EXAMINATION NUMBER: ___________ GEORGE WASHINGTON UNIVERSITY LAW SCHOOL CORPORATIONS PROF. ABRAMOWICZ PRACTICE EXAMINATION Before the examination begins, you may read the instructions on the next page and check the bottom-right corner of each page to make sure that you have all the pages. You must return this examination booklet when handing in your exam. 1 GENERAL INSTRUCTIONS This is an open-book, three-hour examination. Part 1 will count 50% in determining your grade, and Parts 2 and 3 will count 25% each. You may use any written materials, student-written and/or commercial. Identify yourself only with your examination number. Do not write your name on any page or reveal your identity in any way. PART 1: MULTIPLE CHOICE (RECOMMENDED TIME: 90 MINUTES) For each of the multiple choice questions, identify the best answer, and select it on the appropriate line on the scan form. Answers on the exam booklet itself will not be considered. The best answer is the answer that reflects cases, statutes, and other materials read for this class or discussed in class, even if there may be arguments for changing existing law or precedents directly contrary to the holdings of those materials that we read and discussed. You will receive one point for each correct answer. No deductions will be made for incorrect answers, so it is always in your interest to guess. If you believe that a particular question has no answers or more than one best answer, you may write down an objection to a particular question at the beginning of the written portion of your exam. Your objection must identify the ambiguity or problem in the question and reveal what your answer would be for all possible resolutions of the ambiguity. Your objection will be considered, and a decision will be made to reject it, to accept it only for you, or to cancel the question altogether. PART 2: SHORT ANSWER (RECOMMENDED TIME: 45 MINUTES) Read the six questions carefully, and write an answer one paragraph in length. You will be graded on the basis of the perceptiveness of your answer, as well as on the clarity, correctness, and conciseness of your writing. PART 3: ESSAY (RECOMMENDED TIME: 45 MINUTES) Read the question carefully, and write an answer of any length. You will be graded on the basis of the perceptiveness of your answer, as well as on the clarity, correctness, and organization of your writing. GOOD LUCK! 2 PART 1: MULTIPLE CHOICE (FORTY QUESTIONS) 1. Jane was mowing David’s lawn but was confused about the borderline between David’s property and that of David’s neighbor, Peter. As a result, Jane mowed a portion of Peter’s property too, including a portion of the lawn that was devoted to cultivating an experimental new kind of grass seed. Jane’s mowing also destroyed the signs that clearly warned “Valuable Grass: Do Not Mow”. Peter suffered thousands of dollars in damages, and sued David. Peter claims, and David concedes, that Jane’s mowing was negligent. Which of the following, if true, would be most likely to help David defend the lawsuit? (A) David told Jane exactly where the property borderline was, specifically instructing her where to mow, and Jane promised to do as he told her. (B) After David offered Jane $50 to mow the lawn pursuant to his instructions, she accepted and put the $50 bill in her pocket. (C) When David urged that Jane use the “quiet” setting on her mower once she began mowing, she replied that she would mow how she saw fit, and that if he didn’t like it, she would find some other lawn to mow. (D) Jane assured David that she would make every effort to beautify his lawn while avoiding those of his neighbors. 2. Under Montana law, a shareholder bringing a derivative suit must post a bond of $500,000, to assure the court that the shareholder will be able to pay any legal costs assessed against the shareholder if the suit is unsuccessful. Sally is a shareholder of Fancy Feast, Inc., a Florida corporation with principal place of business in Florida, and she brings a derivative suit against one of Fancy Feast’s directors, Dracon, in a Montana federal court under diversity jurisdiction. Florida law does not require a shareholder bringing a derivative suit to post a bond. Which of the following is a correct statement concerning whether the court should require posting of the bond? (A) The court should base its decision on federal common law or federal procedural rules. (B) The court should follow Montana law and require the plaintiff to post a bond. (C) The court should follow Florida law and not require the plaintiff to post a bond. (D) The above description of Montana and Florida law is insufficient to determine whether the court should require posting a bond. 3 3. Suppose that former partners of a partnership still receive fixed pension income from the partnership. Assuming that continued operation of the partnership in the usual way would ensure a steady income sufficient to pay the former partners, and assuming that the pension income is roughly equivalent to the income of current partners, which of the following is the most accurate statement about the conflict of interest, if any, that exists between former partners and current partners with regard to a decision whether to make a radical change to the business? (A) The conflict of interest is similar to that between debtholders and holders of equity in a corporation, with the former partners’ interest similar to that of debtholders and the current partners’ interest similar to that of holders of equity. (B) The conflict of interest is similar to that between debtholders and holders of equity in a corporation, with the former partners’ interest similar to that of holders of equity and the current partners’ interest similar to that of debtholders. (C) Current partners will be more risk-averse. (D) There is no conflict of interest. 