______________________

Exam Number

TOURO COLLEGE
Jacob D. Fuchsberg Law Center

FINAL EXAMINATION

Restricted Open Book Fall 2015

RETURN
DAY: Wednesday DATE: December 16, 2015
LENGTH: 3 hours TIME: 2:00pm

BUSINESS ORGANIZATIONS I
PROFESSOR MEREDITH R. MILLER

INSTRUCTIONS:

DO NOT USE YOUR NAME OR SOCIAL SECURITY NUMBER. IDENTIFY

YOURSELF BY USING THE EXAM NUMBER WHICH WAS DISTRIBUTED BY
THE REGISTRAR’S OFFICE.

YOU MUST SIGN OUT AT THE CLOSE OF THE EXAM. PLEASE BRING ALL OF
YOUR TEST PAPERS UP TO THE FRONT OF THE ROOM. PLEASE SIGN YOUR
NAME NEXT TO WHERE IT IS PRINTED ON THE PAGE AND WRITE YOUR
EXAM NUMBER.

SPECIAL INSTRUCTIONS:

(1) NUMBER OF PAGES: This exam contains 13 pages, of which this is page 1. Make
sure you are not missing any pages.

(2) WHAT YOU MAY BRING WITH YOU: This is not an open book exam. The only
thing you are permitted to bring and consult is a “cheat sheet.” The cheat sheet is limited
to 4 sheets of notes (letter size – 8½ by 11 inches). You may use both sides of each
sheet (totaling 8 pages) and you may handwrite or type your notes – essentially, feel free
to make use of the pages however you like. The only further restriction is that you must
participate in preparing your own cheat sheet. You may collaborate with others, but you
must have had some involvement in creating the cheat sheet (you are on your honor).

(3) GOVERNING LAW FOR ALL QUESTIONS: Unless the question specifies a
jurisdiction, assume that the cases we have discussed in class, and the relevant New York
statutory provisions or uniform laws govern the question.

(4) MULTIPLE CHOICE QUESTIONS: This exam contains 20 multiple choice

questions worth a total of 40 points (2 points per question). Please read the questions
carefully. For each question, you should fill in the appropriate space on the Scantron
form identifying the correct answer. You will only receive credit for answers marked on
the Scantron sheet. Even if you think that more than one answer is correct, you must
select one and only one answer. If more than one answer is chosen you will not in any
circumstance receive credit.

(5) ESSAYS: There are 6 short essay questions based upon 3 separate fact patterns. The
essay portion is worth a total of 60 points. The number of points each essay is worth is
indicated along with the question.

(a) LEGIBILITY AND FORMAT OF ESSAY ANSWER: If you handwrite your

exam, please write as legibly as possible. I cannot give you credit for an answer I
cannot read. I strongly urge you to write only on one side of each page, and to
write on every other line.
(b) OMISSIONS AND ASSUMPTIONS OF FACT IN ESSAY ANSWER: If any
pertinent facts appear to have been omitted from the question, or you are
convinced there is an error, please make reasonable assumptions, state them, and
proceed with your answer. If we have discussed a split in authority among cases
or statutory provisions, mention that split in your essay answer and how it bears
on your analysis of the issue. You do not need to cite cases or statutory
provisions in your answers, but you must take care to state the relevant rule of
law precisely.

REMINDER: This final exam is subject to the Law School’s Code of Conduct.

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PART I: MULTIPLE CHOICE (40 POINTS TOTAL – EACH QUESTION IS
WORTH 2 POINTS).

UNLESS OTHERWISE STATED, ASSUME THE CONTINUED EXISTENCE OF

FACTS FROM PREVIOUS QUESTIONS. UNLESS OTHERWISE STATED,
ASSUME THAT THE CERTIFICATE OF INCORPORATION, BYLAWS OR
OTHER AGREEMENT DO NOT ADDRESS THE ISSUES RAISED.

Anita has discovered an algortihm for creating perfect “tie dye” clothing.
She has been making colorful tie dye shirts for friends and family.
Anita’s friend Milton thinks tie dye is going to make a fashion comeback
and he convinces Anita to start selling the shirts. Anita and Milton
properly form LI Tie-Dye Corporation (“LIT”) on May 1, 2015.

LIT’s certificate of incorporation authorizes 600 shares, all of which LIT properly issues.
100 are held by Milton; 100 by Anita; 300 by Bob; and 100 by Dana. The board consists
of two members: Anita and Milton. Milton has the title of President and Anita serves as
Vice President. Ken is hired to serve as Treasurer.

