Corporation engaged in manufacturing high priced motorcycles

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Reference no: EM133855919

Question

Sherry owned 40% of the common stock of Yazuki, a corporation engaged in manufacturing high priced motorcycles. Yazuki has 200 shareholders. No shareholder other than Sherry owned more than 5% of Yazuki's stock. Yazuki's most valuable asset has been a large plant where its internationally famous motorcycles are made. Bizco is a corporation, and all of the stock which is owned by Richie Rich ("Rich"). Three other corporations that were recently acquired by Bizco have since become insolvent and failed. Bizco made an offer to Sherry to buy all of Sherry's Yazuki stock for $25 per share. Before she accepted the offer, Sherry received a letter from the former president of one of the three failed companies asserting that the failure had been caused by Rich "looting" the company after Bizco acquired it. When Sherry questioned Rich about this letter, he was told that the writer was a disgruntled former employee who had been fired for incompetence. Based on that response, Sherry conducted no further inquiries. If she had, she would have found that final judgments had been entered in litigation concerning Bizco's control of the three failed companies, holding Bizco and Rich liable for wrongful diversion of assets. Sherry accepted Bizco's offer. At the time of purchase Yazuki's common stock was selling for $10 per share. As part of the stock sale agreement with Bizco, Sherry undertook to ensure that all eight members of Yazuki's board of directors would resign and that Bizco's nine nominees would be elected as the replacement Yazuki directors, before ownership of Sherry's 40% block of Yazuki stock passed to Bizco. The replacement of the Yazuki directors took place as planned.

Thereafter, Yazuki's new board of directors voted unanimously to convert the Yazuki motorcycle plant exclusively to the manufacture of motor-driven bicycles (mopeds), despite recent adverse publicity over an increasing number of moped accidents. This decision was motivated by a desire to provide an outlet for moped parts manufactured by another corporation controlled by Rich. At present Yazuki's earnings from the sale of mopeds are substantially less than its former earnings from the sale of motorcycles. Pat is a 1% shareholder of Yazuki.

By proper procedures, she has instituted a shareholder's derivative action against Sherry and Bizco based on the events described above. On what basis might Pat be entitled to relief?

Reference no: EM133855919

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