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GENERAL OVERVIEW OF THEASSIGNMENT

Your Ethics Project requires you to assume the position of a judge and issue an opinion to decide the case of Profit v. FlickNet, Inc. This case involves a rouge stockholder who sued the Board of Directors of FlilckNet, Inc. for purporting to breach their fiduciary duties as Directors of the company. This document explains the Assignment and is arranged as follows: Part 1 of this document provides the background and facts you are to use to issue your decision and opinion. Part 2 of this document explains the details of the Assignment and what is expected of you. Part 3 of this document provides the basic outline/template for you to use in drafting your opinion and deciding the case. As you will note, it follows the IRAC system except that it starts with a section on the background and facts of the case. Part 4 of this document provides the General Assignment Guidelines.

Finally, the material you need to review/study for this assignment is as follows:

1. The Ethics Assignment Folder – you should read the pages applicable to a Board of Directors Fiduciary Duties (Duty of Care and Duty of Loyalty) and the cases cited in the discussion on these topics. As you will see, your decision in this case will depend on your application of these duties to the Board of Flicknet.
2. We also briefly covered Corporate Governance that pertains to the Corporate Structure (i.e., the roles of shareholders, Board of Directors, and Officers of a corporation)
3. Briefly review the information on the Business Judgment Rule and in the handout posted with this assignment (note that the handout on the Business Judgment Rule is very detailed, 1 and I do NOT expect you to know all the 2 intricacies of the Business Judgement Rule – rather, you should just understand its basic use by a Board of Directors in defending their decisions).

Part 1: The background/Facts of the Case

FlickNet, Inc. (the “Company”) is a public company that provides an online moving streaming service to customers throughout the United States, and it also rents movies through the mail and through its 400 store locations in the United States. Five (5) years ago it was the leader in the movie streaming industry because it was the first to develop the technology to stream movies on demand and it also obtained the licensing rights to certain block buster movies. The Company also has 400 “brick and mortar” stores located throughout the country. These stores allow people to come into the store browse and watch movie trailers (in 3D) and then rent movies or signup for the online subscription service. The Company is also thinking about creating a program where people can rent smart TVs and computers at very low prices (which they will pick up at one of the stores) if they sign up for a 5-year subscription of the Company’s movie streaming service. Most of the Company’s stores are located in rural areas where wireless technology and bandwidth are not available and also in certain urban areas where residents have a very low income and may not be able to afford the computers and wireless technology to watch streaming on demand movies. The brick and mortar stores do not make a significant amount of money for the Company, and generally break-even in terms of making a profit, but they have a high overhead cost.

The Company has been contemplating shutting the stores down. One of the stockholders, John E. Profit, who owns 30% of the shares of stock in the Company has been very vocal and has demanded that the Board of Directors of the Company (the “Board”) immediately close the stores to boost the short-term profits of the Company. He has written letters to the Board of Directors and has been on various TV business talk shows threatening to sue the Directors if they do not close the stores to save the Company money. Mr. Profit claims if the Board fails to do this they will be in direct breach of their fiduciary duties as Directors. Mr. Profit believes that shutting the stores will immediately save the Company almost $50,000,000, which will allow the Board to increase its dividend to the stockholders and push the price of the stock higher.

The Board has acknowledged that closing the stores will save the Company money in the short term, but they believe it will have devastating effects on the Company’s reputation in the long term. The Board has highlighted the importance of the stores in connecting with a certain segment of the population, and note that the stores and the employees who work in the stores have very strong community ties. The Company is constantly getting positive press coverage 3 from their community outreach programs that are implemented through the stores – from food drives, helping the homeless, proving employment opportunities to minorities in depressed areas, and most recently they played a pivotal role in helping victims of a hurricane that hit the southern part of Florida – the Company’s stores collected a total of $1,000,000 in cash donations, and another $2,000,000 if food and other supplies. In fact, the Company was highlighted on the nightly news for this charitable work; and on the following day, the Company’s online streaming subscription service saw an increase in enrollment by 5%. The Board is convinced that the Company’s outreach program that is implemented through the stores was responsible for the increase in subscriptions.

The Board has decided to keep the stores open – strongly feeling that the stores are paramount to the long-term success of the Company since they create goodwill for the Company, reflect the Company’s commitment to corporate responsibility, and they can be used to help increase enrollment in the Company’s online streaming service. The Board has also pointed out that other online streaming service companies, including the Company’s biggest competitor, Better Stream, Inc., do not have any brick and mortar stores, and thus the stores provide a great opportunity for the Company to differentiate itself. In addition, not only did the Board keep the stores open, it borrowed $30,000,000 from a large financial institution and then invested all $30,000,000 into the stores to upgrade their looks, buy computers and smart TVs to rent out at low prices, and to support additional marketing efforts for the stores. After doing this, things have not gone that well for the Company. Specifically, the Company’s main competitor, Better Stream, Inc., lowered its monthly subscription rate (which the Board did not anticipate) and thus the Company lost 7% of its subscribers who moved over to Better Stream, Inc. Nevertheless, the Board still believes in the long run it made the right decision.