In the certificate of incorporation, LIT’s purpose is: “manufacturing and selling colorful
tie dye clothing and any other lawful business purpose.”

QUESTION 1: LIT needs to raise more capital to purchase supplies and build a website.
If LIT is deciding whether to issue notes or stock, which of the following is accurate?

I. Before LIT may issue additional stock, it will need a shareholder vote amending
the certificate of incorporation to authorize more shares.
II. An advantage of issuing notes is that the directors will not owe a fiduciary duty
to the noteholders, but they would owe a fiduciary duty to stockholders.
III. A disadvantage of using notes is that, unlike stock, LIT makes a commitment to
pay back the noteholders with interest.

(a) I only.
(b) II only.
(c) II and III.
(d) I and II.
(e) I, II and III.

Assume that no additional shares are authorized and the total authorized and issued
shares remains 600.

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QUESTION 2: LIT’s board (consisting of Anita and Milton) is considering whether to
license its designs to a skateboard company. The board believes it would be a good idea
to have a shareholder vote concerning the proposed license agreement. Assume that this
is an ordinary business matter, not a fundamental change to the corporation. Milton and
Bob are present at the meeting but Anita and Dana cannot attend. Bob votes in favor;
Milton votes against. Did the resolution to enter into the licensing agreement get
approved by shareholders?

(a) No, there was not a quorum.

(b) No, there was a quorum but not a sufficient number of votes in favor.
(c) No, because Bob was the only one to vote in favor.
(d) No, because Milton is both a shareholder and a director and he voted against.
(e) Yes, because there was a quorum and a sufficient vote.

QUESTION 3: Milton and Anita were concerned about giving up control when the
corporation issued shares to Bob and Dana. Therefore, Milton and Anita, as shareholders,
agreed in writing to pool their shares in director elections. Which of the following is
accurate?

(a) This agreement is valid because, as shareholders, Milton and Anita may pool
votes.
(b) This agreement is valid because Milton and Anita are the company’s founders.
(c) This agreement is not valid because, as shareholders, Milton and Anita may not
pool votes.
(d) This agreement is not valid because, as directors, Milton and Anita may not
pool votes.
(e) This agreement is not valid because shareholders have a duty to vote their
shares in the best interests of all shareholders.

QUESTION 4: Ken, the corporation’s treasurer, is properly authorized by the board to

hire a new bookkeeper at an annual salary of up to $50,000. Ken is very impressed with
Myrna but she refuses to do the job for less than $60,000. Without first bringing the
issue back to the board, Ken agrees to pay Myrna $60,000 per year. Which of the
following is accurate?

I. Myrna may successfully argue that Ken had express actual authority to obligate
LIT to pay Myrna $60,000.
II. Myrna may successfully argue that that Bob had apparent authority to obligate
LIT to pay Myrna $60,000.
III. Myrna may successfully argue that LIT ratified the salary by continuing to use
Myrna’s services after all of the board members became aware that she was
promised $60,000 per year.

(a) I only.
(b) II only.
(c) III only.
(d) I and II.
(e) II and III.

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QUESTION 5: Ken places an order for 50,000 plain white t-shirts. Ken does not
indicate that he is acting on behalf of LIT. The t-shirt company ships the t-shirts to Ken’s
home address. LIT does not pay the bill. Which of the following is accurate?

(a) Ken is liable because LIT is an undisclosed principal.

(b) Ken is liable because he is treasurer of LIT.
(c) Ken is liable because he should have checked whether LIT could afford to pay
for the t-shirt order before he placed it.
(d) Ken is not liable because he is not a shareholder in LIT.
(e) Ken is not liable because his is an agent acting on behalf of LIT.

QUESTION 6: Following on QUESTION 5, if Bob is held liable to the t-shirt company

for the unpaid order, which of the following is a potential explanation?

I. The t-shirt company successfully argued to forward pierce the corporate veil of
LIT.
II. The t-shirt company successfully argued to reverse pierce the corporate veil of
LIT.
III. The t-shirt company showed that Bob was inattentive to the corporate affairs of
LIT.
IV. The t-shirt company demonstrated that LIT had acted ultra vires in ordering the
t-shirts.

(a) I only.
(b) II and IV.
(c) III and IV.
(d) I and III.
(e) I and IV.

QUESTION 7: Anita and Milton, as directors of LIT, carefully reviewed the

corporation’s finances and the mission of Touro Law and decided unanimously to donate
a 10 shirts to the public interest auction at Touro Law. There is no argument that Anita
and Milton acted in their own self-interest; this was pure kindness of heart. Which of the
following is accurate under New York law?

