SAL - Business Organizations

October, 2023 - Istanbul

Professor Jonathan Decatorsmith

IIT Chicago-Kent College of Law

Student – Shukhrat N. Ravshanov (Uzbekistan)

FINAL EXAMINATION

General Instructions

This Final Examination consists of 12 questions worth a total of 100 points,

on 4 pages, including this cover sheet. Please make certain you have all the pages
before you begin.

The examination is “open book”, which means you may use any materials
you have available to you. However, you must work alone.

Please put all your answers on a separate answer sheet or book. There
are no page limitations.

For the True or False questions (nos. 1-10), please merely indicate whether
you agree with the statement (“True”) or disagree with the statement (“False”).
Read the statements carefully. Don’t provide any explanations or comments. I
won’t read them. Really.

For the Short Essay question (no. 11), please be certain to answer all the
questions asked.

For the (longer) Essay question (no. 12), again please be certain to answer
all the questions asked. If you need to make assumptions in order to answer the
questions, or a part of the questions, please specifically state those assumptions. If
you believe that you have not been given enough facts to answer the questions,
please state which particular facts you would need to know in order to fully answer.

Good luck!
 True/False (10 x 3 points each = 30)
Identify whether the statement is “True” or “False”

1. Anytime an employee diverts from his authorized delivery route he is outside

the scope of his employment and, accordingly, his employer will not be
vicariously liable for torts committed by that employee during the diversion.
False!
2. Advancing a shareholder meeting date to minimize insurgent influence by a
director of a publicly-traded corporation may be a breach of the Director’s
fiduciary duty. TRUE!
3. Courts have generally held that even though a corporation may not legally be
able to accept a potential business opportunity, a Director must nevertheless
first offer that opportunity to the corporation to avoid claims that he breached
his fiduciary duty of loyalty to the company. TRUE!
4. A lawsuit brought by a shareholder against the corporation for failure to
produce records for his inspection is one of the several grounds justifying a
derivative lawsuit against the corporation. TRUE!
5. Respondent Superior imposes liability upon the employer (master) for the
tortious acts of his employee (servant) when the employer manifested some
act of negligence, such as careless hiring or training of the employee.
TRUE!
6. Whether Illinois or Wisconsin law applies to an accident occurring between
citizens of those states in Minnesota is an example of a “vertical” federalism
issue. False!
7. Although most agency issues concern the principal’s liability to a third party
(derivative, or external relationships), some agency issues are internal,
concerning a dispute between the principal and the agent. TRUE!
8. Corporate governance issues mainly impact larger, publicly-traded
companies, as compared with closely-held corporations in which the same
individuals may be both shareholders and Directors. False!
9. A corporation’s liability for the misrepresentations of its president can exist
even when the president’s misrepresentations to a potential contracting third
party are intentional. TRUE!
10. Flow-through taxation of the allocable share of a partnership’s net loss can
be a great tax advantage for those individual partners that may have income
from other sources which they could offset. TRUE!

11.Short essay (20 points)

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 Juan Guiterrez, a state legislator from the southwest suburbs of Chicago, has
drafted a proposed law that would make the compensation package paid to the three
highest executives of any corporation chartered or doing business in Illinois subject
to judicial review for excessiveness at the option of any shareholder. He comes to
you for advice, specifically wanting to know: 1) will the statute, if adopted by the
legislature, be legal? If not, how could the statute be revised to make it stronger,
legally? and 2) will the statute realize its intended objective of making
corporations more accountable to their shareholders? If not, how could the statute
be revised in order to make it more directly connected to, and supportive of, the
underlying policy objective(s)? Please consider statute-authorized or created
causes of action that could be brought in the state or federal courts.
1.Regarding the legality of the proposed law, it would depend on various factors,
including the existing legal framework and constitutional provisions in Illinois.
I can offer some general considerations. If the proposed law is intended to regulate
executive compensation, it may face legal challenges related to constitutional
rights, such as the right to contract or the protection of property rights. To make the
statute stronger legally, it may be necessary to ensure that it does not infringe upon
these rights while still achieving its intended purpose. It may be advisable to
consider the following:
- Incorporating specific criteria or guidelines for determining excessiveness
to provide clarity and avoid potential legal challenges.
- Including provisions for transparency and disclosure requirements to enhance
accountability.
2. The objective of making corporations more accountable to their shareholders can
be complex and multifaceted. While the proposed statute may contribute to
increased accountability, it's important to consider potential limitations and
unintended consequences. To enhance the connection between the statute and its
underlying policy objectives, it may be beneficial to explore additional measures.
For example, the statute could include provisions for increased transparency in
executive compensation, requiring corporations to disclose detailed information
about compensation packages to shareholders. This could empower shareholders to
make more informed decisions and hold executives accountable. Additionally, the
statute could consider creating specific causes of action that shareholders can bring
in state or federal courts to address excessive compensation. This could provide a
direct legal avenue for shareholders to challenge compensation packages they deem
excessive, further aligning the statute with its intended objective. Also, the statute
should provide clear guidelines and mechanisms for shareholders to exercise their
rights effectively.
Essay (50 points)

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 Jon Smith and his brother, Rock Smith, come to you for advice regarding
their developing business venture. The brothers wish to operate an Uber-like dog
walking service in Chicago named “Dog Mess United” (Rock is a huge European
soccer fan). Basically, customers would sign up on their smart phones, and using
GPS technology, the business would dispatch one of their independently contracted
walkers directly to the customer’s home, to walk one or more dogs. The service
would be available every day of the week, 24 hours a day.

