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CL701 Module 5 Discussion Scenario 1 Corporation owns a national chain of 100 hotels and three resorts known for their restaurants. Corporation’s Board of Directors decides to hire a management company to operate its hotels. After reviewing several proposals, the Board has determined that Management’s proposal to operate the hotels and the resorts is the closest to its requirements, although the Board will not agree to the price quoted in Management’s proposal and does not want Management to operate the resorts. Also, the Board recently approved a deal with Chef to operate Chef-branded restaurants in 25 of Corporation’s hotels but wants to make sure that there is a restaurant operating in each of its hotels if a Chef-branded location closes. The Board has authorized the CEO to negotiate a binding contract on behalf of Corporation with Management if possible. What provisions need to be in the resolution of the Board of Directors to ensure that the CEO can enter into a binding contract with Management on terms acceptable to the Board? The resolution of the Board of Directors should include specific provisions to ensure that the CEO can enter into a binding contract with Management on terms acceptable to the Board. Here are some key provisions that may need to be included: 1. Delegation of authority to officers: The business and affairs of Corporation are managed under the direction of, or by, the board of directors. The board of directors has the explicit statutory authorization to delegate day-to-day management of the corporation to officers, except to the extent that the corporation’s certificate of incorporation or by-laws limits or prohibits delegation. Here, the facts state that the Board of Directors authorizes the CEO to negotiate and enter into a binding contract with the Management for the operation of Corporation's hotels creating an agency relationship that provides CEO as agent with the power to contractually bind Corporation, within the scope of the agency authority granted, and to take actions directly and implicitly authorized by the indicators of the Board, including actions necessary or incidental to achieving the Board’s objectives in granting the authority to CEO. Because the agency was created by an express grant of authority from the Board to the CEO, CEO have actual authority. Actual authority is limited to the scope of the agency authority granted. The scope of authority to negotiate the contract include: a. Price Negotiation: empower the CEO to negotiate the price and terms with Management, explicitly stating that the final agreed-upon price should be within the limits determined by the Board. b. Exclusion of Resorts: the facts explicitly mention that the Board does not want Management to operate the resorts making it clear that it includes the operation of hotels only and not the resorts. c. Ensure that the contract with Management does not conflict with the Chef deal. d. ensured a restaurant operation in each hotel, even if a Chef-branded location closes. e. Allow some flexibility for the CEO to make minor adjustments to the terms during negotiations, but make it clear that any significant changes must be approved by the Board.

f. State that any final contract negotiated by the CEO must be submitted to the Board for final approval before becoming binding. 2. Fiduciary Duty: As fiduciaries, officers and directors have a duty to put the interests and advancement of the corporation before their own personal interests and advancement. The duty created by that fiduciary relationship is owed, not to any individual shareholder, but to all the shareholders collectively. Here, The Board the resolution must explicitly state that the CEO's actions in negotiating the contract with Management should prioritize the Corporation's well-being and shareholder value, stressing that the negotiated contract should not only meet the Board's requirements but also ensure the long-term success and profitability of Corporation. 3. Risk Mitigation: Address potential conflicts of interest and risks associated with the negotiation process. Outline mechanisms for mitigating these risks, such as transparency, disclosure of potential conflicts, and adherence to ethical standards as well as performance metrics, and penalties for breaches of duty of loyalty. Scenario 2 After Corporation hires Management to operate its hotels (see Scenario 1), Corporation’s earnings (and share price) drop for three consecutive quarters and Chef-branded restaurants are closed and replaced by less prestigious (and less profitable) Management-operated restaurants in Corporation’s five highest performing locations. Alarmed by the loss of 30% of the value of her investment in Corporation and having heard rumors of a side-deal between CEO and Management, Shareholder demands information from Corporation. Does Shareholder have a proper purpose in demanding information from Corporation? If not, why not? If so, what is that purpose and what information will Shareholder be entitled to receive from Corporation? Duty of Disclosure Directors hold a fiduciary duty to communicate honestly with the shareholders and to make full and fair disclosures to them. Officers also have a fiduciary duty of disclosure. 1. Shareholder Rights to Inspect books and records. A shareholder has rights by virtue of its status as an owner of a corporation, including the right to inspect the company’s books and records. The shareholders may have inspection rights by statute, common law, or contract. Depending on the jurisdiction, both statute and common law may give the shareholder inspection rights. Shareholders are owners of a company, and as such, they have a vested interest in the company's performance, financial health, and overall management. Here, Corporation had loss of 30% of the value of her investment, also there are rumors of a side-deal between CEO and

Management. Shareholders invest their money with the expectation of returns and have a right to be informed about the company's activities, strategies, and financial status. The information shareholders may request can include financial statements, reports on corporate governance, executive compensation details, and other relevant data that can help them assess the company's performance and make informed decisions about their investment.

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