Question

IRAC: Ariel, Sebastian, Flounder and Eric each own 20% of the outstanding shares of the common stock of Ocean, Inc., a profitable retailer of sea-life themed hair accessories,and they are the corporation’s four directors. Ariel and Sebastian are Ocean’s officers. The remaining 20% of the outstanding shares are divided among 10 individuals, including Guppy, who is a 5 % shareholder. Ocean, Inc., has only one class of shares.At a board meeting six months ago, Ariel announced that she had negotiated a contract to have Ocean’s stores cleaned nightly by Triton Cleaning Services, a partnership owned by Ariel and Sebastian. Ariel disclosed that she and Sebastian owned Triton Cleaning, but neither she nor Sebastian disclosed that the price Triton Cleaning would charge Ocean under the contract would be double the market rate. The board approved the contract by unanimous vote of all directors. Triton Cleaning began cleaning services and has been receiving payment under the contract. After recently finding out about the Triton Cleaning contract, Guppy has brought a shareholder derivative lawsuit against all four directors, individually, seeking a judgment rescinding the Triton Cleaning contract and for damages to Ocean, Inc., arising from the approval of the contract by the directors. What should be the result? Discuss.

Answer 1

It is a simple case of conflicts of interest at the board level and breach of contract & negotiation policy. It is unethical to give contract without any disclosure & discussion to a company which is owned by some of BODs. It affects the credibility of board, the company and their financial systems. Ariel and Sebastian should declare before the board about their conflict of interest with this contract. Board members are required to use ethical and appropriate judgment to make seemingly correct choices when conflicts arise. The directors should be act in favor of shareholders. Paying double amount is the loss of company and shareholders and the cost was also not shared with the BOD. Ariel and Sebastian use their influence in the approval of the contract. The offer from other similar companies should also have invited and discussed in BOD meeting. In this case, the entire board should take responsibility of this negligence and proper action should be taken against Ariel and Sebastian by the company.