Leon Tusk owns 30 percent of Mammoth, Inc., a Delaware corporation and is CEO and a member of the
Board. Mammoth is the world’s largest manufacturer of nuclear-powered yachts. Mammoth buys nuclear
propulsion systems from another firm, which it installs in each yacht before sale to boat dealers or consumers.
Mammoth competes with several manufacturers of yachts propelled by gasoline engines. The average gaspowered yacht emits one ton of carbon each year, while nuclear yachts emit no pollution and pose no other
environmental risk. (There is no regulation of carbon emissions by yachts, and a recent constitutional
amendment protects the “fundamental right to operate a boat free of environmental regulation.”) Often hailed
as a great but quirky visionary, Tusk’s motto is: “technology will save the planet.” Mammoth’s Board
unanimously adopted this motto as the firm’s own “Motto and Mission” in 2012.
From 2012-2019, Mammoth charged prices equal to those of firms selling gasoline- powered yachts and
earned a reasonable profit. For instance, Mammoth’s most popular yacht, the “Neptune,” costs about $200,000
to build and distribute to consumers. During the 2012-2019 period, Mammoth charged $210,000 for a Neptune,
earning a five percent profit on each sale. Mammoth reinvested some profits in research and development of
better yachts. The firm also spent $100 million per year developing: “The Mars Round Trip Lander.” If
successful, the probe would gather soil samples and return to Earth. Many experts believe the project is
doomed to fail, like most other efforts to land probes on Mars. However, such a mission is Tusk’s boyhood
dream, and he has convinced fellow directors that the project would further the company’s “Motto and Mission.”
Each director also secretly hopes the probe will bring back rock samples that each can display in his or her
In early 2020, gasoline prices fell 50 percent, after discovery of massive oil deposits near Wytheville, Virginia.
Analysts unanimously expected gasoline prices to remain this low for 20 years. As a result of these lower gas
prices, the cost of operating the typical Mammoth yacht became significantly higher per mile than the cost of
operating a similar gas-powered yacht. Mammoth thus announced a significant price reduction on May 1, 2020,
dropping the price of the Neptune to $190,000, with the result that the firm loses $10,000 on each sale.
Analysts project that, in 2021, the firm will lose $200 million. They also note that the firm has few cash
reserves, because of expenditures on research and development and development of the Mars probe. The
firm’s stock price fell precipitously between early 2020 and late June 2020, even though the overall stock
market was rising.
Mammoth held its annual meeting on July 1, 2020. Several shareholders complained about the recent slide in
Mammoth’s stock price. Sally Slide Rule, who owns 1,000 shares, delivered remarks advocating a switch from
nuclear propulsion systems to gasoline systems. She claimed that this switch would not entail any additional
expense, because some gasoline systems are interchangeable with nuclear systems. She also claimed that
gasoline systems cost the same as
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nuclear ones. She concluded by claiming that: “if we switch to gas, we can raise our prices back to their levels
before May 2020 and return to profitability.”
Mammoth’s directors, including Tusk, listened intently to the speeches. Just two weeks after the meeting, some
employees accidentally discovered gold on company property. Analysts estimated that the gold mine will
produce $400 million in profit each year for the next century. Not surprisingly, the company’s stock price
rebounded, exceeding December 2019 levels. One analyst remarked: “sure, the company is losing $200 million
per year on its yacht operations, but that is more than offset by its gold profits, so investors should be happy.”
In a private conversation, Tusk confided to several fellow directors that “we are lucky we found gold.
Otherwise, we might have to use gasoline engines. That idea was shortsighted and unethical and would
contradict our desire to save the planet.” One director suggested they study the gasoline idea that Sally had
advocated at the annual meeting “just in case, to determine whether we could return our yacht operation to
profitability as Sally claimed.” Tusk replied: “heck no. We can’t let greedy shareholders who feel entitled to run
our company derail our plans for the future.” All the directors, including the one who suggested the idea,
nodded their heads with approval.
