Business Associations MBE's
Selena is not an officer or director of Ajax, Inc. At all relevant times, Ajax has 1,000 shares outstanding. Selena's transactions are as follows: • January 1: buys 50 shares at $10 • February 1: buys 55 shares at $10 • April 1: buys 50 shares at $10. • May 1: sells 60 shares at $15 • May 2: sells 55 shares at $20 What is Selena's liability under Securities Exchange Act §16(b), if any? A. $250 B. $950 C. $450 D. None
A. $250 Liability equals $250 (50 shares times ($15-$10)). The January 1 purchase cannot be matched with either sale, because on January 1 Selena was not yet a 10 percent shareholder. The February 1 purchase cannot be matched with either sale because it is the transaction by which Selena became a (more than) 10 percent shareholder. Only the April 1 purchase is potentially matchable, because only at the time of that purchase did Selena own more than 10 percent of Ajax's stock. As to the sales, only the May 1 sale can be matched with the April 1 purchase. On May 2, Selena owned less than 10 percent of Ajax's stock.
A, B, and C establish a member-managed LLC. A, B, and C all participate equally in the daily operation of the company. The company's operating agreement is very short and includes no provisions relating to the management of the company. On behalf of the LLC, A purchases a new delivery truck for the company's existing fleet of trucks. B and C object, and claim A had no authority to make the purchase. Who will win? A. A because A has authority to act as an agent of the LLC. B. A because the truck has already been purchased. C. B and C because a delivery truck is personal property. D. B and C because only managers, not members, have authority to act as agents for the LLC.
A. A because A has authority to act as an agent of the LLC. In a member-managed LLC, each member is an agent of the company and has actual authority to bind the company.
P signs a contract with A, hiring A to in turn hire a manager for her grocery store. A is to be paid $1,000 to perform this service. As P anticipated, A shows the contract to several candidates for the manager job, including M. Thereafter, P sends a letter to A revoking A's authority to hire a manager for the store. The revocation is not communicated to M. At this point: A. As to M, A has apparent authority to hire a manager for P's store. B. As to M, A has express authority and apparent authority to hire a manager for P's store. C. No answer choices are correct. D. As to M, A has express authority to hire a manager for P's store. E. As to M, A has no authority to hire a manager for P's store.
A. As to M, A has apparent authority to hire a manager for P's store. Because A was authorized to show the original letter to prospective candidates, her doing so constituted the requisite holding out. Because M was unaware of the follow-up letter, he has no reason to change his belief that A is authorized. Accordingly, apparent authority existed at the time the contract was made.
A and B decide to form Corporation. A and B will each own 50% of the outstanding stock. Both A and B will work at Corporation as their primary job. Corporation's bylaws require a simple majority shareholder vote for most decisions relating to Corporation, and an unanimous shareholder vote for fundamental changes. Corporation pays no dividends. After several years, A and B disagree about the management of Corporation, and A quits his job at Corporation. What is likely to happen next? A. B will continue to operate Corporation, and A will be deprived of any meaningful economic return from his investment. B. A will vote his shares to dissolve Corporation, and the assets of Corporation (after all liabilities have been satisfied) will be divided among A and B. C. B will vote his shares to dissociate A, and A will be cashed out of Corporation. D. B will vote his shares to issue more common stock, which he will then purchase in order to assume full control of Corporation.
A. B will continue to operate Corporation, and A will be deprived of any meaningful economic return from his investment. With neither A nor B able to outvote the other, Corporation will continue with B working there. Unless A and B agree, Corporation will not issue dividends, or other distributions, or dissolve, or make any major decisions, and A's investment will be "stuck" in Corporation. This is a risk in closely held corporations, and a reason that management and dissolution provisions in the bylaws should be carefully crafted for this context.
Acme Inc. is currently negotiating a sale of substantially all of its assets to Ajax Corp. The parties have reached agreement on the price to be paid and the other basic terms of the deal, although many minor issues remain open and are still being vigorously negotiated. Which of the following definitions of the word "materiality," as that term is used in the federal securities laws, is a court most likely to use in determining the materiality of the negotiations: A. Materiality will depend on a balancing of both the anticipated magnitude of the sale and the probability that the sale will take place. B. Materiality will depend on whether a reasonable investor would attach importance to the negotiations in deciding whether to buy or sell Acme stock. C. All answers are correct D. Materiality will depend upon whether the negotiations might have a significant propensity to affect the decision of a reasonable investor who was in the process of deciding to buy or sell Acme stock. E. Materiality will depend upon whether the negotiations might be considered important by a reasonable investor who was in the process of deciding to buy or sell Acme stock.
A. Materiality will depend on a balancing of both the anticipated magnitude of the sale and the probability that the sale will take place. Materiality is defined in the federal securities laws as whether there is a substantial likelihood that a reasonable investor would consider the omitted fact important in deciding whether to buy or sell securities. Where a fact is contingent or speculative, such as is the case here, the materiality determination requires that one balance the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company's activity.
A owns and operates a pet "hotel" where dogs can be housed while their owners are out of town. B lives next door to A and often comes over to play with the dogs in the fenced-in yard while A has them out of their kennels. One day B comes over to play with the dogs while A has them out for exercise in the fenced-in yard. While A is in the storeroom getting extra dog food, B takes two of the dogs out of the gate for a walk around the neighborhood. During the walk with B, the dogs get loose and damage another neighbor's award-winning flower garden. The owner of the garden sues A for the damage. Was B acting as A's agent when he took the dogs for a walk? A. No, because A did not manifest assent that B should take the dogs on a walk, and A did not exercise control over the walk. B. Yes, because B consented to take the dogs on a walk. C. No, because B undertook to walk the dogs gratuitously. D. Yes, because A manifested assent that B should take the dogs on a walk, and exercised control over the walk.
A. No, because A did not manifest assent that B should take the dogs on a walk, and A did not exercise control over the walk. It identifies two of the requirements for the establishment of an agency relationship (that the principal manifest assent to the agent that the agent shall act on the principal's behalf and subject to the principal's control), neither of which are met in this case, so no agency relationship was established.
