Reference no: EM131662388

Question: A Question of Ethics. Portland Shellfish Co. processes live shellfish in Maine. As one of the firm's two owners, Frank Wetmore held 300 voting and 150 non-voting shares of the stock. Donna Holden held the other 300 voting shares. Donna's husband, Jeff, managed the company's daily operations, including production, procurement, and sales. The board of directors consisted of Frank and Jeff. In 2001, disagreements arose over the company's management. The Holdens invoked the "Shareholders' Agreement," which provided that "[i]n the event of a deadlock, the directors shall hire an accountant at [MacDonald, Page, Schatz, Fletcher & Co., LLC] to determine the value of the outstanding shares. [E]ach shareholder shall have the right to buy out the other shareholder(s)' interest." MacDonald Page estimated the stock's "fair market value" to be $1.09 million. Donna offered to buy Frank's shares at a price equal to his proportionate share. Frank countered by offering $1.25 million for Donna's shares. Donna rejected Frank's offer and insisted that he sell his shares to her or she would sue. In the face of this threat, Frank sold his shares to Donna for $750,705. Believing the stock to be worth more than twice MacDonald Page's estimate, Frank filed a suit in a federal district court against the accountant.

1 Frank claimed that in valuing the stock, the accountant disregarded "commonly accepted and reliable methods of valuation in favor of less reliable methods." He alleged negligence, among other things. MacDonald Page filed a motion to dismiss the complaint. What are the elements that establish negligence? Which is the most critical element in this case?

2 MacDonald Page evaluated the company's stock by identifying its "fair market value," defined as "[t]he price at which the property would change hands between a willing buyer and a willing seller, neither being under a compulsion to buy or sell and both having reasonable knowledge of relevant facts." The accountant knew that the shareholders would use its estimate to determine the price that one would pay to the other. Under these circumstances, was Frank's injury foreseeable? Explain.

3 What factor might have influenced Frank to sell his shares to Donna even if he thought that MacDonald Page's "fair market value" figure was less than half what it should have been? Does this factor represent an unfair, or unethical, advantage? Why or why not?