Questions & Answers
Business Associations
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3172Branson_Q&A_3e
or — lip2.indb 2 2/12/24 1:45 PM Questions & Answers Business Associations
Multiple-Choice and Short-Answer
Questions and Answers
third edition
Douglas M. Branson
W. Edward Sell Chair in Business Law Emeritus
University o --- Pittsburgh School o --- Law
Seth C. Oranburg
Associate Pro --- essor
University o --- New Hampshire
Franklin Pierce School o --- Law
John Towers Rice
Assistant Pro --- essor o --- Law
Lincoln Memorial University
Duncan School o --- Law
Carolina Academic Press
Durham, North Carolina
3172Branson_Q&A_3e
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Library o --- Congress Cataloging-in-Publication Data
Names: Branson, Douglas M., author. | Oranburg, Seth C., 1983- author. |
Rice, John Towers, author.
Title: Questions & answers : business associations / Douglas M. Branson,
Seth C. Oranburg, and John Towers Rice.
Other titles: Business associations
Description: Third edition. | Durham, North Carolina : Carolina Academic
Press, LLC, 2024. | Prev. edition classed in KF1355.Z9. | Includes
bibliographical re --- erences and index.
Identi --- iers: LCCN 2023055207 | ISBN 9781531029586 (paperback) | ISBN
9781531029593 (ebook)
Subjects: LCSH: Business enterprises--Law and legislation--United
States--Problems, exercises, etc. | Corporation law--United
States--Problems, exercises, etc. | Partnership--United
States--Problems, exercises, etc.
Classi --- ication: LCC KF1355 .B73 2024 | DDC 346.73/065--dc23/eng/20231207
LC record available at https://lccn.loc.gov/2023055207
Carolina Academic Press
700 Kent Street
Durham, North Carolina 27701
(919) 489-7486
www.cap-press.com
Printed in the United States o --- America
3172Branson_Q&A_3e
or — lip2.indb 4 2/12/24 1:45 PM To all who use this text to advance their understanding o — the law o — Business Associations, thank you.
To Clare, Annie, and Elizabeth
— DMB
To Talia
— SCO
To JPS
— JTR
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Foreword ix
About the Authors xi
Questions
Topic 1: The Law o --- Agency 3
Topic 2: General Partnerships 11
Topic 3: LLCs and Other Unincorporated Associations 23
Topic 4: Corporate Incorporation 33
Topic 5: Piercing the Corporate Veil 37
Topic 6: Corporate Finance 41
Topic 7: Closely-Held Corporations 45
Topic 8: Corporate Governance 51
Topic 9: Corporate Fiduciary Duty 63
Topic 10: Shareholder Litigation 77
Topic 11: Mergers and Acquisitions 83
Topic 12: Insider Trading 89
Practice Final Exam: Questions 93
Answers
Topic 1: The Law o --- Agency 111
Topic 2: General Partnerships 119
Topic 3: LLCs and Other Unincorporated Entities 133
Topic 4: Corporate Incorporation 145
Topic 5: Piercing the Corporate Veil 151
Topic 6: Corporate Finance 155
Topic 7: Closely-Held Corporations 161
Topic 8: Corporate Governance 171
Topic 9: Corporate Fiduciary Duty 185
vii
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Topic 10: Shareholder Litigation 199
Topic 11: Mergers & Acquisitions 207
Topic 12: Insider Trading 215
Practice Final Exam: Answers 219
Index 233
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or — lip2.indb 8 2/12/24 1:45 PM Foreword
We are excited to share this third edition o --- the Q&A: Business Associations --- or use by those
exploring this --- ascinating but complex area o --- law. We appreciate your allowing us to assist you in
your academic development.
We are pleased to expand upon our colleague Douglas Branson’s rich work in the --- irst two edi-
tions o --- the text. Among other revisions, this third edition adds a section on the law o --- agency and
expands, clari --- ies, modernizes, and simpli --- ies questions on partnership, limited liability compa-
nies, and corporations. For agency, we have --- ocused on the Restatement (Third) o --- Agency. For
unincorporated entities, we have --- ocused on the Revised Uni --- orm Partnership Act and the Revised
Uni --- orm Limited Liability Company Act. As it pertains to the law o --- corporations, we wanted to
emphasize both the Model Business Corporation Act (as amended in 2016) and the Delaware Gen-
eral Corporation Law.
We have attempted to tailor coverage to re --- lect the content o --- a typical survey course in busi-
ness associations. This is a bit o --- a challenge because opinions range greatly about what should be
included in the course, but nevertheless, we persist in the mission. It is possible that we will cover
material that is not included in your course or that we will not cover material that is included in
your course. This is not to suggest that our text de --- ines what is “typical” or that your pro --- essor
is aberrant in including other topics. Our coverage o --- what might be considered more special-
ized topics like insurance, mergers and acquisitions, securities regulation, corporate --- inance, and
business taxation is limited. We have also care --- ully reviewed the subject matter outline prepared
by the National Con --- erence o --- Bar Examiners --- or the --- orthcoming NextGen Bar Exam, and have
been care --- ul to ensure that we have included questions re --- lecting that scope. Accordingly, students
studying --- or the bar exam may --- ind this text a use --- ul tool.
Importantly, this text is designed to be used by students as a --- ormative assessment tool to engage
with the subject matter; it is not a treatise on the law. O --- course, not every issue lends itsel --- well to
this type o ---
ormative assessment and, instead, requires much deeper analysis in a di —
erent — orum (i.e., a law review article). Other resources undertake the task o — providing a thorough explana- tion o — the law, history, policy, and nuance. Accordingly, we cannot — and will not — attempt to provide a complete, in-depth explanation o — every legal issue. There will always be more to say than what we o —
er you. Instead, we have attempted to revise questions — or clarity and explanations o — answers — or conciseness. We believe that every multiple-choice question should have a “best” answer and that we should be able to explain to you our analysis in a paragraph. I — we can’t do that, then how could we expect you to do the analysis in the time you would have on an exam?
ix
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O --- course, answering the questions — whether right or wrong — is the easy part. The real work
comes when you look at our answers and explanations --- or why we answered the way we did. The
time you spend reviewing our explanation o --- the answer, --- ocusing both on why the best answer
choice is best and why incorrect answers are incorrect, is time well spent. Certainly, the most valu-
able achievement is not to simply answer the question correctly but to understand the why behind
the questions. You may just --- ind that you learn more (both in terms o --- the substantive law and in
test-taking strategies) --- rom understanding why the wrong answers are wrong than why the best
answers are correct.
Again, we thank you --- or including this text in your academic development. We hope you will
ind these questions and our analysis use — ul. We wish you all the best.
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Douglas M. Branson has occupied the W. Edward Sell Chair in Business Law at the University
o --- Pittsburgh since 1996. Prior to 1996, he was a Pro --- essor o --- Law at the Seattle University (1973 to
1996). He also regularly visits the University o --- Alabama School o --- Law, where he has twice held
the Charles Tweedy Pro --- essorship. He also holds the rank o --- Permanent Fellow at the University
o --- Melbourne (Australia) where each year he has taught (with Pro --- essor J. Farrar) the corporate
governance class to Master o --- Law students. He has been a visiting pro --- essor at Arizona State Uni-
versity, Cornell University, the University o --- Oregon, Washington University (St. Louis), and the
University o --- Washington (where he was the Condon-Falknor Distinguished Pro --- essor), among
others. He has taught the basic course in business organization law --- or over 30 years.
Pro --- essor Branson has also taught in New Zealand, South A --- rica, Malaysia, Hong Kong, Indo-
nesia, Ireland, Spain, France, and England. He has been a Fulbright-sponsored lecturer at Univer-
sity o --- Ghent (Belgium) and a U.S. State Department-sponsored lecturer at several universities in
the Ukraine. He has been a USAID-sponsored consultant to the Republic o --- Indonesia on matters
o --- corporate law, corporate governance, and capital markets law. He has worked on similar projects
or Macedonia and A — ghanistan, endeavoring to aid those countries in modernizing their eco- nomic laws. He is the author o — over 70 law review articles and more than a dozen books. His books include the leading treatise Corporate Governance (1993) (with annual supplements); Problems in Corporate Governance (1997); Understanding Corporate Law (1999; 2d ed. 2004; 3d ed. 2009) (with Arthur Pinto); No Seat at the Table: How Law and Governance Keep Women Out o — the Board Room (2007); Business Enterprises: Legal Structures, Governance and Policy (with Joan Heminway et al., 2009); The Last Male Bastion: Gender and the CEO Suite at America’s Public Corporations (2010); The Rus- sell Sage Handbook o — Corporate Governance (Thomas Clarke & Douglas Branson eds., 2011); and Tastes o — Nuoc Mam: Service in the Brown Water Navy and Visits to Vietnam (2011). Seth C. Oranburg teaches Contracts Law, Business Law, Trade Secret Law, and Transactional Legal Practice at the University o — New Hampshire Franklin Pierce School o — Law. He previously taught Contracts, Business Associations, Corporations, Securities Regulation, Corporate Finance, and Venture Capital Law at Duquesne University in Pittsburgh, PA, where he earned tenure and promotion to Associate Pro — essor be — ore moving to UNH to help build the next generation o —
online education via its Hybrid JD program. He recently published a casebook on Contract Law
and is currently writing a casebook on Business Associations.
Pro --- essor Oranburg also writes scholarship on business law topics and co-directs the Program
on Business, Organization, and Markets at the Classical Liberal Institute at NYU School o --- Law. In
xi
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this capacity, Oranburg produces academic symposia, and the resulting papers were published in
leading law reviews and journals.
John Towers Rice is an Assistant Pro --- essor o --- Law at the Lincoln Memorial University Duncan
School o --- Law. Rice teaches and writes about the legal environment o --- business and social change,
civil procedure, pro --- essional responsibility, and legislation. He is devoted to excellence in teaching
and endeavors to provide students with training in legal theory, practice skills, and pro --- essional-
ism. Additionally, he has spoken nationally about Corporate Social Responsibility, corporate gov-
ernance, legal ethics, and anti-discrimination laws, and his scholarship has been published in the
Northeastern University Law Review and the FIU Law Review.
Prior to entering law school teaching, Rice served as a judicial clerk --- or the Supreme Court o ---
Tennessee and practiced civil litigation in Knoxville. He is a member o --- the Tennessee and South
Carolina Bars, and he is admitted to practice in the United States Court o --- Appeals --- or the Sixth
Circuit. He has a distinguished record o --- service with the American Association o --- Law Schools
and the American, Tennessee, and Knoxville Bar Associations, and he is a Fellow o --- the American
Bar Foundation.
A native o --- Greenville, South Carolina, Rice graduated --- rom Clemson University and then
earned his law degree --- rom the University o --- Tennessee College o --- Law. While in law school, Rice
served as the President o --- the Student Bar Association and the Vice Chair o --- the Moot Court
Board, competed in the Dean Jerome Memorial Evidence Moot Court Competition at Brooklyn
Law School, and was honored with the Order o --- the Barrister and the ALI-ABA Scholarship and
Leadership award.
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or — lip2.indb 1 2/12/24 1:45 PM 3172Branson_Q&A_3e — or — lip2.indb 2 2/12/24 1:45 PM Topic 1 Questions
The Law o --- Agency
Assume that each o --- the --- ollowing questions involves --- acts arising in a jurisdiction that has inter-
preted the law o --- agency consistently with the interpretations stated in the Restatement (Third) o ---
Agency.
1. Introduction to Agency.
De --- ine “agency.”
Answer:
2. Painting Doctor’s O ---
ice.
Doctor decided that their medical o ---
ice needed to be updated and re — urbished. On the rec- ommendation o — a — riend, Doctor reached out to discuss the project with Painter. Doctor explained that they desired — or Painter to empty the waiting and patient consult rooms, deep clean the walls, lay drop cloths, paint the walls with a coat o — primer and two coats o — a particular type o — paint, and do any other work reasonably required to accomplish the task. Doctor explained that they would be on site to supervise and provide most o — the necessary equipment; however, Painter would be responsible to locate and order the paint and primer
rom a third party. Painter agreed to do the job as Doctor instructed, and Painter agreed to accept a — lat rate at the end o — the project. Doctor expressed that, i — this went well, Doctor had additional work that they would consider contracting — or Painter to per — orm. The two shook hands and Painter promised to return the next week to complete the job.
What is the status o --- the relationship between Doctor and Painter?
A. There was no principal–agent relationship between Doctor and Painter because Painter
was an independent contractor.
B. There was no principal–agent relationship between Doctor and Painter because the two
never used the words “principal” or “agent” to describe their relationship.
C. Painter is Doctor’s agent because Doctor bene --- ited --- rom Painter’s services.
D. Doctor and Painter are in a principal–agent relationship because Doctor asked Painter
to per --- orm services at Doctor’s behest and subject to Doctor’s control, and Painter
agreed to do so.
3
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3. Power Washing.
Homeowner requested Power Washer to come and provide residential power washing ser-
vices. Power Washer operates a power washing business and books jobs throughout the
region. When Power Washer arrived at the home, Homeowner instructed Power Washer as
to the scope o --- the job. Power Washer agreed to per --- orm the job as instructed. Power Washer
supplied their own tools and equipment and maintained their own liability insurance.
Homeowner agreed to pay Power Washer hal --- o --- the price --- or the job be --- ore Power Washer
began work and hal --- at the completion o --- the project. Power Washer told Homeowner that
the job should take less than two hours and that they expected to leave promptly upon --- in-
ishing the work to travel to their second job --- or the day across town. Power Washer began
work, but because they were in a rush, became careless. During the job, Power Washer neg-
ligently caused damage to Neighbor’s property. Neighbor has --- iled a lawsuit against Home-
owner to recover the damage.
Which o --- the --- ollowing, i --- true, would support Neighbor’s lawsuit against Homeowner?
A. Homeowner had never met Power Washer be --- ore and was thus negligent in permitting
Power Washer to per --- orm services unsupervised.
B. Homeowner remained at the home and monitored Power Washer’s activities, even giv-
ing Power Washer instructions --- or what to do.
C. Homeowner has hired Power Washer in the past to per --- orm work --- or them.
D. Residential power washing is a low skill job that Homeowner could have per --- ormed
themsel --- .
4. Driving the Painting.
Gallery hired Driver to transport a valuable painting --- rom one side o --- the state to the other.
While driving on the interstate, Driver negligently caused a car accident that resulted in
severe injury to Family. Family desires to --- ile a lawsuit to recover their damages.
Against whom may Family assert claims --- or liability?
A. Gallery only
B. Driver only
C. Both Gallery and Driver
D. Neither Gallery nor Driver
5. Catering the Family Reunion.
In anticipation o --- their yearly holiday gathering, Family hired Che --- to cater their meal. Fam-
ily instructed Che --- that they wanted an elaborate bu ---
et spread, appetizers, dessert, and a bar. Che — did not work at a restaurant; rather, Che — caters — rom their home. Family was
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aware o --- this and told Che --- to do what it took to get the job done. When it came time to
do the work, Che --- purchased all the --- ood and supplies necessary but quickly realized the
job was simply too big --- or one person. Accordingly, Che --- elicited the help o --- three --- riends
and promised them payment by the hour. When it came time --- or the --- amily gathering, the
riends helped Che — deliver and set up all the — ood and equipment, and then they worked during the event to replenish — ood, remove empty dishes, and tend the bar. At the end o — the evening, Che — presented Family with an invoice — or services. Shocked, Family agreed to pay
or all the — ood and supplies and Che — ’s — ee, but re — used to pay anything to Che — ’s — riends. Family maintained that Che — had no authority to hire sta —
.
What is Che --- ’s best argument that Family must pay the --- riends?
A. Family would be unjustly enriched i --- it does not pay --- or the --- riends.
B. Family is bound to pay the --- riends because it authorized Che --- to hire them.
C. Che --- could not have per --- ormed the task without help --- rom the --- riends.
D. Che --- has no argument that Family must pay their --- riends.
6. Surgery Gone Wrong.
One day, while playing kickball, Smith --- ell and broke his leg. Smith’s --- riends took him to a
local emergency room operated by Hill --- ield Hospital System. All medical personnel wore
uni --- orms with the Hill --- ield logo on it, and all paperwork indicated that Hill --- ield was provid-
ing emergency medical care. The emergency room physician re --- erred Smith to an orthope-
dist, also in the Hill --- ield Hospital System. During a consult, the orthopedist, wearing a white
coat with the Hill --- ield logo embroidered on it, recommended that Smith undergo surgery.
The orthopedist provided Smith with a pamphlet about the bene --- its and risks o --- surgery that
included lines such as “Here at Hill --- ield Hospital System, we want you to be --- ully in --- ormed
about your medical procedures” and “i --- you have any questions at all, please do not hesitate
to ask your Hill --- ield medical team.” Smith agreed and scheduled the procedure to take place
the --- ollowing week at a Hill --- ield Hospital surgical center. During the procedure, the ortho-
pedist committed negligence and caused serious injury to Smith. Smith has --- iled a lawsuit
against the orthopedist and Hill --- ield Hospital System. Hill --- ield has --- iled a motion --- or sum-
mary judgment, arguing that the orthopedist is an independent contractor and not an agent
o --- the hospital system. In support o --- its motion, Hill --- ield --- iled the orthopedist’s contract
with the hospital, which included the clause “Orthopedist agrees that she is an independent
contractor, and not an agent, o --- Hill --- ield Hospital System.”
How should the court rule?
A. Dismiss the lawsuit because the orthopedist was an independent contractor, and thus,
the orthopedist’s negligence cannot be attributed to the hospital.
B. Dismiss the lawsuit because the orthopedist’s contract with the hospital establishes that
the orthopedist is an independent contractor.
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C. Allow the lawsuit to proceed because Smith reasonably believed that the orthopedist
was an agent o --- the hospital.
D. Allow the lawsuit to proceed because it would be bad public policy to not hold hospitals
accountable --- or negligent procedures per --- ormed in their --- acilities.
7. Traveling Salesman.
Lavery was home one day when someone knocked on the door. He answered the door to see
a man standing there dressed in a suit. The man introduced himsel --- as “Chip” and explained
that he was a sales representative --- or Acme Co. Chip inquired as to whether Lavery might be
interested in purchasing a new set o --- knives. Chip o ---
ered to demonstrate the e —
ectiveness o — the knives, and Lavery agreed. Impressed with how sharp and accurate the knives were, Lavery asked Chip to process an order — or him. Chip agreed to do so but insisted that pay- ment was due “up — ront.” Lavery paid Chip $150 cash, and Chip promised delivery within a week. A — ew hours later, struck with regret, Lavery looked up Acme Co.’s contact in — or- mation and called to request that his order be canceled and his money be re — unded. Lavery spoke with a representative who, to Lavery’s dismay, in — ormed him that Acme Co. did not employ door-to-door salespeople, does not sell knives, and would never take payment in cash up — ront. Lavery has been hoodwinked.
Is Acme Co. liable to re --- und Lavery’s money?
A. Yes. “Chip” claimed to be an agent o --- Acme Co., and thus, Acme Co. is liable --- or the
raud. B. Yes. Acme Co. is estopped — rom denying that Chip had authority to enter into a con- tract on their behal — because they should have had a warning posted on their website re — lecting what the customer representative told Lavery. C. No, because Lavery was reckless in believing that Chip was actually an agent — or Acme Co. D. No, because Lavery’s belie — that Chip was an agent — or Acme Co. was not traceable to any mani — estation — rom Acme.
8. A Land Transaction.
Big Corp. operates a line o --- large retail stores and is looking to expand into a new area.
Concerned that social activists regularly protest expansion because o --- worries about how
Big Corp. stores impact local, mom-and-pop” stores, and aware that landowners typically
in --- late asking prices when they --- ind out they are dealing with Big Corp., Big Corp. wants
to use a secret agent to purchase the land. The secret agent will negotiate the transactions
as i --- the agent were the one who would be paying the purchase price and taking title to the
property. In --- act, however, Big Corp. is --- unding the transaction, and the agent will keep the
land in escrow until it can be titled in Big Corp.’s name. Nobody will know that Big Corp. is
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even involved until the deal has closed. The secret agent approached Nora and o ---
ered to buy a 40-acre parcel o — real estate that she owned — or $300,000. Nora accepted the o —
er, and the transaction was scheduled to close a week later. A — ter the closing, when Nora saw a sign on the property that a Big Corp. store was “coming soon,” she was livid. I — she had known she was dealing with Big Corp., she would have doubled the asking price.
Does Nora have any basis to seek to void the transaction?
A. Yes, the secret agent deceived Nora as to the true identity o --- the parties to the transaction.
B. Yes, because Big Corp. un --- airly bene --- ited --- rom the use o --- a secret agent.
C. No, because the secret agent had authority to enter into the transaction and bind Big
Corp., even though Nora did not know about it.
D. No, because this is just how the market works.
9. The Title Agent.
Insurance Company contracted with Agent, a licensed attorney with specialized training
and experience in real estate law, to permit Agent to write and issue title insurance policies
on its behal --- . As part o --- a commercial real estate transaction, Agent per --- ormed a title search.
Through an act o --- ordinary negligence, Agent --- ailed to identi --- y that a lien had been recorded
against the real property. Agent then issued a commitment --- or a title insurance policy to
Customer on Insurance Company’s behal --- indemni --- ying Customer against any claims on
the property. A --- ter the transaction was complete, Customer discovered the lien on the prop-
erty and made a claim --- or damages against the Insurance Company under the title insur-
ance policy that Agent had issued. An expert opined that most non-attorney title insurance
agents would not have discovered the lien, but an agent who was trained as an attorney
should have discovered the lien. Assume --- or purposes o --- this question that there is no appli-
cable contract, statute, or rule de --- ining the standard o --- care, that issuing title insurance does
not constitute the practice o --- law, and that most title insurance agents are not attorneys.
` Has Agent breached any duty owed to Insurance Company under the law o --- agency?
A. Yes. Under the law o --- agency, the agent is strictly liable --- or any loss caused to the prin-
cipal arising --- rom the agent’s conduct.
B. Yes. Under the law o --- agency, an agent with special skill or knowledge is held to a higher
standard o --- care.
C. No. Under the law o --- agency, an agent does not breach its duty o --- competence to the
principal i --- another agent, in the same or similar circumstances, would have conducted
themsel --- in the same way.
D. No. Under the law o --- agency, an agent only breaches its duty o --- competence to a princi-
pal through gross negligence.
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10. Family Loyalty.
Family owns a local hardware store, and Nephew is one o --- the employees. Recently, Home
Supplies, a national hardware chain, opened a location about --- ive minutes away --- rom Fam-
ily Store. Family immediately noticed a decrease in customers and pro --- it. Desiring to learn
more about National Store’s operations and vendor contacts, Family agreed that Nephew
will apply --- or a job at National Store, investigate the operations and contacts, and report
back to Family Store so that Family Store can try to better compete. Nephew applied --- or a
job with National Store but made no mention o --- his a ---
iliation with Family Store. Nephew was hired, and a — ter working — or National Store — or several weeks, learned that National Store was selling shoddy products at in — lated prices with the expectation that they would break quickly and need to be replaced. Nephew shared this in — ormation with Family Store and the local news. An investigative journalist investigated National Store and discovered, in addition to National Store’s knowingly selling shoddy products, other predatory sales tactics. National Store wants to sue Nephew — or damages.
Does National Store have a claim against Nephew?
A. No. This in --- ormation was discovered by an investigative journalist, and so National
Store had no expectation o --- privacy.
B. No. This is simply part o --- market competition, and National Store got its due.
C. Yes, because an agent has a duty to not disparage their principal.
D. Yes, because Nephew was working to advance an interest adverse to National Store.
11. So Much Stu ---
.
Franklin has worked as a manager --- or Bakery --- or the past seven years. Franklin is respon-
sible --- or the day-to-day operations o --- the Bakery, including being the only contact with ven-
dors. Recently, the daughter o --- the owner o --- Bakery graduated --- rom culinary school, and the
owner wants to bring the business back into the --- amily. Accordingly, the owner in --- ormed
Franklin that she was being let go and would no longer serve as manager. Upset about los-
ing her job, Franklin called several o --- Bakery’s vendors and ordered unusually large (but not
unheard o --- ) quantities o --- products. Franklin knew that this would be an unexpected cost --- or
Bakery, that Bakery did not have adequate storage --- or all the products, and that many o --- the
products would go bad be --- ore they could be used. When the enormous shipments arrived,
the owner re --- used to accept or pay --- or the products.
Will the owner have to pay --- or the products?
A. No, because Franklin had been terminated, and thus, had no authority to make the
order.
B. No, because the vendors should have been suspicious about the size o --- the orders, and
they should have contacted the owner to con --- irm.
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C. Yes, because the vendors reasonably believed that Franklin had the authority to order
the products on the owner’s behal --- .
D. Yes, because it would be un --- air to the vendors --- or the owner to not pay.
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General Partnerships
Assume that each o --- the --- ollowing questions involves --- acts arising in a jurisdiction that has imple-
mented the Revised Uni --- orm Partnership Act (RUPA) and that has interpreted the law o --- agency
consistently with the interpretations stated in the Restatement (Third) o --- Agency.
12. Pike Patrol.
Aaronson, Baker, and Caul --- ield (ABC) together operate a success --- ul business equipping and
guiding tourist --- ishers. They registered the name “Pike Patrol” and opened a business bank
account at a local bank. They operated pro --- itably --- or several years. Then, one spring, they
realized they had booked more clients than they could serve properly that summer. They
emailed local --- ishers Dooley and Estrada (DE) and made the --- ollowing o ---
er: “Pike Patrol has more clients than it can service this summer. I — you supply your own necessary equip- ment, then we will assign to you any client overage, that is, when we have over six clients per day, we will assign excess clients to you.” Dooley and Estrada then each purchased — ishing equipment costing about $4,000 each. During that summer, Pike Patrol had six to eight cli- ents every day. Pike Patrol paid Dooley and Estrada — or the — ishing trips they conducted. At the end o — the summer, Aaronson, Baker, and Caul — ield decide to retire. When Pike Patrol ceased doing business, it had $100,000 in its business bank account. Dooley and Estrada contend that the arrangement constituted a partnership and that Dooley and Estrada are entitled to two- — i — ths o — the bank balance.
You are the lawyer --- or Aaronson, Baker, and Caul --- ield. What is the best argument that ABC
did not --- orm a partnership with DE?
A. Aaronson, Baker, and Caul --- ield never intended to --- orm a partnership.
B. Dooley and Estrada received di ---
erent dollar amounts than did Aaronson, Baker, and Caul — ield. C. The equipment Dooley and Estrada purchased remained their separate property. D. Dooley and Estrada received wages; provided their own equipment as would an inde- pendent contractor; never made a contribution to partnership property; and never voted or otherwise participated in upper-level decision making.
13. Home State Athletics, Part I.
11
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Sammie is a coach and --- ormer track star at Home State University West (West). Tyrese is a
coach and --- ormer basketball star at Home State University East (East). Ursula is a wealthy
industrialist who lives in Home State. Through her support --- or Home State athletics, Ursula
has become --- riends with Sammie and Tyrese. Sammie and Tyrese have rights to distribute
Mercury running shoes in Home State. Sammie, Tyrese, and Ursula agreed to per --- orm as
ollows: Ursula shall invest $250,000 to — inance the purchase o — running shoes — or resale, house the inventory in her warehouse in Home State, and provide a part-time shipping clerk to manage the inventory; Sammie shall market the shoes to retailers in the western part o —
Home State; and Tyrese shall market the shoes to retailers in the eastern part o --- Home State.
In exchange --- or their contributions, Sammie shall receive 10 percent commission on all
shoes she sells, Tyrese shall receive 10 percent commission on all shoes he sells, and Ursula
shall receive 10 percent commission on all shoes sold. The three agree to share equally any-
thing le --- t over a --- ter payment o --- expenses, including commissions.
Sammie, Tyrese, and Ursula visit you in your law o ---
ice. They ask you, what is the nature o —
the legal relationship among the parties? Are there alternative ways in which their relation-
ship might be characterized? What should you do to resolve the ambiguity?
Answer:
14. Home State Athletics, Part II.
Sammie is a coach and --- ormer track star at Home State University West (West). Tyrese is a
coach and --- ormer basketball star at Home State University East (East). Ursula is a wealthy
industrialist who lives in Home State. Through her support --- or Home State athletics, Ursula
has become --- riends with Sammie and Tyrese. Sammie and Tyrese have rights to distribute
Mercury running shoes in Home State. Sammie, Tyrese, and Ursula agreed to per --- orm as
ollows: Ursula shall invest $250,000 to — inance the purchase o — running shoes — or resale, house the inventory in her warehouse in Home State, and provide a part-time shipping clerk to manage the inventory; Sammie shall market the shoes to retailers in the western part Home State; and Tyrese shall market the shoes to retailers in the eastern part o — Home State. In exchange — or their contributions, Sammie shall receive 10 percent commission on all shoes she sells, Tyrese shall receive 10 percent commission on all shoes he sells, and Ursula shall receive 10 percent commission on all shoes sold. The three agree to share equally any- thing le — t over a — ter payment o — expenses, including commissions.
Sammie, Tyrese, and Ursula ask you to be their lawyer and to dra --- t an agreement --- or them.
What type o --- agreement would you dra --- t --- or them? What would be three salient --- eatures o ---
the agreement?
Answer:
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15. Home State Athletics, Part III.
Sammie is a coach and --- ormer track star at Home State University West (West). Tyrese is a
coach and --- ormer basketball star at Home State University East (East). Ursula is a wealthy
industrialist who lives in Home State. Through her support --- or Home State athletics, Ursula
has become --- riends with Sammie and Tyrese. Sammie and Tyrese have rights to distribute
Mercury running shoes in Home State. Sammie, Tyrese, and Ursula agreed to per --- orm as
ollows: Ursula shall invest $250,000 to — inance the purchase o — running shoes — or resale, house the inventory in her warehouse in Home State, and provide a part-time shipping clerk to manage the inventory; Sammie shall market the shoes to retailers in the western part o —
Home State; and Tyrese shall market the shoes to retailers in the eastern part o --- Home State.
In exchange --- or their contributions, Sammie shall receive 10 percent commission on all
shoes she sells, Tyrese shall receive 10 percent commission on all shoes he sells, and Ursula
shall receive 10 percent commission on all shoes sold. The three agree to share equally any-
thing le --- t over a --- ter payment o --- expenses, including commissions.
What might happen i --- Sammie, Tyrese, and Ursula never dra --- t an agreement? What is their
legal relationship, and what are the consequences o --- that relationship?
Answer:
16. Home State Athletics, Part IV.
Sammie is a coach and --- ormer track star at Home State University West (West). Tyrese is a
coach and --- ormer basketball star at Home State University East (East). Ursula is a wealthy
industrialist who lives in Home State. Through her support --- or Home State athletics, Ursula
has become --- riends with Sammie and Tyrese. Sammie and Tyrese have rights to distribute
Mercury running shoes in Home State. Sammie, Tyrese, and Ursula agreed to per --- orm as
ollows: Ursula shall invest $250,000 to — inance the purchase o — running shoes — or resale, house the inventory in her warehouse in Home State, and provide a part-time shipping clerk to manage the inventory; Sammie shall market the shoes to retailers in the western part o —
Home State; and Tyrese shall market the shoes to retailers in the eastern part o --- Home State.
In exchange --- or their contributions, Sammie shall receive 10 percent commission on all
shoes she sells, Tyrese shall receive 10 percent commission on all shoes he sells, and Ursula
shall receive 10 percent commission on all shoes sold. The three agree to share equally any-
thing le --- t over a --- ter payment o --- expenses, including commissions.
Eighteen months later, Home State experiences the rainiest winter in its history. Sammie
and Tyrese receive reports --- rom retailers that much o --- the merchandise shipped to them is
water damaged. They visit Ursula’s warehouse and --- ind the roo --- leaking badly. Ursula’s ship-
ping clerk’s duties have been delegated to an a --- ter-school part-time high school student who
has given --- ree shoes to all o --- his --- riends, and who never inspected the inner portions o --- the
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warehouse where the bulk o --- the inventory has been stored and the leaks occurred. An esti-
mated $150,000 o --- inventory is worthless. Sammie and Tyrese are --- urious with Ursula. They
want to end the business relationship.
What actions should Sammie and Tyrese take in order to end the relationship?
Answer:
17. Home State Athletics, Part V.
Sammie is a coach and --- ormer track star at Home State University West (West). Tyrese is a
coach and --- ormer basketball star at Home State University East (East). Ursula is a wealthy
industrialist who lives in Home State. Through her support --- or Home State athletics, Ursula
has become --- riends with Sammie and Tyrese. Sammie and Tyrese have rights to distribute
Mercury running shoes in Home State. Sammie, Tyrese, and Ursula agreed to per --- orm as
ollows: Ursula shall invest $250,000 to — inance the purchase o — running shoes — or resale, house the inventory in her warehouse in Home State, and provide a part-time shipping clerk to manage the inventory; Sammie shall market the shoes to retailers in the western part o —
Home State; and Tyrese shall market the shoes to retailers in the eastern part o --- Home State.
In exchange --- or their contributions, Sammie shall receive 10 percent commission on all
shoes she sells, Tyrese shall receive 10 percent commission on all shoes he sells, and Ursula
shall receive 10 percent commission on all shoes sold. The three agree to share equally any-
thing le --- t over a --- ter payment o --- expenses, including commissions.
Eighteen months later, Home State experiences the rainiest winter in its history. Sammie
and Tyrese receive reports --- rom retailers that much o --- the merchandise shipped to them
is water damaged. They visit Ursula’s warehouse and --- ind the roo --- leaking badly. Ursula’s
shipping clerk’s duties have been delegated to an a --- ter-school part-time high school student
who has given --- ree shoes to all o --- his --- riends, and who never inspected the inner portions o ---
the warehouse where the bulk o --- the inventory has been stored and the leaks occurred. An
estimated $150,000 o --- inventory is worthless. Sammie and Tyrese are --- urious with Ursula.
Do Sammie and Tyrese have any legal claims against Ursula? I --- they --- ile a court complaint,
what theory or theories should they pursue in their case?
Answer:
18. Joint Microbrewery.
Liam and Clare each own an Irish pub in the same city. To cash in on the microbrew craze,
Liam and Clare wish to go together to establish a small microbrewery that will supply two or
three locally brewed beers to each pub. The brewery will be located o ---
-site, in the industrial
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part o --- town. The premises will be leased. Liam and Clare jointly sign the lease, hire the
brewmeister, and purchase supplies and equipment. They do not memorialize their business
arrangement.
What is the best way to describe the legal status o --- their business arrangement?
A. A partnership
B. A joint venture
C. A limited liability company
D. Both a partnership and a joint venture
19. The Partnership Lease Renewal.
Developer entered into a 20-year lease with Landlord to develop and operate a commercial
strip mall. Lacking the resources to --- ully --- und the project, Developer partnered with Inves-
tor. They agreed that Investor would provide capital necessary to --- inance the project and,
in return, would receive 60 percent o --- the partnership’s pro --- its. Likewise, Developer would
manage the day-to-day operations and receive 40 percent o --- the partnership’s pro --- its. Devel-
oper and Investor agreed to split the debts equally. The arrangement worked well --- or several
years and was pro --- itable, but then the partnership experienced a --- ew rough --- inancial years
and the relationship between Developer and Investor soured. As the lease neared the end o ---
its term, Developer and Investor were barely on speaking terms. Unaware o --- the relationship
between Developer and Investor, Landlord approached Developer to inquire i --- they would
be interested in entering into a new lease o --- the space --- or an additional 20-year term a --- ter
the current lease expired. Developer never told Investor about the new lease opportunity.
Having built up enough capital so that Investor was no longer needed, however, Developer
accepted Landlord’s o ---
er and signed a new lease. A — ter the new lease period began, Investor discovered the arrangement and was — urious.
Has Developer breached any --- iduciary duty owed to Investor?
A. Yes. Developer owed Investor the punctilio o --- an honor the most sensitive, which Devel-
oper breached by entering into a new lease without Investor.
B. Yes. Developer owed Investor a duty o --- loyalty, which Developer breached by entering
into a new lease without Investor.
C. No. Developer only owed a --- iduciary duty to the partnership, not to Investor individually.
D. No. Developer owed a --- iduciary duty to both the partnership and to Investor, but Devel-
oper’s actions did not violate that duty, and there is no indication that Developer --- ailed
to exercise any obligations to the partnership or to Investor in good --- aith.
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20. Partnership Auto Purchase.
The Moss --- amily owns your client, British Auto Imports, Inc. Sterling Moss, the --- leet sales
manager, reached out to you, his attorney and counselor, about an order --- rom the managing
partner o --- Wyco ---
and Van Duzer, LLP, a law — irm with 30 partners. The managing partner has placed an order — or 40 luxury automobiles. The purchase is to be — inanced through British Auto Import’s in-house — inance department. Moss wants to know what, i — any, partnership paperwork he needs be — ore he accepts and places the order with the — actories — or the new cars.
What is the sa --- est practical advice an attorney should give Moss?
A. The managing partner, or any partner, has the inherent authority to do such a deal. Go
ahead and place the order.
B. Ask around to determine i --- the managing partner has done transactions like this in the
past. I --- he has, there exists implied actual authority. Go ahead and place the order.
C. The managing partner, by being given the title, an o ---
ice, letterhead stationery, and so on, has the apparent authority to do the deal. Go ahead and place the order. D. Do not place the order. Require that the law — irm produce a certi — ied copy o — a valid resolution adopted by its partners at a partnership meeting.
21. A Ponzi Scheme.
Turner and Kelley are law partners. Turner’s practice is primarily divorce while Kelley does gen-
eral civil litigation. Without Kelley’s knowledge, Turner has been promising divorce clients high
rates o --- return i --- they leave the proceeds o --- divorce settlements with Turner. Your client, Norma,
le --- t $400,000 with Turner, who paid her high interest --- or --- ive years. Turner has now --- iled per-
sonal bankruptcy and is judgment proo --- . He stopped paying interest last year. The entire a ---
air turns out to have been a “Ponzi scheme.” You represent Norma in a suit against Kelley and the law — irm, and you seek to show that the partnership is liable. The de — ense proposes to put on the stand the state bar association president and partners — rom two other local law — irms who all will testi — y that investing client — unds is not “carrying on in the usual way the business” o — a law partnership, such that the partnership did not authorize the action and is not liable.
Is there a good argument --- or excluding the testimony?
A. Yes. The proper test is the reasonable expectations o --- third parties and the public
regarding what law --- irms do.
B. No. Norma was contributorily negligent in leaving the settlement proceeds with Turner.
C. No. The testimony is relevant as expert testimony about the scope o --- the ordinary prac-
tice o --- law.
D. It is a toss-up. The judge could rule either way without abusing her discretion.
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22. Can’t Stop Shopping.
Joseph and Larry have practiced law together since law school graduation two years ago.
Joseph discovers that Larry is an obsessive online shopper: Larry orders computers, printers,
servers, and other computer accessories on a weekly basis. The law o ---
ice is — illed with Ama- zon boxes. Larry’s excesses vastly in — late the — irm’s accounts payable. Joseph has asked Larry to stop, to no avail. Joseph has also sent a registered letter to Amazon to cease shipments, but Amazon keeps shipping products anyway.
What is the most appropriate next step --- or Joseph to take i --- he does not want to be liable --- or
these Amazon purchases?
A. Noti --- y Amazon that, as partner, Larry has no authority to bind the partnership in these
matters.
B. Invoke a partner’s veto powers under the emergency doctrine and declare that Larry no
longer has power to bind the partnership, noti --- ying creditors.
C. Associate a new partner and then vote 2-1 to restrict Larry’s authority.
D. Dissolve the partnership by Joseph’s express will.
23. A Grouchy Partner.
Oscar and Elmo have a garbage collection business that they operate as a general partner-
ship. For the busy summer season, Elmo wanted to hire a third person. Oscar said no.
Elmo hired a helper anyway, to whom he paid $20,000 out o --- business --- unds. Oscar --- iled
suit against Elmo --- or reimbursement o --- the --- unds, arguing that Elmo had exceeded his
authority.
What is the most likely result o --- a lawsuit?
Answer:
24. Ken the Contractor.
Ken is a --- oreman --- or a local general contractor that does o ---
ice renovations. Ken would like to strike out on his own but needs a certain amount o — capital to purchase tools and a truck, and — or working capital. He approaches Banksie, an old — riend o — his. Banksie agrees to con- tribute $100,000 to the enterprise. Ken will solicit clients, bid the renovation jobs, and do the work. Ken and Banksie agree that they will split the pro — its 50/50, but they do not discuss allocations o — losses. They shake hands on the deal. One year later, a national pandemic causes many o —
ices to close, and — ar — ewer o —
ices want remodeling. Ken “burns through” the $100,000 investment. He and Banksie agree that the venture is to end. Ken will go back
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to working --- or the large contractor. Banksie asks Ken to pay her $50,000 so that they will
“come out even.” Ken re --- uses.
I --- Banksie sues Ken --- or $50,000, what is the most likely result?
A. Ken must pay the $50,000 to Banksie because, unless otherwise agreed, partners share
the losses in the same proportions as they share the pro --- its.
B. Ken owes nothing to Banksie. While Banksie contributed capital, Ken contributed his
labor. As a matter o ---
airness, Ken should not have to make an additional contribution to cover the partnership’s losses. C. Banksie owes Ken $50,000 because the value o — Ken’s labor, at his usual rates, to the partnership has a reasonable value — ar in excess o — Banksie’s $50,000, to wit, $100,000. D. Banksie owes Ken $50,000 because Ken’s labor cannot be valued higher than Banksie’s contribution.
25. Norse Demolition.
Oden, Theo, and Luke collectively own and operate Norse Demolition and Earthmoving.
Their business owns a great quantity o --- heavy equipment (e.g., bulldozers). A --- ter years o ---
success --- ully leading the business, Oden now wishes to cash out his share o --- the partnership
and retire. Oden has in --- ormed Theo and Luke about his decision and given notice that his
retirement would take e ---
ect immediately, but also that he has no problem with the busi- ness’s continuing i — they want it to. Oden just wants cash. Theo and Luke desire to continue the business. The partnership agreement says nothing about retirement or the e —
ect o — dis- sociation o — a partner on the partnership.
What is the current legal status o --- this partnership and the liabilities o --- the parties to each
other?
A. Oden has dissociated as a partner, and as a result, the partnership is dissolved. The
partners must now wind up a ---
airs. A — ter winding up, each partner shall get a third o —
residual pro --- its, i --- any.
B. Oden has disassociated himsel --- as a partner, and as a result, the partnership is dis-
solved; however, all three o --- the partners may waive the dissolution o --- the partnership
and cause Oden’s shares to be bought out.
C. Oden’s disassociation is wrong --- ul because it is unilateral, so he is not entitled to any-
thing. Moreover, Theo and Luke can sue Oden --- or any damages to the partnership
caused by his disassociation.
D. The partners must comply with the de --- ault rules o --- RUPA and have no authority to vary
the de --- ault rules now.
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26. Two Taverns.
Pat and Mike have a partnership that owns two Irish taverns, one on the North Side, where
Pat lives, and one on the South Side, where Mike lives. The taverns are pretty much identi-
cal in decor, revenues, expenses, and so on. There are a --- ew other assets (a pickup truck,
extra chairs and tables, etc.). Pat and Mike have decided, quite amicably, to go their sepa-
rate ways. Mike no longer wants to be in the tavern business. On the other hand, Pat wants
to continue running the business. Additionally, Pat does not have the cash on hand to buy
Mike out. Mike is sympathetic to the situation and Pat’s desire to continue, but he needs
cash --- or retirement. Thus, he cannot agree to any outcome that does not put cash in his
pocket. They have asked you as mediator to apply the partnership rules e ---
ectuating a split- up between them.
How should you resolve this situation?
A. Pat gets the Northside Tavern and Mike gets the Southside Tavern. The other assets will
be split equitably between them.
B. Both taverns and the miscellaneous assets are to be sold with the cash proceeds split
50/50.
C. Each partner gets an election to take a tavern or cash.
D. Pat gets the Northside Tavern and Mike gets the Southside Tavern, but the other assets
will be sold at auction and the proceeds will be divided equally between them.
27. Breaking Up.
Keith and Belinda are partners who have run a talent agency together --- or --- ive years. They
have paid o ---
all the debts they incurred when they — ormed the business, except — or a $50,000 note payable to Belinda. Belinda has developed an impressive client list, but Keith has only a — ew clients, mostly B-class character actors. Keith manages the o —
ice and their in — orma- tion technology systems. He also per — orms numerous tasks — or Belinda’s clients. Keith and Belinda have started bickering. Keith — requently complains about Belinda’s extravagant lunches and her multiple country club memberships. Sick o — the complaints, Belinda moved her personal items out and set up shop in a new o —
ice she rented in another part o — town. She began to make money hand over — ist, but Keith — loundered.
Does Keith have a claim against Belinda?
A. No, not without a partnership agreement. The withdrawal o --- a partner dissolves the
partnership. Such a dissolution is wrong --- ul only i --- it contravenes some provision o --- the
partnership agreement.
B. Yes. The partnership had an implied term, which was to pay o ---
the debts incurred in its
ormation. Belinda’s dissolution o — the partnership prior to that time is wrong — ul.
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C. Yes. A partner at will is not bound to remain in the partnership, but Belinda must
exercise her right to withdraw in good --- aith and consistent with the --- iduciary duties
partners owe one to another.
D. No, Belinda did not take anything that belonged to Keith.
28. Partnership Departure Planning.
You are at your 10-year law school reunion picnic. It is August. Megan, a --- ormer classmate,
takes you aside. Megan is a very success --- ul personal injury practitioner in the mid-size law
irm o — Rose & Rose. In con — idence, she tells you that she is going to — orm her own — irm on January 1. She plans on taking two junior partners and one associate attorney with her.
What should Megan do between August and her date o --- departure?
Answer:
29. Partnership Expulsion.
Pat publicly supported a contentious candidate --- or U.S. President — --- requently, in high pro-
ile ways. Many o — the partners in Pat’s law — irm were in — uriated by her support o — what they deemed to be a loathsome candidate, and they became concerned that Pat’s public support would negatively impact the business. In a regularly scheduled partners’ meeting, a majority o — the partners voted to expel Pat — rom the partnership. Pat is bewildered and upset.
Can Pat win a suit --- or wrong --- ul expulsion?
A. No. But her expulsion is an event o --- dissociation that does not cause the partnership to
be dissolved, so she is entitled to her share o --- partnership assets in its winding up.
B. No. But her expulsion is an event o --- dissociation that causes the partnership to be dis-
solved, its business wound up, and terminated.
C. No. Partnerships are consensual arrangements, and an expulsion o --- a partner is per-
mitted so long as the partners acted consistently with the obligation o --- good --- aith and
air dealing. D. Yes. Any such clause would be void as against public policy i — exercised in such a way as to deny a partner her — undamental First Amendment rights.
30. Partnership Finances, Part I.
Paul and Olivia operate a beach equipment rental business as a general partnership. Each
partner contributed $5,000 to purchase equipment and supplies, and they agreed to share
the pro --- its and losses evenly. They spend their days renting umbrellas, chairs, and canopies
to beachgoers. A --- ter a month in business, Paul and Olivia have made $5,000 in pro --- it.
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What interest do each o --- the partners have in the $5,000 pro --- its?
A. Each partner is entitled to immediately receive a check --- rom the partnership --- or $2,500,
but this payment will have no e ---
ect on the partners’ — inancial interest in the partnership. B. Each partner is entitled to immediately receive a check — rom the partnership — or $2,500, but this payment will reduce the partners’ capital accounts by $2,500. C. The pro — its belong to the partnership, not to the partners individually. D. Each partner has a capital account which should be updated to re — lect their share o — the pro — its, but the partners are not entitled to any immediate payment.
31. Partnership Finances, Part II.
Paul and Olivia operate a beach equipment rental business as a general partnership. The
partnership has been doing well, and the partners have decided to build a beach shack to
house their equipment. The partners have the liquid --- unds to pay --- or much o --- the construc-
tion, but they did not anticipate the steep licensing costs to build on the beach. Accordingly,
the partnership took out a loan --- or $30,000. Therea --- ter, a number o --- particularly strong hur-
ricanes came through, and then a migration o --- jelly --- ish deterred the usual crowds --- rom
coming to the beach. A --- ter several months o --- impacted business, the partners were out o ---
money and realized they could no longer operate the business. They had to shut down, but
even a --- ter they liquidated all partnership property, they still owed $20,000 on the loan.
What are the partners’ obligations as to the repayment o --- the loan?
A. None. This is the partnership’s obligation, not the obligation o --- the partners.
B. Each partner is only liable to pay hal --- the debt, $10,000.
C. As between the partners, each partner is liable to pay hal --- the debt, but each partner is
jointly and severally liable to the lender --- or the --- ull amount o --- the debt.
D. Each partner is jointly and severally liable --- or the --- ull debt.
32. Partnership Finances, Part III.
Paul and Olivia operate a beach equipment rental business as a general partnership, and
they have agreed to share the pro --- its and losses evenly. At the end o --- the year, the partner-
ship had earned an impressive $10,000 in pro --- it.
How should the $10,000 pro --- it be handled --- or purposes o ---
ederal income tax liability? A. The partnership is responsible — or the — ederal income tax liability. B. Each partner is individually responsible — or hal — o — the — ederal income tax liability, and each partner’s capital account should be credited with hal — o — the pro — it.
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C. No partner is responsible --- or any o --- the --- ederal income tax liability unless they have
received a distribution, and then, the partner bears the --- ederal income tax liability --- or
the distribution they have received.
D. Each partner is individually responsible --- or hal --- o --- the --- ederal income tax liability, but
this does not impact the partner’s --- inancial interest in the partnership.
33. Landscaping Liability.
Foster and McGee operate a landscaping business as a general partnership. One day, while
in the ordinary course o --- the partnership’s business, Foster negligently caused injury to a
bystander at a landscaping job. The bystander incurred serious injury and desires to sue --- or
damages.
Against whom may the bystander --- ile suit?
A. Foster only
B. The partnership only
C. The partnership and Foster, but not McGee
D. The partnership, Foster, and McGee
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or — lip2.indb 22 2/12/24 1:45 PM Topic 3 Questions
LLCs and Other Unincorporated
Associations
Assume that each o --- the --- ollowing questions involves --- acts arising in a jurisdiction that has imple-
mented the Revised Uni --- orm Partnership Act (RUPA), the Revised Uni --- orm Limited Partner-
ship Act (RULPA), and the Revised Uni --- orm Limited Liability Company Act (RULLCA), and that
has interpreted the law o --- agency consistently with the interpretations stated in the Restatement
(Third) o --- Agency.
34. Investment Actors.
Three --- ormer child actors, Knight, Plumb, and Lookinland, recently reconnected at a
reunion. They are all now --- airly wealthy and have high-paying jobs. At the reunion, they
discussed pooling some cash to invest in real estate. Knight suggested that he could lead
them in a real estate investment venture. Plumb expressed concerns that she could not par-
ticipate in management since she lives abroad in South Korea. Knight and Lookinland live
in the United States. Lookinland does not want to handle most o --- the day-to-day a ---
airs, but he does want to be involved with the interior design. Knight located a 60-unit townhouse apartment complex. The complex needs some repairs and cosmetic improvement, but it is available at a very reasonable price o — six times the gross rentals. The actors decided to make a near — ull-price o —
er on the property. They seek your advice on the — orm o — business they should set up be — ore making their bid or, in the alternative, once their bid is accepted.
What kind o --- business association should the actors --- orm?
A. They should --- orm a general partnership (either at will or --- or a term o --- years). That way
they can all participate in the management o --- the complex, choosing the color o --- paint
or the units, and so on. B. They should — orm a corporation. The tenants will be raucous undergraduates who will,
rom time to time, injure themselves. You have to have liability insurance, but the lim- ited liability a corporation would a —
ord would give added protection and peace o — mind to the investors. C. They should — orm a limited partnership. Knight will be the general partner, and the other two actors will be the limited partners. D. They should — orm a limited liability company.
23
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35. Partnership Participation.
A group o --- six unrelated people — Aaron, Burt, Cathy, Doug, Ellie, and Felice — want to
invest in real estate. They decide to purchase, renovate, and operate a senior living --- acility.
Aaron plans to supervise day-to-day operations, but he does not want to be personally liable
or harms occurring on the property. Burt and Cathy, who are interior designers by pro — es- sion, want to review all decisions regarding interior decorations (curtain styles, paint colors, cabinets designs, countertops materials, etc.) and to have a veto right regarding any decision they do not pre — er. Doug and Ellie wish to be passive investors. Felice, who is an accountant, wants to require that her signature be on all checks, in addition to Aaron’s.
Is a limited partnership the best organization --- or this business?
A. Yes, because the limited partnership will limit all the partners’ liability.
B. No, because Burt and Cathy will be personally liable --- or poor interior design choices.
C. No, because Felice will be personally liable --- or any --- inancial problems.
D. No, because a limited liability company provides more guarantees o --- limited liability
where members are engaged in business decisions.
36. General Partnerships vs. Limited Liability Companies.
List three key distinctions between general partnerships and limited liability companies.
Answer:
37. “Antique Store, LLC.”
Brother and Sister desired to open a business to buy and sell antique goods. Because
they were concerned about their personal exposure to the business’s liability, the siblings
decided that it would be best to operate the business as a limited liability company. The
siblings, however, wanted to keep startup costs low and decided not to consult with an
attorney about structuring the business. Brother and Sister each contributed $20,000 to the
business, and they deposited the --- unds into a bank account under Sister’s name. Without
taking any --- urther action or --- iling any documentation with the government o ---
ice in the jurisdiction responsible — or business — ilings, Brother and Sister began operating “Antique Store, LLC.” Several months into the venture, as a result o — an employee’s negligence, Cus- tomer — ell in the store and sustained serious injuries. Customer — iled suit against “Antique Store, LLC” and against Brother and Sister. Brother and Sister — iled motions to dismiss the lawsuit as to themselves.
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How should the court rule on the motions to dismiss?
A. The court should grant the motions to dismiss. By operating the business as a limited
liability company, Brother and Sister shielded themselves --- rom any personal liability
incurred as in connection with business operations.
B. The court should grant the motions to dismiss. The injury was the result o --- an employ-
ee’s negligence, not any wrong --- ul act or omission by Brother or Sister.
C. The court should deny the motions to dismiss. Brother and Sister --- ailed to properly
orm the limited liability company, and so they are not entitled to the protection o — a liability shield. D. The Court should deny the motions to dismiss. Members o — a limited liability company are jointly and severally liable — or all the company’s obligations in contract, tort, and otherwise.
38. Cashing Out.
Your --- riend Evelyn is a law librarian who, over the years, has been a persistent real estate
investor. She does not own real estate directly. Rather, she has purchased units o --- participa-
tion in limited partnerships that, in turn, purchased a number o --- commercial and multi-
amily real estate developments. Evelyn has decided to take early retirement. She intends to move to the Rockies and become a pro — essional snowboarder as soon as possible. She wishes to cash out her units o — participation to raise cash to purchase a Hummer and a condominium.
Evelyn seeks your legal advice on how to quickly cash out her stake in various limited part-
nerships. What do you tell her?
Answer:
39. Myron’s Estate.
Myron has had a vineyard and winery --- or 20 years. He has built up the business --- rom near
nothing to a probable market value o --- $7 to $10 million (an exact valuation is di ---
icult to pin down). He produces Pinot Noir wines that have won many gold and silver medals and are served in — ine restaurants up and down the West Coast. Myron has — our children, all grown. None is too — ar away, but none works in the winery, at present. At age 59, Myron has begun to think about his mortality. The value o — his winery is spiraling upward, he is thinking o —
expansion which will increase the value even more, and he wishes the winery to be pre-
served intact because one or two o --- his sons or daughters very well might take it over upon
Myron’s death or retirement. He worries about --- ederal estate taxes, the payment o --- which
might --- orce the sale o --- the winery.
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In what --- orm o --- entity should he put the winery?
A. General partnership
B. Limited partnership
C. Corporation
D. Limited liability company
40. Limited Liability.
North, South, and West are the only members and only employees o --- Builders, LLC. Build-
ers, LLC, is a manager-managed LLC, and North is the only manager. One day, South was
working at one o --- the LLC’s job sites on a construction project --- or which the LLC had been
hired when she negligently caused damage to an adjacent home. Neither North nor West
were present at the time. Assume that no member has received an improper distribution.
Against whom may the homeowner commence suit --- or damages caused by South’s
negligence?
A. The LLC, but not North, South, or West
B. The LLC and South, but not North or West
C. The LLC, South, and North, but not West
D. The homeowner may not sue anyone.
41. Members and Managers.
Baseball, LLC, is a --- amily-owned custom athletic apparel company, and it hosts a youth
sports competition every year. Although there are seven members o --- the LLC, only two are
actively involved in managing the day-to-day activities o --- the business. Because o --- the pas-
sivity o --- most o --- the members, the two active members want to structure the LLC so that
they, and only they, are the only people who may deal with third parties on behal --- o --- the
company and sign contracts on the LLC’s behal --- .
Is such a structure possible?
A. Yes, and it is the de --- ault statutory system.
B. Yes, but the LLC’s certi --- icate o --- organization must state that the LLC is to be
manager-managed.
C. Yes, but the LLC’s operating agreement must state that the LLC is to be manager-managed.
D. No, because all members o --- an LLC are agents o --- the LLC and there --- ore have apparent
authority to bind the LLC in contract.
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42. A Canceled Concert.
Fernado, LLC, is a manager-managed limited liability company that sells merchandise --- or
sporting and entertainment events. Walter has been appointed as the only manager. In
anticipation o --- an upcoming concert, Walter ordered and paid --- or 10,000 custom t-shirts --- or
the LLC to sell that listed both the date and city o --- the concert venue. This order was consis-
tent with orders Walter usually places --- or similarly-sized events. Un --- ortunately, and unex-
pectedly, one o --- the lead members o --- the band had become ill, and the concert was canceled.
Walter was unable to sell any o --- the shirts or receive re --- unds --- rom the vendors who printed
the shirts. In total, the LLC su ---
ered a loss o — $50,000. The LLC operating agreement does not vary the de — ault rules relating to a manager’s — iduciary duty.
Is Walter liable --- or breach o ---
iduciary duty to the LLC and the members o — the LLC by ordering the 10,000 custom t-shirts? A. No. Walter does not owe any — iduciary duty to the LLC or to the members o — the LLC. B. No. Although Walter owes — iduciary duties o — care and loyalty to the LLC, he has not breached either. C. Yes. Walter breached his duty o — care to the LLC and the members o — the LLC. D. Yes, Walter breached his duty o — loyalty to the LLC and the members o — the LLC.
43. Competition at the Gym.
Pump You Up, LLC, is a member-managed LLC that owns and operates a line o ---
itness studios. One o — the members o — the LLC, Kylar, also owns a — itness apparel business. With- out — irst discussing it with the other members, Kylar set up a booth in the lobby o — one o —
the studios to sell various pieces o --- apparel that Kylar had produced through work with the
other business. The apparel --- eatured the “Pump You Up” logo and colors. This proved quite
lucrative, and Kylar quickly made $5,000 o --- pro --- it through the sales. Kylar kept the money
and did not share it with the LLC or the other members o --- the LLC. The LLC operating
agreement does not vary the de --- ault rules relating to a member’s --- iduciary duty.
Has Kylar breached any --- iduciary duty owed to the LLC and the other members o --- the LLC?
A. No. As a member, Kylar does not owe any --- iduciary duty to the LLC or the other mem-
bers o --- the LLC.
B. No. As a member, Kylar owed the --- iduciary duties o --- loyalty and care to the LLC and
the other members o --- the LLC, but he has not violated either o --- those duties through
the conduct here.
C. Yes. Kylar has breached the duty o --- care owed to the LLC and the other members o ---
the LLC.
D. Yes. Kylar has breached the duty o --- loyalty owed to the LLC and the other members o ---
the LLC.
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44. Exit via Trans --- er.
A group o ---
ive — riends organized Cloister, LLC. Each o — the — riends became a member o —
the LLC with rights equal to one another. The LLC operated success --- ully --- or several years.
Recently, Beta has become --- rustrated with decisions made by the other members. While the
LLC has not made any illegal decision, Beta --- eels that the LLC is moving in a new direction
and that now would be a good time to get out. Beta has been discussing the prospect o --- sell-
ing their membership interest to Foxtrot, someone who has been unassociated with the LLC
but is interested in the business venture and is willing to buy Beta out. Beta has not shared
their intent to trans --- er their interest to Foxtrot with any o --- the other members o --- the LLC.
The LLC operating agreement does not vary the de --- ault rules relating to trans --- er o --- member-
ship interest.
May Beta trans --- er their interest in Cloister, LLC, to Foxtrot?
A. Beta may trans --- er only their --- inancial interest in the LLC to Foxtrot, but this will not
result in Foxtrot’s becoming a member o --- the LLC.
B. Beta may trans --- er their --- inancial interest in the LLC to Foxtrot, and as a result, Foxtrot
will become a member o --- the LLC.
C. Beta may not trans --- er any interest in the LLC to Foxtrot.
D. Beta’s trans --- er o --- an interest will result in the dissolution and winding up o --- the LLC.
45. Stuck in the LLC.
PalmQuest, LLC, has eight members and has operated pro --- itably --- or the past --- ive years.
Recently, one member, Delano, has been experiencing --- inancial success in other ventures.