4. Fran is a controlling shareholder of Zappos, Inc., a Connecticut corporation. Because of frequent disagreements with minority shareholders of the corporation, she has the following plan: Fran will create a new corporation, Lightning Shoe, Inc., of which she is the sole owner, and she will merge Zappos into that corporation. The shareholders in Zappos will receive a fair price in cash. Which of the following descriptions of this merger is/are accurate? I. A forward triangular merger. II. A freeze-out merger. III. A cash-out merger. (A) I only. (B) II only. (C) II and III only. (D) I, II, and III. 4 5. Glenn, a space enthusiast, has developed plans to send a private spaceship to the moon and to use a robot to harvest minerals over a land area the size of 1000 acres. After harvesting, Glenn plans to fly the minerals collected back to the United States and to separately auction the minerals for each acre on an Internet auction site. To help finance this venture, Glenn is selling rights to 50% of the revenues for each acre of minerals, with the rights for each acre sold separately, and he has acknowledged that some acres might by chance turn out to produce far more valuable minerals than others. After purchasing such a right and then growing frustrated over delays in the project, Quasar has filed a federal securities fraud suit against Glenn, who has defended in part by arguing that the contract was not a security. It is uncontested that Glenn never called this security “stock.” Which of the following is most relevant in predicting whether the court will determine that the contract is a security? (A) Whether Quasar would have been able to transfer the contract to another party. (B) Whether Quasar would have enjoyed voting rights in proportion to the number of shares owned. (C) Which jurisdiction the court is within, because different jurisdictions have taken different approaches to the issue of horizontal commonality. (D) Which jurisdiction the court is within, because different jurisdictions have taken different approaches to the issue of vertical commonality. 6. Which of the following is closest to the definition of “penalty dilution” in the partnership context? (A) The offering of new partnership points to existing partners at less than their value. (B) The reduction in the amount that a departing partner who has wrongfully taken business owes former partners to account for the efforts that the departing partner must expend in servicing that business. (C) The payment of liquidated damages for wrongful termination of the partnership, even where actual damages are higher. (D) A provision in a partnership agreement that partners who are expelled shall continue to receive some percentage of what otherwise would have been their partnership draws. 5 7. Which of the following provides the most plausible strategic explanation for why a plaintiff in a veil piercing case might seek reverse veil piercing? (A) To avoid subordination to other creditors. (B) To prevent the defendant from relying on an enterprise liability theory. (C) To prevent the defendant’s counterclaim from undermining the plaintiff’s limited liability. (D) To change the burden of proof. 8. Arlene recently purchased an accounting business and hired Jamila to manage it. Without consulting Arlene, Jamila entered into a contract with Tax Software, Inc., to site license Tax Software’s tax preparation product. When Arlene later received the bill for the site license, she refused to pay it. Which of the following is likely to be the strongest argument that Arlene is required to pay the bill? (A) Express actual authority. (B) Implied actual authority. (C) Express apparent authority. (D) Implied apparent authority. 9. Albatross, Inc., was a 51% shareholder of Bulldozer, Inc., and Carmela, an Albatross officer, was a Bulldozer director. Albatross formed a wholly owned subsidiary, A-B, Inc., into which Bulldozer, Inc., merged, after Bulldozer’s minority shareholders approved an all-shares tender offer. All of the corporations are Delaware corporations. Samuel, a Bulldozer shareholder, filed a derivative action against Carmela, seeking damages and injunctive relief, alleging that she withheld information from the Bulldozer board. After the court determined that demand was excused as futile, the Bulldozer Board (with Carmela recused) voted to create a special litigation committee of independent directors to determine whether the corporation should pursue the case. The special litigation committee has recommended that the suit be dismissed. Which of the following is likely to be LEAST relevant to the court’s determination of whether to accept the special litigation committee’s recommendation? (A) Whether the committee was independent. (B) Whether the committee acted in good faith. (C) Whether the committee’s decision was a valid exercise of business judgment. (D) Whether the committee’s decision was consistent with the court’s own business judgment. 6 10. Which of the following is NOT (and logically could not be) a statement from Justice White’s partially dissenting opinion in Basic, Inc. v. Levinson (disregarding differences of punctuation or capitalization)? (A) “While the economists’ theories which underpin the fraud-on-the-market presumption may have the appeal of mathematical exactitude and scientific certainty, they are—in the end—nothing more than theories which may or may not prove accurate upon further consideration.” (B) “Even if securities had some ‘value’—knowable and distinct from the market price of a stock—investors do not always share the Court’s presumption that a stock’s price is a reflection of this value.” (C) “Requiring a plaintiff to show a speculative state of facts, i.e., how he would have acted if omitted material information had been disclosed, would place an unnecessarily unrealistic evidentiary burden on the rule 10b-5 plaintiff who has traded on an impersonal market.” (D) “Many of those who bought or sold Basic stock during the period in question flatly disbelieved the statements which are alleged to have been materially misleading.” 