Mr. Profit on the other hand, was extremely upset about all of this – he could not believe the Board would not only keep the stores open, but then actually borrow money and invest it in the stores. Moreover, the added debt and the loss of 7% of subscribers caused the stock price of the Company to drop from $25 per share to $18 a share, and this caused Mr. Profit to lose $10,000,000 in the value of his stock. Finally, it was discovered during the trial that one of the Directors of the Company owns a cleaning company called Quick Clean, Inc., and Quick Clean, Inc. has a very lucrative cleaning contract with the Company to clean all of the stores. If the Company stores were closed, Quick Clean, Inc. would have obviously lost the cleaning contract. Thus, Mr. Profit claims this is one of the reasons the Board decided to keep the stores open. The Board acknowledges the existence of the contract with Quick Clean, Inc. and its ownership by one of the Directors, but claims that the contract and the Director’s ownership of Quick Clean, Inc. was fully disclosed to the Board and the contract was on commercially reasonable terms. In any event, Mr. Profit filed suit against the Company alleging that the Board of Directors breached its fiduciary duties. He is seeking $10,000,000 in damages to recover his losses from the decrease in the price and value of the Company’s stock.

Part 2: The Assignment

Assume you are the judge that has to decide the case and issue an opinion in the case of Profit v. FlickNet, Inc. The case went to trial, and you presided over the case, heard the testimony, reviewed all of the written material submitted in the case, and have considered all of the evidence of the case. It is now time to issue your opinion. Accordingly, you are to decide the case, and issue your opinion in a Memorandum form, using the template below, and following these guidelines:

1. Assume all of the facts in Part 1 – Background section of this Assignment were either testified to or otherwise submitted as evidence. Thus, in writing your opinion, you can use any of the facts noted in the Background section and you can add additional facts, but not delete any facts. Note that if you add facts, they must be reasonable in nature and not too outlandish.
2. The specific issue for you to decide in the case is whether the Board of Directors breached any of their fiduciary duties as Directors of the FlickNet, Inc. by not closing the stores and then investing additional borrowed money into the stores. You should also address the issue of the cleaning contract. As noted Mr. Profit filed suit claiming that they had breached such duties and is seeking $10,000,000 in damages. Thus, if you decide that the Board of Directors breached their duties, you must find for Mr. Profit and award him $10,000,000 in damages. If on the other hand, you do not find that the Board breached its duties, then you must decide in favor of the Board and not award any damages. In this case, Mr. Profit walks away with nothing.
3. In drafting your opinion, make sure you use the material identified at the beginning of this Assignment covering the duties of Directors, the Business Judgement Rule, and other material. Also, you can use your own research if you want, but you are NOT required to do so.

Part 3: Template for your Opinion  (follow the template for the assignment)

John E. Profit v. FlickNet, Inc.

Memorandum of Opinion

1. Background/Recitation of the Facts [In this section of your opinion, you should provide a brief background of the case, and include the facts of the case that you will use in your analysis section. You can add additional facts as you deemed necessary]
2. State the Issue to be Decided. [In this section, you should state the issue you are deciding in the case (i.e., whether the Board of FlickNet breached its fiduciary duties].

• State the Rule of Law Applicable to the Case. [State the law applicable in this case, which is the law applicable to Directors’ fiduciary duties as directors of a corporation and the business judgement rule. You are also free to incorporate additional research material you find if you want to do additional research – you are NOT required to do this, but you can if you want. Note that in this section you are merely stating the law – you are NOT applying the law to the facts. Also, you do NOT need to use any legal cites to material unless you use research material/cases not in your textbook or you use a direct quote from a case or other reference material].

1. Analysis – Apply the Law to the Facts. [In this section you will apply the law to the facts – just like the “A” in the IRAC system].
2. Conclusion – State your Conclusion – Who Wins? [This section is used to state your conclusion and issue your decision. It should be brief and clearly state whether Mr. Profit wins (i.e., the Board breached its fiduciary duties) or the Board wins (i.e., the Board did NOT breach its fiduciary duties.

APA

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The post FlickNet, Inc. (the “Company”) is a public company that provides an online moving streaming service to customers throughout the United States, and it also rents movies through the mail and through its 400 store locations in the United States. Five (5) years ago it was the leader in the movie streaming industry because it was the first to develop the technology to stream movies on demand and it also obtained the licensing rights to certain block buster movies. The Company also has 400 “brick and mortar” stores located throughout the country. These stores allow people to come into the store browse and watch movie trailers (in 3D) and then rent movies or signup for the online subscription service. appeared first on Apax Researchers.

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