In --- act, Delano has been doing so well that continued association with PalmQuest has
become burdensome. Delano wishes to withdraw --- rom the LLC and has consulted with
an attorney about an “exit strategy.” The attorney has reviewed the PalmQuest operating
agreement and came across the --- ollowing clause: “No member has an absolute right to
withdraw by express will --- rom the company prior to dissolution and completion o --- wind-
ing up o --- the company.”
Is the clause in the operating agreement en --- orceable?
A. No. A member has an absolute right to withdraw --- rom an LLC at any time by express
will, and an operating agreement may not limit such dissociation.
B. No. A prohibition o --- withdrawal by express will is mani --- estly unreasonable.
C. Yes, and this is consistent with the de --- ault rules under RULLCA.
D. Yes. This is a permissible and en --- orceable variance --- rom the de --- ault rules.
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46. Jumping Ship.
Milo is a member o --- Turmoil, LLC, which has recently --- allen on hard times. Frustrated
with the decisions the other members have made — and concerned that the other members
have engaged in some shady --- inancial transactions — Milo wants out. Milo delivered proper
notice o --- his withdrawal to the other members. The LLC’s operating agreement permits a
member to withdraw, and Milo has satis --- ied the procedural requirements. Three months
a --- ter Milo’s withdrawal, the remaining members approved an interim distribution --- or $5,000
to each member under the procedure established in the operating agreement. The operating
agreement expressly permits interim distributions upon a majority vote o --- the members, but
it otherwise is consistent with all de --- ault rules. Assume that the distribution does not render
the LLC insolvent and that the LLC is still able to pay its debts as they come due in the ordi-
nary course o --- the LLC’s business.
Is Milo entitled to receive a distribution?
A. Yes, Milo is entitled to a distribution in equal shares with the other members and dis-
sociated members.
B. No, Milo is not entitled to any distribution approved a --- ter his dissociation.
C. No. Interim distributions are not permitted.
D. Yes, but only a --- ter the LLC is dissolved and wound up.
47. Law Firm Form.
The law --- irm o --- Greene, Egge, and Hamme has been operating as a general partnership --- or
10 years. Now the --- ounding partners wish to promote some o --- their long-term associates to
partners, but they are concerned about liability. The --- ounders approach you and ask you to
reorganize the --- irm.
What is the best choice o --- business entity --- or this law --- irm?
A. Corporation
B. Limited liability company
C. Partnership
D. Limited liability partnership
48. Cabbage Analytics.
Bok, Danish, and Green decide to start a business that provides analytics to cabbage --- arm-
ers throughout the United States. Bok is a Chinese citizen and resident o --- Guizhou Province
in southwest China. Danish lives in Copenhagen and is a citizen o --- Denmark. Green is a
U.S. citizen who resides --- ull time in Missouri. Together, they have enough money to start
and run the business, and they do not plan to invite anyone else to invest in their business.
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They want to distribute business pro --- its to themselves monthly, since they will not otherwise
earn any salary. They come to your o ---
ice seeking counsel on what type o — entity they should
orm.
What type o --- business association should Bak, Danish, and Green --- orm?
A. Corporation
B. Limited liability company
C. Partnership
D. Limited liability partnership
49. Fishmongers I.
Bluegill, Cat --- ish, and Drum own and operate a small business called Fishmongers, LLC, that
sells raw --- ish. Fishmongers, LLC, is a member-managed limited liability company. To keep
ish — resh, Fishmongers, LLC, must keep its — ish in re — rigerators. One day when Drum is alone in the shop, the main re — rigerator stops — unctioning. To prevent $10,000 worth o —
resh
ish — rom spoiling, Drum goes to a local department store and purchases a large re — rigerator
or $1,000, using his personal credit card. When his credit card statement comes due, Drum demands that Fishmongers, LLC, reimburse him — or the cost o — the re — rigerator. Bluegill and Cat — ish re — use on the ground that Fishmongers, LLC, did not make pro — its this month.
Is Drum entitled to reimbursement --- rom Fishmongers, LLC, --- or what he spent on the
re --- rigerator?
A. Yes, because Fishmongers, LLC, must indemni --- y its members --- or liability incurred in
the ordinary course o --- business.
B. Yes, because Fishmongers, LLC, is obligated to reimburse members --- or any payments
made in the course o --- the member’s activities --- or the company.
C. No. Because Fishmongers, LLC, did not earn pro --- its this month, its owners are entitled
only to --- low-through losses.
D. No, because a majority o --- the members o --- a member-managed limited liability com-
pany must elect to make distribution, and only one-third o --- Fishmonger, LLC’s mem-
bers voted --- or a distribution here.
50. Fishmongers II.
Bluegill is a member and one-third owner o --- a small business called Fishmongers, LLC, a
member-managed limited liability company that resells --- ish. At a meeting o --- the members,
the members decide that Fishmongers, LLC, should begin selling sushi-grade tuna. Bluegill
o ---
ers to loan the company $100,000 to purchase three metric tons o — whole blue — in tuna — rom the international market. The other members agree. The company promptly sells the — ish at a
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substantial pro --- it. Three months later, Bluegill demands repayment o --- his loan, plus --- ive per-
cent interest per annum. During this same period, the rate o --- in --- lation was six percent.
Does Fishmongers, LLC, owe interest to Bluegill?
A. Yes, because loans by members which give rise to limited liability company obligations
accrue interest.
B. Yes, because limited liability companies owe imputed interest to their members.
C. No, because Bluegill made a contribution to his capital account, not a loan.
D. No, because members cannot demand interest on loans made to companies they own.
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or — lip2.indb 31 2/12/24 1:45 PM 3172Branson_Q&A_3e — or — lip2.indb 32 2/12/24 1:45 PM Topic 4 Questions
Corporate Incorporation
Assume that each o --- the --- ollowing questions involves --- acts arising in a jurisdiction that has adopted
the Model Business Corporation Act (MBCA) and that has interpreted the law o --- agency consis-
tently with the interpretations stated in the Restatement (Third) o --- Agency. To the extent you need
to consider case law or litigation risk, apply Delaware law. The U.S. Securities and Exchange Com-
mission is re --- erenced as the “SEC.”
51. Exotic Food.
Roy Bean and his sister Gail, both well-to-do dentists, own a store they operate as Bean’s
Exotic Food Supplies. Gail has also become the host o --- a popular cooking show on local tele-
vision. Bean’s --- ood store, a --- ter three years o --- losses, has become pro --- itable, at least in the busy
months o --- the year. In the coming year, they plan to lease premises and open three new stores
in the southeastern part o --- the country. The leases will have seven- to eight-year terms. The
business plan, which they prepared --- or the bank, shows the new stores breaking even in the
ourth year. As they embark upon this expansion, they consult you, their attorney, — or advice.
Which o --- the --- ollowing provides the best advice --- or Roy and Gail?
A. Do nothing. They can save money on legal --- ees and --- iling costs by continuing to operate
as a general partnership.
B. Form a corporation and elect subchapter S status under the Internal Revenue Code.
C. Hire counsel in Wilmington and --- orm a Delaware corporation.
D. Hire you to dra --- t a detailed partnership agreement.
52. Six Lawyers.
Six lawyers practice as partners in a boutique litigation --- irm. Last year, a client brought a
malpractice claim against one partner, and the settlement amount exceeded the group’s
malpractice policy limits. Each partner had to chip in $40,000. They do not wish to see that
happen again.
What alternatives do they have?
A. Remain a general partnership because the Rules o --- Pro --- essional Conduct require it.
B. Form a corporation and elect subchapter S status under the Internal Revenue Code.
33
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C. Form a pro --- essional service corporation.
D. Form a limited partnership with one lawyer as the general partner and the rest as lim-
ited partners.
53. Buddy’s State o --- Formation.
Buddy wishes to incorporate his luxury used car business and, as his lawyer, you concur.
Buddy, his business, and you are all located in the State o --- Peace (a --- ictional U.S. jurisdiction
that has adopted the MBCA).
Buddy should --- orm his corporation by --- iling articles o --- incorporation with the Secretary o ---
State (or similar o ---
icial) in A. Peace. B. Nevada. C. Delaware. D. An o —
shore location (Cayman Islands, Bermuda, the Bahamas, or the Netherlands Antilles).
54. Incorporation Process, Part I.
You are a partner in a law --- irm. A junior associate you mentored several times comes to you
and says, “Another partner has asked me to incorporate a client’s new business. I never took
business associations in law school. What should I do --- irst?” In your --- irm, the --- irst step o ---
corporate --- ormation is to create the corporate legal entity and veri --- y it exists.
Explain the document you need to dra --- t, and what should be done with this document, to
cause a corporation to legally come into existence.
Answer:
55. Incorporation Process, Part II.
You are a partner in a law --- irm who recently mentored a junior associate on what is the --- irst
step in legally --- orming a corporation. The junior associate completed the task and returned
with a --- ile-stamped copy o --- the relevant document and a “certi --- icate o --- good standing”
signed by the secretary o --- state. The junior associate asks, “What do I do next?”
Explain what are the next steps in incorporation a --- ter the corporation is --- ormed. What doc-
uments should you dra --- t, what events should you hold, and what is their purpose?
Answer:
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56. A Narrow Purpose.
Musicians Flaunce and Posh have --- ormed a corporation to produce their music. Posh is con-
cerned that Flaunce, i --- given the chance, will use corporate resources to open a nightclub as
a venue --- or her per --- ormances. In their preliminary meeting with their attorney, Posh voices
her concerns, and Flaunce agrees to any reasonable measure that would rein in or check her
expansionary desires.
What is the simplest way --- or the attorney to implement Flaunce’s and Posh’s meeting o --- the
minds?
A. Dra --- t a hold harmless agreement making Flaunce responsible --- or any losses occasioned
by unauthorized expansion o --- the corporation’s business.
B. Do the same in an employment agreement that outlines Flaunce’s responsibilities.
C. Dra --- t a narrow purpose article in the articles o --- incorporation.
D. Have Flaunce post a bond, with a commercial surety thereon.
57. ET McDonalds.
Ernst Thompson came upon some commercial property --- or rent and decided that the loca-
tion would be an ideal spot --- or a new McDonalds restaurant. Ernst negotiated --- ace to --- ace
with the landlord while wearing a McDonalds polo shirt. When the landlord o ---
ered Ernst a lease, he accepted by signing, “ET McDonalds, Inc.” Ernst then applied to McDonalds — or a — ranchise. When McDonalds denied Ernst’s application, Ernst decided not to — ile incorpo- ration documents and so never — ormed ET McDonalds, Inc. Ernst then called the landlord and repudiated the commercial lease.
Is Ernst liable --- or the lease?
A. No, because a non-existent corporation may not act.
B. No, because Ernst is protected by corporate limited liability.
C. Yes, because Ernst committed --- raud.
D. Yes, because Ernst is subject to promoter liability.
58. Avoiding Promoter Liability.
A promoter inadvertently enters into a contract with a seller on behal --- o --- a to-be- --- ormed
corporation.
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How can the promoter avoid liability --- or that contract?
A. No action is required. The promoter is protected by corporate limited liability.
B. Hold a board o --- directors meeting where the corporation agrees to indemni --- y and hold
harmless the promoter.
C. Agree between the promoter, the seller, and the corporation to a novation a --- ter the cor-
poration comes into existence.
D. Agree with the seller that the promoter is protected by limited liability.
59. Failed Start.
A commercial airline pilot quits his job working --- or a large national airline to start his own
charter air service. The pilot hires a lawyer to incorporate a corporation on his behal --- . The
lawyer tells the pilot that the corporation is created and sends the pilot a bill --- or related legal
services, which the pilot pays. Acting --- or the corporation, the pilot then contacts Learjet and
orders a Learjet 70 --- or $3 million on credit, with the initial payment due in 30 days. Four
weeks later, the lawyer calls the pilot and says that the corporation was not actually --- ormed
because a business with the same name already exists in that state. The pilot --- ailed to make
the --- irst payment to Learjet, and Learjet sues the pilot personally.
What is the pilot’s best de --- ense?
A. The corporation has de jure corporate status.
B. The pilot is shielded by de --- acto corporate existence.
C. The pilot is shielded by promoter liability.
D. The pilot lacked knowledge that the corporation had not been --- ormed.
60. Corporate Restart.
An entrepreneur --- ormed a corporation properly while residing at a certain address. The
entrepreneur later moved away and --- orgot to update his corporate mailing address with the
secretary o --- state. As a result, the entrepreneur never received mail --- rom the state regarding
requirements --- or annual reports, --- ranchise taxes, and other requirements. A --- ter two years o ---
missed --- ilings, the secretary o --- state dissolved the corporation administratively. The entre-
preneur, unaware o --- this dissolution, continued to act --- or the corporation by entering into
business contracts.
Is the entrepreneur personally liable --- or contracts entered into a --- ter the corporation was dis-
solved? I --- so, is there a way to cut o ---
liability? Answer:
3172Branson_Q&A_3e
or — lip2.indb 36 2/12/24 1:45 PM Topic 5 Questions
Piercing the Corporate Veil
Assume that each o --- the --- ollowing questions involves --- acts arising in a jurisdiction that has adopted
the Revised Uni --- orm Limited Liability Company Act (RULLCA) and Model Business Corporation
Act (MBCA) and that has interpreted the law o --- agency consistently with the interpretations stated
in the Restatement (Third) o --- Agency. To the extent you need to consider case law or litigation risk,
apply Delaware law. The U.S. Securities and Exchange Commission is re --- erenced as the “SEC.”
61. Introduction to Piercing the Corporate Veil.
What does it mean to “pierce the corporate veil”?
Answer:
62. Piercing Factors.
Courts must engage in a --- act-intensive inquiry when considering whether to pierce a corpo-
ration’s liability shield. What --- actors must a court consider?
Answer:
63. Dram Shop Liability.
Melba, as sole shareholder, --- ormed CE, Inc., --- or the purpose o --- acquiring the assets o --- a
neighborhood pub. Melba capitalized CE, Inc., --- or $10,000, in return --- or common stock.
She then used CE, Inc., to enter into an asset purchase agreement to purchase the pub --- or
$50,000, payable as --- ollows: $7,500 cash down payment and a promissory note --- or $42,500 to
the sellers. Later, CE, Inc., borrowed $42,500 --- rom Bank to pay o ---
the purchase o — the pub, but Bank required Melba to personally guarantee the loan. CE, Inc., purchased a $100,000 liability insurance policy. Months into the venture, when Melba was working at the pub, a customer le — t in an inebriated condition and got into a wreck that resulted in serious injury to a pedestrian. The jurisdiction allows anyone injured by an inebriated driver to also bring suit against the owner o — the pub and anyone who actually served the driver alcohol. The pedestrian brought suit against the driver, CE, Inc., and Melba individually.
37
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Is there a basis --- or the court to hold Melba personally liable --- or the pedestrian’s injuries?
A. Yes. The court should disregard the corporate liability shield because CE, Inc., only has
one shareholder and that shareholder is heavily involved in the day-to-day activities o ---
the corporation.
B. Yes. The court should disregard the corporate liability shield because CE, Inc., only
acquired minimal liability insurance and is under-capitalized considering the potential
risk.
C. No, Melba should not be held liable because CE, Inc.’s capital is adequate and there is
no indication that Melba was using CE, Inc., as an alter ego.
D. No. Melba cannot be personally liable --- or any obligation arising --- rom CE, Inc.’s
activities.
64. Parent–Subsidiary.
Kenyon owns a warehouse and a manu --- acturing --- acility, which he has leased --- or 20 years to
AgriPac, Inc. AgriPac enters bankruptcy. Back East, Inc. (BEI), a billion-dollar company,
has an interest in expanding to Kenyon’s area. It --- orms a subsidiary corporation, AgriEast,
Inc., to acquire the assets and assume some o --- the contracts o --- AgriPac out o --- bankruptcy.
BEI puts in its own o ---
icers as directors and o —
icers o — subsidiary AgriEast. Within a year, all o — the managers o — AgriEast have been dismissed, their — unctions assumed by BEI under a “services agreement” under which AgriEast pays its parent corporation $1 million plus 40 percent o — earnings be — ore taxes, interest, depreciation, and amortization. Soon AgriEast’s top customers are being billed by BEI. Correspondence with AgriEast’s top customers and bankers o — ten is on BEI stationery, and signed by BEI managers. A — ter two years, BEI — ires everyone at AgriEast and closes shop. All the top AgriEast customers are now BEI custom- ers. BEI capitalized AgriEast with only $1,000 o — its own money, causing AgriEast to borrow $70 million to operate. Kenyon now has an empty warehouse and manu — acturing — acility, with 15 years le — t on the lease. He has been unable to rent the — acility. He calculates that he is losing over $1.5 million per year. Kenyon has — iled a complaint alleging breach o — contract against insolvent AgriEast.
Kenyon should amend his complaint to
A. allege personal liability o --- BEI’s o ---
icers and directors. B. pierce the corporate veil to reach the assets o — BEI. C. add allegations o — a conspiracy to de — raud, naming BEI’s o —
icers, BEI, and AgriEast as co-conspirators. D. seek the intervention o — the state attorney general because BEI abused the corporate
orm when it — ormed AgriEast as a corporation and capitalized it — or only $1,000.
3172Branson_Q&A_3e
or — lip2.indb 38 2/12/24 1:45 PM Questions · Topic 5: Piercing the Corporate Veil 39
65. Enterprise Liability.
BigGasCo operates a --- leet o --- oil tankers. Captain o --- one o --- the supertankers became intoxi-
cated while on duty and le --- t First Mate in charge o --- the ship while in shallow water. First
Mate, who had less training than Captain, drove the giant ship aground, ripping open its
hull and spilling millions o --- gallons o --- crude oil. The damages to the environment and to the
local --- ishing community totaled $15–20 billion. Evidence at trial established that Captain
and First Mate were both negligent and that BigGasCo was aware o --- Captain’s propensity to
“drink and boat” and to leave the untrained First Mate in charge. Discovery reveals, though,
that this supertanker, and every other tanker in the BigGasCo --- leet, is owned and sta ---
ed by an individual corporation, and this supertanker was owned by Transportation Co. Trans- portation Co. also hired and supervised Captain and First Mate. BigGasCo, however, owns each o — the brother-sister (sibling) corporations, including Transportation Co.
What is the best argument --- or holding BigGasCo liable --- or the damage?
A. BigGasCo should be liable because it commissioned the shipment.
B. Even though BigGasCo and Transportation Co. are technically separate entities, they
operate as one single enterprise.
C. Transportation Co. is an agent o --- BigGasCo, and there --- ore Transportation Co.’s negli-
gence should be attributed to BigGasCo.
D. BigGasCo should be liable because a third party would be unaware that the super-
tanker was owned by Transportation Co.
66. Piercing the LLC Veil.
Although a doctrine in corporate law, piercing the corporate veil can also be applied to
limited liability companies. How would a court’s analysis di ---
er in considering whether to pierce the liability shield o — an LLC as opposed to the liability shield o — a corporation? Answer:
3172Branson_Q&A_3e
or — lip2.indb 39 2/12/24 1:45 PM 3172Branson_Q&A_3e — or — lip2.indb 40 2/12/24 1:45 PM Topic 6 Questions
Corporate Finance
Assume that each o --- the --- ollowing questions involves --- acts arising in a jurisdiction that has adopted
the Model Business Corporation Act (MBCA) and that has interpreted the law o --- agency consis-
tently with the interpretations stated in the Restatement (Third) o --- Agency. To the extent you need
to consider case law or litigation risk, apply Delaware law. The U.S. Securities and Exchange Com-
mission is re --- erenced as the “SEC.”
67. Racing Capitalization.
Beau, Luke, and Jesse are starting a stock car racing company. They --- ormed a corporation
named Duke Racing, Inc., and now have to set up its capital structure. Beau and Luke are
each going to put in $15,000. Jesse will contribute the racecar and the lowboy trailer they
use to haul around the car. The parties are not exactly sure how much the racecar and trailer
are worth. All three parties want to share pro --- its equally, and they each want an equal say
regarding who should be director o --- the corporation.
What is the best capital structure --- or Duke Racing, Inc.?
A. Common stock --- or Beau and Luke and pre --- erred stock --- or Jesse
B. Common stock --- or Beau and Luke and a loan by Jesse
C. All common stock
D. All pre --- erred stock
68. Racing Reissuance.
The articles o --- incorporation o --- Duke Racing, Inc., authorize issuance o --- up to 400 shares. At
the corporation’s organizational meeting, 300 shares are issued to its three --- ounders: 100 to
Beau, 100 to Luke, and 100 to Jesse. The shareholders elect Luke to serve as the sole director
o --- the corporation. Two years later, Jesse retires, and the corporation buys back Jesse’s 100
shares. Beau and Luke then decide to sell some shares o --- stock to raise some cash.
How many shares can Duke Racing, Inc., sell without amending its articles o --- incorporation?
A. 400
B. 200
C. 100
D. 0
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69. Racing Distribution.
Beau, Luke, and Jesse have --- ormed Duke Racing, Inc., and had some racing success. In the
last year, they have garnered $200,000 in prizes against $30,000 in expenses. They have put
much o --- their winnings into spare parts (extra engines, tires, etc.), a backup racecar, and a
used Winnebago motor home. They also wish to each cash out $10,000 --- rom the corporation
to spend on a vacation.
Can the shareholders take cash out o --- Duke Racing, Inc? I --- so, explain how and how much.
Answer:
70. Xtra Capitalization.
Vin, Michelle, and Paul decide to --- orm a racing team that will compete in the stock car divi-
sion. They incorporate as Xtra, Inc. Paul is contributing a 2002 Mitsubishi LS sedan that is
worth no more than $2,200, and a VR6 engine, two turbochargers, and an exhaust kit he
claims are worth at least $10,000. Michelle is contributing $30,000 cash, and she wants to
be paid back on schedule. Vin, a mechanic with his own shop, will install all the parts and
serve as mechanic and driver in return --- or his stock. Paul will handle promoting and mar-
keting the team. Vin and Paul plan to split pro --- its equally once they pay back Michelle.
What is the best capital structure --- or Xtra, Inc.?
A. Common stock --- or Vin and Paul and pre --- erred stock --- or Michelle
B. Common stock --- or Vin and Paul and a loan by Michelle
C. All common stock
D. All pre --- erred stock
71. Soccer Capitalization.
Uma, Vicky, and Wanda were on their college soccer team together. Now Uma is a pro --- es-
sional soccer player, Vicky is an attorney who manages her wealthy --- amily’s small --- ortune,
and Wanda is completing her MBA. The three entrepreneurs are going to --- orm a company
named UVW Sports, Inc., that makes a new sports drink. Uma will contribute $5,000 to
pay --- or startup legal --- ees and promote the company’s products in return --- or a “ --- air share” o ---
pro --- its --- rom the company. Vicky will invest $2 million and expects to have the right to invest
more as the company scales. Wanda will work --- ull time as the company’s CEO in exchange
or “sweat equity” plus a small salary.
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or — lip2.indb 42 2/12/24 1:45 PM Questions · Topic 6: Corporate Finance 43
What is the best capital structure --- or UVW Sports Inc.?
A. Common stock --- or Wanda and Uma, and pre --- erred stock --- or Vicky
B. A loan by Vicky and common stock --- or Wanda and Uma
C. Common stock --- or Uma and Vicky. Wanda is an employee with stock options.
D. All common stock
72. DataMine Capitalization.
You represent venture capital investment --- irms. One o --- your clients, Accel Ventures, meets
with you about an investment they want to make into a company named DataMine, Inc.,
that produces database so --- tware. The company has previously received --- unding --- rom its
ounders and their — riends and — amily, and now it seeks $10 million in venture — unds. Accel will invest $8 million as the “lead investor,” and a consortium o — smaller investors known as “ — ollow-on investors” will contribute the rest.
What is the best capital structure --- or DataMine, Inc.?
A. Common stock --- or the lead investor and pre --- erred stock --- or the --- ollow-on investors
B. Pre --- erred stock --- or the lead investor and common stock --- or the --- ollow-on investors
C. All common stock
D. All pre --- erred stock
73. BBB Repurchase.
Bill, Bob, & Bart Broadcasting, Inc. (BBB) has radio stations in three mid-sized markets and
has been quite success --- ul. The --- ounding shareholder, Bill, owns 40 percent o --- the company.
Bill’s son, Bobby, and his college roommate, Bart, own 30 percent each. Bill decided to retire
and wants to cash out his shares. Bobby and Bart are willing to cause the corporation to
repurchase Bill’s shares --- or a price o --- $4.5 million, to be paid over 15 years, with 8 percent
interest per annum.
Are there any corporate law issues that must be resolved be --- ore BBB can repurchase Bill’s shares?
A. No. A long-term repurchase o --- shares is an unregulated transaction in which the par-
ties are --- ree to engage.
B. No. But BBB must require Bill to return his share certi --- icate be --- ore paying him the --- irst
installment payment.
C. Yes. The repurchase o --- shares at such a high price is bound to be a violation o --- the --- idu-
ciary duties Bobby and Bart owe to the corporation.
D. Yes. The transaction is a distribution and there --- ore must be tested --- or legality using the
statutory tests --- or distributions.
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or — lip2.indb 43 2/12/24 1:45 PM 44 Questions · Topic 6: Corporate Finance
74. Accounting --- or Distributions.
A pro --- itable corporation has three shareholders. They decide to issue a $1 million dividend
to each o --- the three shareholders and ask you, the lawyer, to handle the paperwork. Dur-
ing your diligence, you review the corporation’s current balance sheet. When you subtract
the total liabilities --- rom the total assets, the balance sheet reveals that the corporation’s net
worth is only $1 million.
Is this distribution statutorily permissible?
Answer:
3172Branson_Q&A_3e
or — lip2.indb 44 2/12/24 1:45 PM Topic 7 Questions
Closely-Held Corporations
Assume that each o --- the --- ollowing questions involves --- acts arising in a jurisdiction that has adopted
the Model Business Corporation Act (MBCA) and that has interpreted the law o --- agency consis-
tently with the interpretations stated in the Restatement (Third) o --- Agency. To the extent you need
to consider case law or litigation risk, apply Delaware law. The U.S. Securities and Exchange Com-
mission is re --- erenced as the “SEC.”
75. An Easier Way.
The seven shareholders o --- the Winchester Co., a closely-held corporation, are scattered
widely around the world. The bylaws provide that the annual meeting o --- the shareholders
is to be held at the corporation’s o ---
ice on the — irst Monday in September; however, only two shareholders live near the headquarters, and it would impose tremendous cost on the other shareholders to travel to the annual meeting. Fortunately, the shareholders get along well and are in agreement that the two local shareholders should be elected as the corporation’s two directors. The chair o — the board has inquired o — the corporation’s attorney whether there is an easier way to conduct the business that would not require the shareholders to travel or involve the complications o — appointing proxies to vote, particularly considering that all the shareholders are in agreement.
I --- you were the attorney, how would you advise the chair o --- the board o --- directors?
A. Although action by written consent in lieu o --- a meeting is permitted in emergency situ-
ations, costs alone do not justi --- y --- oregoing a meeting.
B. Action by written consent is permitted in lieu o --- a meeting i --- the shareholders’ consents
are unanimous.
C. Action by written consent is permitted in lieu o --- a meeting only --- or special meetings.
D. The corporation is required to hold an annual meeting as proscribed by the bylaws, and
the shares have to be voted at the meeting, whether by the shareholders in person or
through proxy.
76. A Tight Deadline.
On January 30, Arctic Travel, Inc. (AT), a corporation owned by 20 equal shareholders,
received a merger proposal --- rom Happy Holidays, Inc. (HH), through which HH would
acquire AT. The proposal, which the board has determined to be in AT’s best interest and
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properly voted to adopt, stated that the o ---
er would expire i — not accepted by 5:00 p.m. on February 28. Under AT’s bylaws, the corporation’s annual meeting o — shareholders is to be held on the — irst Monday o — March each year. The chair o — AT’s board has attempted to nego- tiate a deadline extension with HH, but HH has insisted on the February 28 deadline.
What, i --- anything, may the board do to arrange --- or a shareholder vote on the merger
proposal?
A. Call a special meeting o --- the shareholders --- or mid-February to take action on the
merger proposal.
B. Wait until the annual meeting in March to vote on the merger proposal.
C. Agree to the merger proposal without --- irst taking a shareholder vote.
D. Pass on the merger proposal because it is impossible to schedule a shareholder vote.
77. Missing the Meeting.
Shareholder o --- Pride, Inc., a closely-held corporation, is planning a big trip to the Scottish
highlands; however, the travel itinerary will require them to miss the corporation’s annual
meeting o --- the shareholders. Pride, Inc.’s shares are held by a small number o --- people, and i ---
Shareholder cannot participate in the meeting, there will not be a quorum.
May Shareholder still participate in the meeting even though they cannot attend in-person?
A. No. In-person attendance and participation at the meeting is required. I --- Shareholder
can’t attend, they can’t vote their shares.
B. Yes. Shareholder has the right to appoint a proxy to vote at the meeting on their behal ---
at the meeting.
C. Yes. Shareholder may cast an absentee ballot to be counted at the meeting.
D. Yes. Shareholder must create a voting trust with another shareholder to allow a trustee
to vote their shares at the meeting.
78. Preserving the Power.
The Whaler Corporation, a closely-held corporation, has proposed acquiring the Jonah
Corporation, another closely-held corporation, in a --- riendly merger. The Jonah Corpora-
tion shareholders are hesitating, however, because a --- ter the merger, they will own only 25
percent o --- the stock o --- the new corporation. They --- ear that they will be “swallowed up” in
the merger. To address — and hope --- ully resolve — these concerns, the Whaler shareholders
have agreed to a bylaw “supermajority” provision that the new corporation will have an 80
percent quorum and voting requirement --- or shareholders’ meetings (to wit, no director can
be elected or matter can be approved by the shareholders unless it receives an 80 percent
vote in --- avor o --- it).
3172Branson_Q&A_3e
or — lip2.indb 46 2/12/24 1:45 PM Questions · Topic 7: Closely-Held Corporations 47
Does the Whaler shareholders’ o ---
er address and resolve the Jonah shareholders’ concerns about being “swallowed up”? A. No. The de — ault statutory rule is that “majority wins,” and any agreement to the con- trary is void and unen — orceable. B. No. Supermajority requirements must be established in the articles o — incorporation, not in the bylaws. C. Yes. The Whaler shareholders’ o —
er will provide the Jonah shareholders with “nega- tive control” by establishing higher quorum and voting requirements — or shareholders’ meetings. D. Yes, but the Jonah shareholders should also insist on a bylaw provision requiring that any vote to repeal supermajority requirements be approved by a supermajority vote. Otherwise, the de — ault rule is that supermajority requirements may be repealed by the vote o — a simple majority.
79. Counting to Quorum.
The board o --- directors o --- Delano Corp., a closely-held corporation, has noticed a special meet-
ing o --- the shareholders to be held to vote on a board-approved plan o --- merger. Dentist, who
holds 30 percent o --- the outstanding shares, has considered the plan o --- merger and has decided
to vote against it. While en route to the special meeting, Dentist receives a text message that
only about 20 percent o --- the shareholders (not counting Dentist) will be present in-person or by
proxy. As a result, it is unlikely that a quorum would be present to vote on the plan o --- merger.
Should Dentist attend the special meeting?
A. No. Dentist should not attend the meeting so that their shares will not be counted
toward establishing a quorum.
B. Yes. As a shareholder, Dentist has a --- iduciary duty to attend the meeting, either in-
person or by proxy.
C. Yes. But i --- a quorum is present and it seems that a vote in --- avor o --- the plan o --- merger is
likely, Dentist should leave be --- ore voting commences.
D. Yes, but only to make a “special appearance” to protest the lack o --- a quorum.
80. Late to the Party.
Baker is a shareholder o --- Figaro, Inc., a closely-held corporation. As part o --- their retirement
planning, Baker has agreed to sell their shares in Figaro to Nurse. Unbeknownst to Baker
and Nurse, on January 30, the Figaro board had discussed calling a special meeting o --- the
shareholders to discuss a merger proposal. On February 1, the board o --- directors called a
special meeting to be held February 28 and sent notice to all shareholders o --- record as o --- the
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or — lip2.indb 47 2/12/24 1:45 PM 48 Questions · Topic 7: Closely-Held Corporations
close o --- business on January 31. The notice did not speci --- y any “record date” --- or determina-
tion o --- eligibility to vote, and the bylaws do not speci --- y any such record date. On February
20, Baker and Nurse closed on their deal and Baker trans --- erred their shares to Nurse. The
same day, Baker noti --- ied the secretary o --- the corporation o --- their trans --- er o --- shares to Nurse,
and the secretary o --- the corporation updated the record o --- shareholders accordingly. As a
new shareholder, Nurse is opposed to the merger and desires to vote against it. Assume that
there are no trans --- er restrictions that would prevent this trans --- er and that Baker has com-
plied with the procedure set --- orth in the bylaws --- or trans --- er o --- shares.
Is Nurse entitled, in their capacity as a shareholder as o --- February 20, to vote at the Febru-
ary 28 special meeting?
A. Nurse is not entitled to vote as a shareholder at the meeting because they acquired their
shares a --- ter the close o --- business on the day be --- ore the date on which the board o --- direc-
tors gave notice o --- the special meeting.
B. Nurse is not entitled to vote as a shareholder because they acquired the shares a --- ter the
board o --- directors gave notice o --- the special meeting.
C. Nurse is entitled to vote as a shareholder because Baker has trans --- erred their shares to
Nurse and has complied with the corporation’s procedures --- or trans --- er o --- shares.
D. Nurse is entitled to vote as a shareholder because Baker has trans --- erred their shares to
Nurse be --- ore the special meeting was called to order.
81. Let’s Vote Together.
Phoenix, Inc., is a closely-held corporation with a three-member board o --- directors, elected
annually. The corporation is privately held by two shareholder groups subject to shareholder
agreements requiring them to vote their shares together as a block: the Mirage shareholders,
who own 600 o --- collectively own 1,000 shares, and the Veridian shareholders, who collectively
own the other 400 shares. Phoenix, Inc., has included a provision in its articles o --- incorporation
permitting cumulative voting --- or the election o --- directors. Four candidates are being considered
or the board, three o — whom are pre — erred by the Mirage shareholders and one o — whom is pre-
erred by the Veridian shareholders. The annual meeting is quickly approaching, and the notice o — meeting stated that cumulative voting will be authorized — or the election o — the directors.
Assuming they vote as a block as required by their shareholder agreement, do the Veridian
shareholders mathematically have the votes to elect their pre --- erred candidate to one o --- the
seats on the board o --- directors?
A. No. The Veridian shareholders are the minority shareholder group, and the Mirage
shareholders will be able to elect all three o --- their pre --- erred candidates to --- ill the board
o --- directors to the exclusion o --- the Veridian-pre --- erred candidate.
B. No. The Veridian shareholders will only be able to cast 400 votes --- or their pre --- erred
candidate, which can be de --- eated by the Mirage shareholder’s 800 votes --- or the position.
3172Branson_Q&A_3e
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C. Yes. The Veridian shareholders have the cumulative votes to elect their pre --- erred can-
didate to one o --- the positions on the board, but they do not have the votes to prevent
Mirage-pre --- erred candidates --- rom being elected to the other two positions.
D. Yes, under a cumulative voting scheme, the Veridian shareholders both have the math-
ematical ability to elect their pre --- erred candidate and to block the Mirage-pre --- erred
candidates.
82. Staggered Boards.
The articles o --- incorporation --- or Farmart, Inc., a closely-held corporation, provide --- or a
“staggered” board o --- six directors. The board is divided into three classes o --- two directors
each, each class to be elected --- or three-year terms. The annual meeting o --- the shareholders is
coming up next month.
How many directors will be up --- or election at the annual meeting o --- the shareholders?
A. All six. Once elected, a director serves --- or a term o --- one-year and their term auto-
matically expires at the next annual meeting. Directors may be reelected by the
shareholders.
B. Two. Only one class o --- two directors will be up --- or election at the meeting, but the other
our directors will continue serving. C. Three. One director — rom each o — the three classes must be elected by the shareholders at the meeting. D. None. When a board is “staggered,” the directors are not elected by the shareholders.
83. We’re Going to Meet, One Way or the Other.
Wheelhouse, Inc., is a closely-held corporation. Although Uncle --- ounded the company
and was, at one point, the only shareholder, he has since given away much o --- the stock to
the second and third generations o --- the --- amily. Uncle now owns only 40 percent o --- the
outstanding shares o --- stock. Nevertheless, he continues to rule with an iron --- ist. Uncle
signs everything on behal --- o --- the company without consulting any other shareholder, and
he has not accepted advice or held a meeting in ten years. Nobody other than the board
o --- directors is authorized by the articles o --- incorporation or bylaws to call a special meet-
ing. Niece, who now owns --- ive percent o --- the outstanding shares o --- stock, desires a --- orum
in which she and the other shareholders may con --- ront Uncle and discuss the status o --- the
corporate a ---
airs. Both she and other members o — the — amily have attempted many times over the past several years to talk to Uncle about the state o — the corporation, but Uncle has consistently re — used to engage in any discussion, take any phone calls, or respond to any written communications. As o — right now, no shareholder other than Niece is willing to engage in con — rontation with Uncle.
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What option would best accomplish Niece’s desire to establish a --- orum --- or discussion?
A. Niece, as a shareholder who owns --- ive percent o --- the outstanding shares o --- stock, may
hersel --- call a special meeting o --- the shareholders --- or the purpose o --- removing Uncle as
a director.
B. Niece may demand that Uncle call a special meeting o --- the shareholders.
C. Niece may seek a court order compelling the corporation to hold a meeting o --- the
shareholders.
D. Niece has no recourse here other than to sell her stock.
84. Keeping It in the Family.
Siblings Indiana and Carolina have each acquired a 30 percent interest in Family, Inc., a
closely-held corporation. Through their combined ownership, they control the board o ---
directors. Indiana has recently been presented with an opportunity to go on a three-year
archaeological dig in a remote area where it will be virtually impossible to communicate
with him. This presents a problem --- or the siblings because, without Indiana’s votes, the other
shareholders have the votes to control outcomes. Indiana is happy to let Carolina handle
everything at least --- or the next three years without --- urther input --- rom him, and Carolina
is quite willing to vote Indiana’s shares --- or him so as to retain the majority vote; however,
she wants the ability to make all decisions without the need to consult with Indiana on each
vote, and she wants to prevent Indiana --- rom showing up unexpectedly during the next three
years and undermining her decisions. At the same time, Indiana wishes to retain all --- inan-
cial rights and does not desire to trans --- er ownership o --- the shares to Carolina.
What voting device is best suited to simultaneously accomplish both siblings’ goals?
A. A proxy, with Indiana as the proxy giver and Carolina as the proxy holder
B. A proxy styled as “irrevocable”
C. A shareholder’s voting agreement (a.k.a. a “pooling agreement”)
D. A voting trust with the trusted --- amily lawyer as the trustee
3172Branson_Q&A_3e
or — lip2.indb 50 2/12/24 1:45 PM Topic 8 Questions
Corporate Governance
Assume that each o --- the --- ollowing questions involves --- acts arising in a jurisdiction that has adopted
the Model Business Corporation Act (MBCA) and that has interpreted the law o --- agency consis-
tently with the interpretations stated in the Restatement (Third) o --- Agency. To the extent you need
to consider case law or litigation risk, apply Delaware law. The U.S. Securities and Exchange Com-
mission is re --- erenced as the “SEC.”
85. Ambush by Quorum.
Two o --- the directors o --- Bank, Inc., Donnell and Barnham, are unhappy with the per --- ormance
o --- the CEO, Nelson, who is also a director. There are --- ive directors in total, but the two other
directors are elderly and, by and large, inactive. Because o --- their absence, the other directors
have signed a valid waiver o --- notice --- or special meetings. Donnell and Barnham have decided
that they want to remove Nelson --- rom the position o --- CEO. One day, when Nelson is in the
o ---
ice, Donnell and Barnham arrive with the hope o — con — ronting Nelson. Nelson, seeing out his o —
ice window that Donnell and Barnham are entering the building, slips out the back door. The next day, Donnell and Barnham approach Nelson when he is in line at a co —
ee shop. Donnell says: “Three directors are a quorum. I vote to remove you as CEO.” Nelson responds: “This is ridiculous. You don’t have any grounds to remove me. I vote no!” But then Barnham quickly adds: “I concur. You’re out.” Bank, Inc.’s bylaws do not vary any relevant de — ault rule.
Has Nelson been removed as CEO o --- Bank, Inc.?
A. Yes. There was a quorum at a special meeting o --- the board o --- directors.
B. No, because the special meeting was not properly noticed.
C. Yes, but he was actually removed when Donnell and Barnham agreed that he should be
removed.
D. No, because there was no notice to the other two directors.
86. Flooding and Director Negligence.
Dorren, Thompson, and Grumberg are the three directors o --- Small, Inc. The board has
recently acquired a parcel o --- real estate that it plans to develop into a commercial space. The
development will require a signi --- icant amount o --- grading to --- latten it to a point where it will
be sa --- e to build upon. Dorren, acting on her behal --- and without giving notice to the other
directors, decided that she would rent a skid steer --- or a day and that she would go out and get
51
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a head start on the grading work. She hoped that this would save the corporation money. On
the rental agreement, she signed, “Dorren, director o --- Small, Inc.” A --- ter spending a solid ten
hours at the job site, Dorren called it a day. Un --- ortunately, that night there was a heavy rain-
storm. As a result o --- Dorren’s grading, the water --- low path was changed, causing substantial
damage to a neighborhood downhill --- rom the development. The neighbors consulted with
an expert who concluded that the --- looding was a direct result o --- Dorren’s grading work.
Is the corporation vicariously liable --- or Dorren’s negligent conduct?
A. Yes. Dorren is a director o --- Small, Inc., and so Small, Inc., is vicariously liable --- or her
conduct.
B. Yes, because the board had approved the grading project and so rati --- ied the conduct
that caused the --- looding.
C. No, because Dorren acted in her own capacity and was not an agent o --- Small, Inc.
D. No, because the board o --- directors had no notice that Dorren was going to do grading
work.
87. An Imminent Proposal.
Stewart is one o --- seven directors o --- a large corporation that owns a string o --- car dealerships.
Stewart is part o --- a contingent o --- three directors on the board who are against expansion,
especially into lower priced new automobiles. This contingent believes it best to stick to top-
o --- -the-line dealerships. Fred’s two allies in this regard are absent --- rom the March regular
meeting o --- the board, which is held at the time and place speci --- ied in the bylaws. Four direc-
tors attend. As the meeting continues, it appears to Stewart that a vote on expansion is immi-
nent and that the other three directors present are likely to vote in --- avor o --- an expansion
proposal. Stewart did not anticipate that this issue would be addressed at this meeting. The
corporation’s bylaws do not vary the de --- ault rules --- or voting and quorum at board meetings.
What can Stewart do, i --- anything, to stop the measure --- rom passing and becoming an action
o --- the board?
A. Nothing. The meeting is underway, and a quorum has already been established.
B. Stewart should immediately leave the meeting and deprive the board o --- a quorum --- or
voting on any additional matters.
C. Stewart doesn’t need to do anything because only three directors (less than a major-
ity o --- all the directors) will vote in --- avor o --- the measure, and so it will --- ail --- or lack o ---
majority.
D. Stewart should object that there was no notice that the board would be voting on an
expansion proposal and insist that the matter be tabled until a --- uture board meeting
when the other two members o --- the anti-expansion contingent can be present.
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88. How Big a Board?
Running Co., which started as a --- amily business but has decided to go public a --- ter its great
success, is in the process o --- preparing --- or its Initial Public O ---
ering. Prolong, one o — the directors o — Running Co. as well as its CEO, has inquired o — the corporation’s attorney as to how many directors should be included on the board o — the public corporation and whether the current directors should continue to serve. Currently, the board has — our directors, including Prolong’s brother and two “independent” directors, a local track coach and a law- yer. Prolong and his brother also serve as the corporation’s CEO and CFO, respectively, hold a signi — icant block o — shares in the corporation, and receive a salary — rom the corporation — or their services.
What advice should the lawyer give Prolong about the size o --- the board?
A. The current slate o ---
our directors is su —
icient, both logistically and legally. B. Public corporations must have at least seven directors, three o — whom must be “independent.” C. Typically, public corporations have 8 to 12 directors, but whatever the number, the board o — a public corporation must include a majority o — “independent” directors. D. Public corporations should have 24 directors but run most things through an executive committee o — 3 members.
89. Governance by Committee.
Linkus, Inc., a closely-held corporation that will soon become a publicly-traded corporation,
has 13 directors serving on the board. As they were preparing --- or the initial public o ---
ering, the directors were discussing the amount o — work — or which the board was responsible. One director mentioned that “it would certainly be easier and more e —
icient i — we could break up into smaller groups — maybe include some people with subject matter expertise — and break this work up into smaller pieces.”
Is the director’s suggestion valid?
A. No. The board o --- directors is solely responsible to manage and oversee the business and
a ---
airs o — the corporation, and they may not divide or delegate that responsibility. B. Yes. Public corporations may, but are not required to, have committees handle all or part o — overseeing the corporation’s business and a —
airs. C. Yes. Public corporations are required to have certain committees and may appoint additional committees — or most, but not all, responsibilities. D. Yes. Public corporations may appoint advisory committees, but they may not delegate decision-making authority to the committees.
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90. Removal as Retaliation.
Stoneham owns a plurality (35 percent) o --- the outstanding shares o --- a minor league baseball
team, the Reading Retrievers. The --- ield manager, McGraw, owns eight percent. A local judge,
Wettick, has recently purchased another 8 percent. The three o --- them, representing 51 per-
cent, sign a contract providing that each will use their best e ---
orts to keep the others in o —
ice as a director o — the corporation, which has a — ive-person board. The contract provides — ur- ther that, as directors, the signatories will use their e —
orts to keep Stoneham in as president, McGraw as vice-president, and Wettick as secretary-treasurer. Wettick repeatedly catches Stoneham wrong — ully accessing corporate — unds. He instructs employees that, under no cir- cumstances, are they to permit Stoneham access to any cash. In retaliation, Stoneham rallies McGraw and one other director. The three directors vote to — ire Wettick and remove him as a director. Wettick, who wants to be restored to the board o — directors and reappointed as an o —
icer, has consulted with you about options.
What recourse is available to Wettick under these circumstances?
A. Wettick retains the seat on the board but does not have a right to be reappointed as an
o ---
icer. B. Wettick has a right to seek a court order enjoining their removal as a director and an o —
icer. C. Nothing. Wettick is out o — both positions. D. Wettick has a right to remain an o —
icer, but not to remain on the board.
91. Firing an O ---
icer.
The board o --- Far --- alle, Inc., a publicly-held corporation, desired to expand its operations into
a new geographic area. Accordingly, the board appointed Tel --- ine as “Feasibility O ---
icer” to undertake a — easibility study. The board approved an employment agreement in which Tel — ine would serve in the position — or eight months, and the position would terminate at the next annual meeting o — the shareholders. Tel — ine accepted the appointment and hired a consulting — irm to begin conducting market research. Two months into the process, a — ter incurring some unexpected expenses, the board decided that it no longer had the capacity to expand and that the investigation should be abandoned. The chair o — the board in — ormed both Tel — ine and the consulting — irm that the project was canceled and that their services would no longer be needed. Tel — ine protested that, as an o —
icer o — the corporation, they could only be removed by a shareholder vote or at the next annual meeting o — the sharehold- ers as provided in the employment agreement.
Is Tel --- ine correct that they can only be removed by a shareholder vote or consistent with the
terms o --- the employment agreement?
A. No. The board appointed Tel --- ine as an o ---
icer and can remove Tel — ine as an o —
icer at any time — or any reason not otherwise prohibited by law.
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B. No, but only because the position o --- “Feasibility O ---
icer” was established by the board and not the bylaws. C. No. Because o — the employment agreement, Tel — ine is guaranteed to serve as an o —
icer until the shareholders’ meeting. D. Yes, because an o —
icer can only be removed — rom their position by a shareholder vote.
92. Personal Backlash.
Rob, Bill, and Sally --- orm Tree Top, Inc., a closely-held corporation that sells and services
various manu --- acturers’ products in the Paci --- ic Northwest, and they are the only three share-
holders. They “rep” products used in the orchard industry. They sign a contract providing
that Rob will devote hal --- o --- his time as CEO and inter --- ace with the various manu --- acturers;
Bill will work hal --- time as Vice President o --- Administration and Secretary Treasurer; and
Sally will work --- ull time as Vice President o --- Sales, traveling 30–35 weeks per year and sell-
ing equipment to orchardists throughout the Northwest. Rob and Bill are each to receive
$50,000 in annual compensation plus 2 percent o --- sales. Sally is to receive $70,000 plus 4
percent o --- sales. The company succeeds, mostly because Sally excels at her job, but Bill has a
alling out with Sally. At a board meeting, Rob and Bill vote to dismiss her as VP Sales. Sally is in a panic. As with many small companies, her primary livelihood will come not — rom her investment as a shareholder but — rom her employment as a corporate o —
icer/employee.
Does Sally have any hope o --- getting her job back?
A. No, because the directors may remove an o ---
icer at any time, — or any reason. B. No, but Sally may have a claim against the corporation — or breach o — employment contract. C. Yes, because the directors breached their — iduciary duty in terminating her. D. Yes, because all the shareholders are parties to the contract requiring that each o — the shareholders be appointed as an o —
icer.
93. A Li --- elong Contract.
Vice President o --- Sales o --- Harbor, Inc., has just delivered one o --- the most pro --- itable quar-
ters in the corporation’s history. Impressed with Vice President’s per --- ormance, the board o ---
directors desires to reward Vice President with a li --- etime, irrevocable appointment to her
o ---
icer position. The chair o — the board o — directors has contacted your law — irm to con — irm the legality o — the arrangement and draw up the necessary paperwork.
What advice do you give the chair?
A. Li --- etime contracts --- or anything are never valid.
B. This may be an impermissible abdication by the board o --- its power and --- uture boards’
power.
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C. Rather than a li --- etime appointment, the board may execute a long-term contract with
Vice President, but this will not prevent a --- uture board --- rom removing Vice President
as an o ---
icer at any time. D. The proposed course o — action is entirely in line with the board’s authority.
94. Consulting Services.
Shoehorn, Inc., a publicly-held corporation with 570 shareholders, has become enormously
success --- ul. Although started by three --- riends, who all serve as the only three directors on
the board and occupy the top three o ---
icers’ positions, Shoehorn has a presence throughout the world. To comply with — ederal law, Shoehorn has engaged Big Accounting Firm (BAF) to audit the corporation’s annual — inancial statements. Now, two o — the three — riends/o —
icers have decided that they’ve done enough and are ready to retire. BAF o —
ers to — ill the gap in the services they have been providing by covering human resources, bookkeeping, account- ing, in — ormation systems, legal, marketing, employee bene — its, actuarial, valuation, and gen- eral management services to the corporation under a 10-year contract, with renewals by mutual agreement — or — ive-year terms therea — ter.
Is BAF’s proposal acceptable?
A. Yes, this sounds like an e ---
icient use o — resources. B. No, BAF does not have the expertise to do this. C. No, this is too broad o — a delegation to an unelected organization. D. No, this is too broad o — a delegation to an unelected organization and a violation o —
ederal law.
95. Executive Committees.
A large, publicly-held movie production company, Serve US, Inc., has three directors
(Wayne, Martin, and Lamour) who dominate its seven-member board. These three direc-
tors convince the rest o --- the board to create an executive committee, appoint them as the
three members o --- the committee, and delegate to it all powers o --- the --- ull board o --- directors,
except declaring dividends and recommending mergers to shareholders. A dissident direc-
tor, Knott, consults you about challenging this arrangement.
What advice do you give?
A. Any challenge would --- ail because the decision to delegate is protected by the business
judgment rule.
B. A court would likely uphold the delegation to the committee as an e ---
icient process — or managing the corporation.
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C. Any delegation o --- authority to a committee violates the rule that the business and
a ---
airs o — the corporation shall be managed by the board o — directors. D. This particular delegation is too broad and exceeds the scope o — what is statutorily permitted.
96. Shareholder Proposals, Part I.
LandCrest, Inc., is a publicly-held garden-implement manu --- acturer with approximately 400
shareholders, many o --- whom live in the community in which LandCrest is located. The cor-
poration has done well, but the last several quarters --- ailed to meet analysts’ projections by a
ew pennies per share. The board o — directors there — ore — ired the CEO, Stewart. Stewart has been extremely popular, both at LandCrest and in the community. He has served as a youth coach, as a scout leader, and on the boards o — several community organizations. He person- ally knows and is — riends with a number o — the corporation’s rank-and- — ile shareholders. At the annual shareholders’ meeting, a shareholder steps to the microphone, propounding two resolutions: 1. That by resolution the shareholders hereby resoundingly voice their praise and a —
ection — or CEO Stewart — or all the great work he has done at LandCrest and in the community. 2. The shareholders move that Stewart be re-hired as the CEO o — LandCrest, Inc.
You are corporate counsel, seated on the dais next to the board chair, who is presiding over
the meeting. The chair leans over and whispers to you, “What should I do?”
A. These are not appropriate matters --- or shareholder proposals. Personnel matters and
appointment o --- corporate o ---
icers are part o — the corporation’s business and a —
airs and are, thus, matters to be decided by the board o — directors. B. Allow discussion o — both resolutions, but allow a vote only on resolution 1, which is purely advisory, and rule resolution 2 “out o — order” because it is a business decision. C. Allow discussion o — and voting on both resolutions which, even i — passed, are purely advisory and not “out o — order.” D. Same as Answer (C), but only i — resolution 2 is rephrased in advisory or precatory lan- guage (i.e., “The shareholders recommend that the board o — directors rehire Stewart as the CEO”).
97. Shareholder Proposals, Part II.
Suppose that rather than presenting the proposals at the shareholders’ meeting, the share-
holder timely submitted the proposals, in the proper --- orm, to the board o --- directors to be
included on the proxy solicitation.
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Must the board o --- directors include the shareholder proposals on the proxy solicitation?
A. Yes, the board must include all timely and properly submitted shareholder proposals in
the proxy solicitation.
B. Yes, the board must include any proposal desired to be included by the shareholder in
the proxy solicitation.
C. No, the board does not have to include a proposal that relates to personal claim or
grievance or ordinary business matters.
D. No, the board does not have to include a proposal that it does not support.
98. Clowning Around.
Clowns, Inc., is a closely-held corporation o ---
un-loving shareholders, directors, and employ- ees. They wish to have the — ollowing (and only the — ollowing) o —
icer positions: “Joker in Chie — ,” “Sidekick,” “Collector,” and “Bookworm.” Their bylaws will describe the respective responsibilities o — each.
Is Clowns, Inc.’s list o --- o ---
icers and titles permissible? A. No. Clowns, Inc., may have the o —
icers as desired, but it must also have o —
icers speci — i- cally identi — ied as “president” and “secretary.” B. No. Corporations are only permitted to have o —
icers designated as “president,” “vice president,” “secretary,” and “treasurer.” C. Yes. Corporations must have at least two o —
icers, but they may designate o —
icers by whatever title they desire. D. Yes. Corporations may have as many o —
icers as they desire with whatever titles they wish, so long as the board designates at least one o —
icer to prepare minutes o — directors’ and shareholders’ meetings and to maintain and authenticate records o — the corporation.
99. Removal o --- a Director.
Lake, Moon, and River occupy the three seats on the board o --- directors o --- Grover, Inc., a closely-
held corporation with 15 shareholders. Lake and Moon are angry with director River and wish
to remove him --- rom the Grover board. The di ---
iculty is that River is “squeaky clean,” and Lake and Moon have no cause to remove him. He attends every board meeting, contributes to the board’s — unctioning, and has long and well chaired the corporation’s audit committee.
What can Lake and Moon do to remove River as a director?
A. Nothing. Directors may only be removed --- or cause.
B. Removal is by a plurality o --- a shareholder vote “with or without cause.” Lake and Moon
can have River removed i --- they can get the votes.
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C. Lake and Moon may call a special meeting o --- the shareholders and give notice that the
purpose o --- the meeting is to consider removal o --- River as a director, and River can be
removed by a plurality o --- a shareholder vote “with or without cause.”
D. Because they constitute a majority o --- the board, they can vote to remove River at the
next board meeting.
100. Stuck with a Director.
Lake, Moon, and River occupy the three seats on the board o --- directors o --- Grover, Inc., a
closely-held corporation with 15 shareholders. Lake and Moon have become aware o --- trou-
bling behavior by River. River has been missing board meetings, harassing employees, mis-
appropriating --- unds, and --- requently comes to the o ---
ice inebriated. Lake and Moon have had enough and wish to remove River — rom the Grover board. The di —
iculty is that River holds 15 percent o — the outstanding stock and his close — riends collectively hold 45 percent o — the stock. Lake and Moon believe that River and his — riends will vote against River’s removal and will again elect him at the next annual meeting.
What options, i --- any, do Lake and Moon have?
A. They may go to state court and seek his removal on grounds that “the director engaged
in --- raudulent conduct with respect to the corporation or its shareholders, grossly abused
the position o --- director, or intentionally in --- licted harm on the corporation.”
B. Under the Sarbanes-Oxley Act, Lake and River may obtain a “li --- etime ban” --- orbidding
his service as a director or o ---
icer. C. They are stuck with River, but perhaps they can get an injunction limiting the harm that he can do. D. They should cause the corporation to sue River — or breach o —
iduciary duty.
101. Proo --- o --- O ---
icer Authority.
Malloy is a contractor who has just signed a contract with a major Fortune 1000 company
to build a new 700,000-square- --- oot manu --- acturing --- acility. It is a --- ixed-price $19.4 million
contract. Malloy’s attorney asked her what kind o --- documentation she got --- rom the corpora-
tion. Malloy replied, “The chie --- executive o ---
icer (CEO) signed the contract.”
What additional in --- ormation or document does Malloy’s attorney need to ensure that Mal-
loy’s contract will be binding on the corporation?
A. None. The contract is signed by the CEO, who is authorized through their appointment
as CEO as an agent to bind the corporation in contract.
B. The articles o --- incorporation. The articles o --- incorporation must identi --- y the corporate
o ---
icers and describe their authority.
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C. The bylaws. The bylaws must identi --- y the corporate o ---
icers and describe their authority. D. A board resolution appointing the CEO and con — irming the CEO’s authority to bind the corporation in contract.
102. Cheers Indemni --- ication.
Sam Malone is a director o --- Cheers, Ltd., a pub chain. A customer slipped and --- ell on wet
tiles in the bathroom in one o --- the Cheers pubs. Sam was in that pub when the customer --- ell.
The customer sued Sam personally --- or negligence, and Sam settled. Sam asks Cheers to pay
his $100,000 legal bill.
What is Sam’s best argument --- or why Cheers should indemni --- y his legal expenses?
A. Sam is entitled to mandatory indemni --- ication i --- he has been “wholly success --- ul on the
merits.”
B. Directors are agents o --- the corporation, and Sam acted within his scope o --- agency.
C. The corporation’s directors’ and o ---
icers’ insurance policy has a low deductible. D. The corporation’s articles permit insurance — or directors acting “in good — aith.”
103. Guarding Against Takeovers.
Concerned about a recent trend o --- hostile takeovers in the industry, the board o --- Lockdown,
Inc., a publicly-held corporation, has been examining its vulnerability to such takeover
attempts. The board is concerned that i --- one activist shareholder acquires enough shares
in the corporation, they may be able to exert disproportional control over the corporation
without paying a respective premium --- or that control. One director has recommended the
adoption o --- a “shareholder rights plan,” which would cause the issuance o --- additional securi-
ties and then allow existing shareholders to purchase those additional securities on --- avor-
able terms, i --- any one shareholder acquires more than 10 percent o --- the outstanding shares
o --- stock.
Which o --- the --- ollowing strategies would ensure that the “shareholder rights plan” --- unctions
e ---
ectively to prevent a hostile takeover? A. Make the plan a “dead hand” plan which may only be deactivated by directors who were in o —
ice at the time the plan was adopted. B. Make it a “no hand” plan which simply cannot be deactivated by anyone (old or new directors) until six months have passed — rom the plan’s being triggered. C. Combine the plan with a staggered board and a removal- — or-cause requirement. D. The mere existence o — the plan is as good a de — ense as the board can accomplish.
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104. A Sel --- ish Board.
The bylaws o --- Boatworth, Inc., a publicly-held corporation, provide that the annual share-
holders’ meeting will be held on the --- irst Monday in March, unless the board o --- directors
otherwise decides. Likewise, the bylaws provide that shareholders’ meetings are to be held at
its West Coast headquarters, but another provision gives the board the right to designate the
place o --- the annual meeting as anywhere in the world. Boatworth learns in July that Sure-
trust, an investment --- irm renowned --- or combative posturing and waging proxy contests,
has acquired a large block o --- Boatworth stock and is in the process o --- negotiating two more
“block” purchases. I --- these transactions were to be completed, Suretrust would become
Boatworth’s majority shareholder. Motivated by concerns that Suretrust would attempt to
wage a combative and costly proxy contest i --- it were able to acquire additional shares o ---
stock be --- ore the annual meeting in March, the directors take two steps: --- irst, they advance
the annual meeting date to the last week o --- December, and second, they designate the place
o --- the meeting to be on a remote island o ---
the coast o — Maine that is accessible only by — erry. The board hopes that these moves will prevent Suretrust — rom organizing a proxy contest be — ore proxy solicitations are sent out and that the remote location will prevent Suretrust
rom appearing in person at the meeting. Suretrust has — iled suit to enjoin the rescheduled shareholders’ meeting and to compel Boatworth to hold the meeting at the time and place speci — ied in the bylaws.