11. Laura is a lawyer in a Washington, D.C., firm. Although she was not generally assigned to cases involving the firm’s chief client, Apple Computer, Inc., many of the firm’s associates were at a golf tournament a few days ago and so the partner in charge asked if she would research a short memo for him. In the process of preparing this memo, she realized that Apple Computer was about to announce a major new discovery that would have a dramatic effect on Apple Computer’s stock price, and moreover that would decimate Apple Computer’s competitor, the Microsoft Corporation. She was tired of being a lawyer, and so she decided to buy put options on Microsoft stock. Before doing so, however, she telephoned all of the partners of the firm as well as appropriate officials at Apple Computer. They tried to dissuade her, but she was determined and purchased the put options. She made several million dollars on the trades and then retired from the practice of law. Is Laura liable for insider trading? (A) Yes, under the traditional theory only. (B) Yes, under the misappropriation theory only. (C) Yes, under both the traditional theory and the misappropriation theory. (D) No, under neither the traditional theory nor the misappropriation theory. 7 12. The directors of Francophile, Inc., a publicly traded Delaware corporation, have decided to begin purchasing an interest in their competitor Francophobe, Inc., also a publicly traded Delaware corporation. Francophile does not currently have any stock, but the Francophile directors have decided that beginning on June 10, the Francophile will begin purchasing shares, and the Francophile Chairman of the Board, Jean, will in concert also begin purchasing shares. By close of business on June 12, Francophile will own just over 4% of Francophobe, and Jean will own just over an additional 1%. On June 14, Francophile will purchase an additional 2%, for a total of 6%. What is the last day by which Francophile must disclose its purchases, if it must do so at all? (A) By June 17. (B) By June 19. (C) By June 22. (D) By June 24. 13. Which of the following statements is accurate? (A) Even a person who receives profits in a business and shares control of that business cannot be a partner of the business in the absence of a written agreement. (B) A person is a partner of a business if and only if the person receives a share of profit and shoulders the burden of a share of losses of the business. (C) The receipt by a person of profits in a business establishes that the person is a partner of the business. (D) The receipt by a person of profits in a business provides prima facie evidence that the person is a partner of the business, but not if the wages were received as an employee. 8 14. When Bob sold Bob’s BBQ Restaurant to Molly, he agreed to stay on as chef and manager and not to tell anyone that there had been any change in ownership. Molly was from out of town and was worried that if locals found out about her ownership, they might conclude that the restaurant’s product was no longer as authentic. To keep up appearances, Molly authorized Bob to enter into food contracts, but prohibited him from entering into any other contracts. Bob, however, had always wanted to build a pool in the back of the restaurant, so that patrons could go for a swim, because he was convinced that being the only barbeque restaurant in the nation with a pool would give the restaurant a competitive advantage. He signed a $100,000 contract with DeLux Pool, signing it “as agent for Bob’s BBQ.” DeLux began building the pool, but after the construction began, Molly found one what was happening and immediately ordered an end to construction. Under which of the following theories should De Lux be able to prevail in a contract action against Molly? I. Apparent authority II. Inherent authority (A) I only. (B) II only. (C) Both I and II. (D) Neither I nor II. 15. Bay Bridge, Inc., is a Delaware corporation that operates private toll bridges. Concerned about possible decay, Bay Bridge entered into a large contract with a bridge inspection company. The Board of Directors of Bay Bridge approved the contract after listening to a presentation by expert Eloise on bridge inspection companies, and Eloise advised that the contract was a good deal for Bay Bridge. The contract, however, turned out to be an exceptionally bad deal for the corporation. A shareholder of Bay Bridge sued the Board, complaining that the Board failed to exercise sufficient care in approving the contract. The Board has responded that it relied on Eloise. Assuming that the court reaches this issue, which of the following facts, if true, would LEAST help the shareholder? (A) The Board in fact did not rely on Eloise. (B) The Board did not reasonably believe that bridge inspection contracts were within the competence of Eloise, who was herself a bridge inspector but knew little of business. (C) Eloise failed to complete calculations that would have identified the cost of the contract under different contingencies. (D) The Board’s decision was so unconscionable as to constitute waste. 