Overview of the Situation
Issue –The issue is to determine if the directors of WSI could personally be held liable for the SXI purchase losses assuming that board resolution was passed properly.
Law- It is noteworthy that the board members essentially are acting as agents of the principal (i.e. owners) and are expected to act in a manner that furthers the interest of the shareholders. One of the key duties of the board is the duty to care and thereby take informed decisions. A key aspect is to ensure that the board must not passively rely on an expert and must actively apply their sound business judgment so as to avoid any losses to the company (Clark, 2002). Even though in order to safeguard the directors from any losses, the business judgment rule is present for the same to apply it is critical that directors must not act in a negligent manner. In case of absence of immunity under business judgment rule, the directors could be held personally responsible for breach of duty to care to the shareholders as apparent from the verdict of the Smith v. Van Gorkom 488 A.2d 858 (Murphy, 2002).
Analysis & Conclusion – Based on the given facts, it is apparent that the directors acted in a negligent manner in approving the proposal put forward by Meg regarding the purchase of $ 3 million inventory from SXI. It is apparent that the directors voted in favor of the resolution without any further analysis of Meg’s proposal and in effect acting solely on her advice. Clearly, this amounts to negligence and hence reflects breach of duty to care for which the directors would be held personally liable.
Issue –The key issue is to determine if the resolution with regards to purchase of SXI property has been approved by the WSI board properly or not.
Law- Typically, the requisite quorum requirements for board meeting are highlighted in either the certificate of incorporation of the company or the relevant by-laws. However, in the absence of the same reasonable assumptions ought to be made on the basis of ongoing practices. However, it is imperative that the board meeting should have been called duty by allowing sufficient advance notices to the directors so as to provide them reasonable chance to appear for the meeting. Further, in relation to the voting and passing of the resolution, the CFR (Code for Federal Regulations) may be deployed to provide general guidelines. In accordance with s.600-5, a basic requirement with regards to passing of any resolution at the board is the majority of the directors present at the meeting must approve the resolution being adopted by the board (Cornell, 2015).
Analysis & Conclusion: In the given case, the quorum requirements for WSI are found wanting in the relevant documents. However, at the meeting 12 out of 15 directors are present which comprises to 80% presence and could reasonably be assumed to be a suitable quorum. Also, it is apparent that more than 50% of the directors present at the meeting voted in favor of the resolution as 7 directors were in favor. Hence, in the given scenario, it is fair to conclude that the given resolution was duly approved by the board.
Potential Liability for WSI Directors
Issue: The issue is to determine any potential issues in Joie’s conduct while she was with Meg.
Law: As per Classical Theory of Insider Trading, an insider may be defined as any individual who has any confidential or material private information about the company. It is imperative that such information should not be divulged to outsider. In such cases, it is possible that the person who receives the information might initiate trades based on the same which is referred to as insider trading. In such cases, as per the Supreme Court, the tipper is held responsible unless the tippee is aware of breach of fiduciary duty when even the tippee would be held responsible (Neubauer & Meinhold, 2016).
Analysis & Conclusion: It is apparent the Joe is an insider because of being a buyer and also on account of her relationship with a board member. Clearly, Joie has provided material confidential information and is acting as the tipper. Knowing that Meg is involved with a rival firm, Joie should not have disclosed this information. Further, she also was providing free gifts to Meg which also potentially could lead to creation of conflict of interest. Besides, considering the nature of the information it was highlight likely that it could lead to trades being initiated by Meg and hence Joie would be held liable for leaking the sensitive information.
Issue: The objective is to identify issues with Meg purchase of SXI shares.
Law: Insider trading is an offense punishable by SEC besides federal regulations. The insider trading basically refers to trading shares solely on material non-public information which was not pre-determined before the procession of the information. In such cases, as per the Supreme Court, the tipper is held responsible unless the tippee is aware of breach of fiduciary duty when even the tippee would be held responsible (Conser, et. al. 2011).
Analysis & Conclusion: In the given case, Meg will be held responsible for insider trading despite being the tippee as the information provided by Joie clearly violates the fiduciary duty as it could potentially hurt the business interests of SXI. Further, Meg initiated the trade only after getting the tip from Joie which reflects that this is insider trading and would attract punishment for Meg also.
