Reference no: EM133314283

Software the Hard Way Pearson Canada Inc. 2017. Case Study.

Fred is a software developer working for Ace Development Company for the last 10 years. He has no management position with the company other than being a software developer, however because he is key to its operation and one of the original founders, he is one of the 5 directors of the company. He and 2 other friends (Sam and Harry) had originally set up Ace to develop some software they had created at the beginning of the personal computer boom. They had all employed by a major computer company but they had found the atmosphere, the suits, and the eight-to-five schedule stifling and decided to take the ideas they were working on and set up their own company. Originally 1,000,000 shares were issued in Ace Development Corp. Fred retained 30 % of the shares (300,000) and is a director of the company. Sam and Harry also have 30% each of the shares and are also directors. The remaining 10% are divided equally between Tom, the President/production manager and a Dick, the Marketing Manager who also hold director positions. Fred Sam and Harry all knew that their skills were in the software development aspect of the business, not the management and so from the beginning they planned to hire the management skills the company needed so that they could get on with their research and development.

This worked out to be a very successful strategy and over the years Ace developed into one of the most successful and influential companies in their field with 30 employees and annual sales in the millions. The next part of the strategic plan developed for Ace by Tom and Dick was to go public and sell shares on the stock market. This would require a further expansion of the business with an infusion of borrowed funds of about $1.5 M. from the bank. It is important to note that although Sam and Harry made important contributions, it was Fred that was considered the software genius. He was key to the whole Ace operation and had a great reputation in the industry. There is no question that the success and reputation of Ace was largely dependent on Fred's role in the company. It is clear that the Bank's willingness to provide the additional capital needed was on the assumption that Fred would continue with the company. Over the years the Ace had specialized in the development of communications software, particularly networking and more recently the company had directed its attention towards exploiting the exploding interest in the interment.

Fred was disinterested in the business aspects of Ace. He had a lab at home and a couch at work and he would wander in and out whenever he felt like it often not distinguishing between his personal and his work life. Certainly, he was just as likely to be working or sleeping at his home as at the office. Everyone was tolerant of his eccentric lifestyle because of what he produced. But Fred was finding Ace in its new successful corporate status as stifling and as restrictive as the company he had left. He was not a happy camper especially when he felt the resentment of the other employees towards his "privileged position". He couldn't deny how successful the company had become however and so he just kept plodding along in what he considered his rut of a life.

On the Morning of June 18 Fred and his assistant George were summoned along with the other employees to a general meeting where it was announced that everything was now in place. The funding had been obtained and the public share offering was to go ahead over the summer. Every Employee of the company was to have the right of first refusal of the additional 1,000,000 shares to be offered to the public. Tom, the president, explained that they had borrowed $1.5 M from the bank and they intended to use this money to diversify. Fred knew vaguely about the intention to go public but he now realized that they had borrowed a considerable amount of money effecting the value of his shares, and that his percentage of Ace would also be severely diluted as well as any say he had in its operation with the sale of the new shares. He also realized that Ace was being diverted from its original purpose and now would be just another business, which completed his disillusionment. Of course he would have known all of this had he bothered to attend the directors meeting as he should have. The champagne was broken out and all began to celebrate. Everyone congratulated Fred and the role he had played in developing the successful company. All recognized the role that Fred's expertise skill and genius had played. Tom Toasted Fred and his great accomplishments. Left unsaid was the fact that the reason the management of Ace wanted to diversify was to make the company fortunes less dependent on such an unstable character as Fred.

Fred's son, Dave, had a lot of his father's characteristics. There was that same flash of genius, and also much of the same instability. He had followed in his father's footsteps and taken computer programming at university. But he became bored and found the regime required by university study stifling and dropped out after his third year. He said that THEY weren't teaching him anything he couldn't learn on his own anyway. He and two friends who had graduated decided to up their own development company just like Fred and his friends had done 20 years before. One of the projects that Dave had been working on at university was a new interface for working with the internet. This was cutting edge and promised to revolutionize the use of the internet and ease the connection with individual users. This new interface promised to speed up the process and the convenience of using the internet.

