This was last year's
of course, I had no idea how to go about answering it..
Essay (50% of Exam Grade)
Dark, Inc., a New York corporation traded on the New York Stock Exchange, manufactures and sells blackout shades for commercial and residential use. These shades eliminate substantially all light passing through a window by the use of a special metal foil that is placed between two layers of fabric. The foil is remarkably opaque to light, resulting in an almost magical “force” that prevents light from entering a room.
Dark also owns 93% of the outstanding shares of Light, Inc., a Delaware corporation whose shares are also traded on the New York Stock Exchange. Light manufactures and sells a new type of light bulb. The bulbs employ a metal alloy – the same metal used as foil in Dark’s blackout shades – as a filament that gives off a remarkably clear, soft, and bright light. The light generated by Light’s bulbs has an almost magical effect or “force” on people’s moods, cheering them even on the most dismal mid-winter day. The remaining 7% of Light’s shares are owned by public shareholders, none of whom owns more than .005% of the corporation. Both Light and Dark operate entirely in California, where all their officers and employees live.
Light owns the patent on the metal alloy (named the “Force,”) used by both Light and Dark. Dark has historically licensed the right to manufacture the alloy from Light for a substantial sum, making up 15% of the manufacturing cost for Dark’s blackout shades (about $5 million per year). Tired of bearing this ongoing cost, Dark decided to purchase the patent for the Force from Light.
The CEO of Dark, D’Art Hvader, called the CEO of Light, O.B. Juan, into his office to negotiate the sale of the Force.
“O.B. Juan,” said Hvader, “I’d like to bring the Force to the Dark side and have Light pay Dark a licensing fee for a change.”
“Sounds O.K. to me, Boss,” replied Juan. “But you’ll need the board’s approval.”
Acting on the advice of Dark’s General Counsel, Sithree Peeyo, Hvader told Juan to set up an independent committee of Light’s board of directors to negotiate the sale.
Light’s board of directors consisted of five board members: O.B. Juan, Light’s CEO and Chairman of the Board and a Vice President of Dark; Luke Oceanrunner, Chief Operating Officer of Light; Yo Da, President of Jedeye College, where Hvader last year donated $5 million towards the construction of the Hvader Library; Hans Alone, a retired Congressman from California, who, while in office, received large political donations from Dark and Hvader; and Leyaor Gana, Hvader’s neighbor and close personal friend.
O.B. Juan duly notified the other directors of a special board meeting. Juan and Oceanrunner attended the meeting in person. Da was in New York during the meeting, but participated by speakerphone. Alone and Gana did not attend the meeting.
At the meeting, Juan proposed that the board form a special committee to negotiate the sale of Light’s Force patent to Dark. He further proposed that this committee consist of Da (chair), Alone, and Gana. Juan voted in favor of the proposal, as did Da, but Oceanrunner voted against the motion. Juan declared that the motion carried. Juan called Alone and Gana afterward and related what had transpired. Each of them told Juan they agreed with the board’s decision to form a special committee.
The special committee met three times over the next month. Da participated in all three meetings by phone. Alone attended all three meetings in person, but Gana missed the three meetings altogether. Da periodically updated Gana by phone and email.
Hvader proposed to the special committee that Dark purchase Light’s Force patent for $1 million, and grant a license to Light to continue manufacturing Force light bulbs for a price of $5 million per year.
At Yo Da’s suggestion, the special committee hired an expert to determine if this constituted a fair price. The committee hired R. Twodeetoo, a certified public accountant with experience in appraising intellectual property. Twodeetoo’s firm had performed accounting work for both Light and Dark.
At the third special committee meeting (attended by Yo Da by phone and Alone in person), Twodeetoo made his report. He valued the Force patent at $5 million, arguing that a single year’s royalty payment from Dark was all Light could count on for sure; the future beyond that was simply too uncertain. Other technologies might emerge to replace the Force alloy by that time, making the patent essentially worthless. Twodeetoo was not specific about what technologies might emerge, nor did any of the directors ask him questions on this subject. Once the new technologies emerged, Twodeetoo asserted, Light would not need to license the Force patent from Dark because Light would instead use the new technologies. In consequence, any licensing fee Light agreed to in order to continue to use the Force patent would be perfectly acceptable, since Light would likely not require the Force alloy for very long.
On the basis of Twodeetoo’s report, Da and Alone (Gana being absent) agreed at the third meeting to authorize Da to negotiate with Hvader for a sale price of $5 million for the Force patent, along with a license for $500,000 per year. Da then met with Hvader, who insisted Dark would not pay more than $3 million, and that the license fee would have to be $750,000/year. The special committee then met for a fourth and final time and, with all three members present, received Da’s report that Hvader would not agree to any price above $3 million, nor any license fee below $750,000. The committee approved the sale of Light’s Force patent at that price, along with a license agreement permitting Light to use Force in its light bulbs in exchange for a licensing fee of $750,000 per year.
The day after the sale was disclosed to the public, a group of Light’s minority shareholders sent Hvader an angry letter, alleging breach of Dark’s fiduciary duties as a majority shareholder to Light’s minority shareholders and threatening to launch a lawsuit.
You represent Dark. (I know it’s less exciting, but it almost certainly pays better!) Draft a memo to Hvader discussing the claim(s) the shareholders will likely bring against Draft and evaluating their chance of success. Hvader is already familiar with derivative actions and their procedural requirements, so please do not pester him with a discussion of whether the shareholders’ claims with be direct or derivative, or what procedural hurdles they might need to overcome if the claim(s) is/are derivative. Please feel free to discuss, though, what state’s law will apply to these claims.