Business Law
CRITICAL THINKING PROJECT
You decided to start a business and considered two different forms of ownership of that business. In this Critical Thinking Project , you are to evaluate the following factual scenario, identify issues and apply the knowledge you have obtain from your readings and the lectures as to how you would deal with this scenario.
A gentleman by the name of Jack way back in 1935, after the great depression, formed a small manufacturing company with his two brothers Tom and Dick. The company provided product that was in high demand at the time. The company grew. The company was a C Corporation incorporated in Maryland with the 3 brothers initially owning equal shares of stock. Each brother was an initial incorporator and served on the board of directors. It was not a closed corporation. The company did business in Virginia, DC, Maryland and Pennsylvania. Over time Jack was able to buy out the interests of his brothers Tom and Dick. The company was very successful and acquired several parcels of real estate worth approximately 5 million dollars ($5,000,000.00).
When Jack died his son Jack, Jr. took over the ownership of all the stock of the corporation. Jack, Jr. had six children Bill, Steve, Brad, Mary, Jane and Kathy. Jack, Jr. had a Last Will and Testament that provided that each of his six children received an equal share of the stock of the corporation. The three sons had always worked for Jack, Jr. The three daughters were not allowed to be involved in any way with the operation of the business while there father was alive. Upon the death of the father, the eldest son Bill, assumed the role of President and Chairman of the board of directors of the corporation. All six of the children were on the board of directors. Bill, Steve and Brad continued to work at the company and received salaries and benefits. The daughters did not work for the corporation nor did they receive any benefits.
The world has certainly changed since 1935. The market for the products produced and sold by this company no longer commanded the sales they once did. New box store competitors could maintain larger inventories and sell product at a much cheaper price. The strength of this corporation remained the loyal customer base and the personal service that the brothers could give as their grandfather and father had done over the years. Unfortunately the markets changed and customers died off or went to competitors.
There came a time when Steve felt that Bill was not doing all that he could do to manage and improve the plight of the business. Steve convinced his brother Brad and at least two of his of sisters that something had to be done to save the business.
At the annual board of directors meeting, Steve put forth a resolution that Bill be removed as President and CEO of the corporation. A second resolution was put forth by Steve that he be the new President and CEO of the corporation. All stockholders and siblings were present. The vote was 4 to 2 in favor of the resolutions to remove Bill as President and CEO. Once the resolutions were passed a discussion was had by the six siblings. Emotions were high and guilt was assumed by just about everyone. Bill discussed the corporation buying out his 1/6 interest in the corporation. Numbers were discussed as to the value of each share held. There was no appraisal, financial statements or other documentation to give insight as to the value of a share of stock. The long time accountant gave guesses as to what the value might be but qualified what he said as he just did not know. Bill scribbled some numbers on a scrap sheet of paper. There were some notes with a notation indicating the value of between $125 and $150 a share. He then passed around this scrap paper and had his siblings sign on the bottom of the page. There was no statement as to what they were signing. Note no resolution was put forth or voted on as to the valuation of a share of stock.
Although the corporation agreed to let Bill have a job with the company, Bill stopped coming to work immediately after the board of directors meeting. He continued to collect a pay check and was still maintained on the health insurance. He had a company car, expense account and company cell phone. He did not resign as a director. He was not doing any work. After about 30 days, a lawyer contacted the company and demanded that his 10,000 shares be purchased by the corporation within 30 days for the total price of $1.5 million dollars and that Bill be provided the company car, cell phone and be maintained on the health insurance plan for one year. The lawyer maintained that an agreement had been reached when each of the siblings signed the scribbled note provide by Bill at the board of directors meeting referenced above. Was there an agreement? Provide the analysis.
The corporation had real estate and other assets but not $1.5 million in cash. Once the demand for the corporation to buy Bill’s shares of stock at $150 per share was made, the 3 daughter’s husband’s started wondering why they could not cash in and sell their shares of stock as well.
Steven panicked. He had hoped he would have been able to dive in and start to turn the company around. He could not speak with his older brother Bill. Two of the daughters had a weak channel of communication to Bill that was mostly through Bill’s wife. Steve called everyone but Bill and set up a board of directors meeting in 5 days from getting the letter from Bill’s attorney. The 5 directors, without Bill, met and discussed what they were going to do. After decisions were made, Steve decided to contact you for advice. You are not only an exceptional student in your business law class but for this exercise you are an attorney that will advise Steve and the corporation of what has been done right, what was done that was not right and how this situation might be resolved amicably or not with the brother Bill.
The set up of this exercise forces you to pause and THINK. You should be able to critically analyze the facts and issues contained herein. All that you need to do this project is contained in the textbook and good common sense. You should consider various avenues to alternative methods of dispute resolution. You should look at the requirements of the RMBCA (Revised Model Business Corporations Act as discussed in class. What does the corporation do? What do you do with the sisters? Think about what you would do in such a situation. Was there a contract? Why or why not? I am not looking for a treatise.