B and C are directors of Large Corp. In the last few months, the Large Corp. board has been called upon to make several decisions relating to Large Corp. transactions with other companies with which B and C have substantial relationships, and from which B and C have derived a personal benefit. In addition, it has come to light B is successfully exerting considerable pressure on C in connection with C's board decisions. Shareholder X argues that the decisions of B and C should be reexamined. B and C both disagree. Who is right? A. Shareholder X, because both B and C are interested directors, and C is not an independent director. B. B and C, because B is an interested director and neither B nor C is an independent director. C. B and C, because neither B nor C is an interested director, and B is an independent director. D. Shareholder X, because both B and C are interested and independent directors.
A. Shareholder X, because both B and C are interested directors, and C is not an independent director. An interested director is one who will receive a personal benefit from the challenged transaction. B and C's substantial relationships with the companies with which Large Corp. is transacting business likely resulted in a personal benefit to them. Because two interested directors participated in approval of those transactions, their approvals should receive additional scrutiny. They may be okay, they just need to be examined. It is also true that C is likely not an independent director. That lack of independence also argues for reexamining C's decisions.
Lin is the CEO and serves on the board of directors of the Corporation. Although Corporation is incorporated in State A, the headquarters of the company, all of its operations, and most of its customers are in State B. Nan is one of the Corporation's shareholders and consistently objects to the manner in which Lin operates the company. In particular, Nan feels that the board of directors does not disclose enough of its decisions to the shareholders. Nan has sought access to the Corporation's board of directors' meeting minutes, but Corporation's board has refused to provide the information. Nan sues. Which of the following is correct? A. The court will be required to apply State A law because of the internal affairs doctrine. B. Nan can file suit against Corporation for defective incorporation, because Corporation should be incorporated in State B, where it is actually located and does business, instead of in State A. C. Nan is unlikely to prevail because the internal affairs doctrine prevents Corporation from disclosing the deliberations of the board of directors. D. The court will be required to apply State B law because the internal affairs doctrine requires courts to use the law of the state where a company is headquartered.
A. The court will be required to apply State A law because of the internal affairs doctrine. This is a statement of the internal affairs doctrine, which governs this question. The internal affairs doctrine provides that the law of the state of incorporation governs disputes regarding the internal affairs of the corporation, and shareholder access to information about board of directors' meetings qualifies as an internal affair.
Cindy is a director and an officer of Development, Inc., a large, national property development company. Development, Inc., is going to be merged into Wide, Inc. The Development, Inc., board of directors reviews the confidential merger agreement sent to them by Wide, Inc. One of the terms of merger agreement is that Cindy will be an officer in the surviving company, Wide, Inc. Maintaining her position as a corporate officer in the surviving company is very important to Cindy. The Development, Inc., board votes unanimously to forward the basic price facts relating to the merger to the Development, Inc., shareholders with their official board recommendation that the shareholders approve the merger. After the Development, Inc. shareholders approve the merger, a disgruntled Development, Inc. shareholder challenges, among other things, Cindy's board vote in favor of recommending shareholder approval. Who will prevail? A. The plaintiff shareholder because Cindy is an interested director. B. Cindy because she is not an interested director. C. The plaintiff shareholder because Cindy is an independent director. D. Cindy because she is not an independent director.
A. The plaintiff shareholder because Cindy is an interested director. Cindy is an interested director. She has a personal interest in the outcome of the vote.
Corporation's proposed articles of incorporation include a provision to eliminate the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty of the director. The provision as drafted would not apply if the liability results from (i) a breach of the director's duty of loyalty to the corporation or its stockholders, (ii) an act or omission not in good faith or involving intentional misconduct or knowing violation of law, or (iii) transaction from which the director derives an improper personal benefit. Can Corporation include this clause? A. Yes, because a corporation can eliminate director liability for breaches of duty of care in its articles of incorporation. B. No, because a corporation cannot exculpate its directors from personal liability for their breaches of fiduciary duty. C. Yes, because directors are not liable for breaches of fiduciary duty if the breaches take place in the course of performing their customary duties as directors. D. No, because such clauses must be in the bylaws of a corporation, not the articles of incorporation.
A. Yes, because a corporation can eliminate director liability for breaches of duty of care in its articles of incorporation. Although the clauses cannot exculpate directors for duty of loyalty violations, they can exculpate directors for duty of care violations.
Corporation, which manufactures shoes, is managed by a 21-person board of directors, who have delegated day-to-day authority for ordinary business decisions relating to Corporation to the CEO. The CEO is approached by a rubber supplier who promises a reliable, high-quality supply of rubber suitable for the soles of Corporation's shoes, at a price less than half of that being charged by Corporation's current rubber supplier. Without investigation, the CEO transmits the offer to the board of directors. Rubber is the most costly single component of Corporation's shoes and so the CEO would like the board to consider the new supply offer. The board, without asking any questions, resolves to accept the offer and authorizes the CEO to sign the contract on behalf of Corporation. The CEO signs the contract and terminates Corporation's contract with its other suppliers. Within six months the new supplier defaults on the contract. Corporation suffers production delays and has to scramble to find alternate sources of rubber, which it finally secures at a much higher price than it was paying before it made the change. Corporation suffers a major loss of profits. Did the CEO, or the board, violate its
A. Yes, both the CEO and the board violated their fiduciary duties because they failed to discharge their duties with the care that an ordinarily prudent person in a like position would exercise under similar circumstances. The CEO did not investigate the offer or the new supplier, and the board failed to ask any questions before approving the contract. Given the essential nature of rubber to Corporation's manufacturing business, this behavior did not represent the care that an ordinarily prudent person in a like position would exercise under similar circumstances.
