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The investor has a habit of investing in firms that are undergoing harsh economic times and by applying sound business management skills, he is able to make a profit out of such an investment. Alternatively, he may deem it necessary to sell some of the firm’s assets and inject the revenue into the business. That was what was on the investor’s mind when he decided to explore Cabinet Manufacturing Ltd. The firm was already faced with a high debt ratio and as such, it was undergoing a period of financial difficulty. As such, Cabinet Manufacturing Ltd is a classic example of the nature of investments that the investor normally targets.
Before investing in any business venture, it is always prudent for a prospective investor to undertake a thorough assessment of the business they are interested in. This way, it becomes easier to reduce possible risks of a failed investment. The investor has decided to consult Harris, who is a business consultant, so that he can undertake this assessment. He in turn recommends Danzil, a consulting engineer, to undertake an assessment of the value and condition of the firm’s equipment. In this case, Danzil would also be expected to advise the investor on what actions to take so that the firm can attain profitability.
The investor is satisfied with their plan, and he gives them the go-ahead. During their investigations, the consultants realize that by reducing the firm’s debt-equity ratio and by altering some of the manufacturing processes, Cabinet Manufacturing Ltd can still attain profitability. The investors introduce them to the firm’s present owners and once the business consultants realize the potential profitability of the firm, they form a corporation with the intention of purchasing the shares of the firm. The investor’s offer of $ 3 million is promptly rejected but when Harris and Danzil make a counteroffer of 3.1 $ through the corporation where they are the major shareholders, it is accepted.
Possible arguments that might be raised by the plaintiff
As the plaintiff, the investor could argue that Harris and Danzil had an ill motive when they decided to form a corporation with the intention of purchasing the shares of Cabinet Manufacturing Ltd. They were already representing the interests of the investor when undertaking the assessment of the firm and this is a reflection of an unethical practice. In addition, they did not inform the investor that they had also decided to pursue the business opportunity, at which point they should have stopped representing the investor to avoid conflict of interest. The investor could also accuse them of undervaluing the worth of the firm so that his bid could be rejected.
Possible arguments that might be raised by the defendants
The defendants could argue that their actions did not affect their valuation of the firm because they provided all the information to the investor. In addition, they could also argue that they were not the only shareholders of the corporation that they helped to establish, and which ended up having its offer accepted by the present owners of Cabinet Manufacturing Ltd. Moreover, the defendants could argue that the actual worth of the company was $ 3 million and their decision to offer $ 3.1 million was a strategy to gain competitive advantage.
Main issues
The case presents a conflict of interest whereby the business consultants are supposed to assess Cabinet Manufacturing Ltd and advise the investor on whether it is a viable business opportunity. At the same time, the business consultants also forms a corporation with a view to acquiring the same firm once they realize that it is a viable business opportunity.
The decision
The defendants have conducted themselves in an unethical manner by using their position as business consultants to gain insight into the business potential of Cabinet Manufacturing Ltd at the expense of the investor. As such, the investor is right in bringing action against both of them for damages.
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