Instructions

1. I know you are not a lawyer, and I don’t expect you to answer the questions in this problem as if you are a lawyer. I expect you to approach the questions from the perspective of a business owner who’s responsible for spotting legal issues and making a preliminary assessment of their impact on your business. Don’t be overly concerned about whether I agree with the exact judgment calls you make in your assessment. The objective here is for you to spot the issues and demonstrate your understanding of the legal implications.
2. Please don’t cite cases or outside materials. If you make a statement in your answer, you can assume that the statement is supported.
3. Your answer should not exceed 5 pages.

Background

It has been 5 years since CloudFabric (your wildly successful start-up with Ann and Bob) settled its first lawsuit with Rich Man. Since then CloudFabric has incorporated as a C-Corp and had a successful IPO last year. CloudFabric’s leading product, BabySpeak, is priced at $79. On the back of BabySpeak’s success, CloudFabric now has more than $100 million in sales and is a market leader in the interactive fabric industry. In fact, CloudFabric now commands 50% of the southeast USA market. Despite its impressive business success, Cloudfabric has been getting a lot of negative PR around diversity. Cloudfabric’s employee base is only 10% women, 3% ethnic minority and only 5% of the employees are over the age of 40. Ann, CloudFabric’s CEO, has made improving diversity one of CloudFabric’s main goals for the next 3 years.

Soft Wear, Inc. (“SWI”) is a competing interactive fabric company based in Atlanta, Georgia. SWI’s employee base is comprised of 49% female, 10% African American, 15% other ethnic minority and the median age is 45. SWI is a privately held company with all of its stock being owned by its founder, Chris, and ten other investors. Chris was your classmate in the MTech graduate degree program and owns the majority of SWI’s shares. SWI’s leading product, CompWear, competes with BabySpeak, but is priced at $119. Over the past 3 years, SWI has seen its market share in the southeast region continue to decline due to some money management issues and CloudFabric’s meteoric rise.

Chris called you last week to catch up. During the call he told you about some of SWI’s financial troubles and suggested the two of you meet again next week to discuss how you may be able to work together.

Question 1: Based on last week’s conversation with Chris, you suspect he will put forth the following options when you speak with him next week.

• Agree to sell BabySpeak and CompWear at $99 to level the playing field
• Agree to carve out the state of Georgia for SWI, while CloudFabric keeps the remainder of the southeast region
• CloudFabric purchases 50% of SWI’s assets
• A CloudFabric + SWI merger

a). What are the likely issues you should be concerned about or consider for each of the 4 options?

b). Is there anything you should do in preparation for the discussion with Chris given that these options are very likely to be proposed?

Question 2: CloudFabric and SWI decided to merge the two companies, with CloudFabric remaining as the surviving entity. Unfortunately, the combined business operations have not produced stellar results. Ann blames the poor performance on the talent pool, largely coming from SWI, and wants to make some immediate changes. Massive layoffs are being planned, which will disproportionately impact former SWI employees. What legal issues are raised by the forthcoming layoffs?