Cinema Ltd. owned a theatre that it wished to sell. To make the property more attractive to a prospective purchaser, the directors decided to acquire a second theatre in the same city and offer the two properties as a “package deal.” Some inquiries were made as to the purchase price of a second theatre, and a price of $300,000 was determined for the property. A subsidiary company was incorporated to acquire the second theatre, with
the intention that the shares in the subsidiary would be wholly owned by Cinema Ltd. Unfortunately, the lending institutions would only advance Cinema Ltd. $180,000 on its assets. In order to effect the purchase of the second theatre, the three directors of the corporation and a lawyer (who frequently acted for the corporation) each agreed to invest $30,000 to make up the necessary $120,000. The subsidiary corporation issued 300,000 shares valued at $1 each to the parent company and the four investors in return for the $300,000 in cash. It then proceeded with the purchase of the second theatre. Some time later, a purchaser was found for the two theatres, and a purchase agreement completed. The purchaser, however, insisted on acquiring the second theatre by way of a purchase of the shares in the subsidiary company. The share price was determined at $1.25. This netted Cinema Ltd. a profit on the sale of $45,000, and each of the four investors a profit of
$7,500. When details of the sale were revealed to the shareholders, one shareholder demanded that the four individuals pay over their profits to the corporation. When the three directors and the lawyer refused to do so, the shareholders instituted legal proceedings to have the funds paid to the corporation. Discuss the various legal arguments that might be raised in this case by the parties. Indicate how the case might be decided.
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