5
CORPORATIONS
Professor Bradford
December 12, 2001
9:00 a.m.
3 Hours and 5 Minutes
INSTRUCTIONS
(PLEASE READ BEFORE PROCEEDING!)
1. This is a partially open book exam. You may use the O=Kelley & Thompson casebook, the Bradford & Ames book, and the statutory supplement required for this course. Those books may contain any handwritten annotations you want, but may not contain any additional printed or typed materials. You may not use any other materials and you may not consult with or communicate with any other person during this exam. If you have any other books, notes, briefcases, book bags, or other items, you must bring them to the front of this room. You may not take any of these items to the special purpose rooms.
2. You have three hours and five minutes (3:05) to complete the exam. The time at which the exam ends will be posted on the board. Writing anything after time is called is an Honor Code violation. You may not even finish a word or sentence.
3. If you finish the exam more than five minutes early, you may turn in your answers in the Dean's Office. Otherwise, you must turn in your answers in this room--regardless of where you take the exam.
4. This exam has eight (8) 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.
5. The exam consists of six (6) questions. The recommended time for each question is as follows:
Question One………….30 Minutes
Question Two…………40 Minutes
Question Three………..15 Minutes
Question Four…………50 Minutes
Question Five………….35 Minutes
Question Six……….…..15 Minutes
Each question will be weighted in accordance with its recommended time.
CONTINUE TO THE NEXT PAGE.
6. You may take the exam in this room or in a designated special purpose room (typing or overflow room) posted on the board. If you decide to take the exam in a special purpose room, remember that (1) time will be called only in this room, and (2) when time is called, you must either be present in this room or have already turned in your answers.
7. 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.
8. Please write legibly. I can=t give you credit for what I can=t read.
9. For each question, assume, unless the question indicates otherwise, that the most recent versions of the Uniform Partnership Act, the Uniform Limited Partnership Act, and the Model Business Corporation Act apply.
10. 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.
11. If you believe that additional facts are necessary 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.
12. The questions should be answered in blue books, or on typing paper if you type your exam. Please write or type on only one side of each page. Double-space if you type. BE SURE TO WRITE YOUR EXAM IDENTIFICATION NUMBER ON EACH BLUE BOOK OR PIECE OF TYPING PAPER THAT YOU USE. Do not put your name on any materials you turn in.
13. The Honor Code is in effect.
14. Good luck and have a pleasant holiday.
DO NOT TURN THIS PAGE UNTIL YOU ARE GIVEN THE SIGNAL TO START.
QUESTION ONE
(30 Minutes)
Diamondback is a general partnership created nine months ago. Its two partners are Johnson and Schilling. Schilling contributed a machine worth $60,000 to the partnership; Johnson invested $30,000 cash.
The Diamondback partnership agreement provides that Johnson will receive 25% of the profits and Schilling will receive 75%. It says nothing about splitting losses. The partnership agreement also says nothing about how long the partnership will exist.
Two days ago, Johnson decided that he no longer wanted to be involved in the business. “I’m calling it quits,” Johnson told Schilling. “This partnership is over.”
“You can’t do that,” Schilling replied. “Partnerships operate by majority rule and you are not a majority. This business continues until I say otherwise.”
As of today, Diamondback has two assets: $20,000 cash and the machine, which has appreciated in value and could now be sold for $80,000. Diamondback owes a total of $160,000 to its creditors, including $15,000 that Schilling loaned to Diamondback.
Discuss what should happen now under the revised Uniform Partnership Act.
QUESTION TWO
(40 Minutes)
William Tell (“William”) is a shareholder of Target Corporation. Target is incorporated in a state that has adopted the latest version of the MBCA. Target has 80,000 shares outstanding, with a total market value of $5 million. Target has 1,800 shareholders, including Arrow Corporation. Arrow owns 72,000 of Target’s 80,000 shares (90% of the total). Target’s shares are traded on the NASDAQ system.
Gio Rossini (“Gio) is a shareholder of Arrow Corporation. Arrow is also incorporated in a state that has adopted the latest version of the MBCA. Arrow has 1,000,000 shares outstanding, with a total market value of $15 million. Arrow’s shares are not traded on either NASDAQ or a stock exchange. Arrow has 2,500 shareholders.
The boards of Arrow and Target recently announced an agreement for Target to merge into Arrow. Target shareholders, other than Arrow, will receive Arrow shares in a one-to-one exchange. As part of the merger, Arrow’s articles of incorporation will be amended to increase the size of its board of directors from five to nine. Otherwise, Arrow will remain unchanged.
A. Do William and/or Gio have the right to vote on the merger?
B. If William and Gio are dissatisfied with the merger, may they dissent and force their corporations to pay them the fair value of their shares?