I. The donation is void because the directors have authorized an ultra vires act.
II. The directors may cause the corporation to make reasonable donations to charity,
irrespective of corporate benefit.
III. If a shareholder challenges the directors’ decision as a breach of the duty of care,
the directors will be entitled to the presumptions of the business judgment rule.

(a) I only.
(b) II only.
(c) III only.
(d) II and III.
(e) I and III.

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QUESTION 8: Following on QUESTION 7, if Bob decides to challenge the directors’
decision to make the donation as a breach of their duty of care, that claim would be:

I. Direct.
II. Derivative.
III. A petition for a charging order.

(a) I only.
(b) II only.
(c) III only.
(d) I and III.
(e) II and III.

QUESTION 9: Following on QUESTIONS 7 and 8, which of the following is accurate

under New York law?

(a) Before bringing the action, Bob would not need to make a demand on the board
because the suit is direct.
(b) Before bringing the action, Bob would need to make a demand on the board
because the suit is derivative.
(c) While the suit is derivative in nature, Bob would not need to first make a
demand on the board because the demand requirement is excused.
(d) Bob may not initiate the action because he is not a board member.
(e) As a shareholder, Bob has the automatic right to petition for a charging order.

QUESTION 10: LIT has never issued dividends but has paid Milton, Anita and Bob
proceeds in the purported form of a salary. Dana has never received any salary and
believes that the salary is, in fact, a disguised dividend. Assume that this constitutes
minority oppression. Under New York law, may Dana petition for dissolution of the
corporation based on minority oppression?
(a) Yes, because LIT is a closely-held corporation.
(b) No, because Dana owns less than 20% of the shares in LIT.
(c) Yes, because Dana’s reasonable expectations in investing have been frustrated.
(d) No, because Dana did not first make a demand on the board to bring the
petition.
(e) No, because Dana should just sell her stock and quit complaining.

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QUESTION 11: Following on QUESTION 10, assume that a petition for dissolution
based on minority oppression is properly filed under New York law, which of the
following accurately describes the statutory rights and/or obligations of the majority (i.e.,
non-petitioning shareholders)?

(a) The majority shareholders must buy the assets of the corporation in dissolution
and start a new company.
(b) The majority shareholders may irrevocably opt to buy the petitioning
shareholder’s shares for fair value, which would prevent dissolution.
(c) The majority shareholders must buy the petitioning shareholder’s share for fair
value.
(d) The majority shareholders may move to dismiss the petition if the minority
shareholder failed to first make a demand on the board.
(e) The majority shareholders may argue that the dissolution proceeding is ultra
vires.

QUESTION 12: If Dana requests access to LIT’s financial statements, which of the
following is accurate?
(a) Dana is not a director and, therefore, she has no right to review the financial
statements.
(b) Dana is not an officer and, therefore, she has no right to review the financial
statements.
(c) As a shareholder, Dana does not have a right to review corporate records unless
she commences a lawsuit and requests those records in discovery.
(d) As a shareholder, Dana has a right to access the corporate records for a proper
purpose.
(e) Dana should review those records as soon as possible or she will be breaching
her fiduciary duty of care due to inattentiveness.

QUESTION 13: Following on QUESTION 12, if LIT refuses to provide Dana with
access to the corporation’s records, which of the following is accurate?

I. Dana’s lawsuit to access corporate records is a direct suit.

II. Dana’s lawsuit to access corporate records is a derivative suit.
III. Dana must first make a demand on the board before bringing a lawsuit for
access to the corporate records.

(a) I only.
(b) II only.
(c) III only.
(d) II and III.
(e) I and III.

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QUESTION 14: Under New York statutory law, before LIT may guarantee repayment of
a personal bank loan to Ken, which is not in furtherance of LIT’s purpose, which of the
following must occur?

I. Board approval.
II. Shareholder approval.
III. New York Attorney General approval.

(a) I only.
(b) II only.
(c) III only.
(d) I and II.
(e) I, II and III.

QUESTION 15: Following on QUESTION 14, which of the following is accurate?

(a) The guarantee must be approved by unanimous vote of all shares entitled to
vote.
(b) The guarantee must be approved by a majority of all shares entitled to vote.
(c) The guarantee must be approved by two-thirds (2/3s) of all shares entitled to
vote.
(d) The guarantee must be approved by a majority of votes cast at a shareholder
meeting.
(e) The guarantee does not require shareholder approval.

QUESTION 16: LIT is going to acquire Dye Corp. (“DYE”), the company that supplies
the colorful dyes. Which of the following structures would make LIT a parent
corporation of DYE?