9 16. Sentax, Inc., has acquired a 5% interest in Liamo, Inc., and plans to announce a tender offer for an additional 46% of the shares of Liamo. Both corporations are publicly traded, and their securities are not exempt from registration. Which of the following is an accurate statement of Sentax’s obligations should the tender result in fewer or more than 46% of shares being offered? (A) Sentax may make its offer conditional on at least 46% of shares being tendered, but if more than 46% of shares are tendered, it must accept the tender of all the shares. (B) Sentax may make its offer conditional on at least 46% of shares being tendered, and if more than 46% of shares are tendered, Sentax can accept the tenders on a pro rata basis. (C) Sentax must purchase the tendered shares if fewer than 46% of the shares are tendered, and if more than 46% of the shares are tendered, it must accept the tender of all the shares. (D) Sentax must purchase the tendered shares if fewer than 46% of the shares are tendered, and if more than 46% of the shares are tendered, Sentax can accept the tenders on a pro rata basis. 17. Randy and Rudolph were brothers who shared an apartment. Randy was unemployed, but Rudolph was an executive of Biogenetics Pharmaceuticals, Inc. The two never talked about work, but Randy had promised Rudolph that if he ever found anything out about Rudolph’s work that he would keep the information in strictest confidence. Randy knew that Rudolph kept a secret diary in his room, and one day, while Rudolph was at work, Randy sneaked into Rudolph’s room, found the diary, and used a lock pick to open it. He found a recent entry that indicated that Biogenetics was on the verge of announcing a major new breakthrough in the treatment of a serious and common disease. Randy called his stockbroker and purchased options on Biogenetics stock. Assuming that the diary entry is true and the announcement eventually does have a significant effect on the stock, providing Randy with large profits, on which if any theory or theories is Randy liable for insider trading? (A) The traditional theory only. (B) The misappropriation theory only. (C) Both the traditional theory and the misappropriation theory. (D) Neither the traditional theory nor the misappropriation theory. 10 18. Yankees/Nets, Inc., is the controlling shareholder of New York Yankees, Inc., and both are Delaware corporations. New York Yankees, Inc., has two types of shares, Class A (all of which are owned by Yankees/Nets) and Class B (some of which are owned by Yankees/Nets). Class B shares receive twice the annual dividend of Class A shares and are entitled to twice as much in liquidation. Owners of Class B shares are entitled to redeem each share for a Class A share at any time, but New York Yankees, Inc., is entitled to redeem Class B shares at any time for $100. The Class A shares are currently trading for $90, but the directors of New York Yankees, Inc., are aware of a pending acquisition that they expect to boost the value of Class A shares to $110. Without informing the Class B shareholders of the pending acquisition, the directors have decided to redeem the Class B shares for $100. A Class B shareholder has sued, alleging that redemption for $100 at any time when the true value of the Class A shares is in excess of $100 would constitute a breach of the duty of loyalty, because it would advantage Class A shareholders over Class B shareholders. In the alternative, the shareholder argues that the redemption without full information disclosure is a breach of the duty of loyalty. How is the court likely to resolve these issues? (A) Redemption for cash with or without provision of information and an opportunity to redeem for Class A shares would violate the duty of loyalty. (B) Redemption for cash with or without provision of information and an opportunity to redeem for Class A shares would not violate the duty of loyalty. (C) Redemption for cash without provision of information and an opportunity to redeem for Class A shares would violate the duty of loyalty, but if the Class B shareholders are given the relevant information and choose not to redeem for Class A shares, the corporation can redeem Class B shares for $100 each. (D) Redemption for cash without provision of information and an opportunity to redeem for Class A shares would not violate the duty of loyalty, but providing information allowing Class B shareholders to redeem their shares for Class A shares would violate the duty of loyalty to Class A shareholders. 19. Which of the following, if true, would have been most likely to have changed the result in Manning v. Grimsley? (A) The incident occurred just after the last game of the season ended. (B) Grimsley’s contract had an explicit clause providing that he was not to throw the ball at or cause injury to fans. (C) The Baltimore Orioles organization had received no indications that Grimsley might be a threat. (D) The Orioles had taken precautions to protect fans near the bullpen from errant thrown balls. 11 20. Sharon was a shareholder of Target, Inc., who had held onto her shares in the hope that they would become more valuable if longstanding rumors that K-Mart, Inc., would acquire Target turned out to be true. A few months ago, however, a Target press released announced that there was no substance to the rumors and that there had been no discussions between K-Mart and Target. Sharon sold her shares. It later turned out that the press release was inaccurate, and K-Mart did acquire Target. Sharon has filed a Rule 10b-5 lawsuit against Target. Assuming that the fraud-on-the market presumption is not rebutted, which of the following statements about causation is accurate? (A) Sharon will have to provide evidence that she would not have sold absent the misrepresentation and that the market believed the misrepresentation. (B) Sharon will have to provide evidence that she would not have sold absent the misrepresentation, but the court will presume that the market believed the misrepresentation. (C) The court will presume that Sharon would not have sold absent the misrepresentation, but Sharon will have to provide evidence that the market believed the misrepresentation. (D) The court will presume that Sharon would not have sold absent the misrepresentation, and it will presume that the market believed the misrepresentation. 