Business Associations
Drafting Assignment*
I.
Fall 2022
Professor Paul Figueroa
Background Information
Juanita runs Tacontento, a small catering business in Albuquerque, NM, and she frequently caters events at
UNMSOL. Her food is tasty, healthy, reasonably priced and always comes with terrific customer service. She is
well-known throughout the legal and business communities in Albuquerque and Santa Fe, and she has become
the go-to caterer for business luncheons and law firm receptions. She earned further fame by winning the Top
Chef of the Southwest award! The secret of Juanita’s success comes from the fact that she is able to make
dishes for a large number of people that still taste as if they were home-made dinners.
Juanita is at a critical point in her business operations. Her television appearance has spread her fame far and
wide, and she has no shortage of requests for catering, but she is underfunded and understaffed. As a result,
she is turning away orders. She received a call from a well-known financial investor, Ahmed Fund. He asked her
to cater a dinner for his family, friends and clients, but Juanita explained to Ahmed that while she would love to
accept the opportunity, she simply does not have the capacity to do it.
Ahmed was surprised to hear that. Juanita explains that she and her best friend from college, Celeste Kim,
started the business together on dreams and a shoestring, with Juanita doing all of the cooking and Celeste
handling the finances, marketing and negotiating with the suppliers. The business took off more quickly than
either of them had expected, and they never stopped to consider how best to expand the business or move it
forward.
During their conversation, Ahmed asked Juanita if she would consider sharing her business plan with him.
Juanita said that she would be happy to do so, if she only knew what a business plan was. Ahmed explained
that a business plan helps business owners evaluate their operational and funding needs in light of things like
operating costs, anticipated growth and projected revenues. Juanita explained that she and Celeste track
income and expenses, and she and Celeste simply include the costs and profits in their personal income tax
returns. So far their oral arrangement has been that Juanita pays for all the expenses and gets 75% of the
profits and Celeste gets 25% for about 20 hours of work per week. When Ahmed expressed some surprise that
Juanita and Celeste did not have a more formal arrangement. Juanita responded that Celeste helped her with
determining pricing and collecting payment. As they got more clients Celeste took on a larger role, including
negotiating with suppliers and keeping the accounting books. Neither one of them expected to be running a
business, let alone a successful one. Celeste has told Juanita that she is thinking seriously about applying to full
time jobs that would pay her more than she earns as Juanita’s partner. While Juanita has a solid high-level
understanding of the business and how to make the food that clients will like, she depends fully on Celeste’s
ability to deal with the suppliers and manage the costs and payments to ensure that they make a profit.
Ahmed suggested that Juanita stop by his office for a meeting later that week. Juanita assumed that he wanted
to sample some of her catering menu, so she reminded him that she would not be able to cater his event.
Ahmed said that he actually had a business proposition for her to help fund and grow her catering business.
Juanita was intrigued and agreed to the meeting.
At the meeting, Ahmed presented Juanita with a letter in which he proposed to make an initial investment of
$150,000 in Juanita’s catering business in exchange for a fifty-one-percent ownership interest. The letter
explained that Ahmed and Juanita would work together to expand the business by, among other things, leasing
space in a commercial kitchen, employing additional staff to help with food preparation and delivery, and
buying customized delivery trucks. The letter indicated that Ahmed would appoint one or more of his business
associates to oversee the management of the business side of things, leaving Juanita to manage the food
selection, preparation and presentation aspects. Ahmed commented that this type of arrangement would
allow each to utilize their unique skills set. Ahmed’s investment comes with a couple of conditions. First,
*This assignment was adapted from Michelle Harner’s Developing Professional Skills: Business Associations, 916 (West Academic, 2012).
Ahmed wants to create a corporation incorporated in Delaware. Second, Ahmed wants to raise additional
funding to expand operations to other cities, including Santa Fe, Las Cruces, and then to other cities in the
South West.
Juanita was not quite sure how to respond to Ahmed’s proposal. She never contemplated working with a
business investor. Ahmed assured her that they could make this work and suggested that they develop a list of
objectives together to guide their business endeavor. They produced the following list:
Juanita’s Objectives:
 Maintain focus on quality products and service
 Retain some control in business and operations decisions
 Recognize and reward Celeste’s loyalty, perhaps by thinking about how she might be incorporated back
into the business more fully
 Invest/risk only a small amount of capital (to protect what little savings she has)
 Ensure that Juanita and Celeste, if she agrees to stay with the business, receive enough income
 Stay true to her ‘buy-local’ roots, be embedded in a community, and have fun
Ahmed’s Objectives:
 Appoint one or two of his business associates to oversee the management and operations of the
company
 Pursue a multi-city and multi-state growth strategy for the business and that the lead cooks be trained
by Juanita.
 Create a governance model that ensures both that Juanita has top-notch business guidance and that
creates checks and balances
 Ensure that the business staff implement his business associates’ vision and policies
 Limit his liability, as he is quite wealthy, and offer limited liability to future investors
 Receive flexibility on duration of investment and an available exit strategy within five years
 Proactively avoid potential liability from conflicted transactions by directors or shareholders
The law firm previously has represented Ahmed in a number of matters. The partner at your firm has
developed a relationship with Ahmed and oversees and bills all legal work. The firm uses a Delaware
incorporator to file the Certificate of Incorporation for a close corporation under Delaware General
Corporation Law (https://delcode.delaware.gov/title8/c001/index.shtml#P-1_0. However, the law firm will be
in charge of drafting the bylaws. She gives you and three other associates (the Team) some additional
background (i.e., the facts above), and asks the Team to draft an advisory letter that summarizes 1) the
benefits of a corporation over a partnership or an LLC, including the filing costs and other important
information; and 2) how the bylaws address the points under sections A-E of the Partner’s Notes. The partner
tells the Team that the purpose of the letter is to educate Juanita about what a corporation is and how it is
different from a partnership or LLC and to explain how the bylaws address Juanita’s and Ahmed’s key concerns.
