Question

Bryan Corporation decided to purchase a plant site. Bill Shephard, a newly elected director, has owned a desirable site for many years. He purchased the property for $60,000, and its present fair value is $100,000. What would be the result if Shephard offered the property to Bryan for $100,000 in an arm’s-length transaction with full disclosure at a meeting of the seven directors of the corporation?

Answer 1

Answer:

C) The sale would be proper and Shephard would not have to account to the corporation for his profit if the sale was approved by a disinterested majority of the directors.

Explanation:

An arm's length transaction means that a transaction is held by two parties that are not influenced by one another. In other words, the fact that Shepard is the owner of the land is not influencing the decision to purchase the land nor it is influencing the price paid for the land.

In this case, the corporation was looking for a land lot to build a new plant. Shepard has just been elected to the board of directors and he happens to own a lot that could be used by the corporation. In order for this transaction to be considered and arm's length transaction, the lot must comply with all the requirements of the corporation and the price paid must be fair market value.

If the board approves the purchase, usually Shepard would not be part of that specific meeting, then the purchase must be treated as any other ordinary land purchase.  

Answer 2

Available options are:

A. The sale would be proper only upon requisite approval by the appropriate number of directors and at no more than Shephard's cost, thus precluding his profiting from the sale to the corporation.

B. The sale would be void under the self-dealing rule.

C. The sale would be proper and Shephard would not have to account to the corporation for his profit if the sale was approved by a disinterested majority of the directors.

D. The sale would not be proper, if sold for the present fair value of the property, without the approval of all of the directors in these circumstances.

Answer:

C. The sale would be proper and Shephard would not have to account to the corporation for his profit if the sale was approved by a disinterested majority of the directors.

Explanation:

The reason is that the transaction is arms length transaction and in this transaction the payer pays the amount that he must pay for an equivalent item which we call an fair value payment. The receiver here is a director though but he is receiving an legitimate price and this price is fair value of the property so he is not required to mention his profit share because the company is paying him fair value of the property.