1
Corporations
Professor Bradford
Summer 2008
Exam Answer Outline
The following answer outlines are not intended to be model answers, nor are they intended to include every issue students discussed. They merely attempt to identify the major issues in each question and some of the problems or questions arising under each issue. They should provide a pretty good idea of the kinds of things I was looking for. If you have any questions about the exam or your performance on the exam, feel free to contact me to talk about it.
I graded each question separately. Those grades appear on your printed exam. To determine your overall average, each question was then weighted in accordance with the time allocated to that question. The following distribution will give you some idea how you did in comparison to the rest of the class:
Question 1: Range 0-8; Average = 4.52
Question 2: Range 5-7; Average = 5.96
Question 3: Range 4-9; Average = 5.76
Question 4: Range 3-8; Average = 5.72
Question 5: Range 3-8; Average = 5.68
Total (of unadjusted exam scores, not final grades): Range 3.31-7.49; Average = 5.55
Question 1
The Free Tibet Now advertisement must comply with the federal proxy rules only if (1) Giant Corporation is subject to the proxy rules; (2) the ad is a proxy solicitation within the meaning of Rule 14a-1(l); and (3) the ad is not exempted from the rules by Rule 14a-2.
Do the Proxy Rules Apply?
The federal proxy rules apply only to the issuers of securities registered pursuant to section 12. The question does not say that Giant is a section 12 registrant, but it must be because Dear is using the Rule 14a-8 shareholder proposal rule.
Rule 14a-1(l): Proxy Solicitation
The advertisement does not request a proxy from anyone, nor does it ask anyone to execute or not execute a proxy, so it’s not a solicitation within the meaning of subsections (i) or (ii) of Rule 14a-1(l)(1). However, it does appear to fall within subsection (iii) as an “other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.”
The advertisement in the New York Times is available to shareholders of Giant Corporation, and will undoubtedly be seen by at least some of them. Therefore, it’s a communication to security holders. Moreover, it could result in at least some of them changing their mind on Dear’s resolution—giving their proxies to Dear or withholding their proxies from management. Free Tibet is aware of Dear’s proposed resolution, and certainly can appreciate this likelihood, so this appears “reasonably calculated” to have that result. It would not matter under subsection (iii) that the ad doesn’t actually mention Giant Corporation or Dear’s resolution.
None of the exceptions to the definition in Rule 14a-1(2) appear to apply. The only possible applicable one, subsection (iv), does not appear to apply because Free Tibet Now is not a security holder of Giant, nor is the ad indicating how it intends to vote any shares.
Rule 14a-2(b): Exemptions
Rule 14a-2(b)(1) could exempt the advertisement from most of the proxy rules, but not from the antifraud rule. See Rule 14a-2(b). Free Tibet Now is not itself seeking the power to act as proxy for any security holder, nor is it furnishing or requesting a proxy form. It does not fall within any of the categories of persons excluded from using Rule 14a-2(b)(1).
The only possible issue relates to the involvement of Dear and its other members in Dear’s solicitation. Dear clearly is engaged in a proxy solicitation within the meaning of Rule 14a-1(l)(i) and (ii). In addition to whatever else he might be doing in connection with the resolution, he has actually solicited proxies from nine friends. That solicitation may be exempted by Rule 14a-2(b)(2), but it is nonetheless a solicitation of someone’s proxy within the meaning of 14a-1(l). Note that Rule 14a-2(b)(1), unlike Rule 14a-1(l)(2)(iv), does not include the parenthetical “other than a solicitation exempt under Rule 14a-2.”
The only question is whether there’s enough of a tie between Dear and Free Tibet Now that we can say either is acting on the other’s behalf. Dear is a director of Free Tibet Now, but he appears to be doing this privately and Free Tibet Now is not formally involved. However, it is suspicious that Free Tibet Now is publishing the ad simultaneously with Dear’s solicitation; that might be enough evidence of coordination to preclude Free Tibet Now from using the Rule 14a-2(b)(1) exemption. The result is unclear. Free Tibet Now’s safest action would be to wait and publish the ad after the Giant Corporation shareholders have voted on Dear’s resolution. Then, the Rule 14a-2(b)(1) exemption would clearly be available.
Question 2
Were the Special Governance Provisions Valid?
Traditionally, provisions like this, that take away some of the management authority of the board of directors, were invalid. See McQuade v. Stoneham. However, the MBCA allows limitations on the board’s authority in certain circumstances. The board has the power to manage the corporation, but that grant of authority is “subject to any limitation set forth in the articles of incorporation or in an agreement authorized under section 7.32.” MBCA § 8.01(b).
These limitations are in the articles and they would also be authorized by § 7.32. Among other things, § 7.32 allows a shareholder agreement to restrict the power of the board of directors, subsection (a)(1); establish who shall be officers, subsection (a)(3); and transfer the authority to exercise corporate powers to one or more shareholders, subsection (a)(6). The provisions in WSI’s articles are clearly the kind of thing §7.32 authorizes.
These articles are also in the form required by § 7.32(b)(1). They are in the articles of incorporation and they were approved by all persons who were shareholders at the time. We don’t know if the agreement was noted conspicuously on the share certificates, as required by 7.32(c), but subsection (c) says that doesn’t affect the validity of the agreement.
Are The Provisions Invalidated Now That WSI is a Public Corporation?
An agreement authorized by § 7.32 automatically ceases to be effective “when the corporation becomes a public corporation.” MBCA § 7.32(d). A “public corporation” is one that has shares traded on a national securities exchange. MBCA § 1.40(18A). WSI’s shares are now traded on the Boston Stock Exchange, so it is a public corporation. Thus, although the agreement was valid under § 7.32 when it was adopted, § 7.32(d) now appears to invalidate it.