(a) DYE owns all of the shares in LIT.

(b) LIT owns all of the shares in DYE.
(c) LIT buys all of DYE’s assets.
(d) LIT mergers with DYE, such that all of DYE’s shareholders are now LIT
shareholders and DYE ceases to exist.
(e) LIT’s board members serve on the board of DYE.

QUESTION 17: LIT’s certificate of incorporation provides for cumulative voting. There
are 2 board vacancies. Anita and Milton are running for re-election. Dana is also
attempting to get elected to the board. How many votes can Dana cast for herself?

(a) None.
(b) 2 votes.
(c) 100 votes.
(d) 200 votes.
(e) 400 votes.

Assume that Anita and Milton are re-elected to the board for another term.

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QUESTION 18: LIT hires Jim as a real estate broker to help identify a new warehouse
property to store inventory. Jim identifies a property and encourages LIT to purchase it;
however, Jim does not do any due diligence. If he had done a basic investigation, he
would have discovered that the building had a history of asbestos and lead issues.
Perhaps Jim did not bother to investigate because the building’s current owner paid Jim a
secret payment to entice Jim to encourage LIT to purchase the property. Which of the
following is accurate?

I. Jim was an agent but not an employee, so Jim did not owe any fiduciary duty
to LIT.
II. Jim breached the duty of care he owed to LIT.
III. Jim breached the duty of loyalty he owed to LIT.

(a) I only.
(b) II only.
(c) III only.
(d) II and III.
(e) None of the above.

QUESTION 19: Continuing on QUESTION 18, Anita and Milton had no idea what Jim
was up to, nor were there any “red flags” to suggest that he was untrustworthy. Acting in
good faith and believing Jim that purchasing the warehouse was in the best interests of
LIT, Anita and Milton, as board members, approved the purchase of the property. Only
after the closing, they learned of expensive remediation work that would be necessary to
remove asbestos and lead from the premises. Bob wants to bring a suit alleging that
Anita and Milton their breach the duty of care to LIT in deciding to purchase the property.
The certificate of incorporation provides: “so long as they have acted in good faith and
absent self-interest, directors will have no personal liability for actions done on behalf of
the corporation.” Which of the following is accurate?

(a) The exculpatory provision in the certificate of incorporation is enforceable and

Anita and Milton will not be personally liable.
(b) The exculpatory provision in the certificate of incorporation is not enforceable
and Anita and Milton will be personally liable.
(c) The exculpatory provision in the certificate of incorporation is enforceable but
Anita and Milton will still be personally liable.
(d) The exculpatory provision is void as against public policy.
(e) Jim is in a pickle.

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QUESTION 20: Dana’s sister is starting a company and has asked you whether she
should form a limited liability company (“LLC”). Which of the following is sound
advice in New York?

I. “The LLC is attractive because it is not a taxable entity.”

II. “The LLC requires publication announcing its formation, which may be
expensive in some counties.”
III. “The LLC members enjoy limited liability even if they partake in managing the
business.”

(a) I only.
(b) II only.
(c) II and III.
(d) I and II.
(e) I, II and III.

***End of multiple choice questions. Essay questions begin on next page.***

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PART II: ESSAY PORTION (60 POINTS TOTAL) (6 questions based on 3 fact
patterns):

FACT PATTERN I (12 points total):

Able and Baker are both partners in a car wash business

operating as a general partnership. Able puts up $100,000
in cash but provides no services to the partnership. Baker
manages all aspects of the partnership’s business but puts
up no cash. Although Baker does not receive a salary, the
fair value of Baker’s services is $30,000 per year. The partnership operates for three
years and dissolves. You may assume that the jurisdiction does not apply the service-only
partner exception. You may also assume that there is no express or implied agreement
between the partners that values Baker’s services as a capital contribution.

ESSAY QUESTION 1 (6 points): If the partnership is sold for $400,000, what

should the partners receive (or pay) on dissolution? Fully but succinctly explain
how you arrive at the amounts.

ESSAY QUESTION 2 (6 points): If the partnership is sold for $50,000, what

should the partners receive (or pay) on dissolution? Fully but succinctly explain
how you arrive at the amounts.

FACT PATTERN II (42 points total):

Mary and Jane decided to open a restaurant called Molly’s in

Long Island City, New York.

In January 2015, Mary contracted with Lew to update and

renovate the kitchen for Molly’s. Shortly thereafter, Mary and
Jane met with an attorney, who advised that they incorporate.