Rock will provide the funding for the venture; specifically, for development
of the app, prepayment of two years’ rent on the office, and a small reserve in the
bank account ($1,000) in case the business needs to purchase or replace office
supplies, such as printer paper or light bulbs. Jon will be the manager of the
operations, and will devote all his working time to it. Rock will be hands-off,
keeping his full-time job as a fireman.

The walkers will be paid on a per/walk basis. They will provide their own
leashes, as necessary, and approve any scheduling made by Jon on their behalf.

Question # 1 – In which form of business do you recommend the brothers

operate their enterprise? Give specific reasons supporting your recommendation.
The most important issue is the registration of such a business.
The legislation of my country (Uzbekistan) stipulates the rules for dog walking, but
there is no list of documents or licenses regulating this activity. When registering a
company, we can rely on the experience of Western countries. They advise us to
think about the form of entrepreneurship, which depends on the number of founders
of the company, scope of business etc. Based on the information provided, there is
one investor and one director who will be responsible for operating the business.
When it comes to legal structure, I’ll suggest to incorporate, to separate a business
entity and the simple way is to form Limited Liability Company (LLC).
LLC provides limited liability protection by separating business and personal
assets. This means that only assets owned by their business can be used to cover
legal claims. Existence of more options for deducting expenses from taxes and
simple taxation forms. Professional status and image will be greatly enhanced when
services are provided as the LLC. They can attract private investment capital to
develop their business. LLCs offer flexibility in terms of management and
ownership. Jon can be designated as the manager and devote his full working time
to the business, while Rock can remain a passive investor and keep his full-time job
as a fireman. This structure allows for clear roles and responsibilities within the
business.

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 After registering a dog walking business, I will advise them to choose
a convenient form of insurance. Having insurance can save them in unforeseen
situations, because a dog can attack someone or injure the workers, or an accident
can happen to a dog. Nowadays, various types of liability and risk insurance are
popular. Also, there are many restrictions and rules in this business, knowledge of
which will save the brothers from unpleasant situations and fines, such as to be
aware the places where walking dogs is prohibited especially large ones, must be
kept in a muzzle and a short leash (up to 1.5 m). Secondly, in order to avoid
criticism from others and keep the city clean, they should clean up after the dog.
And thirdly, they need to carefully monitor the dog and under no circumstances
allow contact with strangers, since if they inflict injuries, they will be liable under
the Criminal Code.

Question # 2 – Let’s jump ahead a few years. After some initial success, the
business is barely breaking even because of entry into the market of several
competitors, all of whom have undercut the brothers’ prices. To make matters
worse, one of the brothers’ independent drivers, Lenny Piecemeal, is careless and
allows one of the dogs he is walking to run into the street and get run over by a
Tesla. The owner of the dog sues Lenny, the business, and the brothers
individually. Assuming you chose an entity with limited liability for one or both
brothers, does the customer have a cause of action against the business for the
careless driver’s acts? Does she have any direct causes of action against the
brothers individually?

The first thing we need to realize is that every employee is an extension of

our business. When an employee causes damage to a customer's property, it is
essentially the same as if our business caused the damage. This means that the
customer has the right to sue the company in question to recover damages caused.
This is true whether the employee acted within the scope of his job or not. The cost
of litigation is often prohibitive for small businesses.
As I mentioned before insurance protects businesses from lawsuits by
providing financial compensation for covered losses, such as damage caused by an
employee acting outside the scope of their duties. This type of coverage is
necessary for businesses that typically cannot handle the financial consequences of
a lawsuit and closure.
The LLC organization of a company generally protects owners from personal
liability, although the LLC itself may be held liable. However, courts have the
ability to determine when an LLC owner, executive director or worker can be sued.

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 In accordance with the internal documentation of the LLC, the professional
skills of an independent driver, Lenny Piecemeal, were most likely taken into
account by the executive director Jon Smith when hiring and the management
familiarized Lenny Piecemeal with the functional responsibilities and job
descriptions, and during employment, all points were stipulated in the contract
between them.
The court must determine whether the director organized training for
employees that met safety requirements. This fact will entail administrative liability
for the Executive Director under the relevant articles of the state.
As the Executive Director, he is obliged to organize training for employees
on the relevant rules in accordance with specific of their activity, as well as to carry
out constant monitoring of employees’ compliance with all work requirements, and
are also obliged to ensure that employees undergo job training and test their
knowledge.
It is also necessary to check the activities of the director to see if he has
allowed an employee to work who has not undergone training, instruction and
testing of knowledge in the field of his activity in accordance with the established
procedure.
The employee did not intentionally, through negligence, cause harm, then the
court must apply the corresponding provision of the article of the current state law,
according to which compensation is established in the amount of the harm caused.
However, special attention should be paid to the activities of the Executive Director
of the LLC.
The plaintiff can sue the owner of an LLC in cases where it is possible to
show that the owner violated his duties as a member of the LLC, did something to
pierce the corporate veil, or is personally responsible under the circumstances.
In current case, the LLC was not used by the owner for illegal activities.