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BUSINESS ASSOCIATIONS
Professor Bradford
December 7, 2009
8:30 a.m.
3 Hours and 15 Minutes
INSTRUCTIONS
General Instructions
1. This exam is partially open book. You may use the required statute book and nothing
else. The statute book may include highlighting, circling, underlining, lines, arrows, or any other
marks, and may be tabbed. However, writing in the statute book is limited to annotations of five
words or less. If your statute book contains annotations or notes that violate this limit, you may
not use it during the exam. When the exam is finished, you must turn in your statute book;
be sure it has your name on it.
2. You may not consult any sources other than the statute book, and you may not
consult with or communicate with any other person during the exam. If you have any books,
notes, briefcases, book bags, cell phones, PDAs, 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.
3. This exam has nine (9) 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.
4. You have three hours and fifteen 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.
5. The exam consists of seven (7) questions. The recommended time for each question
is as follows:
Question 1……...55 Minutes
Question 2……...10 Minutes
Question 3……...35 Minutes
Question 4….…..15 Minutes
Question 5……...10 Minutes
Question 6………40 Minutes
Question 7……...30 Minutes
6. 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.
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7. For each question, if the facts of the question do not indicate otherwise, assume
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.
8. If one of the statutes or regulations we have studied applies, cite the relevant sections
and subsections and explain how those provisions apply to the facts of the problem. An answer
that doesn’t cite and analyze relevant statues or regulations is incomplete and will not receive
full credit.
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.
12. Good luck and have a pleasant holiday.
Instructions Concerning Taking the Exam on a Computer
13. You must take 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.
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.)
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Question One
(55 Minutes)
Seller, Inc. is a Delaware corporation whose stock is traded on NASDAQ. Its certificate
of incorporation includes the following sentence: “The liability of the directors of Seller is
eliminated to the full extent allowed by law.”
Seller’s board of directors consists of three directors: Anne, Betty, and Carla. Anne is
also the CEO of Seller. Betty and Carla are both outside directors who have no other
relationship to either Seller or Anne.
On December 1, 2009, the Seller board of directors unanimously approved the sale of
Blackacre, a 400-acre tract of land Seller owned, to Buyer Corporation, for a cash price of $5.2
million.
Two weeks prior to the board meeting, each director received a 50-page report on the
proposed transaction. In addition to explaining the sale and why it was a good deal, the report
disclosed that Anne’s spouse Hub owned five percent of Buyer’s common stock. The report also
indicated that Anne was not involved in any way in initiating or negotiating the sale. Neither
Betty nor Carla read the report.
At the board meeting, prior to voting on the sale, the board received a briefing on the
transaction from Delta and Ellen, the two Seller employees who negotiated the deal. They said
nothing about Hub’s interest in Buyer, and the subject did not come up.
A. (30 Minutes) Discuss the potential liability of Anne, Betty, and Carla for breach of
fiduciary duty. (Do not discuss any procedural issues that might arise if a shareholder
wants to bring a claim—such as whether a derivative action is appropriate, whether
demand would be required, or whether a special litigation committee could dismiss the
action.)
B. (25 Minutes) Discuss whether the result would be different if Seller were a limited
partnership; Anne, Betty, and Carla were its only general partners; and the liability
limitation were in the partnership agreement.
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Question Two
(10 Minutes)
Briefly explain what the following language means and how it affects Acme
Corporation’s dividend decisions:
Each share of Acme Corporation Class A stock is entitled to a dividend preference of $1
per share. This preference is fully cumulative and fully participating.
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Question Three
(35 Minutes)
Watson is an employee of Husker Sales, a sole proprietorship owned by Pelini. Watson
works as Pelini’s personal secretary.
On September 1, 2009, Pelini called Watson into his office and said, “It’s time our sales
people stopped recording all their notes and contact information on paper. I want to move into
the electronic age. Buy something for all 25 of our sales people, but nothing fancy.”
Pelini handed Watson a brochure for small $200 PDAs (personal digital assistants).
