Crag Rock Enterprises Case Study

MGSC30H3-S-LEC01 (Legal Environment Business I)

Winter 2017

Assignment II

Answers are due Wednesday March 22

Crag Rock Enterprises (“CRE”) is a family-owned gravel pit business located in Gloucester, about 25 km north of the City. CRE has three shareholders and directors, Leirinda, the family matriarch, and her two children, son Regan and daughter Cordelia. Leirinda serves as CEO and principal force in the enterprise, with son Regan as chief operating officer.  Until last week, Cordelia served as secretary-treasurer but has been demoted by Leirinda to officer manager when she failed to join her Brother Regan in buying an elaborate cookie-gram gift to celebrate Leirinda’s 60th birthday, stating that it was a “stupid idea” and that it would be better just to say nothing at all.    

CRE was incorporated many years ago and has two classes of shares, common (shares having voting rights) and non-voting preferred with a dividend preference.  CRE has authorized an unlimited number of voting common shares.  Leirinda holds the majority, with 600.  Regan and Cordelia each hold 300. CRE’s by-laws provide that only officers of CRE are able to enter into contracts on behalf of CRE.  Two years ago, a shareholder agreement was entered into whereby Leirinda, Regan, and Cordelia agreed to vote for each other as Directors of CRE as long as they remained shareholders.  The agreement also restricted any sales of company shares to either family members or to an outside person as long as the outside person was approved in advance by CRE’s Board. It was also agreed that any sale of company shares must first be offered to each of the other family member shareholders on a “right of first refusal”, and if the other family member shareholders refuse to purchase the shares, the shares can be sold to an outside person at the same price.  Finally, the agreement stated that regular business decisions by CRE are to be made by majority vote of directors.  

The gravel pit business has declined in recent years owing to a combination of increased environmental regulation, equipment costs, and activities by the municipal government that imposes more and more restrictions and costs on such operations. Recognizing these realities, Regan has a new vision for a more contemporary enterprise that would serve the surrounding community instead of just scarring it.  He wants CRE to get into the wind farm business, and proposes using CRE’s existing land together with additional land from purchasing adjoining farms to set up a large electrical generation facility.  A special meeting of CRE is called and Leirinda, Regan, and Cordelia all vote to change the business of CRE from operating a gravel pit to wind farm operations.  Operations will begin once the gravel pit operation is phased out and the wind farm plant is constructed.  

Regan begins negotiations to buy some neighbouring properties.  One of the neighbours, Earl Kent, is interested in selling his farm as he is getting too old to operate it.  His family is concerned about his ability to care for himself (as well as the farm) as he has begun to forget many ordinary details, including names, places, and the location of his house.  He has often been seen wandering alone at night, especially during intense storms, next to the ridge of CRE’s open gravel pit.  In fact, Regan and Cordelia have had to rescue Kent from potentially falling into the pit on more than one occasion.  Kent resists any attempt to have a medical examination, saying that he is perfectly fine and able to look after himself.

Kent signs an agreement to sell his farm to CRE for $2 million dollars which is below the market price for other properties that have recently sold in the area.  Regan had several discussions with Kent prior to the actual agreement.  During the discussions, Kent seemed to have a very short attention span and forgot names (including Regan’s) and other details. Regan dismissed those events as “just old age”.  Regan asked Kent whether there were any problems with the land and Kent said “no, as far as I know it’s just fine”.  The deal is completed and CRE pays $2 million to Kent, taking formal title to the land.  The contract has an “entire agreement” clause that states that it constitutes the entire agreement between the parties and that there are “no other promises, inducements, representations, collateral warranties, conditions, options, or terms other than that have been expressly stated in the agreement”.

Six months after the sale, CRE begins the design and preliminary excavation of the newly-acquired land to plot out the wind farm operation, and spends considerable amounts of cash on this effort.  On the excavation, it’s discovered that just below the soil surface, there are numerous bogs (marshy areas of decaying plant life) located all over Kent’s land.  This will make excavation and construction of the wind farm much more expensive and time-consuming, as CRE will now have to bring truckloads of additional soil cover and earth to the land, and build concrete reinforcement bunkers to support the wind turbines, all at considerable additional costs. CRE has financed the purchase by a combination of its own reserves plus mortgage financing.  CRE is required to make large monthly payments on the mortgage on the purchased property and now may have to spend hundreds of thousands of dollars more in additional expenses.  It is looking for possible remedies to this problem.  

Kent’s family is also looking into the transaction, because they believe that Kent sold away the land at too low a price.  Moreover, the boggy areas discovered on the land can produce peat moss, which is a valuable source of energy.  The family also believes that there could be reserves of oil below the boggy land.

Meanwhile, CRE starts disposing of its old equipment that won’t be needed for the wind farm. The first to go are 15 dump trucks which are offered for sale by advertisement stating “15 Used Dump Trucks – sell as a group for $75,000”.  Buyers can come by CRE’s property to look at the trucks.  Leirinda is managing the sale.  One potential buyer says “I can offer $60,000 for them”.  Leirinda says “We’ll think about it.”  The buyer then asks whether he can take one to test it out.  Leirinda tells him that CRE will require a deposit of $200 and that buyer gives her the money.  

Two hours later, another buyer turns up with a $70,000 cheque in hand.  He asks Leirinda “Are these trucks good for Class “A” registration?”  Leirinda hasn’t’ reviewed the current details on the trucks but wants to get them sold.  She replies “Sure.”.  The buyer says, “We’ve got a deal” and hands the cheque to her. The buyer tells her he will return with a team of drivers tomorrow to pick them up.  Meanwhile, the first potential buyer returns with the test truck and produces a cheque for $60,000.  He tells Leirinda that the truck is fine and says, “let’s go with the deal”.  Leirinda tells the buyer “You’re too late, they are already sold.  Here’s your $200 back”.  The buyer thinks he missed out on a really good deal.