Question

An investor carried on the business of buying business firms that were in financial difficulties. Once purchased, he would use his management skills to turn the businesses into profitable operations, or break up the firms by selling their assets. In his search for value, he became interested in the purchase of the shares of Cabinet Manufacturing Ltd. which was in financial difficulties due to a high debt load. He contacted Harris, a business consultant, and requested an assessment of the firm. Harris was also authorized to negotiate the purchase of the shares of the business on the investor’s behalf if his investigation indicated that the purchase of the shares represented a good investment. Harris suggested that Danzil, a consulting engineer, be engaged to assess the condition and value of the manufacturing equipment. Danzil was also to provide some advice on what might be done to improve the profitability of the operation. The investor agreed, and Harris and Danzil proceeded with their assessment of the firm. During the examination, Harris and Danzil realized that the firm represented a good investment if the equity to debt ratio could be altered and some manufacturing processes changed to improve efficiency. The two then established a corporation for the purposes of buying the manufacturing firm. They indicated to the present owners of the manufacturing firm (whom they had met through the investor) that they also represented a corporation that might be interested in the purchase if the investor should decide against the investment. Harris and Danzil provided a written opinion to the investor that the business was worth approximately $3.1 million. They submitted accounts of $5,000 and $5,500 respectively, which the investor promptly paid. A few days later, as a bargaining approach, the investor presented the owners of the manufacturing firm with an offer to purchase the shares for $3million.The offer was prompt1y rejected. Before the investor could submit a new offer, the corporation that Harris and Danzil had incorporated made an offer of $3.1 million for the business. The second offer was accepted, and the shares were transferred to the corporation for the $3.1 million. When the investor discovered that Harris and Danzil were the principal shareholders of the corporation that had made the $3.1 million offer, he brought an action against them for damages. Describe the nature of the investor’s action. Discuss the possible arguments that might be raised by both the plaintiff and the defendants. Identify the main issues and render a decision.

Answer 1