The State Bar of California - July 1995 Essay 5 (Corporations) lyrics

Dan is the president of Exco, a closely held corporation. He is also a member of its board of directors and a 10% shareholder of the corporation. For the past five years, Exco has averaged annual net pre-tax earnings of 50% of its gross sales. During this period, Exco has not paid a dividend or made any other distribution to its shareholders. This was planned so that Exco will have substantial retained earnings to enhance the chances of its sale to another company. With the approval of his fellow directors, Dan has just started negotiations with officers of Morcorp to sell Exco to Morcorp. Dan wants to complete arrangements for the sale of Exco to Morcorp on an expedited basis within the next 45 days, because he believes that a brief, present high demand for Exco's products will increase Exco's sale price. He has neither submitted the plan to Exco's shareholders for approval, nor has he obtained a review of the proposed terms of sale by outside consultants. After the negotiations started, Dan was interviewed by a reporter for The Stock Market Times, a financial newspaper with nationwide circulation, about persistent rumors that Exco is for sale at a price which exceeds the book value of its stock. Dan is accurately quoted in The Stock Market Times as saying "There are no pending discussions regarding the sale or merger of Exco." Polly owns 5% of Exco's shares. Polly is concerned that she has received no dividends on her Exco stock despite Exco's recent earnings. Polly has commenced a lawsuit against Dan and the other Exco board members seeking a decree compelling the defendants to declare and Exco to pay a dividend on its stock. In response to Polly's suit, Dan and the other directors voted to have Exco indemnify them for costs of defense. While her suit is pending, Polly has learned of the recent negotiations for sale of Exco to Morcorp. She has amended her complaint to enjoin the sale and obtain damages from Dan and the other directors for alleged breaches of fiduciary duty in the negotiations for an expedited sale and for Dan's false a**ertion in The Stock Market Times that Exco was not for sale. 1. How should Polly's attempt to compel payment of a dividend be decided? Discuss. 2. Can Exco lawfully provide indemnity to Dan and the other Exco directors for their costs incurred in defending Polly's suit? Discuss. 3. Are Dan and the other Exco directors liable to Polly because of Dan's statement quoted in The Stock Market Times and ifso, to what relief is Polly entitled? Discuss. 4. What responsibilities do Dan and the other Exco directors have in seeking to effect the expedited sale of Exco to Morcorp, and have they fulfilled their responsibilities? Discuss.