Description
Essays Q&A
1.Jin and Kae have been operating a restaurant on Est 68th Street in Manhattan, named Kae-Jin Cookin for over three years. In June, 2020, they formed a New York corporation under the name Kae-Jin Cookin, Inc. (KJCI) with 200 authorized shares. Jin and Kae each received 50 shares in return for payment of $50,000 each. They also sold 15 shares to Jins aunt, Simone Chateaubriand, a retired restaurant industry executive, for $15,000. Since its formation, KJCIs Board of Directors has been composed of Jin, Kae and Aunt Simone. Jin and Kae also entered into employment agreements with KJCI under which Jin serves as Chief Executive Officer and Kae serves as Chief Financial Officer. They were elected to those positions at KJCIs first Board of Directors meeting and have served ever since. Aunt Simone has been very involved in the planning for the restaurants expansion outside New York. She has not been elected an officer of KJCI but holds herself out as KJCIs Vice President of Marketing and Development.
It is now September 2022. Kae and Jin are looking to open a second restaurant in New Jersey and a third restaurant in Cabo San Lucas, Mexico. They have recently signed a lease for space in Nutley, New Jersey where they plan to open their restaurant. They are thinking of utilizing an issuance of debentures to finance the costs of opening these new restaurants, estimated to be $1,000,000 and have spoken with an underwriter. Kae and Jin ask you to conduct an audit in connection with the planned offering of debentures by KJCI. In the course or your audit, you discover the following:
A.A default judgment against KJCI in a New Jersey State Court for $250,000 arising out of a contract negotiation which took place in Atlantic City, New Jersey. The default judgment was entered against KJCI because it failed to answer the complaint. Jin tells you that Aunt Simone did sign an advertising contract with Garden State Marketing Inc., a New Jersey corporation, (Garden State) after three days of negotiations with representatives of Garden State in Atlantic City. Aunt Simone was attempting to help KJCI expand its current advertising in the New Jersey market in anticipation of opening the new restaurant. While in Atlantic City, Aunt Simone stayed in an apartment that KJCI rents both for the personal use of its officers and for business meetings in the Atlantic City area. Jin tells you not to be concerned about the judgment because KJCI is not registered to do business in New Jersey, so the court lacked jurisdiction over KJCI. In addition, he tells this contract cannot be binding on KJCI because Aunt Simone was only authorized to discuss a possible contract with Garden State, but not to sign and type of any agreement.
B.An e-mail from Aunt Simone advising that she needs US$10,000 cash to take care of some local politicians in order to obtain a building permit and zoning variance in Mexico so construction of the new restaurant can begin.
C.A brokerage account in the name of KJCI showing ownership of 10,000 shares of Howey, Inc. with a total value of $250,000. This represents thirty percent of the net assets of KJCI. Kae tells you she and Jin decided to buy Howey stock on the advice of Sally Scienter, Kaes cousin and a regular customer of their Manhattan restaurant. Howey is a Delaware corporation whose shares are publicly traded on NASDAQ. Sally is a securities analyst for a large investment firm and frequently takes customers to dinner at the restaurant. Sally always pays the bill and leaves a big tip. One evening last month, Sally told Kae that she wanted the best table in the restaurant because her dinner guest would be the CEO of Howey. Sally ordered two bottles of very expensive wine during dinner and, as usual, paid the check. Afterward Sally thanked Kae for making the evening a success and, as an additional tip, suggested that Kae buy Howey stock because Proctor and Gamble, Inc. (P&G) was about to announce publicly that it would be acquiring Howey. Jin and Kae bought 10,000 shares of Howey stock on behalf of KJCI the next day. A week later they saw an article in the Wall Street Journal reporting that P&G had announced its entry into an agreement to buy Howey. Howeys stock increased twenty-five percent after the public announcement of P&Gs agreement to buy Howey.
D.A letter from a law firm representing Aunt Simone threatening to bring an action to enjoin KJCIs plan to engage in a reverse share split in order to purchase Aunt Simones shares and freeze her out of ownership in KJCI. Kae tells you KJCIs Board has adopted this reverse share split plan at the suggestion of the underwriter with whom they have been speaking. The reverse share split would reduce all of Aunt Simones shares to fractional shares which KJCI could then force Aunt Simone to sell back to KJCI. Kae tells you Aunt Simone is only entitled to a fair appraisal of her shares and should have no right to enjoin the reverse share split plan.
Write a brief memo summarizing any issues you see arising from the facts in paragraphs A-D above.
