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Jim Barns is a promoter for a corporation to be formed and known as Wonda Corp. Barns entered into several supply and service agreements with Servco....
Jim Barns is a promoter for a corporation to be formed and known as Wonda Corp. Barns entered into several supply and service agreements with Servco. These agreements were executed as follows: "Jim Barns, on behalf of a corporation to be formed", and were based solely on Wonda's anticipated financial strength. Within two weeks after the signing of the agreements, Wonda was duly formed and operating. Wonda never accepted any benefits under any of the agreements signed by Jim Barns. Shortly thereafter, Wonda, by its Board of Directors, rejected the preincorporation agreements entered into by Barns and Servco, stating that it could obtain more beneficial contracts elsewhere. Wonda never received any benefits from any of the agreements.
During the second year of Wonda's operations, certain members of the Board of Directors were accused of negligence in the performance of their duties. In addition, there were allegations made that these same directors failed to exercise due care by paying cash dividends of $25,000 to shareholders that exceeded the profits and paid-in capital. Even before the dividends were paid, the value of the assets of the corporation were $250,000, and its liabilities were $275,000. These directors based their decision upon negligently prepared reports issued by the vice president of finance indicating that there were sufficient funds to pay cash dividends to shareholders, and that the corporation had retained earnings of $25,000. These incidents caused Wonda severe liquidity problems and huge losses in the following year of operation. White, a shareholder of Wonda, has properly commenced a derivative suit against these directors.
Discuss the following, setting forth reasons for any conclusions stated:
1. Discuss Wonda's and Barns' liability to Servco on the pre-incorporation agreements.
2. What are the necessary requirements to properly declare and pay cash dividends and whether Wonda's payments of its dividends were proper?
3. What defenses, if any, are available to the directors regarding the charges of negligence in the performance of their duties and the failure to exercise due care in declaring cash dividends?
