Case Study – Gemstar and Canstar Corporation

Case Study – Gemstar and Canstar Corporation

Key Players

1. Plaintiffs

Adam Kunst: This is the principal of the Kunst and R. Pape Corporations and one of the plaintiffs in the case. He owns 10% shares of the Gemstar and Canstar corporations.

Herbert Bergmann: Owned 10% of Gemstar and Canstar Limited’s shares and is the principal of H.K. Bergmann Inc. He is another plaintiff in the case.

Kurt Kittan is a plaintiff in the case. He owned 10% of Gemstar and Canstar Limited Company’s shares and is Kittan, Inc.’s principal.

Joseph Stangl: He owned 10% of Gemstar and Canstar Limited shares and is the principal of Richard Holding, Inc. He is one of the plaintiffs in the case.

James Tomasin is an individual plaintiff in the case involving the sale and purchase of Gemstar and Canstar Company.

2. Defendants

Ernst Young is an individual defendant involved in the case of the breach of fiduciary duty due to the selling of the Gemstar and Canstar Companies. He was accused of professional negligence, breach of contract, and breach of fiduciary duty.

Edward Villanueva: The Accountant working with Ernst Young. He is a defendant accused of substantial assistance of another’s breach of fiduciary duty. As Ernst Young’s accountant, he had a duty to perform reliable audits for his customers and ensure that his finances met the regulations.

Lynn Villanueva: The wife of Edward Villanueva. She is a defendant accused of substantial assistance of another’s breach of fiduciary duty.

3. The Jury

Robert J. Corcoran was the justice who decided on the case of Gemstar and Canstar Corporation. He was the judge of the Supreme Court of Arizona.

Case Analysis

In this case, the defendants were accused of breach of contract, professional negligence, and fiduciary duty after allegedly selling the Gemstar and Canstar corporation. The lawsuit presented different key facts that this part of this report will cover. The major elements of the case that this part will present are the capacity of the shareholders to sue the defendants, the capacity of the company to sue the defendant, and the details of some of the defenses that the defendant used in the case. Below are the major facts of the case.

1. Key Issue:

   The individual plaintiff could sue for breach of contract as it presented an ethical issue for the company (Easterbrook and Fischel).

Question: Did the individual plaintiffs in the case have the capacity to sue the defendants for breach of contract?

In the case, the defendants challenged the capacity of the individual shareholders to sue for breach of contract. The court ruled against the defendants’ arguments because the case details presented that the defendants patriated in activities that led to the selling of Gemstar and Canstar corporation without the consent of the six shareholders. Violating a partnership in a firm is a significant offense that is punishable in court and presents a significant ethical issue for the shareholders. According to the case of Gemstar and Canstar corporation, the company’s acquisition in the late 1970s led to an agreement between the shareholders to share and share alike in the costs and benefits of the company. These costs and benefits were to be distributed to these shareholders based on the amount they sent to acquire the company. This means that the shareholders got into a contractual agreement, and therefore, selling the company without any of the partners’ consent would lead to a breach of a contract lawsuit (Dorril, Schindel, and Bhojani 112). This is the major reason for the court ruling against the defendant for the breach of contract.

2. Key Issue:

   The individual plaintiffs could sue for breach of fiduciary duty because their partner’s actions caused them a loss (Van 86).

Question: What arguments allowed the individual shareholders to sue for breach of fiduciary duty in the case?

Despite the defendants’ claim that the plaintiffs could not sue for breach of fiduciary duty, the jury ruled in favor of the shareholders. This is an important element for the case study as it presents the elements of fiduciary duty. The concept of fiduciary duty covers the actions taken in the interest of the firm or the six shareholders by the defendants (Ribstein 220). The company’s operations and the setup of the partnership meant that all the partners and shareholders of the company were obligated to offer fiduciary duty to the company and the other shareholders. The defendants selling the company was an action to satisfy their needs and disregard the needs of the company and the other shareholders. This means that the defendants were in breach of fiduciary duty when they sold the company. Therefore, the plaintiffs could sue them for the breach of fiduciary duty.

3. Key Issue:

   The individual plaintiffs had the capacity to sue for professional negligence (Anderson 248).

Question: What laws and corporate elements gave the plaintiffs capacity to sue for professional negligence in the care provided?