The idea had come from his father. Dave had been out with Fred on his boat one day and had complained to about needing a major project to work on as part of his studies. Fred remembered a conversation he had with one of his clients who had expressed a need for a faster and better internet interface and had also given some basic ideas as to how it could be accomplished. Fred had been too busy to follow up on it and had never told anyone else at Ace about the idea. Dave took the idea back to the university and got the permission and support of his supervisors to proceed with the project. In fact the university thought so highly about the idea that they provided a Lab and several other personal to work with Dave. They told Dave that if things worked out this could be the basis for a major part of the new product development and marketing strategy of the university. The two other students (graduate students) were the friends that Fred was working with and at the university they proved the workability of this new software. Those three were the only ones who had any detailed knowledge of the project.

When they decided to leave the university their main problem was how to take their equipment with them. They didn't want to leave anything behinds so that their ideas and work could be stolen. They came to Fred. Fred advised them that even though they had assembled the equipment it was with university grant money and they couldn't get away with taking the equipment with them. That belonged to the university. But they should erase all extra copies of their data that remain in those computers before they go. It was clear to Fred that a new business should be set up and that capital would have to be raised to recreate the lab that the boys had left behind. Other funds would be needed to market the new product. Fred even mentioned to the boys that they could go to Ace and enter into an arrangement with that company to co-develop the software. They had the market developed, the marketing expertise, and the production facilities and there was no question that they could successfully market the new product.

Although Fred was enthusiastic about the new enterprise his years of experience in the computer industry had taught him to be cautious. Many of these new ideas run into snags and never get anywhere. He understood that it was risky but that the potential rewards were great. He told this to Dave and his friends but they didn't care about the risk. They knew it would work and anyway, they didn't have anything to lose. They were just concerned about how to best complete the development of the product and how to best exploit it and get it out on the market. Fred said that he would help as much as he could.

After a considerable amount of thinking and after checking his finances, Fred decided that he could take some personal risk and told the boys to count him in. It was clear that they would need at least $900,000 to set up the lab and get the business going. He decided that he could risk $300,000. Since Dave and his friends had no money the rest would have to be borrowed from other sources. Fred wanted to make sure that the rest of his fortune was protected and not at risk. He couldn't start all over again. He also didn't want to do anything to put Ace in danger as most of his wealth was tied up with his shares in that company. He had to consider whether he would stay working for Ace and remain as a director or sell his shares, quit and go into business with Dave and his friends even with all of the negative impact that would have on Ace. One thing was sure and that is that if he left Ace he would take his sidekick George with him who was a technician and an absolute miracle worker with software and this would further damage Ace.

Remembering his own experience with his own friends and Ace that they had started, he wanted to not only limit his liability to the $300,000 but also make sure that the had more control in what would happen with the new business. He wanted to have some say in management and he wanted to be assured of a share of the profits. He didn't want to discourage or control the enthusiasm of the young people he was helping out but with his experience and age he knew that there had to be some guiding hand and that that guiding hand was going to be his. A major difficulty was just what kind of business arrangement would be appropriate for him and the boys. Fred decided that he needed advice and although it was against everything he stood for he decided he had to talk to his lawyer. All of these were on his mind when he called on his lawyer to discuss his options. The lawyer talked about Companies, limited liability, limited and general partnerships, shareholder agreements, share structures, security arrangements, collateral, directors' duties, personal liability, fiduciary duties and by the time that Fred left his head was reeling. Examine this situation and discuss it from the point of view of Ace, the university, Fred, the bankers, and Dave and his friends. In your answer look at the different methods of carrying on business that Fred, Dave, Tom and Dick might consider.

overall;

What are the legal issues that arise in this problem? Why are they important? What are the applicable legal rules?
Analysis:

Is there a clear answer as to the operation of the law? If not, what are the potential legal outcomes and which is most likely?

What is the objective or purpose behind the rules being applied? Will the purpose or objective behind the rule being applied likely affect the outcome of a court action?

What effect can these outcomes have on the business involved?
Recommendation:

What is the best course of action for the business? (Why?)

Discuss the potential impact of the various possible courses of action that can be taken on the business. What should have been done (if anything) to avoid this problem in the first place? (risk analysis) What steps (if any) should be taken to avoid similar problems in the future? (risk avoidance)