A pension fund, which is a qualified shareholder of a major U.S. tobacco corporation, which receives all of its revenues from tobacco sales, has proposed the following shareholder resolution for inclusion in the corporation's proxy statement pursuant to SEC Rule 14a-8: "The shareholders instruct the board of directors to conduct a study and investigation into the effects of cigarette smoking on human health and report the findings to the shareholders." Which of the following SEC rules would best support management's efforts to exclude the proposal in the last question from the company's annual proxy solicitation statement to shareholders? A. 14a-8(i)(5) B. 14a-8(i)(1) C. 14a-8(i)(7)
B. 14a-8(i)(1) Rule 14a-8(i)(1) provides that the corporation may exclude a proposal that is not a proper subject of shareholder action. In general, proposals that command the board of directors to take specific actions are not proper subjects of shareholder action.
Corporation has four shareholders, each of whom owns 25% of the outstanding voting stock. Corporation's bylaws include an 80% quorum and voting requirement for all decisions, including the issuance of additional shares. Corporation is successful, but the four shareholders do not get along. A, one of the 4 shareholders, decides that in order to "teach his fellow shareholders a lesson" he will refuse to vote in favor of any dividends and will vote against use of any earnings for repairs or expansion of Corporation's business. Corporation's excessive retained earnings eventually result in a significant tax penalty. The other three shareholders file suit against A, arguing that he has breached his fiduciary duty to the other three shareholders. What are the plaintiff shareholders most likely to argue in order to support their claim? A. The duties of stockholders to one another in closely held corporations are like those of proxies, and may be revocable or irrevocable depending on the arrangements made by the parties. B. A had a de facto controlling interest in Corporation and violated his fiduciary duty to his fellow shareholders in his refusal to deploy Corporation's earnings. C. Shareho
B. A had a de facto controlling interest in Corporation and violated his fiduciary duty to his fellow shareholders in his refusal to deploy Corporation's earnings. The 80% requirement gave A's 25% of the outstanding voting stock a veto over almost all decisions relating to Corporation. The plaintiff shareholders could argue, therefore, that A functioned like a majority shareholder in the closely held corporation because of his de facto controlling interest, and draw on cases in which courts have imposed fiduciary duties on controlling, majority shareholders, especially in the context of closely-held corporations.
Alex is a minority shareholder of Corporation, which manufactures bicycles. Corporation is very successful and has paid a substantial regular dividend, as well as a second, substantial bonus dividend, every year. Corporation is majority-owned by Cole. Cole is also the CEO and the Chairman of the Board of Directors of Corporation. Cole begins to behave erratically and makes a series of unusual decisions: Corporation begins destroying every third bicycle it manufactures, Corporation ceases all manufacturing on Tuesdays and Thursdays in favor of all-day trips to local amusement parks for the employees, and Corporation hires a pilot to drop $100,000,000 in cash out of a small airplane over the ocean. Alex sues Cole and Corporation. Cole argues that as majority shareholder, he is entitled to run the Corporation as he wishes. Alex argues that Corporation should be run for the benefit of its shareholders. Who wins? A. Cole and Corporation, because Cole is the CEO and Chairman of the Board of Corporation. B. Alex, because Cole and Corporation's actions are contrary to the purpose of a business corporation. C. Cole and Corporation, because Cole owns the majority of the shares of Corporation. D. Alex, because the ocean is outside the United States and therefore Corporation's actions were extraterritorial.
B. Alex, because Cole and Corporation's actions are contrary to the purpose of a business corporation. The purpose of a business corporation is to return economic value to its shareholders (also known as the shareholder primacy doctrine). Although use of corporate assets for purposes not directly related to profits (e.g., charitable contributions) are permissible, and although there are states in which other constituencies are allowed to be taken into account, neither is the case in this question.
Elaine, Jerry, and George have formed an oral partnership to run a catering business. Elaine and Jerry have kept their day jobs, working nights and weekends for the business. George is working full time for the business, running it on a day-to-day basis. The business isn't doing well and is running out of the original cash invested by the partners. George would like to pay himself a $50-a-day salary, which is the same amount he pays the other employees. He seeks your advice. You tell him: A. Sure, pay yourself a salary; you're working for the business, and you're entitled to it, as long as it's fair. B. Are you crazy? You can't pay yourself a salary unless Jerry and Elaine have agreed beforehand. C. Sure, the business isn't doing well, you'll be winding it up in no time, and you're entitled to a salary on winding up.
B. Are you crazy? You can't pay yourself a salary unless Jerry and Elaine have agreed beforehand. UPA (1997) § 401(h) provides that "A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership." Although that rule can be modified by agreement among the partners (see UPA (1997) § 103), no such agreement is present here.
Bainbridge and Klein are partners in a used bookstore, Books R Us. Bainbridge contributed sixty-five percent of the capital. The partnership agreement provides that Bainbridge will receive seventy-five percent of the profits. They do not have an agreement as to how losses are to be shared. What is Bainbridge's share of any losses? A. Bainbridge bears sixty-five percent of the losses. B. Bainbridge bears seventy-five percent of the losses. C. Bainbridge bears half of the losses. D. No answer choices are correct.
B. Bainbridge bears seventy-five percent of the losses. In the absence of a contrary agreement, partners divide losses in the same proposition as they divide profits.
The management of Mark Automotive Components, Inc. ("Mark") proposed to the board that Mark's only manufacturing plant in Alabama be closed. Closing the plant would lead to firing 8,000 of Mark's 24,000 employees and cause substantial disruption to the local economy. The board voted 5-2 not to close the plant. A shareholder sued, alleging that the board of directors violated its duty of care. Assuming Dodge v. Ford Motor Co. and Shlenesky v. Wrigley are the governing precedents, the court should hold: A. All answers are correct B. Directors have a duty to maximize shareholder wealth; the court may not inquire into the board's subjective motivation for their decision; as long as the directors made an informed decision, the court should hold that the board's decision was protected by the business judgment rule. C. No answers are correct D. Directors may take into account the corporation's social responsibility to its employees and the local economy even if doing so reduces shareholder wealth.
B. Directors have a duty to maximize shareholder wealth; the court may not inquire into the board's subjective motivation for their decision; as long as the directors made an informed decision, the court should hold that the board's decision was protected by the business judgment rule. In the absence of fraud, illegality, or self-dealing, both cases teach that the board's decision will be protected by the business judgment rule.
