Reference no: EM131402972

DQ

Frolic, Inc. ("Frolic") is a publicly traded corporation with its shares listed on the New York Stock Exchange. In existence since 1972, Frolic was formed under Delaware law for the purpose of "investing in, developing, acquiring, and/or operating all forms of entertainment ventures suitable for children and/or adults." To that end, Frolic currently owns and operates approximately 100 amusement parks, movie theaters, party centers, and similar attractions located in some thirty-five states.

Clyde and Fresno are shareholders with significant investments in Frolic. Both retired, Clyde and Fresno make it a point every year to attend Frolic's annual shareholders' meeting in Chicago, Illinois, where they personally vote their shares. This year, Clyde and Fresno are extremely upset, having learned that the Board of Directors a majority of the shareholders intend to elect has decided to "take Frolic in a new direction of family entertainment." In this regard, Clyde and Fresno have read where the new Board intends to "turn the corporate focus away" from amusement parks and movie theaters and instead focus on "more wholesome recreational ventures" like "petting zoos, pumpkin patches, and apple picking orchards."

As shareholders who have seen the value of their stock skyrocket over the years, Clyde and Fresno are furious about this new business plan, which they see as "ill-advised" given the profit margin Fresno currently maintains on movie theater and amusement park tickets. Despite their efforts and vigorous objections, however, the new Board is elected by an overwhelming majority vote, and Frolic begins acquiring what it deems "wholesome family attractions" across the country.

Sure enough, Clyde and Fresno were right. In a matter of months, the price of their stock begins to plummet as Frolic begins to transition into the petting zoo and apple orchard business. With time on their hands, not wanting to sell their stock and relinquish their "hobby" of being active shareholders, Clyde and Fresno decide instead to sue the new Board of Directors over their decision to take Frolic in a "new direction of family entertainment."

QUESTIONS: Are Clyde and Fresno likely to have much success in their lawsuit challenging the Board's decisions? What will they have to prove? Is there a better course of action for Clyde and Fresno to follow? What would you do if you were in Clyde and Fresno's shoes?