Issue: To identify any issues arising from the recommendation given by Meg to the board.
Law: An employee tends to act as the agent for the both the management and also the shareholders. As a result, the employees have a duty to care and act in good faith. In accordance with this, advice should be provided regarding a particular course of action only after adequate due diligence so that it could further the interest of the principal (Clark, 2002).
Analysis & Conclusion: In the given case, Meg has given recommendation to the board to buy the stock purely on the basis of the positive reviews extended by her friend Joie who on account of being a buyer of SXI has vested interests. Ideally, even after getting the review, Meg should have conducted a thorough analysis of the clothing line and should have gained review of her team, suppliers and customers before advising the same to the board. Clearly, her conduct violates the agency law and is grossly negligent.
Meg’s Actions and Potential Consequences
If the board finds about trading done by Meg either with respect to SXI or WSI shares, then they should report the same to SEC and other federal agencies as the same can be investigated by these so that all the other players involved behind the trade could also be identified.
Issue: To determine the potential issues with Joie buying the SXI stock before the tentative announcement on August 1.
Law: Initiating trades based on material non-public information amounts to insider trading and is a punishable act in the US with both monetary punishment and imprisonment. Hence, the tippee must not initiate trades on the base of the tip received especially when there is potential breach of fiduciary duty by the tipper as it mounts to wrongdoing on the part of both tipper and tippee (Conser, et. al. 2011).
Analysis & Conclusion: In the given case, tipper is the board member who happens to be boyfriend of Joie but clearly gaining access to such information to an outsider such as Joie would amount to breach of fiduciary duty on the part of the board member who are expected to not disclose material information privately whether knowingly or otherwise. Clearly, this would have legal implications as Joie would be held for insider trading besides his boyfriend who unknowingly acted as the tipper. The issue of insider trading would continue to remain so even if Joie does not exercise the stock options.
2 Issue: To determine whether the repurchase of interest by the partners needs to be executed at the finances value at the time of Dr. Donin’s death or the sale price of the hospital.
Law: With regards to a partnership, the conduct of the partnership and their mutual profit sharing and responsibilities are outlined in the partnership agreement which is the most critical document. Further, every partner tends to act as agent of not only the firm but also the other partners. Besides, the property is held by the partners in common. Additionally, if the partnership agreement does not explicitly outlines any provision, then reasonable assumptions about the same may be made (Farnsworth, 2010).
Analysis & Conclusion: In the given case, a hospital is owned by a partnership firm where Dr. Donin is a partner. As part of the partnership agreement, it is required that the remaining partners need to acquire the interest of Dr. Donin at the fair value and pay the proceeds to his widow. Further, repurchasing the finance of the partnership at the time of payment is to be considered and not that at the time of the death. It is apparent that due to proposed sale, the price of the hospital and consequent partnership would be increased to four times the current value. Further, failure on the part of the partners to disclose the same to the widow clearly indicates wrong intention on the part of the remaining partners who are willfully withholding information which can estimate the fair value of the hospital. Thus, the interest repurchase must be carried out at the sales price of the hospital irrespective of the fact whether the deal has been closed or not. Further, the widow should be informed about the development of this deal so that fair value at the time of settlement can be determined with objectivity.
Recommendations for WSI Board
3 Issue: To determine whether the assets of the partners (both present and past) can be liquidated to recover the outstanding lease payments payable to Lean.
Law: While there are a number of forms of partnership firms possible but for law firms the most common and popular form of partnership is the LLP or Limited Liability Partnership. As the name suggests, the liability of the partners tends to be limited in nature unlike a general partnership where there is huge personal liability attached. In this regards, s. 306c of RUPA i.e. Revised Union Partnership Act is significant. This section states that partnership obligation for a LLP would not extend to the partners and would essentially be limited only to the partnership assets in order to satisfy any outstanding claims (Conser, et. al. 2011).
