(a) Susanna’s Decision to Sell was Lawful: The general rule for selling significantly all of a corporation’s assets and liabilities is that the Board must first vote to approve the action, and then submit it to a formal shareholder vote. In cases where all shares are owned by a sole shareholder, however, that sole shareholder may unilaterally make the decision to sell without the formal procedures necessary of a non- closely held corporation.
      In this case, Susanna was the sole shareholder of Specialty. Therefore, hers was the only necessary vote and decision to sell the company’s assets; it does not ultimately matter that she made the decision acting in her capacity as Director of Manufacturing. Susanna’s vote to sell Specialty’s assets was lawful.

      (b) Hams’ Board’s Decision to Buy Specialty’s Assets and Aiabilities was Within its Power: In a corporation, unless otherwise agreed to in the charter, there is a separation of ownership and control between shareholders and the Board of Directors. Although the shareholders own the company, the Board unilaterally controls the day-to-day operations of the company. The shareholders do, however, have the right to vote on fundamental changes in the company, including (1) mergers, (2) amendments to the charter, and (3) sale of all assets.
      In this case, the Board voted to buy Specialty without shareholder approval. This was a lawful act within the Board’s power because it is not one of the fundamental changes that the shareholders have a right to vote upon. Although shareholders have a right to vote on sale of all assets, they do not have a right to vote on procurement of another company’s assets, unless it is a formal merger and their interests might be at stake. Therefore, the Board’s vote without shareholder approval was lawful and within its power.

      (c) Individual Liability of the Boardmembers: as explained below, the Board will likely be liable for the $600,000, but not the $200,000.

      (i)The Boardmembers may be held individually liable for the $600,000 FLSA Claims. Although individual boardmembers are not ordinarily liable for their actions as Boardmembers, they may be liable for violating their fiduciary duties to the corporation. At issue in this case is the Duty of Care, which states that a Board must make decisions that are reasonable and in the best interest of the corporation. The business judgment rule provides a presumption of reasonableness of the decision, unless the decision is made with inexcusable negligence, investigation, or wrongdoing. Boardmembers are entitled to rely on reasonable documents, reports, and presentations of other boardmembers or professionals when makes their decisions.
      In this case, the Hams Board is not entitled to the protection of the business judgment rule. Their decision to buy Specialty’s assets and liabilities was done with inexcusable lack of investigation: the Board did not even attempt to make an investigation, and instead relied wholeheartedly on Hank’s assurance that Susanna’s books were clean, even though an actual investigation would have revealed the FLSA claim. Therefore, a court would likely conclude that the Ham Board breached its duty of care in its decision to buy Specialty without any investigation, and the Boardmembers will likely be individually liable for the $600,000.

      (ii) The Boardmembers likely will not be individually liable for the $200,000 loan to Hank. The rule for breach of the duty of care for business decisions is stated above. Moreover, Boards must also tread carefully in situations involving a conflict of interest business transaction between the company and its officers or directors. Decisions pertaining to a conflict of interest business transaction are ordinarily impermissible, but may be ratified upon a favorable vote of disinterested boardmembers, or vote of disinterested shareholders.
      In this case, there are no facts indicating the the Board made this decision wrongly or negligently, or without investigation, so the Board is most likely entitled to the presumption of the business judgment rule with respect to the duty of care. Additionally, although this was a potential conflict of interest transaction between Hank, a Boardmember and CEO, and the company, the decision was ratified by a unanimous number of disinterested Boardmembers. There is no indication that Hank or any other interested director participated in the vote. Therefore, a court would likely conclude that the Board did not breach any fiduciary duty in voting to give Hank the loan, and they therefore will not be personally liable for the $200,000 loss.

I.      Whether Susanna's decision, acting solely as Director of Manufacturing, to sell Specialty to Hams was lawful.

      Susanna's decision was lawful in this case, but only because she was the only shareholder.