Partners in companies have the right to file for a lawsuit if another partner engages in management actions that will lead to a loss for the firm or other partners. This is an evident element in the case of Gemstar and Canstar Corporation. The case presented that the defendants sold the company without the consent of the other partners. This would lead to a loss for the others as they acquired the company for financial gains. This also shows that the defendants neglected their rights to act in the company’s interest and the other investors. Therefore, they presented professional negligence (Fortney 401). Therefore, the six shareholders could sue for professional negligence. Due to this, the court ruled in favor of the plaintiffs regardless of the arguments by the defendants.

4. Key Issue:

   The individual plaintiffs could sue derivatively in all four claims as the defendant exploited his shareholder’s position of control (Ferris et al. 143).

Question: What concepts and conditions gave the plaintiffs the capacity to sue derivatively in all four claims in the case?

Derivative suit presents the capacity of the shareholders (the plaintiffs) to sue the directors, managers, officers, other shareholders, or third parties for breach of duty. This is an important element in this case as it presents the element of substantial assistance of another’s breach of duty. This means that the shareholders could sue Ernst Young for breach of duty. On the other hand, the shareholders could also sue their accountant for breach of duty. The law, however, presents the accountant’s capacity and relationship with his client. Furthermore, the law also presents that the accountant of Ernst Young was obligated to project high standards of professionalism, good faith, loyalty, and disclosure. This also presents the elements of audits as done by financial experts. The accountant had to perform reliable audits for the client and establish the possible consequences of the decision to sell the company. Failing to cover these aspects meant that the accountants had to be sued for breach of duty (AU-C Section 320). This means that the accountant was obligated to advise Ernst Young on the repercussions of selling the company. However, he encouraged the activity with disregard for his client’s benefits. This means that Edward Villanueva and Lynn Villanueva were at fault for supporting the act. Therefore, the plaintiffs had the capacity to sue all the defendants under all four claims.

5. Key Issue:

   The capacity of Gemstar and Canstar Corporation to sue the individual shareholder on all the claims of the case (Ferris et al.143).

Question: Did the company have the capacity to sue for breach of contract, professional negligence, substantial assistance of another’s breach of fiduciary duty, or breach of fiduciary duty?

The case presents that the shareholders restored Gemstar and Canstar corporation registration under British Virgin Islands laws. This renders the claims by the defendant that the company was the one struck from the B.V.I register null and void. On the other hand, the court and the defendants focused on the timeliness of the ratification of the suit in 1991. The case presents that Adam Kunst presented the case in court on behalf of Gemstar and Canstar Corporation as needed. This also shows that the timeliness of the ratification was irrelevant to the court proceedings. Therefore, the claim that the ratification of the suit was not timely for the company did not work in favor of the defendants. Therefore, the plaintiff could sue for all four claims against the defendants.

Lessons Learned and Discussion

This case presents four major claims in court. These claims cover breach of contract, professional negligence, breach of fiduciary duty, and substantial assistance of another’s breach of fiduciary duty. In addition, the case also presents the element of derivative suits as an important tool in the justice system. These are some of the major elements of consideration for partnerships in the corporate sector. In general, this paper presents that the defendants were at fault due to different aspects; therefore, the plaintiffs could sue them for all the claims. The case presents the aspect of fiduciary duty as one of the major issues in the lawsuit. The fiduciary duty element presents the duty of faith and fair dealing, the duty of care, the duty of loyalty, and the duty of disclosure. These cover the relationship between Kurt Kittan and his accountant. As an accountant, Edward Villanueva had to use all the financial materials relevant to the case to advise and audit Kurt Kittan. The accountant, however, did not do that and considered activities that were good for performance. While accountants do not directly interact with the company, the lawsuit involved them because they failed to perform their duties in advising Kurt Kittan. These are some of the major elements addressed in the case.

The partnership agreement is legally binding and establishes the rights and duties of business partners. If a business partner violates a collaboration agreement, the contract should be the first source of information since it should provide provisions to fix the violation. If the contract does not include a breach of contract clause, the shareholders may have to sue the partner for breach of contract. Therefore, this presents an aspect of consideration in the corporate world. Based on the case, the agreement between the investors that led to developing and forming Gemstar and Canstar Corporation meant that the individuals got into a contract. Therefore, they all had to honor the terms of the agreements. On the other hand, they were obligated to act in favor of the company and ensure their actions did not cause the other partners any harm or losses. This means that the plaintiff could sue the defendants.