How should the court rule?
A. Advancing the meeting date is permissible, but the relocation to a remote island is not.
The court should order the meeting to be held at the corporate headquarters as pro-
vided by the bylaws.
B. The meeting can stay on the remote island, but the court should order that the annual
meeting must be held in March as provided by the bylaws.
C. The court should a ---
irm the board’s decision to advance the meeting to December and to hold the meeting on the remote island. D. Although both actions by the board are technically law — ul, the court should enjoin the actions because the Boatworth board acted inequitably — or the purpose o — preventing Suretrust — rom waging a proxy contest.
105. Remote Participation.
A prominent shareholder o --- Veridian Corp., a public corporation, has to be away at his
daughter’s wedding when the annual meeting o --- the shareholders is scheduled to occur.
Although he cannot attend in person, he still wants to participate in real time.
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Is this permissible?
A. No, only in-person attendance is permitted. I --- the shareholder can’t attend, he may vote
by proxy.
B. Yes, but only i --- the board o --- directors has authorized remote participation --- or the class
o --- share that the shareholder holds.
C. Yes. The shareholder has an absolute right to participate remotely.
D. Yes, but only i --- the board grants the shareholder special permission.
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Corporate Fiduciary Duty
Assume, unless otherwise noted, that each o --- the --- ollowing questions involves --- acts arising in a
jurisdiction that has adopted the Model Business Corporation Act (MBCA) and that has inter-
preted the law o --- agency consistently with the interpretations stated in the Restatement (Third) o ---
Agency. To the extent you need to consider case law or litigation risk, apply Delaware law. The U.S.
Securities and Exchange Commission is re --- erenced as the “SEC.”
106. Introduction to Corporate Fiduciary Duty.
What --- iduciary duties do corporate directors owe to the corporation and to the shareholders?
Answer:
107. A Bad New Idea.
The directors o --- New Idea, Inc., a publicly-held corporation incorporated under Delaware
law, have recently been exploring expanding into new lines o --- business. A --- ter conducting
standard due diligence, the directors have just approved a contract with a --- ood manu --- ac-
turer --- or the exclusive rights to manu --- acture --- rozen meat in the mid-Atlantic region o --- the
country. To carry out this endeavor, the directors also approved the acquisition o --- a distribu-
tion center. Un --- ortunately, six months a --- ter approving the contract, public health o ---
icials announced that a new disease strain had been discovered in recent weeks in several o — the products manu — actured by the — ood manu — acturer. As a result, stores in the mid-Atlantic region re — used to purchase or sell the — ood product. New Idea, Inc., was able to resell the distribution center, but at a signi — icantly lower price than — or what it was acquired. New Idea, Inc., su —
ered a $3 million loss as a result o — the contract and sale o — the distribution center.
Have the directors o --- New Idea, Inc., breached their duty o --- care?
A. Yes, because the corporation lost $3 million as a result o --- the directors’ poor decision.
B. Yes, because the directors should never have entered into this contract or acquired the
distribution center.
C. No, because the directors made a reasonable business decision based on standard due
diligence.
D. No, because directors never owe liability --- or a business loss.
63
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108. The Business Judgment Rule.
The board o --- Missed Opportunity, Inc., a public corporation incorporated under Delaware
law, had noted that the corporation had on hand excess cash o --- $500 million. Desiring to lie
low --- or a year, a --- ter a quick canvas o --- the markets, the board directed the CFO to invest the
cash in tax- --- ree municipal bonds earning --- ive percent interest. Uncertainty in the markets
soon therea --- ter pushed interest rates to 16 percent in the short-term bond market. With all
o --- that excess cash, Missed Opportunity could have earned considerably more in the high-
yield bond market. A shareholder has sued the board, seeking to hold liable its members --- or
the decision they made. The board --- iles a motion --- or summary judgment. The judge asks
you, his law clerk, what decision he should make on the motion and why.
You recommend that the judge should do which o --- the --- ollowing?
A. Grant the motion. The law charges boards o --- directors, not judges, with management o ---
the corporation’s business.
B. Grant the motion. Courts will not second guess business decisions made in good --- aith
by duly elected corporate o ---
icials. C. Grant the motion. The board decision is protected by the “business judgment rule.” D. Deny the motion. The board o — directors — ailed to comply with the business judgment rule.
109. Failure to Monitor.
Old Line Insurance Co. (“Old Line”) is a public corporation incorporated under Delaware
law that operates as a regional medical malpractice insurance carrier. The directors o --- Old
Line never discussed or otherwise inquired into the adequacy o --- Old Line’s cash reserves,
nor was there any reporting system in place to draw the board’s attention to the cash reserve
status. When malpractice claims increased, and the payout per claim also increased, Old
Line had insu ---
icient reserves to carry it through the tough times. When Old Line began to
ail, the state insurance commissioner put the corporation into receivership. The sharehold- ers lost the entire value o — their investment.
Which o --- the --- ollowing best describes the board’s breach o ---
iduciary duty? A. Simple negligence in breach o — the duty o — care B. Intentional or knowing violation o — law in breach o — the duty o — care C. Sustained and systematic — ailure to exercise oversight in breach o — the duty o — loyalty D. A con — lict-o — -interest transaction in breach o — the duty o — loyalty
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110. Who’s to Blame? Part I.
The directors o --- Old Line include an actuary who practices her pro --- ession through her own
actuarial --- irm and a corporate lawyer --- rom a large multi-service metropolitan law --- irm. The
board also includes the son and daughter o --- the controlling shareholder, who is the CEO.
The daughter is a senior in college. The son is a third-year law student. Neither the son nor
the daughter attended board or committee meetings regularly, nor did they do anything
to --- amiliarize themselves with the insurance industry, with Old Line, or with the current
issues it --- aced.
I --- you had to assess the prospects o --- liability --- or a board decision, which o --- the --- ollowing
would be your best estimate?
A. The actuary and the attorney may well be liable, but the son and daughter would not.
B. The son and daughter would be liable, but the lawyer and actuary would not.
C. None would --- ace liability.
D. All --- our would --- ace liability.
111. Who’s to Blame? Part II.
Two other Old Line directors de --- end on other grounds. Tipton was a --- ormer CEO o --- Big
Time Insurance. He now lives most o --- the year at his --- armhouse in Vermont. What meetings
he participates in, he participates by con --- erence call. In his deposition, he testi --- ies that he
allowed his name to be added to the Old Line board to enhance Old Line’s prestige. Pont, a
retired university administrator and coach in Bloomington, Indiana, attends meetings, but
only when they concern the company’s business in Indiana. He testi --- ies that he was added to
the board to help it drum up and service business in the Hoosier State.
Are these valid de --- enses?
A. No. Each and every director must bring their abilities to bear on the --- ull range o --- issues
the board con --- ronts or should con --- ront.
B. Yes. In its judgment the board may add members to the board o --- directors based upon
their prestige value.
C. Yes. Companies that do business over a broad geographical area need to allocate direc-
tors’ seats geographically.
D. No. Directors who --- ail to attend all, or most, o --- the board’s meetings will be liable --- or
violation o --- their duty o --- care.
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112. An Extravagant De --- iciency.
Cambridge Bank is an old- --- ashioned bank. It has one o ---
ice, three tellers, a cashier, a presi- dent who is responsible — or day-to-day bank operations, and a seven-person board o — direc- tors, which meets quarterly, but a — ter the bank has closed — or the day. Cambridge Bank also has no computers. All recordkeeping is done by hand. The cashier takes slips — rom the tell- ers, makes entries in the journal and ledgers by hand, and counts the cash at the end o — each day. The cashier is a young — ellow who, a — ter working — or two years, has arrived at work in a brand-new convertible. He has also recently taken to wearing expensive suits. Likewise, though in the last three years the bank has seemed very busy, deposits have continued to drop. Finally the outside auditors call in all o — the depositors’ passbooks. The passbooks show deposits exceeding those recorded in the ledger by over $250,000 annually. Deposits actually have increased, but the cash is gone. Upon interrogation, the cashier breaks down and con — esses. Alas, he has spent all the money, and the bank is now de — unct. Disgruntled shareholders sue the cashier, the president, and the directors.
Who has breached their --- iduciary duty to the corporation and the shareholders?
A. The cashier
B. The directors
C. The president
D. The directors and the president
113. A Sick Director.
Aged director Veeck has been on the board o --- Ruckers, Inc., --- or 15 years. The Ruckers board
meets monthly. Veeck has been troubled by a persistent lung in --- ection. In September, he decides
that he would rather not --- ace the cold winter. He leases a home on Siesta Key, below Sarasota,
Florida. A --- ter the October board meeting, Veeck journeys down to Sarasota. He misses the
November meeting. He participates by con --- erence call in December. In addition, each month
the Ruckers corporate secretary --- ederal expresses a “board packet” (trial --- inancial statements,
minutes o --- previous meeting, reports, etc.) to Veeck, which he takes great care to review. He also
misses the January meeting. Still not well, Veeck decides to stay in Florida until April or May.
He seeks your advice about what he should do with regard to his Ruckers board commitment.
What is your advice?
A. Directors have an a ---
irmative duty to attend board meetings, and so he needs to attend despite his health issues. B. Veeck is likely already consciously disregarding his duties, so he should resign now. C. I — Veeck misses another meeting, he should resign then. D. A director’s duty is to keep in — ormed, and so he should try as best he can to participate by con — erence call and continue to review care — ully his board packets.
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114. A Rushed Proposal.
Gherkin is the CEO o --- a large, publicly-held company who is approaching retirement and
holds --- our million shares o --- the company. The company, TransWheel, has a share price that
has languished in the high $30s --- or several years, even though the book value o --- the company
is $45 per share. A --- ew months ago, Gherkin had the CFO “run the numbers” on a purchase
o --- the company using its cash --- low to service the debt that would be incurred i --- Gherkin and
the other senior managers bought up all the shares currently held by the public. The CFO
reported back that a buyout would be --- easible at prices up to and slightly beyond $60 per
share. There were no third-party buyers at $61–62 per share, so Gherkin went to see a well-
known --- inancier, Ghoul. Ghoul o ---
ered to buy the company at $55 per share but also insisted upon an option to purchase one million TransWheel shares — rom TransWheel at $38 per share and a “no shop” clause. Under the latter arrangement, the TransWheel senior manage- ment would not be able to test the market to see i — a better price could be obtained. All o —
the --- oregoing occurred on a Friday and the --- ollowing Monday. On Tuesday, Gherkin then
called a special meeting o --- the TransWheel board o --- directors --- or Friday morning. You are
personal counsel to two outside directors o --- TransWheel. The directors called you during a
break in the meeting. Gherkin has asked --- or approval by the board o --- the buyout by Ghoul
a --- ter only an hour-long meeting. He has not even presented them with the documents --- or
the proposed transaction. He has started pounding the con --- erence room table.
What should you tell them to do?
A. Go ahead and vote --- or the deal. Fi --- ty- --- ive dollars is a good price and the business judg-
ment rule will protect you.
B. Fi --- ty- --- ive dollars may be a good price, but you won’t know that --- or certain until review-
ing all the underlying documentation.
C. Gherkin and perhaps other insiders are pushing too hard. Re --- er the matter to a com-
mittee o --- independent directors.
D. The board should re --- er this to a committee o --- independent directors and empower the
committee to hire an independent investment banker and independent law --- irm, meet
over several sessions be --- ore calling the question, and leave an “out” --- or the directors
should a clearly superior bid sur --- ace.
115. O ---
icer Duties.
The board o --- Shady Pines, Inc., a small public corporation, decided that it would be in the
best interest o --- the corporation to seek to be acquired by a larger corporation. The com-
pany, although historically pro --- itable and holding valuable assets, had been operating in a
depressed economy and was anticipating low --- uture growth. The board charged two o ---
icers, President and Chie — Financial O —
icer (CFO), to solicit bids to purchase the corporation. President and CFO complied and worked with a — irm to list the corporation — or sale. They received three o —
ers. They quickly rejected the — irst o —
er because the acquiring corporation
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would not retain them as o ---
icers a — ter the acquisition. A — ter the board determined that the remaining two o —
ers were acceptable, President and CFO began the due diligence process with the o —
erors; however, both — ailed to — ully participate. They missed several deadlines and neglected to provide pertinent in — ormation. As a result, one o —
er was withdrawn and the other was revised to a substantially lower amount. At the annual meeting o — the share- holders, the board reported as to the e —
orts to sell and speci — ically stated, “We currently have one o —
er that is — ar below asking price.” Accordingly, the board proposed taking the corporation private instead o — selling it. The shareholders voted to approve the privatization; however, one director (also a two percent shareholder), who had voted against the proposal and knew about President and CFO’s — ailure to — ully participate in the due diligence process, sued to invalidate the privatization measure because President and CFO breached their — idu- ciary duties to the corporation. President and CFO have de — ended by maintaining that their actions were undertaken in their capacities as o —
icers rather than as directors, and thus, they did not owe any — iduciary duty to the corporation.
Are President and CFO correct that they do not owe --- iduciary duties to the corporation?
A. Yes. O ---
icers do not owe — iduciary duties to the corporation. B. Yes. O —
icers do not owe — iduciary duties to the corporation unless they speci — ically agreed to undertake such duty by contract. C. No. O —
icers owe — iduciary duties to the corporation that are generally the same as those owed by directors. D. No. O —
icers owe — iduciary duties to the corporation, but they are substantially less than those owed by directors.
116. Exculpation.
You are an associate in a small “town square” law --- irm that provides a variety o --- services
to clients. Your supervising attorney primarily practices in personal injury but has looped
you in on a business planning matter --- or a --- riend o --- hers. The --- riend, along with six others,
wants to --- orm a corporation to do so --- tware development. They also have a hand --- ul o --- inves-
tors who want stock in the company. Your supervising attorney, however, recalls the case o ---
Smith v. Van Gorkum, and she wants to be sure to avoid that outcome as best as possible. She
has instructed you to dra --- t the broadest indemni --- ication provision permissible under cur-
rent Delaware law.
Which o --- the --- ollowing provisions both accomplishes your supervising attorney’s instruc-
tions and is en --- orceable under current Delaware law?
A. “The directors and o ---
icers are exculpated — or all monetary damages arising out o — any breach o —
iduciary duty.” B. “The directors are exculpated — or all monetary damages arising out o — any breach o —
iduciary duty.”
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C. “The directors and o ---
icers are exculpated — or all monetary damages arising out o — any breach o — duty o — care, but not — or any intentional or knowing violation o — law, breach o —
iduciary duty o — loyalty, or actions not in good — aith.” D. “The directors are exculpated — or all monetary damages arising out o — any breach o —
duty o --- care, but not --- or any intentional or knowing violation o --- law, breach o ---
iduciary duty o — loyalty, or actions not in good — aith.”
117. Play Ball at Night, Part I.
Baron Inc. owns a minor league baseball team that plays its home games at Stadium. Bar-
on’s majority shareholder, Laker, a success --- ul local car dealer, --- ervently believes that “God
intended baseball games to be played outdoors in the a --- ternoon.” Stadium thus has no lights;
it cannot accommodate nighttime baseball. Recently, a celebrated athlete has decided to try
his hand at baseball with Baron’s team. His presence would triple attendance, that is, i --- the
games were played at night. Instead, Baron continues to lose money each year. Year a --- ter
year, in attempts to avoid upsetting Laker, the Baron board summarily votes to continue to
have the team play day baseball only. Foster is a minority shareholder who has given up on
the minor league team. He has sued Laker and the other board members --- or breach o --- the
duty o --- care. Foster says that i --- the directors only conducted the most per --- unctory market
study they would see that the team could make considerably more money playing nighttime
baseball, especially given the presence o --- the a --- oresaid celebrated athlete.
Is Foster’s suit likely to succeed?
A. Yes, because the directors have not made an independent decision or judgment. They
have merely rubber stamped the controlling shareholder’s decision.
B. No, because absent --- raud, directors’ decisions are protected --- rom judicial scrutiny by
the business judgment rule.
C. No, because the directors have no personal --- inancial stake in the outcome, and there-
ore, they and their decisions are protected by the business judgment rule. D. Yes, because the directors — ailed to comply with the business judgment rule.
118. Play Ball at Night, Part II.
Presume that all the directors o --- Baron Inc. are pillars o --- the local business community.
None has --- inancial ties to the Barons or its controlling shareholder. They are CEOs and busi-
ness leaders. Only one or two have social ties to Laker. When con --- ronted by the shareholder
demand to consider playing night baseball, the directors hire a consultant, who quickly ren-
ders onto the board a written report. The report purports to --- ind a trend back to daytime
baseball, at least by minor league teams operating in cities with more than 400,000 inhabit-
ants. The consultant also openly discloses that he is the president o --- a not- --- or-pro --- it organi-
zation named “Daytime Baseball Boosters, Inc.” Following receipt and review o --- the report,
the directors now vote 6-0 to continue playing daytime baseball only.
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Would you as a plainti ---
’s attorney still take the case o — the complaining Barons’ shareholder? A. Yes, because the directors have a duty o — care. Receipt o — one report by a biased consul- tant, quickly produced, does not measure up to the directors’ duty. B. No, because how much in — ormation is enough in — ormation is itsel — a matter o — business judgment. C. Yes, because directors making such a decision have a duty not just o — due care but o — the utmost care. D. No, because decisions o — independent directors, as here, are unassailable.
119. Political Forgiveness.
Mercury Bell Co., a local communications company, has equipped a state political party with
technological resources and support --- or a campaign drive. Though the political party’s can-
didates win, a --- ter the election season ends, the party has a huge $4 million bill which it can-
not pay. The political party seeks --- orgiveness o --- the debt. Mercury Bell’s board o --- directors
deliberates. Forgiveness o --- the debt might well serve the company’s best interests as the party’s
candidate won the election and the company has several important measures on its legislative
agenda. None o --- the directors has an interest in the subject matter o --- the decision. The board
receives reports --- rom the CFO and the company’s attorneys. The CFO opines that --- orgiveness
o --- the debt will not put the company in any --- inancial strait. But the attorney o ---
ers a caveat that the — orgiveness o — the debt may be construed as an indirect gi — t to partisan campaigns — or politi- cal o —
ice and, hence, illegal. She indicates that she will do — urther research on the question. The board, however, is impatient. They decide to vote. They — orgive the debt. A week later, the attor- ney reports back that the debt — orgiveness does not run a — oul o — campaign — inance laws.
Is the Mercury Bell board’s decision likely to be shielded --- rom judicial scrutiny by the busi-
ness judgment rule?
A. Yes. The directors made a decision or judgment, they reasonably in --- ormed them-
selves, and they rationally believed the decision made was in the best interests o --- the
corporation.
B. Yes. The directors exercised not only some care, as the rule requires, but due care.
C. Yes. The decision ultimately turned out to be legally permissible.
D. No. The directors did not make the decision in good --- aith because they had notice that
the --- orgiveness might be illegal.
120. Takeover Threat, Part I.
The board o --- VideoGame Inc., a publicly-held entertainment company, is concerned over a
sudden spike in the trading volume o --- VideoGame stock. They have reason to believe that
several activist hedge --- und traders are working in concert to acquire the stock with an eye
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toward waging a proxy contest. The VideoGame board has convened a special meeting to
consider adoption o --- a shareholder rights plan that would enable them to ward o ---
any hos- tile takeover bid. They have asked you, as counsel, to address the board and then guide them through the process o — adopting takeover de — enses.
Which o --- the --- ollowing should you advise them not to do?
A. Ensure that any de --- ense measure “is reasonable in relation to the threat posed.”
B. Convene the independent directors in executive session --- or the --- inal discussion and
actual adoption o --- the de --- enses.
C. Stagger the board o --- directors into three classes and resurrect a requirement o --- removal
or cause only. D. Adopt a scorched earth policy o — sorts that prevents any one shareholder — rom acquir- ing more than 2 percent o — the outstanding stock without board consent.
121. Takeover Threats, Part II.
Presume that the hedge --- und --- iles a Schedule 13D with the SEC (a --- orm that must be --- iled
when a person or group acquires more than 5 percent o --- a voting class o --- stock, also known
as a “bene --- icial owner report”). The hedge --- und announces 15 percent ownership and an
intention to make a cash o ---
er — or a majority o — the VideoGame shares at 30 percent over the market price o — $20, or $26 per share. VideoGame convinces a — riendly competitor, Firstwave, to make a rival bid at $28 per share. The hedge — und rises to the occasion and bumps its o —
er to $30. Firstwave matches that bid. The hedge — und then raises its o —
er to $33. The independent directors o — VideoGame board meet, and a — terward, the board rec- ommends that shareholders accept the $30 Firstwave bid. The directors themselves will tender to Firstwave. They also have caused VideoGame to issue an option to Firstwave to acquire 2,000 authorized but unissued VideoGame shares equivalent to 25 percent o — the VideoGame outstanding shares. One o — the reasons the VideoGame board states — or — avor- ing the Firstwave o —
er is that Firstwave has promised to keep all or most o — the incumbent VideoGame managers in place. Investor Lynch’s mutual — und owns two million shares o —
VideoGame and is upset that success o --- the in --- erior bid will cause him to leave $6 million
“on the table.”
Does the business judgment rule --- orestall any meaning --- ul challenge to the action by the
VideoGame board?
A. Yes, because the directors care --- ully examined the competing o ---
ers and made a deci- sion or judgment. B. Yes, because the directors took action that was “reasonable in relation to the threat posed” by the hedge — und’s ownership.
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C. No, because once it becomes certain that the target company will be sold or broken up,
directors cease to be “de --- enders o --- the corporate bastion” and must attempt to maxi-
mize the short-term value --- or the shareholders.
D. No, because the directors had a con --- lict o --- interest and were more interested in taking
care o --- the incumbent management at VideoGame Co. than in serving shareholders’
best interests.
122. Duty o --- Loyalty.
What types o --- board or o ---
icer conduct will implicate the duty o — loyalty? Answer:
123. A Sneaky Director.
Full Sail, Inc., a public corporation incorporated under Delaware law, is a success --- ul micro-
brewery that has two product lines: Golden Ale and Amber Lager. The board proposes to sell
o ---
a brewery and product line (Golden Ale). Director Birch is interested but believes that i —
he bids on the proposed Golden Ale “spin-o ---
,” he will be “held hostage.” Birch is the wealth- iest o — the directors. Birch, there — ore, has his cousin, Porter, — orm a new corporation. That entity purchases Golden Ale, without ever disclosing its association with Birch. Five years later, Golden Ale has proven to be wildly success — ul. A Full Sail director, however, learns that Birch has been the one behind the new venture all along. Full Sail has demanded that Birch turn over his stock in the new business.
Should Birch de --- end or should he attempt to settle?
A. De --- end. The new corporation paid an objectively veri --- iable “ --- air” price --- or the Golden
Ale line. Full Sail has not been damaged.
B. De --- end. Most o --- the increase in value can be proven to be due to Birch’s management
e ---
ort and expertise. Damages due to Full Sail will be small, i — any. C. De — end, but have Birch resign — rom the board and make his resignation retroactive. D. Settle. Birch has breached his duty o — loyalty, and he is liable not only — or any damage to the corporation but also — or an illicit gain.
124. Interlocking Directors.
Earheart sits on the boards o --- both Aircra --- t, Ltd., and Overby Corning Composites, Inc.
Aircra --- t has been purchasing composite wing assemblies --- rom Overby --- or its new commuter
airliner. The Aircra --- t purchasing department has been purchasing approximately $900,000
worth o --- wing assemblies per year. Aircra --- t’s annual sales are $100 million. Earheart has
discovered these --- acts.
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Does Earheart need to do anything?
A. No. She has no con --- lict o --- interest because the transactions are not material as a per-
centage o --- Aircra --- t’s sales or pro --- its.
B. No. She has no personal interest in the subject matter other than the “interlocking”
directorate position.
C. Yes. She must disclose to the Aircra --- t board o --- directors her interest in the transaction
and have the disinterested directors approve (or reject) the transaction with Overby.
D. Maybe. She must disclose and receive board approval i --- she participated in or in --- lu-
enced negotiation o --- the transaction.
125. All About Fairness.
The Klein and Lauren --- amilies own a Delaware corporation which produces designer jeans.
Dissatis --- ied with a lack o --- bank --- inancing, the Klein --- amily boycotts meetings, concentrat-
ing its resources on real estate ventures instead. Determined not to permit a listing ship to
capsize, and having a quorum at meetings, the Lauren --- amily approves a loan o --- personal
unds to the corporation at a high rate o — interest that re — lects the speculative nature o — the enterprise. They also cause the corporation to enter into and pay a substantial but justi — iable management — ee to themselves. Things soon settle, and the enterprise is pro — itable again. The Kleins, however, sue, alleging that the Laurens have “violated” the interested director statute.
The Lauren --- amily consults you. Is the Klein --- amily’s claim a good one?
A. Yes. The law requires --- ull disclosure and the vote o --- a disinterested decision maker; oth-
erwise, the loan transaction is voidable.
B. No, but the burden will be on the Lauren --- amily to demonstrate why they did not com-
ply with the statute.
C. No. The directors alleged to have had a con --- lict may always prove the --- airness o --- the
transaction.
D. Yes. I --- directors or shareholders loan --- unds to the corporation, they must do so at a low
interest rate.
126. Biased Directors.
The three directors o --- the Blue Moon Motel Co., Ltd., together own a parcel o --- property
which they believe to be a prime motel site, located as it is just o ---
a major interstate highway. They have had the property appraised. They now propose to convey to Blue Moon at the appraised value. At the directors’ meeting convened to approve the land transaction, one o —
the directors looks up and says, “A quorum o --- disinterested directors would be three. There
are only two o --- us without any interest in this transaction. Counsel, what do we do?”
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What advice do you give?
A. Because you cannot obtain a quorum, the directors must convene a shareholders’ meet-
ing and seek shareholder approval.
B. For quorum purposes, interested directors may be counted.
C. The board is paralyzed and cannot enter into the transaction.
D. I --- the directors --- orego shareholder approval, the transaction may be reviewed by a court
under the entire --- airness standard.
127. All the Facts.
Using his corporation, Tenore, Ltd., Havarotti proposes to purchase a valuable piece o ---
downtown real estate --- rom Three Tenors, Inc. He --- urther proposes to construct a building
in which will be housed o ---
ices, a rehearsal hall, and prop storage — or the city’s civic opera. Havarotti will then donate the re — urbished building to the local opera. The Three Tenors board approves the conveyance, with Havarotti stepping out during the — inal board delib- erations and abstaining — rom the vote. Havarotti neglected to disclose that the conveyance by him to the civic opera will be o — a li — e estate in the realty, with the remainder to Havarot- ti’s children. There has been a change in board membership, and the nature o — the realty conveyance has also come to light. The new directors, led by Tomingo, are angry. Tomingo seeks your advice about the transaction.
Can the corporation void the transaction?
Answer:
128. Missed Opportunity.
Weldon owns a number o --- gravel pits personally, but he also is a director and shareholder
o --- a corporation, Pet Rocks, Inc., which owns the second largest gravel pit in the area. Pet
Rocks also owns an undivided one-third interest in the largest gravel pit in the area, the
Crescent. Pet Rocks has made an o ---
er to the owner o — the second o — the three interests in the Crescent and has received a countero —
er. As to the third o — the three interests, a — ter pro- tracted negotiations to obtain a long-term leasehold, Pet Rocks was unable to close a deal. When he receives this news, Weldon approaches the two other Crescent owners to sell him both the second and the third interests. Weldon breaks the impasse with one o — the owners by promising to give the owner’s mother, who lives on the property, a li — e estate in her lot and — lower garden. Weldon ends up nearly cornering the gravel market. Pet Rocks’s directors are angry that Weldon, their colleague director, got the deal.
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Were Weldon’s actions appropriate?
A. No. He has usurped (diverted to his own use) a corporate opportunity, in breach o --- his
duty o --- loyalty.
B. Weldon’s actions were inappropriate as to the second interest, but appropriate as to the
third because Pet Rocks had made no attempt to obtain the third.
C. No. What Weldon did was not “ --- air.”
D. Weldon’s actions were inappropriate, but he could have avoided the trouble i --- he had
resigned be --- ore approaching the owners o --- the other interests in the Crescent.
129. Cellular Licenses.
Brody has her own Delaware corporation — Brody, Ltd. — which has speculated in Federal
Communications Commission cellular telephone licenses. She holds licenses --- or several ser-
vice areas and sits on the board o --- the local telephone company, Yelm Bell Co. Yelm is an
old- --- ashioned local service provider with hard wires running --- rom customers’ homes and
businesses to Yelm’s exchanges. Several cellular licenses have come onto the local market,
and Brody asks all o --- her Yelm director colleagues whether Yelm has an interest, but she
does so individually rather than at a board meeting. They each say “no,” with the CEO add-
ing that Yelm has little cash right now because it has been building out a cable television sys-
tem. Brody and Brody, Ltd., then sign a contract to purchase the licenses. Be --- ore Brody, Ltd.,
closes on the deal, Firstwave Communications, a --- ull-service telecommunications company
(cellular, internet access, cable television, and traditional telephone service) in a neighboring
area, announces a merger with Yelm. Firstwave sues Brody and Brody, Ltd.
Is there a corporate opportunity as to Yelm?
A. Yes, because a director may not divert an opportunity that right --- ully belongs to the
corporation’s prospective merger partner.
B. No, because Yelm’s line o --- business did not include cellular licenses, Brody did not learn
o --- it by virtue o --- her position, and Yelm has no interest or expectancy (indeed, it turned
the deal down).
C. Yes, because cellular is a line o --- business in which Yelm might reasonably be expected
to engage.
D. No, because Brody was in this business long be --- ore she became a member o --- the Yelm
Telephone board o --- directors.
130. Brotherly Competition.
Brothers Hector and Ajax operate a success --- ul business that exports scrap metal. Each
owns 35 percent. The --- ormer manager, Rosen, comes into the o ---
ice one day. Rosen owns
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20 percent. Friends and employees own the remaining 10 percent. Rosen is moving out o ---
the area and inquires whether the corporation will buy back his shares. The brothers con --- er
and respond that the corporation has no interest but that Hector, individually, would give
Rosen $5 per share. Rosen departs on --- riendly terms. Ajax then excuses himsel --- , saying he
has an errand to run. He intercepts Rosen in the parking lot. He o ---
ers Rosen $12 per share. Rosen accepts. Using his newly acquired majority control, Ajax puts his business associates on the board. They promote Ajax to CEO, at a greatly increased salary. Meanwhile, Hector languishes. His salary increases, but only slightly. He decides to consult you about what he should do.
Has Ajax usurped a corporate opportunity?
Answer:
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or — lip2.indb 76 2/12/24 1:45 PM Topic 10 Questions
Shareholder Litigation
Assume, unless otherwise noted, that each o --- the --- ollowing questions involves --- acts arising in a
jurisdiction that has adopted the Model Business Corporation Act (MBCA) and that has inter-
preted the law o --- agency consistently with the interpretations stated in the Restatement (Third) o ---
Agency. To the extent you need to consider case law or litigation risk, apply Delaware law. The U.S.
Securities and Exchange Commission is re --- erenced as the “SEC.”
131. Introduction to Derivative Actions.
What is a “derivative” lawsuit?
Answer:
132. Inspecting the Records.
Faulkner believes that Unlimited, Inc., a publicly-held corporation in which she owns shares,
has made --- alse or misleading disclosures relating to a merger agreement. To her chagrin, the
annual meeting o --- the shareholders is not due to be held --- or eight months. In an attempt to
bring public attention to this scandal, Faulkner wants to --- ile a lawsuit against the corpo-
ration. She has delivered to the board a procedurally proper notice o --- demand to inspect
Unlimited’s list o --- shareholders. As maintained, the list includes the names, numbers o ---
shares held, and contact in --- ormation --- or all shareholders. Faulkner explained in the notice
that she wanted to see the list so that she could noti --- y the other shareholders o --- the lawsuit.
Unlimited’s board believes that Faulkner is requesting the list so that she may solicit other
shareholders to join the suit. Accordingly, the board does not want Faulker to get access to
the shareholder list. Unlimited’s articles o --- incorporation and bylaws include the de --- ault
rules --- or a shareholder’s rights o --- inspection o --- corporate records.
Is Faulkner entitled to see the list o --- shareholders?
A. Yes. She has alleged a proper purpose to inspect the shareholder list.
B. No. Faulkner will not be entitled to inspect the list o --- shareholders until a --- ter notice --- or
the next meeting is given.
C. No. This is just a “ --- ishing expedition” to bolster her lawsuit.
D. Yes. Faulkner is entitled, as a matter o --- absolute right, to see the list o --- shareholders at
any time --- or any reason.
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133. A Disgruntled Shareholder, Part I.
Falconer is a disgruntled shareholder o --- Roadstar, Inc., a small, publicly-held company
with 150 shareholders and a --- ive-person board. Falconer is disgruntled because a vendor
just breached a contract --- or delivery o --- 1,000 widgets over the next two years. Falconer has
learned that the vendor, Drummond Co., is owned by cousins o --- Manley, Roadstar’s CEO
and largest shareholder. Manley’s brother, Stanley, also sits on the Roadstar board, as does
their --- ather, Randley. As a result o --- the cancellation, Roadstar stands to experience a --- inan-
cial loss --- or the --- irst time in --- ive years and will be unable to pay dividends this year. The stock
value will also certainly decrease. The other two directors, Carlson and Winslow, rarely
attend board meetings. Falconer is incensed because the board has done nothing regarding
the breach and has allowed it to happen with nary a protest.
Does Falconer have a right to --- ile a lawsuit against the board o --- directors on behal --- o --- the
corporation?
A. No. The business and a ---
airs are managed by the board o — directors and only they may commence a lawsuit. B. No. A shareholder does not have a right to sue a board o — directors under any circumstance. C. No, but Falconer may — ile a lawsuit on his own behal — against the corporation. D. Yes, but Falconer will be subject to heightened procedural requirements.
134. A Disgruntled Shareholder, Part II.
Falconer has decided to pursue a lawsuit against the board o --- directors on behal --- o --- the corpo-
ration. Speci --- ically, Falconer believes that the board has breached its duty o --- loyalty by enter-
ing into a con --- lict-o --- -interest transaction to the detriment o --- the corporation and its duty o ---
care by making bad decisions. Falconer has engaged your --- irm to discuss the steps moving
orward and has asked i — there is anything he is required to do be — ore — iling the lawsuit.
What advice do you give?
A. Falconer can --- ile the lawsuit immediately.
B. Falconer must --- irst make a demand on the board o --- directors to cure the breach.
C. Falconer must acquire more stock to meet the threshold to have standing to --- ile the suit.
D. Falconer must --- ile a shareholder proposal to authorize the suit to move --- orward.
135. A Disgruntled Shareholder, Part III.
Be --- ore Falconer can even make demand on the board, he obtains more “bad news.” At a
Roadstar board meeting, the directors declared an extraordinary dividend o --- $30 per share
(the stock sells --- or $15), payable only to those shareholders who have held shares --- or --- ive
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years or longer. Falconer is one o ---
ive shareholders who has held shares in the corpora- tion — or less than years. Believing that the dividend payment is in retaliation — or Falconer’s e —
orts to commence a lawsuit, he wishes to add to his lawsuit a challenge over the dividend payments.
Is this additional claim a derivative claim on behal --- o --- the corporation?
A. Yes, this is an additional claim that Falconer can assert derivatively on behal --- o --- the
corporation.
B. Yes, this is a derivative claim because Falconer is not the only shareholder to have been
impacted by the dividend payment.
C. No, this is a claim that Falconer can assert directly, on his own behal --- .
D. No, this is a valid exercise o --- business judgment and so Falconer cannot --- ile a claim at all.
136. A Disgruntled Shareholder, Part IV.
A --- ter your initial consultation with Falconer and the troubles at Roadstar, Inc., you have
done some research and discovered that the corporation has a six-member board. In addi-
tion to Manley, Manley’s --- ather, and Manley’s brother, three other members sit on the board:
an accountant, a lawyer, and a real estate agent. You reviewed their social media pages and
discovered that the lawyer appears to be a close --- riend o --- the Manleys and --- requently vaca-
tions with them. In your investigation, it seems that the accountant and the real estate agent
run in the same social circles as the Manleys, but you cannot --- ind any direct evidence that
they are particularly close. You are preparing a letter to Falconer to advise him as to whether
you believe a court would excuse demand in this case as --- utile. Assume that Delaware law
applies.
What advice do you give to Falconer?
A. Demand is likely to be excused as --- utile because three members o --- the board (the Man-
leys) are sel --- -interested in the challenged transaction and thus con --- licted.
B. Demand is likely to be excused as --- utile because --- our members o --- the board (the Manleys
and the attorney) are sel --- -interested in the challenged transaction and thus con --- licted.
C. Demand is likely to be excused as --- utile because all six members o --- the board are sel --- -
interested in the challenged transaction and thus con --- licted.
D. Demand is not likely to be excused as --- utile.
137. A Disgruntled Shareholder, Part V.
You are sitting down to meet with Falconer to discuss litigation strategy. You’ve discussed
the pros and cons o --- making a demand as well as your views on whether you believe the
court is likely to excuse demand as --- utile. Falconer responds, “I hear what you’re saying.
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To be sa --- e, why not just make a demand. That way we don’t have to worry about any o --- this
stu ---
.” Assume that Delaware law applies.
How will you respond?
Answer:
138. A Disgruntled Shareholder, Part VI.
Assume now that you represent the six-member board o --- Roadstar, Inc., and that you have
received Falconer’s demand to sue or cure the breach o ---
iduciary duty o — loyalty relating to the alleged con — lict-o — -interest transaction. You advise the board that at least three, maybe
our, o — the directors have a con — lict o — interest in the transaction, and thus, the court is likely to permit the lawsuit to progress even i — the board rejects the demand. Assume Dela- ware law applies.
What advice should you o ---
er the board to best ensure the lawsuit will be quickly dismissed? Answer:
139. A Disgruntled Shareholder, Part VII.
Falconer decided to proceed with the derivative lawsuit without --- irst making a demand on
the board. A --- ter receiving service o --- the lawsuit, the board appointed and re --- erred the mat-
ter to a special litigation committee made up o --- the accountant and the real estate agent.
The committee hired outside counsel to review the lawsuit and make a recommendation.
Outside counsel issued a written opinion to the committee advising that Falconer’s lawsuit
was not in the best interest o --- the corporation and should be dismissed. Accordingly, the
special litigation committee voted that the lawsuit should be dismissed, and it noted that its
decision was --- inal and not subject to the review o --- the other directors. Consistent with this
report, the board --- iled a motion with the court to dismiss the lawsuit. Assume that Delaware
law applies.
How should the court rule?
A. The court should deny the motion because Falconer was correct to --- ile the lawsuit with-
out --- irst making a demand on the board o --- directors.
B. The court should deny the motion because it should make its own determination as to
whether the lawsuit is in the best interest o --- the corporation.
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C. The court should grant the motion because the special litigation committee was inde-
pendent, acted in good --- aith, and made a reasonable recommendation.
D. The court should grant the motion because the special litigation committee was inde-
pendent, acted in good --- aith, and made a reasonable recommendation, but only i --- the
court believes in its own independent business judgment that the lawsuit should be
dismissed.
140. Shareholder Incentives.
I --- a shareholder does not stand to receive any recovery --- rom a derivative suit because the
recovery --- lows to the corporation, what incentive does a shareholder have to bring a deriva-
tive suit?
Answer:
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or — lip2.indb 81 2/12/24 1:45 PM 3172Branson_Q&A_3e — or — lip2.indb 82 2/12/24 1:45 PM Topic 11 Questions
Mergers and Acquisitions
Assume that each o --- the --- ollowing questions involves --- acts arising in a jurisdiction that has adopted
the Model Business Corporation Act (MBCA) and that has interpreted the law o --- agency consis-
tently with the interpretations stated in the Restatement (Third) o --- Agency. To the extent you need
to consider case law or litigation risk, apply Delaware law. The U.S. Securities and Exchange Com-
mission is re --- erenced as the “SEC.”
141. Preemptive Rights.
Which o --- the --- ollowing is a “preemptive right” that pre --- erred stockholders might bargain
or? A. Right o —
irst re — usal B. Right o —
irst sale C. In — ormation rights D. Liquidation rights
142. Fabulous De --- ense.
Fabulous Foods, Inc., is a con --- ectionery company whose common stock is traded on the
New York Stock Exchange (symbol: FAB). An inner circle o --- shareholders, which holds about
15 percent o --- the common stock, consists o --- the third generation o --- the company’s --- ounders
and the company’s long-time top managers. The inner circle and Fabulous’s management are
worried about a hostile takeover. Fabulous has no debt, ranks number two or three in every
market in which it has products, and has $100 million in cash or cash equivalents. There has
also been much recent consolidation in the --- ood industry, not only through --- riendly mergers
but also by hostile takeovers. The FAB board o --- directors is conducting its annual “ --- ly away”
board retreat at a resort in Vermont. The board has asked the --- ounding --- amily members to
join the board --- or an a --- ternoon. The board has also asked you to advise them on a takeover
de --- ense they could quickly implement.
Advise the directors on how you could implement a “super voting stock” de --- ense to protect
FAB --- rom hostile takeovers.
Answer:
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143. Preemptive IPO.
A success --- ul corporation decides to go public and hires you as its attorney --- or this transac-
tion. You review its articles o --- incorporation and discover that the shareholders have pre-
emptive rights.
Is it necessary and proper to amend the articles o --- incorporation to remove the preemptive
rights be --- ore going public?
A. Although preemptive rights prevent a corporation --- rom going public, no, it is not proper
to remove them because they are important and valuable property rights vested in the
corporation’s shareholders.
B. Yes. Preemptive rights are problematic when going public, and they should be removed
by a vote by a majority o --- shareholders.
C. No. A public o ---
ering under the Securities Act o — 1933 automatically eliminates pre- emptive rights. D. No. The MBCA does not recognize preemptive rights.
144. Buy–Sell Agreement.
Seven Springs is a small ski resort, opened in the late 1940s by two --- amilies who enjoyed ski-
ing. Over the years, Seven Springs has acquired additional property, added new ski li --- ts, and
opened a hotel and restaurant. Through gi --- ts and bequests, the number o --- shareholders has
increased to 34, though all are members o --- several extended --- amilies: the Steep and Deep
amilies on the one hand, and the Groomed and Gradual — amilies on the other. Many years ago, the shareholders all signed a “buy–sell” agreement. The agreement provided that be — ore any shareholder could sell, she had — irst to o —
er her shares to the other shareholders, on the same terms as the third party was willing to agree to. The existence o — the agreement is con- spicuously noted in the margin o — each Seven Springs share certi — icate. Now the entire Steep and Deep clan proposes to sell. They wish to sell to a larger company, Vail Ski Corp. The Groomed and Gradual — amilies oppose this. They invoke the buy–sell agreement. The Steeps and the Deeps reply, “This is not a sale, it is a merger, and we have you outvoted (19–15).”
What is the legal result?
A. A merger occurs by operation o --- the law ( --- iling articles o --- merger a --- ter the requisite
shareholder vote has been obtained) and is not a sale. The agreement does not apply.
B. In e ---
ect, the shareholders “sell” their shares when they vote on the merger, which will result in their receipt o — Vail Ski Corp. shares. The agreement applies. C. The buy-sell agreement is invalid because it is a restraint on alienation. D. Their re — usal to abide by the agreement constitutes — raud.
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145. Alaska–Hawaii.
On and o ---
over the years, Alaska Airlines, Inc., and Hawaii Airlines, Inc., have discussed combining — orces. They operate the same type o — aircra — t. Their route systems are contigu- ous yet with little overlap, such that combining them will provide synergistic cost savings. The CEOs o — both companies met and con — erred. They agreed on a term sheet, which they presented to their respective boards, who then voted to retain a lawyer to assist with moving
orward toward this deal. You get the call — rom Alaska’s board chair, who asks you, “How do corporate combinations typically proceed?”
Describe the typical steps and some common deal structures.
Answer:
146. Acquirer–Target, Part I.
Two corporations, Acquirer and Target, decide to combine. Acquirer desires Target’s intel-
lectual property and real property, but Acquirer wishes to avoid Target’s tort liability --- or
harms caused by its products. Acquirer wishes to preserve as much o --- its cash as possible.
Which deal structure best meet’s Acquirer’s objectives?
A. Statutory merger
B. Cash --- or assets
C. Stock --- or assets
D. Stock tender o ---
er
147. Acquirer–Target, Part II.
Two corporations, Acquirer and Target, decide to combine. Acquirer desires Target’s FCC
broadcaster license, but FCC broadcaster licenses must be continuously held by the original
licensee.
Which deal structure allows Acquirer and Target to combine such that the combined entity
may continue holding the FCC broadcaster license?
A. Statutory merger
B. Stock --- or assets transaction
C. Reverse triangular merger
D. It cannot be done
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148. Acquirer–Target, Part III.
The board o --- directors and the CEO o --- Acquirer, a very large publicly-traded corporation,
decide to purchase Target, a small but rapidly growing technology startup, --- or $5 million.
However, it would cost nearly that much to hold a special shareholders’ meeting and solicit
proxies to hold a vote about this acquisition. For this deal to be economical, the structure
must permit Acquirer to avoid its shareholder vote.
Which deal structure allows Acquirer to purchase Target without requiring a vote by
Acquirer’s shareholders?
A. Reincorporate Acquirer in a jurisdiction with a small-scale merger statute and then
per --- orm a small-scale merger.
B. Per --- orm a triangular merger.
C. Per --- orm a cash merger.
D. Per --- orm a tender o ---
er.
149. Acquirer–Target, Part IV.
The board o --- directors and the CEO o --- Acquirer, a very large publicly-traded corporation,
decide to purchase Target, a small but rapidly growing technology startup. The CEO o ---
Acquirer o ---
ers terms to acquire Target, but Target’s board does not accept them. To pur- chase Target, Acquirer will need to identi — y a deal structure that does not require Target’s board’s approval.
Which deal structure allows Acquirer to purchase Target without requiring approval by
Target’s board?
A. Proxy contest
B. Takeover bid
C. Stock tender o ---
er D. This transaction cannot be done without target board approval.
150. Dinosaur Classi --- ied Board.
Dinosaur Oil, Inc., is a publicly-traded corporation that owns and operates deep sea oil min-
ing rigs. The corporation has been very pro --- itable --- or over a decade, but last year its pro --- its
and stock price --- ell sharply a --- ter a rig caught on --- ire. The directors are concerned that a
shareholder activist will attempt a proxy contest to oust the current director while public
sentiment is against the corporation. To prevent this, the directors classi --- ied the board into
three groups, each serving a staggered three-year term, and installed a requirement that
shareholders could remove directors “only --- or cause.”
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Can Dinosaur Oil’s board de --- end against a potential proxy contest by classi --- ying the board?
A. Yes. Board classi --- ication schemes are permitted by statutes.
B. Probably. Under the business judgment rule, boards are generally permitted to install
antitakeover devices.
C. Probably not. The court will review the de --- enses and their adoption very closely, apply-
ing a duty o --- loyalty analysis that will strike down a de --- ense i --- the primary motivation
behind adoption was entrenchment o --- the current board and management.
D. No. The court will strike down the board classi --- ication scheme, as it clearly is an
entrenchment device.
151. Dinosaur Crown Jewel.
Dinosaur Oil, Inc., a publicly-traded corporation, has a staggered board that is notably
opposed to takeover o ---
ers. Takeover specialist Picken decided to attempt a hostile takeover via a cash tender o —
er. Picken — iled a Form 13D with the SEC disclosing he owns 12 percent o — Dinosaur Oil. Dinosaur’s directors hold an emergency meeting where they elect to grant their chie — competitor, Cambrian Oil, an option to purchase over hal — o — their oil — ields at a
avorable price. This option, which amounts to Dinosaur Oil’s o —
ering up the “crown jewel” o — its enterprise, sours the deal — or Picken. Picken sues — or a preliminary injunction that pre- vents Dinosaur Oil — rom o —
ering its oil — ields to Cambrian Oil.
Will Picken’s challenge prevail in court?
A. No. Dinosaur’s directors are permitted to o ---
er the crown jewel option under the busi- ness judgment rule. B. No. Dinosaur’s directors are permitted to o —
er the crown jewel option so long they do not stand to personally pro — it — rom the transaction. C. Yes. Dinosaur Oil’s directors — ailed to get shareholder approval o — the option they o —
ered to Cambrian Oil. D. Yes. The granting o — the crown jewel option, especially at such a preliminary stage, is “disproportionate to the threat posed” and will be struck down.
152. Dinosaur Duties.
Dinosaur Oil, Inc., a publicly-traded corporation, is responding to a cash tender o ---
er by takeover specialist Picken, who — iled a Form 13D with the SEC disclosing he owns 12 percent o — Dinosaur Oil and intends to gain control o — the corporation. Dinosaur’s directors hold an emergency meeting to evaluate their options. You, Dinosaur’s corporate counsel, are present to recommend to the board what actions are permitted under corporate law.
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Which o --- the --- ollowing statements best summarizes the board’s obligations when there is an
imminent takeover threat?
A. The directors are obligated to take any and all actions reasonably necessary to prevent
corporate raiders --- rom taking over the corporation.
B. The directors are protected by the business judgment rule --- or any corporate decisions
taken in response to a takeover threat.
C. The directors’ role has changed --- rom de --- enders o --- the corporate bastion to auctioneers
charged with getting the best price --- or the stockholders at a sale o --- the company.
D. The directors must ensure that the transaction is entirely --- air.
153. Dinosaur Equals.
Dinosaur Oil, Inc., a publicly-traded corporation, is responding to a cash tender o ---
er by takeover specialist Picken, who — iled a Form 13D disclosing he owns 12 percent o — Dinosaur Oil and intends to gain control o — the corporation. Dinosaur’s directors hold an emergency meeting and decide to seek a “white knight” buyer. Eventually, Shell Oil, a larger competi- tor with synergistic assets, o —
ers to buy Dinosaur Oil — or a price per share that is 40 per- cent more than market value — or the shares. The directors agree to this deal, which has several “deal protection” measures, including a “no shop” clause that prohibits Dinosaur or its directors — rom soliciting another bidder, a “no talk” provision that prohibits — urnishing any non-public in — ormation to any potential bidder, and a termination — ee provision under which Dinosaur must pay Shell approximately 5 percent o — the value o — the transaction i — , — or any reason, the merger is not consummated.
Has the Dinosaur board o --- directors violated its duties to shareholders by agreeing to the
Shell Oil merger agreement?
A. No. The directors’ business decisions are protected by the business judgment rule.
B. No. In a merger o --- equals (MOE), the parties are --- ree to “just say no” to other bidders,
especially when other values, such as preservation o --- a unique corporate culture, are at
stake.
C. Yes. The board o --- directors is in Revlon mode, such that it must conduct an auction to
achieve the highest cash value --- or stockholders.
D. Yes. Deal protections are presumed to breach --- iduciary duties, and the directors have
not overcome the burden o --- persuasion by showing these deal protections are entirely
air to stockholders.
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or — lip2.indb 88 2/12/24 1:45 PM Topic 12 Questions
Insider Trading
Assume that each o --- the --- ollowing questions involves --- acts arising in a jurisdiction that has adopted
the Model Business Corporation Act (MBCA) and that has interpreted the law o --- agency consis-
tently with the interpretations stated in the Restatement (Third) o --- Agency. To the extent you need
to consider case law or litigation risk, apply Delaware law. The U.S. Securities and Exchange Com-
mission is re --- erenced as the “SEC.”
154. Inside In --- ormation.
MidAmerican Bank is a conservative institution that has, over the years, gained the loy-
alty o --- the local --- arm populace. Approximately 35 individuals own MidAmerican shares.
Long-time director Caron contacts the children o --- the deceased --- ounder o --- MidAmerican.
The children, Barbara and Lynn, are each married with young --- amilies. Caron o ---
ers Bar- bara and Lynn $12 per share — or their — ather’s stock, 20 percent o — the total outstanding, which they inherited. Later, he bids against himsel — , raising the price to $15. Each daughter then sells, grossing over $200,000 each. Two months later, Floatman’s Bank, a larger bank, makes a — riendly tender o —
er (or takeover bid — the terms are used interchangeably) — or MidAmerican shares at $30 per share. Barbara and Lynn have learned that Caron went around to several other shareholders buying up as many shares as he could. Barbara and Lynn — eel that Caron took advantage o — them, likely knowing o — Floatman’s interest in acquiring the shares.
What course o --- action should the sisters pursue?
A. A --- ederal claim --- or insider trading pursuant to SEC Rule 10b-5 and the Securities
Exchange Act o --- 1934
B. A state law claim o --- breach o ---
iduciary duty under the “special — acts” doctrine C. Answers (A) and (B) are equally viable. D. A state law — raud claim
155. Good News Not Shared.
Over the past --- ew years, employees o --- Good News Gas Co. have been prospecting --- or natural
gas deposits. They drill a test well on one o --- their leases. The test results show that the well is
gangbusters, so much so that it may be the largest natural gas --- ield ever discovered in North
America. The employees quickly cap the well and remove the drilling rig. Knowing also that
89
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or — lip2.indb 89 2/12/24 1:45 PM 90 Questions · Topic 12: Insider Trading
natural gas prices are approaching an all-time high, two employees, Twitty and Owen, call
several stockbrokers and place large (but not overly large and there --- ore suspicious) orders
both --- or Good News common shares and --- or call options to purchase such shares. Twitty
and Owen then call Good News headquarters and report the drill test results to Robbin,
the vice president --- or development, who tells Twitty and Owen to keep it under their hat --- or
a --- ew days. Robbin then buys up shares and options on shares. Finally, the “good news” is
announced at a press con --- erence. Director Husky, who is in attendance, whips out his cell
phone. He purchases Good News shares, as does his broker. Within a month the share price
has gone --- rom $14 to $40.
Who is liable and --- or what?
A. They all are liable --- or the pro --- it made and, in addition, subject to a civil penalty --- or up to
three times the pro --- it made (or the loss --- orgone, in cases o --- insiders selling on negative
news) and possible criminal penalties.
B. Husky would not be liable. He did not trade (or “tip” his broker to trade) until a --- ter the
in --- ormation was disclosed.
C. Only Robbin is liable. He is a corporate o ---
icer. Twitty and Owen are just petroleum engineers, rank-and- — ile employees who owe to no one — iduciary or similar duties. D. None o — them is liable. This kind o — trading keeps share markets e —
icient, moving share prices in the right direction, and is also the very type o — incentive-based compensation we wish to encourage.
156. Misappropriation.
Vincent is a --- inancial printer. In the course o --- his work, he reviews printer’s proo --- s o --- “o ---
ers to purchase” in takeover bids. Dra — ts o — these documents are communicated to Vincent’s employer in absolute secrecy and are protected by a strict con — identiality agreement. The name o — the target corporation is encrypted until the — inal press run. The cipher — or the target company name, though, has to have the same number o — characters as the real name. Also, by reading the narrative, Vincent can uncover much in — ormation. For example, he might discover that the target is in the — orest products industry, is headquartered in a Mid- west city, and has ten characters in its name. A — ter conducting some research, he quickly researches the subject and — inds Hammerhill Paper (ten characters) is located in the right area. Vincent buys the stock, albeit in the modest amounts his — inancial circumstances per- mit. Vincent has done this eight times, amassing $80,000. Then the SEC — inds out. They bring a civil suit against Vincent in — ederal district court. In return — or getting o —
with a consent decree, Vincent agrees to disgorge those pro — its. But eight or nine — inancial printers have done this. To make an example o — him, the SEC re — ers the case to the U.S. Attorney, who prosecutes Vincent criminally. You are de — ense counsel.
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or — lip2.indb 90 2/12/24 1:45 PM Questions · Topic 12: Insider Trading 91
Will a de --- ense that Vincent did not occupy an “inside” --- iduciary relationship work here?
A. No. There’s no insider trading, but there may be a breach o --- contract.
B. Yes. Inside in --- ormation comes --- rom a source within the company whose shares are
being traded, but this in --- ormation did not come --- rom “within” the company.
C. No. Vincent misappropriated the in --- ormation and, thus, engaged in unlaw --- ul insider
trading.
D. Yes. Vincent occupies no --- iduciary or similar position vis-à-vis those with whom he
traded. He is a stranger to them and owes them no duties.
157. Lucky Overhearing.
State U --- ootball coach Olsen (Coach Olsen) is attending a track meet at a local high school
because his daughter is running in the 800-meter race. Coach Olsen sits behind Local Pub-
lic Company CEO and his spouse. CEO is talking to his spouse about leaving the next day,
a Sunday, to travel to New York, where he will be meeting with an investment banking --- irm,
Silverman. In the same conversation, CEO talks about mergers and about XYZ Co. Putting
two and two together, Coach Olsen calls a local auto dealer who sponsors Coach Olsen’s
television show. On Monday, they together purchase 20,000 XYZ shares. Sure enough, on
Wednesday, a cash acquisition o --- XYZ by Local Public Company is announced. The cash
merger price is at a 48 percent premium over market. Coach Olsen and --- riendly auto dealer
sell on Friday. Their one-week pro --- its are a whopping $1.9 million. The SEC sues Coach
Olsen and the local auto dealer.
What is their best de --- ense?
A. They have none. Coach Olsen is a tippee, and local auto dealer is a remote tippee. Both
are liable.
B. Coach is liable, but, as a remote tippee, local auto dealer is not liable.
C. The in --- ormation is market in --- ormation rather than inside in --- ormation so that the “dis-
close or abstain” prohibition does not apply.
D. The coach is only an eavesdropper, not a tippee, and there --- ore neither he nor the local
auto dealer is liable.
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Practice Final Exam
Assume that each o --- the --- ollowing questions involves --- acts arising in a jurisdiction that has adopted
the Revised Uni --- orm Partnership Act (RUPA), the Revised Uni --- orm Limited Liability Company
Act (RULLCA), and the Model Business Corporation Act (MBCA) and that has interpreted the law
o --- agency consistently with the interpretations stated in the Restatement (Third) o --- Agency. To the
extent you need to consider case law or litigation risk, apply Delaware law. The U.S. Securities and
Exchange Commission is re --- erenced as the “SEC.”
Recommended Time Allocation: 1 Hour and 30 Minutes
158. Capital Structure.
Five entrepreneurs are opening a French ca --- é. They purchase baked goods and cold sand-
wiches daily --- rom a bakery downtown, then they sell these --- oods in the suburb where they
live. I --- the business goes well, in three to --- our years they may open a second ca --- é in an
adjoining suburb. They have no plans beyond that. Each entrepreneur has agreed to con-
tribute $10,000 to the corporation, and these --- unds will be used to purchase equipment,
urnishings, and — ixtures and — or working capital.
What is the best capital structure --- or this corporation?
A. All common stock, in equal proportions to each entrepreneur’s capital contribution
B. A small amount o --- common stock, along with convertible cumulative pre --- erred shares
to each participating entrepreneur
C. Common stock to each and a loan by each, say, $4,000 in stock and a $6,000 promis-
sory note --- rom the corporation to each couple
D. Common stock to each entrepreneur, and authorize cumulative pre --- erred in the articles
o --- incorporation so as to be able to --- und any --- uture expansion
159. Activist Shareholders.
Activist shareholders in Northern Pines, Inc., a publicly-held corporation with approxi-
mately 900 shareholders, wish to --- orce the corporation to cease the practice known as “clear
cutting” on Northern Pines lands and --- urther to present to the shareholders --- or approval a
“ --- orestry stewardship plan.” One central component o --- such a plan would be to provide --- or
selective harvest o --- trees rather than clear cutting.
95
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Which o --- the --- ollowing represents the most cost-e ---
ective alternative — or the activist share- holders to achieve one or more o — their goals? A. Filing suit against Northern Pines’s directors seeking an injunction to stop the practices B. Enlisting the support o — 20 or so institutional investors who own 40 percent o — North- ern Pines’s common shares C. Filing an SEC Rule 14a-8 proposal requesting that the directors propose an amendment to the articles o — incorporation prohibiting clear cutting and requiring periodic — orestry stewardship plans D. Waging a proxy contest seeking votes to remove the incumbent directors and replacing them with a slate o — activist shareholders and others who oppose clear cutting
160. Promoter Liability.
Frank has obtained approval --- or a donut shop --- ranchise. The --- ranchise agreement will have
a --- ive-year term. Frank has also located suitable commercial real estate space in which to
locate his --- ranchise. The landlord requires a --- ive-year lease. Frank’s two --- riends, Yossi and
Zelda, will each contribute $20,000 --- or a 20 percent interest in Frank’s new company. You
have advised Frank to wait until you have --- ormed a corporation --- or him, but Yossi is impa-
tient to sign the lease and the --- ranchise agreement. Frank does not wish to be personally
liable on the --- ive-year lease and the --- ranchise agreement.
What should Frank do to avoid personal liability on the lease and --- ranchise agreement?
A. On both the lease and the --- ranchise agreement, he should indicate clearly that the cor-
poration does not yet exist (“a corporation to be --- ormed”).
B. He should sign by clearly indicating his representative capacity (“By Frank, Promoter”).
C. He should provide --- or a substitution o --- the corporation --- or Yossi when the corporation
does come into existence (a --- uture “novation”).
D. All o --- the above.
161. LLC In --- ormality.
Dora Bay LLC operates a longshoring venture in the Paci --- ic Northwest loading logs and
other cargo onto ships bound --- or Asia. The LLC’s operating agreement provides that Dora
Bay will be a member-managed LLC. The --- ive members o --- the LLC never have meetings.