However, § 7.32 wasn’t needed to validate these provisions in the first place. Section 8.01(b) allows any corporation to restrict the board’s power by a provision in the articles, and that is available to all corporations, including public corporations. It is unclear how one is to know whether a provision in the articles is pursuant to § 7.32, and thus automatically invalidated, or pursuant to § 8.01 and thus valid.
There are two possibilities. The first is that, since the provisions were “authorized by section 7.32,” even though § 7.32 isn’t mentioned in the articles and even though the provisions would have been valid in the absence of § 7.32, they are automatically invalidated when WSI begins trading on the Boston Stock Exchange. This construction seems anomalous because it would mean a corporation that has always been public could have this in its articles, but a corporation that began as closely held then became public could not. The second possible construction is that § 7.32(d) only covers agreements that would not be valid in the absence of § 7.32. Since these provisions would be valid even absent § 7.32, they continue to be valid after WSI becomes a public corporation. The problem with this argument is that it renders § 7.32(d) ineffective in most cases because many of the things § 7.32 allows could be characterized as restrictions on the power of the board, and hence allowed under § 8.01(b) even in the absence of § 7.32.
Question 3
Bill’s personal liability on the contract with Stephanie depends on how the relationship between Bill and Diane is characterized. There are two possibilities: (1) Bill and Diane could be in a partnership; or (2) Diane could be an employee-agent of Bill as employer-principal.
Have Bill and Diane Created a Partnership?
UPA § 202(a) defines a partnership as “the association of two or more persons to carry on as co-owners a business for profit.” Bill and Diane are two or more persons and PC Repair is a for-profit business. The question is whether Bill and Diane are associated as co-owners.
Diane has “full management authority” over the business. Such control is one indicia of ownership. Of course, an employee-manager also has management authority, but seldom to make all business decisions without consulting with the principal.
Diane also shares in the profits of the business—25%, without limit. A person who shares profits is presumed to be a partner. UPA § 202(c)(3), but not if the profits are in paid as wages or other compensation to an employee. The 25% share is not characterized as employee compensation, and, unlike employee compensation, there’s no limit to it. Moreover, Diane receives a fairly substantial salary in addition to her share of profits. Thus, her 25% share looks more like profit-sharing rather than compensation for her employment. If so, this is probably a partnership.
If It’s a Partnership, Is Bill Personally Liable?
Partnership Liability for a Partner’s Actions: The General Rule
If it is a partnership, then, with an exception to be discussed later, the partnership is liable for any action on Diane’s part that is “apparently carrying on in the ordinary course” either the business of this particular partnership or business of the kind carried on by the partnership. UPA § 301(1). Diane is not apparently carrying on in the ordinary course the business of PC Repair because, as indicated by the sign on the door, PC Repair does not work on Apple computers. However, if most computer repair companies don’t make this distinction, then Diane is apparently carrying on business of the type carried on by the partnership, and the partnership could still be liable.
The Exception
The exception is if Diane had no authority and Stephanie either knew or had received a notification that Diane had no authority. In that case, the partnership isn’t liable even if Diane was apparently carrying on business of the type engaged in by the partnership. UPA § 301(1). Nothing in the problem indicates that Diane or Bill told Stephanie about the Apple restriction, so the real question is whether Stephanie saw the sign. If she did, arguably she knew about the limit on Diane’s authority. If not, she had no knowledge and the exception would not apply, in spite of the sign.
Bill’s Liability for a Partnership Liability
If the partnership is bound under § 301(1), then Bill is personally liable. All partners are jointly and severally liable for all obligations of the partnership. UPA § 306(a).
If It’s an Employer-Employee Relationship, Is Bill Liable?
If this is not a partnership, then the relationship between Bill and Diane is one of employer-employee, subject to agency principles. Bill would be liable only if Diane had actual, apparent, or inherent authority to bind him to the contract with Stephanie. RSA § 140.
Actual authority
Diane has no actual authority because of the agreement not to service Apple computers. Bill and Diane agreed that she would not do this.
Apparent authority
Apparent authority arises from a manifestation from Bill to Stephanie that leads Stephanie to believe Diane has authority. RSA § 8. Bill had no direct communication with Stephanie, nor has he taken any action that would lead Stephanie to believe that Diane had the authority to service Apple computers. The only action he has taken, putting up the sign, is directly to the contrary.
Inherent authority
There’s nothing inherent in Stephanie’s job, particularly given the express limitation, which requires servicing Apple computers. Thus, if this is only an agency relationship, and not a partnership, Bill is not likely to be personally liable.
Question 4
Removal
Usually, a director may be removed, with or without cause, by a vote of the majority of the directors. Del. § 141(k). Special rules apply where, as there, the corporation has cumulative voting. In that case, no director may be removed without cause if the votes cast to retain him would have been sufficient to elect him cumulatively at a regular board election. Del. § 141(k)(ii). Also, where, as here, a class of shareholders is exclusively entitled to elect directors, he may be removed without cause only by a vote of that class. Del. § 141(k), final paragraph.
Removal without cause
Dan may not be removed without cause. He has a sure 30 Class B shares in his favor. In a normal election, only the 100 Class B shares would be voted for the three Class B directors. Dan would have a total of 90 votes (30 shares x 3 directors). The other Class B shareholders would have a total of 210 votes (70 shares x 3 directors). If Dan cast all 90 votes for himself, there’s no way to split the 210 other votes so that three directors receive more votes than him. Therefore, his 30 shares would be enough to elect him. If cast against his removal, as they surely will be, he cannot be removed without cause. Del. § 141(k)(ii).
Removal with cause