Mina is a senior associate in the ABC law firm. Mina is well respected and has been told that she will soon be asked to become a partner. Mina has been approached by a competing law firm, XYZ, and asked by them to join XYZ as a partner. Which of the following circumstances would most likely be found to be a breach of Mina's fiduciary duty to ABC? A. Mina discloses her present salary to the partners at XYZ. B. Mina tells her secretary that she will double his pay if he agrees to leave ABC and work for her at XYZ. C. Mina was working on an important case which will go to trial in 60 days and failed to tell ABC she was quitting until 3 days before she left. D. Mina tells her co-workers (other senior associates), that she is leaving and gives them information about XYZ.
B. Mina tells her secretary that she will double his pay if he agrees to leave ABC and work for her at XYZ. There's a spectrum of conduct in any grabbing and leaving case running from clearly permissible to clearly impermissible, but with much falling into a middle gray area. The question asks which is the "most likely" to be a violation. In grabbing and leaving cases, solicitation of subordinates is the conduct most clearly regarded as improper out of the options available.
Bainbridge and Ramseyer were two unemployed recent law school graduates. They decided to go into practice for themselves. Bainbridge and Ramseyer shared office space, a secretary, and office equipment. To save money, Bainbridge and Ramseyer printed and used stationery and business cards imprinted with the name "Law Offices of Bainbridge & Ramseyer, Attorneys at Law." Bainbridge and Ramseyer each collect their own fees out of which each pays his share of office expenses, with each retaining all profits for himself. Which of the following best describes Bainbridge and Ramseyer's business relationship? A. Bainbridge and Ramseyer are partners by estoppel under South Carolina law as set forth in Young v. Jones because a third party would reasonably believe that Bainbridge and Ramseyer are partners. B. No answer choices are correct. C. Bainbridge and Ramseyer are partners, because they share profits. D. Bainbridge and Ramseyer are partners by estoppel under South Carolina law as set forth in Young v. Jones because they held themselves out as partners. E. Bainbridge and Ramseyer are partners, because they jointly conduct a business for profit.
B. No answer choices are correct. None of the other four answers correctly describe the law or facts relevant to the problem.
P and A are partners in a bar, pursuant to an oral agreement to share profits 50-50. Business has been slow, and inventory has been piling up in the back room. P instructs A not to purchase any more beer, and informs the brewery that A cannot purchase any more beer, and that P will not be responsible if he does. Nevertheless, A orders more beer on credit, and the brewery delivers. When the business fails, the brewery sues P as the only solvent partner. A. P is not liable, because the brewer was on notice that the implied agency of the partnership had ceased. B. P is liable, because he cannot unilaterally terminate the authority of his partner to carry on the usual course of business. C. P is liable, because he owes a duty to his partner not to terminate his authority. D. P is not liable, because partnership is a consensual relationship that can be terminated at any time.
B. P is liable, because he cannot unilaterally terminate the authority of his partner to carry on the usual course of business. National Biscuit Co. v. Stroud held that because each partner has an equal right to the management of the business, one partner in a two-person partnership cannot unilaterally revoke the authority of the other a partner.
Which of the following types of conduct by controlling shareholders towards a minority shareholder is a court least likely to treat as a freeze out for purposes of determining whether the controlling shareholders have breached their fiduciary duties to the minority? A. Draining off the corporation's earnings in the form of exorbitant salaries and bonuses to the controlling shareholders. B. Persistently rejecting recommendations by the minority shareholders about corporate policy and strategy. C. A persistent refusal to pay dividends even if the corporation is financially able to pay them. D. Denying minority shareholders employment by the company even if the minority shareholders are fully qualified to do the work in question.
B. Persistently rejecting recommendations by the minority shareholders about corporate policy and strategy. Business disagreements generally will not be viewed as a freeze-out. As the court explained in Brodie v. Jordan, courts "have defined freeze-outs by way of example: 'The squeezers [those who employ the freeze-out techniques] may refuse to declare dividends; they may drain off the corporation's earnings in the form of exorbitant salaries and bonuses to the majority shareholder-officers and perhaps to their relatives, or in the form of high rent by the corporation for property leased from majority shareholders . . .; they may deprive minority shareholders of corporate offices and of employment by the company; they may cause the corporation to sell its assets at an inadequate price to the majority shareholders . . . .'"
Vacations, Inc. is in the business of real estate development and has a 5 member board of directors. The corporation has 1,000 shares authorized, issued and outstanding, held by 40 shareholders. The corporation's accountants made a presentation to the Board, proposing a change in the method of accounting for inventory. Under the proposed method, the corporation would receive an extra $8.0 million per year in tax benefits. However it would also reduce the corporation's reported profits, possibly making the directors look as if they were poor managers. The board voted 5-0 to reject the proposal. In a subsequent lawsuit brought by the shareholders on behalf of the corporation against the directors, the directors will: A. Prevail because directors have no duty of care or loyalty with respect to accounting matters. B. Prevail because the business judgment rule applies. C. Not prevail because of the inherent conflict of interest. D. Prevail because the transaction was ratified by the accountants. E. Not prevail because they put the corporation into a no-win situation.
B. Prevail because the business judgment rule applies. The facts here are an only slightly modified version of the facts of Kamin v. American Express, in which directors prevailed because the business judgment rule applied.
Shareholder X challenges a transaction between Corporation and one of the directors, and shows that the director has a conflict of interest. The director responds by showing that the transaction was inherently fair. Who prevails? A. The director, because director conflict decisions are exculpated from liability to shareholders. B. The director, because a showing of inherent fairness will cleanse the conflicted transaction. C. Shareholder X because a showing of inherent fairness is insufficient to overcome liability for conflict of interest transaction. D. Shareholder X because Corporation cannot engage in a transaction with one of its directors.
B. The director, because a showing of inherent fairness will cleanse the conflicted transaction. Court-determined fairness is a traditional way to overcome the potential duty of loyalty violation of a director self-dealing transaction.
