Question

After recently finding out about the Triton Cleaning contract, Kristof has brought a shareholder derivative lawsuit against all four directors, individually, seeking a judgment rescinding the Triton Cleaning contract and for damages to Cold Outside, Inc., arising from the approval of the contract by the directors. What should be the result? Discuss.

Answer 1

We need to consider a few aspects in this case. First of all we need to determine if there was a conflict of interest and if it was disclosed to the company. In this situation, we see that since the cleaning service is owned by Elsa, there is a conflict of interest in using Triton as cleaning service for Cold Outside.

Now, next point that we need to consider is if there has been full disclosure of the interest. This means not only the fact that Triton is owned by one of the company insiders but also the financial benefit that they stand to gain. Here the test fails. The contract’s financial details were not exposed to the board or it was not discussed.

Finally, we need to consider if the contract rates mentioned are fair market value or not. Here, the test fails again as the contract value is at double the market price.

Considering these three points, the general understanding will be that the board members of Cold Outside has actively encouraged personal gain through unfair means for one of the company insiders; Elsa. At the least, they should be held liable for negligence in lack of other evidences. However, if evidences support the court may find them liable for financial misdoings.