1
CORPORATIONS
Professor Bradford
December 13, 2007
8:30 a.m.
3 Hours and15 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 eleven (11) 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 andfifteen 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 ofsix(6) questions. The recommended time for each question is as follows:
Question 1…..60 Minutes
Question 2…..15 Minutes
Question 3…..20 Minutes
Question 4…..45Minutes
Question 5…..20Minutes
Question 6…..35 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, assume, unless the facts of the question indicate otherwise, 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.
- 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
(60 Minutes)
Publix Corporation is a publicly-held corporationincorporated in a state that has adopted the Revised Model Business Corporation Act. Its common stock is traded on NASDAQ and is registered pursuant to section 12 of the Securities Exchange Act. Publix has 1,000,000 shares outstanding.
Holder, Inc. is a Delawarecorporation. It has twenty shareholders and its stock is not registered pursuant to section 12. Holder owns 12% of Publix’s stock (120,000 shares). It has owned most of this stock for a long time, but it recently acquired some of it from Smith when Smith retired from the Publix board. Holder acquired Smith’s 10,000 Publix shareson August 15, 2007, for $50 a share.
On December 10, 2007, Publix repurchased 30,000 Publix shares from Holderfor $60 a share, the market price at the time. Holder needed to sell the shares because it was having unexpected cash-flow difficulties. Holder’s original plan was to sell the shares in the NASDAQ market, but Publix’s directors were worried that selling that much stock on the market at one time would cause Publix’s share price to fall significantly.
A balance sheet for Publix immediately following the December 10 transaction appears on the next page. The note listed on the balance sheet is not due for 15 years and Publix’s directors are confident Publix will be able to pay all itsliabilities as they come due.
Before the repurchase, Publix’s directors confidentially toldHolder that the market value of Publix’s assets was probably around $47 million instead of the $50 million shown on the balance sheet.
Discuss the possible liability of Holderin connection with the December 10 sale of its Publix shares.
Publix CorporationBalance Sheet
As of December 11, 2007
(All numbers are in millions)
Assets / Liabilities and Shareholders' Equity
Liabilities
Cash / $10 / Accounts Payable / $4
Accounts Receivable / 3 / Income Tax Payable / 5
Inventory / 4 / Note Payable / 39
Equipment / 6
Building / 15 / Shareholders' Equity
Land / 12 / Capital Stock / 1
Additional Paid-In Capital / 1
Retained Earnings / 0
Total Assets / $50 / Total Liabilities and Shareholders' Equity / $50
Question Two
(15 Minutes)
Your client, Zachary Morris, is considering buying membership units in Bell, LLC, a limited liability company. Bell’s manager, Richard Belding, has told him that the units have a “$5.00/unit cumulative, fully participating, distribution preference.”
Zachary doesn’t have the slightest idea what the language in quotations means. Explain it to him in terms a financially unsophisticated layperson can understand.
Question Three
(20 Minutes)
Road Kill, LLC is a limited liability company that operates a restaurant in Sidney, Nebraska. Martin Manager was elected by a majority vote of the members to be Road Kill’s manager.
Road Kill’s operating agreement contains the following provisions:
- Road Kill shall be a manager-managed company.
- Road Kill’s manager shall be chosen by a majority vote of the members, and may be removed or replaced by the same majority vote.
- The manager of Road Kill has the right to make all business decisions on behalf of Road Kill.
Martin is negotiating an agreement to sell the restaurant and all the rest of Road Kill’s assets for $250,000.
Discuss whether Road Kill’s members must approve thesale.
Question Four
(45 Minutes)
Marx Corporation is a Delaware corporation. Groucho is Marx’s chief executive officer and one of its four directors. The other three directors—Chico, Harpo, and Zeppo—are all outsiders who are completely independent of Groucho. Groucho, who has been Marx’s CEO for 15 years, is a business genius. Marx has consistently outperformed its competitors, largely due to Groucho’s leadership.
