LEGAL PROBLEM

Techno-Corp. was authorized by its’ Articles to issue 200,000 shares of stock. Mallory bought 60,000 shares. Six
of his associates bought 10,000 shares each. Forty investors who were not well known to Mallory bought 2000 shares
each. Mallory thought of himself as an entrepreneur and considered the corporation to be “his business”. He served
as both President and Chairman of the Board. He and the six shareholders who owned 10,000 shares each made up the
board of directors. Formal directors meetings were never held. Mallory believed that since he and the other
directors owned a majority of the shares, there was no need to invite the other shareholders to the annual
shareholders meetings which were held at Club Margarita –Mallory’s favorite bar — following an informal meeting
of the directors.

Mallory lived in an expensive beach estate in Montecito. Since he was having financial problems, he ordered the
corporate treasurer to cover his mortgage payments from the corporation’s account. His mortgage payments were
$20,000 per month. Knowing that Techno-Corp’s finances were also shaky, Mallory borrowed $1 million from Milhouse,
a wealthy investor. The loan was in the corporation’s name and was unsecured. Mallory did not inform Milhouse of
Techno-Corp’s financial problems. Mallory had express authority to borrow money for the corporation. Milhouse has
been unable to obtain repayment of his loan from Techno-Corp.

Will he be able to obtain repayment from anyone else? Explain.

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