1

CORPORATIONS

Professor Bradford

July 11, 2008

8:30 a.m.

3 Hours and 15 Minutes

INSTRUCTIONS

General Instructions

1. This is a closed-book exam. You may not consult any sources other than the statutes and regulations furnished with the exam, and you may not consult with or communicate with any other person during the exam. If you have any books, notes, briefcases, book bags, cell phones, PDAs, or other items, you must bring them to the front of the room now. You may not take any of these items to another designated exam room.

2. This exam has nine (9) pages, including the instructions. The page numbers appear on the top right-hand corner of each page. Please check to be sure that this copy has all the pages.

3. You have three hours and fifteen minutes (3:15) to complete the exam. You must turn in your answers in the designated room, even if you are taking the exam somewhere else. If you finish more than five minutes early, you may turn in your answers in the Dean’s Office.

4. The exam consists of five (5) questions. The recommended time for each question is as follows:

Question 1…..35 Minutes

Question 2…..35 Minutes

Question 3…..40 Minutes

Question 4…..55 Minutes

Question 5…..30 Minutes

5. Do not spend all of your time writing. Think about the issues and organize your answers before writing. Be concise. Be organized. Long, disorganized, rambling answers will be penalized.

CONTINUE TO NEXT PAGE

6. For each question, if the facts of the question do not indicate otherwise, assume that the Revised Uniform Partnership Act, the Revised Uniform Limited Partnership Act, the Revised Uniform Limited Liability Company Act, and the Revised Model Business Corporation Act apply.

7. If one of the statutes we have studied applies, cite the relevant sections and subsections and explain how those provisions apply to the facts of the problem.

8. Review the statutes and regulations now to see what is included. You should have everything you need to answer the questions. Nothing has been deliberately omitted. However, if you believe an omitted statute or regulation answers a question, describe it as well as you can.

9. If you believe that additional facts are needed to answer a question, state exactly what those facts are and how they would affect your answer. If you believe that a question is ambiguous or unclear, note the ambiguity or lack of clarity and indicate how it affects your answer.

10. You may take the exam in this room, in another designated room, or in the computer lab if you are not using your own computer.

11. The Honor Code is in effect.

  1. Good luck and have a pleasant holiday.

Instructions Concerning Taking the Exam on a Computer

13. You must take the exam on a computer that has the latest version of the Exam 4 software installed. If you have not previously installed the Exam 4 software, please notify the exam administrator immediately. You must take your exam in the CLOSED MODE.

14. Be sure to enter your exam number in the Exam ID field. (Do not use your NU Card ID number or your social security number.) You will be required to enter your exam number twice. Select the course name from the drop-down box. Be sure you find the folder for this course, because that is where your exam will be stored. Verify that the information is correct just before you select “Begin Exam.”

15. Do not worry about headers, footers, page numbers, or double spacing your exam; the software does all that for you when the exam is printed.

CONTINUE TO NEXT PAGE

16. When you are finished, please submit your exam electronically. A pop-up box will show the status of your exam. It should show a black bar with 100% in it and a message that says, “Your file has been successfully stored.” If you do not get this message, please see Vicki in the Registrar’s office immediately.

17. If you have any technical problems during the exam, please report them immediately to the Dean’s Office; we will assume you had no technical problems until when you reported them. Be prepared to finish your exam by writing it. (Regular notebook paper is O.K.)

DO NOT TURN THIS PAGE UNTIL YOU ARE GIVEN THE SIGNAL TO BEGIN.

Question 1

(35 Minutes)

You represent Free Tibet Now, a non-profit organization whose purpose is to “end Chinese repression in Tibet.” Free Tibet plans to publish an advertisement in the New York Times detailing China’s actions in Tibet. The ad urges the United States government to sanction China and urges United States businesses to quit doing business in China until there is reform in Tibet.

