Major formed the Dix Corporation for the purpose of operating a business to repair, install, and sell appliances. Major is the president of the board of directors of Dix.
•Pine, one of Dix’s largest creditors, has asserted that Major is personally liable for all of the debts of Dix because he instructed several of Dix’s customers to make checks payable to the order of Major which were deposited in his individual account and not recorded on the corporate books.
•Dix’s board of directors unanimously voted to have Dix reacquire 10,000 shares of its common stock. In determining whether to reacquire the shares, the board of directors relied on reports and financial statements that were negligently prepared by Dix’s internal accounting department under the supervision of the treasurer and reviewed by its independent accountants. The reports and financial statements indicated that Dix was solvent and there were sufficient funds to reacquire the shares. Subsequently, it was discovered that Dix had become insolvent and had liquidity problems and losses. Shareholders are attempting to hold the board members personally liable because they voted to reacquire the shares while Dix was insolvent.
Discuss the above situations, including the applicable rule of law, appropriate terminology, and the most probable outcome of each situation.
It would be dependent on state law, but in general, in a) Major is in for a rough time on this, and in trial probably would be found partially responsible, but in a criminal proceeding he would be subject to fraud by misappropriation in most jurisdictions. In b)the issue that is most revelent is what should have the board members know about the insolvency. They probably would be acquitted if they can demonstrate they had no evidence of the insolvency, and could not have known. That will be very difficult to demonstrate without demonstrating negligence.
More and more courts are finding that board members cannot cry innocence by ignorance, they have an affirmative responsibility to seek out the facts.
Nice case study.