Byrne v. Lor

1995 WL 684868 (1995)

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Nature of the Case

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Facts

Pace is a Delaware corporation, and through its wholly-owned subsidiary, ABC, Pace provides contractor and insurance bonds. Pace’s capital structure consisted of 6 million shares or common stock. Pace’s management team changed in 1994 and before the new board took over the Arizona Department of Insurance began an investigation of ABC’s activities. The DOI placed ABC under its direct supervision; Pace had disregarded the separate corporate identities and corporate formalities of Pace and ABC and have usurped the management authority of ABC’s board. DOI prohibited ABC from conducting any further business independently. The public accountants of Pace resigned, and Pace was unable to submit financial statements for filing its 10K with the SEC. For failing to file its 10K, the NASDAQ delisted Pace. Pace also defaulted on a substantial loan and Pace’s officers and directors were unable to renew their liability insurance. Without some greater incentives to solve the problems facing Pace, Lord informed the board he wanted an opportunity to own 10-15% of the Pace, or he had no interest in serving and solving the problems. The board adopted an incentive stock plan, which allowed Pace to issue 4 million shares to current and future board members. The bid price on the shares was the December 1-10^th, 1994 bid price. The board ratified the plan by unanimous written consent. On September 14, 1994, DOI found that directors Aller and Lord lacked the experience necessary to deal with the situation and ordered them to vacate their offices. The board then elected Gray and Oppenheimer. Gray had 25 years experience in the insurance industry. Bryne and others (P) formed a committee to remove and replace the current board. On December 7, 1994, three months after Madero resigned, each of the Defendants (D) exercised their options and purchased 4.6 million shares at $.0625 per share, and thus the four of the Ds owned 40% of the outstanding shares of Pace. P attempted to oust the board with a consent solicitation. Ps then filed the present actions. The first was derivative and alleged a breach of fiduciary duty by the board to entrench themselves with below-market stock options. Both parties moved for summary judgments.