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THOMAS M.

COOLEY LAW SCHOOL

Business Organizations Exam Hilary Term, 2005


Professor Larson

1. Instructions: This examination consists of 40 multiple choice questions and two essay
questions. The examination will last two (2) hours and 45 minutes. The exact times will be
posted (or announced) in the examination room. The questions are weighted as follows:
Multiple Choice - 60 points and two Short Answer questions worth 20 points each; total points
possible are 100.

2. Instructions for All Multiple Choice: ALL MULTIPLE CHOICE QUESTION


RESPONSES ARE TO BE PLACED ON THE SCORE SHEETS.

Please place your BLUE BOOK NUMBER ONLY in the box designated
"BLUE BOOK NUMBER". Place 2 zeros in the first 2 left hand columns
followed by your blue book number. Thus, blue book number 12345 will be
placed under BLUE BOOK NUMBER as 0012345. Do not put your name or
student number anywhere on this computer score sheet. Please use only a pencil
on the computer score sheet. Pencils have been provided.

In each multiple choice question, there is only one correct answer.

3. Instructions for Essay Questions: Please write legibly in your blue book in ink on every other
line and on only one side of the page. It is not necessary to write extensively, but you should
explain or support all conclusions you reach and apply the law to the specific facts set forth in
the question. No credit will be given for unsupported conclusions or general discussion of the
law not related to the facts of the question. If you deem it necessary to make assumptions,
please be certain that you indicate the assumptions you made and why you deemed it necessary
to do so.

4. Assume the Model Business Corporation Act (MBCA), Revised Uniform Partnership Act
(RUPA) and Revised Uniform Limited Partnership Act (RULPA) apply in all questions, unless
expressly stated otherwise. Unless otherwise specified, "partnership" means "general
partnership," and "partner" means "general partner."

5. You may bring a calculator to the exam.

6. Please remember that answers that cannot be read, cannot be graded.

7. Watch your time carefully. I suggest that you spend no more than one and one/half hours on the
multiple choice questions so that you have at least one hour and 15 minutes for the essay
questions.

8. THE PROCTOR WILL COLLECT THE ENTIRE EXAMINATION. FAILURE TO HAND


IN THE ENTIRE EXAM WILL RESULT IN A GRADE OF "F".

9. Good luck! Relax and try to enjoy!

NOTICE - PLACE YOUR BLUEBOOK NUMBER HERE _____________

Page 1 of 27 Pages
MULTIPLE CHOICE QUESTIONS

Select the best answer for each of the following questions. Mark only one answer for each
question.

Problems 1 and 2 are based on the following fact pattern.

Mr. Blackwell owns stock in People Magazine Corporation, a publicly traded corporation
incorporated in Delaware. The corporation had been having financial difficulties lately, given the
increase in gossip-type magazines that recently entered the market. However, the corporation recently
sold a record-breaking number of copies of the weekly edition that broke the story that Brad and
Jennifer had split. Even with the increased revenues, the corporation was not entirely out of financial
difficulties.

Mr. Blackwell has discovered that the directors voted to pay themselves a large bonus based on the
success of the record-breaking edition of the magazine. Given the financial difficulties of the
corporation and the board’’s minimal involvement in getting the record-breaking edition of the
magazine to press, he believes that the bonus constitutes a wasting of corporate assets. He is
interested in bringing a derivative suit.

1. With respect to your advice to Mr. Blackwell regarding whether he must make a demand on the
board of directors under Delaware law, which of the following is correct?

A. Mr. Blackwell must always make a demand on the board of directors, then wait 90 days
for its response.

B. Mr. Blackwell should make a demand on the board of directors to prove to the court that
he made a good faith effort to get the board to remedy the wrong it committed.

*C. Mr. Blackwell is required to make a demand on the board of directors, unless he can
show with particularity that a reasonable doubt exists that a majority of the directors on
whom demand would have been made are disinterested or that a reasonable doubt exists
that the challenged transaction was protected by the business judgment rule.

D. Mr. Blackwell is not required to make a demand on the board of directors if he can show
with particularity that the directors did not adequately disclose their involvement in the
transaction so that the intrinsic fairness standard will be applicable.

Page 2 of 27 Pages
2. Assume that Mr. Blackwell properly filed a derivative lawsuit on behalf of People Magazine
Corporation. The corporation then formed a special litigation committee, and the committee
recommended that the lawsuit be terminated. Acting on the committee’’s recommendation, the
corporation filed a motion with the court to have the case dismissed.
Under what facts will the court grant the corporation’’s motion?