They rely on word o --- mouth, one to another. They also have kept very poor records. A tug-
boat company is suing the LLC and its members personally --- or unpaid bills.
Should the members be held personally liable?
A. No. LLC statutes contemplate in --- ormality, which alone should not be a ground --- or
piercing the veil.
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B. Yes. Lack o ---
ormalities is a ground — or “piercing the veil” and denying members lim- ited liability. C. Yes, because maintenance o — books and records is a statutory requirement which the Dora Bay LLC members have violated. D. Yes, because LLC members have no limited liability i — they permit the LLC to engage in ultrahazardous activities such as longshoring.
162. M&A De --- enses.
You represent a publicly-held company whose senior executives --- eel that the corporation may
be vulnerable to a hostile takeover bid. The corporation’s eight directors are elected annually.
Which o --- the --- ollowing is not a common strategy employed to de --- end against hostile take-
over bids?
A. Staggering the board into classes
B. Giving a competitor an option to purchase the company’s most valuable assets
C. Adopting a requirement that directors can be removed only --- or cause
D. Limiting shareholders’ abilities to call special shareholders’ meetings.
163. Partnership Pro --- essional Responsibility.
Crawley & Morass, LLP, is a 30-lawyer --- irm. Stephens is a young partner in the --- irm. She has
worked extensively on the Bloomberg account. Over the past --- ew years, she has noted that the
supervising partner, Johnson, has in --- lated the hours billed to Bloomberg, sometimes by a --- ac-
tor o --- 40 or 50 percent. Eventually, Stephens could take it no longer. In June, she reported the
over-billing to the managing partner. In August, two o --- the management committee part-
ners requested an interview with Stephens. They reported to her that their investigation had
uncovered no intentional over-billing o --- Bloomberg. They also stated that she should begin to
look --- or work elsewhere. Her partnership draw would continue only until December 31.
Can the --- irm get away with such an injustice?
A. Yes. Partnerships are consensual, so the partners may expel her i --- the partnership
agreement so provides.
B. Maybe. They may expel her but only --- or cause, so the --- irm would have to prove that
Stephens acted improperly.
C. No. The partnership violated the --- iduciary duties partners owe one to another.
D. No. The rules o --- pro --- essional responsibility are implied terms o --- the partnership agree-
ment, and Stephens had a duty to take reasonable remedial action to avoid the conse-
quences o --- known violations by another lawyer in the --- irm.
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164. Family Business.
Meyer started a success --- ul automobile parts business named First Gear, Inc. When Meyer
died, his children, Nate, Olivia, and Pat, inherited the business, with each receiving one-
third o --- the shares. Nate runs the business back in the Midwest. Nate earns a nice salary,
leases a company car, and pays --- or NBA basketball and NFL --- ootball season tickets using
corporate --- unds. He re --- uses to have the company pay dividends. This has gone on --- or 12
years. Now Olivia is --- ed up with what she sees as Nate’s exploitation o --- his position. She is
willing to go to court to get comparable bene --- its --- or hersel --- . She is not on speaking terms
with Nate. Pat is indi ---
erent.
What cause o --- action might Olivia bring against Nate?
A. A derivative suit against Nate --- or breach o ---
iduciary duty B. A direct suit — or breach o —
iduciary duty owed her by her brother and by the corpora- tion to her as a shareholder in a closely-held corporation C. A securities — raud lawsuit in — ederal court D. A suit — or involuntary dissolution o — the corporation on grounds o — oppression (“denial o — reasonable expectations”)
165. Family Con --- lict.
Sole is a director and the CEO o --- publicly-held Sunsweet Co. The corporation processes --- ruit
or its own brand o — juice and — or other labels as well. The corporation has now decided to divest itsel — o — the bottling plant and the vehicle — leet utilized — or that particular endeavor. Mott, — irst cousin and childhood — riend o — Sole, bids at the appraised market price. Or, more accurately, he bids in the name o — a corporation he has — ormed — or the purpose o — acquiring the assets.
Does the transaction require any special scrutiny or treatment?
A. No. Doing business with a director’s --- irst cousin or with an entity controlled by him is
not a de --- ined “con --- licting interest” transaction.
B. Yes. A transaction with an entity controlled by a director or o ---
icer’s cousin involves a con — lict o — interest. The transaction should receive special scrutiny by the disinterested directors. C. Yes. Whether this is a con — lict o — interest is a question o —
act that needs to be consid- ered by the board. D. Yes. Sole has a con — lict o — interest as a matter o — law and the transaction is impermissible.
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166. Stealing In --- ormation.
Horatio worked at a major bank on a team that analyzed leveraged buyout proposals. A --- ter
the bank terminated his employment six months ago, Horatio kept his corporate identi --- ica-
tion, which he wears suspended --- rom his neck. He has a magnetic key card --- or the eleva-
tor. He also long ago be --- riended the Saturday morning security guard who watches over
the building lobby and elevators. The guard believes that Horatio still works --- or the bank.
On Saturday mornings, Horatio buys a co ---
ee “to go,” passes through the lobby, greets the security guard, and rides the elevator to the 40th — loor, where he ri — les in the desks o — his
ormer co-workers. In this way, he has identi — ied nine LBO targets, eight o — which have gone
orward. With some uncles, cousins, and college — riends, Horatio has an “investment club” that has invested heavily in LBO target company shares. The club has made $2.3 million in pro — its. Horatio receives 30 percent.
Horatio is liable --- or insider trading, but in what capacity?
A. Insider
B. Temporary insider
C. Tippee
D. Thie --- (or misappropriator)
167. Dividend Issuance.
Bill, Pauline, and Steve each own one-third o --- the stock o --- a so --- tware company, Pear, Inc. Pear
has been quite success --- ul in selling its products. Pear has $100,000 in cash and $300,000 in
accounts payable. Pear also has $1,000,000 in current accounts receivable. Pear’s other assets
and liabilities are negligible, at least on the balance sheet. Pauline and Steve have made o ---
ers on new houses that have been accepted. They wish to have the corporation declare a dividend o — $200,000 each, $600,000 in all, to help them make the down payments on their new homes. A prospective venture capital investor requests that Bill, Pauline, and Steve obtain a letter o —
opinion --- rom their counsel (you) that the distribution (dividend) is legal. Pear is incorporated
in a jurisdiction that has a “double insolvency test” --- or distributions to shareholders.
What is the best argument --- or why Pear cannot issue this dividend?
A. Paying this dividend will cause an “impairment o --- capital.”
B. Giving e ---
ect to the payment, Pear will be insolvent in the equity sense, although not in the balance sheet sense. C. Giving e —
ect to the payment, Pear will be insolvent in the balance sheet sense but not in the equity sense. D. Giving e —
ect to the payment, Pear will be insolvent in the balance sheet sense and in the equity sense.
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168. Partridge Proxies.
Partridge developed a very success --- ul --- oods product company, Partridge Orchards, Inc.
When he died, his six children inherited the shares and now own the company. The siblings
are young, inexperienced in business, and cannot agree regarding determination o --- corpo-
rate policy or who should be on the board. They --- ight all o --- the time. When they can agree to
have meetings to discuss corporate a ---
airs, which is seldom, they are at each other’s throats within — ive minutes.
What is a potential solution to this closely-held corporate governance predicament?
A. Dra --- t 5- or 10-year irrevocable proxies running to the eldest sibling, who is 23 years o --- age.
B. Implement a voting trust arrangement with the trusted --- amily business adviser as trustee.
C. Have the six siblings enter into a shareholders’ voting (pooling) agreement under which
all six agree to vote as a majority o --- them ( --- our) may agree.
D. Have the six siblings enter into a shareholders’ voting (pooling) agreement under which,
ailing to agree unanimously, they appoint the trusted — amily business adviser to vote their shares.
169. Ultra Vires.
Lumber Company, Inc. (LCI), agreed to --- urnish plumbing supplies to your client, Mitchell
Plumbing, at very advantageous prices (15–20 percent below what Mitchell had been paying
or supplies). Open market prices — or plumbing supplies then rose dramatically. LCI re — used to — urnish the supplies or otherwise honor the contract. Mitchell was — orced to “cover” in the open market, paying 20 percent more than it had been paying and 40 percent more than the contract with LCI had provided. In the meanwhile, relying on its contract with LCI, Mitchell had bid on a number o — jobs. Mitchell was the low bidder on all o — them. Mitchell has completed the work but has su —
ered signi — icant losses on each job, all due to the in — lated price o — plumbing supplies. Mitchell has sued LCI. LCI’s counsel attempts to dismiss Mitch- ell’s claim by responding that the LCI’s promise to Mitchell, even i — made, is unauthorized. LCI provides its articles, which show that LCI’s purpose is limited to “sales o — lumber and plywood products.”
Should Mitchell’s claim be dismissed?
A. No. LCI will be unjustly enriched i --- Mitchell is stuck with the losses.
B. No. Lumber and plywood are building products as are plumbing supplies. Hence, LCI
had implied power to agree to --- urnish plumbing supplies.
C. No. The MBCA estops the corporation itsel --- (as opposed to a shareholder) --- rom raising
lack o --- power or capacity in dealings with third parties.
D. No. Ultra vires cannot be raised in a case in which one side has partly per --- ormed.
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170. Entity Choice — Gol --- Course.
Stuart, Vijay, and Fred are gol --- pro --- essionals. They propose to develop a championship-caliber
gol --- course in the --- oothills o --- a nearby mountain range. They propose to sell 100 memberships
or $75,000 each.
Which o --- the --- ollowing is the best corporate structure --- or this business venture?
A. Limited liability partnership
B. Corporation
C. Limited liability company
D. General partnership
171. Takeover De --- enses.
The senior executives o --- ENIX, Inc., a publicly-traded company, notice that, in recent
weeks, the average daily trading volume in ENIX shares has tripled. Later that day, ENIX
executives are noti --- ied by an SEC Schedule 13D --- iling that Goldman, a known corporate
takeover specialist, has acquired over 12 percent o --- ENIX shares. ENIX’s senior executives
propose to give an option to purchase ENIX’s new state-o --- -the-art manu --- acturing --- acility
to a --- riendly “white knight” investor, McDu ---
y. McDu —
y already owns 15 percent o — ENIX shares.
What should the ENIX directors do be --- ore approving (or not approving) management’s pro-
posed “crown jewel option” de --- ense strategy?
A. Do nothing apart --- rom ensuring that the business judgment rule sa --- e harbor protects
them and any decision they may make.
B. Conduct an investigation to determine i --- a credible threat exists to ENIX’s means o ---
doing business.
C. Conduct an investigation and also ensure that the de --- ense is proportionate to the threat
posed.
D. Conduct an investigation and adopt an irreversible poison pill takeover de --- ense.
172. Partnership Contract Liability.
Abe and Betty are law students at State University Law School. They each contributed $10,000
to their business venture. The business plan is to purchase computer hardware and then rent
the equipment to their --- ellow law students. In the --- irst month, however, Abe ordered over
$20,000 worth o --- hardware on credit. Betty does not want to be personally liable --- or more
than she contributed to the business.
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What advice do you give Betty to avoid personal liability?
A. Betty should noti --- y all computer hardware manu --- acturers that Abe is no longer autho-
rized to place orders.
B. Betty should --- ile a notice with the secretary o --- state to the e ---
ect that she does not take personal liability — or Abe’s purchases. C. Betty should dissolve their partnership. D. Betty should sue Abe — or breach o —
iduciary duty.
173. Settling a Derivative Action.
Shareholder --- iled a derivative action against Yesteryear, Inc., a public corporation. The court
denied the corporation’s motion to dismiss --- or --- ailure to state a claim. Shortly a --- ter the court
denied the motion to dismiss, the directors determined that the lawsuit was too expensive to
maintain and authorized a settlement with Shareholder. Yesteryear’s counsel called Share-
holder’s counsel to discuss the settlement, and ultimately, Shareholder accepted the o ---
er.
What procedural requirements must be completed?
A. Shareholder and Yesteryear may --- ile a notice o --- dismissal with the court.
B. The court must approve the settlement.
C. A derivative suit cannot be settled. The case must proceed to trial.
D. Shareholder must withdraw the complaint.
174. Pepsi-Cola.
Lo --- t, Inc., a Delaware corporation, is an ice cream parlor and soda --- ountain company. The
directors and senior executives are seeking ways to cut costs. For years, the corporation
has bought syrup --- or its soda --- ountain so --- t drinks --- rom Coca-Cola. Coca-Cola, however,
will not negotiate a price reduction, despite Lo --- t’s volume purchases. The board, there --- ore,
directs the CEO, Guth, to explore alternatives to Coca-Cola. In his market research, Guth
discovers a little company with a cheaper product that has recently declared bankruptcy.
Its name is Pepsi-Cola. Guth knows a good deal when he sees one and --- orms a company in
his wi --- e’s maiden name. Using that company, he purchases the secret --- ormula and the trade
name to develop Pepsi Cola out o --- bankruptcy. A year into that process, Guth quietly resigns
his position with Lo --- t. Five years later, the Lo --- t board o --- directors learns o --- what Guth has
done. They sue him.
What result?
A. Guth is not liable because the corporation had no “interest or expectancy” in the Pepsi
Cola opportunity.
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B. Guth is liable because the opportunity is in a “line o --- business” in which the corpora-
tion is engaged or might reasonably be expected to be engaged, but he is liable only --- or
the value o --- the opportunity at the time it was diverted.
C. Guth is liable, and a court will place a constructive trust on the stock o --- his new com-
pany because the opportunity should have gone to Lo --- t.
D. Guth is not liable because his wi --- e owns the stock.
175. Share Trans --- er Restrictions.
Four doctors --- orm a pro --- essional service corporation in which each invests $750,000 in
exchange --- or one-quarter o --- its shares. The corporation uses the --- unds to purchase state-o --- -
the-art diagnostic equipment. From the outset, all --- our want to preserve their proportionate
ownership interests by limiting the ability o --- a majority to issue additional shares, which
would have the e ---
ect o — diluting any shareholder’s interest in the corporation.
Which o --- the --- ollowing legal strategies is the best approach to achieve the shareholder’s goal?
A. Dra --- t a share trans --- er restriction (buy-sell) agreement.
B. Include preemptive rights in the corporate articles that govern issuances by the
corporation.
C. Opt in to the preemptive rights provision o --- the MBCA.
D. All o --- the above.
176. Bad Director.
Xavier owns one-third o --- the shares in XYZ Corp. He used his entire vote allocation in
cumulative voting to elect himsel --- to one o --- three director positions on the board o --- direc-
tors. Therea --- ter, Xavier sexually harassed various employees o --- the company, and he once
threatened to start a --- ist --- ight at a board meeting. You are counsel to XYZ. Shareholders,
directors, and senior managers have all insisted that “Xavier must go.”
How do you get rid o --- him?
A. Convene a special shareholders’ meeting to remove him as a director by majority vote,
with or without cause.
B. Go to court, alleging that he has grossly abused his position and that his removal would
be “in the best interests” o --- the corporation.
C. Nothing. Xavier was elected by the shareholders and will serve his term until the next
election.
D. Allege cause (probably required by articles or bylaws), convene a special shareholders’
meeting, and remove him as a director by majority vote.
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177. Mistakes in Formation.
Three people, Georgia, Hector, and Indigo, decide to start a business together. Georgia and
Hector want to be silent partners, meaning that they will contribute $1 million each but will
not actively run the business. Indigo plans to manage the business and invest business --- unds
to purchase an antique car collection that the business will rent out to movie and television
production companies --- or use in period pieces. Indigo hires her lawyer to set up the business
as a corporation, but the lawyer --- orgets to pay the --- iling --- ee, so the corporation is not legally
ormed. Meanwhile, Indigo wins an auction to purchase an antique car collection — or $2 million. But when the seller seeks payment — or the cars, Indigo realizes that her lawyer never
ormed a corporation, and she re — uses to pay — or them. The seller sues Georgia and Hector in their personal capacity — or the amount due on the contract — or the cars.
What is the best legal de --- ense --- or Georgia and Hector?
A. Invoke the de --- acto corporation doctrine.
B. Argue Georgie and Hector are not liable because they had no knowledge o --- the --- ailure
to --- orm the corporation.
C. Argue that Georgia and Hector are not liable because they never purported to act on
behal --- o --- a corporation, only Indigo did.
D. There is no de --- ense. Either a corporation exists --- or all purposes (“de jure”) or it does not
exist. It is an either/or proposition. Try to settle the case.
178. Poison Pill.
The senior executives o --- XINE, Inc., a publicly-traded company, notice that, in recent weeks,
the average daily trading volume in XINE shares has tripled. Later that day, XINE execu-
tives are noti --- ied by an SEC Schedule 13D --- iling that Goldberg, a known corporate takeover
specialist, has acquired over 13 percent o --- XINE shares. XINE’s board holds an emergency
meeting where they adopt a poison pill takeover de --- ense. In response, Goldberg publicly
disavows the takeover plans he had announced earlier. The price o --- XINE shares, which had
climbed on the prospect o --- a possible takeover, drops. Goldberg silently sells the shares he
has already acquired, pushing the XINE share price down --- urther. A XINE shareholder --- iles
a suit against XINE and its directors, alleging breaches o --- the duty o --- care and loyalty. You
are the litigator hired to de --- end the directors.
What should be your early responses to the suit?
A. Recommend expansion o --- the XINE board o --- directors and creation o --- a special litiga-
tion committee (SLC). Request an adjournment o --- the court proceedings while the SLC
investigates the shareholder’s allegations.
B. Recommend expansion o --- the XINE board o --- directors and hire a reputable indepen-
dent counsel (who has done no work --- or the corporation or its directors in the past) to
represent the SLC.
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C. Let the suit proceed and --- ile a motion --- or summary judgment on business judgment
rule grounds a --- ter the --- acts have been developed through discovery.
D. File a motion to dismiss on grounds that demand was required and has not been made.
179. Can’t Take It On.
Celeste is vice president o --- Hemlock, Inc., a --- orest products company incorporated in Del-
aware that has recently --- allen on hard --- inancial times and is scaling back its operations.
While at a --- undraiser --- or the school her children attend, Celeste is approached by Barbar,
who describes a process he has developed --- or recycling used lumber into wood chips. The
breakthrough is that the process removes nails and other impurities. Celeste telephones sev-
eral acquaintances in the industry. They are extremely skeptical that it can be done, but they
emphasize the potential i --- it can. Celeste also speaks with a banker about --- inancing. She has
one additional conversation with Barbar. Celeste resigns --- rom Hemlock. She and Barbar
orm a new corporation, obtain a loan — rom the bank, and build a prototype. In no time, they are licensing the technology to all the major — orest products and paper producing com- panies, except Hemlock. Hemlock hauls Celeste into court. You are de — ending.
What is the theory o --- your de --- ense?
A. Recycling used lumber is neither in the line o --- business o --- a major --- orest products com-
pany nor in any line o --- business that such a company is likely to pursue.
B. Hemlock had no “interest or expectancy” in the opportunity.
C. Hemlock was having --- inancial di ---
iculties and, there — ore, would not have had the wherewithal to pursue the technology. Hence, the opportunity was not a corporate opportunity. D. Celeste breached no duty to Hemlock because, upon — orming a resolve to develop the technology, she promptly resigned.
180. Shareholder Rati --- ication.
Sam and Dave’s, Inc., a clothing manu --- acturing company, lost money by investing sig-
ni --- icant sums in Sam’s cousin’s nightclub and then --- ailing to monitor the club’s (lack o --- )
progress. Two shareholders, Lamont and Grady, who each own 10 percent o --- the shares, are
implacable in their anger over the losses due to the ill- --- ated nightclub diversi --- ication. Sam
asks i --- it can be --- ixed at the annual shareholders’ meeting in two weeks.
Can Sam and Dave obtain protection by a --- avorable shareholder vote?
A. No. “Waste” o --- corporate assets is not rati --- iable.
B. Yes. Just include a standard resolution rati --- ying all acts o --- the past year.
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C. Yes, i --- speci --- ic disclosure is made concerning the investment and the ensuing losses and
a majority o --- the shareholders approve.
D. No. Fiduciary duties are duties that are owed to each and every shareholder. A breach o ---
those duties may only be rati --- ied by a unanimous shareholder vote.
181. Film Projects.
Walter owns the movie rights to “Teenage Mutants.” Sizemore asks Walter to join the Ster-
ling Productions Co. board o --- directors, and Walter accepts. Shortly therea --- ter, the Ster-
ling board discusses another property, “Nail Polish,” but declines the movie rights. Walter
then acquires “Nail Polish” and --- orms his own production company, Sparkling Walter, Inc.,
employing his children, Rickey and Victoria. They success --- ully produce “Mutants” and
“Polish.” Walter then has a --- alling out with Sizemore and resigns --- rom the Sterling board.
Sizemore demands a cut o --- Sparkling Waters’s pro --- its --- or the Sterling treasury.
Does Sizemore have a valid claim?
A. No. A director may compete with the corporation and, o --- the two properties, Sterling
had no rights in one and turned down the other.
B. Yes. A director may not compete with the corporation under the “line o --- business” test.
C. Yes. Sterling may seek pro --- its o --- “Polish” but not o --- “Mutants.” Sterling never gave Wal-
ter permission to take up the “Polish” opportunity.
D. No. It is outlandish to think that a director may not pursue his own business interests.
182. Director Protections.
Sybil, the wealthy mother o --- your law school classmate Sylvia, wishes to join the board o ---
Old Squirrel Savings and Loan, a publicly-held regional thri --- t institution corporation. Old
Squirrel has had a history o --- making bad investments (loans), and its directors have been
sued --- or breach o --- the --- iduciary duty o --- care in the past. Now, however, Old Squirrel seems
mostly clear --- rom legal troubles. The derivative suits various shareholders have --- iled have all
been settled or otherwise disposed o --- . Sylvia has sought to dissuade her mother --- rom joining
the Old Squirrel board o --- directors and, alternatively, has urged her mother to delay so that
the picture can clari --- y even more. Sybil, however, is insistent. She --- eels this is her window o ---
opportunity. On her mother’s behal --- , Sylvia seeks your advice on how Sybil may best be able
to protect hersel --- and her assets, which are considerable.
What advice do you give Sylvia regarding protecting Sybil?
A. Purchase a signi --- icant amount o --- stock in Old Squirrel so that you have a say in remov-
ing (or not slating --- or reelection) underper --- orming directors.
B. Do not join the board unless Old Squirrel has directors’ and o ---
icers’ (D&O) liability insurance.
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C. Negotiate a contract with Old Squirrel on Sybil’s behal --- with multiple protections (e.g.,
indemni --- ication, insurance, other --- unding sources --- or indemni --- ication, exculpatory
charter provisions) that will shield Sybil regardless o --- a change o --- control, a --- alling out,
or subsequent charter amendments.
D. Review care --- ully the statutory indemni --- ication provisions and determine whether
the corporation has implemented them. Insist on implementation i --- the authority to
indemni --- y granted by the statute has not been --- ully, or largely, implemented.
183. Martha’s Troubles.
Martha is a television celebrity, known as a home decorating and li --- estyle guru. She is
a weekend house guest at the home o --- Peter Finch, the --- abled stock picker. While going
through the linen drawer in Finch’s house, Martha --- inds a list o --- stocks labeled “Magel-
lan — recommended purchases.” She memorizes all the stock symbols (15 in all), and, when
she gets home, she buys all 15 stocks, 14 o --- which turn out to be big winners. Her pro --- its
exceed $15 million.
In what capacity can Martha be prosecuted in --- ederal court?
A. Insider, or temporary insider
B. Tippee
C. None
D. Misappropriator
184. CHC Oppression.
The Zook brothers, Zach and Jack, own a collection o --- movie theater properties. For tax
reasons, the brothers hold the real property 50/50 through a series o --- limited partnerships.
When the --- ather and --- amily patriarch died, he le --- t 51 percent o --- the shares in the operating
company, Silver Screens, Inc., to the younger and more educated Zach, and 49 percent to the
older and less educated Jack. Immediately therea --- ter, Zach began recommending, and the
board o --- directors approved, a series o --- substantial salary increases --- or Zach, the CEO. Jack
got only small raises. Zach upgraded his company car to a luxury model, while Jack did not
get a company car. Zach --- requently --- orgot to give Jack notice o --- board and other meetings.
At the meetings Jack did attend, Zach --- requently shouted Jack down or told him he was “out
o --- order” and to “keep his mouth shut.” When Jack protested to other board members, he
was moved to a small o ---
ice at the end o — the hallway, adjacent to the door leading to the gar- bage dumpsters. It has been three years since their — ather died. Nothing Jack has tried seems to work. He has become completely isolated — rom Silver Screens, his brother Zach, and other managers and board members. He wants to take action.
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What legal action can Jack take to obtain more control over the corporation?
A. File suit --- or dissolution o --- the corporation on the ground that Jack has been “oppressed,”
and allege that the majority shareholder and the corporation have been “highly preju-
dicial” to Jack.
B. File suit --- or dissolution o --- the corporation on the ground that Jack has been “oppressed,”
and allege that the actions o --- Zach and the board have been “unduly harsh and
burdensome.”
C. File a suit in the name o --- the corporation alleging that the increased salary and perks
Zach has received result --- rom a breach o ---
iduciary duty and should be paid back to the corporation. D. File suit and allege only that, as a substantial minority shareholder in Silver Screens, Jack has been denied his reasonable expectations and is there — ore oppressed and enti- tled to the involuntary dissolution remedy.
185. SOX.
A publicly-traded corporation that operates throughout the United States has had several
accounting irregularities that --- orced it to restate its earnings. Many items that should have
been listed as expenses were --- alsely recorded as “capital expenditures,” to be deducted over
ive years rather than one year. The result o — these misstatements is that corporation shares have dropped 80 percent recently. This is the third company run by this same management team that has needed to restate its earnings in this way. You are the U.S. Attorney — or a state impacted by this corporation.
What --- ederal law remedies can you seek in this case?
A. A constructive trust on their stock option pro --- its in --- avor o --- the company.
B. For --- eiture o --- compensation (salary and bonuses) received --- or the period during which
they were in breach o --- their --- iduciary duties.
C. For --- eiture o --- incentive-based compensation, such as stock option pro --- its, --- or executives
o --- the corporation.
D. For --- eiture o --- incentive-based compensation, such as stock option pro --- its, --- or executives
o --- the corporation, plus a li --- etime or similar bar against this corporation’s o ---
icers or directors — rom serving as o —
icers or directors o — another publicly-held company.
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The Law o --- Agency
1. Introduction to Agency.
“Agency is the --- iduciary relationship that arises when one person (a ‘principal’) mani --- ests
assent to another person (an ‘agent’) that the agent shall act on the principal’s behal --- and
subject to the principal’s control, and the agent mani --- ests assent or otherwise consents so to
act.” Restatement (Third) o --- Agency § 1.01.
This de --- inition is critical --- or law school and bar exam purposes, and it must be committed to
memory.
2. Painting Doctor’s O ---
ice. Answer (D) is the best answer. “Agency is the — iduciary relationship that arises when one person (a “principal”) mani — ests assent to another person (an “agent”) that the agent shall act on the principal’s behal — and subject to the principal’s control, and the agent mani — ests assent or otherwise consents so to act.” Restatement (Third) o — Agency § 1.01. Here, Doc- tor mani — ested assent that Painter would per — orm work — or Doctor, on Doctor’s behal — and subject to Doctor’s control, and Painter consented to act on Doctor’s behal — and subject to Doctor’s control. Thus, the classic elements — or an agency relationship have been established between Doctor and Painter. Answer (A) is incorrect. Although many courts have moved away — rom the vocabulary o —
“independent contractor” in --- avor o --- “agent” and “non-agent,” see Restatement (Third) o ---
Agency § 1.01, cmt. 2, this terminology still pops up --- rom time to time. The term “inde-
pendent contractor” is equivocal because it does not resolve the question o --- whether a prin-
cipal–agent relationship exists because o --- the test enumerated in § 1.01. Thus, even i --- an
individual is an independent contractor, they may still be an agent.
Answer (B) is incorrect because a principal–agent relationship can exist even i --- the parties
to the relationship never used those words and even i --- the parties did not realize the legal
consequence o --- their actions would be the --- ormation o --- a principal–agent relationship.
Answer (C) is incorrect because it simply misstates the rule. The test --- or a principal–agent
relationship is not whether the principal bene --- its --- rom the agent’s actions but rather whether
the agent was acting on the principal’s behal --- and subject to the principal’s control.
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3. Power Washing.
Answer (B) is the best answer. This question explores the parameters o --- the classic distinc-
tion between employees and independent contractors. Under the Restatement (Second) o ---
Agency, a “master [was] subject to liability --- or the torts o --- his servants committed while
acting in the scope o --- their employment.” Restatement (Second) o --- Agency § 219(1). On the
other hand, independent contractors were typically not agents o --- the purported principal.
The distinction between a servant (an employee) and an independent contractor turned on
a number o ---
actors, including “(1) the control exerted by the employer, (2) whether the one employed is engaged in a distinct occupation, (3) whether the work is normally done under the supervision o — an employer, (4) the skill required, (5) whether the employer supplies tools and instrumentalities, (6) the length o — time employed, (7) whether payment is by time or by the job, (8) whether the work is in the regular business o — the employer, (9) the subjective intent o — the parties, and (10) whether the employer is or is not in business.” Restatement (Second) Agency § 220(2). The critical element, however, was “the extent o — control exercised by the employer.” NLRB v. Friendly Cab Co., 512 F.3d 1090, 1096 (9th Cir. 2008). The Restate- ment (Third) o — Agency abandoned the labels “master” and “servant,” likely because the terms are outdated, but also because the term “independent contractor” is “equivocal.” See Restatement (Third) o — Agency § 1.01, cmt. c. Rather, the Restatement (Third) simply uses the terms “agent” and “non-agent” and directs that the ordinary de — inition o — agency de — ine the relationships o — the parties. At least one court has recognized that, while the Restate- ment (Third) o — Agency has repackaged the language o — the provisions, this does not mate- rially alter the analysis. See United States v. Bonds, 608 F.3d 495, 504-05 (9th Cir. 2010). Here, Power Washer certainly seems to meet the traditional de — inition o — an independent contractor. Among other things, they are engaged in a distinct occupation, they supply their own tools and instrumentalities, they set their own schedule and do contract jobs, and they appear to be paid — or the job. Thus, under the — acts presented, it seems that Neighbor sim- ply has no claim that Homeowner should be liable — or Power Washer’s conduct. This would change, however, i — Homeowner were present and directing Power Washer’s activities and giving Power Washer instructions. That would constitute Homeowner’s exerting control over Power Washer and would likely place Power Washer in the position o — employee under the Restatement (Second) or agent under the Restatement (Third). Answer (A) is incorrect. Although there are some circumstances under which the pur- ported principal might — ace liability — or negligent hiring, there are simply no — acts here to implicate that sort o — liability. In — act, Homeowner’s un — amiliarity with Power Washer seems to make it clearer that Power Washer would be an independent contractor or non-agent. Answer (C) is incorrect. Although past work may weigh slightly more in — avor o — the Power Washer’s being an employee rather than an independent contract, this is not likely enough to overcome the other — actors that weigh the other way, especially i — Homeowner is not exer- cising any sort o — control over Power Washer’s activities. Answer (D) is incorrect. Whether power washing is a low-skill job is irrelevant. This alone does not impact the agent vs. non-agent analysis.
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4. Driving the Painting.
Answer (C) is the best answer. Critically, “[a]n agent is subject to liability to a third party
harmed by the agent’s tortious conduct.” Restatement (Third) o --- Agency § 7.01. Additionally,
a principal is directly liable to third parties harmed by an agent’s conduct when the agent
acts with actual authority and the agent’s conduct is tortious. See Restatement (Third) o ---
Agency § 7.03. “An agent acts with actual authority when, at the time o --- taking action that
has legal consequences --- or the principal, the agent reasonably believes, in accordance with
the principal’s mani --- estations to the agent, that the principal wishes the agent so to act.”
Restatement (Third) o --- Agency § 2.01. Here, Family should assert claims against both Gal-
lery and Driver. Family should assert a claim against Driver because Driver is the tort --- ea-
sor whose negligence caused them injury. Driver’s liability to Family is not absolved merely
because they were working as an agent --- or Gallery. Additionally, Family should assert a
claim against Gallery --- or Driver’s negligence because Driver was Gallery’s agent and was
acting with actual authority when they committed a tort. Gallery hired Driver to drive the
painting, and thus, Driver’s authority was to drive the painting --- or Gallery; there --- ore, it is as
i --- Gallery itsel --- was driving and injured --- amily.
Answer (A) is incorrect because it overlooks Driver’s liability as tort --- easor.
Answer (B) is incorrect because it overlooks Gallery’s direct liability --- or Driver’s tortious act
while Driver was acting with actual authority.
Answer (D) is incorrect because Family has claims against both Gallery and Driver.
5. Catering the Family Reunion.
Answer (B) is the best answer. This question explores actual authority. “An agent acts with
actual authority when, at the time o --- taking action that has legal consequences --- or the prin-
cipal, the agent reasonably believes, in accordance with the principal’s mani --- estations to the
agent, that the principal wishes the agent so to act.” Restatement (Third) o --- Agency § 2.01.
Actual authority may be express or implied. An agent acts with express actual authority “to
take action designated or implied in the principal’s mani --- estations to the agent,” and implied
actual authority to undertake “acts necessary or incidental to achieving the principal’s
objectives, as the agent reasonably understands the principal’s mani --- estations and objec-
tives when the agent determines how to act.” Restatement (Third) o --- Agency § 2.02(a). Addi-
tionally, when an agent with actual authority makes a contract on behal --- o --- the principal,
the agent binds the principal on the contract. See Restatement (Third) o --- Agency § 6.01(1).
Finally, the principal has a duty to indemni --- y (in this context, reimburse) the agent --- or losses
that should --- airly be borne by the principal in light o --- their relationship. See Restatement
(Third) o --- Agency § 8.14. Here, Che --- ’s best argument is that, by hiring Che --- and instructing
Che --- to do what it took to get the job done, Family expressly authorized Che --- to purchase
and prepare the --- ood and re --- reshment --- or the --- amily gathering but also impliedly autho-
rized Che --- to do whatever was necessary or incidental to achieving the objective — such as
hiring sta ---
to help “get the job done.” Additionally, to the extent Family’s obligation to pay sta —
may sound in contract law, Che — was acting within the scope o — their implied actual
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authority when they hired the --- riends as sta ---
. Accordingly, this would provide a sound basis to compel Family to pay the — riends. Answer (A) is incorrect. “Unjust enrichment is de — ined as the unjust retention o — ‘money or bene — its which in justice and equity belong to another.’” Tkachik v. Mandeville, 790 N.W.2d 260, 48 (Mich. 2010). Unjust enrichment is typically a claim in equity, when there is other- wise no en — orceable contract. Here, unjust enrichment may sound like a tempting answer. But consider the — ollowing: I — Family did not authorize Che — to hire sta —
, would it truly be unjust — or Family to be obligated to pay? Would it be a better argument to say that Che — took on a job they knew was too big — or them without negotiating the authority to hire sta —
? Alternatively, i — Che — had the authority to hire sta —
, it would likely be a better argument to claim that Family’s obligation arose under contract law rather than equity. Thus, unjust enrichment is not the best answer here. Answer (C) is incorrect because it — ocuses on Che — ’s dilemma without considering Che — ’s authority. The better argument here would be that Che — was authorized to hire sta —
. Answer (D) is incorrect because Che — likely had authority to hire sta —
on Family’s behal — , and thus, Family must pay the — riends. 6. Surgery Gone Wrong. Answer (C) is the best answer. This question explores apparent authority. “Apparent author- ity is the power held by an agent or other actor to a —
ect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behal — o — the principal and that belie — is traceable to the principal’s mani — estations.” Restatement (Third) o — Agency § 2.03. Critical here is the language “other actor” in the de — inition. This is to say that, under some circumstances, even a non-agent may possess apparent authority to bind the principal in tort. See Restatement (Third) o — Agency § 7.03(b) (“A principal is subject to vicarious liability to a third party harmed by an agent’s conduct when . . . the agent commits a tort when acting with apparent authority in dealing with a third party on or purportedly on behal — o — the principal.”). Always — irst consider whether the purported agent indeed is an agent acting with actual authority. I — you conclude that the purported agent is not an agent, or i — you conclude the purported agent is an agent but does not have actual authority, you should then consider apparent authority. Some courts will use the term “apparent agency” to describe circumstances in which a non-agent nevertheless possesses apparent authority to act on the principal’s behal — . When the third party relies on the purported principal to select the purported agent, the test — or apparent agency is as — ollows: “(1) the principal held itsel —
out as providing certain services; (2) the plainti ---
selected the principal on the basis o — its representations; and (3) the plainti —
relied on the principal to select the speci — ic person who per — ormed the services that resulted in the harm complained o — by the plainti —
.” Ce — aratti v. Aranow, 141 A.3d 752, 624 (Conn. 2016). When the third party selects the agent, they must show “(1) the principal held the apparent agent or employee out to the public as possess- ing the authority to engage in the conduct at issue, or knowingly permitted the apparent agent or employee to act as having such authority; (2) the plainti —
knew o — these acts by the
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principal, and actually and reasonably believed that the agent or employee or apparent agent
or employee possessed the necessary authority . . . ; and (3) the plainti ---
detrimentally relied on the principal’s acts, i.e., the plainti —
would not have dealt with the tort — easor i — the plain- ti —
had known that the tort — easor was not the principal’s agent or employee.” Id. Here, Smith did not select the orthopedist; rather, he was re — erred to the orthopedist by the Hill — ield Emergency Room. Thus, even i — we were to credit the argument that the orthopedist is not an agent o — the hospital, the inquiry continues as to whether the orthopedist had apparent authority. Arguably, she did. Hill — ield held itsel — out to the public as providing medical, and speci — ically orthopedic, services, and Smith selected Hill — ield on that basis. Additionally, Smith relied on Hill — ield’s recommendation and re — erral to the orthopedist. All indicators apparent to Smith were that the orthopedist was Hill — ield’s agent. Thus, Smith can likely argue that the orthopedist’s negligence can be attributed to Hill — ield. Answer (A) is incorrect. Even i — the statement were — actually true, the mere — act that some- one is labeled an “independent contractor” does not mean that they are not an agent, or a non-agent with apparent authority, acting on the principal’s behal — . Answer (B) is incorrect. The contract between Hill — ield and the orthopedist is irrelevant in determining whether the orthopedist had apparent authority. Additionally, because Smith was not a party to that contract, the contract cannot be used to alter Smith’s rights. Answer (D) is incorrect. This is merely a statement o — policy, rather than law. On top o — that, the statement o — policy is arguable, and reasonable minds may di —
er on the importance o —
protecting hospitals under circumstances like this. In any event, it does not answer the ques-
tion posed.
7. Traveling Salesman.
Answer (D) is the best answer. “Agency is the --- iduciary relationship that arises when one
person (a ‘principal’) mani --- ests assent to another person (an ‘agent’) that the agent shall
act on the principal’s behal --- and subject to the principal’s control, and the agent mani --- ests
assent or otherwise consents so to act.” Restatement (Third) o --- Agency § 1.01. Even when
there is no principal–agent relationship, a non-agent may have the power “to a ---
ect a prin- cipal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behal — o — the principal and that belie — is traceable to the principal’s mani — estations.” Restatement (Third) o — Agency § 2.03. The key word here is mani — estation. “A person mani — ests assent or intention through written or spoken words or other conduct.” Restatement (Third) o — Agency § 1.03. Signi — icantly here, the question is whether Acme Co. made any mani — estations to “Chuck” — or “Chuck” to act on its behal — or any mani — esta- tions to Lavery that “Chuck” was authorized to act on its behal — . Under the — acts presented, the answer is no. There is no indication that Acme Co. ever mani — ested assent to “Chuck” that “Chuck” may act on its behal — , and so there is no principal–agent relationship between Acme Co. and “Chuck.” Likewise, Acme Co.’s only interactions with Lavery occurred a — ter Lavery encountered “Chuck.” While “Chuck” claimed to work — or Acme Co. and Lavery believed him, these mani — estations are not traceable to Acme Co. Accordingly, “Chuck” did
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not have apparent authority to act on behal --- o --- Acme Co. Thus, Lavery is simply the victim
o --- a scheme. Acme Co. likely has no liability here.
Answer (A) is incorrect. Under the --- acts given, there is no basis to conclude that a principal–
agent relationship exists between Acme Co. and “Chuck.”
Answer (B) is incorrect. This choice seems to o ---
er a — actual claim, which may or may not be true. Even crediting it as true, there is no indication that Lavery looked at the website be — ore the encounter with “Chuck,” and so the warning (or lack thereo — ) had no connection to whether Lavery reasonably believed “Chuck” had authority to act on Acme Co.’s behal — . Answer (C) is incorrect. Although Lavery may have been reckless, the real question is whether Acme Co. made any mani — estation to Lavery that “Chuck” was authorized to act on its behal — . There is no such indication here. 8. A Land Transaction. Answer (C) is the best answer. This question describes a — airly common practice in real estate transactions. A principal is “undisclosed” when “an agent and a third party interact, [but] the third party has no notice that the agent is acting — or a principal.” Restatement (Third) o — Agency § 1.04(2)(b). When an agent acting with actual authority makes a contract on behal — o — an undisclosed principal, the parties to the contract are, in — act, the agent, the undisclosed principal, and the third party, even though the third party has no knowledge o — the undisclosed principal. See Restatement (Third) o — Agency § 6.03. It is o — no legal con- sequence that the third party was unaware that they were even dealing with an agent. Here, Big Corp. was an undisclosed principal, and the secret agent was acting with actual author- ity when they entered into the transaction with Nora. Accordingly, Big Corp. is a party to the contract and Nora has no basis to seek to invalidate the deal. Answer (A) is incorrect because the transaction is valid, even i — Nora did not know she was dealing with Big Corp. Answer (B) is incorrect because there is no un — air bene — it to Big Corp., at least not under law. Answer (D) is incorrect because, while it rightly states the status o — the market, it does not address the legal issues at work. 9. The Title Agent. Answer (B) is the best answer. The rule is that “an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar cir- cumstances.” Restatement (Third) o — Agency § 8.08. This duty o — care derives — rom tort law, but “an agent’s conduct may sometimes be subject to regulation by statutes, administrative rules, or rules o — a particular pro — ession.” Restatement (Third) o — Agency § 8.08, cmt. b. “I —
an agent claims to possess special skills or knowledge, the agent has a duty to the principal
to act with the care, competence, and diligence normally exercised by agents with such skill
or knowledge.” Restatement (Third) o --- Agency § 8.08. Further, when an agent is a member o ---
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a pro --- ession, they “may reasonably be expected to know at least the basic rules and practices
under which the agency’s industry or pro --- ession operates.” Restatement (Third) o --- Agency
§ 8.08, cmt. c. Here, Agent is an attorney and is there --- ore held to the higher standard o --- care
consistent with Agent’s specialized skill and knowledge, even though the work being per-
ormed does not have to be done by an attorney. Thus, Answer (B) correctly recognizes that, while a non-attorney agent may not have breached their duty o — care in this situation, Agent here was expected to act with the care, competence, and diligence o — an attorney. Answer (A) is incorrect because it states too high a standard — strict liability instead o —
negligence — --- or breaching the agent’s duty o --- care.
Answer (C) is incorrect because it --- ails to account --- or Agent’s specialized skills and
knowledge.
Answer (D) is incorrect because, in the absence o --- a contract, statute, administrative rule, or
rule o --- a pro --- ession, see, e.g., RUPA § 404(c) (“A partner’s duty o --- care to the partnership and
the other partners . . . is limited to re --- raining --- rom engaging in grossly negligent or reckless
conduct, intentional misconduct, or a knowing violation o --- law.”), it raises the standard --- or
breaching the duty o --- care to gross negligence.
10. Family Loyalty.
Answer (D) is the best answer. An agent owes their principal a general --- iduciary duty to act
in the principal’s bene --- it in all matters connected with the agency relationship. See Restate-
ment (Third) o --- Agency § 8.01. Additionally, an agent has a duty o --- loyalty to re --- rain --- rom
dealing with the principal on behal --- o --- an adverse party, --- rom competing with the principal,
and --- rom using or communicating a principal’s con --- idential in --- ormation --- or the agent’s own
purpose or the purpose o --- a third party. See Restatement (Third) o --- Agency §§ 8.02 to 8.05.
Here, it seems clear that Nephew is in breach o --- his duties to National Store. He applied --- or
a job without disclosing his relationship to Family Store, and then while on National Store’s
payroll, he essentially served as a spy. More signi --- icantly, he gave light to --- acts that may not
have otherwise become publicly known, seemingly --- or the purpose o --- hurting National Store
so that Family Store would have a better opportunity to compete. It may well be that Nephew
did not divulge strictly “con --- idential” in --- ormation, at least in the sense o --- how in --- ormation
might legally be deemed con --- idential or privileged, but it seems that this in --- ormation only
came to light because o --- Nephew’s reporting. Accordingly, Nephew is likely liable --- or breach
o ---
iduciary duty to National Store. Answer (A) is incorrect because the in — ormation only came to light because o — Nephew’s conduct. Strictly speaking, Nephew may not have revealed “con — idential” in — ormation, but there are certainly other grounds — or claiming that he breached his — iduciary duties. Answer (B) is incorrect because the mere competitive nature o — the marketplace is o — no legal consequence. Instead, Nephew occupied a position o — trust with National Store, and accordingly, owed National Store a — iduciary duty.
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Answer (C) is incorrect because the law does not speci --- ically prohibit an agent --- rom dispar-
aging its principal, but even disparagement aside, there are more grounds here to conclude
that Nephew breached his --- iduciary duties.
11. So Much Stu ---
. Answer (C) is the best answer. An agent’s actual authority is terminated by a mani — es- tation o — revocation o — the agent’s authority by the principal. See Restatement (Third) o —
Agency § 3.06(5). Termination o --- actual authority, however, does not necessarily terminate
any apparent authority that the agent may have. An agent has apparent authority so long
as a third party reasonably believes that the agent has authority to act with legal conse-
quence --- or a person and that belie --- is traceable to mani --- estations o --- the person. See Restate-
ment (Third) o --- Agency § 3.03. The termination o --- actual authority does not terminate the
agent’s apparent authority, and the agent’s apparent authority only terminates when “it is
no longer reasonable --- or the third party with whom an agent deals to believe that the agent
continues to act with actual authority.” Restatement (Third) o --- Agency § 3.11(2). Here, the
owner terminated Franklin’s actual authority when they --- ired Franklin --- rom her position
as manager o --- Bakery; however, there is no indication that the owner then contacted the
vendors to in --- orm them that Franklin had been terminated. Having dealt solely with
Franklin --- or the past seven years, there is no reason why the vendors should have been
aware that Franklin had been --- ired or that Franklin no longer had authority to place orders.
Accordingly, the owner is likely on the hook to pay --- or the products that Franklin ordered
a --- ter she was terminated.
Answer (A) is incorrect because termination o --- actual authority does not terminate appar-
ent authority.
Answer (B) is incorrect because there is no reason why the vendors should have suspected
that Franklin had been --- ired or --- or them to contact the owner.
Answer (D) is incorrect because --- airness alone does not resolve this case. Apparent author-
ity does.
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General Partnerships
12. Pike Patrol.
Answer (D) is the best answer. Formation o --- a partnership is de --- ined as “an association o ---
two or more persons to carry on as co-owners a business --- or pro --- it whether or not the par-
ties intend to --- orm a partnership.” RUPA § 202(a). So in many cases we examine all the --- acts
and circumstances to determine whether a partnership was --- ormed. For example, one court
delineated eight --- actors a court must weigh in determining i --- a partnerships exists: (1) the
right and duty to participate in management; (2) the right and duty to act as agent --- or the
other owners; (3) unlimited exposure to liability; (4) participation in pro --- its and in losses;
(5) contribution (investment) in the --- irm; (6) ownership stake in the --- irm’s property; (7) vot-
ing rights; and (8) the --- orm which compensation takes. Serapion v. Martinez, 119 F.3d 982
(1st Cir. 1997). This is the best answer because it addresses more o --- these --- actors than the
other answers.
Answer (A) is not the best answer. Under RUPA, intention (or lack thereo --- ) is not disposi-
tive. The parties may have intended nothing in particular (they did not think about it) but a
partnership can result.
Answer (B) is not the best answer. Although receiving pro --- its and losses is one --- actor in
determining whether there is a partnership, parties can --- orm a partnership even where some
receive di ---
erent payments than others do. On the other hand, — inancial bene — its determined by taking a percentage o — pro — its may nonetheless be wages. Sharing o — pro — its and losses is just one o — many — actors in determining whether a partnership exists. Co-ownership does not necessarily imply a partnership. Answer (C) is not the best answer. Although this — act tends to show that Dooley and Estrada were independent contractors because they were required to purchase their own equipment, standing alone, this — act would not be dispositive. 13. Home State Athletics, Part I. It appears that the trio have — ormed a general partnership. More precisely, they have — ormed a partnership at will. No writing is necessary — or the — ormation o — a partnership. All that is necessary — or — ormation o — a partnership is “an association o — two or more persons to carry on as co-owners a business — or pro — it.” RUPA § 202(a). Alternatively, it may be that Ursula is not a partner but a lender to the business. The receipt by a person o — a share o — pro — its o —
a business is prima --- acie evidence that he is a partner in the business, but no such in --- erence
119
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shall be drawn i --- such pro --- its were received in payment as interest on a loan, though the
amount o --- payment may vary with the pro --- its o --- the business. See RUPA § 202(3)(i). To solve
this ambiguity, while the parties are in your o ---
ice, the easy solution is to ask them what they intend Ursula’s status to be. I — they want Ursula to be a partner and not just a lender, you might structure part or all o — Ursula’s — inancial contribution as partner’s equity. 14. Home State Athletics, Part II. You should probably dra — t a partnership agreement — or them. You may also have to dra — t a promissory note — rom the partnership to Ursula i — the parties decide that all, or a portion, o — Ursula’s contribution is to be structured as a loan. Three salient — eatures o — the agreement would be how the partners are to divide the pro — its, how the partners are to share the losses (i — any), and what the duties and responsibilities o — each partner will be ( — or example, who maintains the warehouse and inventory, who will have what sales territory, how much time is to be devoted to sales, who keeps the partnership books, etc.). 15. Home State Athletics, Part III. I — they do not dra — t a partnership agreement, they are partners at will. The consequences o — a partnership at will is that the partners will split the pro — its equally. Upon dissolution, “[e]ach partner shall be repaid his [or her] contributions whether by way o — capital or advances to the partnership property and share equally in the pro — its and surplus remaining a — ter all lia- bilities[.]” RUPA § 401(b). So, what happens in the event o — dissolution depends on whether there is a surplus o — losses. I — there is a surplus, Ursula’s disproportionate contribution will be repaid in — ull — irst, and then the others will share in the remainder. It is the event o — losses
or which parties tend not to provide and which may cause di —
iculties in a partnership at will situation. A number o — courts have held that in the event o — a dissolution in a partner- ship consisting o — a partner who has contributed primarily capital (Ursula) and partners who have contributed primarily services (Sammie and Tyrese), neither party is entitled to a contribution — rom the other when there are losses. The reasoning is that “where one party contributes money and the other labor, then in the event o — loss each would lose his own capital — the one his money and the other his labor.” Kovacik v. Reed, 315 P.2d 314 (Cal. 1957). A number o — jurisdictions — ollow this rule. See, e.g., Becker v. Killarney, 532 N.E.2d 931 (Ill. App. Ct. 1988); Snellbaker v. Herrmann, 462 A.2d 713 (Pa. Super. Ct. 1983). This result is bad — or Ursula, and it may be unexpected by all because it is counterintuitive. To avoid disputes later, the parties are better o —
agreeing or at least discussing whether Sammie and Tyrese should in some — ashion make monetary contributions in the event o — losses. 16. Home State Athletics, Part IV. Sam and Charlene can just give Dave notice that they are dissolving the partnership. Dis- solution is the change in the relation o — the partners caused by any partner’s ceasing to be associated in the carrying on o — the business. In the absence o — an agreement to the contrary, dissolution is caused “by the express will o — any partner.” RUPA § 801(1). So they should check the terms o — the partnership agreement, i — any. I — the partnership agreement is silent,
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or there is no partnership agreement, Sam and Charlene may dissolve it by simple notice to
Dave, to be --- ollowed by a “winding up” o --- the partnership a ---
airs. 17. Home State Athletics, Part V. Sammie and Tyrese may or may not have legal rights against Ursula — or her absences, — or her — ailure to supervise, and — or the losses resulting — rom her absences and — ailure to super- vise. The key thing is — or Sammie and Tyrese to couch their claims in terms o — Ursula’s
iduciary duties to the partners and their partnership. However, Sammie and Tyrese must show that Ursula was more than merely negligent. RUPA § 404(c) states, “A partner’s duty o —
care to the partnership and the other partners . . . is limited to re --- raining --- rom or engaging
in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation o ---
law.” Unless they can show that Ursula was grossly negligent or worse, Sammie and Tyrese
probably do not have a cognizable claim. Under RUPA, they should have been stopping in at
the Central City --- acility periodically in order to assure themselves that Ursula was manag-
ing things properly.
18. Joint Microbrewery.
Answer (D) is the best answer. A joint venture is the association o --- two or more persons
or entities in business --- or a limited purpose, but a joint venture is not a --- orm o --- business
association itsel --- , so it must take some --- orm. In this case, the parties have --- ormed a partner-
ship, which is best understood as a joint venture operation. So the best answer is Answer (D)
because this venture is both a partnership and a joint venture.
Answer (A) is not the best answer because it is incomplete. While it is true that the parties
ormed a partnership by carrying on as co-owners a business — or pro — it, that business has a limited purpose, and so it is also a joint venture. Answer (B) is not the best answer because it is incomplete. While it is true that the parties
ormed a business — or a limited purpose, they also — ormed a partnership under RUPA at the same time. Answer (C) is incorrect because parties cannot — orm LLCs inadvertently. I — , however, the co- venturers (Liam and Clare) take no a —
irmative steps to — orm a business organization such as a corporation or an LLC, their joint venture will be a partnership at will (“an association o —
two or more persons to carry on as co-owners a business --- or pro --- it[.]” RUPA § 202(a)).
19. The Partnership Lease Renewal.
Answer (D) is the best answer. As you read this --- act pattern, you likely thought about the
landmark case o --- Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928), in which then Judge (later
Supreme Court Justice) Benjamin Cardozo announced a lo --- ty standard o ---
iduciary duty. There, Judge Cardozo depicted — iduciary duty as “something stricter than the morals o — the market place” and that the standard was that a — iduciary owed “the punctilio o — an honor o —
the most sensitive.” Meinhard involved what was regarded at the time as a “joint venture,”
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which does not line up well with our understanding o --- general partnerships (such as the
one in this --- act pattern) today. Thus, Cardozo’s views are likely modernly regarded as more
aspiration than law, particularly in light o --- RUPA’s articulation o --- a distinct --- iduciary duty
standard. RUPA § 404(a) instructs that “[t]he only --- iduciary duties a partner owes to the
partnership and the other partners are the duty o --- loyalty and the duty o --- care. . . .” A part-
ner’s duty o --- loyalty, owed both to the partnership and to the other partners, is limited to
requiring the partner to (1) account to partnership and hold property, pro --- it, or bene --- it --- or
partnership; (2) re --- rain --- rom acting with an adverse interest; and (3) re --- rain --- rom compet-
ing with the partnership. See RUPA § 404(b). Although the obligations under the statute are
not --- ramed explicitly as --- iduciary duties, RUPA provides that “[a] partner shall discharge the
duties to the partnership and the other partners . . . and exercise any rights consistently with
the obligation o --- good --- aith and --- air dealing.” RUPA § 404(d). Answer (D) best re --- lect the
rules o ---
iduciary duty under RUPA. Answer (A) is incorrect because it re — lects the aspirational standard — rom Meinhard and
ails to consider the duties imposed under RUPA § 404(a). Some states have rejected the lim- iting language in RUPA § 404(a) that the “only” — iduciary duties owed are the duties o — care and loyalty, see, e.g., 15 Pa. Cons. Stat. § 8447(a). In these states, courts may — ind that part- ners owe a broader — iduciary duty than articulated by the statute and may be more inclined to apply Cardozo’s aspirational standard (or something like it). Answer (B) is incorrect because Developer’s conduct does not seem to run a — oul o — any o —
the requirements under the duty o --- loyalty stated in § 404(b).
Answer (C) is incorrect because it misstates the rule. RUPA § 404(a) is clear that a partner
owes --- iduciary duties to both the partnership and the other partners.
20. Partnership Auto Purchase.
Answer (D) is the best answer because there is no obvious source o --- authority --- or this
unusual or extraordinary transaction. While it is true that partners can bind the partner-
ship in ordinary a ---
airs (“Every partner is an agent o — the partnership — or the purpose o — its business, and the act o — every partner . . . — or apparently carrying on in the usual way the business o — the partnership o — which he is a member binds the partnership,” RUPA § 301), ordering luxury automobiles cannot be said to be carrying on in the usual way the business o — a law partnership. The managing partner probably would not have the power to bind the law — irm in such an unusual transaction. What a lawyer will advise a client to obtain is “express actual” authority that the agent — or the counterparty has the authority to bind the entity (i.e., the partnership, the corporation, the LLC) — or which he is acting. A provision in the partnership agreement (or articles or bylaws in the corporate setting) may contain a broad grant o — authority to the agent. More probable is that the lawyer will request a resolu- tion — rom a partnership or board meeting authorizing the partner or corporate o —
icial to carry out the transaction. Answer (A) is incorrect because a care — ul lawyer should not rely on the vague concept o —
inherent authority in such a case as this one. It is true that partnerships grant some degree o ---
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inherent authority by vesting o ---
ices and titles in a person, but this is limited to the authority possessed by similar agents, with similar titles, and in similar types o — businesses. Look to the le — t, look to the right, see what similar agents in similar corporations actually do. Trea- surers sign checks. Purchasing agents purchase automobiles. Purchasing agents, or here, managing partners o — medium-sized law — irms, do not order luxury automobiles (and in great numbers, to boot). Even i — the transaction proposed was arguably in the realm o — the managing partner’s or other o —
icial’s inherent authority, be — ore the — act, in a transaction o —
any size, no reasonable business lawyer would rely on inherent authority. Inherent authority
is more suited to smaller or routine transactions or, a --- ter the --- act, --- or argument in arbitra-
tion or court proceedings that the other party to a contract is bound.
Answer (B) is not the best answer because it is better to get prior authorization o --- a transac-
tion instead o --- arguing it existed in a past transaction. A particular agent may have very sim-
ilar authority through having done the same or similar transactions in the past. This source
o --- authority is called implied actual authority. Again, though, as with inherent authority,
implied actual authority is more suited to smaller or routine transactions or, a --- ter the --- act,
or argument in arbitration or court proceedings. Answer (C) is incorrect. I — the principal has created in third parties a reasonable appre- hension that the agent has the authority to enter into the transaction, the principal will be bound because the agent is clothed with apparent authority. The principal could do so by provision to the agent o — o —
ice, stationery, title, and so on, or by having permitted the agent to engage in similar acts in the past and not rescinding them or otherwise objecting. In many cases in which implied actual or inherent authority is present, apparent authority also is present. But, yet again, no transactional lawyer is going to advise a client to enter into a major transaction based upon the apparent authority o — a managing partner. 21. A Ponzi Scheme. Answer (A) is the best answer. A partner is an agent o — the partnership, and an action o —
the partner in the ordinary course o --- the partnership’s business binds the partnership. See
RUPA § 301(a). On the other hand, “an act o --- a partner which is not apparently --- or carrying
on in the ordinary course the partnership business . . . binds the partnership only i --- the act
was authorized by the other partners.” RUPA § 301(b). Here, the question is whether Turn-
er’s scheme was in the ordinary course o --- the partnership’s business. It is clear that Turner
did not have actual authority to run this scheme, since his 50/50 partner did not even know
it was happening. The question o --- whether the partnership authorized this actually turns
on whether Turner had apparent authority. The question, there --- ore, is whether a reasonable
third party, such as a client like Norma, should expect this conduct to be authorized. And
what is common or public understanding does not turn on expert opinion.
Answer (B) is incorrect. There simply is no evidence that Norma was “contributorily
negligent.”
Answer (C) is not the best answer. This expert testimony does not seem to address what the
public would reasonably expect.
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Answer (D) is incorrect. The judge should bar the testimony o --- the bar association president
and other leading members o --- the bar as irrelevant. This is not a toss-up question.
