ANSWERS TO PROBLEMS
1. The stock in Hotel Management, Inc., a hotel management corporation, was
divided equally between two families. For several years the two families had been
unable to agree on or cooperate in the management of the corporation. As a
result, no meeting of shareholders or directors had been held for five years. There
had been no withdrawal of profits for five years, and last year the hotel operated
at a loss. Although the corporation was not insolvent, such a state was imminent
because the business was poorly managed and its properties were in need of
repair. As a result, the owners of half the stock brought an action in equity for
dissolution of the corporation. Will they succeed? Explain.
2. (a) When may a corporation sell, lease, exchange, mortgage, or pledge all or
substantially all of its assets in the usual and regular course of its business?
(b) When may a corporaon sell, lease, exchange, mortgage, or pledge all or
substanally all of its assets other than in the usual and regular course of its business?
(c) What are the rights of a shareholder who dissents from a proposed sale or exchange
of all or substanally all of the assets of a corporaon other than in the usual and
regular course of its business?
Answer: Combinations: Purchase or Lease of All or Substantially All of the Assets.
(a)When the board of directors authorizes such a sale, lease, exchange, mortgage, or pledge
of all of the assets in the usual and regular course of the business. Section 12.01, Revised
Act.
3. Cutler Company was duly merged into Stone Company. Yetta, a shareholder of the
former Cutler Company, having paid only one-half of her subscription, is now
sued by 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
Cutler Company no longer exists, all her rights and obligations in connection
with Cutler Company have been terminated. Explain whether she is correct.
4. Smith, while in the course of his employment with the Bee Corporation,
negligently ran the company’s truck into Williams, injuring him severely.
Subsequently, the Bee Corporation and the Sea Corporation consolidated,
forming the SeaBee Corporation. Williams filed suit against the SeaBee
Corporation for damages, and the SeaBee Corporation argued the defense that
the injuries Williams sustained were not caused by any of SeaBee’s employees,
that SeaBee was not even in existence at the time of the injury, and that the
SeaBee Corporation was therefore not liable. What decision?
5. The Johnson Company, a corporation organized under the laws of State X, after
proper authorization by the shareholders, sold its entire assets to the Samson
Company, also a State X corporation. Ellen, an unpaid creditor of the Johnson
Company, sues the Samson Company on her claim. Is Sampson liable? Explain.
Answer: Combinations: Purchase of Assets/Shares. If Johnson Company received from
Samson Company cash or other consideration (not shares of stock of Samson Company)
6. Zenith Steel Company operates a prosperous business. The board of directors
voted to spend $20 million of the company’s surplus funds to purchase a majority
of the stock of two other companies—Green Insurance Company and Blue Trust
Company. Green Insurance Company is a thriving business whose stock is an
excellent investment at the price at which it will be sold to Zenith Steel Company.
The principal reasons for Zenith’s purchase of Green Insurance stock are to invest
surplus funds and to diversify its business. Blue Trust Company owns a
controlling interest in Zenith Steel Company. The Blue Trust Company is subject
to special governmental controls. The main purpose for Zenith’s purchase of Blue
Trust Company stock is to enable the present management and directors of Zenith
Steel Company to continue their management of the company. Jones, a minority
shareholder in Zenith Steel Company, brings an appropriate action to enjoin the
purchase by Zenith Steel Company of the stock of either Green Insurance
Company or of Blue Trust Company. What is the decision as to each purchase?
Answer: Purchase of Shares.
(a)Decision for Zenith Steel Company against Jones denying injunction against purchase of
the stock of Green Insurance Company. A corporation may purchase a majority of the
stock of another corporation, provided the purchase is made in good faith, and for a
7. Mildred, Deborah, and Bob each own one-third of the stock of Nova Corporation.
On Friday, Mildred received an offer to merge Nova into Buyer Corporation.