Groucho owns 40% of the stock of another corporation, Krazy Konstruction, Inc., a large, well-regarded construction firm. Groucho does not participate in any way in Krazy’s operations.
Marx is currently leasing its office space; the lease expires in 2008. In 2005, the Marx board decided to build its own building rather than renew the lease. The board asked Anne Assistant, Groucho’s administrative assistant, to find a builder and negotiate a contract.
Anne reviewed proposals from several builders and finally decided that Krazy had the best offer. She then negotiated a contract with Krazy. Groucho did not participate in this process.
The final contract between Marx and Krazy, which was subject to board approval, specified a price of $10 million, payable over time based on the percentage of completion(e.g., when the building is 10% complete, Krazy is entitled to $1 million). This percentage-of-completion type of payment is standard in the office construction business.
Anne submitted the contract to Groucho, who put it on the agenda for the September 2005 board of directors meeting. Groucho brought to the board meeting a folder full of detailed information about Groucho’s ownership of Krazy stock, the cost to Krazy of performing the contract, and what other companies were charging for similar contracts, which was about the same as this contract.
Groucho was about to present that information to the board when Chico, the chairman of the board, said, “Groucho, everyone knows you own a lot ofKrazy stock, and that’s why you’re bringing this transaction to the board for review. We don’t need to look at all that information. We trust you and we just have one question: based on what you know, is this transaction fair to the company?”
Groucho responded, “Yes, I’ve carefully reviewed all the relevant information, including comparable contracts, and this is fair. Here’s the complete file.” Groucho then handed Chico his folder.
“That’s fine,” Chico said, “but I think we’re ready to vote.”
The board then approved the transaction 3-0, with Groucho abstaining. Construction of the office building began shortly after the board’s approval.
During construction, Freddy Fowl, an employee of Krazy, was able to hack into Marx’s computer system using a password carelessly left lying around by a Marx employee. Freddy was able to manipulate Marx’s payment system so that Krazy was paid $5 million more than it was entitled to; Freddy took the excess for himself. Krazy is now bankrupt and Freddy’s whereabouts are unknown, so Marx has a $5 million loss.
Marx has a corporate monitoring system designed to spot wrongdoing and report it to the board of directors. The plan was developed by a well-respected consulting firm and approved by the board after substantial review and discussion. Marx has not had any problems since the new system was instituted five years ago. However, Freddy was able to circumvent the system in a clever way that neither the consultant nor anyone on the board had anticipated, so the system did not revealFreddy’s wrongdoing.
Discuss whether the Marx directors have breached their duties to the corporation. (Assume Marx has nothing in its articles protecting the directors from liability.) Do not discuss any procedural aspects of recovery.
Question Five
(20 Minutes)
Geek Enterprises is a general partnership. Its partners are Leonard, Sheldon, and Raj. Penny has a judgment against Geek on a contract claim, but she believes Geek has insufficient assets to pay the full amount of the judgment.
Advise Penny as to whether, and how, she may recover the judgment amount from Leonard, Sheldon, and Raj.
Question Six
(35 Minutes)
Club Soda is a limited partnership. It operates a dance club that attracts a lot of college students.
Club Soda recently hired Barney Fife, a police officer, to work as a part-time security guard and bouncer. Barney is not a Club Soda partner. Barney is paid $25 an hour. His job is to maintain order in the club and to eject any troublemakers, forcibly if necessary. Club Soda has an extensive set of rules that Barney and the other security guards are required to follow.
On November 15, Barney was standing outside the door of Club Soda when he saw a small woman slap a 300-pound professional football player in the face. Both the woman and the football player, who had just exited the club, were standing on the public street in front of the club. Barney immediately rushed to the aid of the football player, jumping on the woman and throwing her to the ground. The woman’s head hit the ground and she suffered a concussion.
Assume that Barney acted negligently and is personally liable to the woman. Discuss the possible liability of Club Soda for Barney’s action. (Assume that Barney was well-qualified for the job and Club Soda was not negligent in hiring Barney.)