Note: A Ponzi scheme is a prevalent species o ---
raud. The scheme’s promoter promises and pays high rates o — return by using — unds contributed later (as principal) to pay interest on
unds contributed earlier, which have been spent — or personal expenses or otherwise squan- dered. Eventually the scheme collapses when the promoter is unable to attract new investors. The — orm o —
raud takes its name — rom Carlo Ponzi, who apparently developed this scheme in the 20th century. 22. Can’t Stop Shopping. Answer (D) is the best answer because Joseph must be prepared to dissolve the partner- ship because there is no e —
ective way to restrict Larry’s authority and have that restriction bind third parties. As with the absence o — a duty o — care among partners, this outcome, too, lends support — or the proposition that in a small partnership a partner truly is their sibling’s keeper. Answer (A) is incorrect because Joseph does not have unilateral authority to restrict his 50/50 partner’s spending. See RUPA § 401(j) (“A di —
erence arising as to a matter in the ordinary course o — business o — partnership may be decided by a majority o — the partners.”) Restricting a partner’s authority requires a decision by majority vote o — the partnership, which is e —
ectively a unanimity requirement where there are just two equal partners. Answer (B) is incorrect because there is no such thing as a partner’s veto in such ordinary matters as ordering o —
ice supplies. In a two-person partnership, a majority is 50 percent plus one. I — Larry re — uses to cooperate, there is no way in which Joseph can vote to restrict Larry’s authority. Answer (C) is incorrect. Joseph cannot associate a new partner because that action requires unanimous consent by the partners. RUPA § 401(i) (“A person may become a partner only with the consent o — all the partners.”). Thus, Larry could, by withholding his consent, block any attempt to end-run him by expanding the partnership. 23. A Grouchy Partner. Oscar is likely to win. See RUPA § 401(i) (“A person may become a partner only with the consent o — all the partners.”). The partnership must act — or the hire to be en — orceable against it. The partnership acts by a majority. A majority o — two (50 percent plus 1) is two. Elmo had only one vote (his own). His act was not authorized by the partnership and so he is liable to the partnership — or its cost. Accordingly, Elmo did not have authority to hire a helper and will be required to reimburse the partnership. 24. Ken the Contractor. Answer (B) is the best answer because these — acts present a common law exception to a general statutory rule, although not all jurisdictions will — ollow that exception. The ordinary rule, at least when all partners are contributing capital (property and/or cash), is “[e]ach
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partner . . . must contribute towards the losses whether o --- capital or otherwise, sustained by
the partnership according to his share in the pro --- its.” RUPA § 401(b). Many states hold that
when one partner is a pure capital contributor and the other is a pure talent/labor contribu-
tor, they do not share in --- inancial losses. See , e.g., Kovacik v. Reed, 315 P.2d 314 (Cal. 1957)
(“The rationale o --- this rule . . . is that where one party contributes money and the other
contributes service, then in the event o --- a loss each would lose his own capital — the one his
money and the other his labor.”).
Answer (A) is incorrect, though it is a plausible answer because a court could --- ollow the
statutory language i --- a particular jurisdiction does not have higher court precedent that
deviates --- rom it, but it reaches a harsh and inequitable result. Courts may also attempt to
distinguish the present situation --- rom ones where unequal contributions were equitable, but
this is not the best answer because most courts would probably at least consider Ken’s claim
that he did not expect to share losses.
Answer (C) is incorrect because, absent agreement, a partner is not entitled to remuneration
or services to the partnership, so the — air value o — those services is irrelevant. Answer (D) is incorrect because, absent agreement, a partner is not entitled to remunera- tion — or services to the partnership, so the — air value o — those services is irrelevant. Note: Several jurisdictions have case law expressly — ollowing the rule in Kovacik v. Reed. The rami — ication — or the business lawyer is thus: (1) always discuss with clients how they intend to share losses as well as how they intend to share pro — its; and (2) memorialize their agree- ment in the partnership agreement. Unless the parties expressly provide otherwise, at least in the capital versus talent/labor partnership, the somewhat counterintuitive rule o — Kovacik v. Reed might be applied. 25. Norse Demolition. Answer (B) is the best answer. Oden’s notice o — retirement is an event that causes Oden’s dissociation — rom the partnership. RUPA § 601(1). The de — ault rule is that a partner’s disso- ciation by express will is an event o — dissociation that causes the partnership to dissolve and requires that its business be wound up. RUPA § 801(1). RUPA, recognizing that the partner- ship is an entity distinct — rom the partners, o —
ers a way — orward. Thus, “[a]t any time a — ter the dissolution o — a partnership and be — ore the winding up o — its business is completed, all o — the partners, including any dissociating partner other than a wrong — ully dissociating partner, may waive the right to have the partnership’s business wound up and the part- nership terminated.” RUPA § 802(b). In such an event, the partnership may continue as i —
it was never dissolved. The partnership shall cause the dissociated partner’s interest to be
purchased --- or a buyout price. See RUPA § 701(a). Here, the --- acts indicate that all the part-
ners, including the dissociated partner (Oden), are agreeable to allowing the partnership to
continue even though Oden has dissociated. Accordingly, the partners may waive the right
to have the partnership’s business wound up, and Theo and Luke shall cause Oden’s interest
to be purchased. Then, the partnership can continue as i --- it had never been dissolved, with
Theo and Luke at the helm.
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Answer (A) is incorrect because, while it states the general rule correctly, it --- ails to account
or the — act that the partners may waive the right to have the business wound up and the partnership terminated. Answer (C) is incorrect. Dissociation is wrong — ul only i — the partnership agreement is vio- lated by their dissociation. See RUPA § 602. Answer (D) is incorrect. Indeed, the partners may certainly agree to avoid the outcome pro- vided by the de — ault rules o — RUPA. 26. Two Taverns. Answer (B) is the best answer. A partner has a right to dissociate at any time by express will. See RUPA § 601(1). There are two general routes once a partner dissociates: either the partner- ship is dissolved, the business is wound up, and the partnership is terminated, or the partner- ship continues and causes the interest o — the dissociated partner to be bought out. See RUPA § 603. The problem here is that there is not enough cash — or Pat (or the partnership) to buy Mike out. This complicates things because “[a] partner has no right to receive, and may not be required to accept, a distribution in kind,” (i.e., a distribution in the — orm o — partnership prop- erty). RUPA § 402. Thus, i — Pat or the partnership cannot cause Mike’s interest to be bought out, all o — the partnership pro — it must be liquidated and split between the partners according to their right to share in the partnership pro — its. That’s the only route that works here. Answer (A) is incorrect because Pat cannot — orce Mike to take an in-kind distribution. Thus, i — Pat cannot come up with cash, the only option is to sell everything. Answer (C) is incorrect because Mike cannot make a unilateral election to sell just one o —
the taverns. The parties would have to agree on what assets to sell and what to keep.
Answer (D) is incorrect because this would be an in-kind distribution, which Mike will not
agree to and cannot be --- orced to accept.
27. Breaking Up.
Answer (A) is the best answer. Partnerships are consensual in nature. A partner’s with-
drawal, and the ensuing dissolution o --- the partnership, is wrong --- ul only i --- it is in contraven-
tion o --- the partnership agreement. RUPA § 602(b) de --- ines “wrong --- ul” as dissolution that is
“in breach o --- an express provision o --- the partnership agreement,” which implies that any-
thing not in breach o --- that agreement is not wrong --- ul. Here, we see an un --- ortunately typical
pattern where the stronger partner withdraws in an opportunistic manner, setting up in
business alone or with someone else.
Answer (B) is not the best answer because there is no evidence that the partners joined
together --- or a “de --- inite term or particular undertaking” under RUPA § 602(b)(2). While
Keith can locate cases --- inding that partners who intended to continue the partnership --- or a
term were required to allow the partnership to earn su ---
icient — unds to accomplish the objec- tive understood by all the partners, and where paying o —
startup expenses is a common objective, Keith simply has no evidence to this e —
ect.
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Answer (C) is not the best answer because Belinda did not use threat o --- withdrawal to
extract concessions --- rom Keith. Rather, Belinda made a “clean break,” where she le --- t without
taking partnership property.
Answer (D) is not the best answer because it is incomplete. While it is true that Keith has
no claim because Belinda did not take anything that belonged to him or the partnership,
i --- there had been a partnership agreement with a provision protecting Keith --- rom the dis-
solution, Keith would have a claim against Belinda. Partnership law does not have, as an
objective, making all partners equal in all things. There is no per --- ectly level playing --- ield.
28. Partnership Departure Planning.
Up until the date o --- departure, Megan should continue to per --- orm her partnership obliga-
tions in good --- aith and in accordance with the letter o --- the partnership agreement. Your
discussion points may include some o --- the --- ollowing:
(1) I --- the agreement requires advance notice o --- her withdrawal, she should give
such notice; otherwise, her withdrawal will be wrong --- ul. Once she gives notice,
she may be treated as a pariah, but some discom --- ort is better than a suit --- or wrong-
ul withdrawal. (2) I — cases are ripe — or settlement, she should settle them. She should not post- pone settlement to a date when her own partnership will enjoy the entire — ee. She should make reasonable e —
orts to avoid continuances in her cases and conduct discovery at her normal pace. (3) She should not use — irm resources (copy machine, telephone, and so on) to develop her new partnership. (4) She should work during normal working hours. She should meet with the architect, the o —
ice machine salesperson, and so on, on Saturdays, or a — ter normal working hours. (5) She may take her clients, and their — iles, with her, but — irst she must obtain their consent. The choice o — representation is the client’s and not the law — irm’s or the lawyer’s. In seeking such consent, she should avoid misrepresentation or pu —
ery. The notice must be “brie — , digni — ied, and not disparaging o — the lawyer’s
ormer — irm.” The notice should be sent only to persons with whom the lawyer has an active attorney-client relationship and not to other o — the — irm’s clients. (6) The law — irm may also send to the clients solicitation letters and authorization
orms. (7) I — asked, be truth — ul. Thus, i — the — irm asks which clients Megan intends to take with her (so the — irm may conduct a dueling solicitation), she must provide the in — ormation. RUPA § 403(c) provides that a partner has an obligation to render on demand true and — ull in — ormation o — all things a —
ecting the partnership and the partner.
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(8) The --- irm associates are employees. She should not o ---
er them employment with the new — irm be — ore she has le — t the old — irm. The day a — ter she leaves, she may o —
er them positions with the new — irm. 29. Partnership Expulsion. Answer (A) is the best answer. A partner’s expulsion is an event o — dissociation. See RUPA § 601(3). But the expulsion o — a partner is not an event o — dissociation that causes the disso- lution o — the partnership. See RUPA § 801(1). Instead, the partnership shall cause the interest o — a dissociated partner to be purchased — or a buyout price. See RUPA § 701(a). Underscor- ing their conclusions with observations about the consensual nature o — partnerships, courts have upheld such clauses in the — ace o — a number o — policy objections. Partners who have been expelled by a vote o — their partners because o — , — or example, their political activities (including actions taken as a state senator), their reporting o — their law partners’ ethics rules violations, or their — ormer alcoholism, have — ailed to win damages — or wrong — ul expulsion. Answer (B) is incorrect because the expulsion o — a partner does not cause the partnership to be dissolved. Answer (C) is not the best answer. Although it correctly states the proposition that partners must “exercise any rights consistently with the obligation o — good — aith and — air dealing,” RUPA § 404(c), it — ails to consider what e —
ect the expulsion has on the partnership. Answer (D) is incorrect. The First Amendment has no applicability because no governmen- tal action is involved. 30. Partnership Finances, Part I. Answer (D) is the best answer. Partners are not co-owners o — partnership property or — unds. See RUPA § 501. Instead, each partner is deemed to have a “capital account” that is credited with the amount o — any contribution the partner has made and the partner’s share o — the partnership pro — its, and that is charged the amount distributed to the partner and the part- ner’s share o — the partnership losses. See RUPA § 401(a). In other words, the capital account
luctuates; however, the partner is not immediately entitled to the balance o — their capital account. Additionally, as a matter o — de — ault rules, “[e]ach partner is entitled to an equal share o — the partnership pro — its and is chargeable with a share o — the partnership losses in proportion to the partner’s share o — the pro — its.” RUPA § 401(b). Finally, once the partnership has been dissolved and its business wound up, no partner is entitled to a distribution — rom their capital account until the capital accounts are settled, see RUPA § 807(b), but under some circumstances, the partners may agree to pay interim distributions. Here, the $5,000 pro — it is strictly partnership property, and neither partner is entitled to immediate payment o — any pro — it. Instead, because they share pro — its evenly, both o — their capital accounts will be credited with their share o — the pro — its. Answer (A) is incorrect because the partners have no individual interest in the partner- ship pro — its, nor are they entitled to immediate payment. Additionally, i — there were to be
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a distribution to the partners, the amount o --- the distribution would be charged against the
partners’ capital accounts.
Answer (B) is incorrect because the partners have no individual interest in the partnership
pro --- its, nor are they entitled to immediate payment.
Answer (C) is not the best answer because it only states hal --- the rule. While it is true that
the pro --- its are partnership property, the capital accounts o --- the partners should be credited
or their share o — the pro — its. 31. Partnership Finances, Part II. Answer (C) is the best answer. “[A]ll partners are liable jointly and severally — or all obliga- tions o — the partnership unless otherwise agreed by the claimant or provided by law.” RUPA § 306(a). A — ter the dissolution o — the partnership and the winding up o — its business, “[a] partner shall contribute to the partnership an amount equal to any excess o — the charges over the credits in the partner’s account.” RUPA § 807(b). I — any one partner — ails to contrib- ute to cover the loss, the other partners are required to do so. See RUPA § 807(c). The bottom line is that, when dealing among themselves, the de — ault rule is that partners share equally in the pro — its and losses o — the partnership, and each partner is on the hook — or the — ull extent o — the partnership’s obligations when it comes to third parties. I — there is a disparity, then the partners can settle it among themselves. Here, Answer (C) best re — lects the contrast in the obligations among the partners and the obligations o — the partners to third parties. Answer (A) is incorrect. The partners are jointly and severally liable — or all o — the partner- ship’s obligations. Answer (B) is incorrect. Although when dealing among themselves, the partners split the pro — its and losses equally, each is jointly and severally liable to third parties — or the obligation. Answer (D) is incorrect. While this choice correctly states the partners’ liability to third parties, it — ails to account — or how the partners allocate pro — its and losses among themselves. 32. Partnership Finances, Part III. Answer (B) is the best answer. The actual calculation o — the tax liability is beyond the scope o — a traditional Business Associations course, but it is important — or lawyers to understand the basic tax — ramework. A general partnership is a “pass through” entity — or purposes o —
ederal income tax liability. That means that each partner is responsible — or the — ederal income tax liability — or their respective share o — any pro — its that the partnership experienced, and that each partner may claim their respective share o — any partnership losses. The part- ner’s capital account should be credited with their share o — the pro — it or charged — or their share o — the losses. See RUPA § 401(a). The partnership should issue each o — the partners an IRS Form K-1 at the end o — the tax year to re — lect the adjustment o — the balance o — the partner’s capital account. The partnership may — ile a — ederal income tax return, but this is in — ormational only. The partnership does not bear any responsibility — or the — ederal income
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tax liability. Signi --- icantly, the partnership may owe liability --- or other taxes under --- ederal or
state law. Keep in mind, o --- course, that by de --- ault, a partner is not entitled to distributions
until the partnership is dissolved, its business is wound up, and the accounts are settled.
Even i --- the partnership agreement provides --- or interim distributions, or even i --- the partners
themselves desire to make an interim distribution, they may not be able to do so i --- making
the distribution would render the partnership insolvent or unable to pay its debts as the
debts come due in the ordinary course. Thus, this exposes the partner to tax liability --- or
pro --- its they may never receive in their own pocket, and this is one o --- the key considerations
that lawyers should talk to clients about when discussing appropriate business entities --- or
the clients’ ventures. In this case, the partnership earned $10,000 in pro --- it. Because Paul and
Olivia share the pro --- its evenly, each will be responsible --- or the --- ederal income tax liability --- or
$5,000, and their capital accounts should be credited with the $5,000 pro --- it.
Answer (A) is incorrect. The partnership itsel --- does not bear any responsibility --- or --- ederal
income tax liability.
Answer (C) is incorrect. The partners are responsible --- or the --- ederal income tax liability,
even i --- they have not received a distribution.
Answer (D) is incorrect. Although this answer choice rightly places the --- ederal income tax
liability on the partners, it wrongly states that the partners’ --- inancial interest in the partner-
ship will be una ---
ected. In — act, the partners’ capital accounts will be credited — or their share o — the pro — its. 33. Landscaping Liability. Answer (D) is the correct answer. One o — the scariest — eatures o — the general partnership is that the partners are each jointly and severally liable — or all o — the obligations o — the partner- ship. See RUPA § 306(a). To compound this, “[a] partnership is liable — or loss or injury caused to a person, or — or a penalty incurred, as a result o — a wrong — ul act or omission, or other actionable conduct, o — a partner acting in the ordinary course o — business o — the partnership or with authority o — the partnership.” RUPA § 305(a). Finally, each partner is an agent o — the partnership — or the purposes o — its business, see RUPA § 301(a), and under ordinary prin- ciples o — agency law, “[a]n agent is subject to liability to a third party harmed by the agent’s tortious conduct.” Restatement (Third) o — Agency § 7.01 Thus, the liability proceeds in three steps. First, the agent/partner is always liable — or their own tortious conduct. Second, the partnership is liable — or any harm caused by a partner acting in the ordinary course o — busi- ness. Finally, each partner is jointly and severally liable — or the partnership’s obligations. Here, the bystander should sue the partnership, Foster, and McGee. The bystander may sue Foster because Foster is the one who negligently caused the injury. Next, the bystander may sue the partnership because the partnership is liable — or the injuries caused by Foster’s negli- gence while Foster was acting in the ordinary course o — business. Finally, the bystander may sue McGee (and Foster, too) because, as a partner, McGee is jointly and severally liable — or the partnership’s obligations.
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Answer (A) is incorrect because it --- ails to account --- or the partnership’s liability --- or Fos-
ter’s negligence and McGee’s (and Foster’s) joint and several liability --- or the partnership’s
obligations.
Answer (B) is incorrect because it --- ails to account --- or Foster’s individual liability as the per-
son who negligently caused damage and McGee’s (and Foster’s) joint and several liability --- or
the partnership’s obligations.
Answer (C) is incorrect because it --- ails to account --- or McGee’s joint and several liability --- or
the partnership’s obligations.
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LLCs and Other Unincorporated Entities
34. Investment Actors.
Answer (D) is the best answer. A limited liability company provides liability protection --- or
all members, it o ---
ers a — lexible management structure which allows the members to partici- pate in management (or to be silent partners), and it can be taxed like a partnership. Answer (A) is a bad answer. A general partnership is not a good idea. The partners would be personally liable on both contract and tort claims against the partnership, which — or these purposes is nothing more than an aggregate o — the partners. Student tenants who — all o —
balconies could and would sue the partners personally. General partnership would be well
suited only --- or a small-time investment such as a duplex or small commercial property.
Answer (B) is a poor choice. A corporation would provide the limited liability but not the
low-through tax treatment essential here. While a corporation can make an “S” election, that election is unavailable where one o — the shareholders is not a U.S. taxpayer. This corpo- ration would generate paper losses that would accumulate in the corporation, doing no one any good. Though plausible, Answer (C) is not the best answer because LPs have been generally obvi- ated by LLCs in recent years. A limited partnership must have one or more general partners, who remain personally liable. This can be avoided by using a “blocking corporation” as the general partner, but the need — or this rigmarole is obviated by using an LLC. The limited partners (sometimes called “sleeping partners”) may not undertake active management o —
the partnership’s business and a ---
airs. I — they do, they may lose their limited liability. This
orm o —
ers desirable — low-through tax treatment, but it is not the best way to achieve limited liability at the same time. 35. Partnership Participation. Answer (D) is the best answer because the actions described are not characteristic o — how limited partners should act. Even i — the business — orms in a RULPA jurisdiction, where there are sa — e harbors — or certain actions, it is unclear whether the actions contemplated here — all within those sa — e harbors. Moreover, the LLC — orm is much more obviously suited to a busi- ness such as this, making an LLC a better choice than an LP. Answer (A) is not the best answer. Even in a RULPA jurisdiction, actions such as those described would very likely lead to liability — or the acting members. RULPA introduces a number o — sa — e harbors, that is, activities in which limited partners now may be engaged.
133
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Second, it introduces a --- urther requirement o --- reliance. A limited partner who oversteps
the boundary “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.” RULPA § 303(a).
Answer (B) is not the best answer because it does not contemplate Felice’s liability, and
because it is unclear whether Burt and Cathy would in --- act be liable under RULPA, where
RULPA does not provide an obvious sa --- e harbor --- or making business decisions such as
these. RULPA permits exercise o --- a limited partner’s “democracy rights.” The --- ormer
includes “being a contractor --- or or an agent or employee o --- the limited partnership or o ---
a general partner.” RULPA § 303(b)(1). Thus, ironically, under RULPA, while Burt and
Cathy probably should not oversee the renovations by an interior decorator, they themselves
could contract with the partnership to be the interior decorators. Other permitted business
activity includes “consulting with and advising the general partner,” acting as surety --- or or
guaranteeing partnership obligations, or winding up the partnership’s business and a ---
airs. Democratic rights include attendance at partners’ meetings; bringing derivative actions in the name o — the partnership; proposing and voting on dissolution, sale, or pledge o — sub- stantially all the partnership’s assets; incurrence o — indebtedness; a change in the nature o — the partnership’s business; admission or removal o — a general partner; and admission or removal o — a limited partner. Answer (C) is not the best answer. At a minimum, it is incomplete, as it does not contem- plate Burt’s and Cathy’s probable liability. But there is also a — actual question as to whether Felice has control over partnership — unds where her signature is required on the checks. This makes her liability uncertain as well. 36. General Partnerships vs. Limited Liability Companies. Although limited liability companies are hybrid entities that seek to combine the ease o —
management and --- lexibility o --- general partnerships with the structure and limited liabil-
ity shield provided under corporate law, general partnerships and limited liability compa-
nies may be distinguished in at least three critical ways: First, the organization o --- an LLC
requires an intentional and overt step — the organizers must --- ile a certi --- icate o --- organiza-
tion with the governmental o ---
ice designated — or handling business — ilings (most commonly, the Secretary o — State). See RULLCA § 201(a). A general partnership, on the other hand, may be — ormed (sometimes by accident!) merely through the conduct o — the partners. See RUPA § 202(a). (“[T]he association o — two or more persons to carry on as co-owners a business
or pro — it — orms a partnership, whether or not the persons intend to — orm a partnership.”). Second, LLCs o —
er the limited liability shield. “The debts, obligations, or other liabilities o — a limited liability company, whether arising in contract, tort, or otherwise . . . do not become the debts, obligations, or other liabilities o — a member or manager solely by reason o — the member acting as a member or manager acting as a manager.” RULLCA § 304(a)(2). Conversely, “all partners are liable jointly and severally — or all obligations o — the partner- ship unless otherwise agreed by the claimant or provided by law.” RUPA § 306(a). Finally, the LLC is designed to endure beyond the dissociation o — a member, see RULLCA § 701(a),
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whereas the de --- ault rule is that a partnership is dissolved and must be wound up when a
partner dissociates, see RUPA § 801(1).
37. “Antique Store, LLC.”
Answer (C) is the best answer. The problem here is that, while Brother and Sister desired
to --- orm a limited liability company (LLC), they --- ailed to take the legal steps necessary to
do so. Accordingly, they cannot claim the limited liability protection that an LLC o ---
ers its members and managers. To — orm an LLC, “one or more persons may act as organizers . . . by signing and delivering to the [Secretary o — State] — or — iling a certi — icate o — organization.” RULLCA § 201(a). Generally speaking, an LLC “is — ormed when the [Secretary o — State] has
iled the certi — icate o — organization and the company has at least one member.” RULLCA § 201(d)(1). Once the LLC is — ormed, “[t]he debts, obligations, or other liabilities o — [an LLC], whether arising in contract, tort, or otherwise . . . are solely the debts, obligations, or other liabilities o — the [LLC]; and do not become the debts, obligations, or other liabilities o — a member or manager solely by reason o — the member acting as a member or a manager act- ing as a manager.” RULLCA § 304(a). Although there may be some equitable principles that would allow a court to treat the business entity as a de — acto LLC, see, e.g., Stone v. Jetmar Properties, LLC, 733 N.W.2d 480 (Minn. Ct. App. 2007), no such considerations appear pres- ent here. As a result, Answer (C) best re — lects that no LLC was properly — ormed and that Brother and Sister are not entitled to any liability shield under RULLCA § 304. Answer (A) is incorrect because, even had the LLC been properly — ormed and the liability shield applied, this choice overstates the protections o —
ered by the liability shield. RULLCA § 304(a) protects members — rom being liable — or the LLC’s obligations solely because they are members. There may be other reasons — or why a member would be liable — or the LLC’s obligations — — or example, i — the obligation arose because o — their own tortious conduct. Answer (B) is incorrect. It contains a more accurate description o — the liability shield o —
ered by RULLCA § 304, but it is nevertheless incorrect because the LLC was not properly — ormed. Answer (D) is incorrect because it misstates the liability shield applicable to members o — an LLC and instead states the rule — or liability o — a partner in a partnership. See RUPA § 306(a) (“[A]ll partners are liable jointly and severally — or all obligations o — the partnership . . . .”). 38. Cashing Out. You should advise Evelyn that limited partnership interests are extremely illiquid, so she will likely have trouble cashing out these investments quickly. There are — irms that stand willing to purchase some limited partnership interests, but at a deep discount — rom probable market value, based on their illiquidity discount. Usually, there is no market in which to sell your interest to another investor. Illiquidity makes partners’ dissolution rights doubly important. RULPA § 603 provides that a limited partner may withdraw on six months’ notice to the general partner, absent a contrary agreement. Under RULPA § 604, the withdrawing part- ner must be paid any distributions to which she is entitled and, i — not otherwise provided in the agreement, the — air value o — her interest in the partnership. Those are the de — ault rules.
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Usually (but not always — so it is worth checking each o --- Evelyn’s agreements), the limited
partnership agreement “provides otherwise.” The agreement may provide --- or sale o --- the real
estate a --- ter a holding o --- so many years (e.g., 10 years), --- ollowed by a distribution. There may
also be provision --- or dissolution by a vote o --- a majority, or a super majority, o --- the units o ---
participation. I --- the partnership is a smaller, local “deal,” perhaps Evelyn can procure the
requisite vote. Overall, however, you should advise Evelyn that she likely will obtain liquid-
ity only over time.
39. Myron’s Estate.
Answer (B) is the best answer. While LLCs have obviated many use cases --- or LPs, an area o ---
remaining vitality --- or the LP --- orm o --- entity is the “ --- amily limited partnership.” It is a device
used to minimize estate taxes upon death and, short o --- death, gi --- t taxes. The details o ---
am- ily limited partnership tax strategy are beyond the scope o — this text, but it is worth noting just that — amily limited partnerships seem to be the last area o — robust vitality — or the LP as a
orm o — entity. Answer (A) is incorrect. A general partnership would not work. The partners would have
ull rights to participate in the business. They might be in Myron’s hair all o — the time. More- over, their control rights would increase the value o — what they hold, thereby increasing gi — t tax payments. Answer (C) is incorrect. A corporation may not work, at least not without complex and novel machinations such as non-voting stock that divests all potential control — rom share- holders. Even then, there is no good reason to take the risks and expense associated with using a novel — orm. Answer (D) is not the best answer. A limited liability company could be adapted to suit Myron’s purposes (manager-managed, etc.). Currently, however, most estate planners utilize the limited partnership — orm as there are simply more tax rulings and thus more certainty
or this traditional — orm. 40. Limited Liability. Answer (B) is the best answer. This analysis requires us to ask three questions: First, who is personally liable? Next, is the LLC liable? Finally, is anyone else liable — or the LLC’s obliga- tions? It is easy to overlook it, but a tort — easor is always liable to third parties — or damages caused by their own torts. See Restatement (Third) o — Agency § 7.01. Thus, we can quickly identi — y here that South is the negligent actor, and so the homeowner may sue South — or damages. Next, we need to establish whether the LLC is also liable — or South’s negligence. A member o — an LLC is not an agent o — the LLC “solely by reason o — being a member.” RUL- LCA § 301(a). Still, there may be a di —
erent basis to impute liability to the LLC — agency law! “An employer is subject to vicarious liability — or a tort committed by its employee act- ing within the scope o — employment.” Restatement (Third) o — Agency § 7.07. Here, the — act pattern provides that, in addition to her being a member o — the LLC, South was also an employee o — the LLC acting within the scope o — her employment. Accordingly, the LLC
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can be held vicariously liable --- or damages caused by South’s negligence here. Finally, under
RULLCA, “the debts, obligations, or other liabilities o --- a limited liability company, whether
arising in contract, tort, or otherwise . . . are solely the debts, obligations, or other liabili-
ties o --- the company; and . . . do not become the debts, obligations, or other liabilities o --- a
member or manager solely by reason o --- the member acting as a member or manager acting
as a manager.” RULLCA § 304. Here, North is the manager o --- the LLC and West is a mem-
ber. Accordingly, without additional --- acts that would justi --- y imposing liability on North or
West, they cannot be held liable --- or the LLC’s obligations solely because they are members,
or in North’s case, a manager.
Answer (A) is incorrect because it does not recognize that the homeowner may sue South.
Answer (C) is incorrect because it wrongly extends liability to North.
Answer (D) is incorrect because it does not recognize that the homeowner may sue South.
41. Members and Managers.
Answer (C) is the best answer. Under RULLCA, an LLC may be either “member-managed”
or “manager-managed.” See RULLCA § 407. A member is not an agent o --- the LLC solely by
reason o --- being a member. See RULLCA § 301(a). In a member-managed LLC, “[t]he man-
agement and conduct o --- the company is vested in the members” and “[e]ach member has
equal right in the management and conduct o --- the company’s activities.” RULLCA § 407(b).
In a manager-managed LLC, however, the general rule is that “any matter relating to the
activities o --- the company is decided exclusively by the managers.” RULLCA § 407(c)(1). The
de --- ault rule is that an LLC is “member-managed” unless the LLC’s operating agreement
states that it is to be managed by managers. See RULLCA § 407. Here, it sounds like the best
way to set up the active members’ desired structure would be to organize the LLC as man-
ager managed. To do so, this needs to be addressed in the operating agreement.
Answer (A) is incorrect because it wrongly states that “manager-managed” is the de --- ault
rule.
Answer (B) is incorrect because it wrongly states that the certi --- icate o --- organization, rather
than the operating agreement, is needed to establish the LLC as manager-managed.
Answer (D) is incorrect because members o --- an LLC are not agents o --- the LLC (nor do they
have apparent authority to bind the LLC) solely because they are members.
42. A Canceled Concert.
Answer (B) is the best answer. A manager o --- a manager-managed LLC owes the --- iduciary
duties o --- care and loyalty both to the LLC and to the members o --- the LLC. See RULLCA
§ 409(g). The duty o --- loyalty requires a manager “to account to the company and to hold as
trustee --- or it any property, pro --- it, or bene --- it derived” in the conduct o --- the LLC business, see
RULLCA § 409(b)(1); “to re --- rain --- rom dealing with the company in the conduct or winding
up o --- the company’s activities as or on behal --- o --- a person having an interest adverse to the
company[,]” see RULLCA § 409(b)(2); and “to re --- rain --- rom competing with the company in
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the conduct o --- the company’s activities be --- ore the dissolution o --- the company[,]” see RUL-
LCA § 409(b)(3). The duty o --- care required o --- a manager “is to act with the care that a person
in a like position would reasonably exercise under similar circumstances and in a man-
ner the member reasonably believes to be in the best interests o --- the company.” RULLCA
§ 409(c). Generally, the standard --- or breach o --- the duty o --- care is gross negligence. Addi-
tionally, a manager must discharge their duties to the LLC and the members “consistently
with the contractual obligation o --- good --- aith and --- air dealing.” RULLCA § 409(b)(3). Here,
Walter’s decision to order 10,000 shirts was consistent with prior practice and seems within
the scope o --- his authority as manager. There is nothing to indicate that his decision to place
this order was sel --- -motivated, the result o --- a con --- lict-o --- -interest transaction, or a --- orm o ---
competition with the LLC. Accordingly, there is no indication here that Walter breached any
iduciary duty owed to the LLC or to the members o — the LLC merely by ordering the 10,000 custom t-shirts when the concert was unexpectedly canceled. Answer (A) is incorrect because managers most certainly do owe — iduciary duties to the LLC and the members o — the LLC. Answer (C) is incorrect because it wrong — ully concludes that Walter breached his duty o — care. Answer (D) is incorrect because it wrong — ully concludes that Walter breached his duty o —
loyalty.
43. Competition at the Gym.
Answer (D) is the best answer. Members o --- a member-managed LLC owe to the LLC and to
the other members o --- the LLC the --- iduciary duties o --- loyalty and care. See RULLCA § 409(a).
The duty o --- loyalty requires a member “to account to the company and to hold as trustee --- or
it any property, pro --- it, or bene --- it derived” in the conduct o --- the LLC business, see RULLCA
§ 409(b)(1); “to re --- rain --- rom dealing with the company in the conduct or winding up o --- the
company’s activities as or on behal --- o --- a person having an interest adverse to the company[,]”
see RULLCA § 409(b)(2); and “to re --- rain --- rom competing with the company in the conduct
o --- the company’s activities be --- ore the dissolution o --- the company[,]” see RULLCA § 409(b)(3).
The duty o --- care required o --- a member “is to act with the care that a person in a like posi-
tion would reasonably exercise under similar circumstances and in a manner the member
reasonably believes to be in the best interests o --- the company.” RULLCA § 409(c). Generally,
the standard --- or breach o --- the duty o --- care is gross negligence. Additionally, a member must
discharge their duties to the LLC and the members “consistently with the contractual obli-
gation o --- good --- aith and --- air dealing.” RULLCA § 409(b)(3). Here, Kylar’s conduct seems to
be a --- airly textbook example o --- breach o --- the duty o --- loyalty. Arguably, by selling the apparel
in the --- itness studio and using the “Pump You Up” logo and colors, the LLC is entitled to at
least some o --- the pro --- it o --- the sales. Likewise, Kylar was acting in --- urtherance o --- the interests
o --- the apparel business rather than the LLC by not looping the LLC in on the deal or getting
approval --- rom the other members. Finally, this seems like competition; the LLC could have
produced and sold its own apparel. On the other hand, this does not quite seem to rise to
a level o --- breach o --- the duty o --- care, as the duty is de --- ined by RULLCA. It’s hard to see how
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Kylar’s conduct here would constitute gross negligence. In all likelihood, i --- this were to go to
court, the court could enjoin Kylar --- rom selling any more apparel and could order that Kylar
pay all pro --- its earned to the LLC.
Answer (A) is incorrect because it wrongly states that a member does not owe a --- iduciary
duty.
Answer (B) is incorrect because, as stated, Kylar’s conduct is a textbook example o --- breach
o --- the duty o --- loyalty.
Answer (C) is incorrect because, although Kylar’s conduct is wrong, it likely does not meet
the de --- inition o --- breach o --- the duty o --- care.
44. Exit via Trans --- er.
Answer (A) is the best answer. Broadly speaking, a member’s interest in an LLC consists o --- a
voting interest and a --- inancial interest. The voting interest re --- lects the member’s right to par-
ticipate in the management o --- the LLC’s business and a ---
airs, see RULLCA § 407(b), while the — inancial interest re — lects the member’s right to receive distributions, see RULLCA § 404. The de — ault rule is that a member has a trans — erable interest in the LLC, and that interest is personal property o — the member. See RULLCA § 501. A member may trans — er to a trans — eree “the right to receive . . . distributions to which the trans — eror would otherwise be entitled.” RULLCA § 502(b). Such a trans — er does not, by itsel — , cause the member’s dissociation — rom the LLC, nor does it require that the LLC be dissolved and wound up. See RULLCA § 502(a) (1)-(2). On the other hand, a member’s trans — er to a trans — eree does not entitle the trans — eree to “participate in the management or conduct o — the company’s activities [or] . . . have access to records or other in — ormation concerning the company’s activities.” RULLCA § 502(a)(3). In other words, under the de — ault rule, a member may trans — er their — inancial interests in the LLC only, not their voting interests. “[W]hen a member trans — ers a trans — erable interest, the trans — eror retains the rights o — a member other than the interest in distributions trans — erred and retains all duties and obligations o — a member.” RULLCA § 502(g). Generally speak- ing, a trans — eree may only become a member as provided — or in the operating agreement or with the consent o — all the members. See RULLCA § 401(d). This is known as the “pick your partner” rule. Here, applying the de — ault rules, Beta may trans — er their — inancial interests in the LLC to Foxtrot, but Beta may not trans — er their voting rights to Foxtrot, and Foxtrot does not become a member o — the LLC as a result o — the trans — er. Foxtrot may be delighted to receive Beta’s — inancial rights, but a trans — er here does not accomplish Beta’s goal o — getting out o — the business. Answer (B) is incorrect because Foxtrot can only become a member o — the LLC as provided
or in the LLC’s operating agreement or with consent o — all the members. Answer (C) is incorrect because the de — ault rules permit Beta to trans — er their — inancial interests in the LLC. Answer (D) is incorrect because the trans — er o — a member’s trans — erable interest does not result in the dissociation o — the member or in the dissolution and winding up o — the LLC.
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45. Stuck in the LLC.
Answer (D) is the best answer. An LLC’s operating agreement governs “relations among
the members as members and between the members and the limited liability company; the
rights and duties . . . o --- a person in the capacity o --- manager; the activities o --- the company
and the conduct o --- those activities; and . . . the means and conditions --- or amending the
operating agreement.” RULLCA § 110(a). To the extent an operating agreement does not
provide --- or any o --- these matters, RULLCA provides the de --- ault rules. See RULLCA § 110(b).
LLCs have great leeway in how they structure their governance in the operating agreement,
but there are certain things that an operating agreement may not do, see RULLCA § 110(c),
and other things that an operating agreement may do, so long as it is not mani --- estly unrea-
sonable, see RULLCA § 110(d). Under RULLCA, the de --- ault rule --- or a member’s dissocia-
tion is that “[a] person has the power to dissociate as a member at any time, right --- ully or
wrong --- ully, by withdrawing as a member by express will . . . .” RULLCA § 601(a). Neither
RULLCA § 110(c) nor § 110(d) prohibits an operating agreement --- rom varying this de --- ault
rule. Indeed, it is quite common --- or LLC operating agreements to prohibit a member --- rom
voluntarily dissociating. Thus, here, the provision in the operating agreement is valid, and
Delano does not have the right to withdraw by express will --- rom the LLC.
Answer (A) is incorrect because it wrongly states that RULLCA prevents an operating agree-
ment --- rom varying the de --- ault rules permitting withdrawal by express will. This is an area
where LLCs are distinguishable --- rom general partnerships. In general partnerships, “[a] partner
has the power to dissociate at any time[,]” RUPA § 602(a), and a “partnership agreement may
not . . . vary the power to dissociate as a partner under Section 602(a), except to require the
notice under Section 601(1) to be in writing[,]” RUPA § 103(b)(6). From a policy perspective, it
makes sense to permit an operating agreement to limit a member’s ability to withdraw --- rom the
LLC because a member is not an agent o --- the LLC and is not liable --- or the obligations o --- the LLC
solely by reason o --- being a member o --- the LLC; the converse is true o --- general partnerships.
Answer (B) is incorrect --- or the same reason as Answer (A).
Answer (C) is incorrect because, while permissible, this provision is a variance --- rom the
de --- ault rules.
46. Jumping Ship.
Answer (A) is the best answer. As a matter o --- de --- ault rules, RULLCA does provide --- or interim
distributions — that is, a distribution be --- ore the LLC’s dissolution and winding up. RULLCA
merely provides that an LLC may not make an interim distribution i --- , a --- ter the distribution,
“the company would not be able to pay its debts as they become due in the ordinary course
o --- the company’s activities; or . . . the company’s total assets would be less than the sum o --- its
total liabilities plus the amount that would be needed, i --- the company were to be dissolved,
wound up, and terminated at the time o --- the distribution, to satis --- y the pre --- erential rights
upon dissolution, winding up, and termination o --- members whose pre --- erential rights are
superior to those o --- persons receiving the distribution.” RULLCA § 405(a). Signi --- icantly, “[a]
ny distributions made by a limited liability company be --- ore its dissolution and winding up
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must be in equal shares among members and dissociated members.” RULLCA § 404(a). Noth-
ing prohibits the operating agreement --- rom varying these rules (subject to the general require-
ment that all members and managers must act consistently with the contractual duty o --- good
aith and — air dealing). See RULLCA §§ 110(c)-(h). As an e —
ect o — a person’s dissociation as a member, “the person’s right to participate as a member in the management and conduct o —
the company’s activities terminates.” RULLCA § 603(a)(1). Here, Milo had dissociated as a
member, and Milo’s right to vote on whether the LLC should make an interim distribution
had terminated. But this did not impact Milo’s --- inancial rights. Milo is still entitled to receive
a distribution in equal shares to the other members and dissociated members.
Answer (B) is incorrect because Milo’s dissociation has no e ---
ect on Milo’s right to receive an interim distribution. Answer (C) is incorrect because, as a general rule, interim distributions are permitted. Answer (D) is incorrect because an LLC may certainly make distributions be — ore it is dis- solved and wound up. 47. Law Firm Form. Answer (D) is the best answer. Under the Model Rules o — Pro — essional Conduct, and pre- decessor ethics provisions, attorneys must remain pro — essionally and — inancially responsible
or the work they do and — or the work they supervise. There — ore, lawyers are not and have never been able to practice using a — orm o — organization that accords them across-the-board limited liability. A law — irm, then, may not practice by means o — a corporation or a limited liability company. Answer (A) is incorrect. Although some states allow — irms to — orm as pro — essional corpora- tions, that is distinguishable — rom the “vanilla” corporation suggested by this answer. A law
irm may not usually — orm as a corporation because the partners are not allowed to protect themselves — rom their malpractice via corporate limited liability. Answer (B) is incorrect. Although some states provide — or pro — essional limited liability com- panies, that is distinguishable — rom the “vanilla” LLC suggested by this answer. A law — irm may not usually — orm as an LLC because the partners are not allowed to protect themselves
rom malpractice in this way. Answer (C) is incorrect. The partnership — orm does not give the — irm enough protection
rom non-pro — essional liabilities, such as the lease on the — irm’s o —
ices. Note: The question does not ask how to e —
ectuate this reorganization, but the answer is relatively simple. The — irm can reorganize by — iling a certi — icate with a state o —
icial such as the secretary o — state. They would then dra — t a partnership agreement — or the conduct o —
their LLP. In most respects, aside --- rom providing --- or the curtailment o --- across-the-board
pro --- essional liability, the LLP statute provides a set o --- de --- ault rules. The dra --- ter o --- the LLP
agreement should consult with the partners to determine whether they want to contract out
o --- the de --- ault regime by, --- or example, prohibiting opportunistic withdrawal.
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48. Cabbage Analytics.
Answer (B) is the best answer. An LLC by de --- ault is taxed like a partnership, which is a --- low-
through entity --- rom a --- ederal tax perspective. This means that the partners will be taxed on
pro --- its earned just once, not twice, as occurs with corporate taxation. Unlike a partnership,
a corporation pays --- ederal taxes on annual pro --- its, and then its shareholders pay tax again
on distributions the corporation makes to them. While corporations can make an S election
by --- iling IRS Form 2553, this corporation is ineligible --- or an S election because some o --- its
shareholders are non-resident aliens, thus disquali --- ying the corporation --- rom electing --- low-
through taxation. An LCC, on the other hand, can be taxed as a --- low-through entity even
where it has non-resident alien owners. Given the --- ounders’ desire to distribute business
pro --- its monthly, this is the optimal tax structure.
Answer (A) is not the best answer because corporate distribution will be taxed twice: once
when the corporation earns pro --- its and again when it distributes those pro --- its to sharehold-
ers. Since the business intends to distribute pro --- its regularly, this option produces a sub-
optimal tax result. A more e ---
icient tax result will occur i — the business is not taxed at the entity level but instead is treated as a — low-through entity. Corporations can sometimes be treated like — low-through entities where they make an election to become a so-called S cor- poration by — iling Form 2553 with the IRS. But this — low-through tax treatment is not pos- sible here because corporations cannot elect to be treated as — low-through entities where any o — the shareholders are not U.S. taxpayers. Here, Bok and Danish are not U.S. taxpayers, so their business is ineligible to quali — y — or S corporation status. There — ore, they cannot obtain a tax-optimal result through the corporate — orm. Answer (C) is not the best answer because partners have unlimited liability — or partnership debts and torts. Answer (D) is not the best answer because limited liability partners have liability — or pro-
essional malpractice. While this — orm is required in some jurisdictions — or speci — ic pro — es- sions, here, the business does not appear to engage in any restricted pro — ession that requires practitioners to maintain malpractice liability, such as law, medicine, or accounting. There is another — orm o — business association that better suits this client’s business needs. Note: While noting that — ederal tax law changes separately — rom the law o — business associa- tions per se, lawyers engaged with business associations should generally understand the di —
erence between entity taxation and — low-through taxation. Entity taxation means the business association is a U.S. taxpayer that retains income, losses, deductions, and cred- its. In a simple example, i — a corporation earns net pro — its, that corporation owes taxes to the Internal Revenue Service. The individual shareholders o — that corporation do not, how- ever, owe taxes purely because the corporation they own earns pro — its. Rather, corporate shareholders owe IRS taxes only when the corporation issues distributions to them. A — low- through entity, on the other hand, is taxed as a partnership, which is a — orm o — disregarded entity — rom an IRS perspective. Instead o — the pro — itable partnership paying taxes, the part- ners owe taxes on their share o — pro — its.
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49. Fishmongers I.
Answer (B) is the best answer. Under RULLCA § 408(a), “[a] limited liability company shall
reimburse a member o --- a member-managed company or the manager o --- a manager-man-
aged company --- or any payment made by the member or manager in the course o --- the mem-
ber’s or manager’s activities on behal --- o --- the company, i --- the member or manager complied
with Sections 405, 407, and 409 in making the payment.”
Answer (A) is not the best answer. Under RULLCA § 408(d), as a de --- ault, the company may
purchase insurance on behal --- o --- its members. This situation, however, does not appear to
present an insurance issue. Rather, this is either a payment made by a member on behal --- o ---
the company, see RULLCA § 408(a), or indemni --- ication o --- a member with respect to a debt
incurred by reason o --- the member’s capacity as member, see RULLCA § 408(b). Since this is
not an insurance claim, this is not the best answer.
Answer (C) is incorrect. As a matter o --- de --- ault law, limited liability companies must reim-
burse members --- or company payments, regardless o --- whether or not the company earned
pro --- its that period. While it is true that members are entitled to --- low-through losses, such
losses are not usually calculated on a monthly basis.
Answer (D) is incorrect. Unless the company’s operating agreement otherwise speci --- ies,
de --- ault law applies, and the de --- ault under limited liability company law is that members are
entitled to reimbursement o --- debts, even i --- a majority o --- members do not wish to pay them.
50. Fishmongers II.
Answer (A) is the best answer. Under RULLCA § 407(g), members are speci --- ically entitled
to interest on loans they make to the company.
Answer (B) is not the best answer. While the speci --- ic amount o --- interest that the company
owes to Bluegill may be said to be imputed because interest terms were not expressed when
the loan was made, it is not accurate to say that the interest is owed because it is imputed.
This statement would be a tautology. Rather, a better answer is that the company owes inter-
est to its members because, under de --- ault law, loans by members to their companies accrue
interest. The amount o --- interest, in turn, may be established by extrinsic evidence such as
the prevailing interest rate. In this case, 5 percent interest seems reasonable, given that the
in --- lation rate is higher than that.
Answer (C) is incorrect. The members speci --- ically discussed Bluegill’s payment as a loan,
not a contribution. RULLCA distinguishes between capital accounts and loans. See gener-
ally RULLCA § 408. Nothing in these --- acts suggests that the members could not e ---
ectuate Bluegill’s payment as a loan, the members speci — ically termed this payment a loan, and loans are distinguished — rom contributions to capital accounts, so this is a wrong answer. Answer (D) is incorrect. RULLCA § 407(g) speci — ically states that interest shall accrue on loans by members to companies — rom the date on which the loan is issued. This answer is thus an incorrect statement o — the law.
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Corporate Incorporation
51. Exotic Food.
Answer (B) is the best answer. Roy and Gail should --- orm a corporation. Once the business
has been incorporated and adequately capitalized (see the discussion o --- veil piercing below),
the corporation will a ---
ord Roy and Gail limited liability, which does not mean “no liability.” It means that Roy and Gail’s liability will be limited to the monies and property they convey to the corporation. Answer (A) is a bad answer because it leaves Roy and Gail with unlimited personal liabil- ity — or business harms, such as tort liability — rom — ood poisoning, and contract liability — or leases and amounts payable on goods. This is also a bad answer because Roy and Gail have duties to each other under de — ault rules according to the Alabama partnership statute, even i — that is not what they intend. Answer (C) is not the best answer. Roy and Gail should — orm their corporation in the state in which they do business. Incorporating in Delaware would entail added expense and is generally inappropriate — or small businesses like this one. Answer (D) is a bad answer, although it is not as bad as doing nothing. The partnership agreement does give Roy and Gail better de — ined rights and responsibilities as to each other, but it does nothing to protect them — rom liabilities — rom business torts and contracts. Note: An alternative to — orming a subchapter “S” corporation is — orming an LLC and elect- ing to tax it as a partnership. 52. Six Lawyers. Answer (C) is the best answer. Beginning in the 1960s, most states adopted pro — essional ser- vice corporation acts. Generally, anyone required to be licensed (a physician, lawyer, accoun- tant, cosmetologist, dentist, veterinarian, etc.) incorporates under that act rather than under the general business corporation law. All shareholders and directors must be members in good standing o — the same pro — ession (except architects and structural engineers). Two dis- parate pro — essions (e.g., surgeon and undertaker) cannot combine. The active business o — the corporation must be limited to the carrying on o — the pro — ession. Passive business invest- ments (e.g., owning real estate or stocks and bonds) are permitted. The incorporated pro — es- sional or pro — essionals must place a special appellation (“PS” or “PC” are common) a — ter the corporate name. The acts deal with the malpractice liability issue in one o — two ways. Some acts provide that with regard to rendition o — the pro — essional service there will be no limited
145
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liability. Other acts remain silent, on the theory that i --- pro --- essionals abuse the privilege o ---
incorporation, say, by practicing without malpractice insurance, courts will pierce the cor-
porate veil to hold the pro --- essionals personally liable as the owners o --- the enterprise.
Answer (A) is incorrect. Partners are liable --- or the acts o --- every other partner --- or carrying
on in the usual way the business o --- the partnership. Bar associations used to require com-
plete --- inancial responsibility --- or each and every lawyer in a group practice. Lawyers did that
by practicing law together in a partnership. Today, while lawyers may have to be --- inancially
responsible --- or one another, they may accomplish that in ways other than remaining in a
general partnership and being personally liable.
Answer (B) is incorrect. Most states will not permit law --- irms to operate as general business
corporations.
Answer (D) is incorrect. Most states will not permit law --- irms to operate as limited part-
nerships because, --- irst, that would imply either that some limited partners are actively par-
ticipating in the business or that the --- irm has investors who are not actively participating
pro --- essionals, and neither scenario is permitted by limited partnership acts on the one hand
and pro --- essional bar association rules on the other. Second, permitting law --- irms to oper-
ate as limited partnerships would imply that some pro --- essional practitioners enjoy limited
liability --- or their own malpractice, which is generally inappropriate.
53. Buddy’s State o --- Formation.
Answer (A) is the best answer because, generally, small business entrepreneurs should
incorporate in the state where they operate. The Home State (here, “Peace”) vs. Delaware
calculus is simpli --- ied somewhat because this jurisdiction adopted the Model Business Cor-
poration Act (MBCA). As the name implies, the MBCA is a model statute adopted in at least
35 states. The MBCA is suitable --- or most corporate business situations.
Answer (B) is not the best answer. While Nevada o ---
ers unique corporate law and is some- times — avored by very large private corporations and going-private transactions, Buddy’s business seems rather ordinary. There appears to be no need to bear additional expense to incorporate Buddy’s business out o — state in Nevada. Answer (C) is not the best answer. While Delaware o —
ers well established corporate law and is sometimes — avored by venture-capital investors and high-growth startups, Buddy’s business seems unlikely to require — requent resolution by corporate law expert courts. There appears to be no need to bear additional expense to incorporate Buddy’s business out o — state in Delaware. Answer (D) is not the best answer. Going o —
shore o —
ers tax advantages in certain situa- tions, especially those involving intellectual property licensing or substantial operations in Asia, but Buddy’s business is unlikely to have any signi — icant income — rom IP, and he seems unlikely to do any manu — acturing.
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54. Incorporation Process, Part I.
To legally --- orm a corporation, you --- irst must dra --- t the articles o --- incorporation and --- ile them
with your secretary o --- state, generally in its division o --- corporations.
This need not be technically di ---
icult. Most modern statutes provide a — orm — or “plain vanilla” articles o — incorporation that — it on a single side o — letter paper. For example, MBCA § 2.02(a) requires only that articles state the business name, the number o — shares autho- rized, the name and street address o — the registered agent, and the name and address o — each incorporator. Under the de — ault rules, corporate duration is assumed to be perpetual. No speci — ic business purpose needs to be stated, as general business corporations are presumed able to per — orm “any law — ul purpose.” No other in — ormation is required. However, more provisions are expected in all but the simplest articles/certi — icates o — incorpora- tion. Typically, lawyers may put in a provision opting out o — or limiting directors’ duty o — care liability; provisions — or indemni — ication o — directors (see the discussion o — protecting directors below); a provision naming the — irst or initial board o — directors; elimination o — preemptive rights in — urther share issuances or creation o — preemptive rights (the right to subscribe to
urther issuances — or cash in proportion to one’s preexisting proportionate interest, discussed below); authority to issue pre — erred shares and a description o — the relative rights and pre — er- ences o — the pre — erred class; restrictions on the trans — er o — shares (although restrictions usually are set out in a separate “buy–sell” agreement); and so on. Articles/certi — icates o — incorpora- tion generated by lawyers — or speci — ic clients are usually — ive to eight pages long. Complex ones
or startups which have enjoyed several rounds o — venture capital — inancings may be dozens o —
pages because they list many speci --- ic rights o --- many traunched investor groups.
To save the client a trip back to the lawyer’s o ---
ice, the lawyer may sign the articles as incor- porator. The lawyer-incorporator then — iles the document with a check with the secretary o — state — or the state o — incorporation and pays any applicable startup — ees. Once the lawyer- incorporator veri — ies the corporation success — ully — ormed, the lawyer should appoint the client’s directors and o —
icers and resign as incorporator. 55. Incorporation Process, Part II. A — ter — iling the articles o — incorporation, the lawyer-incorporator should dra — t bylaws. This is typically a matter o — selecting a standard — orm and modi — ying it as needed to — it the client’s business circumstances. Seldom will anyone dra — t bylaws — rom scratch, and they are o — ten rather generic. Bylaws deal with the — requency and preliminaries — or shareholders’ and directors’ meet- ings, descriptions o — the o —
icers’ duties, what their titles will be (president or CEO, treasurer or CFO, secretary, etc.), and other internal arrangements — or conduct o — the corporation’s business. Generally, bar association committees or legal stationers provide stock bylaws that may be adapted by — illing in the blanks (“the annual meeting o — shareholders will be held on the (third) (Tuesday) o — (March)”). Many law — irms have their own model bylaws. I — bylaws
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rom those sources are not — orthcoming, check with your local law library — or some standard
orms. You might also prepare stock certi — icates — or the — ounders. You can establish a corporation with uncerti — icated stock, as physical certi — icates are not strictly necessary, but it is tradi- tional to print these certi — icates (stamped with any legends that are required by securities regulation or agreement) — or signature by the — ounders at the organizational meeting or when they sign their organizational resolutions by unanimous consent. You should also enter stock in — ormation into a spreadsheet, which you should send to your — ounders with admonitions that they must keep track o — all stock issuances (or hire your — irm to manage their “cap table”). Third, you should prepare organizational resolutions, which are the startup matters the new board must approve. These organizational resolutions establish directors and o —
icers, empower them to open accounts and — ile — orms on behal — o — the corporation, issue — ounder’s stock, etc. Finally, you should hold the organizational meeting, where you in — orm all the directors and o —
icers about what you’ve done to establish the corporation and advise them what they must do to maintain the corporation. You can alternatively do this via email in a process called resolutions by unanimous consent. You should provide signed copies o — everything to the new corporate o —
icers and directors. The corporation can thus get up and running accordingly. A — ter incorporation, some lawyers remain involved in corporate a —
airs as secretary o — board meetings, while others get involved less — requently (such as when the corporation engages in a major transaction or considers litigation). 56. A Narrow Purpose. Answer (C) is the best answer. Corporations generally have all the powers natural persons have. The applicable statute will list many o — those powers. See, e.g., MBCA § 3.02. Corpora- tions may operate “any law — ul business”; in — act, the MBCA presumes such a broad purpose. See MBCA § 3.01 (“[E]very corporation ‘has the purpose o — engaging in any law — ul business unless a more limited purpose is set — orth in the articles o — incorporation.’”). A corporation may, however, provide — or a more limited purpose in the articles o — incorporation. Then, i —
any shareholder or director desires to engage in business outside the purpose, they will have
to seek amendment or revision o --- the article o --- incorporation. This adds an “extra step” that
must be accomplished be --- ore extending the corporation’s business.
Answer (A) is incorrect because this would not impact the corporation’s ability to open the
nightclub.
Answer (B) is incorrect --- or the same reason as Answer (A).
Answer (D) is incorrect because the bond would only become relevant i --- there was a loss; it
would not prevent Flaunce --- rom opening the nightclub.
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Note: The outcome would be similar under Delaware law. See DGCL §§ 102(a)(3), 121, and
122. Signi --- icantly, while the MBCA presumes that a corporation’s purpose is --- or any law --- ul
purpose unless the articles o --- incorporation state a narrower one, the DGCL requires that the
corporation’s purpose be stated in the certi --- ication o --- incorporation. See DGCL § 102(a)(3).
57. ET McDonalds.
Answer (D) is the best answer because Ernst is subject to promoter liability. There is no pre-
cise and universal legal de --- inition o --- who is, or is not, a promoter, but generally this means
the entrepreneur responsible --- or the corporate project. The promoter is personally liable --- or
“corporate” contracts to the extent that the promoter leads others to believe the corporation
exists. Here, by signing --- or a corporation that does not exist, Ernst implied that it does, and
so he likely has promoter’s liability --- or this contract.
Answer (A) is incorrect because it does not address Ernst’s liability --- or the purported action.
Answer (B) is incorrect because the promoter is not protected by corporate limited liability
until the corporation is duly --- ormed, and then only enjoys its projection while it validly
exists.
Answer (C) is not the best answer because these --- acts do not indicate that Ernst committed
raud. In particular, nothing suggests he has “scienter,” that is, that he has knowing intent to de — raud. 58. Avoiding Promoter Liability. Answer (C) is the best answer. A novation is a three-party transaction in which one obligor is substituted — or another on a contract. Answer (A) is incorrect because limited liability does not apply to pre-incorporation transactions. Answer (B) is not the best answer because the corporation’s indemni — ication does not pre- vent the seller — rom holding the promoter liable — or breach o — contract. Answer (D) is incorrect because neither the seller nor the promoter can make the corpora- tion liable to the contract without the corporation’s authorization. 59. Failed Start. Answer (D) is the best answer. “All persons purporting to act as or on behal — o — a corpora- tion, knowing there was no incorporation under this Act, are jointly and severally liable — or all liabilities created while so acting.” MBCA § 2.04. Here, the pilot has no actual or con- structive knowledge that there was no incorporation, and he was likely reasonable in relying on the lawyer’s statement that the corporation was — ormed. Under that standard, the pilot would likely escape liability. Answer (A) is incorrect. A de jure corporation is a business that complies with all the requirements o — its state incorporation statute. Such a de jure corporation has recognized
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existence as a juridical person. This would protect an entrepreneur --- rom liability --- rom all
claimants, including the state, but de jure status cannot exist here because the lawyer never
made an acceptable --- iling with the incorporating authority. The lawyer did not comply with
all the requirements, so the protection does not exist.
Answer (B) is not the best answer. The de --- ense o --- de --- acto corporation has three elements:
(1) existence o --- a statutory scheme permitting incorporation --- or the purposes stated; (2) good
aith attempt to incorporate under that scheme; and (3) purported use o — corporate powers or activity as a corporation. These elements appear to be present here. But the MBCA has tried to eliminate this common law de — ense because the doctrine originally arose when the incorporation process was more di —
icult and — raught with potential — or — ailure. The thinking now is that incorporation has become so simple that there is no possibility to — ail to incor- porate in “good — aith” — the second prong o — the de — acto corporation test. Some states have expressly eliminated the doctrine o — de — acto corporation — or this reason. The MBCA seems to rede — ine the test as related to knowledge instead o — good — aith. Answer (C) is incorrect. Promoter liability is not a de — ense but rather an a —
irmative basis — or rendering the pilot liable — or this transaction. Note: A related doctrine is “corporation by estoppel.” I — a contract creditor dealt with the entity as though it were a corporation, sending invoices in the corporate name to the cor- porate address, etc., and i — the owners o — the business have changed position or otherwise relied in good — aith upon their belie — that a corporation exists, the creditor may be estopped to deny the corporation’s existence. The o —
icial comment to MBCA § 2.04 makes clear that estoppel is possible under the statute i — , and only i — , the owners had no knowledge o — the de — ective corporate existence. This is not presented as an answer choice because the — act pat- tern does not address whether Learjet thought it was dealing with a corporation. 60. Corporate Restart. Yes, the entrepreneur has promoter liability — or contracts entered into on behal — o — the non- existent corporation a — ter the corporation was administratively dissolved. The way to cut o —
personal liability and to potentially retroactively reinstate limited liability, including --- or past
contracts, is to --- ollow the state reinstatement procedures. In most states, paying back taxes,
interest, and penalties, plus --- iling the required report --- orm, can reinstate corporate exis-
tence. There may, however, be an outside time limit, --- or example, three years a --- ter the date
o --- dissolution, MBCA § 14.22(a). Most statutes also provide that any reinstatement relates
back to the date o --- dissolution. See, e.g., MBCA § 14.22(c). A --- ew do not and a question
exists, upon which little authority exists, as to whether a reinstated corporation in such a
jurisdiction may have a gap in its corporate existence. Quite a bit o --- variation exists among
jurisdictions, so the best answer is always to check the relevant statute. But, in most cases,
the entrepreneur can cut o ---
liability and retroactively reinstate protections by — ollowing reinstatement procedures.
