Question 6
Stage, Inc. (“SI”) is a properly formed close corporation. SI's Articles of Incorporation
include the following provision: “SI is formed for the sole purpose of operating comedy
clubs.” SI has a three-member Board of Directors, consisting of Al, Betty, and Charlie,
none of whom is a shareholder.
Some time ago, Charlie persuaded Al and Betty that SI should expand into a new
business direction, real estate development. After heated discussions, the board
approved and entered into a contract with Great Properties (“GP”), a construction
company, committing substantial SI capital to the construction of a new shopping mall,
which was set to break ground shortly.
Although Charlie remained enthusiastic, Al and Betty changed their minds about the
decision to expand beyond SI's usual business. SI was struggling financially to keep its
comedy clubs open. Al and Betty decided to avoid SI's contract with GP in order to
devote all of SI's capital to its comedy clubs.
Last month, GP approached Charlie about another real estate project under
development. GP was building a smaller mall on the other side of town and was
seeking investors. Aware that Al and Betty were unhappy about the earlier contract with
GP, Charlie believed that S's board would not approve any further investments in real
estate. As a result, Charlie decided to invest his own money in the endeavor without
mentioning the project to anyone at SI.
Meanwhile, Al and Betty have come to suspect that Charlie has been skimming
corporate funds for his personal activities, and, although they have little proof, they want
to oust Charlie as a director.
1. Under what theory or theories might SI attempt to avoid its contractual obligation to
GP and what is the likelihood of success? Discuss.
2. Has Charlie violated any duties owed to SI as to the smaller mall? Discuss.
3. Under what theory or theories might Al and Betty attempt to oust Charlie from the
Board of Directors and what is the likelihood of success? Discuss.
