Name: Syed Sajjad Imam
Roll No: 21110030
Question 1
(1 Hour)
Max Word Count 800 Words
Rex Partnership (RP) is a general partnership in a state that has adopted the Revised
Uniform Partnership Act (1997). RP operates an expensive, fine -dining restaurant. It
does not have a partnership agreement.
On September 1, Skittle, one of RP’s partners, wrongfully dissociated from the
partnership. On September 2, on the advice of counsel, RP filed with the Secretary of
State a statement of dissociation indicating Skittle’s dissociation.
Prior to Skittle’s dissociation, a representative of Novu Gaming Corporation, a video
game distributor, contacted RP to ask if RP wanted to purchase video game machines
to install in the restaurant. All of the partners, including Skittles, met with the Novu
Gaming representative, but did not commit to a purchase.
On November 10, Skittle entered into a contract, purportedly on behalf of RP, to
purchase three video poker machines from Novu Gaming. The contract was signed:
Rex Partnership
By: Skittle
RP has never had video games of any kind in its restaurant and Novu Gaming knew
that at the time of the contract. However, Novu Gaming has supplied video poker
games like this to many other restaurants.
Discuss whether RP or Skittle are liable to Novu Gaming on this contract. (Assume
that it’s legal to own and operate video poker machines, so this is a legal contract.)
Please answer on the basis of material discussed in the coursepack and Revised
Uniform Partnership Act 1997 available online.
Answer 1:
Issues at Hand:
The issue at hand is whether the purchase of 3 poker machines by Skittle, a dissociated member,
is likely to result in RP being held liable to Novu Gaming on this Contract or whether Skittle is
the Only one personally liable for the purchase.
Skittles wrongfully dissociated from the partnership on September 1 and on September 2 the
dissociation was filed with the secretary of State. Skittle then went on purchase video game
machines from Novu Gaming purportedly as a partner of RP.
The thing to analyze here is whether Novu Gaming knew of Skittles dissociation or not and
whether Novu had reasonable reliance on the fact that Skittle was still a partner in RP and had
authority to make the purchase on RP’s behalf.
Rules that apply:
As no written Partnership Agreement exists between RP partners the Revised Uniform Partnership
Act (1997) will serve as the basis for the Partnership Agreement.
On a partner’s dissociation, his or her right to participate in the management and conduct of the
partnership business terminates, duty of loyalty also ends. and duty of care continues only with
respect to events that occurred before dissociation, unless the partner participates in winding up
the partnership’s business.
According to Section 308 of the UPA, “If the representation, either by the purported partner or by
a person with the purported partner’s consent, is made in a public manner, the purported partner
is liable to a person who relies upon the purported partnership even if the purported partner is
not aware of being held out as a partner to the claimant.”
Similarly, “ If partnership liability results, the purported partner is liable with respect to that
liability as if the purported partner were a partner. If no partnership liability results, the purported
partner is liable with respect to that liability jointly and severally with any other person consenting
to the representation.
Analysis:
The case states that skittles wrongfully Dissociated from the partnership. According to the UPA,
by dissociating from the partnership, Skittles no longer has the right to participate in the
management or any of the Activities of the Business.
Secondly, as the dissociation was made public by the partnership and Novu cannot claim that they
were unaware of the dissociation as RP did file with the Secretary of State a statement of
dissociation indicating Skittle’s dissociation on the very next day.
Lastly, According to Section 308, only the purported partner is responsible for the agreement
between Novu and Skittles.
Conclusion:
Based on the above Analysis, ONLY Skittles would be responsible to Novu Gaming should any
issues may arise related to the agreement and the partnership (RP) will not be liable for skittles
actions as stated in Section 308 of the UPA.
Question II
(1 Hour)
Max Word Count 800 Words
Mega Corporation is incorporated in Delaware. It has a five -person board of directors.
The directors are Alan, Betty, Carl, Donna, and Ellen.
On October 10, 2019, Mega entered into a contract to purchase a substantial number
of widgets from Zappa, LLC. Alan negotiated the contract on Mega ’s behalf, and it
was unanimously approved by Mega’s board. Widgets were available from other
suppliers at a lower price, but Alan contends on reasonable basis that the Zappa
widgets are higher quality.
Sheila is a shareholder of Mega. On February 20, 2020, Sheila filed a shareholder ’s
derivative action on behalf of Mega, claiming that the Zappa contract breached Alan ’s
duty of care as well as duty of loyalty to Mega.