Investor legal rights are seen as an important aspect of corporate governance. The efficacy of these rights is assessed by analyzing changes in the board of directors connected to the initial expenses of shareholders. In the above details, preliminary legal action is available for firms that are more prone to corporate disputes. Furthermore, the analysis of the cases presented that fiduciary suits make significant changes in the corporate world as the shareholders can sue any person who sabotages the company’s operations regardless of their level of involvement in the company’s operations. There is also an indication that the board of directors’ other roles are evolving and can affect the success or performance of the companies. This clearly demonstrates that contrary to popular belief, hierarchical claims against shareholders may be employed as an effective way of corporate governance (Ferris et al. 143). Therefore, fiduciary suits are present to govern the actions of the stakeholders in the company against actions that can sabotage operations and cause losses or unfairness. This presents the element of fiduciary suits as covered in the case analyzed in this paper.

Works Cited

Anderson, Roy R. “Fiduciary Duty, Tort and Contrast: A Premier on the Legal Malpractice Puzzle.” SMU Law Review, 1994, vol. 7, no. 2, pp. 235 – 269. https://scholar.smu.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=2344&context=smulr

AU-C Section 320. “Materiality in Planning and Performing an Audit.” https://us.aicpa.org/content/dam/aicpa/research/standards/auditatest/downloadabledocuments/au-c00320.pdf. Accessed 17 Feb. 2023

Dorril, Jeff., Schindel, Mathew., and Bhojani, Salman, “Partnership Law.” 1 SMU Annual. Texas Survey, 2014, pp.  101 – 115. https://scholar.smu.edu/cgi/viewcontent.cgi?article=1013&context=smuatxs. Accessed 17 Feb. 2023

Easterbrook, Frank H., and Daniel R. Fischel. “Contract and Fiduciary Duty.” The Journal of Law & Economics 36, no. 1 (1993): 425–46. http://www.jstor.org/stable/725483.

Ferris, Stephen P., et al. “Derivative Lawsuits as a Corporate Governance Mechanism: Empirical Evidence on Board Changes Surrounding Filings.” The Journal of Financial and Quantitative Analysis, vol. 42, no. 1, 2007, pp. 143–65. JSTOR, http://www.jstor.org/stable/27647289. Accessed 17 Feb. 2023

Fortney, Susan S., “Professional Responsibility and Liability Issues Related to Limited Liability Law Partnerships.” Maurice A. Deane School of Law at Hofstra University. Texas Literature Review, 1998, pp. 399 – 442. https://scholarlycommons.law.hofstra.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1806&context=faculty_scholarship. Accessed 17 Feb. 2023

Ribstein, Larry E., “Are Partners Fiduciaries?” 2005, University of Illinois Law and Economics Working Papers. Working Paper 10, pp. 211-252. http://law.bepress.com/uiuclwps/art10.

Vann, Vicki. “CAUSATION AND BREACH OF FIDUCIARY DUTY.” Singapore Journal of Legal Studies, 2006, 86–107. http://www.jstor.org/stable/24869218.

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Case Assignments. The case assignments are group assignments based on cases in the Knapp book. You will be required to submit a written report for one case—one case that focuses on audit planning and risk assessment (choose case 1.4). The written report is due the day the case is scheduled for class discussion. The written report consists of three sections:

1. Key Players. Identify the client (the company and key company people), the accountant (the accounting firm and the engagement team), the third parties (creditors and investors), and others.

2. Case Analysis (key facts, questions, and related discussion). Based on the key facts in the case, pose questions and then answer the questions. The answer should incorporate information from the case, requirements and guidance from the AICPA’s professional standards, and your comments that link the facts and guidance.

3. Lessons Learned. Identify lessons the accounting profession should have learned from this case. In other words, what are the implications? Lessons should link to your case analysis.

Case 1.4 Gemstar

AU-C 320, Materiality in Planning and Performing an Audit
Be prepared to discuss the case, looking for audit, ethical, and quality control issues. In particular, look for AU-C 320 issues.