*A. People Magazine Corporation establishes that the special litigation committee was
independent and made a complete investigation prior to making its recommendation and
the court may, in its own discretion, consider if it agrees that it is in the corporation’’s
best interest to dismiss the suit.

B. Mr. Blackwell is unable to establish that the committee lacked independence and failed
to make a compete investigation prior to making its recommendation.

C. Mr. Blackwell cannot show that the lawsuit is in the best interest of the corporation.

D. People Magazine Corporation establishes that the intrinsic fairness standard is met.

3. For many years Tara has made scrumptious chocolate chip cookies. One day, while nibbling
on cookies, she and her three friends (Scarlet, Ashley, and Meg) decided to form Chocolate
Chip Express Corporation under the MBCA. To the extent possible, the four friends want to
minimize the amount of administrative requirements needed to operate the corporation. Their
plan is that each of them will work for the corporation and have an equal voice in making
corporate decisions. Since they will be seeing each other every day, they believe they can
address problems and make decisions as they come up, rather than have formal (and often time-
consuming) meetings. To eliminate such required meetings, they want to eliminate the board
of directors. Tara asks you, her attorney, if they can eliminate the board of directors. What
advice do you give Tara?

A. Under the McQuade line of cases, a corporation must always have a board of directors.

*B. The McQuade line of cases have been specifically overruled by statute, and now the
shareholders, by unanimous agreement, can eliminate the board of directors by
executing a shareholder agreement.

C. Because a board of directors is one of the attributes that distinguishes a corporation from
a partnership, a corporation must always have a board of directors. If the shareholders
did eliminate the board, the entity would then be characterized as a partnership, making
the shareholders liable for the debts of the corporation.

D. The shareholders could eliminate the board of directors only if they also agreed to
eliminate the officers of the corporation.

Page 3 of 27 Pages
5. Four sisters, Amy, Beth, Jo, and Meg, own stock in Alcott, Inc., a closely-held corporation.
They want to assure themselves that they will always be able to vote themselves in as directors
of the corporation. To assure this result, last year they formed a voting trust, with each of the
sisters transferring title to her shares to the trustee. Under the terms of the trust agreement,
each sister will be voted onto the board of directors.

Earlier this year, Amy voiced her opinion that the corporation should expand into the area of
buying and selling fine art. The other three director-sisters disagreed. Amy is unhappy with
this result and would like to vote herself and another person of her choosing onto the board of
directors.

As to the advice you would give Amy, which of the following is correct?

A. Amy can vote herself and someone else onto the board of directors because a voting
trust is not specifically enforceable.

*B. Amy is bound by the voting trust, so each of the sisters will be elected onto the board
and Amy will not be able to vote in another person of her choosing.

C. A voting trust is unenforceable as a matter of law because the shareholders must be


allowed to exercise their discretion when casting their votes. Therefore, Amy can vote
for anyone she wants.

D. None of the above.

25. Starbuck’’s stock is traded on the New York Stock Exchange and has 1,000,000 shares
outstanding. Emma, who loves coffee, likes to invest in coffee companies. During 2003,
Emma purchased 200,000 shares of Starbucks. In addition, on January 1, 2004, Emma
purchased 200,000 shares of Starbucks at $20 per share. On February 1, 2004, she purchased
another 5,000 shares at $40 per share. On March 1, 2004, she sold 100,000 shares at $30 per
share. On April 1, 2004, she sold 100,000 shares at $25 per share.

What is Emma’’s Section 16(b) liability, if any?

A. Emma is not liable under Section 16(b) because she was not a director of Starbucks at
the time of purchase and time of sale.

B. Emma is liable for $500,000.

C. Emma is liable for $1,000,000.

*D. Emma is liable for $1,500,000.

Page 4 of 27 Pages
Essay Question 1 (20 points)

Computer Corporation is a medium-sized corporation that sells computers. Its primary market is to
businesses, but it also makes a small number of sales to individuals each year.

In December of last year, the board met to discuss its marketing plans for 2005. After many days of
intense meetings, the board agreed upon broad policy objectives which included selling between
10,000 and 15,000 computers manufactured by Macrosoft, a wholesale manufacturer of multi-
purposes business computers, and between 5,000 and 10,000 computers manufactured by BananaCo, a
wholesale manufacturer of high-end business computers. These sales goals were only slightly greater
than the sales proposed in 2004.

In January of 2005, the board met with the president, vice president, treasurer, and secretary of
Computer Corporation and advised them of the sales goals that had been agreed upon by the board.
After discussing other miscellaneous matters, the meeting was adjourned.

