Question #4(a) The board of directors of Bicycle City Corporation were approache
ID: 338893 • Letter: Q
Question
Question #4(a) The board of directors of Bicycle City Corporation were approached by Bikes R Us for a proposed acquisition of all of Bicycle City Corporation’s assets. Knowing that the annual shareholders meeting was still eight months away and not wanting to wait until then, the board of directors went ahead and approved the acquisition and instructed the CEO to sign a Purchase Agreement. Is Bicycle City Corporation’s execution of the Purchase Agreement for the sale of all of its assets valid? Why or why not? (5 pts) Question #4(b) Assuming the execution was valid under Question #4(a), we later discover that Alex Hernandez, one of the directors of Bicycle City Corporation is also a shareholder of Bikes R Us. Alex was one of the most vocal supporters of executing the deal with Bikes R Us but none of the other directors knew about Alex’s relationship with Bikes R Us when they decided to approve the acquisition. Can Bicycle City Corporation bring a claim against Alex for approving the deal with Bikes R Us? Explain why or why not, and if yes, please explain which claim? (5 pts) Question #4(c) If Alex had told the other directors about his relationship with Bikes R Us prior to the board’s approval of the transaction between Bicycle City Corporation and Bikes R Us, would Bicycle City Corporation have a claim against Alex? Why or why not? (5 pts)
Explanation / Answer
4a) The purchase agreement does not have an approval from shareholders and hence it may not be valid. After the board approves the acquisition, the shareholders need to vote on approval in a special general meeting to pass the order of acquisition.
4b) Yes, Bicycle City Corporation bring a claim against Alex for approving the deal with Bikes R Us. As a director, your duty of loyalty requires that there is no conflict between your duty and self-interest. In this case, it is possible that post-acquisition share prices go up, hence a clear conflict of interest. Further, as per duty of disclosure, Alex should have disclosed material information such as this which puts him in a conflict of interest. Here, the claim by Bicycle City corp could be "breach of fiduciary duties" by Alex.
4c) No, the company may not have a claim against Alex. Alex did a full disclosure and other board of directors should have considered his dealings in this transaction to be done at arm's length. There was a clear conflict of interests and board of directors could have appointed an independent committee to help with the transaction.