Smith, Jones, and Brown entered into a real estate partnership. They agreed that they would buy undeveloped land in northern Los Angeles County, develop it for residential purposes, and resell it. The three partners did not enter into a written partnership agreement. Each of the three was already employed and agreed they would carry on the partnership business in their spare time. Smith was a criminal lawyer, Jones was an insurance salesman, and Brown was the assistant manager of a large department store. The three partners agreed that they had no obligation to share investment opportunities, other than undeveloped land, with the partnership. About a year after starting the partnership, Jones had an opportunity to buy a small apartment building in his neighborhood and fix it up for resale. He did so and made a substantial profit. Smith and Brown claimed the profit belonged to the partnership. What would a court most likely hold if the issue were litigated? A. The profit belongs to Jones regardless of the agreement because the apartment house transaction had no connection with the conduct of the partnership. B. The profit belongs to Jones because the partners agreed to limit their fiduciary obligations to undeveloped land. C. The profit belongs to the partnership because partners owe each other the highest fiduciary obligation, which cannot be waived except in a written agreement and therefore all real estate profits must be shared with the partnership. D. The profit belongs to the partnership because Jones did not specifically offer the opportunity to his partners and have them turn it down before he took it himself.
B. The profit belongs to Jones because the partners agreed to limit their fiduciary obligations to undeveloped land. See UPA (1997) § 103(b), which allows parties to modify (but not eliminate) the duty of loyalty.
A, B, C, and D each own 100 of the 400 shares outstanding in Group Corp. A and B enter into a written shareholders' agreement under which A and B agree to vote for the same candidates in all future board elections. Which of the following statements is most accurate regarding this arrangement? A. The shareholders' agreement violates the principles set forth in McQuade v. Stoneham. B. The shareholders' agreement is valid. C. The shareholders' agreement is valid if C and D do not object to it. D. The shareholders' agreement is invalid because all shareholders have not agreed to it. E. The shareholders' agreement is valid only if it is disclosed in the corporation's articles of incorporation.
B. The shareholders' agreement is valid. Vote pooling agreements between less than all shareholders are valid even under McQuade.
Corporation X is properly formed and doing business. Its articles of incorporation provided for 1000 authorized shares. Its bylaws also originally provided for 1000 shares, but after Corporation X had issued 1000 shares, its bylaws were properly amended to provide for 2000 authorized shares. Corporation X then issued an additional 500 shares. Shareholders challenged the issuance of the 500 shares. Do the challenging shareholders prevail? A. No, because a corporation has the innate right to issue as many shares as it wants. B. Yes, because the articles of incorporation, which were not amended, trump the bylaws. C. No, because the bylaws, which were properly amended, trump the articles of incorporation. D. Yes, because the bylaws cannot be amended.
B. Yes, because the articles of incorporation, which were not amended, trump the bylaws. Even if the bylaws were properly amended, provisions in the articles of incorporation trump any conflicting provision in the bylaws, and the bylaws amendment is ineffective until the provision in the articles of incorporation is also amended.
Acme, LLC, is a limited liability company. Its proposed members include the following: Juan Lopez (a natural person); Gold, LLC; Silver, Inc.; and Bronze Associates, a general partnership. Which of those proposed members can properly be members of an LLC? A. Juan Lopez and Bronze Associates because an LLC member cannot itself be a limited liability entity. B. Juan Lopez; Silver, Inc.; and Bronze Associates because an LLC cannot be a member of another LLC. C. All four can be members. D. Juan Lopez only because an LLC member must be a person.
C. All four can be members. A member of an LLC must be a "person," which may include a natural person (Juan Lopez), a partnership (general or limited) (Bronze Associates), another LLC (Gold, LLC), or a corporation (Silver, Inc.).
A, B, and C establish an LLC. They will each own one-third of the membership interests. A contributes $10,000 cash. B has already set up the store and created a marketing plan for the company, and estimates the value of her services to be $10,000. C contributes a used delivery truck, with a value of $10,000. Which of the three has made a permissible capital contribution to the company? A. A and B because a truck is not capital, and therefore C did not make a permissible contribution to the LLC. B. A only because neither B nor C contributed something that can be considered capital. C. All three. All three contributions are permissible. D. A and C because services are not capital, and therefore B did not make a permissible contribution to the LLC.
C. All three. All three contributions are permissible. A member's capital contribution may be in cash, property or services already performed.
Colette Bohatch was one of three partners in Butler & Binion's Texas office. She suspected that John McDonald, one of the other partners in that office, was padding his timesheets and over-billing their client Pennzoil. She reported her concerns to the firm's national managing partner. McDonald was cleared after an investigation. Shortly thereafter, the managing partner told Bohatch that a major client was dissatisfied with her work. The firm subsequently expelled Bohatch pursuant to the following provision of the partnership agreement: "A two thirds (2/3) majority of the Equity Partners, at any time, may expel any partner from the partnership upon such terms and conditions as set by said Equity Partners." She sued for breach of fiduciary duty. What result, assuming Texas has adopted the UPA (1914)? A. Bohatch should be reinstated if she can prove she was fired because she blew the whistle on McDonald, because expelling her on such grounds breached the fiduciary duties her fellow partners owed her. B. Bohatch should be reinstated because the UPA (1914) does not authorize expulsion of a partner. C. Bohatch loses. D. Bohatch should be reinstated because it is against public policy to fire employees who blow the whistle on misconduct.
C. Bohatch loses. Although Lawlis v. Kightlinger & Gray held that a partnership must act in good faith when expelling one of its members, the good faith requirement is satisfied if there was no wrongful withholding of any money or property belonging to the expelled partner.
John and Jacob would like to establish a small business. They will be the sole owners of the entity, and will each contribute 50% of the capital. They would like to manage the business jointly and would like to share in the profits jointly. They are optimistic about their new venture but, just in case, they would like to protect their personal assets from any liability that results from the debts of the business. What do you advise them to do? A. Establish a general partnership, which does not require filing with the state. B. Establish a manager-managed limited liability company and file articles of incorporation with the state. C. Establish a member-managed limited liability company and file articles of organization with the state. D. Establish a corporation and work towards an initial public offering.