The week following the meeting with the board, Terry, the president of Computer Corporation, placed
an order with Macrosoft for 10,000 Deluxe computers. He also placed an order with Jobs Corp. for
5,000 units of the latest hand-held personal computers. Computer Corporation had never sold such
hand-held personal computers before, but Terry wanted to explore whether Computer Corporation
could develop a new market in this area.

Two weeks after Terry had placed his order with Macrosoft for the 10,000 Deluxe computers,
Macrosoft came out with an updated model of the computer –– the Deluxe 2005.

1. Having discovered that the 10,000 Deluxe computers Terry ordered from Macrosoft are unlikely to
sell well, due to the availability of the updated model, the Deluxe 2005, Terry wants to know whether
the contract with Macrosoft is binding on Computer Corporation. You are the attorney for Computer
Corporation. What do you advise Terry and why? (10 points)

2. The board discovers that Terry has ordered the 5,000 units of hand-held personal computers from
Jobs Corp. and is livid. He has deviated from their business plan and they fear that this deviation may
cost the corporation thousands of dollars in lost profits. The board wants to know whether the
contract with Jobs Corp. is binding on Computer Corporation. You are the attorney for Computer
Corporation. What do you advise the board and why? (10 points)

Page 5 of 27 Pages
Essay Question 2 (20 points)

After having spent many years in public law enforcement, Olivia, Elliot, and Jack resigned and
formed their own private investigative agency. They incorporated as Secrets and Vices Uncovered,
Inc. (SVU), each receiving one-third of the outstanding common stock. Olivia and Elliot both
obtained private investigator licenses and permits to carry concealed weapons. Jack located suitable
office space and the necessary office equipment. Their initial understanding was that Olivia and Elliot
would do the actual investigative work and Jack would handle the administrative work, such as
answer phones, filling out paper work, and billing clients. They each elected themselves to the three-
member board of directors. Jack was appointed president and treasurer, Olivia was appointed vice
president, and Elliot was appointed secretary. They each devoted their services full time to SVU and
paid themselves a salary, each receiving one-third of the net corporate profits.

For the first five years of operation the business ran smoothly. Last year, Jack’’s wife had their
first child, a daughter. Due in large part to his new obligations as a father, Jack was unable to devote
as much time to SVU as he had in the past. In addition, Jack’’s work product declined. He failed to
return calls to several potential new clients, resulting in a substantial loss of business. He also
improperly billed several clients, resulting in a substantial drop in corporate profits.

At the shareholder meeting this year, Olivia and Elliot elected themselves as directors. They
also validly used their votes to elect Ice-T as the third member of the board; Jack had insufficient
votes to elect himself to the board. The new board then appointed Olivia as president and treasurer,
Elliot as vice president, and Ice-T as secretary. Olivia, as president, fired Jack, terminating any
further salary payments to him.

Jack has come to you for advice.

1. What advice would you give Jack if SVU were incorporated in Massachusetts? (5 points)

2. What advice would you give Jack if SVU were incorporated in Michigan? (4 points)

3. What advice would you give Jack if SVU were incorporated in a state that had adopted the
MBCA? (5 points)

4. Why doesn’’t Jack just sell his stock in SVU? (6 points)

END OF EXAMINATION
HAVE A RELAXING BREAK

Page 6 of 27 Pages
Business Organizations
Hilary 2005 - Larson
Essay Question 1 (20 points)
1. In order for the contract with Macrosoft to be binding on Computer Corporation, it must have been entered
into by an agent of Computer Corp who was acting within the scope of his authority. As president of
Computer Corporation, Terry is an agent of Computer Corporation. The first type of authority to consider is
actual authority. Actual authority can be express or implied. Express authority is based on the literal words of
the principal and implied authority includes those things that would be reasonably necessary, or usual and
incidental, customary, etc., to accomplish the task of the agency. Given the board’’s business plans for 2005, it
appears that Terry had actual authority to enter into the contract with Macrosoft on behalf of Computer
Corporation. Thus, the contract is binding on Computer Corporation (10 points).