      The sale of all or almost all of the assets of a company is considered a fundamental change, and therefore, the shareholders have the right to vote on whether the action should be taken. Typically, a Director cannot elect to sell a company without shareholder approval. However, in the case where the only shareholder is also a director, no shareholder approval or formailties are needed aside from the consent of that one shareholder to enact fundamental changes.

      Susanna is the sole shareholder and Director of Manufacturing for Specialty. While her role as director would usually not authorize her to unalaterally decide to sell the company, this action was permissible because she is also the only shareholder. Because she is just one individual, the formalities of a formal vote may be dispenced.

Susanna's decision was lawful in this case, but only because she is also the only shareholder.

II.       Whether the Board of Hams acted within its power in purchasing the assets and assuming the liabilities of Specialty without Shareholder approval.

      The Board of Hams did act within its power in purchasing the assets and assuming the liabilities of Specialty without shareholder approval.

      A Board of Directors has the power to purchase assets and assume liabilities without shareholder approval for those actions. Decisions such as these are made by majority vote of the Board of Directors, or as the Articles of Incorporation may otherwise describe.

      Here, the Board decided by majority vote to purchase the assets and assume the liabilities of Specialty by unanimous vote of the members of the Board.

      The Board of Hams did act within its power in purchasing the assets and assuming the liabilities of Specialty without shareholder approval.

III.       Whether the Board members should be held individually liable for the following debts.

      Board members are typically protected from individual liability for decisions they make as board members, acting on behalf of the corporation. However, a board member is not protected for liability that arises in the case that they commit intentional torts, fraud, or breach a duty. Board members are held to the duty to use their best business judgment. They are protected from decisions that do not turn out for the best so long as they acted in their best business judgment, or as a business person in their situation would.

A. The money paid on the FLSA claims

      The Board members will be individually liable for the money paid on the FLSA claims.

      The members of the Board were acting on behalf of the corporation to purchase assets and assume liabilities. The fact that Susanna, the seller of an asset that turned out to be a bad investment, is Hank's best friend, should raise suspicion of fraud or wrongdoing. However, Hank did not act alone in purchasing Specialty. Rather, after a discussion of the prose and cons of the purchase, the entire Board voted unanimously. Because of the discussion and the vote of un-intrested or un-biased board members, there is likely no reason to believe that fraud or wrongdoing occured despite Hank's close relationship with Susanna.

      The fact that the members of the board asked only cursory questions about potential liabilities of Specialty, rahter than conducting an actual investigation into the company's finances is more problematic. Especially considering that an investigation would have revealed the potential liability for FLSA claims. Whether they are liable for this failure hinges on whether they used their best business judgment, or whether a reasonable businessperson member would have acted with better knowledge or care in this situation. An investigation into the finances and liabilities of a company a corporation plans to purchase is a step a reasonable business person would have taken prior to assuming the debt, and the Board members likely breached their duty in failing to do the investigation prior to assuming the liabilities of Specialty.

Therefore, the Board members may be individually liable for the money paid on the FLSA claims.

B. the loan to Hank

      Board members will not be individually liable for the loan to Hank.

      There is no specific prohibition against the members of a board agreeing to loan corporate money to a member of the board, as long as there is no self-dealing. When the majority needed to take the action is comprised of members of the board who have no personal interest in the loan, no suspicion of self-dealing arises. The best business judgment rule, described above, also applies.

Here, the board of directors voted unanimously, so there were sufficent non-interested board members who voted for the action to prohibit concern of self-dealing, despite the fact that the loan was to Hank, a fellow boardmember. The board could have required that Hank purchase insurance on the plane as a condition of their providing the loan. However, fatal airplane crashes are uncommon, and the board members had no reason to predict that this might occur, and interfere with their ability to repay the loan. So giving Hank the loan without this condition cannot be said to fall below the best business judgment standard, as the board members had no reason to believe that Hank would not be able to repay the loan.

Therefore, Board members should not be personally liable for the money loaned to Hank.