C. Establish a member-managed limited liability company and file articles of organization with the state. A member-managed LLC form provides them with the management power as well as the limited liability that they seek. To establish an LLC, articles of organization are filed with the secretary of state of the state in which the LLC will be formed.
Harry, Stanley, and Fred establish an LLC. Harry and Stanley spend most of their time traveling. Fred functions as the member-manager of the LLC and is solely responsible for all of the financial aspects of the company. One year, the annual distribution to members is much lower than usual. Fred emails Harry and Stanley to let them know, explaining that profits were way down. Harry and Stanley are very alarmed and return to town immediately (it is a Saturday). They go straight to Fred's house (Fred works from home) and demand to inspect the books and records of the LLC immediately. Fred refuses. Who wins? A. Harry and Stanley because each member is entitled to inspect the books and records of the LLC. B. Fred because he is solely responsible for managing the finances of the LLC. C. Fred because it is a Saturday. D. Harry and Stanley because it is a member-managed LLC.
C. Fred because it is a Saturday. Although each member of an LLC is entitled to inspect (and copy) the books and records of the LLC, that right must be exercised during regular business hours.
Member 1 and Member 2 establish an LLC that provides catering services. Member 1 and Member 2 elect to establish a manager-managed LCC (they are chefs and have no interest in running the business). They engage Manager to run the LLC. Manager is paid a salary, but does not own any of the membership interests in the LLC. Manager, with Member 1 and Member 2's agreement and assistance, arranges a $50,000 loan to the LLC from Local Bank. The LLC signs up hundreds of customers but cannot deliver the food as required and the business fails. When it fails, the LLC still owes Local Bank $47,500. To whom can Local Bank look for payment of the outstanding debt? A. Member 1 and Member 2 because they owned the company. B. Manager because she had control of the company. C. The LLC because the loan was to the company. D. The LLC, Member 1, and Member 2 because the company is primarily liable and the owners of the company are responsible for any residual debts.
C. The LLC because the loan was to the company. An LLC provides limited liability for its members/owners, which means that creditors can look only to the company's assets for satisfaction of debts, so the members are only liable to the extent of their contributions to the LLC.
Spielberg, Katzenberg and Geffen form a corporation, New Millennium Entertainment Corporation ("NMEC"). They next form a subsidiary corporation called Jurassic Park IV, Inc. ("JPIV"). The subsidiary will be producing a sequel to a recent movie and then distributing the movie to theaters, video stores and other markets. To raise money for the venture JPIV will do one of the following transactions. Which one is least likely to require a registration statement to be filed with the Securities and Exchange Commission? A. The corporation forms a limited partnership and sells limited partnership interests to the public. B. The corporation sells 20 year bonds paying 5% interest and secured by a lien on the film rights, in $10,000 amounts, to 500 individual investors. C. The corporation issues preferred stock to Spielberg, Katzenberg and Geffen in exchange for their contribution of $100 million. D. The corporation sells demand notes paying 5% interest, in $1,000 amounts, to 10,000 individual investors.
C. The corporation issues preferred stock to Spielberg, Katzenberg and Geffen in exchange for their contribution of $100 million. An offering to the corporation's top three insiders should qualify for the private placement exemption, as it well within the allowable number of offerees, and all of the offerees are going to highly knowledgeable about the company, so this offering should not have to be registered with the SEC.
Ana and Nina form an LLC to operate a restaurant. After many extremely profitable years, Ana and Nina disagree about the future of the restaurant, and Ana seeks to have the LLC dissolved and all of its assets sold as provided for in their state's LLC act. Nina, however, argues that Ana is limited to the exit mechanism in their LLC operating agreement, which would allow Nina to buy Ana out at "fair value" and allow the LLC/restaurant to continue operating without selling its principal assets. What will happen when they go to court? A. The court will rule in favor of Ana and apply the state's LLC act, which trumps any contractual arrangements made by the LLC members. B. The court will apply the operating agreement, but not the exit mechanism specified, because pre-arranged exit mechanisms are not permitted. C. The court will rule in favor of Nina, and hold the members to the exit mechanism specified in their operating agreement. D. The court will balance Ana's fiduciary duty of care with her fiduciary duty of loyalty and determine whether a buyout is appropriate.
C. The court will rule in favor of Nina, and hold the members to the exit mechanism specified in their operating agreement. Sates allow parties substantial contractual freedom to set out how an LLC will work, absent public policy or other equitable objections. The LLC act usually functions as a default rule for when some aspect of company management is not specified. Here, an exit mechanism has been agreed on in advance, and there are no facts in the question to suggest that honoring that will result in inequity.
A duly qualified shareholder of Acme Corp., Susan Shareholder, has properly put forward a shareholder proposal under SEC Rule 14a-8, which would amend the bylaws of Acme to prohibit Acme's Chief Executive Officer from serving as the Chairman of the Acme Board of Directors and would further require that the Chairman of the Board be an independent director. Out of deference to the incumbent CEO, who currently serves in both capacities, Susan's proposed bylaw would only apply prospectively to the next CEO. Acme would like to exclude this bylaw from its proxy statement. Acme is incorporated in Delaware. On what grounds, if any, may Acme do so? A. Acme's shareholders have no power under Delaware law to initiate corporate action with respect to amending, altering, repealing, or revising the company's bylaws. Under Delaware law, shareholders may vote on proposed bylaw changes only if the board of directors recommends such a change. Accordingly, the proposal is not a proper subject of shareholder action and may therefore be excluded from Acme's proxy statement pursuant to SEC Rule 14a-8(i)(1) unless rephrased as a recommendation. B. The proposal relates to an election and therefore may be excl
C. The proposal cannot be excluded.
Employee has just gotten a job as a clerk at an insurance company, Employer. Employer sends Employee to the annual insurance conference for their region. At the conference, Employee makes numerous derogatory comments about the Employer, calling it a company "full of morons" and "the worst place to work in the world" in conversations with other insurance company representatives. Has Employee violated a duty to Employer? A. No, Employee owes no fiduciary duty to Employer unless Employee is a partner in the Employer's enterprise. B. No, it is Employer's duty to ensure that Employee's reputation is not harmed through Employee's association with Employer. C. Yes, Employee has violated the duty to refrain from conduct likely to damage the Employer's enterprise. D. Yes, Employee has violated the duty to take all actions within the scope of Employee's actual authority.
