1
CORPORATIONS
Professor Bradford
December 4, 2006
8:30 a.m.
Three Hours andThirty Minutes
INSTRUCTIONS
General Instructions
1. This is a closed-book exam. You may not consult any sourcesother 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, 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 andthirty minutes (3:30) 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 ofsix(6) questions. The recommended time for each question is as follows:
Question 1…..30 Minutes
Question 2…..50 Minutes
Question 3…..20 Minutes
Question 4…..45 Minutes
Question 5…..30 Minutes
Question 6…..30 Minutes
An additional five minutes is not allocated to any particular question.
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.
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6. For each question, assume, unless the facts of the question indicate otherwise, that the Revised Uniform Partnership Act, the Revised Uniform Limited Partnership Act, the 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.
- Good luck and have a pleasant holiday.
Instructions Concerning Taking the Exam on a Computer
13. You musttake 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 One
(30 Minutes)
Alpha is a limited partnership organized in a state that has adopted the Revised Uniform Limited Partnership Act. Gina General is the general partner of Alpha and there are ten limited partners.
Alpha’s partnership agreement grants full management authority to Gina, except that a majority of the limited partners must approve any expenditure of more than $10,000. The partnership agreement also contains the following language: “The general partner, or any person or company affiliated with the general partner, may transact business with the limited partnership. The general partner shall not be liable for any breach of fiduciary duty because she has a personal interest in such a transaction.”
On October 1, the Alpha limited partners, by a 7-3 vote, approved the purchase of equipment from Machines, Inc. for $25,000. Prior to the vote, Gina informed the limited partners that similar equipment was available from other manufacturers for prices ranging from $20,000 to $30,000. Gina said she chose Machines because she thought its equipment was the best; this was a true statement of what she believed. Gina did not tell the limited partners, nor did they know, that she owned 50 percent of Machine’s stock.
Discuss whether Gina is liable under partnership law to Alpha or its limited partners in connection with this transaction.
Question Two
(50 Minutes)
Farah Fruit is Vice President-Marketing and a director of Produce Legumes Unlimited Marketing, Inc. (“PLUM”). PLUM, which is incorporated in a state that has adopted the latest version of the Revised Model Business Corporation Act, is in the business of distributing produce to grocery stores. PLUM’s business is cyclical and it has been having serious cash flow problems lately. Because of a market glut of produce, PLUM has barely been able to pay its bills during the past two years. PLUM’s board has discussed ways to generate more cash, including acquiring a company in another line of business, but no specific plans have been made.
Gretta Grocer is the Vice President-Purchasing for Mighty Market, a large national grocery store chain. Mighty Market is one of PLUM’s biggest customers. On November 1, Farah was visiting Gretta on business; Gretta invited Farah to stay in town overnight and play golf the next day. Farah changed her travel plans so she could stay.
The next day, while playing golf, Gretta mentioned that a friend of hers, Ed Elf, owned a small but growing toy store, Turbo Toys. Gretta said Ed was looking for someone to help him market his toys to department stores and toy stores. “Would you be interested?,” Gretta asked Farah.
Farah said yes, got Ed’s phone number from Gretta, and phoned Ed as soon as she finished golfing. On November 15, Farah quit her job with PLUM (but not her board position) and formed a new sole proprietorship, Farah’s Toy Distribution. Farah then signed a contract with Turbo agreeing to help distribute Turbo’s toys for a commission.
Discuss whether Farah breached her duties to PLUM by entering into the contract with Turbo Toys.
Question Three
(20 Minutes)
Giant Corporation, the world’s largest manufacturer of personal computers, is a huge public corporation whose stock is traded on the New York Stock Exchange. Small Corporation, which sells computer chips, is also a public corporation, but it is much smaller than Giant.
Giant uses roughly 5 million computer chips each year. It buys its chips from several suppliers; in the past, Small has not been one of its suppliers. However, on November 30, Giant signed a contract to purchase 400,000 chips from Small over the next year. This will double Small’s annual sales.
Giant and Small have no agreement or understanding to keep the contract confidential, but the public does not yet know about the contract. Small plans to announce the contract at a press conference on Tuesday, December 5.
Bob, a vice-president of Giant, was one of the people negotiating the contract with Small. He has come to you for legal advice. He wants to purchase some of Small’s stock today, but not if it would be illegal.
Discuss whether Bob’s purchase of Small stock prior to the announcement would be illegal insider trading under federal securities law.