In addition, she has asked the Team to attach a draft of bylaws for a close corporation under Delaware General
Corporation Law. At this point, she is keen for the Team to keep the draft focused on what the Team thinks are
essential terms, making sure to address Ahmed’s and Juanita’s demands memorialized in the Partner’s Notes
below.
Also note: this is a group assignment due no later than 5p.m. October 23th.
Using the bylaws template for a Statutory Close Corporation under Delaware laws (uploaded to Lexis
Classroom), 1) fill in the blanks where required; 2) change the relevant sections to address/incorporate the
concerns and demands in sections A-D below; and 3) a draft of the cover letter (worth 15 points). You may do
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research, including on the “MFW” framework mentioned by Ahmed, and use as reference any other bylaws
that you can find online or the CooleyGo sample bylaws.
II.
Partner’s Notes
A. Board of Directors, Officers (5 points)
Juanita wants to be the Chief Executive Officer, which will give her complete control of the day-to-day business
decisions, including the authority to hire and fire of employees. Ahmed agreed to Juanita’s request to be the
CEO provided that Ahmed is the Chair of the Board of Directors (BoD) and that Ali and Mark, his business
associates, are also directors. Juanita did some research on Ahmed and his business associates, and she found
out that they are savvy investors who have extensive experience managing restaurant businesses. However,
Juanita was warned that Ahmed often positions himself to have substantial control of the companies he invests
in. For this reason, Juanita would like to appoint Maria as a director. Maria, her grandmother who taught
Juanita how to make the delicious food she has always made, ran a successful restaurant for many years before
she retired. Juanita wants to limit the level of micromanagement of the BoDs—so she wants the BoDs to meet
only four times a year. Ahmed agrees, but wants the chair to convene the regular meetings, set the agenda
with input from the CEO and other officers and have the authority to call a minimum of four special meetings
per year.
B. Authorities of the BoDs (5 points)
Juanita knows that the BoDs will be dominated by Ahmed and his associates, and to a large extent she is okay
with it given their experience and expertise. However, Juanita wants the draft to include a voting provision
that somehow addresses this power imbalance making it e0sier for Juanita and Maria to have more of a say at
least on the following decisions:
-
Mergers and acquisitions
Changes to the bylaws
Issuance of stock
Purchase of shareholders’ stock
Ahmed agrees in principle but feels strongly that the issuance of dividends to shareholders should be a
straightforward simple majority decision by the BoD. Juanita agrees provided that no dividends be issued
during the first two years, and that the term of the BoD is limited to two years. Juanita strongly prefers that
the first two year’s profit, if any, be invested back in the company. Ahmed agreed.
C. Restrictions on the Sales of Shares (5 points)
It is clear that Ahmed wants an exit plan- i.e., selling his shares for whatever reason. This is not an
unreasonable request from investors. If Ahmed decides to sell his shares, Juanita wants to make sure that
Juanita or the corporation have an opportunity to buy Ahmed’s shares before he finds other buyers. Ahmed
agreed reluctantly with one caveat that the shareholders and corporations be required to exercise their right of
first refusal no longer than 10 business days after they receive notice of his intention to sell the shares.
D. Shareholders’ Voting (10 points)
Another one of Juanita’s concern is that Ahmed holds 50% of the stock, which means that if they disagree
about something they will be deadlocked. Juanita mentioned this to Ahmed, and he told her that he will ask
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the attorneys to propose a fix. Also, Juanita understands that as the business expands, and more capital is
needed, new investors will be given equity. Juanita is worried that these new investors’ voting rights will dilute
her voting rights and would like to see (a) provision(s) in the draft ensuring that the founders’ voting powers
are protected while still giving the new investors an incentive to invest in the company.
E. Conflicts of Interest (10 points)
A previous company that Ahmed invested in was sued by a shareholder claiming that one of the directors--who
held 51% of the shares of the company--breached her fiduciary duty of loyalty in a conflicted transaction. The
director procedurally cleansed the transaction under Delaware law, i.e., disclosed the transaction and it was
approved by the majority of disinterested directors and shareholders. Nevertheless, the director was accused
of dominating the disinterested board members and minority shareholders. Under Delaware law, majority
shareholders’ decisions that may affect minority shareholders’ rights do not get the business judgement rule
protection. The company ended up settling with the minority shareholders given the uncertainty that the
business judgement rule was going to protect the board of directors. To avoid the same situation, Ahmed asks
that you include a conflict of interest section setting protocols stricter than the “safe harbor” rules under
Section 144 of the DGCL to cleanse conflicted transactions. Specifically, Ahmed wants to make sure that the
draft of the bylaws operationalizes the “MFW” framework, which his attorney-friend referred to as the gold
standard. Juanita is fine with that.
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___________ Law Firm, LLP
Best ABQ Lawyers for Business Innovation
1000 Alternatives Lane,
Albuquerque, NM, 87103
___________________ , 20_____
Confidential Attorney-Client Communication
Via Electronic Mail
Juanita Cook
3 Venture Circle
Albuquerque, NM, 87104
bcook@email.com
Re: Bylaws
Dear Ms. Cook:
You have provided us with information concerning the bylaws. We have already filed the Certificate of
Incorporation under Delaware Law and attach draft bylaws for your review.
………….
We look forward to discussing the draft bylaws. In the meantime, please do not hesitate to call u with any
questions or comments.
Sincerely,
Take-All-The-Credit Partner for Overworked Associates’ Work
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