C. Yes, Employee has violated the duty to refrain from conduct likely to damage the Employer's enterprise. An employee/agent has a fiduciary duty, within the scope of the agency relationship, to act reasonably and to refrain from conduct that is likely to damage the employer/principal's enterprise.
Big Corp is a large, publicly-traded corporation with subsidiaries and offices in every country of the world. You own 500 shares of Big Corp. Because of some less-than-terrific decisions of the board of directors, Big Corp has debts that total more than its cash on hand. Several Big Corp creditors contact you and explain that you owe them payment for your pro rata share of the Big Corp debts. You disagree. Who will prevail? A. The creditors will, because as a shareholder your liability for Big Corp's debts is based on your pro rata shareholding. B. The creditors will, because the corporation has a perpetual existence. C. You will, because your liability as a shareholder is limited to the amount of your investment. D. You will, because Big Corp's problems are the result of poor decisions by the board of directors.
C. You will, because your liability as a shareholder is limited to the amount of your investment. It correctly states that doctrine of shareholder limited liability for a corporation's debts.
Suppose you own 500 shares of Biosphere common stock. Four directors are to be elected to the board. If the firm uses cumulative voting, you can cast _____ votes for a single director candidate. A. 1,000 B. 500 C. 125 D. 2,000 E. 1,500
D. 2,000 In cumulative voting, a shareholder gets a number of votes equal to the number of shares he or she owns times the number of vacancies to be filled on the board of directors. See the discussion in Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling. So you would get 2,000 votes, all of which can be cast for a single candidate.
Sam, Sandra, and Sal decide to establish a limited liability company. Each would like management rights as well as protection from personal liability for the debts of the business. They file articles of organization with the secretary of state. They draft an operating agreement providing that they each contribute a third of the capital needed to start the business and requiring a two-thirds majority vote for most management decisions. They elect partnership tax treatment and set out a system for how the company's profits will be distributed to its owners. Which of the following statements is most likely to be true about their arrangement? A. The company will have corporate tax treatment, not partnership tax treatment. B. The constitutive documents for a limited liability company can allocate how profits will be allocated, but not how they will be distributed, to the owners. C. Because a limited liability company will not shield its members from personal liability, liability for the debts of the business will still "flow through" to the members. D. They have established a member-managed limited liability company.
D. An LLC is established by filing articles of organization and executing an operating agreement, which is the basic contractual arrangement among its members/owners governing how the company will be run. An LLC offers both limited personal liability for its members/owners, and "flow through" (partnership) tax treatment.
Mikayla objects on purely ethical grounds to a product manufactured by Corporation. She wants to publish the names of all the shareholders of Corporation in a full-page newspaper ad in order to shame the shareholders into demanding that Corporation cease making that product. Mikayla buys 100 shares of Corporation (1% of the total outstanding shares), and asks Corporation for a copy of its shareholders' list. Corporation refuses, and Mikayla sues. Who will win? A. Corporation wins because a stockholder must hold a minimum of 5% of a corporation's shares to be allowed to demand inspection. B. Mikayla wins because her request for the list is prompted by ethical concerns. C. Mikayla wins because as an owner of Corporation she has a right to inspect the shareholder list. D. Corporation wins because a shareholder must have a proper purpose to exercise such inspection rights.
D. Corporation wins because a shareholder must have a proper purpose to exercise such inspection rights. Corporation wins because a shareholder must have a proper purpose to exercise such inspection rights.
Corporation has 5 directors. After decades of profitable operations, Corporation begins to suffer heavy losses. Shareholders of Corporation file a derivative suit against the directors, which focuses on the behavior of three directors. Director 1 has an ethical objection to the business of Corporation and has been making decisions with an actual intent to do harm to Corporation. Director 2 could not care less about Corporation and has behaved with a lack of due care in fulfilling his responsibilities but without any malevolent intent. Director 3 is very busy with another job, and has been deliberately shirking his responsibilities in an intentional dereliction of his duties as a director. Which of Directors 1, 2, and/or 3 has/have failed to act in good faith such that they may be subject to liability in the shareholder derivative suit. A. Directors 1, 2, and 3. B. Director 1 only. C. Directors 1 and 2 only. D. Directors 1 and 3 only.
D. Directors 1 and 3 only. Director 1 has behaved with subjective bad faith: his conduct constituted the classic, quintessential bad faith. Director 3's behavior, with its intentional dereliction of duty and conscious disregard for his responsibilities is a violation of his duty to act in good faith. Director 2, however, has behaved without malevolent intent and his behavior, without more, does not constitute bad faith.
In US v. Chiarella, Vincent Chiarella worked at a company that printed financial documents relating to corporate tender offers. In one document printed for a corporate bidder, he read confidential information that allowed him to buy stock in the target corporation and make a nice profit because of his knowledge. Which of the following statements are correct, if any? I. Chiarella was guilty of insider trading under the disclose or abstain theory II. Chiarella was not guilty of insider trading under the disclose or abstain theory III. The Supreme Court did not consider whether Chiarella could be held liable under the misappropriation theory because that theory had not been included in the indictment IV. If Chiarella had been charged with violating the misappropriation theory as it exists today, he probably would have been found guilty A. II and III only B. I and IV only C. I and III only D. II, III, and IV only E. I, III, and IV only
D. II, III, and IV only
Investor owns common (voting) stock in Corporation. Corporation is run by a somewhat surly CEO and Chairman of the Board of Directors, M. M and his fellow board members are uninterested in shareholder input, and refuse to call and hold regular shareholder meetings because, as they explain, "Shareholder meetings are a waste of time and money." Investor would like to sue. You are advising her. Which of the following is the best advice you could give her? A. Investor should not file a direct suit, because it requires a 5% shareholding; a derivative suit, which does not require the ownership of the actual shares, is a better idea for her. B. Investor should file a direct suit against the corporation, to extract a remedy for harm to the corporation, as opposed to a derivative suit, which would seek a remedy for harm to the shareholders. C. Investor should file a derivative suit, on behalf of the corporation, against the stakeholders for breach of their fiduciary duties. D. Investor should file a direct suit to enforce her right to vote, and not a derivative suit, which would be filed on behalf of the corporation.
