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Business Associations
Elon University School of Law
Fink, Eric Mitchell

— Grant v. Mitchell —

Grant brings action to determine the proper directors and officers of Epasys. He claims he is the sole director. Mitchell contends that she & Grant are the directors.

Issue: when did Grant first exercise his authority as incorporated to name Epasys’s board?

Rule/Holding and Judgment: For Mitchell

Application/Reasoning: Grant acted as incorporator on or around the date of creation to name himself and Mitchell as the initial directors of Epasys.
1. Grant admits that he told them that one or the other would be on the board at the time the company was formed.
2. Egan’s testimony doesn’t help, because it doesn’t clarify what happened from the time he gave the advice to the time the company was formed.
3. Something made people think that Grant and Mitchell were directors, and Grant had the most to do with incorporation.
4. Grant signed the official FCC under penalty of perjury.
5. Rational business strategy would indicate that they would need an operating board.
6. Grant’s inconsistency is crap

Three founders agreed to form an LLC (“Phoenix”) to sell a computer system, “Monitor.” Grant invested $500K and received 1/3 of stock, Mitchell and Meltzer held the other 2/3. When Grant invested another $500K, he was more stock (so he now owned 42%) and the right to use all of the tax losses generated by Phoenix. When the founders began the process of converting Phoenix into a corporation, they wanted new venture capital, so they moved the company to Boston.

John Egan
There, they met with John Egan who informed them that it was typical for a party like Grant (who was the money) to get a preferred equity position and “sweat equity” positions for investors like Mitchell and Meltzer. Egan testified that they discussed Grant having control of the corporation until the new investors came on board, and he would be the incorporator, and that the new business would be called “Epasys.” Egan also testified that the founders agreed there would be a 5-person board of directors composed of Grant, Mitchell, and 3 new outside investors to be selected by Grant. Mitchell denies that she was advised that Grant would have sole power to select the board because of his status as incorporator, and, while they did discuss giving Grant a priority position, neither she nor Meltzer agreed to this. Epsys was incorporated and Grant was named incorporator and president, and Mitchell was named Treasurer and Secretary.

Grant contends that before Epasys began doing business, he and the other founders discussed what equity stakes each would hold in the company (the same as in Phoenix) and the composition of the Epasys board (contentious). Grant says that they discussed it and agreed to take Egan’s advice (a five member board with Mitchell or Meltzer), while Mitchell claims that the founders agreed all three would be on the board, and outside investors would be added later.

The Foreign Corporation Certificate was required as a condition for Epasys to do business in MA. It identifies the directors and officers of the corporation and must be signed under penalties of perjury. The FCC identified both Grant and Mitchell as directors of the company. Grant says he did not read it carefully, and Mitchell says she was upset because it didn’t list Meltzer as a director. She said she discussed the situation with Meltzer and they agreed she work as the only director along with Grant.

Epasys began doing business with each of the founders holding themselves out as officers of the company. They did not issue stock to themselves, however, in amounts reflecting their respective equity stakes, and Mitchell and Grant never met formally as a board of directors. Grant took no salary (because he was providing all the money anyway) and Mitchell and Meltzer took salaries of $160K each. Epasys began hiring other staff and offering them stock options. Grant says he was fine funding the business while the company’s equity ownership was undocumented because they had agreed he would receive 5% equity for every million dollars he put into the business. Mitchell denies this was the agreement; instead, she says it was a low-interest loan.

It hits the fan
The working relationship deteriorated between the partners—there was no money and the product development efforts were slow. Mitchell claims that Grant began to make decisions without her or Meltzer involved. Grant says he didn’t think the other two were working and were causing morale problems with the other employees and were lazy. He became set on removing the other two from their offices, claiming that they had improperly awarded themselves bonuses and had forged his name on a lease renewal. With his attorney, Grant prepared a written consent naming himself as sole director and executing a later consent naming himself to all the statutory offices at Epasys, and removed Mitchell and Meltzer from their jobs.

Procedure: Mitchell and Meltzer sued Grant seeking a determination that they collectively owned a majority of Epasys’s stock and a compulsory annual meeting. Acting as members of Phoenix, they removed Grant as managing director and demanded Epasys stop using the Monitor software. Grant sought to have Epasys put in bankruptcy which would have assured his control of the company, and then filed this action seeking a declaration that he is the sole director of Epas

e agent goes out and acts w/o authority and then the P ratifies that action.

Essentially the law of this country — all acts of the corporation should be made with the sole goal of increasing the value for the shareholders.

Officers – are in charge of the day-to-day operations of the corp.
These include:
· Chief Executive Officer
· President
· Chief Financial Officer
These are the most senior employees of the corp and they make many of the decisions that define a corp’s activities.
These top officers are also members of the board of directors.

Directors — “chosen by the shareholders” — are elected by shareholders to supervise the officers.
These are the shareholders’ representatives w/in the corp.
Directors typically have no authority to act as individuals. Instead, they act as a collective body known as a board of directors.

Shareholders –“owners” — posses important control rights. Including the right to elect directors and to vote on fundamental transactions, such as mergers, as well as the right to all of the assets of the corp once the corp’s creditors have been paid in a liquidation.
· Shareholders are not liable for the obligations of the corp; they have limited liability.
· Shareholders control the directors, if at all, through annual elections of directors and through voting on specific proposals, when allowed.
o Must have the right to select the board of directors

Other people involved in the affairs of a corporation:
· Creditors — practical interest in affairs but have no legal rights under corporation law.
· Government regulators — state & federal level. Regulate affairs. These aren’t’ actors under corporations law. They are sometimes the “enforcers” of the law. They don’t have an internal voice in the internal affairs of the corporation.
· Employees — not shareholders, directors, or officers. Irrelevant for purposes of corporations law.
· The community/ “stakeholders” — people who are not recognized under corporations law but have some stake in what happens in the corporation.

Questions of corporations law:
· To whom should the corporation be accountable?