21. Which of the following statements about debt and equity is/are true? I. In bankruptcy, a firm’s assets will ordinarily be distributed to debtholders before holders of equity. II. Equity is generally more risky than debt. (A) I only. (B) II only. (C) Both I and II. (D) Neither I nor II. 12 22. Minute Maid, Inc., was the manufacturer of Minute Maid Lemonade Flavor Drink and the holder of the Minute Maid trademark. Several years ago, Minute Maid, Inc., sold all of its processing plants and the Minute Maid trademark to Coca-Cola, Inc. The management of both companies worried, however, that if the arrangement became publicly known, lemonade consumers, who generally do not have a high opinion of the Coca-Cola brand, might no longer drink Minute Maid. The companies thus successfully kept the agreement secret. Pursuant to the agreement, the Minute Maid, Inc., marketing department continued to make marketing decisions for the Minute Maid brand on behalf of Coca-Cola. The agreement provided that Minute Maid, Inc., was permitted to make advertising and endorsement contracts for Minute Maid, but Coca-Cola officials encouraged Minute Maid officials to consult them before entering into major contracts. Without consultation, Minute Maid entered into a $100 million agreement for naming rights to a baseball stadium in Houston. When Coca-Cola learned of the agreement, executives were furious, and word of the dispute and of the secret agreement leaked to the press. Trying to put a good face on the matter, Coca-Cola announced that it was thrilled with the sponsorship and did not try to stop officials from placing Minute Maid signs around the stadium. Days later, however, Coca-Cola sued to void the contract. Which of the following represents the WEAKEST argument that the contract is valid? (A) Actual authority. (B) Apparent authority. (C) Inherent authority. (D) Ratification. 23. At what point does a creditor become a principal of the debtor and the debtor an agent of the creditor? (A) When the creditor exercises a contractual provision requiring immediate repayment of all loans. (B) When the creditor assumes de facto control over the conduct of the debtor. (C) When the creditor assures the debtor that it is acting for the debtor’s benefit. (D) When the debtor declares bankruptcy. 13 24. Acquirer, Inc. is launching a hostile bid for Target, Inc. Both corporations are publicly held Delaware corporations. In which of the following scenarios is a court LEAST likely to conclude that Revlon duties have been triggered? (A) Before the hostile acquisition, Target, Inc., had developed an agreement in principle with Third Co., Inc., a publicly held Delaware corporation, to enter into a merger. Third Co., Inc., shareholders would own 60% of the combined corporation, but Target, Inc. managers would run the merged corporation. If Acquirer, Inc., a publicly held corporation, is successful, then Acquirer will not have enough money to pursue the plan with Third Co. (B) Before the hostile acquisition, Target, Inc., had developed an agreement in principle with Third Co., Inc., a privately held Delaware corporation. Under the agreement, Third Co. would acquire Target, Inc., via a triangular freeze-out merger. (C) A break-up of Target, Inc., is inevitable, and the Board of Directors have placed the corporation up for sale, but would prefer that Acquirer, Inc., not participate in the bidding process. (D) In response to the bid, the Board of Directors of Target, Inc., have decided to abandon its long-term strategy and find a friendly bidder other than Acquirer, Inc., to break up the company. 14 25. European Food, Inc., was a controlling shareholder of French Food, Inc., and nominated a majority of the French Food board. European Food used a proxy solicitation to propose that the French Food board modify its Articles of Incorporation, which previously prohibited the adoption of poison pills, to permit the adoption of poison pills. The Articles of Incorporation provide that they may be modified by a vote of two-thirds of the shareholders. The proposal was approved by a majority of the shareholders. The proxy solicitation, however, contained a deliberate misstatement about the original text of the Articles of Incorporation provision on poison pills, and a minority shareholder of French Food, Gaston, sued to have the vote declared invalid. What showing does Gaston have to make to show that the misstatement was material and caused his loss? (A) Regardless of the vote by which the measure passed, Gaston must show that the defect had a significant propensity to affect the voting standard. (B) Regardless of the vote by which the measure passed, Gaston must show that the defect affect a sufficient number of votes to alter the outcome. (C) If European Food owned less than two-thirds of the shares of French Food, then Gaston must show that the defect had a significant propensity to affect the voting standard, but if European Food owned more than two-thirds, Gaston will be unable to establish materiality and causation. (D) If the measure was approved by a majority of the minority shareholders, then Gaston must show that the defect had a significant propensity to affect the voting standard, but if a majority of the minority shareholders voted against the measure, Gaston need not show materiality and causation. 