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RSM225H1 Study Guide - Midterm Guide: Board Of Directors, The Instructor, Family Reunion

Rotman Commerce
Course Code
Jaclyn Seidman
Study Guide

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RSM 225 FALL 2014 - MIDTERM - TIME: 90 minutes
This test paper must be returned along with your written response.
QUESTION ONE (60 marks) (54 minutes)
UT has recently added a corporate governance course to its Executive Program. The course is intended to help
individuals that will be taking on the role of a corporate director, bankers that lend to corporations, and others
better understand how corporations are directed and controlled. The course is taught using a series of simulated
situations (simulations). The individual that was hired to prepare some of the course material has written some
simulations, but due to a family emergency has had to leave. You, Bea Calm, have now been hired on a part
time basis to prepare a solution guide for Simulation One. Your instructions are to identify legal issues; provide a
detailed legal analysis of the issues, with relevant conclusions, and where appropriate provide practical advice
to avoid those issues. As part of your solution guide, you are asked to discuss any legal rights or remedies
available to the shareholders and creditors of DI.
Simulation OneDisko Inc. (“DI”) manufactures compact discs. DI is a private corporation with 10 shareholders,
including Heather Case and her two sons, Justin Case and Mike Case. The three of them hold sixty percent of
the common shares and are also the only directors of DI. Justin and Mike run the business. Heather has very
little business experience, having inherited her shares from her husband. Accordingly she takes on no
significant role. Heather does attend the director meetings for which she is well compensated. She pays no
attention at any of the meetings, instead just agreeing with what her sons want.
In 2012, Justin incorporated Money Source Inc. (“MSI”). Justin is the sole shareholder and director of MSI. MSI
borrowed $3 million dollars from DI in order to fund its new operations. The loan was approved by the DI
directors. MSI subsequently paid the $3 million to Justin as a “director honorarium” and as dividends.
In 2012, the directors of DI approved a re-organization of share capital. Articles of Amendment were filed that
essentially converted the common shares into three new classes of shares, Class A Common, Class B Common
and Class C Common. The re-organization converted Justin and Mike’s common shares to Class B Common
shares and Class C Common shares, and all the other shareholders’ common shares (including Heather’s) to
Class A Common shares. Once complete, a directors resolution was passed by Justin and Mike paying a
significant dividend on the Class B Common shares and Class C Common shares. Apart from Justin, Mike and
Heather, none of the other shareholders were aware of the reorganization.
In 2013, Mike and Justin incorporated Modern Flash Drives Ltd. (“MFDL”). MFDL manufactures high speed
memory sticks. Many of the customers of MFDL were customers of DI (e.g. BestBuy, FutureShop). Much of the
equipment used by MFDL was purchased from DI after the purchase was approved by the DI directors.
In 2013, the board of DI approved the financial statements of DI. Heather was at the meeting but did not look at
the financial statements. Accordingly she did not notice the large receivable from MSI which, because MSI
never commenced any form of operations, MSI had no assets to repay, and would have to be written off. Shortly
after that board meeting, Justin and Mike resigned as directors.
Within two months, DI was no longer able to pay its creditors, largely because the loan to MSI had to be written
off. A court appointed trustee has determined that DI is essentially bankrupt, and will not be able to pay most of
its debt nor have anything for its shareholders. Heather was recently quoted in the newspaper saying, “I am
sad. My husband built up a great business. With the lack of interest in compact discs our sales dropped and
this is the result. It is a sad day for everyone.”
REQUIRED: Assume the role of Bea Calm and provide the simulation response requested.
QUESTION TWO (40 marks) (36 minutes)
Molly Cyras was once one of North America’s top performing talents. After many high-profile scandals and trips
to the Betsy Ford Center for rehabilitation, Molly decided to quit music to pursue her first childhood love: dog
training. To Molly, it was a perfect transition, as most of her friends in Hollywood owned dogs and very few of
them took the time to train them properly. Although Molly was, and remains, scared of larger dogs, that concern
was quickly swept aside, as all of Molly’s friends’ dogs fit snugly into their handbags. Using the last of her
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