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BUSINESS ASSOCIATIONS

Professor Bradford

December 12, 2008

8:30 a.m.

3 Hours and 15 Minutes

INSTRUCTIONS

General Instructions

1. This exam is partially open book. You may use the required statute book and nothing else. The statute book may include highlighting, circling, underlining, lines, arrows, or any other marks, and may be tabbed. However, writing in the statute book is limited to annotations of five words or less. If your statute contains annotations or notes that violate this limit, you may not use it during the exam. When the exam is finished, you must turn in your statute book; be sure it has your name on it.

2. You may not consult any sources other than the statute book, 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.

3. 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.

4. 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.

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

Question 1…..25 Minutes

Question 2…..70 Minutes

Question 3…..35 Minutes

Question 4…..35 Minutes

Question 5…..30 Minutes


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6. 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.

7. 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.

8. 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.

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.

12. 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 One

(25 Minutes)

Marx, LP, is a limited partnership organized in a state that has adopted the Revised Uniform Limited Partnership Act. Marx has one general partner and three limited partners. The general partner is Groucho Corporation. The limited partners are Chico, Harpo, and Zeppo. There is no written partnership agreement.

When the partnership was formed in January 2008, Groucho contributed $100,000 cash; Chico contributed $10,000 cash; Harpo contributed $40,000 cash; and Zeppo contributed real property that the partners agreed to value at $55,000. No partner has contributed any additional capital since the partnership was formed, but Harpo has withdrawn $5,000 from the business.

On August 1, 2008, Chico sent to each of the other partners a written notice of his intent to withdraw from the partnership. None of the other partners responded to Chico’s notice. The partners have never discussed the right of partners to withdraw.

On December 31, 2008, the partnership plans to distribute to the partners $100,000 of the profits it has made this year. When the partnership was formed, the partners agreed orally that the general partner would receive 50% of the profits, but they said nothing else about profits or distributions.

Discuss how much of this distribution, if any, Chico is entitled to receive.


Question Two

(70 Minutes)

Zappa, Inc., is incorporated in a state that has adopted the latest version of the Model Business Corporation Act. Zappa’s articles provide for a five-person board of directors. The current directors are Alan, Barb, Cathy, Dan, and Elaine. Alan is the chairman of the board.

All of the directors except Barb are outside directors who have no other relationship with Zappa. Barb works for a law firm that represents Zappa from time to time. Alan and Barb have known each other since college thirty years ago, and are close friends. They play golf regularly and their families occasionally have dinner together. None of the other Zappa directors are particularly close.

On November 1, 2008, the board of directors of Zappa approved a contract to purchase a warehouse from Gamma Corporation for $4 million.

Gamma Corporation is a closely-held corporation controlled by Frank, who owns 60% of Gamma’s stock. Frank is Alan’s brother-in-law. Alan originally brought the warehouse to the attention of Zappa’s board, after Frank told Alan he was interested in selling. However, Alan was not involved in negotiating the deal.

Dan and Elaine handled all the negotiations with Gamma. Prior to beginning the negotiations to buy the property, Dan and Elaine consulted a real estate valuation expert. The expert’s opinion, dated October 1, 2008, was that the warehouse’s fair market value was somewhere in the $3.8 million to $4.3 million range. The negotiations lasted for several weeks. During that time, Dan and Elaine negotiated Gamma down from its original offer of $4.7 million to the final contract price of $4.0 million.

The contract was approved by Zappa’s board of directors on November 1. Alan excused himself from the meeting before the discussion of the Gamma contract began. After a 30-minute discussion, the remaining directors unanimously approved the purchase.

Alan did not disclose his brother-in-law’s interest in Gamma, but all of the directors were aware of both Frank’s relationship to Alan and Frank’s interest in Gamma. Alan also did not disclose that Frank had told him that Frank thought the contract was “a great deal for Gamma.” These were the only things Alan knew about the transaction that didn’t appear in the substantial information packet that was provided to the directors prior to the meeting.

Sally, a shareholder of Zappa, has filed an action seeking to enjoin the closing of the warehouse purchase. Sally alleges that the purchase violates the directors’ fiduciary duty of loyalty.

Sally’s expert witness is prepared to testify that $4 million was too high a price for the property, that the fair market value at the time the contract was signed was only $3.8 million, and that, in a falling market, its current value is only $3.5 million. Zappa’s own experts, hired to testify in the case, concede that $4 million was probably “a little high;” they think the property was probably worth around $3.9 million when the contract was signed and that it’s worth about $3.6 million now.