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Piercing the Corporate Veil
61. Introduction to Piercing the Corporate Veil.
The corporation is a legal --- iction with its own legal standing. One o --- the key --- eatures o --- the
corporate --- orm is the separation o --- ownership (the shareholders) and control (the board
o --- directors). As a legal --- iction, a corporation may only act through its board o --- direc-
tors, o ---
icers, agents, and employees. Under principles o — agency law, however, obligations incurred — whether through tort, contract, or otherwise — may be attributed to the corpo- ration itsel — . Because o — the separation o — ownership and control, our law recognizes that the corporate — orm serves as a liability shield between the corporation and the individual share- holders. That is, the shareholders are generally not personally liable — or the obligations o — the corporation. The shareholders may lose whatever they have invested in the corporation, but the creditors o — the corporation cannot generally reach the shareholders’ personal assets to satis — y the corporation’s obligations. This “limited liability shield” is one o — the most valu- able aspects o — the corporation. Sometimes, however, the wall between shareholders and the corporation itsel — may blur when the shareholders — ail to observe the separate corporate
orm and treat it instead as a mere alter ego o — themselves. In these circumstances, it would be inequitable — or courts to permit a shareholder to hide behind the corporate — orm when it comes to personal liability — or the corporation’s obligations. I — the shareholder does not con- sider the corporation a di —
erent — orm, why should anyone else? Thus, as an equitable remedy in extraordinary situations, a court may disregard the corporate liability shield (“pierce the corporate veil”), attribute corporate obligations to the shareholders, and allow creditors o —
the corporation to reach the personal assets o --- the shareholders to satis --- y those corporate
obligations.
62. Piercing Factors.
Jurisdictions have articulated the analysis --- or piercing the corporate veil in numerous ways.
In essence, most courts require a party seeking to pierce the corporate veil to show an over-
all element o --- injustice or un --- airness. A court may consider --- actors such as whether the
corporation was adequately capitalized --- or the corporate undertaking; whether the corpora-
tion was solvent; whether dividends were paid, corporate records kept, o ---
icers and directors
unctioned properly, and other corporate — ormalities were observed; whether the dominant shareholder siphoned corporate — unds; and whether, in general, the corporation simply
unctioned as a — acade — or the dominant shareholder. No single — actor will justi — y a decision to pierce the corporate veil, but there must be some combination o — these — actors as well as an overall element o — injustice or un — airness.
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63. Dram Shop Liability.
Answer (C) is the best answer. This question is based on Baatz v. Arrow Bar, 452 N.W.2d 138
(S.D. 1990). When the owners utilize a corporation solely or primarily to evade (an existing)
contract, statute, or other obligation imposed by law, the court may disregard the corpora-
tion. I --- the promoters and owners do not abuse that privilege, courts will not pierce the veil.
The doctrine does not look to the adequacy o --- capital with the bene --- it o --- hindsight and does
not exist to achieve the objective o --- making tort and contract claimants whole in every case.
It exists to prevent or police extreme abuses o --- the corporate --- orm. Most courts would --- ind
the capital here adequate.
Answer (A) is incorrect because the mere --- act that there is only one shareholder or that the
shareholder is actively involved in the management o --- the corporation, without any evi-
dence that the shareholder is disregarding or abusing the corporate --- orm, is insu ---
icient to permit a court to disregard the liability shield. Answer (B) is incorrect because the capitalization here seems appropriate. The mere — act that the pedestrian sustained greater damages than it turned out CE, Inc., had in assets is not itsel — a basis to pierce the corporate veil. Answer (D) is incorrect. Law students sometimes — orget that an agent o — a corporation is always liable — or her own torts. I — Melba served the drinks to a customer, knowing that the customer was inebriated, she is a tort — easor, liable directly — or her tort. 64. Parent–Subsidiary. Answer (B) is the best answer. This question presents a “parent–subsidiary” basis — or pierc- ing the corporate veil. The idea is that separate existence is so lacking and intermixture o —
a ---
airs is so complete that the subsidiary has become “the mere instrumentality,” “alter ego,” or “agent” o — the parent. The parent completely dominates the subsidiary’s business and a —
airs. Here, it seems that BEI’s attorney, however sophisticated, allowed conduct that would provide a good basis — or veil piercing. Courts have held that the mere identity o — joint o —
icers and directors in the subsidiary may be relevant evidence, but alone it is not enough to justi — y veil piercing. Beyond the identity o — corporate o —
icials, plainti —
Kenyon can prove grossly thin capitalization o — the subsidiary and extensive intermeddling. The conversion (the — t o —
customers), the abdication by AgriEast o ---
icers and directors in — avor o — BEI employees, and the takeover by the parent o — the subsidiary’s day-to-day a —
airs all might convince a court to hold BEI liable on veil piercing grounds. In such a case, the separate corporate identity o — the subsidiary should be disregarded. Answer (A) is incorrect because it would require an entirely separate analysis to pierce the veil o — BEI to reach the individual o —
icers and directors, and there are not enough — acts here to support that. Answer (C) is incorrect because there is no indication o —
raud here, and Kenyon can prevail in this claim even i — he cannot prove — raud.
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Answer (D) is incorrect because merely capitalizing a corporation --- or $1,000 is not an abuse
o --- the corporate --- orm.
65. Enterprise Liability.
Answer (B) is the best answer, even though it is not a sure thing that this argument would
succeed. This question demonstrates a theory --- or piercing the corporate veil known as “enter-
prise liability.” Enterprise liability may apply when there exists common control o --- various
corporations and those corporations have contributed to a collective enterprise or endeavor.
Facts such as common employees, use o --- the same parent company logo, use o --- a central
treasury or bank account, undercapitalization, and the like support a --- inding o --- enterprise
liability. Enterprise liability has been applied when large multinationals have attempted to
hide behind subsidiaries’ separate existence a --- ter torts have been committed by a --- ar- --- lung
subsidiary. This must be balanced against the idea that it is entirely appropriate to organize
an enterprise such that riskier segments o --- a business might be segregated --- rom asset-rich or
less-risky segments o --- the same business, assuming the strategy is not abused. As long as the
separation is clear and maintained, capital adequate to “the business to be done or the risks
o --- loss” is provided, and the subsidiary has a measure o ---
unctional independence, a busi- ness may pursue a segmentation strategy. Answer (A) is incorrect because merely commissioning a shipment does not expose the commissioner to liability. Answer (C) is not the best answer because there are no — acts here to indicate that Transpor- tation Co. is an agent o — BigGasCo. Answer (D) is incorrect because the perception o — a third party is not relevant. 66. Piercing the LLC Veil. Although the LLCs borrow certain structural aspects — rom corporate law, they retain the
lexibility and ease o — management o — partnerships. Thus, it undermines the purpose o — the LLC to disregard the liability shield where members or managers — ail to adhere to strin- gent corporate — ormalities. Under RULLCA, “[t]he — ailure o — a limited liability company to observe any particular — ormalities relating to the exercise o — its powers or management o — its activities is not a ground — or imposing liability on the members or managers — or the debts, obligations, or other liabilities o — the company.” RULLCA § 304(b).
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Corporate Finance
67. Racing Capitalization.
Answer (C) is the best answer. Since all three want to share pro --- its equally, and since all
three are making equal contributions, the simplest and best way to achieve this is to grant
common stock to all o --- them. They should each receive the same amount o --- stock. It does not
matter that some contributed cash and others contributed property. Doing this will e ---
ec- tively value the racecar and trailer at $15,000, since it is presumed that all shares o —
ounders’ stock issued at the same time were issued — or the same price. Answer (A) is not the best answer. In simple, small incorporations such as the one described, attorneys avoid complexity such as multiple classes o — stock. Issuing common and pre — erred stock would be too complicated — or this — act scenario. Answer (B) is incorrect. This is a simple incorporation — or a small company with relatively little capital. Issuing a loan would require additional legal work that is not needed here. Moreover, as a creditor, Jesse would not have the control or pro — it rights that he seeks. Answer (D) is incorrect. A corporation must issue at least one share o — common stock. It cannot issue only pre — erred stock. Moreover, the concept o — pre — erred stock is deprived o —
meaning where there is no common stock to compare its pre --- erential treatment to.
Note: There are tax reasons to issue promissory notes to all three shareholders, namely,
interest on a debt is an expense to the corporation and there --- ore deductible, while money
paid out as dividends on shares is taxed as pro --- its to the corporation and as income to the
shareholders. This is not presented as an answer choice because the tax decision would be
based on additional --- actors including whether this corporation makes a subchapter S tax
election, when the corporation expects to earn pro --- its, and additional --- actors not included in
the prompt.
68. Racing Reissuance.
Answer (B) is the best answer. The corporation can issue 200 shares because the MBCA
considers reacquired shares to be available --- or issuance. MBCA § 6.03(a) (“Shares that are
issued are outstanding shares until they are reacquired, redeemed, converted, or canceled.”).
Answer (A) is incorrect. The corporation authorized 400 shares --- or issuances. O --- those
shares, 200 are currently outstanding; there --- ore, only 200 remain available --- or issuance.
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Answer (C) is incorrect. Statutes older than the MBCA o --- ten provided that, when the cor-
poration reacquired, the directors could vote to “retire” the shares, in which case the power
to reissue would be lost and the number o --- authorized shares reduced accordingly. The
MBCA abolishes this concept. Moreover, the --- acts do not indicate that the director intended
to retire Jesse’s shares. The MBCA does allow the articles to prohibit the reissue o --- acquired
shares. See MBCA § 6.31(b).
Answer (D) is incorrect. The corporation has 200 shares at its disposal --- or issuance. Under
MBCA, there are 200 authorized, unissued shares. Under older statutes, there are 100 autho-
rized but unissued shares, which can be issued, and 100 treasury shares, which can be
reissued.
69. Racing Distribution.
Yes. Shareholders can take cash out via what the MBCA calls a “distribution” and what
Delaware law calls a “dividend.” A distribution is payment made “in respect o --- ” sharehold-
ings. It may be in the --- orm o --- a cash dividend, but it could be in the --- orm o --- a dividend in
kind (e.g., two new tires --- or each shareholder) or a pro rata repurchase o --- stock by the cor-
poration. MBCA § 1.40(6) de --- ines “distribution” as --- ollows: “A direct or indirect trans --- er o ---
money or other property (except its own shares) or incurrence o --- indebtedness by a corpora-
tion to or --- or the bene --- it o --- its shareholders in respect o --- any o --- its shares. A distribution may
be in the --- orm o --- a declaration or payment o --- a dividend; a purchase, redemption, or other
acquisition o --- shares . . . or otherwise.”
Not all corporate payments are distributions or dividends, even when made to shareholders.
A payment might be made to, say, shareholder Luke, but with respect to labor per --- ormed
or the corporation. Or a payment could be made to, say, Beau, but with respect to a loan he made to the corporation. Those payments to shareholders would not be dividends because the corporation did not pay them “in respect o — any o — its shares.” Rather they were wages paid to an employee and principal or interest paid to a lender. Corporate law regulates distributions. A director who authorizes an “illegal” distribution is “personally liable to the corporation — or the amount o — the distribution that exceeds what could have been distributed without violating section 6.40(a).” MBCA § 8.33(a). The liability standard is negligence, not strict liability: “[T]he party asserting liability [must establish] that when taking the action the director did not comply with [the statutory duty o — care].” Id. So, be — ore making a distribution, a corporation should obtain the opinion o — an attorney ( — ormal or in — ormal) that the distribution is legal. MBCA § 6.40 uses “double insolvency” testing — or establishing the legality o — distributions. A — ter giving e —
ect to the distribution, the corporation must still “be able to pay its debts as they become due in the usual course o — the business,” that is, it must be solvent in terms o —
what is known as the “equity” sense. Also, a --- ter giving e ---
ect to the distribution, the corpora- tion’s total assets must also exceed its total liabilities, that is, the corporation must be solvent in what is known as the “bankruptcy” sense.
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Here, testing --- or bankruptcy solvency is easy as the corporation has no liabilities. Giving
e ---
ect to the distribution, assets minus liabilities equals $70,000. The corporation would be solvent in the bankruptcy, or balance sheet, sense. Testing — or equity solvency (or insol- vency) is more problematic. Paying a $30,000 dividend will deprive the corporation o — all its cash. Thus, it will not be able to pay its debts as they become due (i — , in — act, it has any debts). The wise advice may be to pay out only $24,000–$27,000, leaving $3,000–$6,000 cash in the corporation — or working capital. Note: Delaware law addresses dividends in DGCL § 170. 70. Xtra Capitalization. Answer (B) is the best answer. Michelle’s contribution should be treated as a loan and doc- umented with a promissory note. Since Michelle wants to be paid back on schedule, she apparently wants to be in a debtor–creditor relationship with Xtra, Inc. She does not indi- cate interest in controlling or managing the company, which accords with this relationship because the debt relationship does not con — er shareholder rights on its creditor. Vin and Paul, however, indicate they want to be partners in this going- — orward co-adventure known as Xtra, Inc. The simplest and best way to achieve this is to grant common stock to Vin and Paul. Each should receive the same amount o — stock. It does not matter that Michelle was the only one who contributed cash while the others only contributed property or services. Doing this will e —
ectively value the race car at $15,000, since it is presumed that all shares o —
ounders’ stock issued at the same time were issued — or the same price. Answer (A) is not the best answer. Pre — erred stockholders are usually paid be — ore com- mon stockholders, but they are not paid back on schedule, as Michelle desires. Michelle does not indicate a desire to actively manage the business, and she does not expect pro — its beyond being paid back. Michelle apparently wants to be a creditor to the corporation, not a shareholder. Answer (C) is not the best answer. Issuing common stock to all three is uncomplicated, but it does not re — lect the — act that Michelle desires a di —
erent relationship with the corporation than does Vin and Paul. Michelle should be treated as a creditor, while Vin and Paul should be treated as shareholders. Answer (D) is incorrect. A corporation must issue at least one share o — common stock. It cannot only issue pre — erred stock. Moreover, the concept o — pre — erred stock is deprived o —
meaning where there is no common stock to compare its pre --- erential treatment to.
71. Soccer Capitalization.
Answer (A) is the best answer. Vicky should get pre --- erred stock because she is acting like a
venture capital investor, someone who typically demands pre --- erred stock because they are
willing to pay a premium --- or the pre --- erences associated with pre --- erred stock. Wanda should
receive common stock because she is acting like a typical --- ounding entrepreneur, someone
who invests time in the business in exchange --- or common stock and thus a share in its
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pro --- its commonly known as sweat equity. Uma should probably also receive common stock;
although she is investing, it is a relatively small amount compared to Vicky’s, so it’s likely
that her “ --- air share” should come mainly --- rom her e ---
orts in promoting the company going
orward and not — rom what she invested. Answer (B) is not the best answer. Vicky does not appear to be acting like a creditor who expects to be repaid on a debt. It would be rather — oolish to loan $2 million to a startup com- pany with no track record. Instead, Vicky is acting like a venture capital investor, one who takes pre — erred stock that provides signi — icant — inancial upside and more business control than a loan would provide. Answer (C) is not the best answer. Setting up stock options — or just one employee is overkill in terms o — complexity at this stage. Instead, Wanda should get common stock that vests, meaning the company loses the right to repurchase that stock — rom her over time as she works — or the company. Also, Uma and Vicky are di —
erently situated, so it does not make sense to grant both o — them the same kind o — stock. Uma plans to be actively engaged in day-to-day business in exchange — or her shares, so it makes sense to grant her common stock that vests over time, like Wanda’s. Vicky, on the other hand, should get — ully vested pre — erred shares — or her large up — ront investment in the company. Answer (D) is not the best answer. Vicky is situated di —
erently than Wanda and Uma. Vicky is acting like an investor, while Wanda is behaving like an entrepreneur. Uma might be cat- egorized as an advisor or part-time employee. At a minimum, Vicky should get pre — erred stock, and in any case, the three should not all receive the same type o — shares. 72. DataMine Capitalization. Answer (D) is the best answer. Venture capitalists o — ten take convertible pre — erred stock in companies in which they have made an investment. A pre — erred stock is “pre — erred” because the issuing company’s articles o — incorporation so provide. The stock may be pre — erred as to dividends (e.g., 7 percent pre — erred, meaning 7 percent o — stated value which o — ten is $100), or pre — erred upon liquidation (in which case the articles set out a “liquidation pre — erence,” say, $110). O — ten pre — erred shares are pre — erred in both ways, but, again, the articles o — incor- poration have to spell out the pre — erred’s “designations, pre — erences, limitations and relative rights.” See MBCA § 6.01(c) & (d). Answer (A) is incorrect. Venture capitalists rarely take common stock, especially in compa- nies where the — ounders already received — unding — rom other investors. None o — the venture capital investors are likely to take common stock here, and least o — all the lead investor, who i — anything would negotiate — or special pre — erences like a board seat. Answer (B) is incorrect. There is no reason — or the — ollow-on investors to take di —
erent stock than the lead investor. Venture capital investors generally expect to receive pre — erred stock in exchange — or multimillion dollar investments, and nothing here suggests otherwise. Answer (C) is not the best answer. While it is possible — or venture capital investors to pur- chase common stock, they or the companies in which they invest millions o — dollars are
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willing to pay --- or legal --- ees that achieve venture capital objectives through specialized capi-
talization. The reason most small businesses grant common stock is to avoid the complexity
associated with multiple classes o --- pre --- erred stock, but at this stage in the company’s li --- e-
cycle such complexities are merely a cost o --- doing business.
Note: Delaware law requires that classes o --- stock be described in the certi --- icate o --- incorpora-
tion. See DGCL § 151(a).
73. BBB Repurchase.
Answer (D) is the best answer. A long-term repurchase is a distribution. It must there --- ore be
tested --- or legality under MBCA § 6.40.
Answer (A) is incorrect. This transaction is regulated by statutory authority, namely, MBCA
§ 6.40.
Answer (B) is incorrect. There is no magic regarding the share certi --- icate. By returning it,
Bill accepts the promissory note in exchange --- or his shares, but it is not strictly necessary to
collect that document be --- ore paying Bill.
Answer (C) is incorrect. The price is not necessarily high just because it is in the millions o ---
dollars. Moreover, this transaction was approved by all the shareholders, so they probably
cannot later complain that the board approved the transaction.
Note: Delaware law addresses the legality o --- dividends in DGCL § 170.
74. Accounting --- or Distributions.
It depends. A corporation’s solvency is not necessarily determined by its balance sheet value.
I --- the balance sheet --- igures produce ambiguous results, we should either hire an appraiser
to value the corporation or not proceed with the transaction. Whatever --- igures we use, we
must pass the MBCA’s double insolvency test, which tests --- or bankruptcy solvency and
equity solvency.
The board o --- directors may base a determination that a distribution is not prohibited under
subsection (c) [double insolvency test] either on the basis o --- accounting practices and prin-
ciples that are reasonable in the circumstances or on a --- air valuation or other method that is
reasonable in the circumstances. MBCA § 6.40(d).
The comments to the section make clear that, in revaluing assets, directors are subject to
their --- iduciary duties. Also, i --- they undertake a revaluation, directors should not do so on a
selective basis. I --- they write up some assets, they should also write down the value o --- other
assets, i --- economic reality so dictates.
Equity solvency seems not to be a problem. A --- ter giving e ---
ect to the $3 million in payments, the corporation has su —
icient cash o — $3 million. Balance sheet solvency is more challenging. Under the MBCA, the corporation must have a balance sheet surplus equal to, or greater than, $4.5 million.
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The corporation has, however, only $1 million in balance sheet surplus. A --- ter giving e ---
ect to the distribution, liabilities would exceed assets by $3.5 million. The corporation would be insolvent in the “bankruptcy sense.” But this ambiguous result is based on accounting — igures, which are not necessarily in line with real-world values. For example, i — this corporation owns real property, it depreciates the accounting value o — that property each year. But, i — land values are going up and i — the property is well maintained, the real value o — that property may very well have appreciated over that same time. Instead o — relying on accounting in — ormation that is not designed to strictly correlate with the real world, the corporation can hire an appraiser who provides a valuation — or the corporation. I — the appraiser values corporate assets with an accounting or “book” value o — $1 to be worth $6 million on the open market, then there is no insolvency problem here. Note: There is usually a distinction between accounting (e.g., balance sheet) value and the real-world valuation o — a corporation. Most corporations, or other business entities — or that matter, carry assets on their balance sheet at cost. They may “mark to market” assets they hold — or purposes o — sale, such as inventory. A securities — irm, — or example, might revalue the inventory o — securities it holds — or sale on a daily basis. But most assets (equipment, land and building, and so on) are not held — or sale. Instead, a business holds them — or their use — ulness in producing income. Conservative accounting thus dictates that those assets remain on the books at their historical cost until such time as they actually are sold. Businesses have on their books assets they have held — or a long period o — time that have appreciated signi — icantly in value (say, commercial real estate in Seattle, Denver, Chicago, or New York City that was acquired many years ago). Especially in periods o — in — lation, hard assets such as equipment or airplanes may have value much higher than their historical cost. Intangibles, such as patents, licenses, so — tware may have values much higher than their carrying value on the books.
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Closely-Held Corporations
75. An Easier Way.
Answer (B) is the best answer. “[A] corporation shall hold a meeting o --- shareholders annu-
ally at a time stated in or --- ixed in accordance with the bylaws at which directors shall be
elected.” MBCA § 7.01(a). On the other hand, “[a]ction required or permitted by this Act to
be taken at a shareholders’ meeting may be taken without a meeting i --- the action is taken
by all the shareholders entitled to vote on the action.” MBCA § 7.04(a). Critically, under
the MBCA, the de --- ault rule is that action by written consent is only permissible when the
shareholders unanimously agree to the action. Id. As a practical matter, unanimous con-
sent is easier to achieve when there is a smaller number o --- shareholders; thus, it is unusual
(though not theoretically impossible) to see actions by written consent in larger or publicly-
held corporations incorporated in an MBCA jurisdiction. The MBCA a ---
ords corporations some opportunity to vary this de — ault rule requiring unanimous consent: “[I] — consents in writing setting — orth the action so taken are signed by the holders o — outstanding shares having not less than the minimum number o — votes that would be required to authorize or take the action at a meeting at which all shares entitled to vote on the action were pres- ent and voted[.]” MBCA § 7.04(b). I — an action by written consent is to be taken by — ewer than all voting shareholders, the corporation must give notice to the nonconsenting voting shareholders. MBCA § 7.04( — ). I — cumulative voting is permitted, only unanimous written consents are permissible. MBCA § 7.04(b). “A consent signed pursuant to the provisions o —
this section has the e ---
ect o — a vote taken at a meeting and may be described as such in any document.” MBCA § 7.04(d). Here, because there is unanimity among all the shareholders, they may take action by written consent in lieu o — a meeting. Answer (A) is incorrect because there is no rule that action by written consent is only avail- able in emergency situations. Answer (C) is incorrect because action may be taken by written consent in lieu o — either an annual or a special meeting. Answer (D) is incorrect because no annual meeting is required when an action can be accomplished through written consent. Note: Answer (B) is also probably the best answer under Delaware law. Action by writ- ten consent may be held in lieu o — a stockholder meeting, but there is no requirement that the consent be unanimous. See DGCL § 228(a). Majority stockholders still must comply with statutory — ormalities, and non-consenting shareholders must be given prompt notice
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o --- the action. See DGCL § 228(e); Espinoza v. Zuckerberg, 124 A.3d 47, 65 (Del. Ch. 2015)
(“Although minority stockholders have no power to alter a controlling stockholder’s bind-
ing decisions absent a --- iduciary breach, they are entitled to the bene --- its o --- the --- ormalities
imposed by the DGCL, including prompt noti --- ication under Section 228(e).”).
76. A Tight Deadline.
Answer (A) is the best answer. Shareholders have the right to exercise control o --- the corpora-
tion by voting. Shareholders generally may exercise their right to vote at meetings, although
they also have a right to vote by proxy and some shareholder action may be accomplished
through written consent, see MBCA § 7.04. There are two types o --- shareholder meetings:
the annual meeting and special meetings. The annual meeting o --- the shareholders is held
“at a time stated in or --- ixed in accordance with the bylaws.” MBCA § 7.01(a). The primary
purpose o --- the annual meeting is to elect directors, but other business can be (and o --- ten is)
conducted at the annual meeting, even i --- the notice --- or the annual meeting did not describe
the additional business to be conducted. See MBCA § 7.05(b). Special meetings, on the other
hand, may be called --- or by the board o --- directors, anyone authorized by the articles o --- incor-
poration or bylaws to call special meetings, or shareholders holding at least 10 percent o --- the
votes entitled to be cast on an issue. See MBCA § 7.02(a). Notice o --- special meetings must be
given at least 10 days prior to the meeting (and no more than 60 days prior to the meeting)
and must speci --- y the purpose --- or which the meeting is being held. See MBCA § 7.05(a) & (c);
see also MBCA § 11.04(d) (describing notice requirements --- or meetings to approve plans o ---
merger). Only business within the purpose described in the notice o --- special meeting may
be conducted at the special meeting. See MBCA § 7.02(d). Mergers involve a two-step pro-
cess: First, the board o --- directors considers the plan; i --- the board approves it, then it votes
to adopt the plan o --- merger. See MBCA § 11.04(a). Then, plans o --- merger generally must be
approved by “the shareholders at a meeting at which a quorum exists consisting o --- a major-
ity o --- the votes entitled to be cast on the plan.” MBCA § 11.04(e). Here, AT’s board has voted
to approve a plan o --- merger with HH. Although this plan certainly could be presented to the
shareholders at an annual meeting, there is a practical problem here in that AT’s next annual
meeting will not be until a --- ter the deadline --- or the merger has expired. Thus, the only way
AT’s board could get shareholder approval o --- the plan o --- merger would be to give notice o ---
and hold a special meeting o --- the shareholders to consider and vote upon the plan o --- merger.
The deadline here is tight, but doable.
Answer (B) is incorrect because the o ---
er will expire be — ore the annual meeting. I — the board waited until the annual meeting to obtain shareholder approval, the o —
er that they had approved as being in AT’s best interest would have expired. Answer (C) is incorrect because shareholder approval o — a plan o — merger is statutorily required, and a tight deadline does not allow a board to bypass shareholder approval. Answer (D) is incorrect because the board may call a special meeting — or the purpose o —
obtaining shareholder approval o --- the plan o --- merger.
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Note: This issue would turn out the same under Delaware law. See DGCL §§ 211(d) (autho-
rizing special meetings), 222(a) (describing notice o --- special meetings, and 251(c) (discussing
stockholder approval o --- agreements o --- merger).
77. Missing the Meeting.
Answer (B) is the best answer. Shareholders have the right to exercise control o --- the corpo-
ration by voting, and they may do so either in person at a meeting or through a proxy. See
MBCA § 7.22(a). This is a matter o --- right, not o --- grace. Although the word “proxy” tends to be
used in everyday parlance to mean a number o --- di ---
erent things, the MBCA uses “proxy” to re — erence a person whom a shareholder appoints as an agent to vote or otherwise act — or the shareholder. See MBCA § 7.22(b). So, in this context, when a shareholder appoints a proxy, they appoint a person to vote at the meeting on their behal — — most typically in an instructed way. Likewise, when a shareholder participates in a meeting through proxy, they are counted as present — or purposes o — establishing a quorum. See MBCA §§ 7.22(a) & 7.25(b). Answer (A) is incorrect because it misstates the rule — in-person attendance and participa- tion are simply not required. Answer (C) is incorrect because voting takes place at the meeting and there is no provision under the MBCA providing — or a shareholder to cast an absentee ballot. Answer (D) is incorrect because the solution to Shareholder’s problem does not require a voting trust. A voting trust — unctions di —
erently — rom a proxy. When a shareholder creates a voting trust, they “con — er[ ] on a trustee the right to vote or otherwise act — or them . . . and trans — er[ ] their shares to the trustee.” MBCA § 7.30(a). Voting trusts are distinct — rom the appointment o — a proxy because the shareholder does not trans — er the share to the proxy. Note: The outcome would be the same under Delaware law. See DGCL §§ 212(b) (authoriz- ing stockholders vote through proxy), 216(1) (permitting votes by proxy to establish a quo- rum), and 218(a) (authorizing voting trusts). 78. Preserving the Power. Answer (B) is the best answer. Under the MBCA, the de — ault rule is that shareholders exer- cise their voting power at meetings o — the shareholders. The MBCA — urther provides that “shares representing a majority o — the votes entitled to be cast on the matter by the voting group constitutes a quorum o — that voting group — or action on that matter.” MBCA § 7.25(a). In corporate law, supermajority requirements — unction as protection — or minority share- holders by giving them “negative control” or “veto power” over the corporation (i.e., they may not be able to a —
irmatively accomplish their policy goals, but they can prevent a simple majority — rom accomplishing their goals by preventing a quorum or withholding votes). Under the MBCA, supermajority voting requirements must be set — orth in the articles o —
incorporation, see MBCA § 7.25(d), and must be approved by the same vote percentage that
would constitute the supermajority requirement, see MBCA § 7.27. Likewise, supermajority
requirements can only be repealed by a vote o --- the supermajority. Id.
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Answer (A) is incorrect because, while “majority wins” is the de --- ault rule, the articles o ---
incorporation may vary this rule by establishing supermajority requirements.
Answer (C) is incorrect because, under the MBCA, supermajority requirements must be
established by the articles o --- incorporation, not the bylaws.
Answer (D) is incorrect --- or the same reason as (C).
Note: Under Delaware law, Answer (D) would be the best answer. The DGCL allows
supermajority requirements to be established either in the certi --- icate o --- incorporation or
the bylaws. DGCL § 216. Supermajority voting requirements may be adopted by a simple
majority. Supermajority requirements established in the certi --- icate o --- incorporation require
a vote o --- the supermajority, see DGCL § 242(b)(4), while supermajority requirements estab-
lished by the bylaws may be amended with a vote o --- only a simple majority, see DGCL § 109
(discussing amendments to bylaws). Thus, the shareholders in this case would either want to
enshrine supermajority voting requirements in the certi --- icate o --- incorporation or ensure that
the bylaws also require a vote o --- the supermajority to repeal the supermajority requirement.
79. Counting to Quorum.
Answer (A) is the best answer. Under the MBCA, “[s]hares entitled to vote as a separate vot-
ing group may take action on a matter at a meeting only i --- a quorum o --- those shares exists
with respect to that matter.” MBCA § 7.25(a). The de --- ault rule is that a quorum exists when
shareholders holding “shares representing a majority o --- the votes entitled to be cast on the
matter by the voting group” participate in the meeting. Id. Thus, i --- Dentist does not attend
and participate in the special meeting, shareholders holding only 25 percent o --- the shares
entitled to vote will be present. This --- alls short o --- a quorum, and so no business can be voted
on at the meeting.
Answer (B) is incorrect. Typically, only corporate directors and o ---
icers owe — iduciary duties to the corporation and shareholders. See, e.g., MBCA §§ 8.30 & 8.42. Some courts have held that, at least in some circumstances, majority shareholders owe some — orm o —
iduciary duty to the corporation and minority shareholders. See, e.g., Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 661–62 (Mass. 1976); Donahue v. Rodd Electrotype Co., 328 N.E.2d 505, 512 (Mass. 1975). Here, there is no indication that Dentist is a director or o —
icer, and because they only hold 30 percent o — the outstanding shares, it is unlikely that a court would
ind that Dentist owed — much less breached — a — iduciary duty by not attending the meet- ing. Thus, Dentist likely owes no — iduciary duty to attend the meeting, and their absence
rom the meeting, which here prevents a quorum, will have the same practical e —
ect as a “no” vote. Answer (C) is incorrect because “[o]nce a share is represented — or any purpose at a meet- ing, it is deemed present — or quorum purposes — or the remainder o — the meeting and — or any adjournment o — that meeting.” MBCA § 7.25(b). Thus, once a quorum has been established, Dentist cannot then de — eat a quorum by leaving the meeting.
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Answer (D) is incorrect. A shareholder’s attendance at a meeting waives any objection
that the shareholder may have as to the su ---
iciency o — the notice o — the meeting. See MBCA § 7.06(b). A shareholder may only make a “special appearance” to object to the su —
iciency o —
the notice o --- the meeting or that business is being considered that exceeds the scope o --- the
notice o --- the meeting. Id. Thus, Dentist’s attendance here would be sel --- -de --- eating. I --- Dentist
were to attend the meeting and object to a lack o --- quorum, they would actually be deemed to
have participated in the meeting and their shares would count toward establishing a quorum.
Note: Answer (A) is also the best answer under Delaware law --- or similar reasons. See DGCL
§ 216 (describing quorum and voting requirements). O --- note as it relates to Answer (B), Del-
aware courts have --- irmly rejected the imposition o ---
iduciary duty on non-majority stock- holders. See, e.g., Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987) (“Under Delaware law a shareholder owes a — iduciary duty only i — it owns a majority interest in or exercises control over the business a —
airs o — the corporation.”). 80. Late to the Party. Answer (A) is the best answer. Shareholders have the right to participate in and vote at annual and special meetings o — the shareholders. The bylaws may — ix or provide a manner
or — ixing the “record date” to determine the shareholders entitled to vote at a meeting. See MBCA § 7.07(a). A record date is essentially a snapshot o — shareholders on a certain date — or determining exactly who is entitled to be given notice o — the meeting and vote. Record dates help provide certainty and avoid chaos. I — the bylaws do not designate a record date, the board o — directors may — ix the record date. Id. Under no circumstances may a record date be more than 70 days in advance o — the shareholder vote. See MBCA § 7.07(b). I — neither pro- vided — or by the bylaws nor set by the board o — directors, the record date is the close o — busi- ness “the day be — ore the — irst notice is delivered to shareholders.” MBCA § 7.05(d); see also MBCA § 1.40 (de — ining “record date.”). Only shareholders as o — the record date are permit- ted to vote at the meeting. See MBCA § 7.07; see also MBCA § 1.40 (de — ining “shareholder” as “record shareholder”). Here, the prompt makes clear that the notice o — special meeting did not speci — y a record date — or determining eligibility to vote. Thus, by operation o — the MBCA, the “record date” is the close o — business the day be — ore the notice o — special meeting was sent out — January 31. Answer (B) is incorrect, although the di —
erence between it and Answer (A) is subtle. The date o — the notice was February 1, and so under the MBCA’s de — ault rule, the record date would be close o — business on January 31. Answer (C) is incorrect because the — act that the trans — er occurred be — ore the special meet- ing is simply not relevant. Nurse will likely be able to vote at — uture meetings, assuming that the board does not set a record date that predates Nurse’s acquisition o — the shares. O —
course, Baker is entitled to vote, and nothing would prevent Baker --- rom appointing Nurse as
their proxy to vote at the meeting.
Answer (D) is incorrect --- or the same reason as Answer (C).
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Note: The outcome is the same under Delaware law. “[O]nly holders o --- record o --- voting stock,
as o --- the record date, are ‘entitled . . . to vote at the meeting.’” Mariner LDC v. Stone Container
Corp., 729 A.2d 267, 273 (Del. Ch. 1998) (quoting DGCL § 213(a)). The board o --- directors may
ix a record date at least 10, but no more than 60, days be — ore the meeting. “I — no record date is — ixed by the board o — directors, the record date — or determining stockholders entitled to notice o — and to vote at a meeting o — stockholders shall be at the close o — business on the day next preceding the day on which notice is given, or, i — notice is waived, at the close o — business on the day next preceding the day on which the meeting is held.” DGCL § 213(a). 81. Let’s Vote Together. Answer (C) is the best answer. Shareholders have the power to exert control over the cor- poration through voting their shares. The de — ault rule — or voting is “one share, one vote,” see MBCA § 7.21(a), where every share o — stock in a class entitles the shareholder to one vote on each matter voted upon — equal to the vote associated with every other share o — stock in the class. Typically, matters may be approved by a plurality o — the vote (i.e., the largest numbers o — votes, even i — the number o — votes does not equal a majority o — the shares entitled to vote on the matter). See MBCA § 7.28(a). A corporation may, however, provide in the articles o — incorporation — or “cumulative” voting. See MBCA § 7.28. Cumulative voting permits a shareholder to take the number o — shares she has the right to vote (say, 400), multiplied by the number o — directors to be elected at the meeting (say, 3), to compute the number o — votes she has (here, 1,200), which she may then vote — or one candidate, or less than all, o — the can- didates standing — or election. See MBCA § 7.28(c). Then the candidates with the most votes are elected to the vacant positions. This is a power — ul protection — or minority shareholders because, while they may not have the votes to — ill all seats on the board o — directors with their pre — erred candidates, they may be able to — ill at least one seat, thus ensuring that their interests are represented on the board. Cumulative voting may be contrasted with “straight” voting, in which the majority (or, under today’s MBCA, a plurality) at the meeting elects all o — the directors. Thus, all shares would be voted once per each vacancy. Almost all publicly- held companies have eliminated cumulative voting. Few state laws mandate it anymore. However, most state laws do provide that corporations may “opt in” to cumulative voting by a provision in their articles o — incorporation. See MBCA § 7.28(b). Many corporations, and their lawyers, do so to — acilitate power-sharing arrangements in small- and medium-sized corporations. As an aside, even i — authorized by the articles o — incorporation, shareholders may vote cumulatively only when the meeting notice or proxy solicitation states conspicu- ously that cumulative voting is authorized or a shareholder gives notice o — their intent to vote cumulatively. See MBCA § 7.28(d). As calculated here, the Veridian shareholders cumu- latively have 1,200 votes, whereas the Mirage shareholders have 1,800 votes. Thus, i — the Veridian shareholders voted all o — their 1,200 votes in — avor o — their pre — erred candidate, it would be mathematically impossible — or the Mirage shareholders to — ill all three positions on the board o — directors with their pre — erred candidates. They would have to vote at least 1,201 votes in — avor o — three Meridian-pre — erred candidates to elect them over the Veridian- pre — erred candidate. They do not have the votes here. Stated di —
erently, even though they are the minority shareholder group, the Veridian shareholders still have the mathematical
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ability to elect their one pre --- erred candidate under this cumulative voting scheme. On the
other hand, i --- Phoenix, Inc., --- ollowed the de --- ault straight voting scheme, the Mirage share-
holders would be able to outvote the Veridian shareholders --- or each o --- the seats on the board
under the “one share, one vote” rule.
Answer (A) is incorrect because it re --- lects the de --- ault “one share, one vote” rule.
Answer (B) is incorrect --- or the same reason as Answer (A).
Answer (D) is incorrect because it overstates the Veridian shareholders’ voting power.
Note: The outcome would be essentially the same in Delaware. The DGCL adopts the same
“one share, one vote” de --- ault rule. See DGCL § 212(a). Cumulative voting may be permitted
by the certi --- icate o --- incorporation, but there is no additional requirement that either the
notice o --- meeting or proxy solicitation state conspicuously that cumulative voting is permit-
ted or that the shareholder needs to give advance notice o --- their intent to vote cumulatively.
See DGCL § 214.
82. Staggered Boards.
Answer (B) is the best answer. The de --- ault rule is that directors are elected at the annual
meeting o --- the shareholders, see MBCA § 8.03(c), and then serve a term that expires at the
next annual meeting o --- the shareholders, see MBCA § 8.04(b). A corporation may, however,
in its articles o --- incorporation, provide --- or the “staggering” o --- the terms o --- directors into two
or three groups, with each group being up --- or election every two to three years. See MBCA
§ 8.06. There are several reasons to stagger — or “classi --- y” — a board. It provides --- or greater
consistency and preserves institutional knowledge while also avoiding the pressure and
dynamics o --- having every director up --- or election every year. Staggered boards also serve
as a de --- ense mechanism against hostile takeovers. Although more common in closely-held
corporations, it is not extraordinary --- or a publicly-traded corporation to have a staggered
board. Accordingly, i --- the articles o --- incorporation provide --- or a staggered board and divide
the directors into three classes o --- two directors each, only two directors will be standing --- or
election at the upcoming annual meeting o --- the shareholders, and the directors elected will
serve a three-year term until their class is back up --- or election.
Answer (A) is incorrect because it states the de --- ault rule and does not account --- or MBCA’s
authorization o --- staggered boards.
Answer (C) is incorrect because the class o --- directors will stand --- or election, not one direc-
tor --- rom each class.
Answer (D) is incorrect because, even when a board is staggered, the power to elect direc-
tors remains with the shareholders and is exercised at the annual meeting.
Note: The outcome is the same under Delaware law. DGCL § 141(d) permits directors to be
divided into up to three classes, to stand --- or elections in staggered years. O --- note, the DGCL
permits the authorization o --- a staggered board to be set --- orth in either the certi --- icate o ---
incorporation or the bylaws. See id.
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83. We’re Going to Meet, One Way or the Other.
Answer (C) is the best answer. The list o --- things that a corporation is statutorily required
to do is quite short, but the corporation is required to “hold a meeting o --- the shareholders
annually.” MBCA § 7.01(a). In addition to annual meetings, a corporation may hold special
meetings o --- the shareholders. See MBCA § 7.02(a). A special meeting may be called by the
board o --- directors or by any other person authorized to do so by the articles o --- incorpora-
tion or the corporation’s bylaws. The board o --- directors must call a special meeting upon
receipt o --- written demand --- rom one or more shareholders who own at least 10 percent o ---
the outstanding shares o --- stock entitled to vote. I --- a corporation --- ails (or re --- uses) to hold a
meeting, a shareholder may seek an order --- rom a court requiring the corporation to hold
a meeting i --- (1) the corporation has not held an annual meeting “within the earlier o --- six
months a --- ter the end o --- the corporation’s --- iscal year or 15 months a --- ter its last annual meet-
ing,” MBCA § 7.03(a)(1); or (2) shareholders holding 10 percent o --- the outstanding shares o ---
stock entitled to vote have made written demand to the corporation --- or a special meeting
and then the corporation either did not, within 30 days o --- receiving the demand, give notice
o --- a special meeting or did not hold a special meeting in accordance with the notice, see
MBCA § 7.03(a)(2). Under these circumstances, the court has broad discretion in ordering
the meeting and may itsel --- give notice o --- the meeting and set the time, place, and quorum
requirements --- or the meeting. See MBCA § 7.03(b). Here, Wheelhouse is plainly due to have
an annual meeting. Indeed, it is questionable whether anyone has authority to conduct the
corporation’s business or to call a meeting. It seems a sa --- e bet that, under these circum-
stances, a court would likely order that the corporation hold a meeting. Niece, however,
lacks the power to hersel --- call the meeting, and similarly, does not have enough shares alone
to make demand o --- the corporation to hold the meeting. Thus, i --- she wants the corporation
to have a meeting, her only option is likely to go to a court and seek an order compelling
the corporation to hold an annual meeting because the corporation has not held an annual
meeting in the past 10 years.
Answer (A) is incorrect because Niece is not authorized by the MBCA, the articles o --- incor-
poration, or the bylaws to call a meeting.
Answer (B) is incorrect because Niece only owns 5 percent o --- the outstanding stock — not
enough to entitle her alone to demand the corporation hold a special meeting.
Answer (D) is incorrect because Niece has more recourse than simply selling her shares.
Note: The answer would essentially be the same under Delaware law, although requirements
or timing and demands — or special meetings are di —
erent. See DGCL § 211(c). “I — there be a — ailure to hold the annual meeting . . . — or a period o — 13 months a — ter the latest to occur o — the organization o — the corporation, its last annual meeting or the last action by written consent to elect directors in lieu o — an annual meeting, the Court o — Chancery may sum- marily order a meeting to be held upon the application o — any stockholder or director.” Id. The DGCL does not mirror the MBCA provision that the corporation must call a special
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meeting upon receipt o --- written demand o --- stockholders holding at least 10 percent o --- the
outstanding shares o --- stock entitled to vote.
84. Keeping It in the Family.
Answer (B) is the best answer. We need a tool that accomplishes the limited goals o --- permit-
ting Carolina to vote Indiana’s shares and preventing Indiana --- rom revoking the arrange-
ment --- or three years. The best tool is probably an irrevocable proxy. A proxy is a specialized
agency relationship that grants the authority to vote to another. The proxy does not trans --- er
ownership or --- inancial rights away --- rom the owner o --- the stock. See MBCA § 7.22(b). A
proxy appointment --- orm or writing may provide the term o --- the appointment, but i --- it does
not provide such a term, the de --- ault rule is that the appointment is e ---
ective — or 11 months. See MBCA § 7.22(c). A proxy is revocable at any time unless the appointment — orm states that the proxy is irrevocable and it is coupled with an interest. See MBCA § 7.22(d). MBCA § 7.22(d) sets out some examples o — proxies coupled with an interest without being brave enough to attempt an overarching de — inition. See id. Court decisions in a number o — states hold that a proxy given by one shareholder to a — ellow shareholder — or their mutual bene — it, as here, always is coupled with an interest and will be held irrevocable i — the proxy ( — orm o —
appointment) so provides. See, e.g., Ha --- t v. Ha --- t, 671 A.2d 413 (Del. Ch. 1995) (irrevocable
proxy to chie --- executive o ---
icer upheld because he was also a shareholder). Answer (A) is incorrect. A simple proxy like the one presented here certainly satis — ies Indiana’s desire to retain ownership o — the stock while also allowing Indiana and Carolina to maintain a majority vote, and the siblings could even dra — t the appointment to last — or three years. But this does not satis — y Carolina’s desire to prevent Indiana — rom unexpect- edly showing up and reclaiming the voting power by revoking the proxy. The appointment
orm could speci — y that the proxy is irrevocable, and the required accompanying interest would be maintaining a majority vote in the siblings’ mutual interest. This is best re — lected by Answer (B). Answer (C) is incorrect because, although shareholder voting agreements are permissible and are en — orceable by speci — ic per — ormance, see MBCA § 7.31, these agreements still require each shareholder themsel — to vote. Thus, a voting agreement would not resolve the problem o — Indiana’s inaccessibility. Answer (D) is incorrect because a voting trust requires that a shareholder “trans — er their shares to the trustee.” MBCA § 7.30(a). Thus, the shareholder would only retain equitable rights to the shares, and the legal rights would vest with the trustee. This would run a — oul o —
Indiana’s desire to retain ownership o --- the shares.
Note: The outcome would be virtually the same under Delaware law. See DGCL § 212(e);
Ha --- t, 671 A.2d at 416.
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Corporate Governance
85. Ambush by Quorum.
Answer (A) is the best answer. The board o --- directors exercises its authority to manage “the
business and a ---
airs o — the corporation,” see MBCA § 8.01(b), either by voting at meetings or acting by written consent. See MBCA §§ 8.20 & 8.21. This includes removing o —
icers — rom their appointed positions. See MBCA § 8.43(b). Board meetings may be regular or special. MBCA § 8.20(a). Usually, the time and place o — regular meetings is established in the corpo- rate bylaws, and these meetings may be held without any notice. See MBCA § 8.21(a). Spe- cial meetings, however, must be preceded by at least two days’ notice. See MBCA § 8.21(b). Nevertheless, directors may waive notice — or special meetings. MBCA § 8.23(a). A director entitled to notice waives any objection based on notice i — they attend or participate in a meeting without objecting at the beginning that the meeting is improper and then re — rain
rom voting on any matter taken at the meeting. See MBCA § 8.23(b). The de — ault rule is that a quorum is established at a meeting i — a majority o — the number o — directors are present, see MBCA § 8.24(b), and i — a quorum is present when the vote takes place, “the a —
irmative vote o — a majority o — directors present is the act o — the board o — directors.” MBCA § 8.24(c). Gen- erally speaking, a director who is present at the meeting when corporate action is taken but does not object to the holding at the meeting is deemed to have assented to the meeting. See MBCA § 8.24(d). Here, the meeting-by-ambush probably worked to remove Nelson as CEO. Ordinarily, a special meeting would have required at least two days’ notice, but the other directors had validly waived the right to notice o — special meetings. Thus, everything turns on Nelson’s conduct. Nelson had the right to notice o — the meeting but likely waived any objection to the meeting on the basis o — notice by addressing the substance o — Donnell and Barnham’s actions and voting against his removal. Had Nelson only said, “I object to this meeting because you haven’t given proper notice,” and then re — rained — rom otherwise par- ticipating, the ambush would have been thwarted. O — course, this would not have stopped Donnell and Barnham — rom giving the notice — or a special meeting to be held in two days, but then Nelson could have re — used to attend — thus depriving the board o — a quorum — or solicited the other directors to participate. In conclusion, Nelson is likely out as CEO. Answer (B) is incorrect because, while it correctly states a part o — the rule — or notice o — spe- cial meeting, it neglects to mention that objections on the basis o — notice may be waived by participating in the meeting without objection. Answer (C) is incorrect because Donnell and Barnham, speaking between themselves, did not have a quorum to take board action.
171
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Answer (D) is incorrect because the other directors had validly waived notice o --- special
meetings.
Note: Although Delaware law is a bit harsher (to Nelson!), the answer is the same. In --- act, we
can be more certain that Answer (A) is the best answer. Delaware law does not distinguish
between regular and special meetings o --- the board. Instead, “[a] majority o --- the total num-
ber o --- directors shall constitute a quorum --- or the transaction o --- business unless the certi --- i-
cate o --- incorporation or the bylaws require a greater number. . . . The vote o --- the majority
o --- the directors presents at a meeting at which a quorum is present shall be the act o --- the
board o --- directors unless the certi --- icate o --- incorporation or the bylaws shall require a vote
o --- a greater number.” DGCL § 141(b). Thus, unless the corporate bylaws impose additional
requirements, all Delaware requires --- or a board meeting is a quorum o --- directors.
86. Flooding and Director Negligence.
Answer (C) is the best answer. Although the board o --- directors o --- a corporation is responsi-
ble --- or managing the business and a ---
airs o — the corporation, see MBCA § 8.01(b), the board o — directors acts as a collective at meetings or through written consent, see MBCA §§ 8.20 & 8.21. No director is an agent o — the corporation solely because they are a director. Thus, unless the corporation has otherwise authorized the director to act individually on behal — o —
the corporation (i.e., as an o ---
icer with actual authority), the director does not have individ- ual authority to bind the corporation in contract or tort. Here, the — acts are clear that Dorren was acting in her own capacity and without any notice to the other directors. Accordingly, the corporation is not vicariously liable — or Dorren’s conduct. Answer (A) is incorrect because a director is not an agent o — the corporation solely because they are a director, and there are no — acts here to give rise to a principal–agent relationship between Small, Inc., and Dorren. Answer (B) is incorrect because the — acts make clear that the other directors did not have notice that Dorren was going to go out and do the work hersel — . Thus, the corporation did not rati — y the conduct. Answer (D) is incorrect because it understates the rule. True, the board did not have notice that Dorren was going to go out and do the work, but that would not be relevant i — Dorren was an agent o — the corporation. Answer (C) is a better answer than Answer (D) because it better states why the corporation is not vicariously liable here. Note: The answer and analysis would be the same under Delaware law. See DGCL § 141(b). 87. An Imminent Proposal. Answer (B) is the best answer. Although the rule — or votes o — the shareholders is “once a quorum, always a quorum,” see MBCA § 7.25(b), this is not the rule — or meetings o — the board o — directors. “I — a quorum is present when a vote is taken, the a —
irmative vote o — a majority o — directors present is the act o — the board o — directors unless the articles o — incor- poration or bylaws require the vote o — a greater number o — directors or unless otherwise
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expressly provided in this Act.” MBCA § 8.24(c) (emphasis added). The o ---
icial comments to the MBCA make clear that “[i] — directors leave during the course o — a meeting, the board o —
directors may not act a --- ter the number o --- directors present is reduced to less than a quorum.”
Here, to have a quorum, there must be --- our directors present at the vote. That is exactly how
many directors are present at this meeting. Thus, i --- Stewart is opposed to the expansion pro-
posal and wishes to, at least temporarily, prevent it --- rom passing, Stewart may simply leave
the meeting and “bust” the quorum.
Answer (A) is incorrect because it wrong --- ully applies the shareholder quorum rule to meet-
ings o --- the board o --- directors.
Answer (C) is incorrect because, i --- Stewart stays, the quorum remains at the time o --- the vote
and the a ---
irmative vote becomes an action o — the board. Answer (D) is incorrect because regular meetings may be held without notice o — the pur- pose o — the meeting, see MBCA § 8.22(a), and i — Stewart remains, any motion to table or continue the discussion can be de — eated by the other three directors. Note: The result is likely the same under Delaware law, although the “quorum busting” rule is not as explicitly stated. “A majority o — the total number o — directors shall constitute a quorum — or the transaction o — business unless the certi — icate o — incorporation or the bylaws require a greater number. . . . The vote o — the majority o — the directors present at a meeting at which a quorum is present shall be the act o — the board o — directors unless the certi — icate o —
incorporation or the bylaws shall require a vote o --- a greater number.” DGCL § 141(b). Thus,
the critical piece is that the director must leave the meeting rather than simply remain and
abstain --- rom voting.
88. How Big a Board?
Answer (C) is the best answer. Notably, there is no statutorily required number o --- directors,
see MBCA § 8.03(a) (“A board o --- directors shall consist o --- one or more individuals, with the
number speci --- ied in or --- ixed in accordance with the articles o --- incorporation or bylaws.”),
but the general trend in public corporations is that the board will consist o --- 8 to 12 directors.
Since the enactment o --- the Sarbanes-Oxley Act o --- 2002, New York Stock Exchange and Nas-
daq rules require that publicly-traded corporations have a majority o --- independent directors
on their boards. The question o --- whether a director is “independent” is complicated, but it
essentially boils down to the idea that the director has no material relationship with the cor-
poration aside --- rom being a director. That could mean that the director is not a major stock-
holder in the corporation or that the director does not receive additional compensation or is
otherwise employed by the corporation. The idea is that having a majority o --- “independent”
directors increases the quality o --- oversight and lessens the risks o --- con --- licts o --- interest. Here,
the lawyer needs to tell Prolong that --- our directors is likely too --- ew and that the majority o ---
directors needs to be independent. Neither Prolong nor Prolong’s brother will satis --- y that
de --- inition because o --- their close --- inancial relationship. Accordingly, at minimum, the board
should be expanded to --- ive, and one more independent director should be elected. The better
advice would be to expand the board to 8 to 12 directors.
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Answer (A) is incorrect because the current composition o --- the board is problematic — there
is not a majority o --- independent directors.
Answer (B) is incorrect because there is no mandatory number o --- directors.
Answer (D) is incorrect because it results in a board that is likely too large. Aside --- rom
being logistically unwieldy, The size o --- the board here would likely dilute the in --- luence o --- the
independent directors and enable the inside directors to exercise more control.
Note: The analysis would be exactly the same under Delaware law. See DGCL § 141(a) (“The
number o --- directors shall be --- ixed by, or in the manner provided in, the bylaws, unless the
certi --- icate o --- incorporation --- ixes the number o --- directors, in which case a change in the
number o --- directors shall be made only by amendment o --- the certi --- icate.”).
89. Governance by Committee.
Answer (C) is the best answer. Although “the business and a ---
airs o — the corporation shall be managed by or under the direction, and subject to the oversight, o — the board o — direc- tors[,]” MBCA § 8.01(b), “a board o — directors may establish one or more board committees composed exclusively o — one or more directors to per — orm — unctions o — the board o — direc- tors[.]” MBCA § 8.25(a). Generally speaking, once appointed, a committee may exercise the powers o — the board as speci — ied by the board, the articles o — incorporation, or the bylaws. See MBCA § 8.25(d). A committee may not, however, authorize or approve distributions; approve or propose to shareholders actions that are statutorily required to be approved by shareholder; — ill vacancies on the board; or adopt, amend, or repeal bylaws (although noth- ing prohibits a committee — rom merely advising the board about any o — these). See id. For public corporations, some committees are required under the Sarbanes-Oxley Act o — 2002 and some stock exchange listing requirements: all corporations that — ile — inancial reports with the Securities and Exchange Commission must have an audit committee. Public corpo- rations are also required to have a nominating committee and a compensation committee. Answer (A) is incorrect because it overlooks the authority o — the board o — directors to appoint committees. Answer (B) is incorrect because it — ails to account — or the committees required o — public corporations. Answer (D) is incorrect because, except as limited by statute, committees may exercise the authority o — the board. Note: The outcome would be the same under Delaware law, including the requirements that public corporations have an audit, nominating, and compensation committee. See DGCL § 141(c). 90. Removal as Retaliation. Answer (A) is the best answer. A shareholder agreement to require the shareholders to elect each other to the board is en — orceable — by speci — ic per — ormance i — necessary. At the same
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time, the corporation’s business and a ---
airs shall be managed by or under the direction o — a board o — directors. See MBCA § 8.01(b) (“All corporate powers shall be exercised by or under the authority o — , and the business and a —
airs o — the corporation managed by or under the direction o — , its board o — directors.”). The business and a —
airs o — a corporation includes the appointment o — its o —
icers and other agents. Under the traditional governance model, by their contract, shareholders could not bind, “handcu —
,” or “sterilize” the board o — directors, on decisions as to who the o —
icers may be or on any other matter. Some courts struck down such contracts as e —
orts to conduct a corporation’s business “as i — it were a partnership.” As a matter o — policy, directors should have a — ull measure, or nearly — ull measure, o — discre- tion, un — ettered by prior restraints. Along similar lines, — uture shareholders should be able to elect directors with a — ull measure o — discretion. Prior restraints on directors disen — ran- chises — uture shareholders. Once elected, directors generally have no power to remove — ellow directors; that power resides either in the shareholders by majority vote, MBCA § 8.08, or by a court, MBCA § 8.09. Thus, Wettick is not entitled to be reappointed as an o —
icer but may be entitled to damages i — the contract provided — or a salary. See MBCA § 8.44(b) (“An o —
icer’s removal does not a —
ect the o —
icer’s contract rights, i — any, with the corporation.”). On the other hand, “[t]he appointment o — an o —
icer does not itsel — create contract rights.” MBCA § 8.44(a). It is customary — or minutes o — directors’ meetings to record the appoint- ment o — o —
icers and the — ixing o — their compensation. Answer (B) is incorrect because Wettick has no contractual right to remain an o —
icer o — the corporation. Answer (C) is incorrect because the e —
ort to remove Wettick — rom the board is ine —
ective. Answer (D) is incorrect because Wettick has no right to remain an o —
icer. Note: Delaware law — unctions similarly as to the removal o — o —
icers. See DGCL § 142. 91. Firing an O —
icer. Answer (A) is the best answer. “An o —
icer may be removed at any time with or without cause by (i) the board o — directors; (ii) the appointing o —
icer, unless the bylaws or the board o — directors provide otherwise; or (iii) any other o —
icer i — authorized by the bylaws or the board o — directors.” MBCA § 8.43(b). This is the rule no matter whether the position was created by the bylaws or established by the board. The o —
icial comments to the MBCA rec- ognize that, to provide stability, the board may enter into an employment agreement with an o —
icer, but “[s]uch an employment agreement does not override the removal power set
orth in section 8.43(b) and may give the o —
icer the right to damages, but not speci — ic per-
ormance, i — employment is terminated be — ore the end o — the contract term.” Accordingly, here, the board retains the authority to remove Tel — ine as an o —
icer at any time, although the corporation may be liable — or monetary damages to Tel — ine — or breach o — the employment agreement. Answer (B) is incorrect because the distinction between an o —
icer position’s being estab- lished by the board rather than the bylaws is irrelevant.
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Answer (C) is incorrect because the employment agreement does not override the board’s
removal authority under MBCA § 8.43(b).
Answer (D) is incorrect because shareholders do not vote on the appointment or removal
o --- o ---
icers. Note: The outcome would be the same under Delaware law. See DGCL § 141(b). 92. Personal Backlash. Answer (D) is the best answer. Although the business and a —
airs o — a corporation are gen- erally managed by the board o — directors, and the appointment o — o —
icers is within the purview o — the board, courts may exercise their equitable powers to en — orce shareholder contracts pertaining to the appointment o — o —
icers when all o — the shareholders are parties to the contract. Thus, a court in equity may hold that Rob and Bill lack the power to — ire Sally. Answer (A) is incorrect because, while it correctly re — lects the general rule, it overlooks the court’s equitable powers when all the shareholders enter into a contract. Answer (B) is incorrect because an employment contract does not prevent an o —
icer — rom being removed, but it may entitle the o —
ice to damages — or a wrong — ul termination. Answer (C) is incorrect because it is unclear that these circumstances involve a breach o —
iduciary duty, but even i — they did, the remedy may not be that Sally could get her job back. 93. A Li — elong Contract. Answer (C) is the best answer. Boards o — directors may abdicate their duty to manage through long-term (or overly broad) delegations o — three kinds: (1) contracts with o —
icers or employees; (2) contracts with outsiders; or (3) delegations to committees o — their own number. With regard to the — irst, the traditional model is that the board appoints, and re- appoints, the o —
icers annually. Longer-term appointments tie the hands o —
uture boards o — directors and tend also to disen — ranchise — uture shareholders. Li — etime, or excessively long-term, appointments were seldom, i — ever, upheld. Today, courts apply a rule o — reason analysis. How broad is the delegation? What is the term? What are the shareholders’ other relationships to the corporation? What is the nature o — the corporation: small, — amily-owned, closely-held, publicly-held? And so on. The easy — ix is to dra — t a long-term contract, with the understanding that the contract will not stop the board — rom — iring the o —
icer. Instead, the contract may entitle the o —
icer to damages i — the o —
icer is wrong — ully terminated. Answer (A) is not the best answer because, even i — a li — etime contract would not be en — orce- able, this option does not address how the board could continue to engage with Vice President. Answer (B) is not the best answer because, even though it correctly raises the concern o —
shareholder disen --- ranchisement, it does not address the possibility o --- a long-term employ-
ment contract.