26. One approach to valuing a company is based on a multiple of earnings. Which of the following critiques of this approach is WEAKEST? (A) The approach requires a projection of future cash flow and earnings. (B) Even within the same industry, different corporations have different ratios of value to earnings. (C) Earnings in the most recent year or years may not be good predictors of earnings in future years. (D) The approach may be less effective when the corporation’s expenses in a particular year are unusual. 15 27. Fran’s Furniture Store advertised that it is part of the Dayton Furniture Partnership, a consortium of seven stores that will agree to service any broken furniture purchased from any of the seven. Punky purchased a table from Fran’s Furniture Store, and Punky and Fran’s were the only two parties to the contract. When one of the legs of the table broke, Fran’s was out of business. Punky thus went to Dan’s Furniture Store, another member of the Dayton Furniture Partnership, but she was informed that Dan’s would only service furniture from other stores that remained in the partnership. Which of the following would be LEAST relevant in a suit by Punky against Dan’s? (A) Whether Fran’s and Dan’s shared profits at the time of the sale. (B) Whether Fran’s and Dan’s shared control of the furniture repair business at the time of the sale. (C) Whether Fran’s and Dan’s shared profits and control at the time that Punky sought service. (D) Whether Punky relied on the representation that Fran’s was a member of the partnership. 28. Which of the following statements about the de facto merger doctrine is/are correct? I. The Delaware courts apply the doctrine. II. Courts applying the doctrine must have some means of determining the true substance of the transaction, for example by assessing whether the essential nature of the corporation has changed. (A) I only. (B) II only. (C) Both I and II. (D) Neither I nor II. 16 29. Coffeetable Book, Inc., is a Delaware corporation with three directors: George, Jerry, and Kramer. The corporation has 100 shareholders. George and Kramer have been illegally borrowing money from the corporation’s bank account for personal use. Jerry noticed that the bank account was relatively low and asked George and Kramer about it, but they replied that the money was being spent on a corporate investment. Even a rudimentary analysis of the corporation’s books would have revealed this to be false. If Jerry is sued for a violation of the duty of care, which of the following would be a sufficient defense? I. Before agreeing to assume the directorship, Jerry informed the other directors that he did not have expertise in reading a corporation’s books and would have to rely on the other directors and officers to do that. II. If Jerry had proposed that funds no longer be spent on George and Kramer’s personal expenses, they would have outvoted him. (A) I only. (B) II only. (C) Both I and II. (D) Neither I nor II. 30. Fred and Barney were partners until Fred dissolved the partnership. A court has now ordered that the partnership be placed up for auction. Which of the following statements about the auction is NOT accurate? (A) If Fred’s dissolution is wrongful, he may not be allowed to bid for the partnership. (B) If the courts determine that Fred dissolved the partnership to take advantage of Barney’s liquidity problem, they may find a breach of fiduciary duties. (C) If Barney is the high bidder, then he will in effect keep, subject to paying the partnership’s liabilities, his partnership share of his own bid. (D) Fred will be allowed to bid for the partnership, but he will not be allowed to use paper dollars. 17 31. Paul, a lifelong executive in the candy industry, has developed in his own kitchen a new candy bar, the Paul Bar. He has distributed samples of this candy bar to various friends in the industry, and several of them immediately agreed to enter into long-term contracts to purchase large volumes of the treats. Paul agreed, and signed contracts on behalf of “Paul Bar, Inc., to be formed as a Missouri corporation.” In which of the following situations might Paul retain personal liability on such a contract? I. The articles of incorporation for Paul Bar, Inc., are successfully filed in Missouri, and the corporation adopts the contract. II. Paul has second thoughts and decides not to form Paul Bar, Inc. (A) I only. (B) II only. (C) Both I and II. (D) Neither I nor II. 32. In which of the following circumstances would the dissolution of a partnership be properly said to be “by operation of law”? (A) The partnership dissolves as a result of the conclusion of the partnership term. (B) The partnership dissolves because of the death of one of the partners. (C) The partnership is wrongfully dissolved by an act of one or more partners. (D) The partnership is dissolvable and dissolved at the will of one or more of the partners. 33. Which of the following helps explain the need of the court in Cinerama v. Technicolor to consider the entire fairness of the transaction? (A) The CEO of Technicolor did not conduct sufficient investigation. (B) The CEO of Technicolor did not negotiate aggressively enough. (C) The Board did not proceed carefully enough. (D) The Board approved a sale price that did not represent a significant premium. 18 34. Which of the following facts, if true, would have been LEAST likely to change the result in Smith v. Van Gorkom? (A) Seventy-five percent of Trans Union’s shareholders voted to approve the merger. (B) The Trans Union Board of Directors deliberated about the offer for eight hours. (C) Pritzker agreed to remove the lockup provision entirely and yet no other bidder emerged. (D) An independent fairness analysis concluded that Pritzker could not have afforded to pay any more for Trans Union. 