QUESTION THREE
(15 Minutes)
Meridian Corporation is a Delaware corporation. Meridian has lost money for the last three years. Here is Meridian’s balance sheet as of December 12, 2001:
Meridian Corporation
Balance Sheet
As of December 12, 2001
5
Assets
Cash
Accounts Receivable
Inventory
Machinery
Land
TOTAL
$ 6,500
1,200
1,000
7,200
12,100
$28,000
Liabilities and Shareholders’ Equity
Liabilities
Accounts Payable
Notes Payable
Income Taxes Payable
Total Liabilities
Shareholders’ Equity
Common Stock
Additional Paid-in Capital
Retained Earnings
Total Shareholders’ Equity
TOTAL
$ 9,700
8,500
4,400
$22,600
1,200
2,400
1,800
$5,400
$28,000
5
The fair market values of Meridian’s assets and liabilities are equal to their book values, except that the fair market value of the land is $14,100.
What is the maximum amount of dividends Meridian may lawfully pay to its shareholders, assuming it does not change the par value of its stock or do anything else that requires a shareholder vote? Explain.
QUESTION FOUR
(50 Minutes)
Ajax, Inc. is a Delaware corporation whose stock is traded on the New York Stock Exchange. Ajax has 5,000,000 shares of common stock outstanding. Jane Doe owns 20 shares of Ajax common stock, worth $1,000. In 2000, Ajax held its annual shareholders’ meeting on May 15, 2000. It mailed its 2000 proxy statement and annual report to the shareholders on March 25, 2000; most shareholders received it within a week.
In 2001, Ajax held its annual shareholders’ meeting on May 15, the same day as last year. The events in this question concern the 2001 annual meeting.
Jane believes that corporate directors are resisting hostile takeovers, at the expense of shareholders, just to save the directors’ jobs. With her attorney’s help, Jane drafted the following proposal to submit to the shareholders at the 2001 annual meeting:
Resolved: Ajax shall not adopt any poison pill plan in response to a tender offer for Ajax stock.
On January 1, 2001, Jane hand-delivered a copy of the proposal to Ajax’s corporate offices and notified Ajax that she would present the proposal at the 2001 annual shareholders’ meeting. Jane asked Ajax to send the proposal to each of the Ajax shareholders at Ajax’s expense, since Jane could not afford her own proxy solicitation.
Ajax notified Jane that it would not send her proposal to the shareholders. When Ajax mailed its proxy statement to the shareholders on April 15, 2001, neither the proxy statement nor the proxy card contained or even mentioned Jane’s proposal. In fact, the proxy statement stated that the corporation was unaware of any shareholder proposals to be submitted at the 2001 annual meeting.
At the May 15 meeting, Jane presented her proposal. The Ajax board member conducting the meeting objected that Jane’s proposal was improper, but nevertheless allowed the shareholders to vote on the proposal, “just in case,” as he put it.
The vote was 20% in favor of Jane’s proposal and 80% against. Jane objected to the corporation including in the “no” votes the proxies they obtained from shareholders in the April 15 solicitation, but those votes were nevertheless counted. The proxies held by Ajax accounted for 53% of the shares present. Not counting those proxies, the vote would have been 20% in favor of Jane’s proposal and 27% against.
Discuss Jane’s legal claims against Ajax.
QUESTION FIVE
(35 Minutes)
Carefree Corporation is an insurance company regulated by and doing business in the State of Konfusion, its state of incorporation. Konfusion has adopted the most recent version of the Model Business Corporation Act. Konfusion’s Supreme Court recently decided that it would use the ALI Principles of Corporate Governance to resolve any issue not covered by the MBCA.
Carefree’s primary business is selling insurance-related investment products to individual investors. All of its customers are residents of Konfusion, but the Carefree board has been considering using some of its millions in free cash to expand its insurance business into other states. Parent Corporation, which is not an insurance company, owns 75% of the stock of Carefree.
Dimwit, a very wealthy individual, is an outside director on Carefree’s board of directors. Dimwit has no position with Parent.
Recently, Dimwit was in Miami helping to negotiate a new advertising deal for Carefree. During a break in the negotiations, Dimwit was sunbathing on the beach when he struck up a conversation with Molly B. Denim. Molly owned 100 percent of the stock of Advice, Inc., a federally regulated investment adviser that does business nationwide. Advice helps individual investors choose among possible investments. Advice acts only as an independent advisor; it does not sell any investments itself. When Dimwit bragged about how wealthy he was, Molly told Dimwit that she wanted to sell her Advice stock and retire to Tahiti. The conversation continued in the bar and Dimwit eventually agreed to buy all of the Advice stock from Molly for $5 million.
Dimwit and Molly closed their deal on November 15. Dimwit did not tell anyone at Carefree about his purchase because, under Konfusion insurance law, Carefree is prohibited from owning any stock of a federally regulated investment adviser. Carefree itself may offer investment advisory services, but it may not own the stock of another company that offers such services.
Has Dimwit violated his fiduciary duties as a director of Carefree?
QUESTION SIX
(15 Minutes)
Briefly (in a paragraph or two) explain how bounded rationality and other transaction costs create a need for fiduciary duties in corporate law.