Sheila’s complaint alleges the following facts. (Assume these facts are true.)
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Alan is a 25% common shareholder of Beta Corporation, which owns a 65%
membership interest in Zappa.
Betty is the CEO of Mega and a long-time friend of Alan.
Carl is Alan’s next-door neighbor.
Donna is Alan’s spouse.
Ellen is Alan’s personal intellectual property attorney. Work for Alan
constitutes about 50% of Ellen’s total billings.
Please analyze how the court is likely to rule on whether or not Alan breached his
duty of care and/or duty of loyalty.
Answer 2:
Case Facts:
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Mega entered into a contract with Zappa for widgets
Unanimously approved by other BoD’s
Alan negotiated on Mega’s behalf
Widgets expensive that other market options
Alan contends they were of higher quality
Sheila , Shareholder, files shareholder’s derivative action
Sheila claims that the Zappa contract breached Alan’s duty of care as well as duty of
loyalty to Mega.
Issue at Hand:
The issue at hand here is whether Alan, a Board member at Mega Corporations has breached his
Duty of Care and Duty of Loyalty by purchasing a substantial amount of widgets from Zappa at a
relatively higher price compared to other options in the market. Secondly, the other issue is
whether other Board members are also responsible for this or not and whether they are also
involved in this breach.
Alan is a Board member in Mega Corporation who is negotiating the contact with Zappa on Mega’s
Behalf. The Contract has been unanimously approved by the Board even though cheaper market
options existed which Alan claims are of relatively lower quality than Zappa’s offering.
The issue to Analyze here is whether Alan is acting in good faith or not and whether he acted in
the best interest of the corporation by signing with Zappa. Lastly, it is also to be analyzed if Alan
is keeping his self interest first by purchasing from Zappa at a higher price.
Rules that Apply:
Duty of Care: requires that “director or officer act in good faith, exercise the care that an
ordinarily prudent (careful) person would exercise in similar circumstances and to do what she or
he believes is in the best interests of the corporation .Those who fail to exercise due care which
results in harm to the corporation or its shareholders can be held liable for negligence”.
Duty of Loyalty: requires “directors and officers to subordinate their personal interests to the
welfare of the corporation. They should not oppose a transaction that is in the corporation’s best
interest simply because pursuing it may cost the director her or his position. Lastly, they cannot
use corporate funds or confidential corporate information for personal advantage and must refrain
from self-dealing.”
Conflict of Interest: Any conflict of interest that a board members have with the corporation's
interest should be fully disclosed to all Board Members and such directors should refrain from
participating in such a decision.
Analysis:
If shareholders perceive that the corporate directors are not acting in the best interests of the
corporation, they may sue the directors, in what is called a shareholder’s derivative suit, on behalf
of the corporation. As in this case Alan has several interests, Shareholders can use derivative action
to sue.
In the case , the following were alleged to be the reasons of breach of loyalty and care:
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Alan is a 25% common shareholder of Beta Corporation, which owns a 65%
membership interest in Zappa.
Betty is the CEO of Mega and a long-time friend of Alan.
Carl is Alan’s next-door neighbor.
Donna is Alan’s spouse.
Ellen is Alan’s personal intellectual property attorney. Work for Alan constitutes
about 50% of Ellen’s total billings.
Given that Alan had 25 % share in Beta which owned 65% of Zappa, Alan should have disclosed
such information publicly and should not have participated in this decision. The case does not
mention that such information was disclosed by Alan therefore there is a clear conflict of Interest
and Alan can be held liable for negligence. Secondly, as Alan is in some way or another related
to the other board members, he may have the ability to influence their decisions and therefore the
unanimous decision by the Board can be challenged by the Shareholders. The reason here would
be that the board members are not independent of each other and Alan can significantly influence
their vote.
So, the investigation here needs to focus on whether the reason that Alan used for buying from
Zappa actually holds or not. If it can be established that Zappa’s widgets were of reasonably better
quality than the competition and Alan had no personal interest attached in the arrangement then he
has not breached his duty of care and loyalty.
Conclusion:
If it can be reasonably established that Zappa’s offering was of significantly better quality than the
competition than Alan has not breached his duty of care and loyalty. However, given that his
Conflict of interest was not disclosed, Alan can be held liable for negligence for not disclosing
such information.
However, if it cannot be established that Zappa had better quality products than the competition
than this would imply that Alan had some self-interest and the fact that such conflicts were not
disclosed would mean that he is liable for breach of duty and loyalty to Zappa and the court is
likely to rule against Alan.