35. Dinah and Dave hire Tom’s Tree Service, an independent contractor, to cut down some trees on their yard. Tom’s cuts down a tree, and it falls on the house of neighbors Paula and Padma, who sue Dinah and Dave for damages to their home. In which of the following situations would Paula and Padma necessarily be liable? I. Although Tom’s was not negligent, tree cutting is an inherently dangerous activity. II. Dinah and Dave were negligent in their selection of Tom’s, which is an incompetent tree cutting service, and this negligence caused the accident and the damages. (A) I only. (B) II only. (C) Both I and II. (D) Neither I nor II. 19 36. Peter and Paul operate a partnership that has the following three liabilities. What is the order of payment (from first to last) of these liabilities, if it is not possible to satisfy them all? I. A loan from Pam, who retired and exited the partnership before making the loan. II. A contribution of capital from Peter, made before the loan from Pam. III. A payment of salary owed to Paul. (A) I, II, III. (B) I, III, II. (C) II, I, III. (D) III, II, I. 37. McDonald’s, Inc., recently disclosed that it has acquired 5% of Baja Fresh, Inc., and that it plans to acquire 40% of the corporation, enough to make McDonald’s the controlling shareholder. Both corporations are publicly traded and incorporated in Delaware. Concerned about this plan, the Baja Fresh directors decided to offer to buy back the shares that McDonald’s acquired at a substantial premium. A disgruntled Baja Fresh shareholder, Tex, has filed a derivative suit against Mex, the Chairman and CEO of Baja Fresh, challenging the corporation’s decision to buy back the shares. Which of the following is the correct standard for evaluating the lawsuit? (A) Tex has the burden of proving that Mex did not act with a proper business purpose. (B) Mex has the burden of proving that he acted with a proper business purpose. (C) Tex has the burden of proving that the deal was entirely fair. (D) Mex has the burden of proving that the deal was not entirely fair. 20 38. American Grocery Corp., Inc., a Delaware corporation, is a 90% shareholder of one of its suppliers, Grocery Suppliers, Inc., also a Delaware corporation, and has nominated a majority of the Grocery Suppliers Board. American Grocery Corp. is considering whether to enter into a long-term contract with Grocery Suppliers, or whether simply to negotiate each purchase individually. Which of the following is/are accurate statements of the relevant law? I. To protect minority shareholders of Grocery Suppliers, Inc., American Grocery Corp., Inc. must enter into a long-term supply contract ratified by American Grocery Corp. shareholders. II. The burden of proof will be on American Grocery Corp., Inc., to show that any contracts it enters into with Grocery Suppliers, Inc., are intrinsically fair. (A) I only. (B) II only. (C) Both I and II. (D) Neither I nor II. 39. Which of the following would have been LEAST likely to change the outcome of Goodwin v. Agassiz? (A) The transaction took place face-to-face rather than on an open securities market. (B) The defendants’ information was certain, not just a nebulous prediction. (C) The defendants had purchased their shares before the corporation released news of the initial exploratory operation. (D) The court determined that the defendants owed a duty to the shareholders, not just to the corporation itself. 21 40. Pizza Hut, Inc., operates a national chain of pizza restaurants, each of which is independently operated. Victoria recently ordered a barbecue chicken pizza, and then gagged on a chicken bone that had been placed on the pizza. She sues Pizza Hut, Inc., for severe injuries, which all parties agree were caused by employee negligence. Which of the following, if true, would be the LEAST helpful to Victoria in her attempt to recover from the national chain? (A) Although Pizza Hut, Inc., provided franchisees with a recommended protocol for preventing food injuries, it was optional and the local franchise decided not to follow it. (B) Pizza Hut, Inc., pays the utility bills of the local franchisee. (C) Pizza Hut, Inc., promises its franchisees that they will sell at least 10,000 pizzas a month, and makes up the difference in franchisee profits when there is a shortfall. (D) Pizza Hut, Inc., determines the hours of operation of the franchise. 22 PART 2: SHORT ANSWER (SIX QUESTIONS) 1. Darth is the sole shareholder of Daver Industries, Inc., a corporation into which he has placed $10,000 in capital. Darth in the past has taken zero-interest loans from Daver Industries, but he has always repaid these loans. Darth Industries is properly incorporated in New Mexico, but Darth has occasionally failed to strictly follow New Mexico corporate law; for example, he remembered that he had to have an annual meeting late and then held the meeting a week past the date the meeting should have occurred. Daver is in the business of purchasing and reconditioning abandoned hubcaps and selling them to car dealerships. Porsche Repair, Inc., entered into a long-term contract with Daver Industries in which Porsche Repair provided $1,000,000 in exchange for a promise to provide 10,000 hubcaps annually for ten years. Darth decided to have Daver Industries invest the money in derivatives contracts. Three months later, the investment was worthless, and Daver Industries has informed Porsche Repair that it will not be able to fulfill the contract or return the money. Porsche Repair has filed a lawsuit against Darth. Assess Porsche Repair’s chances. 