2. In order for the contract with Jobs Corp to be binding on Computer Corporation, it must have been entered
into by an agent of Computer Corp who was acting within the scope of his authority. As president of
Computer Corporation, Terry is an agent of Computer Corporation. The first type of authority to consider is
actual authority. Terry did not have actual authority to enter into the contract. The second type of authority to
consider is apparent authority. To establish apparent authority, Jobs Corp would have to first establish that
Computer Corporation acted in a way that made it appear Terry had the authority. By appointing him as
president, it is arguable that Computer Corporation acted in way that made it appear Terry had authority to
enter into contracts for the purchase of hand-held computers on behalf of Computer Corporation. Next, Jobs
Corp. must establish that its belief Terry had such authority was objectively reasonable. Given that Computer
Corporation has never purchased hand-held computers in the past, and generally did not market individual
computers, focusing instead on sales to businesses, it is questionable whether Jobs Corp’’s belief was
objectively reasonable. (10 points)

Essay Question 2 (20 points)


1. SVU is a closely-held corporation. If incorporated in Massachusetts, SVU must establish that there was a
legitimate business reason for firing Jack. Jack committed several mistakes that were costly to the corporation
and SVU put an end to the loss of profits by firing Jack. Thus, it is likely SVU can establish a legitimate
business reason for firing Jack. Then, Jack must show that there was a less harmful way for SVU to achieve
the same objective. Jack could argue that SVU could have reduced his hours or reduced his pay, rather than
firing him. (5 points)

2. If SVU is incorporated in Michigan, the only rights that are protected are his rights as a shareholder.
Michigan has interpreted such rights as not including any ““expectation rights,”” such as the right to be on the
board of directors or the right to be employed by the corporation even where the corporation is a closely-held
corporation. Essentially, Jack has no recourse. (4 points)

3. If SVU is incorporated under the MBCA, based on the fact the corporation is a closely-held corporation,
Jack could sue for dissolution of the corporation based on oppression. If he is successful, then Olivia and
Elliott would be given the opportunity to purchase his shares in SVU and avoid dissolution of the corporation.
(5 points)

4. Given that SVU is a closely-held corporation and Jack owns only one-third of the stock, it is unlikely that
there is a public market for the stock. Unless the purchaser were to be employed by the corporation, the stock
would have minimal value. Similarly, the stock would be of interest only to someone interested in working
with Olivia and Elliot. Finally, the potential purchaser likely would not have a controlling vote in
management, as he/she could be outvoted by Olivia and Elliot. Finally, Olivia and Elliot, as potential buyers
of the stock and realizing Jack’’s predicament, may be trying to force Jack into selling the stock at below its
fair market value. (6 points)
Essay Question 1 (20 points)
1. Is the contract binding on Computer Corporation? (10 points)
_____ the contract must have been entered into by an agent of Computer Corp (the principal) (1)
_____ and, the agent must have been acting within the scope of his authority (1)
_____ as president of Computer Corp, Terry is an agent of Computer Corp (1)
_____ was there actual authority, either express or implied? (2)
_____ given the board’’s decisions and Terry’’s position as president, it appears he had actual authority and
acted with the scope of his authority when he entered into the contract with Macrosoft (4)
_____ the contract is therefore binding on Computer Corporation (1)

2. Is the contract with Jobs Corp, binding on Computer Corporation? (10 points)
_____ the contract must have been entered into by an agent of Computer Corp acting within the scope of this
authority (1)
_____ as president of Computer Corp, Terry is an agent of Computer Corp (1)
_____ was there actual authority? No (1)
_____ was there apparent authority? (1)
_____ did Computer Corp act in a way that would make it appear that Terry had the authority? (2)
_____ was Jobs Corp’’s belief that Terry had such authority objectively reasonable? (2)
_____ analysis and conclusion (2)

Essay Question 2 (20 points)


1. If SVU is incorporated in Massachusetts? (5 point)
_____ SVU is a closely-held corporation (1)
_____ SVU must show that it had a legitimate business purpose for firing Jack (2)
_____ Jack must establish that there was a less harmful way for SVU to achieve its objective (2)

2. If SVU is incorporated in Michigan? (4 points)


_____ Michigan protects only SH rights (1)
_____ SH rights do not encompass ““expectation rights,”” even in closely-held corporations (2)
_____ Jack has no recourse in Michigan (1)

3. If SVU is incorporated under the MBCA? (5 points)


_____ SVU is a closely-held corporation (1)
_____ Jack could argue that the conduct of Olivia and Elliot constituted oppression (1)
_____ Jack could then sue for dissolution (1)
_____ If the court agrees, it would then give Olivia and Elliot the opportunity to purchase Jack’’s
shares and avoid dissolution of SVU (2)

4. Why doesn’’t Jack just sell his stock? (6 points)


_____ SVU is a closely-held corporation (1)
_____ generally is no public market for the stock (1)
_____ minimal value unless the buyer is employed by the corporation (1)
_____ of value only to someone interested in working with Olivia and Elliot (1)
_____ SH would be a minority SH (1)
_____ Olivia and Elliott as potential purchasers may not be willing to pay full fmv (1)