Arnold is a director and the majority shareholder of Beta Investments Corporatio

Question

Arnold is a director and the majority shareholder of Beta Investments Corporation. Arnold buys, for $1,500, an option to purchase a tract of real estate for $50,000. Arnold forms a new corporation, Commercial Property, Inc., to hold the option. As the majority shareholder, and thus controlling director, of Beta, Arnold orders Beta to authorize the purchase of the land from Commercial Property for $100,000. Arnold then has Commercial Property buy the land and sell it to Beta, and loan the money to Beta for the purchase at a 10 percent interest rate. Diana, a minority shareholder in Beta, complains to Beta’s board, which takes no action. Diana files a suit against Arnold on Beta’s behalf. Will Diana prevail? Why or why not?

Explanation / Answer

The will prevail. This is because the director ordered to purchase the land at higher price and he will pocket the benefit of the deal. This deal will have negative impact on the firm.

Ms. D notified the board of directors of the firm and they refused to take any action. If she told about the wrong in this transaction and the board of directors did not take any action to safeguard the interest of shareholders then Mr. A is at fault. This is because the director is a fiduciary which shall be loyal to the firm, act in good faith, and make full disclosure in any transaction. Here, director attempt to made undisclosed profit with the firm and breached his duty to the firm.

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