The directors changed the subject and decided to take an informal, non-binding vote on whether to enter a
long-term supply contract with Atlas, the firm’s supplier of nuclear propulsion systems. The results of the
informal, non-binding vote were as follows: five of the directors voted “yes” and seven voted “no.” A few days
later, Hercules, the nation’s largest manufacturer of gasoline-powered engines, sent each board member an email proposal to supply Mammoth with gasoline-powered engines “fully compatible with your current yacht
designs.” The board did not discuss the proposal, and no board member responded to the e-mail.
Sir Not So Friendly (“Friendly” or “Sir Friendly”) is an independently wealthy takeover specialist who has been
following Mammoth for several months. On October 31, 2020, Mammoth’s stock was trading at $65 per share.
On November 1, Friendly announced a “tender offer for all outstanding shares of Mammoth” at $80 per share.
The offer was conditioned upon “Mammoth retaining the contractual freedom to purchase propulsion systems
from the supplier of its choice.” The offer expired on November 9th. Friendly then appeared on several talk
shows andexplainedhisplansforMammothifheobtainedamajorityofthefirm’sshares. Heannounced that he would
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replace the current Board with individuals who “embrace gas propulsion and don’t care about space
exploration.” By November 2, Mammoth’s stock price had risen to $76 per share.
Mammoth’s Board held an emergency meeting on November 3. The firm’s outside legal counsel was present,
as was Martha Moneybags, the firm’s investment banker. Moneybags presented the Board a detailed 50 page
“valuation study” of Mammoth. The study concluded that: “If the company is properly managed, Mammoth’s
share price could easily reach $100.” A footnote on page 36 observed that “proper management” would
include: (1) “eliminating expenditures on the Mars probe and (2) exclusive focus on maximizing shareholder
value within the bounds of the law.”
After receiving the report, the Board considered two resolutions. The first approved a long- term supply
contract with Atlas. The lengthy contract, delivered to the directors 20 minutes before
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the meeting, required Mammoth to purchase its entire requirement of propulsion systems from Atlas “for the
next ten years.” The contract also included a requirement that Mammoth purchase a minimum number of
propulsion systems each year, even if Mammoth does not need such systems. The “minimum number” is equal
to Mammoth’s average annual purchases in 2016-2019. The resolution passed unanimously. “We must follow
our motto,” several directors said simultaneously, while the others nodded with approval. The second resolution
amended the firm’s bylaws to provide that one third of the firm’s directors would serve until June 30, 2021, one
third would serve until June 30, 2022, and one third would serve until June 30, 2023. (Without such an
amendment, the Bylaws would continue to provide that the terms of all 12 directors would expire on June 30,
2021.) This second resolution also passed unanimously. A company press release urged shareholders to reject
what it called an “offer well below the true value of Mammoth, as determined by its investment banker.” After
the resolutions and press release, Sir Friendly withdrew his offer, and the price of Mammoth’s stock fell to $65
On December 1, Sally brought an against Mammoth’s Board of Directors, in the Delaware Chancery Court,
challenging the Board’s adoption of the two resolutions at the November 3 emergency meeting “as breaches of
fiduciary duties.” Before the trial, a major business school published a “case study” of how Mammoth’s Mars
Lander project, while likely to fail, actually generates tens of millions of dollars of free positive publicity for Tusk
and Mammoth each year.
The case goes to trial, and Sally proves all of facts detailed above, including the 50 page valuation study. The
directors introduce the business school case study described above, without objection from Sally. The parties
waive a jury.
You are a law clerk for the Chancery Court judge. The Judge has asked you to prepare a memorandum
assessing the strength of Sally’s case against the directors, including an assessment of what relief Sally could
obtain if successful. Please draft the requested memorandum. For purposes of the memorandum, ignore the
question of whether Sally should have made a demand on directors. Also, assume solely for the sake of
argument, that Delaware Law allows directors to amend a firm’s bylaws to “stagger” the terms of directors, as
the Board did in the second resolution, so long as the “purpose and objective of such an amendment is
otherwise consistent with the Board’s fiduciary duties.” Finally, do not distinguish between Tusk, on the one
hand, and other directors, on the other. Instead, treat the entire Board as a single entity, acting with unitary
purposes and objectives, as illuminated by the facts described above.