Richard Dear is on the board of Free Tibet Now. Dear is also a shareholder of Giant Corporation, which has substantial business interests in China. Dear has submitted a shareholder resolution pursuant to Rule 14a-8 recommending that the board end Giant’s activities in China. Dear’s resolution will be voted on at Giant’s annual meeting in August. Dear has also written letters to nine friends who are Giant shareholders, asking for their proxies so he can vote their shares in favor of the resolution.

The Free Tibet advertisement mentions neither Giant Corporation nor Dear’s proposed resolution. Free Tibet as an organization is not directly involved with Dear’s resolution, although several individuals who are members of Free Tibet are supporting Dear’s effort.

Discuss whether Free Tibet’s proposed advertisement in the New York Times must comply with the federal proxy rules.

Question 2

(35 Minutes)

Wooden Shoe, Inc. (“WSI”) is incorporated in a state that has adopted the Model Business Corporation Act. It sells frozen fish wholesale.

WSI began business five years ago. Its initial shareholders were Winkin, Blinkin, and Nod. Each owned one-third of the shares. WSI’s articles of incorporation, approved unanimously by the three shareholders, contain the following “Special Governance” section:

Special Governance Provisions

  1. Winkin shall be the President of WSI; Blinkin shall be Vice-President; and Nod shall be Treasurer. Winkin, Blinkin, or Nod may be removed from these offices only if (1) the board of directors determines that the officer is not competent to do the job or is engaged in wrongful or illegal behavior; or (2) 95% of the voting shares are voted to remove the officer.
  2. A vote of a majority of the shares of WSI shall be required for WSI to do any of the following:
  3. Engage in any business not related to the catching, preparation, or sale of fish and fish products;
  4. Borrow in excess of $10 million;
  5. Make any sales for delivery outside the continental United States or Canada;
  6. Sell additional shares, even if those shares are already authorized by these articles.
  7. A unanimous vote of the shareholders is required to amend paragraphs 1-3 of this section.

Winkin, Blinkin, and Nod recently unanimously approved the sale of additional stock to the general public. WSI raised $50 million in the public offering, and its stock is now traded on the Boston Stock Exchange. After the public sale, Winkin, Blinkin, and Nod each own 10 percent of WSI’s stock.

Prior to the stock sale, Winkin and Blinkin sought to amend the articles to eliminate the Special Governance Provisions, but Nod voted against the amendment. As a result, under Paragraph 3, the amendment was not adopted. The Special Governance Provisions of the articles were disclosed to all prospective purchasers before they purchased in the public offering.

Discuss whether the Special Governance Provisions in the articles are valid.

Question 3

(40 Minutes)

Bill Bates has for many years owned a sole proprietorship, PC Repair of Lincoln, which is in the business of repairing personal computers. Bill hates Apple computers, so the business has never repaired any Apple computers. A sign in the front window of the shop says “We Repair PCs. Sorry, No Apples.”

Bill is getting older and recently decided he didn’t want to devote as much time to the business. He asked his friend, Diane Dell, if she would like to “join the business.” Bill and Diane orally agreed that Diane would manage PC Repair and receive $2,500 a month, plus 25 percent of the profits. Bill would receive $1,000 a month plus 75 percent of the profits.

Bill agreed to give Diane “full authority” to make any necessary business decisions on behalf of PC Repair. However, Bill and Diane agreed that the business would not work on Apple computers, because neither one of them has sufficient expertise.

On July 1, Stephanie Jobs, the owner of a telemarketing business that uses only Apple computers, came to the shop. Diane, the only person in the shop that day, signed a contract on behalf of PC Repair agreeing to maintain all of Stephanie’s Apple computers. Once Bill found out, he and Diane sent a letter to Stephanie disavowing the contract.

Discuss the potential personal liability of Bill for damages resulting from non-performance of the contract. Do not discuss any procedural issues involved in enforcing that liability, if any.