Discuss the likely success of Sally’s claim. (Do not discuss any issues arising under § 7.44 of the MBCA.)


Question Three

(35 Minutes)

ABC Partnership is a general partnership. Its partners are Alicia, Betty, and Carl. Its business is run out of the basement of Carl’s home.

On September 15, 2008, Alicia, Betty, and Carl decided to incorporate the business in order to limit their personal liability. They agreed that each of them would own 1/3 of the corporation’s stock. Betty and Carl authorized Alicia to “take the steps necessary to put the partnership business into corporate form,” including hiring a lawyer to draft and file articles of incorporation.

Alicia contacted Bob Barrister, a local corporate attorney and asked him to draft articles of incorporation for a corporation to be known as ABC Corporation. Alicia approved those articles on October 6 and told Barrister to file them as soon as possible. “I will,” Barrister replied. “I’ll let you know as soon as they’re filed.”

On October 8, Alicia signed a lease with Larry Landlord on behalf of ABC Corporation. The lease obligated ABC Corporation to pay $10,000 within 60 days to lease an office for one year. The lease indicates that the lessee is “ABC Corporation,” and is signed “ABC Corporation, by Alicia, Agent.”

On October 10, Alicia received a call from Barrister. Barrister said, “I just filed ABC’s articles of incorporation. Sorry I didn’t get it done earlier, but I was swamped.”

On October 15, Alicia, Betty, and Carl met to organize ABC Corporation. Each of them contributed a total of $500 for 10 shares of stock. They elected themselves directors and voted to have ABC Corporation accept liability on the lease with Landlord.

Alicia, Betty, and Carl had planned to invest an additional $100,000 in the corporation. However, a few days later, they decided that the leased space was not satisfactory and that they were better off continuing to operate out of Carl’s basement. The corporation ceased doing business at that point and they began functioning as a partnership again. Landlord has not been paid the $10,000 due on the lease.

Discuss the potential personal liability of Alicia, Betty, and Carl on the lease. Assume that ABC Corporation is incorporated in a state that has adopted the latest version of the Model Business Corporation Act.


Question Four

(35 Minutes)

Fred Flush operates a plumbing business; it is a sole proprietorship. On September 15, 2008, Fred replaced a toilet in the executive bathroom at Giant Corporation. Fred was working in one of the stalls with the door closed when he heard two Giant executives talking about a major new contract between Giant and Mega, Inc. Fred heard just enough to realize that the contract was not yet public and that it would significantly increase Giant’s profits.

After finishing the Giant plumbing job, Fred had lunch with Victoria Veep, a friend of his who is the Vice President for Human Relations at Giant. “Would you do a favor for me?,” Fred asked Victoria. “But you have to keep it confidential.”

“O.K., I promise to keep it confidential,” said Victoria. “What is it?”

Fred then told Victoria about what he had overheard, and asked Victoria to contact his broker and have the broker buy 1,000 Giant shares for Fred’s account. “I would do it myself,” Fred said, “but I’m too busy.”

“I don’t think so. That doesn’t sound legit,” said Victoria, who hadn’t heard about Giant’s contract with Mega until Fred told her.

Later that day, Fred had some unexpected free time and was able to call his broker, who bought 1,000 shares of Giant for Fred.

That evening, Victoria had dinner with her daughter, Lotta Law, who is an attorney practicing securities law. Victoria told Lotta that she had heard of an important contract between Giant and Mega that was about to be announced. Victoria didn’t tell Lotta where she got the information and Lotta didn’t ask. The next morning, Lotta bought 500 shares of Giant stock.

On September 18, Giant announced its contract with Mega. Giant’s stock price immediately rose 20%.

Discuss the possible liability of Fred and Lotta under Rule 10b-5.


Question Five

(30 Minutes)

Sydney X. Magnificent, III is a wealthy client of yours. Sydney was recently approached by the Chairman of the Board of a large, publicly-traded Delaware corporation, Big Bucks Corporation, and asked to serve on its board of directors.

Sydney would like to serve, but is worried about his potential liability. Big Bucks is a multi-billion dollar company and is involved in many sophisticated financial transactions. Sydney has an extensive financial background, so he can handle the complexity, but he knows that some of these transactions require quick decisions and, no matter how well-planned, sometimes fail. Sydney is concerned about his possible liability in shareholder lawsuits.