Mildred, who agreed to call a shareholders’ meeting to discuss the offer on the
following Tuesday, telephoned Deborah and Bob and informed them of the offer
and the scheduled meeting. Deborah agreed to attend. Bob was unable to attend
because he was leaving on a trip on Saturday and asked if the three of them could
meet Friday night to discuss the offer. Mildred and Deborah agreed. The three
shareholders met informally Friday night and agreed to accept the offer only if
they received preferred stock of Buyer Corporation for their shares. Bob then left
on his trip. On Tuesday, at the time and place appointed by Mildred, Mildred and
Deborah convened the shareholders’ meeting. After discussion, they concluded
that the preferred stock payment limitation was unwise and passed a formal
resolution to accept Buyer Corporation’s offer without any such condition. Bob
files suit to enjoin Mildred, Deborah, and the Nova Corporation from
implementing this resolution. Explain whether the injunction should be issued.
Answer: Dissenting Shareholders. Bob can probably have the resolution set aside due to
failure to provide him with adequate notice of the shareholders’ meeting at which it was
passed.
(a) The first question is whether proper notice of the shareholders’ meeting was given.
Shareholders are entitled to receive a lawful and authentic notice of any shareholders’
8. Tretter alleged that his exposure over the years to asbestos products manufactured
by Philip Carey Manufacturing Corporation caused him to contract asbestosis.
Tretter brought an action against Rapid American Corporation, which was the
surviving corporation of a merger between Philip Carey and Rapid American.
Rapid American denied liability, claiming that immediately after the merger it had
transferred its asbestos operations to a newly formed subsidiary corporation. Can
Rapid avoid liability by such transfer? Explain.
Answer: Merger. No. Judgment for Tretter. If the parties effect the transfer of a corporate
enterprise through a merger, consolidation, or sale of stock, the transferee assumes its
predecessor’s liabilities, including product liability claims. Therefore, when Rapid
9. All Steel Pipe and Tube is a closely held corporation engaged in the business of
selling steel pipes and tubes. Leo and Scott Callier are its two equal shareholders.
Scott is Leo’s uncle. Leo is one of the company’s two directors and is president of
the corporation. Scott is the general manager. Scott’s father and Leo’s
grandfather, Felix, is the other director. Over the years, Scott and Leo have had
differences of opinion about various aspects of the operation of the business.
However, despite the deterioration of their relationship, the company has
flourished. When negotiations aimed at the redemption of Scott’s shares by Leo
began, the parties could not reach an agreement. The discussion then turned to
voluntary dissolution and liquidation of the corporation, but still no agreement
could be reached. Finally, Leo fired Scott and began to wind down All Steel’s
business and to form a new corporation, Callier Steel Pipe and Tube. Leo then
brought an action seeking a dissolution and liquidation of All Steel. Should the
court order dissolution? Explain.
Answer: Dissolution. No, the court should not order dissolution. Corporations are creatures
of statute and, therefore, can be dissolved only according to the applicable statute.
Corporate dissolution is a drastic remedy, and it must not be lightly invoked. Its grant
10. The shareholders of Endicott Johnson who had dissented from a proposed merger
of Endicott with McDonough Corporation brought a proceeding to fix the fair
value of their stock. At issue was the proper weight to be given the market price of
the stock in fixing its fair value. The shareholders argued that the market value
should not be considered because McDonough controlled 70 percent of Endicott’s
stock and the stock had been delisted from the New York Stock Exchange. Are the
shareholders correct?
Answer: Dissenting Shareholders. Yes. Judgment for the shareholders. Shareholders who
dissent from an impending merger are entitled to be paid the “fair value” of their stock.
11. Ray fell from a defective ladder while working for his employer. Ray brought suit
in strict tort liability against the Alad Corporation (Alad II), which neither manufactured
nor sold the ladder to Ray’s employer. Prior to the accident, Alad II succeeded to the
business of the ladder’s manufacturer, the now-dissolved “Alad Corporation” (Alad I),
through a purchase of Alad I’s assets for an adequate cash consideration. Alad II
acquired Alad I‘s plant, equipment, inventory, trade name, and goodwill, and continued
to manufacture the same line of ladders under the “Alad” name, using the same
equipment, designs, and personnel. In addition, Alad II solicited through the same sales
representatives with no outward indication of any change in the ownership of the
business. The parties had no agreement, however, concerning Alad II’s assumption of
Alad I’s tort liabilities. Decision?