D. Investor should file a direct suit to enforce her right to vote, and not a derivative suit, which would be filed on behalf of the corporation. A direct suit may be filed by a shareholder on his or her own behalf to enforce duties owed to that shareholder by the corporation. Investor is suing on her own behalf to vindicate her individual rights as a shareholder, and any remedy will be made to her. This is in contrast to the derivative suit, in which a shareholder may bring an action on behalf of a corporation in which he or she holds stock. In those actions, the shareholder asserts rights belonging to the corporation, and any remedy goes to the corporation itself.
The board of directors of Corporation, a manufacturer of building materials, decides to invest its earnings in mutual funds while waiting for the opportunity to acquire a competitor. Before Corporation can effect its acquisition plans, the bottom drops out of the mutual fund market and Corporation loses the entire value of those investments. The market value of the shares of Corporation decreases from $60/share (before the investments lost their value) to just over $5/share. Shareholders sue the board of directors for a remedy. Are they likely to prevail? A. No, because the business judgment rule prevents suits by directors and officers relating to a corporation. B. Yes, because the investment was a poor one, which resulted in the loss of almost all of the shareholders' investments. C. Yes, because earnings are required to be distributed in the form of dividends. D. No, because the business judgment rule will protect the board's business decision from judicial second-guessing.
D. No, because the business judgment rule will protect the board's business decision from judicial second-guessing. It explains that, in the suit brought by the shareholders, the court is likely to defer to the board's business decision, even if it was a poor decision, as long as certain basic things (e.g., the board acted in good faith, it was informed when it made the decision) are true.
You are on the subway in New York when you overhear two people you do not know talking about an upcoming merger, news not yet public. They seem to know their stuff. If you buy stock based on this information, and profit when the information turns out true, you have: A. Violated the so-called disclose or abstain theory of insider trading liability. B. Not violated the insider trading laws because the information became public when two insiders discussed it where others could hear them. C. Violated the so-called misappropriation theory of insider trading liability. D. Not violated the insider trading laws because you owe no fiduciary duties to the company in question and the apparent insiders at most violated their fiduciary duty of care by publicly discussing the merger.
D. Not violated the insider trading laws because you owe no fiduciary duties to the company in question and the apparent insiders at most violated their fiduciary duty of care by publicly discussing the merger. In order for this situation to be an illegal tip, the insiders would have had to violate their duty of loyalty to their employer by getting a personal benefit in return for making the tip. In any case, this isn't really a "tip" at all. The blabbermouths did not intend for you to receive the information; they were just careless.
Shareholder X challenges a transaction between Corporation and one of the directors, and shows that the director has a conflict of interest. The director responds by showing that the transaction was inherently fair. Who prevails? A. The director, because director conflict decisions are exculpated from liability to shareholders. B. Shareholder X because Corporation cannot engage in a transaction with one of its directors. C. Shareholder X because a showing of inherent fairness is insufficient to overcome liability for conflict of interest transaction. D. The director, because a showing of inherent fairness will cleanse the conflicted transaction.
D. The director, because a showing of inherent fairness will cleanse the conflicted transaction. Court-determined fairness is a traditional way to overcome the potential duty of loyalty violation of a director self-dealing transaction.
Deborah, Janine, and Sarah have decided to form a construction partnership. They have agreed that each of the three will contribute $25,000 to the business and that Deborah and Janine will run the day to day business, while Sarah will be responsible for raising more money for the business and will participate in important business decisions. Which of the following statements most accurately describes Sarah's power to bind the partnership in her dealings with third parties? A. Since Deborah and Janine are managing partners, Sarah has no power to bind the partnership when she acts alone. B. Deborah and Janine, acting as a majority, can at any time restrict or completely eliminate Sarah's power to bind the partnership in dealing with third parties in ordinary matters. C. Sarah can bind the partnership in obtaining additional capital, but she has no power to bind the partnership in day to day matters within Deborah and Janine's sphere of authority. D. Whatever her agreement with Deborah and Janine, Sarah has the power to bind the partnership in all usual business matters when dealing with third parties who are not aware of any agreed limits on her authority.
D. Whatever her agreement with Deborah and Janine, Sarah has the power to bind the partnership in all usual business matters when dealing with third parties who are not aware of any agreed limits on her authority. UPA (1914) § 9 and UPA (1997) § 301 both provide that a partner has apparent authority to carry on the business of the partnership unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority.
Paul is a bail bondsman and employs Alice as a bounty hunter. Paul provides Alice's equipment, including bulletproof vests and firearms. Alice's assigned work is to locate persons for whom Paul has written bonds who jump bail and return them to custody. Paul directs Alice to search for John. Alice mistakenly identifies Ted as John, breaks down the door of Ted's home, and holds Ted at gunpoint. Under applicable law, Alice's conduct toward Ted is tortious. Was Alice acting within the scope of her employment? A. No, because intentional torts are never within the scope of the employment. B. No, because there is no evidence Paul instructed Alice to use force. C. No, because her conduct was not reasonably foreseeable by Paul. D. Yes, because her conduct was motivated by a desire to serve her master.
D. Yes, because her conduct was motivated by a desire to serve her master. Ira S. Bushey & Sons, Inc. v. United States quoted § 228(1) of the Restatement (Second) of Agency which provides that "conduct of a servant is within the scope of employment if . . . it is actuated, at least in part, by a purpose to serve the master."
