Chapter 35, Problem 16CP

Little Switzerland Brewing Company was incorporated on January 28. On February 18, Ellison and Oxley were made directors of the company after they purchased some stock. Then on September 25, Ellison and Oxley signed stock subscription agreements to purchase five thousand shares each. Under the agreement, they both issued a note that indicated that they would pay for the stock “at their discretion.” Two years later in March, the board of directors passed a resolution canceling the stock subscription agreements of Ellison and Oxley. The creditors of Little Switzerland brought suit against Ellison and Oxley to recover the money owed under the subscription agreements. Are Ellison and Oxley liable? Why or why not?

Spence was a promoter in the incorporation of a new business. The new corporation had not yet been formed when he bought Huffman’s employment agency to serve as the nucleus of that corporation. Eventually, the corporation was formed, but it never generated enough cash to pay Huffman for the employment agency. Huffman sued Spence, attempting to hold him personally liable for the amount due. Spence claimed that the corporation was liable and that his personal assets were not a proper target of the suit. Was Spence correct? Explain.

Muller, a shareholder of SCM, brought an action against SCM over his unsuccessful negotiations to purchase some of SCM’s assets overseas. He then formed a shareholder committee to challenge the position of SCM’s management in that suit. To conduct a proxy battle for management control at the next election of directors, the committee sought to obtain the list of shareholders who would be eligible to vote. At the time, however, no member of the committee had owned stock in SCM for the six-month period required to gain access to such information. Then Lopez, a former SCM executive and a shareholder for more than one year, joined the committee and demanded to be allowed to inspect the minutes of SCM shareholder proceedings and to gain access to the current shareholder list. His stated reason for making the demand was to solicit proxies in support of those the committee had nominated for positions as directors. Lopez brought this action after SCM rejected this demand. Will Lopez succeed?

The Cutler Company was duly merged into the Stone Company. Yetta, a shareholder of the former Cutler Company, having paid only one-half of her subscription, is now sued by the Stone Company for the balance of the subscription. Yetta, who took no part in the merger proceedings, denies liability on the ground that, inasmuch as the Cutler Company no longer exists, all her rights and obligations in connection with the Cutler Company have been terminated. Explain whether she is correct.

Paul Bunyan is the owner of noncumulative 8 percent preferred stock in the Broadview Corporation, which had no earnings or profits in 2012. In 2013, the corporation had large profits and a surplus from which it might properly have declared dividends. The directors refused to do so, however, instead using the surplus to purchase goods necessary for the corporation’s expanding business. The corporation earned a small profit in 2014. The directors at the end of 2014 declared a 10 percent dividend on the common stock and an 8 percent dividend on the preferred stock without paying preferred dividends for 2013. a. Is Bunyan entitled to dividends for 2012? For 2013? b. Is Bunyan entitled to a dividend of 10 percent rather than 8 percent in 2014?

Pritchard & Baird was a reinsurance broker. A reinsurance broker arranges contracts between insurance companies so that companies that have sold large policies may sell participations in these policies to other companies in order to share the risks. Charles Pritchard, who died in December 2011, controlled Pritchard & Baird for many years. Prior to his death, he brought his two sons, Charles Jr. and William, into the business. The pair assumed an increas ingly dominant role in the affairs of the business during the elder Charles’s later years. Starting in 2008, Charles Jr. and William began to withdraw from the corporate account ever-increasing sums that were designated as “loans” on the balance sheet. These “loans,” however, represented a significant misappropriation of funds belonging to the corporation’s clients. By late 2013, Charles Jr. and William had plunged the corporation into hopeless bankruptcy. A total of $12,333,514.47 in “loans” had accumulated by October of that…

Michael Ross formed a limited partnership with his father-in-law, Robert Zane, to open a seafood restaurant in a mid-western town. Mr. Ross was the general partner and Mr. Zane was a limited partner and invested $100,000. After one year, difficulties in the restaurant’s operation caused business to drop off, and Mr. Ross called Mr. Zane for advice. After hearing of the difficulties and concerned with the security of his investment, Mr. Zane traveled to visit the operation. After observing the operation for two days, the two partners jointly decided to launch a large and expensive television ad campaign to increase lagging sales. Mr. Zane designed the campaign with the help of Brandon Advertising and Video, a local advertising agency specializing in television commercials. Despite an immediate increase in sales, volume continued to decline, and finally, three months after the ad campaign launched, the restaurant closed its doors. Total debts at the time the restaurant closed equaled…

. Mr. John Bedward was a sole proprietor dealing in the manufacture and supply of concrete blocks. He owned a block factory with machinery and equipment which he financed from his personal savings as well as money which he inherited from his late father. After years of operating as a sole proprietor he was encouraged by a business colleague to form a company so that he could get the benefits of limited liability. Mr. Bedward therefore incorporated “Bedward Blocks Ltd” and all the business assets including the machinery and equipment became the property of the newly incorporated business. Another business colleague advised Mr. Bedward that it would be prudent to insure the coonpany’s assets. Mr. Bedward decided to insure the assets but figured that since he was the one who had acquired these assets before the incorporation of the business that it would be best that he insured t in his name, so that he could be paid personally if the assets were damaged. Mr. Bedward, had by now retired…

Zenith Steel Company operates a prosperous business. In January, Zenith’s chief executive officer (CEO) and president, Roe, who is also a member of the board, was voted a $1 million bonus by the board of directors for the valuable services he provided to the company during the previous year. Roe receives an annual salary of $850,000 from the company. Black, Inc., a minority shareholder in Zenith Steel Company, brings an appropriate action to enjoin the company from paying the $1 million bonus. Explain whether Black will succeed in its attempt.