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Answer (D) is incorrect because it overstates the board’s authority and --- ails to address how
the board’s proposed course o --- conduct may result in shareholder disen --- ranchisement.
94. Consulting Services.
Answer (D) is the best answer. There are two issues here. First, delegations to outsiders,
such as consulting --- irms, today have also come to be judged by “rule o --- reason” analysis as
well. How broad is the delegation? What is the term? What are the shareholders’ other rela-
tionships to the corporation? What is the nature o --- the corporation: small, --- amily-owned,
closely-held, publicly-held? And so on. The legal objections to overly broad or lengthy del-
egations include that such delegations handcu ---
or tie the hands o —
uture boards and disen-
ranchise — uture shareholders. Here, a 10-year contract is likely too great a commitment that could limit the ability o —
uture directors to manage the business and a —
airs o — the corpora- tion. Likewise, under the Sarbanes Oxley Act, accounting — irms that provide audit services are limited in what consulting services they may o —
er the same clients because o — con — lict- o — -interest concerns. Answer (A) is incorrect because it approves an improper delegation and con — lict o — interest. Answer (B) is incorrect because BAF likely has the requisite expertise, but the contract is still problematic. Answer (C) is not the best answer. It states a correct rule o — law but overlooks the con — lict o —
interest issue. Thus, it is not as good o --- an answer as Answer (D).
95. Executive Committees.
Answer (D) is the best answer. The general rule is that “a board o --- directors may establish
one or more board committees composed exclusively o --- one or more directors to per --- orm
unctions o — the board o — directors.” MBCA § 8.25(a). But the board may not delegate all management o — the business and a —
airs o — the corporation to a committee. MBCA § 8.25(e). A committee may not “(1) authorize or approve distributions, except according to a — ormula or method, or within limits, prescribed by the board o — directors; . . . (2) approve or propose to shareholders action that this Act requires be approved by shareholders; . . . (3) — ill vacan- cies on the board o — directors or . . . on any o — its committees; or . . . (4) adopt, amend, or repeal bylaws.” MBCA § 8.25(d). Here, this delegation is certainly broad, and although some powers are reserved (dividends and the recommendation o — mergers), it nevertheless exceeds the scope o — delegation permitted. Speci — ically, this delegation is impermissible because it empowers the committee to “ — ill vacancies on the board o — directors or . . . on any o — its com- mittees” and “adopt, amend, or repeal bylaws.” Answer (A) is incorrect because this delegation exceeds the permissible scope o — delegation established by statute. Answer (B) is incorrect because the matter o — whether this delegation is e —
icient does not change the — act that the delegation is too broad.
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Answer (C) is incorrect because some delegation o --- the authority o --- the board to a commit-
tee is expressly permitted.
Note: Delaware law similarly permits and limits the delegation o --- board authority to com-
mittees. See DGCL § 141(c)(2).
96. Shareholder Proposals, Part I.
Answer (D) is the best answer. This question addresses a classic problem — even though
the shareholders own the company, they have very limited powers and even more limited
powers o --- initiative. That is, by statute, shareholders’ votes are necessary --- or mergers, sale
o --- substantially all o --- the corporation’s assets, amendment o --- the articles o --- incorporation,
or dissolution o --- the corporation, but only based upon a recommendation made to them by
the board o --- directors. Shareholders’ powers o --- initiative are limited to rights to elect and
to remove directors. Then, the business and a ---
airs o — the corporation are managed by the board o — directors. See MBCA § 8.01(b). Thus, — or example, i — shareholders want a merger to take place, they cannot, strictly speaking, accomplish it directly. They must accomplish it indirectly. At their own expense, the shareholders must put up a slate o — directors whom they believe will recommend the merger, solicit proxies, and then put their own nominees in o —
ice. Between annual meetings, they may — irst have to remove the incumbent board. With that said, it is entirely appropriate — or shareholders to discuss the business and a —
airs at meetings and adopt resolutions, even i — they are merely advisory. See, e.g., Auer v. Dressel, 118 N.E.2d 590 (N.Y. 1954). Such resolutions are not — utile because, i — passed, they serve to put the directors on notice that the shareholders are less than pleased and may take more strident action, such as removal and election o — a new slate o — directors, should conditions not improve. Answer (A) is incorrect because, while the phrase o — the second resolution is problematic, it is appropriate — or shareholders to discuss the state o — the business and adopt advisory resolu- tions at shareholder meetings. Answer (B) is similarly incorrect because shareholders have a right to discuss business mat- ters; they simply cannot make business decisions. Answer (C) is not the best answer. It is not as good as Answer (D) because the resolution is
ramed as a business decision rather than an advisory resolution. 97. Shareholder Proposals, Part II. Answer (C) is the best answer. The Securities and Exchange Commission requires and regulates the solicitation o — proxies to vote shares in publicly-held companies. Public com- panies must submit to the SEC, and send to their shareholders, an annual report, a notice o — the shareholder’s meeting, and a proxy statement. The latter is a disclosure document, but one limited in scope. It contains the text o — resolutions to be voted upon and disclosure that will enable a shareholder to cast an in — ormed vote. I — the shareholders were insistent on including their own proposal, the shareholders would have to undertake the same process.
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That is to say, the shareholders would have to prepare and --- ile their own proxy statement
and --- orm o --- proxy, which they would then mail to the shareholders. SEC rules establish
the process by which shareholders may submit proposals to be included on the solicita-
tion. Assuming that the shareholder owns su ---
icient stock, timely submits the proposal, and submits the proposal in the proper — orm, the board o — directors is required to include the proposal unless there is a basis to exclude it. Some common reasons — or a board’s prop- erly excluding a proposal are i — the proposal pertains to “a matter relating to the company’s ordinary business operations” or “to the redress o — a personal claim or grievance against the company or any other person, or i — it is designed to result in a bene — it to you, or to — ur- ther a personal interest, which is not shared by the other shareholders at large.” Here, the shareholder proposals could likely be categorized as related to personal claim or grievance and to ordinary business matters. Answer (A) is incorrect because, even i — a proposal is timely and properly submitted, there are various reasons a board may exclude the proposal. Answer (B) is incorrect because there simply is no requirement that every proposal be included. Answer (D) is incorrect because a board may be required to include proposals, even i — the board does not support the proposal. 98. Clowning Around. Answer (D) is the best answer. “A corporation has the o —
icers described in its bylaws or appointed by the board o — directors in accordance with the bylaws.” MBCA § 8.40(a). The o —
icial comments to the MBCA clari — y that no particular o —
icers are required. The corpora- tion must, however, “assign to an o —
icer responsibility — or maintaining and authenticating the records o — the corporation.” MBCA § 8.40(c). The MBCA re — ers to this o —
icer as the “secretary o — the corporation,” see MBCA § 1.40, but there is no requirement that the corpo- ration expressly title this o —
icer as “secretary.” For public corporations, the rules are di —
er- ent — the Sarbanes-Oxley Act o — 2002 established requirements — or chie — executive o —
icers and chie —
inancial o —
icers. These rules are not applicable to closely-held corporations. Thus, here, the slate o — o —
icers desired by Clowns, Inc., is entirely permissible under the MBCA, so long as the corporation designates at least one o —
icer to maintain and authenticate corporate records. Answer (A) is incorrect because there is no requirement to designate an o —
icer by any given title. Answer (B) is incorrect — or the same reason as Answer (A). Answer (C) is incorrect because the requisite o —
icer responsibilities could be vested in one person. Note: The outcome is the same under Delaware law. See DGCL § 142(a).
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99. Removal o --- a Director.
Answer (C) is the best answer. “The shareholders may remove one or more directors with
or without cause unless the articles o --- incorporation provide that directors may be removed
only --- or cause.” MBCA § 8.08(a). Shareholders may vote at annual, see MBCA § 7.01, or spe-
cial meetings, see MBCA § 7.01 (or via written consent i --- the vote to remove River is unani-
mous, see MBCA § 7.04(a)), but the notice o --- special meeting “must include a description o ---
the purpose or purposes --- or which the meeting is called.” MBCA § 7.05(c). Thus, assuming
the articles o --- incorporation do not include a removal- --- or-cause provision, the only way that
River could be removed as a director would be by plurality vote o --- the shareholders at a
properly noticed meeting.
Answer (A) is incorrect because, unless the articles o --- incorporation include a removal- --- or-
cause provision, a director on a non-staggered board may be removed by shareholder vote
with or without cause.
Answer (B) is incorrect because it is incomplete. Unless the shareholder vote to remove
River is unanimous, it can only be accomplished at a meeting o --- the shareholders.
Answer (D) is incorrect because directors do not have authority to remove other directors.
Note: Under Delaware law, a director can be removed by shareholder vote with or without
cause. See DGCL § 141(k). Delaware law does not distinguish between annual and special
meetings, and there is no statutory requirement that notice be given. Similarly, there is no
statutory requirement that actions by written consent be by unanimous vote. I --- the board o ---
directors is staggered, a director may only be removed --- or cause. See id.
100. Stuck with a Director.
Answer (A) is the best answer. A court “may remove a director --- rom o ---
ice or may order other relie — , including barring the director — rom reelection — or a period prescribed by the court, in a proceeding commenced by or in the right o — the corporation i — the court — inds that (i) the director engaged in — raudulent conduct with respect to the corporation or its shareholders, grossly abused the position o — director, or intentionally in — licted harm on the corporation; and (ii) considering the director’s course o — conduct and the inadequacy o —
other available remedies, removal or such other relie --- would be in the best interest o --- the
corporation.” MBCA § 8.09(a). Here, they may not have the shareholder votes to remove
River, but Lake and Moon have the votes (as directors) to cause the corporation to sue --- or
River’s removal. This is their best, and likely only, option.
Answer (B) is incorrect --- or two reasons. First, the SEC, and not the company, has power to
seek River’s removal and obtain a “director and o ---
icer bar order.” Second, this only applies to public corporations, not closely-held corporations. Answer (C) is incorrect because it ignores that Lake and Moon could seek judicial removal o —
River; a temporary injunction, however, may be appropriate pending the outcome o --- the case.
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Answer (D) is incorrect because it is insu ---
icient. The priority is to stop more harm — rom occurring, not just to seek damages — or past breaches. Note: The outcome would be di —
erent under Delaware law. By statute, a court may only remove a director i — they have been convicted o — a — elony or adjudicated to have breached their — idu- ciary duty. See DGCL § 225(c). Some Delaware courts have indicated a hesitancy to exercise equitable powers to remove a director. See, e.g., Ross Sys. Corp. v. Ross, 1993 WL 49778, at *17– 18 (Del. Ch. Feb. 22, 1993). I — Lake and Moon do not have enough o — the shareholder vote, they are likely stuck with River as a director. O — course, — rom a practical perspective, they could likely — ire River as an o —
icer (i — he had been appointed), cut o —
his access to — unds, prevent him
rom entering the premises, or seek injunctive relie —
rom a court. I — this does not resolve the issue, then they may have to cause the corporation to sue River — or breach o —
iduciary duty. 101. Proo — o — O —
icer Authority. Answer (D) is the best answer. “The business and a —
airs o — the corporation shall be man- aged by or under the direction, and subject to the oversight, o — the board o — directors.” MBCA § 8.01(b). “A corporation has the o —
icers described in its bylaws or appointed by the board o — directors in accordance with the bylaws.” MBCA § 8.40(a). A prudent attorney would want to con — irm that the CEO’s authority is rooted in an appointment by the board o —
directors, which would be re --- lected in a board resolution. Although there may be an argu-
ment that the CEO has apparent authority to enter the transaction by virtue o --- their “loaded
title,” it is questionable how reasonable it would be --- or a third party to rely simply on the title
when executing such a signi --- icant contract. Here, it would be best to have a board resolution
appointing the CEO and con --- irming that the CEO has the authority to enter into a transac-
tion o --- this magnitude. In --- act, it would be best that the board execute a resolution explicitly
approving this transaction and authorizing the CEO to sign the contract.
Answer (A) is incorrect because the common law principle o --- apparent authority is unlikely
to --- orm a su ---
icient basis — or the CEO to bind the corporation on a contract o — this magnitude. Answer (B) is incorrect because the articles o — incorporation would not be the corporate record establishing the positions o — o —
icers or articulating their authority. Answer (C) is incorrect because, although the bylaws may speci — y that the corporation will have a CEO and may articulate the CEO’s authority, we do not know whether the current CEO was actually appointed by the board. Note: The outcome would be the same under Delaware law. See DGCL § 142(a). 102. Cheers Indemni — ication. Answer (D) is the best answer. Here, language o — permissive indemni — ication expands the scope o — protections — or directors like Sam. This is the best argument — or Sam to make. Answer (A) is incorrect. Factually, Sam has not necessarily been wholly success — ul. He paid out $100,000 in settlement on a liability claim. MBCA § 8.52 provides that “[a] corporation
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shall indemni --- y a director who was wholly success --- ul, on the merits or otherwise, in the
de --- ense o --- any proceeding to which he was a party because he was a director o --- the corpora-
tion against reasonable expenses incurred by him in connection with the proceeding.” But
Sam likely did not meet this standard.
Answer (B) is incorrect --- or two reasons. First, directors are not agents o --- the corporation,
and they are not entitled to indemni --- ication as agents might be. Second, Sam was not act-
ing in his capacity as director o --- the corporation when this slip and --- all accident occurred.
Directors bind the company only through their actions as board members.
Answer (C) is incorrect. There is nothing in the --- act pattern regarding insurance. Moreover,
the existence o --- insurance vel non has nothing to do with the duty to indemni --- y.
Note: The outcome would be the same under Delaware law. See DGCL § 145.
103. Guarding Against Takeovers.
Answer (C) is the best answer. A shareholder rights plan (also called a “poison pill”) is
intended to make a corporation unattractive to hostile takeovers by making it more expen-
sive or more di ---
icult to acquire a controlling interest in the corporation. Any shareholder rights plan would be subject to judicial review, and potentially judicial invalidation. Thus, to posture the corporation to best de — end against hostile takeovers, a board would be advised to adopt multiple de — ensive mechanisms. A staggered board can help guard against hostile takeovers because it would extend the amount o — time that an activist would have to spend to elect enough directors to the board to take control o — the corporation. Here, pairing a shareholder rights plan with a staggered board bolstered by a removal- — or-cause require- ment may be about the best de — ense the board could implement. Answer (A) is incorrect because a court would not be likely to uphold the board’s attempt to “handcu —
” — uture boards — rom deactivating the shareholder rights plan. Answer (B) is incorrect because such a plan would similarly “handcu —
” — uture boards, at least — or the — irst six months o — their terms. Answer (D) is not a good answer because, while at some point hostile takeovers become inevitable, there are other de — ensive mechanisms that could be implemented that this choice does not take into account. 104. A Sel — ish Board. Answer (D) is the best answer. The challenge here is that the board’s actions are techni- cally law — ul, but they are being undertaken — or sel — ish reasons. This situation highlights the tension between — reedom o — contract and equity that — requently arises in the context o —
corporate governance. Likewise, it illustrates the court’s broad equitable powers. In Schnell
v. Chris-Cra --- t Industries, Inc., 285 A.2d 437 (Del. 1971), the Supreme Court o --- Delaware
instructed the Court o --- Chancery to enjoin an annual meeting under --- actual circumstances
nearly identical to this question. The Schnell court held that, even though both actions were
technically permissible under the bylaws, it would not countenance wrong --- ul subversion
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o --- corporate democracy or impermissible manipulation o --- the election machinery. That is,
“inequitable action does not become permissible simply because it is legally possible.” Id.
at 439. A later Delaware case, Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651, 661 (Del.
Ch. 1988), emphasized “the central importance o --- the --- ranchise to the scheme o --- corpo-
rate governance” and clari --- ied that, even i --- the board acted in good --- aith, any action o --- the
board that impedes the stockholder --- ranchise must be supported by a “compelling justi --- i-
cation.” More recently, the Delaware courts have recognized that Schnell and Blasius have
been “ --- olded” into the analysis o --- Unocal Corp. v. Mesa Petroleum Corp., 493 A.2d 946 (Del.
1985), such that under the new test, when a stockholder challenges a board action that inter-
eres with the stockholder — ranchise, the board bears the burden to prove that (1) “the board
aced a threat ‘to an important corporate interest or to the achievement o — a signi — icant cor- porate bene — it’” and that (2) “the board’s response to the threat was reasonable in relation to the threat posed and was not preclusive or coercive to the stockholder — ranchise.” Coster v. UIP Companies, Inc., 300 A.3d 656 at 672-73 (Del. 2023). Here, it goes without question that the Boatworth board took action that impacted the stockholder — ranchise by trying to “speed up” the process be — ore Sureturst could acquire enough shares o — stock to constitute a majority. But there is no indication o — a “compelling justi — ication,” only o — the directors’ sel — - interested desire to entrench themselves to continue on the board. Thus, even i — the action had been taken in good — aith, it likely would not withstand scrutiny under the Schnell test as developed through its progeny. Answer (A) is incorrect because it relies too much on the “technically law — ul” action with- out — urther scrutinizing the board action through an equitable lens. Answer (B) is incorrect — or the same reason as Answer (A). Answer (C) is incorrect — or the same reason as Answer (A). 105. Remote Participation. Answer (B) is the best answer. “Shareholders o — any class or series o — shares may participate in any meeting o — shareholders by means o — remote communication to the extent the board o — directors authorizes such participation — or such class or series.” MBCA § 7.09(a). A share- holder participating remotely may — ully participate and be counted present, but only i — “the corporation has implemented reasonable measures . . . to veri — y that each person participat- ing remotely is a shareholder, and . . . to provide such shareholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the shareholders, including an opportunity to communicate, and read or hear the proceedings o — the meetings, substan- tially concurrent with such proceedings.” MBCA § 7.09(b). Importantly, the board must per- mit a class o — shareholders to participate; the board may not permit an individual shareholder to attend remotely without also authorizing all shareholders o — the same class to do so. Answer (A) is incorrect because it — ails to account — or remote participation. Answer (C) is incorrect because a shareholder does not have an absolute right to participate remotely; they may only do so i — authorized by the board.
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Answer (D) is incorrect because the board does not have authority to grant special permis-
sion --- or a single shareholder without also granting permission --- or all other shareholders o ---
the same class.
Note: Delaware law also permits remote participation in shareholder meetings subject to
board discretion. See DGCL § 211.
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Corporate Fiduciary Duty
106. Introduction to Corporate Fiduciary Duty.
Under the MBCA, each director, when discharging their duties as a director, is required to
act in good --- aith and in a manner the director reasonably believes to be in the best interest
o --- the corporation. See MBCA § 8.30(a). More speci --- ically, the directors must be in --- ormed
regarding the decisions they make and in exercising oversight o --- the corporation. See MBCA
§ 8.30(b)(1). Additionally, directors must disclose to the other directors any in --- ormation that
they have that would be material to the other directors’ discharge o --- their decision-making
and oversight --- unctions. MBCA § 8.30(b)(2).
Under Delaware law, each director owes the corporation and the shareholders a duty o --- care
and a duty o --- loyalty. The duty o --- care requires that directors adequately in --- orm themselves
prior to making any decision and then that they act prudently in carrying out their duties. See
United Food & Comm. Workers Union v. Zuckerberg, 262 A.3d 1034, 1049 (Del. 2021). Gross
negligence constitutes a breach o --- the duty o --- care. Id. The duty o --- loyalty requires undivided
and unsel --- ish loyalty to the corporation and that there be no con --- lict between duty and sel --- -
interest. Id. The duty o --- loyalty also requires that directors re --- rain --- rom competing with the
corporation, usurping corporate opportunity, or engaging in con --- lict-o --- -interest transactions.
Finally, the duty o --- loyalty requires that directors exercise their duties in good --- aith. See Stone
v. Ritter, 911 A.2d 362, 369-70 (Del. 2006).
107. A Bad New Idea.
Answer (C) is the best answer. Directors o --- a corporation owe the corporation and the
stockholders a duty o --- care. “‘[P]redicated upon concepts o --- gross negligence,’ the duty o ---
care requires that --- iduciaries in --- orm themselves o --- material in --- ormation be --- ore making a
business decision and act prudently in carrying out their duties.” United Food & Comm.
Workers Union v. Zuckerberg, 262 A.2d 1034, 1049-50 (Del. 2021) (alterations in original). In
other words, “to allege that a corporation has su ---
ered a loss as a result o — a law — ul transac- tion, within the corporation’s powers, authorized by a corporate — iduciary acting in a good
aith pursuit o — corporate purposes, does not state a claim — or relie — against that — iduciary no matter how — oolish the investment may appear in retrospect.” Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049, 1052 (Del. Ch. 1996). Here, the — acts indicate that the directors per — ormed the standard due diligence and that they only learned about the new disease when it was publicly announced. Likewise, there is no indication that the directors were not acting in
185
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good --- aith in pursuit o --- corporate purpose. Certainly, there is no indication that the direc-
tors were acting in a grossly negligent manner.
Answer (A) is incorrect because, even i --- the decision was --- oolish, the directors do not --- ace
liability merely because the decision turned out to be unpro --- itable.
Answer (B) is incorrect because the decision to enter into the contract appears to have been
a decision made in good --- aith in pursuit o --- corporate purpose.
Answer (D) is incorrect because directors do owe a duty o --- care and --- ace liability when they
act in a grossly negligent manner.
108. The Business Judgment Rule.
Answer (C) is the best answer. Directors owe a --- iduciary duty o --- care, that is, the amount o ---
care that a reasonably prudent person would exercise in a like position in similar circum-
stances. The duty o --- care will be breached when the directors act in a grossly negligent man-
ner or engage in intentional or knowing violations o --- law. Courts are hesitant to second-guess
business decisions made by duly elected directors. Thus, “in the absence o ---
acts showing sel — -dealing or improper motive, a corporate o —
icer or director is not legally responsible to the corporation — or losses that may be su —
ered as a result o — a decision that an o —
icer made or that directors authorized in good — aith.” Gagliardi v. TriFoods Int’l Inc., 683 A.2d 1049, 1051 (Del. Ch. 1996). This “business judgment rule” serves — irst and — oremost as directors’ — ront- line de — ense to an allegation that they have breached their duty o — care. The rule serves also as a means whereby courts may conserve the judicial resource, by determining the majority o —
cases at an early point in the litigation. Last o --- all, in cases where directors have been proactive
in making decisions and judgments (rather than doing nothing), the rule does become the de
acto standard — or conduct o — the board’s activities. Here, the business judgment rule protects the board’s decision — rom judicial scrutiny because there is no indication that the directors were acting in a sel — -interested manner or with improper motive. Rather, the board made a business decision that they believed in good — aith was in the corporation’s best interest, and it is o — no legal consequence that a di —
erent decision would have been more pro — itable. Answer (A) is not the best answer because it only o —
ers the policy underlying the rule, not the rule itsel — . Answer (B) is not the best answer because it assumes the outcome without addressing the rule. Answer (D) is incorrect because it misunderstands the rule. The business judgment rule serves to protect board decisions; the rule does not require anything o — the directors. 109. Failure to Monitor. Answer (C) is the best answer. This question re — lects the con — using relationship between the duty o — care and the duty o — loyalty. The duty o — care requires directors to be reasonably in — ormed in carrying out their oversight and decision-making responsibilities and to con- duct themselves in a reasonably prudent manner, but it is well established that only gross negligence or an intentional or knowing violation o — law will breach the duty o — care. This
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problem seems to present what is known as a “classic Caremark claim,” so dubbed a --- ter the
case In re Caremark International Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). The
crux o --- such claims is that the board o --- directors did not know about a problem within the
corporation, but it should have known. It --- ollows that, had the board known, its --- iduciary
duties would have required them to address it. In more recent cases, Delaware courts have
clari --- ied that a knowing disregard --- or duties or a sustained and systematic --- ailure to exercise
oversight, although perhaps ringing in the vernacular o --- the duty o --- care, is actually a --- ailure
to act in good --- aith. See, e.g., Marchand v. Barnhill, 212 A.3d 805, 820–21 (Del. 2019); Stone v.
Ritter, 911 A.2d 363, 370 (Del. 2006). Indeed, directors are required to have reporting in --- or-
mation systems or controls to ensure that pertinent in --- ormation is brought to their attention,
and they are charged with monitoring those reporting systems. See Marchand, 212 A.3d at
821. As the Marchand court explained, “In short, to satis --- y their duty o --- loyalty, directors
must make a good --- aith e ---
ort to implement an oversight system and then monitor it.” Id. The court — urther explained that “a corporate board must make a good — aith e —
ort to exercise its duty o — care. A — ailure to make that e —
ort constitutes a breach o — the duty o — loyalty.” Id. at 824. The Marchand court also seemed persuaded that when a matter is mission critical to the organization, it deserves attention by the board. See id. at 824. Here, — or an insurance com- pany, cash reserves seem almost certainly “mission critical,” and it would be incumbent on the board to ensure that a reporting system is in place — or them to monitor the status o — their reserves and their ability to pay out claims. A — ter all, that is what insurance companies do. Accordingly, under Stone and its progeny, a modern Delaware court would likely conclude that the board here had — ailed to act in good — aith, and thus, breached its duty o — loyalty. Answer (A) is incorrect because simple negligence does not breach the duty o — care. Answer (B) is incorrect because this does not appear to be an intentional or knowing viola- tion o — law. Answer (D) is incorrect because there is no indication that the board has engaged in a con — lict-o — -interest transaction. 110. Who’s to Blame? Part I. Answer (D) is the best answer. Two principles should be brought to bear here. First, although no particular care and skill may be required to be a director, i — an individual director does possess certain skills and knowledge (the actuary or the lawyer here), she must bring it to bear. Second, although no particular care and skill may be required as a prerequisite to being a director (the daughter or the son), upon joining a board, a director must, within a reasonable time, gain the skill, knowledge, and — amiliarity with the company’s a —
airs that will enable her to — unction well as a director. I — she is not able or willing to do so, she should resign. Many lawyers, accountants, bankers, and other persons in business-related pro — es- sions (here, an actuary) no longer wish to serve on boards because they may be held to a “higher standard” — one that includes the baseline o — knowledge and skill that a judge or jury believes a pro — essional should possess. Additionally, the duty o — care requires direc- tors to become reasonably in — ormed as they carry out their decision-making and oversight
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responsibilities. A --- ailure to become in --- ormed or monitor the corporation’s a ---
airs would likely be considered bad — aith in breach o — the duty o — loyalty. Answer (A) is incorrect because it wrongly lets the son and daughter o —
the hook, even though they are demonstrating a conscious disregard — or their duties. Answer (B) is incorrect because there is no reason to hold the two absent directors liable and let the two directors who made the decision o —
the hook. Answer (C) is incorrect because there are substantial grounds — or liability here. 111. Who’s to Blame? Part II. Answer (A) is the best answer. Although they may exist in reality, in law there is no such thing as a specialized, honorary, or — igurehead director. A de — ense that a director was only a “ — igurehead” or a “specialized” director is simply without merit. I — the corporation believes that it would bene — it — rom having “big names” associated with it, it would be better to do something along the lines o —
orming an “advisory board” or, perhaps, appointing those “big names” as o —
icers to limited roles. Answer (B) is incorrect because directors are elected by the shareholders and owe the duties prescribed by law. Answer (C) is incorrect because geography is irrelevant to board responsibilities. Answer (D) is incorrect. Although there is no duty to attend meetings, all directors have the duty to keep in — ormed. The best evidence that a director is in — ormed may well be attendance at all, or most, o — the board’s meetings. 112. An Extravagant De — iciency. Answer (D) is the best answer. Like directors, o —
icers also owe — iduciary duties to the cor- poration and the shareholders. The president here, however, had to bring that standard o —
care to bear in more situations and day-to-day minutiae. The president likely breached these
duties by --- ailing to monitor the discrepancy between deposits and cash on hand as well as
by --- ailing to question the cashier’s new li --- estyle. Additionally, the directors owed a duty
to monitor and to ensure that mission-critical in --- ormation — such as cash on hand — was
brought to their attention. Thus, here, the president is likely in breach --- or --- ailing to detect
that the cashier was stealing, and the directors are in breach --- or --- ailing to have a reporting
system in place to alert them to this discrepancy.
Answer (A) is incorrect because, while what the cashier did was certainly illegal, the cashier
does not owe the corporation or the shareholders any --- iduciary duty.
Answer (B) is not the best answer because it --- ails to account --- or the president’s breach o ---
iduciary duty. Answer (C) is not the best answer because it — ails to account — or the directors’ breach o —
iduciary duty.
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113. A Sick Director.
Answer (D) is the best answer. Courts have been resistant to break the duty o --- care down
into a list o --- sub-duties. However, i --- there were sub-duties, the two principal ones would be
the duty to stay in --- ormed and the duty to make inquiry; it is not likely that the duty o --- care
would impose an absolute duty to attend board meetings. Thus, as long as Veeck remains
capable o --- staying in --- ormed on the corporation’s a ---
airs (and it certainly seems he is), he is likely upholding his duty o — care. Whether he is reelected to the board is another question
or the shareholders to consider at the next meeting. Answer (A) is incorrect because it simply is not true. There is no — ormal duty to attend board meetings. Answer (B) is incorrect because, — actually, the opposite is true. Veeck has been upholding his duties to stay in — ormed and exercise oversight. Answer (C) is incorrect because it simply is not rooted in principle. Why should one more board meeting make the di —
erence, so long as Veeck is staying in — ormed? 114. A Rushed Proposal. Answer (D) is the best answer. This question is based upon the Delaware Supreme Court’s in — amous decision in Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985). In that case, the directors o — Trans Union Corp. did approve the transaction a — ter only a two-hour meet- ing, with no deal documents, reports, or other in — ormation. While announcing a — orgiv- ing standard (“We think the concept o — gross negligence is also the proper standard — or determining whether a business decision reached by a board o — directors was an in — ormed one.”), the court held that the directors had not even met the — orgiving standard. Thus, they were not entitled to the protection o — the business judgment rule. Reaching the merits as well, the court — ound that the directors had breached the — iduciary duty o — care. On remand, the Delaware Chancery Court — ound that a su —
icient price (“intrinsic value”) would have been $65 per share. The directors, who were a prestigious group, were potentially liable — or $133,577,580. Van Gorkom is a “reverse roadmap” case — that is, i — an attorney or other advisor in a major merger or other transaction advises a board to do the opposite o — every- thing that the Trans Union directors did or did not do, that board will be well on its way to complying with its — iduciary duties. Answer (A) is incorrect because it involves almost no process which would tell the directors i — $55 may be a good price. Answer (B) is incorrect because it is incomplete. It properly — rames the issue, but it does not o —
er the directors any sense o — what to propose. Answer (C) is incorrect. It is a better option than Answer (B) because it o —
ers the good idea o — re — erring this matter to a committee, but it is not as good as Answer (D), which is cumula- tive and there — ore the best answer.
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115. O ---
icer Duties. Answer (C) is the best answer. This question is loosely based on Gantler v. Stephens, 965 A.2d 695 (Del. 2009). “Corporate o —
icers, when per — orming in this capacity, have the duty to act in good — aith; . . . with the care that a person in a like position would reasonably exercise under similar circumstances; and . . . in a manner the o —
icer reasonably believes to be in the best interests o — the corporation.” MBCA § 8.42(a). The o —
icial comments to the MBCA recognize that these standards o — conduct generally match those owed by directors. Accord- ingly, here, President and CFO cannot escape liability — or breach o —
iduciary duty simply by arguing that they were acting in their capacities as o —
icers rather than directors. O — course, whether President and CFO will actually be liable monetarily — or their breaches o —
iduciary duties is a di —
erent matter and is beyond the scope o — this question. Answer (A) is incorrect because it — latly misstates the rule. Answer (B) is incorrect because o —
icers owe — iduciary duties, even i — they have not expressly agreed to undertake them. Answer (D) is incorrect because the duties owed by o —
icers are generally the same as those owed by directors. Note: The answer is the same under Delaware law. In — act, Gantler itsel — expressly answers the question. See Gantler, 965 A.2d at 708–09 (“In the past, we have implied that o —
icers o —
Delaware corporations, like directors, owe --- iduciary duties o --- care and loyalty, and that the
iduciary duties o — o —
icers are the same as those o — directors. We now explicitly so hold.”). 116. Exculpation. Answer (C) is the best answer. Following the decision in Smith v. Van Gorkum, the DGCL was amended to permit the inclusion o — an exculpation clause in the certi — icate o — incorpora- tion that exculpated corporate directors — rom monetary liability — or an adjudicated breach o —
their duty o --- care. In Gantler v. Stephens, 965 A.2d 695, 709 n. 37 (Del. 2009), the court noted
that the exculpation provisions were permissible as to directors, but not o ---
icers. In 2022, the DGCL was amended once again and now permits exculpation o — both directors and o —
icers
or “monetary damages — or breach o —
iduciary duty as a director or o —
- icer, provided that
- such provision shall not eliminate or limit the liability o
- —
-
. . . [a] director or o
icer — or any breach o — the director’s or o —
icer’s duty o — loyalty to the corporation or its stockholders; . . . [a] director or o —
icer — or acts or omissions not in good — aith or which involve intentional misconduct or a knowing violation o — law; . . . (iii) [a] director under § 174 o — this title; . . . (iv) [a] director or o —
icer — or any transaction — rom which the director or o —
icer derived an improper personal bene — it; or . . . (v) [a]n o —
icer in any action by or in the right o — the corpo- ration.” DGCL § 102(b)(7). Answer (A) is incorrect because the exculpation is too broad and does not extend to o —
icers. Answer (B) is incorrect because the exculpation is too broad. Answer (D) is incorrect because it does not include o —
icers.
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117. Play Ball at Night, Part I.
Answer (A) is the best answer. The business judgment rule is not something with which
directors are required to or must comply. I --- they do meet its requirements, they receive a
more de --- erential review in court. But, i --- they do not, they may nonetheless de --- end them-
selves on the merits, that is, that they did in --- act exercise the requisite amount o --- care. Some
courts require boards to make an “independent” decision or judgment, rather than merely
de --- erring or rubber stamping the will o --- another, as a prerequisite --- or claiming the protec-
tion o --- the business judgment rule. Here, the Baron board’s mere de --- erral to Laker is prob-
ably insu ---
icient to justi — y the protection o — the business judgment rule. Answer (B) is incorrect because it is an extreme statement o — the rule. Answer (C) is incorrect because the absence o — con — licts o — interest alone is insu —
icient. To invoke the rule success — ully, directors must demonstrate that they exercised at least a modi- cum o — care. Answer (D) is incorrect because the business judgment rule is not the applicable stan- dard — that would be the duty o — care. Rather, the business judgment rule simply o —
ers protections under certain circumstances. 118. Play Ball at Night, Part II. Answer (B) is the best answer. A principal — unction o — the business judgment rule is to — ilter or screen out cases against corporate directors, or some o — them, prior to trial. Trials are use-
ul to address questions such as “Did de — endants exercise due care or reasonable care?” On the other hand, the business judgment rule prevents, at an early stage o — the litigation, cases — rom proceeding when the allegations — ail to establish that a director has not exercised reasonable care or has not made a procedurally sound decision. The business judgment rule would — ail miserably in its role as a — ilter or screen that, among other things, — osters conservation o — judi- cial resources. Instead, the business judgment rule only requires that directors demonstrate that they exercised some care, while at the same time requiring proo — s on several other issues (a decision or judgment, independence and lack o — con — licts, etc.). Gross negligence is the stan- dard — or breach o — the duty o — care, outside the protection o — the business judgment rule. Smith v. Van Gorkom, 488 A.2d 858, 873 (Del. 1985). Here, a shareholder might claim that the report was an insu —
icient basis upon which to make a decision because it was biased, but that is a decision that ultimately boils down to a matter o — business judgment. Assuming there are no allegations that the directors are sel — -interested in the transaction or are acting — or some purpose other than the best interest o — the corporation, the business judgment rule will likely protect their decision and the court will quickly dispose o — this case on a motion to dismiss. Answer (A) is incorrect because it delves into the substance o — the decision rather than the procedural soundness o — it. Answer (C) is incorrect because whether the board met its duty o — care or acted with the utmost care is legally irrelevant, and even i — it were relevant, it is questionable whether this decision truly would be o — the utmost care.
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Answer (D) is incorrect because the mere --- act that directors are independent does not qual-
i --- y their decisions --- or protection under the business judgment rule.
119. Political Forgiveness.
Answer (D) is the best answer. The “brooding omnipresence” in the business judgment rule
is the requirement that the directors made their decision in good --- aith. Even though the
technical elements o --- the rule are satis --- ied, in a given case the court may still hold the action
over --- or trial on grounds that the board’s actions were not taken in good --- aith. Two principal
categories o --- cases exist in which courts have done so. One category involves board action
taken in knowing violation o --- the law. Decisions which directors sincerely believe are in the
corporation’s best interests will not be protected i --- the directors know, or in the exercise o ---
slight care should know, that those decisions are illegal. Here, the board’s haste may place
the decision outside the protection o --- the business judgment rule. The board knew that there
was a question as to the legality o --- the --- orgiveness but proceeded with the action anyway,
rather than --- urther in --- orming themselves o --- the potential legal implications.
Answer (A) is incorrect because the board made a decision that it was aware could poten-
tially violate campaign --- inance law without --- urther investigating the issue --- irst.
Answer (B) is incorrect because the board’s conduct appears to be reckless, not an exercise
o --- due care.
Answer (C) is incorrect because the board did not know, at the time it made the decision,
that the decision was legally permissible.
120. Takeover Threat, Part I.
Answer (D) is the best answer in the sense that it would be the worst thing the board could
do. In the adoption o --- takeover de --- enses, board members may have a tinge or more o --- con-
lict o — interest. A hostile takeover, in which a bidder seeks to acquire a majority o — the vot- ing shares, usually to be — ollowed by replacement o — the incumbent managers and board members, poses a personal threat to those in charge o — the target corporation. They may lose salary, — ringe bene — its, and the prestige o — o —
ice. Nonetheless, in most cases, courts have reviewed the adoption o — takeover de — enses under the duty o — care and the business judg- ment rule rather than the duty o — loyalty. One reason is that, in most cases, counsel — or the target corporation has learned to script the process in a way that will lead to review under a business judgment rule type o — standard. Those with the most at stake, the — ull- time managers, generally are excluded — rom the process at some point, or altogether. Even in the hands o — the independent directors, the adoption o — takeover de — enses di —
ers — rom other types o — decisions that are reviewed under a business judgment standard. Takeover and takeover-de — ense decisions are surrounded by the “omnipresent specter that a board [even o — independent directors] may be acting primarily in its own interests.” For those and other reasons, led by the Delaware Supreme Court, corporate jurists have evolved a special- ized — orm o — the business judgment rule — or reviewing adoption o — takeover de — enses. The “response phase” business judgment rule requires o — directors the usual elements: a decision
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or judgment, --- reedom --- rom con --- licts o --- interest, care in in --- orming themselves on the subject
matter o --- the decision, and a rational basis --- or the decision made. In addition, however, the
directors must have “reasonable grounds --- or believing that a danger to corporate policy and
e ---
ectiveness exist[s] because o — another person’s stock ownership.” Once directors have in good — aith developed that belie — , any “de — ensive measure . . . must be reasonable in relation to the threat posed.” Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). Here, Answer (D) — ails to meet the proportionality and other elements o — the Unocal test. The bar is simply too low, too arbitrary, and is likely unreasonable in relation to the threat presented. Answer (A) is incorrect because it would be a good thing to do. The board must ensure that any response to a takeover threat is reasonable in relation to the threat posed. Answer (B) is incorrect because it is a good idea. Courts are more likely to look — avorably upon responses to takeover threats approved by independent directors. Answer (C) is incorrect because it is a good idea. A staggered board is a reasonable step to take to guard against takeovers and preserve institutional knowledge and experience. 121. Takeover Threats, Part II. Answer (C) is the best answer. In Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), the Delaware Supreme Court enunciated a second version o — the busi- ness judgment rule applicable to takeover activities. In addition to the Unocal rule with its reasonableness and proportionality requirements, there comes a point where a hostile takeover is inevitable. At this point, the board’s — iduciary duty requires it to cease being the de — ender o — the corporate bastion and to shi — t to maximizing immediate shareholder value by securing the highest price available. Here, the hedge — und made the best o —
er, and so the board breached its — iduciary duty by recommending the Firstwave o —
er — especially when the justi — ication — or doing so was that Firstwave would retain the managers. Answer (A) is incorrect because the directors’ job was not merely to consider the o —
er but to maximize immediate shareholder value. Answer (B) is incorrect because it applies the Unocal standard, even though it has now become inevitable that the takeover will go through. Answer (D) is incorrect. This answer would be tempting, but the prompt indicated that the independent directors met; thus, by de — inition, these directors were — ree o — disabling con-
licts o — interest. Mere sympathy, or empathy, — or the incumbent managers does not, without more, disable them — rom making a choice. 122. Duty o — Loyalty. Traditionally, the duty o — loyalty is implicated when the board or an o —
icer has a con — lict o —
interest, engages in competition with the corporation, or usurps a corporate opportunity.
Recently, the Delaware courts have articulated a broader understanding o --- the duty o --- loy-
alty and explained that the duty o --- loyalty is breached when directors or o ---
icers — ail to act in good — aith. See Stone v. Ritter, 911 A.2d 362 (Del. 2006) (“[T]he — iduciary duty o — loyalty is
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not limited to cases involving a --- inancial or other cognizable --- iduciary con --- lict o --- interest. It
also encompasses cases where the --- iduciary --- ails to act in good --- aith.”).
123. A Sneaky Director.
Answer (D) is the best answer. Overall, the duty o --- loyalty requires the --- iduciary at all times
to “serve the best interests o --- the corporation.” While damage to the corporation is an ele-
ment o --- duty o --- care violations, under the duty o --- loyalty, either damage to the principal (the
corporation) or gains procured by disloyalty will su ---
ice. Courts have also said that lack o —
disclosure by the director or o ---
icer is per se disloyal. Thus, — airness may not be a de — ense. Here, Birch and Golden Ale — ailed to disclose Birch’s association with Golden Ale because o — Birch’s desire to purchase the line — or a good price. At minimum, Birch had a duty to disclose his association with Golden Ale, and the best practice would have been — or Birch to abstain — rom voting on the matter. This is a direct violation o — his duty o — loyalty. Answer (A) is incorrect. This is a re — erence to the “entire — airness” test, which requires a showing o —
air price and — air dealing. Here, because o — Birch’s deception, it is unlikely that a court would — ind that this was — air dealing, and so entire — airness would not save the transaction. Answer (B) is incorrect. The courts make no di —
erentiation between value that may be due to the — iduciary’s status and value that has been added subsequently by his e —
orts. Answer (C) is incorrect. Resignation a — ter the — act would do Birch no good. 124. Interlocking Directors. Answer (C) is the best answer. A director may be “interested” because she, or a — amily mem- ber or business associate, proposes to deal with the corporation (e.g., to sell a parcel o — land or a piece o — so — tware to the corporation). Alternatively, a director may be interested when an entity in which the director has a substantial interest (at least 10 or 15 percent owner- ship) proposes to deal with the corporation. In those cases, the director should make — ull disclosure to the board o — directors and seek the approval o — a disinterested decision-maker (the disinterested directors, or the shareholders in general meeting); otherwise, she should be prepared to de — end the — airness, or the “entire — airness,” o — the transaction. Here, however, Earheart has no substantial ownership interest in Overby, but she does sit on the Overby board o — directors. Such cases, in which directors also sit on the board o — another corpora- tion but have no direct pecuniary interest in the transaction, are known as “interlocking directorates.” Traditionally, corporate law has treated an interlocking directorate (common director) as a con — lict o — interest the same as any other. Thus, Earheart has a con — lict o — inter- est and must disclose all material — acts to the board. The disinterested directors may then approve all — uture transactions nevertheless. Answer (A) is incorrect. Earheart has a con — lict o — interest that triggers her — iduciary duty, regardless o — the size o — the transaction. Answer (B) is incorrect. The “interlocking” position is itsel — a con — lict o — interest.
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Answer (D) is incorrect because the directors can only approve --- uture, not past, transac-
tions. Any challenge to the past transactions must be considered under the “entire --- airness”
standard.
125. All About Fairness.
Answer (C) is the best answer. Modern Delaware law recognizes that con --- lict-o --- -interest
transactions may actually be bene --- icial --- or a corporation, and thus, it provides “sa --- e har-
bors” through which such transactions may be approved or rati --- ied. The sa --- e harbors are as
ollows: (1) the material — acts are disclosed to the board and the transaction was approved in good — aith by the majority o — the independent directors, or a committee o — independent directors, see DGCL § 144(1); (2) the material — acts are disclosed to the stockholders and approved in good — aith by majority vote o — the stockholders, see DGCL § 144(2); or (3) “[t] he contract or transaction is — air to the corporation as o — the time it is authorized, approved or rati — ied, by the board o — directors, a committee or the stockholders” — to wit, the “entire
airness” standard determined by a court in litigation. See DGCL § 144(3). Compliance bestows a certain amount o — extra protection (“removes any interested director cloud”) or, under the MBCA’s subchapter F, makes the transaction well-nigh unassailable. However, the ultimate touchstone is — airness, not compliance with the statute, on which issue the inter- ested director(s) will have the burden o — proo — . Answer (A) is incorrect because con — lict-o — -interest transactions that are not approved by the disinterested directors or stockholders are voidable unless they can satis — y the entire
airness standard. This answer choices overlooks entire — airness. Answer (B) is incorrect because DGCL § 144 does not require anything; rather, it provides a mechanism — or approval o — con — lict-o — -interest transactions. Answer (D) is incorrect because there simply is no requirement that any loan by directors or shareholders be at a low rate; rather, the rate must be — air. Note: The outcome would be virtually the same in an MBCA jurisdiction. See MBCA § 8.61(b) et seq. 126. Biased Directors. Answer (D) is the best answer. This question demonstrates the di —
erence between presence and quorum and actually voting on a matter. A director who is present at a vote and delivers notice o — abstention may still be counted toward quorum. See MBCA § 8.24. Thus, there is certainly a quorum here as all the directors are present. There is not, however, any director who is disinterested and can vote to approve the transaction — or purposes o — rati — ying the transaction under the sa — e harbor o — MBCA § 8.62 (which requires that at least two disinter- ested directors vote to approve the transaction). In an abundance o — caution, the directors may submit the matter to the shareholders — or a shareholder vote to approve the transaction, see MBCA § 8.63, but depending on the circumstances, this may not be practical in terms o — logistics or expenses. As a result, any challenge to this transaction will likely be reviewed under the entire — airness standard.
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Answer (A) is incorrect because it makes two signi --- icant misstatements. First, the directors
can acquire a quorum, even though they do not have the votes to approve the transaction.
Second, the transaction can be approved through judicial review under the entire --- airness
standard.
Though an accurate statement o --- law, Answer (B) is incorrect because it does not address
the more signi --- icant legal issue.
Answer (C) is incorrect. Even though the transaction is a con --- lict-o --- -interest transaction,
the board can still go through with it. The transaction is merely voidable, and any challenge
to the transaction would still have to overcome entire --- airness.
Note: The answer would be the same under Delaware law. See DGCL § 144.
127. All the Facts.
Yes. Traditionally, a director’s transactions with corporations on whose board he sat simply
were void. Over time, this harsh common law began to be ameliorated. Such transactions
became voidable at the instance o --- a complaining shareholder or the corporation, not void
altogether. In 1931, Cali --- ornia became the --- irst jurisdiction to pass an interested director
statute, which provided that i --- disclosure and a vote had been obtained, --- airness to the cor-
poration was a de --- ense — or, more precisely, the complaining shareholder had the burden
o --- proving that the transaction had been un --- air. Conversely, i --- the interested director --- ailed
to comply with procedures, that director would have the burden o --- proving the transaction
was entirely --- air. In various --- orms, interested director statutes are common today. See, e.g.,
MBCA § 8.62; DGCL § 144. But, whether at common law or under these “sa --- e harbor” stat-
utes, directors had a duty to make --- ull and --- air disclosure both o --- their interest and o --- the
corporation’s interests in the proposed transaction. Failure to do so would negate any sa --- e
harbor protection the director thought he had otherwise obtained by seeking director or
shareholder approval. Lack o --- disclosure would relegate the transaction back to the voidable
category. Here, despite his good intentions, Havarotti --- ailed to make complete disclosure.
He must there --- ore be prepared either to prove the --- airness o --- the price he paid --- or the prop-
erty or to make --- ull disclosure and seek board approval --- or a second time.
128. Missed Opportunity.
Answer (A) is the best answer. A director’s duty o --- loyalty requires them to act in the best
interest o --- the corporation. When a director pursues or takes advantage o --- a business oppor-
tunity that should have --- irst been given to the corporation, the director breaches their duty o ---
loyalty. Section G o --- the MBCA describes a director’s obligations when pursuing a business
opportunity that should --- irst be o ---
ered to the corporation, but it avoids giving an authorita- tive de — inition o — “corporate opportunity.” Instead, the MBCA recognizes this to be a — act- intensive inquiry. Courts employ a variety o — tests, including the “interest or expectancy test,” the “line o — business test,” and a general “ — airness” test. At the heart o — all these tests, however, lies the idea that the director took advantage o — their position to take an opportu- nity — or themsel — that should — irst go to the corporation. The MBCA o —
ers mechanisms by
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which a director may pursue these opportunities consistent with their --- iduciary duty. See
MBCA § 8.70. First, the director may disclose the material --- acts to the disinterested direc-
tors or to the shareholders and seek to have the corporation either disclaim their interest in
the opportunity or permit the director to pursue it. Alternatively, the articles o --- incorpora-
tion may disclaim the corporation’s interest in certain opportunities. Here, Weldon never
disclosed anything to the directors or the shareholders, and he appears to have exploited an
opportunity and position that he learned about in his capacity as a director. Thus, Weldon
will not be able to claim the protections o --- the sa --- e harbors, and a court will likely rule that
Weldon breached his --- iduciary duty o --- loyalty by usurping these opportunities.
Answer (B) is not the best answer because Weldon was likely privy to in --- ormation in his
capacity as director that led him to pursue these opportunities. At a minimum, Weldon
should have disclosed his intent to pursue the opportunity --- or himsel --- be --- ore doing so.
Answer (C) is incorrect. Although Weldon’s conduct was certainly not --- air, this answer does
not describe the legal principles at work.
Answer (D) is incorrect because the resignation would not save Weldon. He still exploited
his position as director in pursuing this opportunity.
129. Cellular Licenses.
Answer (B) is the best answer. This question is loosely based on Broz v. Cellular In --- ormation
Systems, Inc., 673 A.2d 148 (Del. 1996). In Broz, the court held that a director does not have
to expand her “corporate opportunity horizon” to include the scope o --- a prospective merger
partner’s business interests. In Delaware, multiple tests exist to determine what opportu-
nities are corporate opportunities, and the tests are cumulative rather than alternative.
These tests include considering whether the corporation has an interest or expectancy in the
opportunity, whether it was in the corporation’s line o --- business, and whether the corpora-
tion had the wherewithal to develop the opportunity. In the modern era, then, courts may
well apply a multiple o --- tests. Think o --- the various tests as outwardly expanding concentric
circles. Here, the signi --- icant --- acts are that these new FCC licenses were beyond the scope o ---
Yalm’s business, Yelm had no interest or expectancy in them and had turned them down,
and Brody had not learned about the opportunities in her capacity as a director in Yelm. It
also appears that the deal was essentially negotiated and --- unctionally complete be --- ore the
merger, so it certainly seems that Brody has upheld her --- iduciary duty o --- loyalty to Yelm.
Answer (A) is incorrect because it is too harsh. A director may take an opportunity --- or her-
sel --- under some circumstances.
Answer (C) is incorrect. Yelm is not conducting business in the cellular industry and so has
no expectancy in this opportunity.
Answer (D) is incorrect because it states the rule too leniently. A director may compete with
the corporation on whose board she acts, especially i --- the director was in the business be --- ore
she went on the board. That principle, however, says nothing about deciding whether new
opportunities that arise are corporate opportunities.
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130. Brotherly Competition.
Probably not. Courts have held that, absent a past practice or policy o --- acquiring shares,
purchase o --- shares in a corporation is not a corporate opportunity. See, e.g., Zidell v. Zidell,
Inc., 560 P.2d 1091 (Or. 1977). Because no policy or past practice existed here, Ajax was --- ree
to purchase Rosen’s shares. Hector may claim breach o ---
iduciary duty, but the corollary is that control has its privileges. Hector may also claim that the corporation is closely-held, that he is being denied his reasonable expectations, and that he is there — ore being oppressed. Oppression is a ground — or invoking the statutory remedy o — “involuntary dissolution.” But all o — this is premature. Denial o — reasonable expectations generally envisions a pattern o —
conduct.
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Shareholder Litigation
131. Introduction to Derivative Actions.
A derivative lawsuit is a lawsuit that a shareholder can --- ile when the shareholder believes
the board o --- directors has breached its --- iduciary duties and caused harm to the corpora-
tion. Although generally the management o --- the corporation’s business and a ---
airs is vested in the directors, a derivative lawsuit re — lects the idea that we cannot expect the directors to sue themselves. Thus, under some circumstances, a shareholder may claim this right and commence action on behal — o — the corporation. A derivative lawsuit is truly two lawsuits in one. First, it is a lawsuit by the shareholder against the corporation to compel the cor- poration to act and sue the directors. In this sense, the shareholder is a nominal plainti —
(a plainti —
in name only) and the corporation is a nominal de — endant (a de — endant in name only). The allegations are truly against the directors and maintain that the corporation has been harmed. Thus, any remedy will — low to the corporation. Second, a derivative action is a lawsuit by the corporation against the directors to compel the directors to uphold their
iduciary duties and act as appropriate on behal — o — the corporation. 132. Inspecting the Records. Answer (A) is the best answer. A shareholder’s inspection o — a corporation’s records is o — ten a precursor to shareholder litigation. A corporation is required to maintain a record o — its current shareholders. See MBCA § 16.01(c). Relatedly, a shareholder has an absolute right o — access to inspect certain corporate documents. See MBCA § 16.02(a) (establishing share- holder right o — access to articles o — incorporation, bylaws, minutes o — shareholders’ meetings or other actions, all written communications to shareholders within the past three years,
inancial statements, a list o — directors and o —
icers and their addresses, and the most recent annual report — iled with the secretary o — state). Notably, the shareholder list is not one o —
them. Rather, a shareholder may only demand inspection o --- a shareholder list i --- “the share-
holder’s demand is made in good --- aith[,] the shareholder’s demand describes with reasonable
particularity the shareholder’s purpose and the records the shareholder desires to inspect[,]
and the records are directly connected with the shareholder’s purpose. See MBCA § 16.02(c).
Whether a shareholder’s purpose is proper is a question o --- law and equity. See, e.g., Compaq
Computer Corp. v. Horton, 631 A.2d 1, 3 (Del. 1993). This is distinguishable --- rom a share-
holder’s right to inspect a list o --- shareholders entitled to notice o --- a meeting. See MBCA
§ 7.20(b); see also MBCA §§ 16.01(e) & (g)(1). I --- a shareholder demands to inspect the list o ---
shareholders but the corporation denies the request, the shareholder may seek a court order
199
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compelling inspection. See MBCA § 16.04(b). The shareholder will bear the burden to prove
that their request to inspect the list o --- shareholders was made in good --- aith and --- or a proper
purpose. Signi --- icantly, courts must resolve these matters on an “expedited basis” and, i --- the
court orders inspection o --- the records, may award the shareholder their attorneys’ --- ees. Id.
Here, Faulkner’s request will be governed by MBCA § 16.02(b) rather than § 7.20(b) because
the annual meeting is eight months away. Accordingly, Faulkner’s right to inspect the list o ---
shareholders is not absolute, and the board may rightly deny the request i --- it is not made in
good --- aith, is not --- or a proper purpose, or i --- the records are not directly connected with the
purpose. Whether Faulkner’s request is proper may be arguable, but i --- a court believed that
Faulkner merely wanted to alert other shareholders to misleading statements by the board
about the merger, the purpose is probably proper. Even i --- the board’s suspicion were correct
that Faulkner was --- ishing --- or other shareholders to join the lawsuit, this would probably still
be a proper purpose.
Answer (B) is incorrect because, while Faulkner would have inspection rights o --- a list o ---
shareholders entitled to notice o --- a meeting, this rule is inapplicable here and ignores her
inspection rights under MBCA § 16.02(b).
Answer (C) is incorrect because pending litigation does not alter a shareholder’s rights
under MBCA § 16.02(b).
Answer (D) is incorrect because a shareholder does not have an absolute right to inspect a
list o --- shareholders at any time --- or any reason.
Note: The analysis is a little di ---
erent under Delaware law, but Answer (A) is still the best answer. “Any stockholder . . . upon written demand under oath stating the purpose thereo — , [has] the right during the usual hours — or business to inspect — or any proper purpose . . . [t]he corporation’s stock ledger, a list o — its stockholders, and its other books and records[.]” DGCL § 220(b)(1). “A proper purpose shall mean a purpose reasonably related to such person’s inter- est as a stockholder.” DGCL § 220(b)(2). Thus, unlike a shareholder in an MBCA corporation that has an absolute right to inspect some corporate records — or any reason, a stockholder in a Delaware corporation must show the heightened standard to inspect any records. 133. A Disgruntled Shareholder, Part I. Answer (D) is the best answer. Generally speaking, “the business and a —
airs o — the corpora- tion shall be managed by or under the direction, and subject to the oversight, o — the board o — directors.” MBCA § 8.01(b). Nevertheless, shareholders retain the right to exert control over the corporation by (1) selling their shares o — stock; (2) voting their shares o — stock; or (3) through suing the corporation, the board o — directors, or both. Under some circumstances, a shareholder may commence a derivative action — a civil lawsuit in the right o — the cor- poration — against the corporation. See MBCA § 7.40. A derivative action is best thought o — as two lawsuits in one: First, it is a lawsuit by the shareholder against the corporation to compel the corporation to sue the board o — directors; the shareholder is the nominal plain- ti —
and the corporation is the nominal de — endant. Second, it is a lawsuit by the corporation (via the shareholder) against the directors to compel the directors to take remedial action
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on behal --- o --- the corporation. The theory here is that the directors (who are responsible --- or
managing the corporation) are harming the corporation, and we cannot expect them to
sue themselves. So a derivative action permits a shareholder to step into the right o --- the
corporation and sue the directors on the corporation’s behal --- . The allegations are that the
directors have engaged in misconduct, and any relie --- or remedy will --- low to the corpora-
tion — not the shareholder-plainti ---
individually. Derivative actions require a shareholder to show standing and meeting heightened procedural requirements. “A shareholder may not commence or maintain a derivative proceeding unless the shareholder (i) was a shareholder o — the corporation at the time o — the act or omission complained o — or became a shareholder through trans — er by operation o — law — rom one who was a shareholder at that time and (ii)
airly and adequately represents the interests o — the corporation in en — orcing the right o —
the corporation.” MBCA § 7.41. Additionally, except under limited circumstances, no share-
holder may commence a derivative action without --- irst making a demand to the corporation
to take corrective action. See MBCA § 7.42. Here, Falconer believes that the board has --- ailed
to take action to protect the corporation and that, as a result, the value o --- the corporation
has decreased. Thus, a derivative action is the appropriate tool i --- Falconer can overcome the
heightened procedural scrutiny.
Answer (A) is incorrect because, even though it is a correct statement o --- the law, it ignores
the shareholders’ ability to commence a derivative action.
Answer (B) is incorrect --- or the same reason as (A).
Answer (C) is incorrect because Falconer may have a right to commence a derivative action
in the right o --- the corporation, but it is questionable whether Falconer could do so in his
own right when the only harm alleged is harm to the corporation.
Note: Answer (D) is also the best answer under Delaware law, although the analysis is some-
what di ---
erent. Derivative actions arose under Delaware law as a judicially cra — ted equitable remedy; the DGCL recognizes derivative actions but does not create them. See DGCL § 327. Procedural requirements are set — orth in Del. R. Ch. Ct. 23.1. 134. A Disgruntled Shareholder, Part II. Answer (B) is the best answer. The MBCA imposes a “universal demand” requirement on all shareholder derivative lawsuits. Under this requirement, “[n]o shareholder may commence a derivative proceeding until (i) a written demand has been made upon the corporation to take suitable action and (ii) 90 days have expired — rom the date delivery o — the demand was made unless the shareholder has earlier been noti — ied that the demand has been rejected by the corporation[.]” MBCA § 7.42. The only exception to this requirement is when irreparable injury to the corporation would occur as a result o — waiting — or the 90-day period to expire be — ore — iling suit. Id. Accordingly, Falconer must make demand on the board o — directors to cure or sue — or the alleged breach be — ore — iling the lawsuit himsel — . Answer (A) is incorrect because, absent evidence o — irreparable harm, Falconer must — irst make demand.