Question Four
(45 Minutes)
Design Unlimited is a general partnership in the business of designing buildings. It has three partners: Alpha, Beta, and Gamma. The partnership agreement provides that Gamma will receive 50% of the profits, and Alpha and Beta 25% each. The agreement also provides that the business will continue until July 1, 2007.
Design Unlimited’s business has been sporadic lately, but in November it was negotiating a contract to design a building for Capital Construction. It expected to make a profit of $7,500 on the contract.
On November 15, Alpha told Beta and Gamma that he was quitting the business immediately—that he didn’t want to wait until next July. Gamma told Capital Construction, but they said it didn’t affect their plans: “As long as Beta’s still with the company, we want to do the deal. Send us your standard contract and we will sign it.”
On November 25, before Capital Construction signed the contract, Beta told Gamma that he also was withdrawing. “But Capital won’t give me the contract without you,” Gamma replied. Beta said he was sorry, but he had made up his mind. As a result, Capital Construction never signed the contract.
Design Unlimited currently has no ongoing contracts. It has cash and assets worth $15,000, and owes its creditors $14,000. The totals in the partners’ capital accounts are: Alpha, $1,000; Beta, $4,000; and Gamma, $8,000.
Discuss what should happen to Design Unlimited and the three partners under the Revised Uniform Partnership Act now that Alpha and Beta have both quit.
Question Five
(30 Minutes)
Genome Corporation is a Delaware corporation. It has two classes of voting stock, Class X and Class Y. There are 100,000 shares of Class X and 50,000 shares of Class Y outstanding; each class has one vote per share. Genome’s articles of incorporation authorize cumulative voting, although it does not appear that shareholders have ever actually cumulated their votes.
Genome has a five-person board of directors. Each director is elected annually at the corporation’s shareholders’ meeting in mid-May. The Class X shareholders have the exclusive right to elect three of the directors. The Class X and Y shareholders both vote for the other two directors.
Watson is one of the directors elected exclusively by the Class X shareholders. On December 1, Crick, a Class X shareholder, delivered to Genome written consents signed by the holders of 76,000 of the Class X shares. These consent forms purport to vote the shares to remove Watson as a director (without cause) and to elect Crick in his place.
Has Watson been validly removed as a director? Explain.
Question Six
(30 Minutes)
Iago Casino, Inc. is incorporated in a state that has adopted the latest version of the Model Business Corporation Act. Iago has a five-person board of directors. The members of its board are Molly Mudd, Melvin Mal, Marge Mean, Cal Clean, and Polly Pure.
Iago operates a gambling casino in Las Vegas. On April 1, Iago’s board unanimously approved a contract for Iago to purchase 500 slot machines from Bandit Corporation. Bandit is owned and controlled by three of Iago’s directors: Molly, Melvin, and Marge.
Shelly Shares is an Iago shareholder; she owns only five of Iago’s one million outstanding shares. Shelly believes Iago overpaid for the Bandit slot machines. On May 1, Shelly delivered a letter to the Iago board demanding that Iago sue Molly, Melvin, and Marge for breach of their duties of loyalty in approving the Iago-Bandit contract. On August 15, the Iago board still had not responded to Shelly’s request, so she brought a shareholder derivative action on behalf of Iago against Molly, Melvin, and Marge.
On September 1, the Iago board voted 4-1 to appoint Cal Clean and Polly Pure to a special committee to consider whether the action against the other three directors was in Iago’s best interests. Polly was the only director voting against creating the committee, not because she was opposed to a special committee but because she didn’t want to serve on it.
Cal and Polly hired independent outside counsel and did an extensive investigation of the self-dealing claims. They produced a lengthy report explaining why they did not believe the litigation was in the best interests of Iago. The Cal-Polly report concluded that there was a strong possibility Molly, Melvin, and Marge would be held liable, but decided that the cost of the negative publicity to Iago’s business would outweigh the value of any damages recovered. They also noted that Molly, Melvin, and Marge were not seeking re-election to Iago’s board, so there was no chance of a repeat violation.
Iago filed the Cal-Polly report with the court and moved to dismiss the derivative action. Iago has also filed uncontested affidavits showing that (1) neither Cal nor Polly had any financial interest in the Bandit contract and (2) there is no relationship between Cal and Polly and the other directors except for the business friendships they have developed serving on Iago’s board.
Discuss whether the court is required to dismiss the derivative action.