Answer: Purchase of Assets. Judgment for Ray. Generally, a purchaser does not assume a
seller’s liabilities unless: (1) there is an express or implied agreement of such
assumption; (2) the transaction is a consolidation or merger; (3) the purchasing
12. Kemp & Beatley was a company incorporated under the laws of New York. Eight
shareholders held the corporation’s outstanding 1,500 shares of stock. Petitioners Dissin
and Gardstein together owned 20.33 percent of the stock, and each had been a longtime
employee of the corporation. Kemp & Beatley had a longstanding practice of awarding
compensation bonuses based upon stock ownership. However, when the policy was
changed in 2011 to compensation based on service to the corporation, not on stock
ownership, Dissin resigned. Gardstein was terminated in 2012. They commenced suit in
2013, seeking involuntary dissolution of the corporation and alleging that the
corporation’s board of directors had acted in a “fraudulent and oppressive” manner
toward them, rendering their stock virtually worthless and frustrating their “reasonable
expectations” regarding this business venture. What result? Explain.
Answer: Involuntary Judicial Dissolution. Judgment for Petitioners Dissin and Gardstein.
Oppressive action within the meaning of the statute exists when the conduct of the
13. In early 1984, Royal Dutch Petroleum Company (Royal Dutch), through various
subsidiaries, controlled approximately 70 percent of the outstanding common
shares of Shell Oil Co. (Shell). On January 24, 1984, Royal Dutch announced its
intention to merge Shell into SPNV Holdings, Inc. (Holdings), which is now Shell
Petroleum, Inc., by offering the minority shareholders $55 per share. Shell’s
board of directors, however, rejected the offer as inadequate. Royal Dutch then
withdrew the merger proposal and initiated a tender offer at $58 per share. As a
result of the tender offer, Holdings’ ownership interest increased to 94.6 percent of
Shell’s outstanding stock. Holdings then initiated a short-form merger. Under the
terms of the merger, Shell’s minority stockholders were to receive $58 per share.
However, if before July 1, 1985, a shareholder waived his right to seek an
appraisal, he would receive an extra $2 per share. In conjunction with the
short-form merger, Holdings distributed several documents to the minority,
including a document entitled “Certain Information About Shell” (CIAS).
The CIAS included a table of discounted future net cash “ows (DCF) for Shell’s oil and gas
reserves. However, due to a computer programming error, the DCF failed to account for
the cash “ows from approximately 295 million barrel equivalents of U.S. proved oil and
gas reserves. Shell’s failure to include the reserves in its calculaons resulted in an
understatement of its discounted future net cash “ows of approximately $993 million to
$1.1 billion or $3.00 to $3.45 per share. Moreover, as a result of the error, Shell stated in
the CIAS that there had been a slight decline in the value of its oil and gas reserves from
1984 to 1985. When properly calculated, the value of the reserves had actually
increased over that me period.
Shell’s minority shareholders sued in the Court of Chancery, asserng that the error in
the DCF along with other alleged disclosure violaons constuted a breach of Holdings’
5duciary “duty of candor.” Was the error in the DCF material and misleading?
Answer: Minority Shareholders. Yes, the error was material and misleading. The question
whether the disclosures to Shell’s minority shareholders were adequate is a mixed one of
law and fact, requiring an assessment of the inferences a reasonable shareholder would
ANSWERS TO “TAKING SIDES” PROBLEMS
Wilcox, chief executive officer and chairman of the board of directors, owned 60 percent of
the shares of Sterling Corporation. When the market price of Sterling’s shares was $22
per share, Wilcox sold all of his shares in Sterling to Conrad for $29 per share. The
minority shareholders of Sterling brought suit against Wilcox demanding a pro rata share
of the amount Wilcox received in excess of the market price.
(a) What are the arguments to support the minority shareholders’ claim for a pro rata
share of the amount Wilcox received in excess of the market price?
(b) What are the arguments to reject the minority shareholders’ claim for a pro rata
share of the amount Wilcox received in excess of the market price?
(c) Which side should prevail?
14.
ANSWER:
(a) The minority shareholders would argue that the amount Wilcox received in excess of
the market price represents the value of control over the corporation. Since control is
a corporate asset, it is owned proportionately by all of the shareholders who are