Question 4

(55 Minutes)

You are an associate in the law firm Prim and Proper. Mark Money is a client of the firm. This morning, Paula Partner, your boss, told you that Mark is trying to remove Dan Dweeb as a director of Big, Inc. She asked you to review the following information and advise her about the legal issues involved in removing Dan.

Paula told you that another associate has done some preliminary research indicating that Delaware law says that only illegal action or breach of the duty of loyalty is adequate cause to remove a director. (She does not want you to reexamine this conclusion; accept it as a given.)

Big, Inc. is a Delaware corporation. It certificate of incorporation authorizes it to issue 1,000 Class A shares and 1,000 Class B shares, each with one vote per share. The certificate of incorporation also provides for cumulative voting. There are currently 300 Class A shares and 100 Class B shares outstanding.

Big has a nine-person board of directors; directors serve one-year terms. Six of the directors are elected exclusively by the Class A shareholders; the other three directors are elected exclusively by the Class B shareholders. Dan is one of the Class B directors.

On May 1, 2008, the board of directors of Big corporation voted to approve Big’s purchase from Ned Nephew of a two-acre tract of real estate on the Charles River in Cambridge, Massachusetts. Big paid $3.8 million cash for the property, on which it plans to build a new headquarters building.

Ned Nephew is Dan’s nephew. Before Big even began negotiating to buy the property, Dan informed the board of his relationship to Ned.

The purchase price was negotiated on behalf of Big by a two-person team of Dan Dweeb and Charles Chair (the Chairman of the Board of Directors and Chief Executive Officer of Big).

The transaction was approved by a 5-3 vote of the board, with Dan abstaining. One of the directors approving the transaction, Betty Books, is an accountant who has done personal accounting work for Dan in the past. Another one of the directors approving the transaction, Harvey Head, is the President of the University of Insomnia, for which Dan works as a professor.

Just before the board approved the purchase, Ned showed Dan a recent appraisal indicating that the property was worth $3.2 million. Dan did not inform the board of this appraisal.

Another two-acre tract, just off the Charles River, was available for $3.4 million. This tract, although not as picturesque, was suitable for construction of the planned headquarters building.

Mark Money, your firm’s client, believes that the owners of 140 of the Class A shares and 70 of the Class B shares will support Dan’s removal. Dan owns the other 30 Class B shares.

Advise Paula concerning the possibility of removing Dan as a director.

Question 5

(30 Minutes)

Scion Corporation is a Delaware corporation. It makes high-definition, digital television screens. Scion is currently developing a screen that could be produced for half the cost of screens now on the market. The research on this screen has been very promising, but Scion has not yet reached the production stage. Scion has not publicly disclosed this research.

Papa Corporation, also a Delaware corporation, owns 55% of Scion’s stock. The rest of Scion’s stock is owned by a number of smaller investors. Scion’s stock is not publicly traded, nor is it registered pursuant to section 12 of the Securities Exchange Act.

Greg Greed is a director of Papa; he has no other position with Papa, and he is not a director, officer, or employee of Scion.

On June 1, Greg met Martha Maven, Scion’s Vice President for Research, at a cocktail party given by a mutual friend. After Greg introduced himself as a Papa director, Martha said, “If that new TV screen we’re working on is as good as I think it will be, Papa’s investment in our company could really pay off. Can you imagine how many more televisions people will buy at half the current price?”

“What are you talking about?,” asked Greg, who was unaware of Scion’s research. Although a couple of Papa officers knew about the Scion research, neither Greg nor anyone else on the Papa board had been briefed on it.

“I’m sorry,” said Martha. “I thought you knew. I probably shouldn’t have said anything. It’s very hush-hush. Even the Papa people we briefed have been required to sign non-disclosure agreements. Please keep this confidential.”

“No way,” said Greg. “This sounds great. I’m calling my broker right now to buy some Scion stock.” That same day, Greg bought 1,000 shares of Scion common stock from one of the Scion shareholders. Greg did not say anything to the seller about the Scion research.

Discuss whether Greg’s purchase is legal under federal securities law.