Case
Starco, stockbrokers registered in New York, in attempting to market 1,000,000 common shares to be issued by Reform Corp, a Canadian corporation, offered 500,000 shares to the MastersonConstruction, a Michigan corporation, at $50 per share. Masterson already owned a substantial number of Reform Corp’s shares and Masterson wanted to make a large, immediate acquisition of additional shares of Reform Corp to have more control over Reform Corp.
Masterson’s articles of incorporation state that five out of its seven directors must be present to make any decision of “major importance”. Michigan law also requires that directors be properly notified of all board meetings. After proper notice was given to the four directors who lived in Michigan, but without notice to the three non-Michigan directors, located in UAE, Singapore, and Canada respectively, a special emergency of the board of directors of Masterson was held. All four Michigan-based directors attended the meeting as was Webster, a non-Michigan director who had found out about it from one of his Michigan-based director friends. The directors who were present unanimously voted to purchase 400,000 additional Reform Corp shares. Immediately following the meeting, Masterson Construction purchased and paid for 400,000 shares of Reform Corp stock from Starco at $50 per share via wire transfer.
Starco then struggles to get other buyers for the remaining 600,000 Reform Corp shares at $50 per share. It is able to sell 100,000 shares at $40 per share to accredited investors in New Jersey and an additional 200,000 shares to accredited investors in Massachusetts for $30 per share. In order not to be embarrassed at not having sold all of the 1,000,000 shares, Starco executives market shares to government officials in Canada by creating an all-expenses-paid trip and tour of Vancouver, a major Canadian tourist destination, for any government official that purchased shares of Reform Corp at $20 per share. With this final method, Starco was able to sell all of the remaining 1,000,000 shares.
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The day after Starco makes the final sale, its CEO, Jim Star, calls Reform Corp headquarters to report the good news and begin the process of transferring the money to Reform Corp minus Starco’s commission and transferring the shares of Reform Corp to the buyers. Every number Jim calls is disconnected. When he walks across the hall to see if his CFO knows a different number, Jim sees that everyone in the office is watching a television news report showing that all of Reform Corp’s top officials, including CEO Leo Ref, have been arrested in Canada for larceny by false pretenses (fraud). The Canadian public prosecutor claims that the fraud has been taking place for at least five years.
1. Is Starco liable to any of the buyers of the 1,000,000 Reform Corp shares? Explain using the IRAC method.
2. The UAE-based director of MastersonConstruction wants to challenge the purchase of Reform Corp shares by Masterson’s board. In which court(s) may she file suit? Explain using the IRAC method.
3. Is Starco guilty of a crime? Explain using the IRAC method.
4. Is Leo Ref liable for any Reform Corp debts that its assets cannot cover? Explain using the IRAC method.
5. Because of the collapse of Reform Corp, Starco cancels the all-expenses-paid trips of some of the Canadian government officials. One official, Rhonda, had already requested unpaid leave from her job and was unable to get it back at such a late date. Is Starco liable to Rhonda? Explain using the IRAC method.