Analysis & Conclusion: The relevant firm is a law firm and it is a reasonable assumption to make that it would be in LLP form considering the prevalent business structure. On account of being an LLP, the various partners (present or past) would not be personally liable for any outstanding lease payment when the partnership filed for bankruptcy in accordance with s. 306c of RUPA. However, a tacit assumption is that there was no wrong doing on the part of any of the partners in which case personal liability in the form of fines or settling outstanding dues may arise.
4 Issue: To determine if Quitt can be held liable for the loss of business to the former employer.
Law: A firm may has certain trade secrets which need to be protected. One of items covered under the trade secrets is the customer lists. However, for protection under trade secret to be valid certain conditions need to be fulfilled. The trade secret is confidential and reasonable measures are taken by the company to assure that it remains a secret. Further, it also needs to be valuable, difficult to duplicate and known only to certain insiders. In order to protect such secrets, non-disclosure agreements may be put in place. However, the protection tends to exist even in the absence of an agreement as there are implied obligations on the employer whenever there is an employment contract. The absence of an explicit non-disclosure agreement does not imply that protection to trade secrets is not valid (Murphy, 2002).
Analysis & Conclusion: Based on the given facts, it is apparent that Quitt used to work as a high level account manager with Big$. Clearly, the customer list is a trade secret since it is confidential, valuable and only accessible by the employees of the company. Thus, possession of information about the same by Quitt clearly reflects access to a trade secret which he later deploys to generate business thus adversely impacting the legitimate business interests of the former employer. The fact that Quitt memorized the customer details and also did not sign any non-disclosure agreement with the former employer would not provide protection to Quitt as there is implied duty to take care of employer and not to disclose trade secrets which the employee gained access due to the privileged position. Thus, Quitt would be held liable for the loss of revenue to the former employer.
It is known that the revenue generated for each of these would be the same and hence there are various factors which need to be considered in order to arrive at the optimum choice from the available four options. The various factors are outlined below (Conser, et. al. 2011).
- Level of competition in the market – It is imperative to take the amount of competition into consideration coupled with the industry structure. For instance, in case of monopoly there is no competition and hence it would make sense for the company to prescribe a maximum limit of price so as to not amount to unjustified prices that cannot be justified through inputs. Further, in case of intense competition, it makes sense to define the minimum level of prices so that the goods are not sold in losses and healthy development of the industry is ensured.
- Branding of the company- Each company tends to cater to a different segment and thus pricing is to be reflected of the segment targeted. Hence, for a high end brand, it makes sense to define minimum prices so that the products are not labeled as cheap and exclusivity is maintained. For a mass brand, the volumes are significant and a maximum price may be defined as to ensure that prices are able to maximize the sales and hence the profit.
- Profit expectations – This is also a critical aspect which defines the pricing as different models of price determination are used. Further, there is a minimum profit expectation that the company would have and hence would not like the price to fall below the same without any implications for the wholesaler. The channels of sale are also imperative as the retail players should also be given sufficient margins.
- Legal considerations – These are legal issues that are involved with regards to price fixing and the same becomes very pertinent in case of oligopoly and monopoly. This is because in oligopoly, there could be price fixing in the form of cartelization which amounts to violation of law. Further, in monopoly also, the price charged should be kept within limits.
References:
Clark, D. & Ansay, T. (2002) Introduction to the Law of the United States (8th ed.). Washington: Kluwer Law International.
Conser, A. J., Paynich, R., Gingerich, T. & Gingerich , E.T. (2011) Law Enforcement in the United States (3rd ed.). Burlington: Jones & Bartlett Publishers.
Cornell, (2015) Legal information institute: 40 CFE 1600.5- Quorum and voting requirements. Retrieved August 14, 2017, from https://www.law.cornell.edu/cfr/text/40/1600.5
Farnsworth, A.E. (2010) An Introduction to the Legal System of the United States (4th ed.). Oxford: Oxford University Press.
Murphy, D.S. (2002) United States Practice in International Law: 2002-2004 (6th ed.). New York: Cambridge University Press,
Neubauer, W. D. & Meinhold, S. S. (2016) Judicial Process: Law, Courts, and Politics in the United States (7th ed.). Boston: Cengage Learning.
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