The Case of the Director Who Wore Too Many Hats

Ruby is one of 5 directors of Opulent Investments Corporation. She is also a majority shareholder holding both common and preferred stock. Her stock with voting rights amounts to 47% of all stock issued with voting rights.

Ruby buys, for $1,500, an option to purchase a tract of real estate called Blackacre, which is next to Opulents home office, for $50,000. Ruby forms a new corporation, Commercial Property, Inc., to hold the option. She then has Commercial Property bought Blackacre. As a director of Opulent, Ruby orders Opulent to authorize its real estate agent to negotiate the purchase of the land from Commercial Property for $100,000. After a successful negotiation for the purchase of Blackacre for $100,000, Ruby has Commercial Property sell it to Opulent, and loan the money to Opulent for the purchase price at a 5% interest rate which is 2% below the market rate. James, a minority shareholder in Opulent, formally complains to Opulents board which takes no action.

The Trial

James files a suit against Ruby on Opulents behalf seeking to cancel the sale. Ruby asks the Court to dismiss the lawsuit as James has no standing to bring the lawsuit.

Arguments At Trial

Rubys attorney argues that Blackacre is necessary for Opulent as it will allow them to expand their offices and production plant thus increasing the net worth and potential profits to the shareholders. Further, the Board of Directors of Opulent authorized the purchase which appeared to be under the Articles of Incorporation.

James attorney argues that the purchase of Blackacre should have been put to a vote of the shareholders of Opulent as required by Opulents Bylaws. Opulents Board of Directors failed in its duty to make sure this sale was in the corporations best interest.

Questions to Decide

1. What kind of suit will James file and what is its basis?
2. Who are the Plaintiffs and who are the Defendants? Why?
3. What are the defenses, if any, of Opulent or Ruby?
4. Who will win the case and why?

Please give references from the book The-legal-environment-and-business-law-v1.0