Brothers P, J, and their 3rd partner, G, have launched their first business and have opened a storefront in LA. They have incorporated their business as FIS, Inc. and have run the corporation for almost 2 years now. They have made more than $200,000 in net profit in year one and more than $350,000 in net profit in year two.

In the beginning days of the company, this business was a side job for all 3 individuals. As their business has grown, however, they have realized that their business could be huge, thanks to Paul's sage business acumen, John's innovative surfwear technology, and George's excellent experience and skills in sales.

1.P, J, and G have an opportunity to open up a second storefront in San Diego, as a prime location has recently opened up. The dilemma is that their corporation does not have the capital to set up the store and pay rent, as all their cash is tied up in inventory. L, G's sister, has approached them about the possibility of becoming a fourth investor. J also has a good relationship with his local credit union, the SSCUS (for a possible loan).

2.What considerations should P, J, and G weigh in order to decide whether to take on another equity investor, take out debt, do neither, or do both? and why?

G has indicated he would like to aggressively expand and open up a second storefront in San Diego and a third store front in Santa Monica at the same time. J has concerns and thinks that the focus should solely be on slowly expanding the LA location. Paul does not have particularly strong views, but this disagreement between G and J has become more intense in recent years.

The corporation is about to hold its annual shareholders meeting with P, J, and G as the sole shareholders. They are also the only three directors of the corporation, though they are also contemplating adding two additional directors: R, who is one of J's best friends and a software engineer who has helped the corporation with its website; and D, who is a local surfer, is an avid social media advocate for the corporation, and has close ties to the surf community in Santa Monica. P has serious reservations about adding any new directors at this time.

3.What considerations do the shareholders need to weigh at the shareholders meeting? What types of votes do they need to hold? What documentation do they need to prepare to thoroughly document their decision? What steps do they need to take to change the number of board members on the board?

Right after the shareholders' meeting, C, a wealthy angel investor and part-time surfer, approaches P about investing $1 million in the corporation on the condition that he receive a board seat. He has no prior personal or professional connections with P, J, or G, but G is excited about this potential infusion of capital and is thinking about giving up his board seat and having C take his place.

4.What questions should they ask C in order to determine whether he would be an appropriate fit for the Board of Directors? Should G resign from the board? If he does want to resign, what steps would need to be taken?

Three years later, P has returned to you with more questions and concerns. Now, the shareholders of the corporation consist of P, J, G, R, D, and C. P, J, and G each own 1/4th of the corporation and the remaining 1/4th of the corporation was equally divided among R, D, and C. All six also sit on the board; P is the CEO, J is the COO, and G is the CMO. By this time, the corporation has turned net profit of $3 million in the most recent fiscal year, and it is poised to double its profit in the upcoming year.

The corporation caught the eye of Surfs Up, Inc., a competitor, who approached G and offered $20 per share, valuing the corporation at $20 million. That same month, J's sister A, a major shareholder in a large retail conglomerate, The Clothes Conglomerate, indicated that The Clothes Conglomerate would like to offer $25 per share, valuing the corporation at $25 million. Andrea texted to John that the Clothes Conglomerate did not trust in P's leadership, however, and that it would be "their little secret" that the Clothes Conglomerate would terminate Pas CEO after the acquisition and replace him with J, to whom they would give a $1 million bonus if the transaction was successful.

Both G and J took their respective offers to the Board of Directors. The Board of Directors hired a local financial analyst to weigh the competing offers. In the meantime, Surfs Up, Inc. increased its offer to $30 per share, and The Clothes Conglomerate promptly matched the offer. The financial analyst studied the question for a week 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. D and C expressed that they were "extremely uncomfortable" with not soliciting other offers, as they believed that the corporation could be worth as much as $50 per share.

During a contentious debate over which offer was better, J (who knew G preferred The Clothes Conglomerate already) pulled R aside and indicated that if he voted in favor of The Clothes Conglomerate, he would allow R to live in his large house in Malibu rent free for a year. J 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, J, G and R (voting 58.3% of the shares) voted to approve of moving forward with the Clothes Conglomerate acquisition, while P, D and C (voting 41.7% of the shares) voted in favor of moving forward with Surfs Up, Inc.

P, D and C initiate a shareholder derivative lawsuit.

5. What issues do you think existing with respect to fiduciaries duties? What do you think the majority shareholders would argue, and what do you think the minority shareholders who initiated the derivate lawsuit would argue? Which party do you think will ultimately prevail? If the lawsuit is successful, what should the company now do?