Rio Grande Solar: the boardroom plotRio Grande Solar: la conspiración en el consejo

Facts

Rio Grande Solar, Inc. (“RGS”) is a Texas corporation listed on Nasdaq that installs rooftop solar systems in four states. Its founders, Elena (chair of the board) and Marcus (chief executive officer), together own 28% of the shares. Priya, the chief financial officer, owns 12%; she joined early and her employment contract promises, if she is terminated “without cause,” a severance of twice her salary and a repurchase of her shares at market price plus 10%. The contract never defines “cause.” A private equity fund, Pecos Capital, owns 25%; the public owns the remaining 35%.

The board has seven members: Elena; Marcus; Priya; Marcus’s nephew Teo, who serves as corporate secretary; Hana, a partner of Pecos Capital; Walter, a senior vice president of Lone Star Bank, RGS’s main lender; and Gloria, owner of Bluebonnet Installers, the contractor that performs most RGS installations. All directors are elected together each year.

For two years Priya has pushed RGS to add battery storage by acquiring StoreWell, a startup run by her brother-in-law. Elena and Marcus have refused every time, saying storage would dilute the brand, and the last time they told Priya to “drop it if you like your job.” Priya quietly commissioned a consultant’s report projecting strong returns from the acquisition and asked RGS’s outside auditor to review the numbers; the auditor’s partner wrote a favorable memo. Priya then met separately with Hana, Walter and Gloria, showed them the reports, and proposed that at the next meeting the four of them vote to approve the StoreWell acquisition, elect Hana as chair, and, if the founders resisted, replace Marcus as CEO. She pointed out that more installations would mean more loans for Lone Star Bank and more work for Bluebonnet Installers. Hana and Walter were enthusiastic; Gloria said she wanted “hard evidence” first. Priya asked all three not to tell the founders.

At the company picnic a junior auditor, after a few beers, congratulated Marcus on “the StoreWell deal.” Marcus confronted Priya in front of the guests. Priya admitted the reports and the plan. Marcus said: “You’re fired for disloyalty. Clear out your desk.” The next morning a trade blog reported the firing and the “secret storage plan,” and RGS stock fell 14%.

Call of the question

Write no more than 1,200 words. Three clients come to you separately. (1) Priya wants her job back and still wants the board to approve the acquisition; what do you advise? (2) Elena and Marcus want to stop the plan and keep control; what can they do? (3) A group of public shareholders is angry about the stock drop and wants to know whether they have claims against the directors or officers, whether or not the acquisition goes forward. Advise each in turn.

Model answer

Priya. Start with her hats: officer under contract, director, 12% shareholder. Marcus’s words at the picnic did not by themselves remove her as CFO. Officers serve at the pleasure of the board, and in a Texas corporation it is the board, by vote at a meeting or by unanimous written consent, that removes an officer; a CEO can suspend an officer in practice but the removal becomes effective only when the board acts. Even when the board does act, the removal is a power question; the contract is a liability question. RGS may remove her and still owe severance if the termination was “without cause.” Because the contract leaves “cause” undefined, a court will give the word its ordinary meaning (material misconduct, disloyalty, breach of duty) and look at the evidence. The founders’ best facts are strong: as an officer she owed RGS a duty of loyalty, she concealed from the board a plan to acquire a company run by her brother-in-law, and she organized a secret voting bloc. Her best facts are also real: she was pursuing a strategy she believed in, she commissioned professional reports rather than hiding the ball from the board forever, and a strategic disagreement with founders is not cause. My advice: do not claim the firing is void; instead demand a board meeting on the termination, argue that any termination is without cause and triggers the severance and the share repurchase, and be ready to settle. Nothing about the firing touches her board seat: only the shareholders can remove a director, so she keeps her vote and her access to information until the next election or a special meeting. On the acquisition, tell her the truth: as proposed it is a related-party transaction. Her brother-in-law’s interest makes her an interested director, and the hidden process is the worst way to present it. If she still wants it, the path is disclosure to the full board, recusal, review by independent directors with their own advisers, and a vote by the disinterested majority or the shareholders; otherwise the deal would be judged under fairness, and she would carry the burden.

Elena and Marcus. Their hats: directors, officers, 28% shareholders. First, fix the process: have the board, not Marcus alone, act on Priya’s removal at a properly noticed meeting with minutes, and state the reasons. Second, count votes. On the board they have two sure votes plus probably Teo; the plotters have at most four, and Gloria is wavering. But three of the four are conflicted. Walter’s bank profits from more loans; Gloria’s company profits from more installations; Hana represents a shareholder that may want an exit. Under the exchange rules none of Walter or Gloria is independent if the payments cross the thresholds, and Teo is a relative of management. A vote on a conflicted acquisition pushed by an interested officer, taken by directors with their own financial stakes, would not get business judgment protection; it would face a fairness inquiry and a loyalty claim. That is the founders’ leverage: remind Walter and Gloria, in writing, of the conflict and of their exposure, and insist that any acquisition be reviewed by an independent committee with independent advisers. Third, the shareholder route. The board cannot remove directors, but the shareholders can, with or without cause unless the certificate restricts it, at a special meeting or by written consent. The founders hold 28%; the public holds 35%; Pecos Capital holds 25% and is the pivot. If Pecos sides with the founders, they control a majority and can replace Walter and Gloria. If Pecos sides with Priya, the founders need the public, which means a proxy fight. Fourth, their own duties. Refusing the acquisition is a business judgment; to keep its protection they should consider the consultant and auditor reports on the merits, document why storage does not fit, and avoid any appearance of entrenchment. Finally, disclosure: a listed company whose CFO was fired and whose stock fell 14% on a leak must make accurate and timely disclosure of the facts and must ensure nobody at RGS trades on what is not yet public.

The public shareholders. Separate the injuries. The stock drop itself is not a claim against anyone; directors do not insure share prices, and the business judgment rule protects honest decisions in either direction. Their possible claims are derivative, because the harm runs to the corporation: a loyalty claim against Priya for concealment and for pursuing a transaction with a relative’s company; a claim against any director who votes for the acquisition with a financial conflict; and an oversight claim if the board ignores red flags about the deal. A derivative suit requires a written demand on the board and, in Texas, usually a ninety-day wait, and the certificate may now require a minimum ownership stake of up to 3%. A direct claim exists only for an injury personal to them, for example a securities-fraud claim if RGS’s public statements about the matter are false or misleading, or if insiders traded on the news before disclosure. Advice: send a demand letter asking the board to investigate Priya’s conduct and the conflicts, request the books and records, and watch the disclosures. If the acquisition is approved by conflicted directors without independent review, the derivative claim becomes real; if it is rejected or approved through a clean process, there is little to sue over.

Common mistakes

• Treating Marcus’s words as a valid termination, or the opposite, treating the contract as a bar to removal. Power and damages are different questions.
• Letting the board “remove” the founders as directors. Only shareholders do that.
• Missing the brother-in-law, which turns a strategy dispute into a loyalty problem.
• Assuming the bank’s and contractor’s directors are independent because they are outsiders.
• Giving the public shareholders a direct claim for the stock drop.
• Forgetting advice. Each client wanted to know what to do next, not only what the law is.