“Something like this should do the job,” Pelini said.
Shortly after his conversation with Watson, Pelini ran into Suh, a close friend who also
works in sales. Suh showed Pelini the $1000 touch-screen tablet computer Suh was using to
record all his sales information. “These would be great for my sales people,” Pelini said. “I
think I will have Watson buy tablet computers like this for everyone at Husker.”
After his conversation with Pelini, Suh called Gates, a friend of his who sells tablet
computers. Suh repeated what Pelini told him and suggested Gates contact Pelini.
Before Gates could call Pelini, Watson came to Gates’ store and said, “My boss wants me
to buy 25 tablet computers for Husker Sales.” Watson signed a contract to buy the computers at
a price of $1000 each. The contract listed Husker Sales as the buyer; Watson signed it, “Husker
Sales, by Watson, Secretary.”
Discuss whether Pelini is liable on this contract.
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Question Four
(15 Minutes)
Sandy is a shareholder of Library Corporation, a Delaware corporation. She plans to
propose a resolution for shareholders to vote on at the annual shareholders’ meeting that would
require the corporation to recycle its trash to the greatest extent possible. She believes a majority
of the shareholders would support her position. Discuss the legal problems, if any, with Sandy’s
proposed resolution.
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Question Five
(10 Minutes)
Stooge Partnership is a general partnership with three equal partners—Moe, Larry, and
Curly. Stooge does not have a partnership agreement. Moe and Larry are actively involved in
managing the business of the partnership. Curly does not actively participate in the business. At
a recent meeting of the three partners, the partners voted 2-1 to pay Moe and Larry a salary of
$500 a year for their work on behalf of the partnership. Briefly discuss any legal issues related
to this decision.
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Question Six
(40 Minutes)
Trek Corporation is incorporated in a state that has adopted the latest version of the
Model Business Corporation Act. Trek’s stock is traded on the New York Stock Exchange.
Kirk is a shareholder of Trek. On March 1, 2009, Kirk sent a letter to five of Trek’s
largest shareholders, including Spock. The letter briefly discussed Trek’s flagging performance
relative to other companies in its industry and concluded that “Trek’s shareholders deserve
better.”
Spock liked the letter, so Spock forwarded it to 50 other individuals and institutions that
Spock knew owned Trek shares. Spock included a brief note that said, “Dear Fellow
Shareholder, Thought you might be interested. Spock.” Spock did not ask for Kirk’s permission
to forward the letter.
On March 20, Kirk sent a formal solicitation to all of Trek’s shareholders seeking their
proxies to elect new directors to replace Trek’s current directors. This communication, which
included a proxy form for shareholders to fill out, complied with all the applicable proxy rules.
Spock was not involved in any way with Kirk’s March 20 solicitation and did not know that Kirk
intended to do this.
Discuss whether Kirk or Spock has violated the federal proxy rules by circulating the
March 1 letter.
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Question Seven
(30 Minutes)
Magna Corporation is a publicly-traded corporation. On October 1, it held a conference
call with a number of professional securities analysts who follow the company. Paula Prez, the
CEO of Magna, began the phone call by announcing, “We expect you to keep the information
released in this call confidential.” None of the analysts responded to this statement.
During the call, Paula announced Magna had developed a new machine that would
substantially increase the company’s profits. Paula predicted an increase in profits of roughly
20% over the next three years. Magna had not previously disclosed this development to the
public.
Anna was one of the analysts participating in the phone call. Anna is not related in any
way to Magna or any of its directors, officers, or employees. Immediately after the call, Anna
relayed the news to her friend Fred, who had offered to pay her for any hot stock tips. Fred gave
Anna $500 for the tip and immediately purchased 500 shares of Magna common stock.
Magna publicly announced the development of the machine and the expected increase in
profits on October 10. Shortly thereafter, Fred sold his Magna stock for a $10,000 profit.
Discuss the possible liability of Anna and Fred under Rule 10b-5. (Assume the
information about the new machine was material.)