In February 2015, Mary and Jane properly formed MJ Ventures Inc. to own and operate
Molly’s. MJ Ventures Inc. authorized and issued 150 shares, 50 each to Mary and Jane.
The other 50 were issued to Mary’s father, Pops, who would tend bar during the day shift.

Mary, Jane and Pops signed a written shareholder agreement that provided, in pertinent
part:

If a shareholder ceases to be employed by MJ Ventures Inc. for any reason, the

corporation has a 60-day option to repurchase the departing shareholder’s shares
at the price at which they were acquired.

MJ Ventures Inc. has 5 board members: Mary, Jane, Alice, Brad and Cal. A properly
noticed meeting of the board of directors of MJ Ventures Inc. was held in March 2015.
All five directors were present. The board unanimously adopted a resolution that MJ
Ventures Inc. would assume the construction contract with Lew.

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At the board meeting, a proposal was presented for Duff Corp, a beer company, to
provide MJ Ventures Inc. with all of its beer at a 10% discount to wholesale price. Cal
advised the board that he is the sole shareholder of Duff Corp. The certificate of
incorporation of MJ Ventures Inc. is silent as to restrictions on contracts between the
corporation and its directors. Mary, Jane and Cal voted in favor of the proposal. Alice
and Brad voted against the proposal.

Finally, at the same March board meeting, the directors discussed opening another
restaurant in Central Islip, New York. Alice said she had a good friend who consulted
with businesses on expansion. Alice thought the board should retain the consultant and
hear data regarding the concentration of restaurants in Central Islip and information from
surveys regarding the drinking and eating patterns, economy and demographics of
Central Islip. The board declined to hire a consultant. Instead, all of the board members
except Alice voted to approve opening another restaurant in Central Islip. Had the board
done a more thorough investigation, the consultant would have reported that there were
already a significant number of competing restaurants and bars in Central Islip, most of
which were struggling to stay open.

The Long Island City restaurant did very well. Unfortunately, however, in May 2015,
Pops suffered from a knee injury and had to quit as daytime bartender. Ten days after
Pops quit, MJ Ventures Inc. required that Pops sell his shares back to the corporation for
the $1000 he paid for them, much less than they were actually worth.

The Central Islip location is floundering, experiencing significant losses every month.

ESSAY QUESTION 3 (26 points): Pops sued MJ Ventures Inc. and the board
seeking more money for his shares and challenging the board’s decision to open a
Central Islip location. The court dismissed Pop’s case, ruling that (a) the
shareholder agreement is enforceable and (b) the board mismanaged MJ Ventures
Inc. in deciding to open a Central Islip location. Were the court’s rulings correct?
You should assume Pops complied with any procedural prerequisites to bringing
suit.

ESSAY QUESTION 4 (6 points): MJ Ventures Inc. never paid Lew for the bar
he constructed and installed. Lew sued Mary for the amount owed. Is Mary
liable to Lew?

ESSAY QUESTION 5 (10 points): Is the contract with Duff Corp. voidable by
MJ Ventures Inc?

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 FACT PATTERN III (6 points total):

You have a client that is choosing between forming a limited

partnership (“LP”) in Florida or New York. Your client will be a
limited partner in that LP. Assume that the LP is the appropriate
entity for the client’s business goals. Below you will find the text of a
provision of the applicable LP statute from Florida. You will also find
the relevant text of a provision of the applicable LP statute from New
York (which you were assigned to review and we discussed in class).

ESSAY QUESTION 6 (6 points): Based solely upon a comparison of these two

provisions (i.e., not taking into account any other factors), do you recommend that
your client form the LP in Florida or in New York? Chose one and fully explain
your answer.

Florida Partnership Law § 620.1303.

An obligation of a limited partnership, whether arising in contract, tort, or

otherwise, is not the obligation of a limited partner. A limited partner is not
personally liable, directly or indirectly, by way of contribution or otherwise, for
an obligation of the limited partnership solely by reason of being a limited
partner, even if the limited partner participates in the management and control of
the limited partnership.

New York Partnership Law § 121-393.

(a) Except as provided in subdivision (d) of this section, a limited partner is not
liable for the contractual obligations and other liabilities of a limited partnership
unless he * * * participates in the control of the business. However, if the limited
partner does participate in the control of the business, he is liable only to persons
who transact business with the limited partnership reasonably believing, based
upon the limited partner's conduct, that the limited partner is a general partner.

***
(d) A limited partner who expressly consents in writing to his name being used in
the name of the limited partnership is liable to creditors who extend credit to the
limited partnership without actual knowledge that the limited partner is not a
general partner. ***

*** THE END ***

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