly but hopes to expand his business within 5 (five) years to neighboring towns including Winterville, Wilson, Raleigh, and Goldsboro. Within 10 (ten) years, McNeel would like to expand to neighboring states including Virginia, Maryland, and South Carolina. His inclination is to incorporate in Delaware."

Is McNeel's inclination correct? Why or why not? Are there any other facts you would like/need to know which would shed light on this situation? What would be the advantages of incorporating in Delaware? What about any drawbacks? What would you advise McNeel to put in his corporate charter?

Answer rating: 100% (QA)

a The biggest problem in this fact situation is the potential violation of fiduciary duties by Donald as the CEO and chairperson of BHs Board of Directors Donalds plan to use BHs resources to pursue a ... View the full answer