2. You are the legislative counsel for a U.S. senator, who has decided to sponsor a bill that would allow corporations, by majority vote of their shareholders, to opt out of insider trading regulations. She has asked you to draft a brief summary of reasons that this might be a good idea and counter arguments that it is a bad idea. Do so. 3. Pedro, Paula, and Pamela have decided to become partners in an emergency child care provision business. Because they are uncertain about the degree of demand for emergency child care services, they have each agreed initially to contribute $50,000 in capital, but they recognize that additional capital contributions may be necessary later. They also recognize that they might have disagreements about how much additional capital each partner should contribute at a later date. In particular, they worry that two of the three might at some point in the future be in a better financial position than the third and use a requirement of a capital infusion to freeze out the third partner. They have requested advice about what provisions to place in their partnership agreement, if any, concerning the contribution by partners of new capital. Provide brief advice. 4. Malcolm is planning to start a business that he will incorporate in Delaware. Malcolm expects the business to have an initial capitalization of $100 million, and has asked your law firm to draw up the articles of incorporation. The law firm partner primarily working on this project has asked you to determine whether the articles of incorporation can include a provision that would limit the liability of the directors for breaches of the duty of care, and, either way, what the benefits and drawbacks of such a provision would be. Offer a response. 5. In a number of cases concerning the permissibility of tactics defending against takeover attempts, the Delaware courts have considered the extent to which a Board of Directors may consider the interests of constituencies other than shareholders. How have the Delaware courts’ views of this issue changed over time? 23 6. The International House of Pancakes, Inc., is a Delaware corporation that runs a national restaurant chain. Each individual restaurant is open 24 hours, serves the same menu, orders all of its ingredients from the national chain, and maintains the same blue-roof design theme, but individual franchisees keep the profits (or suffer the losses) that they receive. Recently, a group of protesters picketed outside the International House of Pancakes restaurant in Larchmont, New York, complaining that the corporation had contributed to the obesity epidemic. The protesters, however, quickly became hungry and decided to enter the restaurant. The manager of the restaurant immediately became irate and hit one of the protesters, Pam, over the head with a frying pan, causing her severe injuries. Pam has filed a tort suit against the International House of Pancakes, Inc., which concedes that the manager has committed a tort but denies that it is responsible. Evaluate the issues. 24 PART 3: ESSAY (ONE QUESTION) The Bluth Development Co., Inc., is a California corporation that develops gated communities. The former president of the corporation, George Bluth Sr., is currently in jail awaiting trial on charges that he stole money from the corporation, and his son, Michael Bluth, is currently serving as Chairman and CEO. The seven-member Board of Directors also includes Michael’s sister, Lindsay Funke; and his mother, Lucille Bluth. Also on the corporate payroll are Michael’s brothers, Gob Bluth, a professional magician, and Buster Bluth, a graduate student, neither of whom has any skills of relevance to the corporation. A shareholder, L. Austero, wrote a letter to the Board, demanding that the corporation cease sending paychecks to Gob and Buster Bluth and that the corporation institute a lawsuit against George Bluth Sr. Austero also threatened to launch a takeover of the corporation if the Board did not comply. At a meeting, the directors appeared initially sympathetic to Austero’s complaint about the paychecks for Gob and Buster Bluth, complaining to Michael Bluth that they were receiving less pay than Gob and Buster. Michael explained that it was important to have Gob and Buster remain on the corporate payroll, to preserve the public image of Bluth Development as a family corporation, a characteristic important to many home buyers. He suggested that instead of voting to dismiss Gob and Buster, the Board vote itself a pay increase. The Board deliberated for five minutes, and then unanimously agreed. Michael also convinced the directors not to file a lawsuit against his father. Any money recovered, Michael argued, would ultimately be at his personal expense, and his effectiveness in running the corporation would be impaired. The Board agreed to reject Austero’s demand for a suit. Finally, at the same meeting, Michael also suggested that the directors vote to institute a flip-in poison pill, which the Board agreed to do. Shortly after the meeting, the corporation began the process of distributing the relevant rights to the corporation’s shareholders. Austero has brought a lawsuit in California state court, and you are one of the law clerks to the judge overseeing the matter. The judge has informed you that a different law clerk is considering the applicability of California law to this case, and would like you to consider how other jurisdictions, such as Delaware, might approach this case. Where there are different possible legal approaches to the issues, she has also asked you to offer any relevant arguments about what approach is the best approach, so that if any of the relevant issues are unsettled under California law, she can move California corporate law in a good direction. Draft a memorandum responding to her request. 25