After graduating from MBA program, you spent considerable time and money developing a product, and everyone told you the product has tremendous potential. Jim Jones and Bill Stafford, your former roommates, have always been supportive of your work, and willing to invest money in your business. You believe Jim is smart and honest, but he is also unpredictable and undisciplined; Bill is trustworthy in every respect, but is "not a businessman". You created a California corporation named Invent Industries, Inc. ("III"). You contributed your product design and expertise to the company, in exchange for 51% of III's stock, Jim contributed $40,000 to the company in exchange for 40% of III's stock, and Bill contributed $10,000 for 9% of III's stock. The three of you agreed that you will exercise primary management and control of the company, that Jim will handle all sales and marketing matters, and the Bill will have no role in III's business; it was also agreed that all contracts must be approved by you. The company's records state that you are the CEO of the company, and your business card so indicates; Jim's title is Sales Manager, and his business card so indicates. Over the past few years, Jim has hosted several "sales promotional parties" at yacht clubs. These parties are normally attended by a few select customers as well as most members of Jim's family, and always include catered dinner, short cruises aboard lavish yachts, and musical entertainment by his son's band - all paid for by III. You have never attended one of these parties, believing Jim should be able to perform his sales and marketing functions as he sees fit, and you have never questioned the costs involved. Bill attended one party two years ago, and informed you they were excessive and unnecessary and did not seem to serve a legitimate business purpose.
Jim recently attended a trade show in Las Vegas, and signed several contracts to sell thousands of dollars of III products to many customers, including Walter Comstock, a customer who attended one of the parties described above, at very low prices. Jim did not inform you of the orders and you never approved them. III began fulfilling the orders, until you terminated them, informing the customers that Jim had no authority to sign the contracts. All customers threatened to file lawsuits against III, and Mr. Comstock has threatened to sue you and Jim personally. Bill is so upset, he stated he might file suit as well.
Q. What fiduciary responsibilities and obligations do you and Jim have related to each other, Bill and III?
Q. Does the story above indicate that you and/or Jim have violated any of your fiduciary duties? If so, which one(s), and how?
Q. Assuming the contracts Jim signed at the Las Vegas trade show contain all the requisite elements needed to form a contract, are the contracts enforceable against III? Why or why not?
Q. Can Mr. Comstock file suit against you and Jim personally? On what basis? What must he prove to be successful in such a lawsuit?
Q. What do you believe is the most ethical and commercially reasonable course of action III should take concerning the pending orders? Litigate the orders? Full some or all of the orders? Give ethical and legal reasons for your answers.
Q. Does Bill have a viable claim against you, Jim and/or III? For what? What do you believe is the most ethical and legally appropriate course of action you and Jim should take concerning Bill's complaint?