Sally Black is on the board of Best Body Fitness, Inc., which owns fitness clubs

Question

Sally Black is on the board of Best Body Fitness, Inc., which owns fitness clubs in California. Black owns 15 % of the Best Body stock and is also the manager of the tanning division operating in the clubs. After the January financial report showed that Best Body’s tanning division was operating at a substantial net loss, the board of directors, led by Marty Levinson, discussed terminating the classes. Black successfully convinced a majority of the board that the tanning division was necessary as part of its overall marketing strategy. By April, the division’s financial losses had risen. The board hired a business analyst, who conducted surveys and determined that the tanning operations did not significantly increase membership.

A shareholder, Diego Perez, discovered that Black owned stock in TanGlow, Inc., the company from which Best Body purchased its tanning equipment. Perez notified Levinson, who privately reprimanded Black. Shortly thereafter, Black and Manfred Vail, who owned 37% of the Best Body stock and also held shares of TanGlow, voted to replace Levinson on the board of directors, and voted to continue the tanning division operations.

Define Black’s duties owing to Best Body as a shareholder, director, and manager. On what basis might Best Body bring an action against Black, and what defenses might be available to Black? If Best Body did not bring an action against Black, does Perez have a remedy?

Explanation / Answer

Define Black’s duties owing to Best Body as a shareholder, director, and manager.

Let us break down the duties for shareholder, director and manager.

Sally Black as a shareholder is making a financial investment in the corporation. They select directors who run the company. They want to make sure that their investment is secure and they do not lose out on it.

As a director Sally Black needs to make sure that the shareholders money is secure and that the operations take place properly and ethically which results in profit.

Sally Black the manager needs to make sure that the department which is under her performs well and meets the corporate requirement.

On what basis might Best Body bring an action against Black, and what defenses might be available to Black?

The action that can be taken against Black is that she is owning stock in the company from whom they were purchasing tanning equipment. Now Black was in charge of the tanning division and she purchased tanning equipment from TanGlow Inc., where Black owned stock. So to increase sales of TanGlow or to keep the company operational as Black had interest in the company she kept the loss making tanning division of Best Body functional. It is not ethical or it is a case of conflict of interest to have stock in companies from whom you purchase as you will try and do anything to keep those company afloat even if it meant causing harm to the company for which you are working.

Black however, can state that TanGlow Inc., is giving them the best equipment at reasonable prices. The fact that she owns stock has no role in them purchasing from TanGlow Inc.,

If Best Body did not bring an action against Black, does Perez have a remedy?

If Best Body does not do anything Perez can go to an arbitrator or a court of law and state that there are unethical practices being carried out and they need to be looked into.

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