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Answer (C) is incorrect because there is no requirement that a shareholder hold a speci --- ic
percentage o --- stock be --- ore commencing a suit. Rather, the only standing requirements are
that the shareholder was a shareholder at the time o --- the alleged breach and remains a share-
holder throughout the proceeding and that the shareholder adequately represents the inter-
ests o --- the corporation in bringing the suit. See MBCA § 7.41.
Answer (D) is incorrect because there is no requirement that a shareholder --- irst --- ile a share-
holder proposal be --- ore commencing suit.
Note: Under Delaware law, Answer (A) is likely the best answer. Delaware law similarly
requires a stockholder make demand be --- ore commencing suit but excuses demand when
demand would be --- utile. See Aronson v. Lewis, 473 A.2d 805, 814–15 (Del. 1984). Demand is
excused when a stockholder establishes a reasonable doubt that the directors are disinter-
ested and independent or that the challenged transactions were otherwise the product o ---
valid business judgment. See id. at 814. Here, because the stockholder is challenging that the
directors have breached their --- iduciary duty o --- loyalty by engaging in a con --- lict-o --- -interest
transaction, the stockholder is likely to be able to establish that demand is excused.
135. A Disgruntled Shareholder, Part III.
Answer (C) is the best answer. In shareholder litigation, it is important to distinguish
between direct and derivative claims. Derivative claims are claims asserted by a shareholder
on behal --- o --- the corporation and are subject to heightened procedural obstacles. Direct
claims, on the other hand, are solely on behal --- o --- an individual shareholder and do not
have to overcome the heightened procedural obstacles. Over time, courts and litigants alike
have struggled to distinguish between these claims. At one time, courts applied the “special
injury rule,” which essentially inquired as to whether the shareholder’s claims were unique
to them or whether the shareholder was similarly situated to any other shareholder. In 2004,
the Delaware Supreme Court rejected this standard as con --- using and amorphous, and it
instead adopted a two-part test: “A court should look to the nature o --- the wrong and to
whom the relie --- should go. The stockholder’s claimed direct injury must be independent
o --- any alleged injury to the corporation. The stockholder must demonstrate that the duty
breached was owed to the stockholder and that he or she can prevail without showing an
injury to the corporation.” Tooley v. Donaldson, Lu --- kin & Jenrette, Inc., 845 A.2d 1031, 1039
(Del. 2004). Applying the Tooley harm/remedy test here, Falconer’s claim about retaliatory
dividends is likely direct. First, the harm appears to be to Falconer and the other sharehold-
ers individually. They are not receiving dividend payments, and it appears that such pay-
ments are being withheld in an arbitrary — i --- not purpose --- ul — way to deny them --- inancial
payment. Likewise, any remedy --- or the withheld payments would --- low to the shareholders
directly, not to the corporation. Thus, Falconer has a strong argument that the discrimina-
tory dividend payments entitle him to assert a direct claim against the directors.
Answer (A) is incorrect because the harm to Falconer as a shareholder is distinct --- rom any
harm to the corporation, and any remedy would --- low to Falconer directly.
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Answer (B) is incorrect because it seems to be applying the “special injury” test that the
court had rejected. The mere --- act that other shareholders were harmed in the same way does
not render this claim derivative.
Answer (D) is incorrect because the business judgment rule does not prevent a claim --- rom
being brought; it just may provide the court with a quick mechanism with which to dismiss
the claim.
136. A Disgruntled Shareholder, Part IV.
Answer (A) is the best answer. Delaware law requires that a stockholder seeking to bring
a derivative suit against a board o --- directors --- irst make demand on the board to cure the
breach or sue. See Aronson v. Lewis, 473 A.2d 805, 814-15 (Del. 1984). The demand require-
ment, however, is excused when demand would be --- utile. Id. at 814. Demand is --- utile when
the plainti ---
can establish a reasonable doubt “that (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product o — a valid exer- cise o — business judgment.” Id. Directors are entitled to a presumption that they are inde- pendent and disinterested and that they are acting in the best interest o — the corporation. See Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1048 (Del. 2004). A director will be deemed to not be disinterested and independent when the plainti —
can show that the director has a personal interest in the outcome o — the litigation. Id. at 1049. There may be a variety o — motives to show that a director is not independent, including — riendship. Id. at 1050. But mere — riendship alone is insu —
icient to show such bias. Here, because there are six directors, Falconer need only demonstrate that three o — them are interested in the action. Falconer can likely meet his burden by arguing that Manley, Manley’s — ather, and Manley’s brother are all personally interested in the underlying trans- action. This alone should be enough to establish that demand would be — utile because there is a reasonable doubt that a majority o — the board is disinterested and independent. The next director most susceptible to being con — licted is the attorney, but it seems questionable whether there are enough — acts here to show that close — riendship and vacationing together would rise to such a level as to establish reasonable doubt about the attorney’s indepen- dence. It will be even more di —
icult — or Falconer to cause doubt about the accountant and the real estate agent’s independence. Falconer need not do this, though, because he can eas- ily establish that three o — the six are con — licted, and thus a majority o — the directors are not independent and disinterested. Answer (B) is incorrect because it is very likely that Falconer will not be able to establish the attorney’s con — lict. Answer (C) is incorrect because merely running in the same social circles will not con — lict a director. Answer (D) is incorrect because Falconer can likely establish that three o — the six directors are con — licted.
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137. A Disgruntled Shareholder, Part V.
Falconer’s proposition is dangerous. Many courts interpret a shareholder demand as a stipu-
lation that demand was required, and that the board is disinterested and independent and
will respond to the demand in a way that it in good --- aith believes is in the best interest o --- the
corporation. See Rales v. Blasband, 634 A.2d 927, 935 n.12 (Del. 1993); Spiegel v. Buntrock,
571 A.2d 767, 775 (Del. 1990). In other words, the board’s response to the demand trans-
orms the entire claim into a claim about the board’s response to the demand — a claim that would trigger analysis under the duty o — care and be subject to the highly de — erential business judgment rule! I — Falconer makes a demand and then seeks to challenge the board’s re — usal to cure or sue (a “demand re — used” case), the court will likely apply the business judgment rule to the board’s decision and dismiss the claim. It would be better to attempt to argue that demand should be excused as — utile (a “demand excused” case) and hope that the court accepts the allegations in the complaint as a su —
icient basis to determine that there is a reasonable doubt that the majority o — directors are disinterested and independent or that the challenged transaction is otherwise the product o — a valid exercise o — business judgment. 138. A Disgruntled Shareholder, Part VI. Under these circumstances, it would be best to appoint and re — er the demand to a special lit- igation committee made up o — the accountant and the real estate agent as disinterested and independent directors. The committee could then investigate the shareholder’s demand and make a determination — or how to best proceed — either by curing conduct, commencing litigation, or (most likely) re — using the shareholder’s demand. A special litigation committee is likely to hire outside counsel to advise the committee and may consider — actors beyond the shareholder’s demand, including the potential waste o — assets and public perception. As a practical matter, very rarely does a special litigation committee endorse a decision to sue the corporation. By re — erring this case to a special litigation committee, however, the board is likely to remove doubt that the decision to re — use the demand was con — licted or not the product o — a valid exercise o — business judgment. 139. A Disgruntled Shareholder, Part VII. Answer (D) is the best answer. A special litigation committee represents the corporation’s “last chance — or a corporation to control a derivative claim in circumstances when a majority o — its directors cannot impartially consider a demand.” In re Oracle Corp. Derivative Litig., 824 A.2d 917, 939–40 (Del. Ch. 2004). A court must review a special litigation committee’s recommendation through a two-part test. See Zapata Corp. v. Maldonado, 430 A.2d 779, 788 (Del. 1981). First, the court must determine whether the committee was independent and acted in good — aith. Id. at 789. The corporation bears the burden to prove the committee’s good — aith and independence. Id. The court must conclude that the committee has shown a reasonable basis — or its conclusion. Id. Next, the court must exercise its own “indepen- dent business judgment” that the lawsuit should be dismissed. Id. Thus, it is possible that a committee would recommend dismissal but the court would still deny the motion. Here, Answer (D) best re — lects this two-step process.
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Answer (A) is incorrect because the demand --- utility analysis is completely separate --- rom
any recommendation made by the committee.
Answer (B) is incorrect because a court does not have authority to make its own deci-
sion to dismiss a lawsuit without --- irst considering the reasonableness o --- the committee’s
recommendation.
Answer (C) is incorrect because it --- ails to account --- or the court’s own independent business
judgment.
140. Shareholder Incentives.
Shareholders may have a range o --- personal incentives --- or bringing derivative actions in
response to what they perceive as corporate mismanagement, but the key --- inancial incentive
is that a court can award the shareholder their attorneys’ --- ees --- or bringing the action. See,
e.g., MBCA § 7.46.
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Mergers & Acquisitions
141. Preemptive Rights.
Answer (A) is correct. Right o ---
irst re — usal is a common preemptive right. Preemptive rights are shareholders’ rights to preserve their proportionate ownership and control interest in the corporation. Right o —
irst re — usal means that the shareholder must match the terms which the third party is willing to pay. Answer (B) is incorrect. There is not a legal concept o — a stockholder’s right o —
irst sale. Rather, stockholders may have a right o —
irst re — usal or a right o —
irst o —
er. Answer (C) is incorrect. Stockholders may bargain — or in — ormation rights, and they may have statutory rights to certain in — ormation like books and records, but this is not a preemp- tive right. Answer (D) is incorrect. Liquidation rights, which are most commonly called liquidation pre — erences, speci — y how much a shareholder should get paid i — the corporation liquidates. Preemptive rights, on the other hand, regard a shareholder’s ability to maintain ownership and control o — an ongoing corporation, and thus preemptive rights are not directly related to what happens when a company stops operating or otherwise liquidates. 142. Fabulous De — ense. In a hostile takeover bid, or tender o —
er (the two terms are used interchangeably), a bidder anticipates that the “target company” board o — directors will not be receptive to a merger proposal. The bidder thus makes an o —
er directly to the target company shareholders. I — the bidder obtains enough shares, the bidder elects its own people to the target board. Those new directors then propose a merger with the bidder or a subsidiary o — the bidder. Creating dual class capitalization by super voting stock, as contemplated here, is a general de — ense to all takeover threats whether identi — ied or not yet identi — ied. This de — ense measure could be adopted here and now, where there is no identi — iable threat to de — end against. The key move behind this strategy is the issuance o — super voting stock to an inner circle o —
“sa --- e” shareholders. The corporate euphemism --- or such a de --- ensive use o --- a company’s capi-
tal structure is “dual class capitalization.”
The mechanisms o --- issuing super voting stock vary. In the question, --- or example, Fabulous
could seek to amend its articles to provide that shares held --- or over 10 years by the same
207
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person or persons would have --- ive times the normal voting power in the election o --- direc-
tors, thus vastly enlarging the inner circle’s voting power.
Yet Fabulous might not need to amend its articles. Many companies have authority in their
articles --- or “blank check” classes o --- stock. MBCA § 6.02(a) authorizes the practice: “I --- the
articles o --- incorporation so provide, the board o --- directors may determine, in whole or in
part, the pre --- erences, limitations, and relative rights . . . o --- any class o --- shares be --- ore the issu-
ance o --- any shares o --- that class.” The board o --- directors is able to “ --- ill in the blanks” on the
blank check.
Some critics o --- this practice argue that blank check authority to issue “super voting stock”
seems a corruption o --- the original purpose, but it has become an accepted practice in pub-
licly-held corporations.
143. Preemptive IPO.
Answer (B) is correct. The preemptive right is the shareholder’s right to preserve her pro-
portionate ownership and control interest in the corporation by having a right o --- re --- usal on
any new shares the corporation proposes to issue --- or cash (but not in merger or --- or prop-
erty). Right o ---
irst re — usal means that the shareholder must match the terms which the third party is willing to pay. Answer (A) is no longer correct. Early case law — ound that preemptive rights were vested property rights, but the last o — these cases were overruled by the end o — the 1960s. Now, pre- emptive rights are not vested property rights. Answer (C) is incorrect. Federal law has nothing to say about preemptive rights. They are governed by state corporation law and regard the “internal a —
airs” o — a corporation. Answer (D) is incorrect. The MBCA does recognize preemptive rights, provided that cor- porations opt in, as this one has here. Articles o — incorporation must contain an “opt in.” See MBCA § 6.30(a) (“The shareholders o — a corporation do not have a preemptive right to acquire the corporation’s unissued shares except to the extent the articles o — incorporation so provide.”). 144. Buy–Sell Agreement. Answer (A) is the best answer, or at least that is what the Pennsylvania Supreme Court held in the case upon which these — acts are based, Seven Springs Farm, Inc. v. Croker, 801 A.2d 1212 (Pa. 2002). There are two schools o — judicial thought with regard to share trans — er restrictions. The majority school is that they tend to be restraints on alienation and, there-
ore, should be strictly construed. Thus, each and every triggering event must be spelled out in the agreement (sale to a third party, sale to a — ellow shareholder, merger, disability, cessation o — employment, death, gi — t, and so on). Courts have held that “sale” means sale to a third party and does not include a sale to a — ellow shareholder. Along the same lines, the Pennsylvania court held that a merger is a di —
erent thing than a sale. Thus, the best (major- ity) answer is that a merger is not a sale.
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Answer (B) is the second-best answer. The minority school holds that share trans --- er restric-
tions are ubiquitous in business li --- e. Every closely-held corporation will have a buy–sell
agreement precisely to keep participation “close.” Shareholders wish to have control over
who their “partners” will be in these “incorporated partnerships.” A court which --- ollows
this school might, --- or example, look to --- ederal securities law, which has held --- or a number o ---
years now that a merger is a sale.
Answer (C) is incorrect because there is no evidence that the buy–sell agreement contains
any extreme and unconscionable terms. On the --- acts presented, this is an ordinary buy–sell
agreement, which is a valid sort o --- contract and not a de --- acto invalid restraint on alienation
o --- shares.
Answer (D) is incorrect because there is no evidence o ---
ailures to disclose, or o — attempts to disclose in a misleading way, much less any evidence o — intentional misrepresentation. There is simply no plausible allegation o —
raud here. 145. Alaska–Hawaii. Corporate combinations, at least — riendly ones, begin with an agreement between senior managers, o — ten memorialized in a “term sheet,” “letter o — intent,” or “memorandum o —
understanding,” which is an agreement to work toward creating a “merger agreement” or
“plan o --- merger.” Lawyers are heavily involved at this merger dra --- ting stage, and these plans
must be approved by the board and then presented to the shareholders --- or their vote.
The merger agreement or plan o --- merger will speci --- y which is to be the surviving entity, who
is to receive what (in terms o --- shares o --- stock o --- the surviving corporation, or cash), what
warranties and representations the parties make to one another, and a myriad o --- details.
A --- ter adoption, the articles o --- merger, together with a certi --- icate describing the meeting and
the votes by which the shareholders approved the articles o --- merger, are --- iled in the secretary
o --- state’s o ---
ices. When the articles o — merger are — iled, the acquired corporation ceases to exist, by operation o — the law. Its shareholders become shareholders o — the surviving corpo- ration, or creditors to a cash payment — rom it. There are several types o — statutory mergers. I — the surviving corporation is to be an entirely new entity, into which both o — the constituent corporations are to be merged, the transac- tion is o — ten called a consolidation, rather than a merger. The Model Act drops the term “consolidation,” but many lawyers still use the term to distinguish such transactions — rom those in which one o — the constituent corporations is the survivor. Many state statutes authorize use o — short- — orm mergers. See, e.g., MBCA § 11.04 (merger o —
90 percent owned subsidiary). In a case in which a parent corporation owns 90 or 95 percent
o --- the shares o --- a subsidiary, the parent may merge the subsidiary into another subsidiary
and the 5 or 10 percent minority has no voting rights.
Another --- orm o --- merger is the small-scale merger, which Delaware, Michigan, and a --- ew
other states have. See DGCL § 251( --- ). In that type o --- transaction, the statute excuses a
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shareholder vote in the acquiring, or surviving, corporation. Generally, the vote is excused
i --- the outstanding voting shares o --- the acquiring corporation will not be increased by more
than a stated percentage (15 or 20) as a result o --- the merger (20 percent in Delaware).
Other deal --- orms are also viable. Purchasing shares in the market be --- ore a merger is not
illegal i --- only the corporation (Alaska here), and not its executives, do it. It is, a --- ter all, sel --- -
developed inside in --- ormation, upon which Alaska would be --- ree to trade. Many corporations
re --- rain --- rom the practice because o --- the hard --- eelings it might cause among target company
shareholders who sold and thereby --- orewent the (presumably) higher merger consideration.
Cash tender o ---
ers (takeover bids) conjure up visions o — hostile acquisitions, but that is not always the case. The parties here could structure their — riendly acquisition as either a cash or stock takeover bid, but it would eventually have to be — ollowed by a merger to consolidate the two airlines’ operations. The merger would be a — orgone conclusion, though, because due to the tender o —
er, the acquiring company would already own a substantial share block. Other options — or deals include leveraged buy-outs, SPACs, and more. 146. Acquirer–Target, Part I. Answer (C) is the best answer. A stock- — or-assets deal means Acquirer can obtain Target’s property without spending cash by issuing stock in exchange — or these assets. The liabilities remain behind in the Target corporation, which does not automatically cease to exist as would happen in a statutory merger. Answer (A) is not the best answer because Acquirer wishes to avoid successor liability, i — it can. Merger o — the two entities may automatically result in successor liability. This answer does not meet one o — the client’s three main objectives, so it is not the best answer. Answer (B) is not the best answer. Paying cash — or assets obviously does not meet Acquirer’s goal o — preserving cash by issuing stock instead. While the asset-purchase structure o — the deal makes sense, this answer does not meet one o — the client’s three main objectives, so it is not the best answer. Answer (D) is not the best answer. A stock tender has the same problems as a statutory merger, plus a tender o —
er could turn hostile and quickly get expensive. In merger, dis- senters’ rights spring into being. I — any number o — Target shareholders vote “no,” dissent, and seek appraisal o — their shares, payment to them may be a signi — icant cash drain, even i — the court does not appraise the shares at a number vastly higher than the value o — their merger consideration. This is a wild card element in the equation that, along with the suc- cessor liability issue, tips the balance strongly against merger. Many statutes (Delaware’s, — or example) do not grant dissenters’ rights in sale-o — -assets transactions. 147. Acquirer–Target, Part II. Answer (C) is the best answer. In a reverse triangular merger, Acquirer creates a temporary subsidiary called Merger Sub. Then Target per — orms a reverse statutory merger with Merger
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Sub, whereby Target is the surviving corporation --- or legal purposes so that it can continue
operating under its FCC license. Target ends up a wholly owned subsidiary o --- Acquirer.
Answer (A) is incorrect. The result o --- a statutory merger is that there is no separation
between Acquirer and Target, which needlessly puts Acquirer assets at risk --- or liabilities
associated with Target. Moreover, a standard or “ --- orward” statutory merger would result in
Target ceasing to exist, as it would be subsumed by Acquirer, and thus, this deal structure
does not achieve the goal o --- this transaction.
Answer (B) is incorrect. Stock --- or assets would not work at all. The broadcast licenses are
assets o --- the selling corporation. The attempt to trans --- er them, along with the other assets,
may well result in their --- or --- eiture back to the FCC.
Answer (D) is incorrect. The business objective can be achieved through various legal means.
148. Acquirer–Target, Part III.
Answer (B) is the best answer. Triangular mergers are utilized --- or a variety o --- reasons (to
preserve a valuable brand, to maintain a veil o --- liability between acquired and acquiring
companies, --- or other management or organizational reasons, and so on). Another reason is
to avoid a shareholder vote in the acquiring company. More accurately, there still must be
a shareholder vote, but the number o --- shareholders is one. The parent corporation votes the
shares o --- the acquisition subsidiary, all o --- which the parent corporation owns. Those shares
are voted by resolution o --- the board o --- directors o --- the parent corporation.
Answer (A) is not the best answer. Re-incorporating in a jurisdiction such as Delaware,
which has a small-scale merger statute, would not solve the immediate problem. Re-incor-
poration would also require a special shareholders’ meeting, solicitation o --- proxies, and
expenses at least similar to what the deal structure aims to avoid.
Answer (C) is not the best answer. Cash --- or stock, or cash --- or assets, does not require a
shareholder vote, but would require the parties to re-negotiate the deal, which they may not
wish to do. They have agreed on stock --- or stock and merger.
Answer (D) is not the best answer. A tender is a tool to push through deals where share-
holders and directors have divergent interests. Here, Target is a small startup, such that its
shareholders, directors, and o ---
icers are likely to be the same small group o — people. More- over, conducting a tender o —
er does not itsel — avoid the need — or Acquirer to hold a share- holder vote. Note: To e —
ect a triangular merger in a situation like this one, Acquirer — orms a subsidiary, Acquirer Acquisition Corp. Acquirer drops into that subsidiary su —
icient Acquirer shares (and/or cash) to make the acquisition. On the Acquirer side, the Acquirer board o — direc- tors votes (on behal — o — the sole shareholder o — the subsidiary) in — avor o — a reverse statutory merger o — Target into a subsidiary. On the Target side o — the transaction, there will still have to be a shareholders’ meeting and solicitation o — proxies.
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149. Acquirer–Target, Part IV.
Answer (B) is the best answer. A takeover bid, also known as a tender o ---
er or hostile ten- der o —
er, is an o —
er to purchase made directly to a company’s shareholders, — or cash or — or stock, without the intervention o — any intermediary, such as a stock exchange. The share- holders have rights to sell their stock without board approval. A publicly-traded acquirer will probably need to — ile SEC Schedule 14D and observe various rules and regulations about tender o —
ers. Answer (A) is incorrect. A proxy contest, or proxy — ight, is a principal means o — taking over a company by hostile means. It involves voting in a new slate o — directors who will approve the deal. It does not, however, avoid board approval altogether. Also, proxy contests entail delays
or regulatory — ilings that must be made with the SEC and — or the actual solicitation process. Answer (C) is not the best answer. Stock tender o —
ers entail delays and expense because the corporation must — ile with the SEC be — ore the actual solicitation process. It may also have to register additional stock — or public issuance. Answer (D) is incorrect. Shareholders have rights to sell shares and thus trans — er control o —
a corporation even i --- the directors oppose it.
150. Dinosaur Classi --- ied Board.
Answer (B) is the best answer. Early on the courts decided that, i --- the process is scripted
correctly (i.e., i --- independent directors approve the adoption), courts would review adoption
o --- takeover de --- enses utilizing duty o --- care and de --- erential business judgment rule concepts
rather than duty o --- loyalty analysis.
Answer (A) is incorrect. Board classi --- ication schemes are not permitted by all states. More-
over, the question is not whether the scheme is permitted in general, but whether this board’s
response to a perceived threat was somehow a breach o ---
iduciary duties. Answer (C) is not the best answer because boards are not strictly prohibited — rom installing entrenchment devices. Answer (D) is not the best answer because some states do not permit board classi — ication. Moreover, the question is not whether there is blanket permission or prohibition — or classi-
ied boards, but whether doing so was appropriate here. 151. Dinosaur Crown Jewel. Answer (D) is the best answer. When directors unilaterally adopt de — ensive mechanisms in response to an alleged threat to corporate control or policy, courts apply the Unocal test, established in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). The Unocal test requires that de — ensive mechanisms pass a test o — reasonableness and proportionality. Rea- sonableness means that the board must show that it had reasonable grounds to believe that a danger to corporate policy and e —
ectiveness existed. Proportionality means that the board must show that the de — ensive mechanism was reasonable in relation to the threat posed,
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meaning that at a minimum the action was not coercive or preclusive. When a corporate
sale is imminent, boards go into “Revlon mode,” named a --- ter the landmark decision Revlon,
Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), which held that direc-
tors have heightened --- iduciary obligations, called Revlon duties, to maximize stockholder
value by securing the highest sale price available. Here, Dinosaur’s board has likely acted
disproportionately with regard to a merger de --- ense mechanism that could hurt corporate
value, so Picken’s challenge will likely prevail in court.
Answer (A) is incorrect. The directors are not necessarily entitled to business judgment pro-
tection when responding to a potential proxy contest by insulating the board --- rom takeover
bids. There is an inherent con --- lict o --- interest when directors seek to maintain their jobs that
makes simple reliance on the business judgment rule inappropriate here.
Answer (B) is incorrect. Directors may be violating their duty o --- loyalty, even i --- they do not
stand to personally pro --- it --- rom the transaction, by being the purchaser. Simply desiring to
maintain board seats may be a loyalty concern. In any event, the appropriate test here is the
Unocal test, not the business judgment rule, and the --- acts presented by this answer choice do
not address this test’s elements.
Answer (C) is not the best answer. Shareholder approval is not strictly required by the appli-
cable tests --- or propriety o --- board de --- ensive measures to prevent hostile takeovers. While
shareholder approval can cleanse a director con --- lict-o --- -interest transaction, it may be di --- -
icult, expensive, untimely, and otherwise inappropriate to seek a shareholder vote on the de — ensive measures. 152. Dinosaur Duties. Answer (C) is the best answer. This language is quoted — rom the landmark Delaware opin- ion regarding board duties during takeovers, Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986). Answer (A) is incorrect. Directors are — orbidden — rom taking actions that are inconsistent with getting the best price — or stockholders at a sale. Not only are they not obligated to mount a takeover de — ense, but they can breach — iduciary duties by instituting disproportion- ate takeover de — enses. Answer (B) is incorrect. The business judgment rule, a relatively lenient standard, is replaced by the heightened Revlon duties regarding a potential takeover. Answer (D) is incorrect. The entire — airness standard is a higher standard that is not trig- gered unless a majority o — the directors approving the transaction were interested in its out- come. Directors can be — ound to be interested i — they “appear on both sides o — a transaction [or] expect to derive any personal — inancial bene — it — rom it in the sense o — sel — -dealing, as opposed to a bene — it which devolves upon the corporation or all stockholders generally.” Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). Once the entire — airness standard is trig- gered, the corporate board has the burden to demonstrate that the transaction was inher- ently — air to the shareholders, and it does this by demonstrating both — air dealing (i.e.,
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process) and --- air price (i.e., substance). This is a higher standard that does not apply here
because no --- acts suggest that any directors (much less a majority o --- them) stand on both
sides o --- this proposed transaction.
153. Dinosaur Equals.
Answer (B) is the best answer. The merger-o --- -equals situation was excluded --- rom the Revlon
holding by Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1989). In this
instance, Time was permitted to say “just say no” to a clearly superior bid by Paramount
in --- avor o --- its merger o --- equals (MOEs) with Warner Communications. Time pointed to
the care --- ully constructed makeup o --- the prospective Time-Warner Co., the CEO succession
plan, and the necessity o --- permitting the Time board o --- directors to choose the “partner-
ship” that would best preserve the unique “Time culture.” The Delaware court pointed out
that, in a true merger o --- equals, the target company is not “ --- or sale.” Because breakup or sale
o --- the company is not in the works, or even remotely likely, and, a --- ter the transaction, a pool
o --- disaggregated shareholders will still own the new company, Revlon does not apply.
Answer (A) is not the best answer because directors are not protected by the business judg-
ment rule in the merger context, per Unocal and Revlon. It is more appropriate to say that
the merger-o --- -equals situation exempts this particular merger situation --- rom Revlon duties.
Answer (C) is incorrect because Paramount Communications, 571 A.2d 1140, modi --- ied the
Revlon rule in the merger-o --- -equals context, such as this one. Directors are permitted to
engage in a merger o --- equals even where doing so does not necessarily generate the highest
value --- or stockholders.
Answer (D) is incorrect. The entire --- airness standard does not apply to mergers unless a
majority o --- directors are on both sides o --- the transactions (e.g., where directors o --- the target
corporation are shareholders o --- the acquiring corporation). Moreover, deal protections are
not presumptively problematic. In --- act, deal protections can be necessary to secure the high-
est value --- or stockholders.
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Insider Trading
154. Inside In --- ormation.
Answer (C) is the best answer. Insider trading may be de --- ined, roughly, as trading or tipping
others to trade, committed by someone in a --- iduciary or similar relationship o --- trust and
con --- idence, while in possession o --- material nonpublic in --- ormation. The Securities Exchange
Act o --- 1934, pursuant to which the SEC has adopted Rule 10b-5, provides --- or exclusive sub-
ject matter jurisdiction in the --- ederal courts. Many states have their own securities acts,
known as “blue sky laws.” Blue sky laws typically contain a statutory provision that, by and
large, tracks SEC Rule 10b-5. A disgruntled shareholder or investor could sue an insider
under those statutory provisions as well. These shareholders have the added advantage that
the statute directs the court to award reasonable attorneys’ --- ees to the prevailing plainti ---
. Additionally, some courts have held that when a director is in possession o — knowledge con- stituting “special — acts,” the director owes a duty directly to shareholders either to disclose the “special — acts” or to re — rain — rom trading. “Special — acts” are not precisely de — ined but are thought to include episodic evolutions in the corporation’s li — e (a merger, sale o — assets, liq- uidation, etc.). A — avorable — orthcoming earnings report or new contract probably does not constitute special — acts. Other courts have expanded the “special — acts doctrine,” holding that special — acts are any material — acts likely to have an e —
ect on the price o — a security. Directors with knowledge o — special — acts, so de — ined, owe a duty not to buy or sell — rom their corpora- tion’s shareholders unless, o — course, they disclosed their inside in — ormation. See, e.g., Bai- ley v. Vaughan, 359 S.E.2d 599 (W. Va. 1987) (holding liable bank director who bought up shares while knowing that bank would be sold to larger bank); Van Schaack Holdings, Ltd. v. Van Schaack, 867 P.2d 892 (Colo. 1994) (director o —
amily — arming corporation bought up shares knowing new Denver airport would be located on corporation’s — armland). Here, it seems that Caron was likely aware o — Floatman’s interest in acquiring the bank and took advantage o — the in — ormation in dealing with the sisters and other shareholders. This likely constitutes insider trading and a breach o —
iduciary duty. Answer (A) is incorrect because it ignores the viability o — a lawsuit — or breach o —
iduciary duty. Answer (B) is incorrect because it ignores the viability o — a lawsuit — or insider trading under Rule 10b-5. Answer (D) is incorrect because common law — raud claims do not work well under these circumstances. Insider trading claims are claims o — silence, while common-law — raud deals mostly with misrepresentation and hal — -truths. Fraud requires — ace-to- — ace dealings (privity)
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which, while present here, would not be present in transactions taking place through a bro-
ker or over a stock exchange.
155. Good News Not Shared.
Answer (A) is the best answer. See SEC v. Texas Gul --- Sulphur Co., 401 F.2d 833 (2d Cir. 1968).
Insider trading has become one o --- the most prevalent white collar crimes o --- this century.
Until recently, the insider trading prohibition under the --- ederal securities laws has been a
matter wholly o --- judge-made law. Rule 10b-5 is an opaque catch-all anti --- raud rule which
also governs misrepresentations, hal --- -truths, and omissions in the purchase or sale o --- any
security (not just those issued by publicly-held companies). Insider trading cases are merely
a subset o --- a subset (cases o --- silence or omission) o --- the broad array o --- cases Rule 10b-5 gov-
erns. The text o --- the rule itsel --- o ---
ers little, i — any, guidance. Insiders, though, are those “who by virtue o — a — iduciary or similar relationship o — trust and con — idence” come into possession o — inside in — ormation. Chiarella v. United States, 445 U.S. 222 (1980). Generally, an insider violates the law when they act on material in — ormation. A — act is a material — act i — the “rea- sonable investor would consider it important in the making o — his or her decision” — not necessarily that the investor would have acted in a di —
erent manner had they had the in — or- mation. Materiality also is to be judged in light o — the “total mix” o — in — ormation available about the issuer and the developments at issue. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976). Here, it seems almost a — oregone conclusion that the presence o — the largest gas — ield in North America is material in — ormation. Thus, the discovery o — the gas — ield is inside in — ormation. Likewise, Twitty and Owen are insiders because they learned about the in — ormation by virtue o — a position o — trust and con — idence. Similarly, Robbin had a position o — trust and con — idence. Thus, all o — their purchases o — shares be — ore the in — ormation was widely disseminated likely constitutes illegal insider trading. Likewise, Husky likely traded too soon, doing so be — ore the in — ormation had been disclosed and e —
ectively disseminated. Answer (B) is likely incorrect because Huskey traded too soon, that is, be — ore the in — orma- tion had been disclosed and e —
ectively disseminated. Answer (C) is incorrect because Twitty and Owen are likely insiders and violated the law. Answer (D) is incorrect. Although a respectable school o — thought exists, mostly among economists, that insider trading should be permitted — or reasons such as those enumerated in Answer (D), this is inconsistent with case law interpreting Rule 10b-5 to prohibit the practice. 156. Misappropriation. Answer (C) is the best answer. This is the — amous case o — Chiarella v. United States, 445 U.S. 222 (1980), in which the court noted that insider trading requires more than mere access; it requires “a relationship giving access . . . to in — ormation intended to be available only — or a corporate purpose.” Those kinds o — relationships, the Court noted, would be — iduciary or similar relationships o — trust and con — idence. But in United States v. O’Hagan, 521 U.S. 642 (1997), the Court recognized an expanded “misappropriation theory.” The Court explained that Rule 10b-5 protects all buyers and sellers o — shares, not any particular or identi — iable
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buyer or seller. “The misappropriation theory comports with § 10(b)’s language, which
requires deception ‘in connection with the purchase or sale o --- any security,’ not deception o ---
an identi --- iable purchaser or seller.” Id. at 658.
Answer (A) is incorrect because the misappropriation theory addresses Vincent’s conduct
within the context o --- insider trading.
Answer (B) is incorrect because one can engage in insider trading, even i --- one is not an
insider.
Answer (D) is incorrect. Although this answer summarizes the outcome under Chiarella, it
does not re --- lect the Court’s ruling in O’Hagan.
157. Lucky Overhearing.
Answer (D) is the best answer. This question is based on SEC v. Switzer, 590 F. Supp. 756
(W.D. Okla. 1984), in which the SEC charged then University o --- Oklahoma (and later Dal-
las Cowboys) head --- ootball coach Barry Switzer with insider trading. Coach Switzer won
because his attorney read and applied the U.S. Supreme Court’s opinion in Dirks v. SEC,
463 U.S. 646 (1983). In Dirks, the Court recognized tipping as an o ---
ense, but only when it is consistent with, and derivative o — , an insider or temporary insider’s breach o — his — iduciary or similar duty o — trust and con — idence. In turn, the Court noted, the insider breaches his duty when “(1) he receives a bene — it or expects to receive a bene — it, loosely de — ined, — rom commu- nication o — the in — ormation; and . . . (2) the insider knows, or in the exercise o — some care, should know, that the communication o — the in — ormation will likely result in trading or the tipping o — others to trade.” The “bene — it” may be increased in — luence or prestige with one with whom the insider wishes to curry — avor, or reciprocity, or continued love and a —
ection
rom a — amily member. Dirks, the de — endant, a securities analyst, received material, non- public in — ormation about a massive — raud within Equity Funding, Inc. Because the tip came
rom a — ormer executive who had been dismissed (not an insider source) and whose motive was revenge (not receipt o — a bene — it), the SEC — ailed to obtain an injunction. The Supreme Court circumscribed tippee–tipper liability care — ully because one person’s tip is another’s diligent research. Securities analysts search — ar and wide — or tidbits o — in — ormation, which they piece together into a mosaic about a company or an industry. That process, which occurs thousands o — times each day, promotes market e —
iciency. It is an activity we wish to encourage. An overly broad and ill-de — ined law o — tippee–tipper trading would inhibit legiti- mate analyst activity and market research. The Dirks Court also eschewed broad equality o —
in --- ormation as a policy goal --- or the law o --- insider trading. Some individuals (analysts, New
York-based traders, etc.) o --- ten will have superior in --- ormation about securities. The law o ---
insider trading is not meant to level that playing --- ield. In the instant case, Local CEO reaped
no bene --- it and violated no --- iduciary duty in conversing with his spouse. He also did not
knowingly communicate the in --- ormation to Coach Olsen. The coach is merely a --- ortuitous
eavesdropper.
Answer (A) is incorrect because Coach Olsen is not an insider, and thus, is not a tipper.
Likewise, the local auto dealer is not a tippee.
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Answer (B) is incorrect because Coach Olsen has no liability.
Answer (C) is incorrect. The in --- ormation is about the market --- or the company shares rather
than classic inside in --- ormation about the company itsel --- , its assets, and its earnings. The
courts have seldom explored the di ---
erences, but it is clear that they regard market in — orma- tion involving a change o — control (at XYZ here) as visiting upon the possessor o — that in — or- mation a duty to “abstain or disclose.”
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Practice Final Exam
158. Capital Structure.
Answer (C) is the best answer. The reason --- or holding some debt is that interest on debt is
deductible (an expense) --- or the corporation. By contrast, payment with respect to shares is
taxed once as pro --- it --- or the corporation and again as dividend income --- or the sharehold-
ers, albeit now only at a modest 15 percent rate. Moreover, upon any --- orced liquidation,
shareholders will be able to stand elbow to elbow with the unsecured creditors as to the
contribution that has been structured as a loan, as long as the shareholders have not “thinly
capitalized” the corporation.
Though it could su ---
ice as well, Answer (A) is not the best choice. When all participants in the venture are making equal contributions, an alternative to the capital structure described in Answer (C) above is to have the corporation issue only common stock. This alternative has the virtue o — simplicity. Answer (B) is incorrect. There is neither now nor in the — oreseeable — uture any need to authorize convertible participating or any other kind o — pre — erred stock. Answer (D) is incorrect — or similar reasons. The business plan contemplates only modest expansion, i — at all. 159. Activist Shareholders. Answer (C) is the best answer. SEC Rule 14a-8 allows the activist shareholders to utilize management’s annual proxy solicitation to present a proposed resolution and supporting statement to Northern Pines’s remaining shareholders. While not without di —
iculties, the rule is a low-cost way to achieve some o — their aims. Answer (A) is incorrect. In all probability, the directors would assert, and the court would accept, a business judgment rule de — ense to the action. It is the directors, and not the share- holders, who manage the corporation’s business and a —
airs, including the methods by which the corporation harvests its timber. Answer (B) is incorrect. “Enlisting support” would constitute a solicitation under the SEC’s rules, which de — ine solicitation very broadly. Because no proxy statement had been — iled with the SEC, it would also be an illegal solicitation which a court would quickly enjoin.
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Answer (D) is incorrect. A --- ull- --- ledged proxy contest would be exceedingly expensive. Bet-
ter to try to use a Rule 14a-8 proposal to begin to get their views across and perhaps begin to
persuade the directors.
160. Promoter Liability.
Answer (D) is the best answer. To avoid liability, an agent --- or a corporation to be --- ormed
must do all three things: indicate the non-existence o --- her principal; indicate her represen-
tative capacity; and provide --- or a novation in the --- uture when the corporation does come
into existence.
Answer (A) is incorrect. An agent warrants the existence o --- her principal. She can be held
liable hersel ---
or breach o — that warranty i — the principal does not exist, but her correct action in this regard alone is not enough to escape liability. Answer (B) is incorrect. Courts have held that i — a promoter or corporate o —
icial signs “XYZ Co., Personal Name,” both parties will be bound. The person must recite a title (e.g., Presi- dent, Promoter) or use other words indicating representative capacity (e.g., “by”). However, indication o — representative capacity alone, while necessary, is insu —
icient to get Frank “o —
the hook.”
Answer (C) is incorrect. A novation where the company assumes liability --- rom Frank is
necessary but not su ---
icient to avoid his having personal liability. 161. LLC In — ormality. Answer (A) is the best answer. Corporate law has a doctrine known as corporate disregard, or piercing the corporate veil. One ground — or piercing is intermixture o — the a —
airs o — the owner and o — the corporation. Failure to observe corporate — ormalities is evidence o — inter- mixture o — a —
airs. Answer (B) is incorrect because the question involves a limited liability company, which contemplates more in — ormal dealing and less strict observance o —
ormalities than do corpo- rations and corporate legal doctrines. Answer (C) is incorrect. There is a requirement — or maintaining books and records, but its violation does not necessarily lead to loss o — limited liability on the owners’ part. Answer (D) is incorrect. Limited liability entities (corporations, LLCs) engage in ultrahaz- ardous (blasting, crop dusting, etc.) activities all the time. The only requirement is that they have capital (owners’ contributions and liability insurance) su —
icient to cover the — oreseeable risk o — the venture. 162. M&A De — enses. Answer (B) is the best answer. The crown jewel option is a rare de — ensive strategy, and here it would seem to be an extreme and disproportionate response to such vague concerns about a hostile takeover.
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Answer (A) is incorrect. Staggering the board into three, with each class to be elected --- or a
three-year term, is a common de --- ensive strategy.
Answer (C) is incorrect. Requiring that directors may be removed only --- or cause is a com-
mon de --- ense strategy.
Answer (D) is incorrect. Limiting the ability o --- shareholders to call special shareholders’
meetings is a common de --- ense strategy.
163. Partnership Pro --- essional Responsibility.
Answer (A) is the best answer. Many partnership agreements provide that the partners may
by majority or super majority vote to expel a partner, with or without cause. Such clauses
are known as “guillotine clauses.” They are common in law --- irms as well as other partner-
ship agreements. Several celebrated cases involve law --- irms’ expulsion o --- partners because o ---
political activities or --- ailure to produce enough business.
Answer (B) is incorrect. There is no requirement --- or cause in many partnership agreements.
A simple vote to expel is su ---
icient. Answer (C) is incorrect. The tension that arises is that partners also are — iduciaries one to another. But, absent sel — -dealing or bad — aith, courts have sided with the consensual nature o — a partnership. Partners have no obligation to remain partners. Partners are bound together by shared values and expectations as to e —
ort, collegiality, and pro — essionalism. I —
a partner does not measure up to these mutual expectations, the partners should be able
to exclude her --- rom the partnership without liability --- or wrong --- ul dissolution or breach o ---
iduciary duty. Answer (D) is incorrect. In anything but an extreme case o — wrongdoing, bad — aith, or the like, courts uphold expulsion o — a partner i — the expulsion has been pursuant to the express terms o — the partnership agreement. While courts have read rules o — pro — essional respon- sibility into attorney employment agreements, a law — irm partner is not an employee. The partner-to-partner relationship has at its core trust and con — idence in one’s — ellow partners. 164. Family Business. Answer (B) is the best answer. Many MBCA courts have now held that, in a closely-held corporation, the participants and the corporation all owe duties one to another, akin to partners in a partnership, and not just to the corporation. This is known as the Donahue principle, a — ter Donahue v. Rodd Electrotype Co., 328 N.E.2d 505 (Mass. 1975). The remedial implication is that a shareholder such as Olivia may obtain “me, too” relie — . She may be able to obtain the same perks, or the monetary equivalent, as her brother Nate enjoys. Answer (A) is incorrect. A traditional derivative suit results only in a payback to the cor- porate treasury. It would leave Olivia in the same position as be — ore the lawsuit. In addition, it may just harden Nate’s resolve and rend asunder any relationship they may have had as brother and sister.
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Answer (C) is incorrect. There are no grounds --- or such a suit. There exists neither mislead-
ing disclosure or nondisclosure nor a purchase or sale o --- securities.
Answer (D) is incorrect. All Olivia wants is some return on her shares and some o --- the same
bene --- its her brother enjoys. A suit --- or involuntary dissolution would be overkill.
165. Family Con --- lict.
Answer (A) is the best answer. MBCA, chapter 8, subchapter F, addresses directors’ con --- lict-
ing interest transactions. The subchapter attempts to achieve two ends. First is the adoption
o --- a relatively narrow and all-encompassing de --- inition o --- which transactions involve “con-
licting interests.” Second is an “unassailable sa — e harbor” — or transactions that do involve a con — lict but are approved by as — ew as one or two disinterested directors given — ull disclo- sure. A transaction merits special treatment i — “the director knows at the time o — commit- ment that he or a related person is a party to the transaction or has a bene — icial interest in or is so closely linked to the transaction and o — such — inancial signi — icance to the director or related person that the interest would reasonably be expected to exert an in — luence on the director’s judgment i — he were called upon to vote on the transaction.” MBCA § 8.60. Note that the director must “know” (not “should know”) and that the transaction must be sig- ni — icant — inancially, and not merely socially or — amilially. For purposes o — the de — inition, the subde — inition “related party” is narrowly drawn. It excludes — irst cousins: “Related person o — a director” means “the spouse (or a parent or sibling thereo — ) o — the director, or a child, grandchild, sibling, parent (or spouse o — any thereo — ) o — the director, or any individual hav- ing the same home as the director, or a trust or estate o — which an individual speci — ied in this clause is a substantial bene — iciary.” MBCA § 8.60. Here, although as a matter o — common sense we might believe there is a con — lict, Mott is not a “related person” o — Sole, and there-
ore, this is no con — lict o — interest as de — ined under the MBCA. Answer (B) is incorrect because it stretches the con — lict-o — -interest rule too — ar. Answer (C) is incorrect because this situation is, by de — inition, not a con — lict o — interest. Thus, there is nothing — or the board to resolve. Answer (D) is incorrect because, as a matter o — law, this is not a con — lict o — interest. But even i — it were, that alone does not make the transaction impermissible. Note: The outcome would be the same under Delaware law, but — or a subtly di —
erent reason. In — act, the answer is more certain. DGCL § 144 addresses con — licts o — interest but, by its de — inition, only — ocuses on the directors, not on related persons o — directors, — or purposes o —
de --- ining con --- licts o --- interest.
166. Stealing In --- ormation.
Answer (D) is the best answer. Horatio does not have a --- iduciary or similar relationship o ---
trust or con --- idence. He occupies no position at all. He was terminated months ago. Hence,
he is a thie --- .
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Answer (A) is incorrect because the de --- inition o --- “insider” only includes directors, o ---
icers, 10-percent (or more) stockholders, or anyone who possesses inside in — ormation because o —
their relationship with the company or a director, o ---
icer, or major stockholder. Answer (B) is incorrect because a “temporary insider” is someone who has entered into a special con — idential relationship with the company and thus is given access to con — idential in — ormation. Answer (C) is incorrect because a “tippee” is someone who uses in — ormation that has been provided to them by an insider or a temporary insider. There was no tipping. Horatio simply stole in — ormation, in violation o — a legally cognizable duty. 167. Dividend Issuance. Answer (B) is the best answer. This question requires you to apply a statutory test — or the legality o — distributions (a cash dividend is one type o — distribution). Here, payment o —
the dividend would cause a cash --- low squeeze (i --- , indeed, the --- unds could be borrowed to
make the distribution). The corporation would be le --- t with little or no cash and $300,000 in
accounts payable. This makes Pear insolvent “currently” in the equity sense, even though it
is not insolvent in a balance sheet sense.
Answer (A) is incorrect. It uses terminology (“impairment o --- capital”) which has become
obsolete since the demise o --- the old “legal capital rules.”
Answer (C) is incorrect. Giving e ---
ect to the dividend, Pear will still be solvent in the bal- ance sheet sense ($500,000 in assets and $300,000 in liabilities). The di —
iculty lies with sol- vency in the equity sense. Answer (D) is incorrect. While it is true that Pear does not pass the equity solvency test — or this distribution, it does pass the balance sheet solvency test. 168. Partridge Proxies. Answer (B) is the best answer. The hallmark o — a voting trust is a complete separation o —
voting --- rom the other attributes o --- share ownership. Voting trusts are sometimes used to
impose stability upon a corporation emerging --- rom bankruptcy or beset by arguments
among shareholders.
Answer (A) is incorrect. I --- the siblings --- ight all o --- the time, they are likely to --- ight over this
alternative. In addition, at age 23, even the older sibling seems very young to be entrusted
with all o --- the --- amily’s power within the corporation.
Answer (C) is incorrect. A pooling arrangement would require that the parties thereto --- irst
attempt to reach an agreement o --- sorts ( --- our siblings would have to agree), which they have
shown themselves incapable o --- doing. Moreover, rule by majority rather than consensus is
likely to exacerbate resentments and hard --- eelings that build up over time.
Answer (D) is incorrect. Achieving unanimity would be even more di ---
icult than achieving the majority vote suggested in Answer (C).
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169. Ultra Vires.
Answer (C) is the best answer. The MBCA provides that the de --- ense o --- ultra vires (beyond
the purpose or powers o --- the corporation) may be raised only in a proceeding brought by a
shareholder, and only i --- the court --- inds that it is equitable to allow the de --- ense.
Answer (A) is incorrect. LCI has not been enriched; it has only evaded a loss.
Answer (B) is incorrect. The MBCA does contain broad grants o --- implied powers (e.g., “to
do all things necessary or convenient to carry out its business and a ---
airs,” MBCA § 3.02), but to say that — urnishing plumbing supplies is implied by the purpose o — “sales o — lumber and plywood products” is too much o — a stretch. Answer (D) is incorrect. The contract has not been partially per — ormed here. Be — ore the ultra vires statutes were enacted, court decisions held that ultra vires could be raised only in cases o — executory contracts (where neither side has per — ormed in whole or in part). Here, however, the contract was executory. 170. Entity Choice — Gol — Course. Answer (C) is the best answer. The LLC would protect the owners — rom large tort or contract liabilities. It would also allow “ — low through” o — startup losses to the members, who could uti- lize the losses to shelter income — rom other sources. Last o — all, unlike a limited partnership, LLC members could enjoy those bene — its while also participating in decision-making (e.g., clubhouse and gol — course design). They would not lose their limited liability by doing so. Answer (A) is not the best answer. This LLP — orm o — entity was designed with accounting and law — irms in mind. While the entrepreneurs are gol — pro — essionals, they are not the sort o — pro — essionals whose ethics rules require them not to — orm an LLC. This is not the most suitable choice — or this business. Answer (B) is not the best answer. The corporate — orm — acilitates outside investment, but that — unding source does not seem necessary based on these — acts. Answer (D) is incorrect. A general partnership will leave all partners exposed to joint and several liability — or partnership contracts and torts. This venture has su —
icient liability to justi — y using a limited liability vehicle like the LLC. 171. Takeover De — enses. Answer (C) is the best answer. This is the Delaware Unocal standard, a — ter Unocal Corp. v. Mesa Petroleum, 493 A.2d 946 (Del. 1985). In addition to satis — ying other elements o — the business judgment rule, in adopting takeover de — enses, a target corporation’s board o — direc- tors must conduct an investigation and satis — y itsel — that a credible threat exists to the cor- poration’s policies or way o — doing business. Then any de — ense adopted must be reasonable (proportionate) in relation to the threat posed. Answer (A) is incorrect. As a — oresaid, courts have evolved a more demanding version o — the business judgment rule applicable to adoption o — takeover de — enses.
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Answer (B) is incorrect because is incomplete. The directors must investigate and ensure that
any de --- ense adopted is reasonable in relation to the threat posed, as stated in Answer (C).
Answer (D) is incorrect. An irreversible (preclusive) de --- ense is per se unreasonable.
172. Partnership Contract Liability.
Answer (C) is the best answer. I --- Betty is unhappy with how this partnership is run, she
must dissolve it to end her general liability.
Answer (A) is incorrect. In a partnership, a majority vote would be necessary to impose a
valid restriction on a partner’s authority. A majority is 50 percent plus one. In a partnership
o --- two persons, 50 percent plus one (a majority) is two. Betty cannot unilaterally restrict
Abe’s purchasing authority on behal --- o --- their partnership.
Answer (B) is incorrect because there is no legal mechanism --- or a general partner to avoid
partnership liability in this way. The parties could --- orm a di ---
erent sort o — company, but that is not contemplated by this answer choice. Answer (D) is incorrect. A suit — or breach o —
iduciary duty against Abe may or may not stop or deter him. I — Abe has — ew assets, a suit may have little e —
ect. The amounts in question are likely not enough to merit a lawsuit regardless. In small partnerships, in case o — deadlock (e.g., one versus one, two versus two), the only recourse may be to dissolve the partnership. 173. Settling a Derivative Action. Answer (B) is correct. Among the other procedural sa — eguards applicable to derivative actions, these lawsuits may only be settled with court approval. See MBCA § 7.45; Del. Ch. Ct. R. 23.1(c). Remember, when pursuing a derivative lawsuit, a shareholder does so in the name o — the corporation and acts — or the bene — it o — the corporation and all other sharehold- ers. Thus, the court has a special responsibility to ensure that the settlement is — air to the corporation. Answer (A) is incorrect because the parties may not settle without the court’s approval. Answer (C) is incorrect because derivative suits can be settled and resolved without going to trial. Answer (D) is incorrect because the court must approve the settlement. 174. Pepsi-Cola. Answer (C) is the best answer. This is the — amous Delaware case o — Guth v. Lo — t, Inc., 5 A.2d 503 (Del. 1939). In the opinion, the court “layered” onto the interest and expectancy test a “line o — business” test. An opportunity is a corporate opportunity i — (1) it is in the corpora- tion’s line o — business, broadly de — ined; (2) it is in a line o — business in which the corporation might reasonably be expected to engage; or (3) it is in a line o — business in which the director or o —
icer knows the corporation has intentions o — engaging. Note the extreme remedy when a corporate o —
icial is — ound to have breached his or her duty o — loyalty. Besides a constructive
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trust on the opportunity, courts also o --- ten require disgorgement o --- compensation received
by the corporate o ---
icial during the period in which she is — ound to have been in breach o —
her --- iduciary duty.
Answer (A) is incorrect because the court looked beyond the “interest or expectancy” test to
recognize a broader de --- inition o --- corporate opportunity.
Answer (B) is incorrect because the remedy is too narrow; everything Guth received as a
result o --- the diversion belongs to Lo --- t.
Answer (D) is incorrect. Accepting this would exalt --- orm over substance, and a court o ---
equity will look beyond the mere labeling.
175. Share Trans --- er Restrictions.
Answer (D) is the best answer. To preserve shareholders’ proportionate interests in the cor-
poration several steps are necessary. A share trans --- er restriction would limit the ability o --- a
shareholder to sell out to an “outsider” without giving the remaining shareholders an option
(or right o ---
irst re — usal) on the selling shareholder’s shares. Such an agreement would not, however, govern issuances o — new shares by the corporation. Answer (A) is incorrect. A buy–sell agreement restricts the existing shareholders’ right to sell their shares to third parties. But this does not itsel — address the issuance o — new shares. Answer (B) is incorrect. Preemptive rights govern issuance o — new shares, requiring that the corporation give each shareholder the right to preserve her proportionate ownership and control (voting) interest. Yet, standing alone, preemptive rights are not su —
icient because they do not prevent one shareholder — rom selling her shares to a third party. Answer (C) is incorrect. Under the MBCA, in the articles o — incorporation, the corpora- tion must “opt in to” preemptive rights. Under MBCA § 6.30, however, even a corporation that “opts in” will — ind a number o — exceptions to the statutory provisions (e.g., issuances to directors, o —
icers, or employees o — shares sold — or other than money). A cautious practitio- ner might negate some or all o — those exceptions in the corporation’s articles. Even so, this does not — orgo the need — or a buy–sell agreement and preemptive rights. 176. Bad Director. Answer (B) is the best answer. The MBCA provides — or judicial removal o — a director. Answer (B) tracks the language o — the provision. A stated reason — or the adoption was the di —
iculty o — removing a badly acting director who had been elected by means o — cumulative voting. Answer (A) is incorrect. A director elected cumulatively will not be removed by majority vote i — the number o — votes cast against his removal would have been su —
icient to elect him in the — irst place. This common provision would give Xavier power to block his removal by the normal process (majority vote).
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Answer (C) is incorrect. Under the MBCA, you may now go to court to seek the removal o ---
a badly acting director who had been elected by means o --- cumulative voting.
Answer (D) is incorrect. A director elected cumulatively will not be removed by majority
vote i --- the number o --- votes cast against his removal would have been su ---
icient to elect him in the — irst place. Whether the shareholders are evaluating the director under cause or not does not change this analysis. This common provision would give Xavier power to block his removal by the normal process (majority vote). 177. Mistakes in Formation. Answer (B) is the best answer. MBCA § 2.04 provides that “[a]ll persons purporting to act as or on behal — o — a corporation, knowing there was no incorporation under this Act, are jointly and severally liable.” Georgia and Hector thought that the corporation did exist; they had no knowledge to the contrary. Answer (A) is incorrect. Courts have held that the above-quoted MBCA and predecessor provisions abolish the common law de — acto incorporation doctrine. Answer (C) is incorrect. The lack-o — -knowledge de — ense would be stronger and more certain than the more nebulous de — ense that Georgia and Hector never “purported to act.” Answer (D) is incorrect. Although corporations are now either de jure or non-existent, with no middle ground such as de — acto existence, Georgia and Hector lacked knowledge that the corporation had not been — ormed, and that provides a de — ense — or them under the MBCA. 178. Poison Pill. Answer (B) is the best answer. The answer states the correct triage when a colorable deriva- tive suit has been — iled against corporate directors: — orm an SLC, sta —
it with “expansion directors,” and hire reputable independent counsel — or the committee. Answer (A) is incorrect because it is incomplete. The SLC will need independent counsel to aid it in the conduct o — its investigation and to research and apply the applicable law. Answer (C) is incorrect because it leaves too much to chance (i.e., in the normal discovery process). Also, the question o — whether a derivative suit should proceed is not strictly just a matter o — law. The corporation may choose not to stand on legal rights it has because doing so would not be in the corporation’s best overall interests. That decision is to be made in the
irst instance by the directors or the SLC, and not by a court. Answer (D) is incorrect. A “reasonable doubt” exists as to whether the directors, had they acted on any hypothetical demand, would have been entitled to business judgment rule pro- tection. The directors’ receipt o — consulting — ees could lead to a — inding that they are not — ree o — con — licts o — interest or that they are not dominated by a controlling shareholder. They thus would not be entitled to business judgment rule protection — or the decision they made with respect to the hypothetical demand.
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179. Can’t Take It On.
Answer (C) is the best answer. In some jurisdictions, including Delaware, lack o --- where-
withal means that the opportunity is not a corporate opportunity. See, e.g., Broz v. Cellular
In --- ormation Systems, Inc., 673 A.2d 148, 155 (Del. 1996); Schreiber v. Bryan, 396 A.2d 512,
519 (Del. Ch. 1978).
Answer (A) is incorrect. There is no evidence Hemlock has ever been in or considered the
recycling business.
Answer (B) is incorrect. Hemlock never had an “interest or expectancy” as courts use the term.
Answer (D) is incorrect. Celeste telephoned acquaintances within the industry and con-
sulted a banker about --- inancing. She used corporate resources in doing those things.
180. Shareholder Rati --- ication.
Answer (C) is the best answer. The limits o --- shareholder rati --- ication are said to be “ --- raud,
illegality, or a gi --- t or wasting o --- corporate assets.” Within those limits, shareholders may,
subject to --- ull and --- air disclosure, vote to rati --- y violations by directors or o ---
icers o — the duty o — care or the duty o — loyalty. Answer (D) is incorrect. Such a rati — ication need not be by unanimous vote. Answer (B) is incorrect. Such blanket rati — ications are worthless because they are not made pursuant to — ull and — air disclosure, which must include all the bad news. Answer (A) is incorrect, although it may be a close question. “Waste” is de — ined as an exchange in which no reasonable person could say that the corporation received the rough equivalent o — what it gave up in the transaction or endeavor. Undoubtedly, someone could be
ound to testi — y that what Sam and David did was a gamble, indeed a very unwise gamble, but that some prospect existed, however small, that the corporation might receive a return at least equivalent to its investment. 181. Film Projects. Answer (A) is the best answer. Directors may compete with the corporation on whose board they sit, but o — ten they will have to proceed care — ully. The rule may be stated to be that a director may not engage in “bad — aith competition” with the corporation on whose board she sits. Bad — aith competition would include acts such as disparagement (commercial de — amation), “passing o —
” (using the name o — or association with the corporation to sell products or services), and use o — customer lists, trade secrets, and other items o — proprietary in — ormation. Also, i — the incorporating jurisdiction has adopted the popular line-o — -busi- ness de — inition o — a corporate opportunity, the director will have to seek board permission to compete i — the director was not already in the business. Here, however, Walter was in the
ilmmaking business be — ore he joined Sterling, and Sterling never sought “Mutants” and it turned down “Polish.”
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Answer (B) is incorrect because the mere --- act that Walter is producing other projects does
not impermissibly place him in competition with Sterling, especially when Sterling declined
one o --- the projects.
Answer (C) is incorrect because it would be a stretch --- or Sterling to insist on pro --- its in a
project it rejected.
Answer (D) is incorrect because it states the rule too broadly and ignores the notion o ---
idu- ciary duty. 182. Director Protections. Answer (C) is the best answer. Directors’ protection has — our elements (“the — our legged stool”): indemni — ication, insurance, opting out o — duty o — care liability, and a contract guar- anteeing to an individual director that the — irst three elements will stay in place despite a change o — control, a — alling out with the other directors, and so on. Answer (A) is incorrect. Stock ownership alone provides no direct, and only a modicum o —
indirect, protection.
Answer (B) is incorrect. Insurance may not be renewed in some --- uture year. It may not be
obtainable at all. Even i --- it is obtained and renewed, insurance alone does not a ---
ord com- plete protection because o — deductibles, policy exclusions, and the like. Answer (D) is incorrect. It, too, does not go — ar enough. Provisions implementing the authority granted by the statute, which by and large are enabling only and not mandatory, can always be amended or revoked by a subsequent board majority. 183. Martha’s Troubles. Answer (C) is the best answer. I — anything, her actions are ordinary the — t, which busy state court prosecutors may be unwilling to pursue. Answer (A) is incorrect. Martha is neither a classic insider (director, o —
icer) nor a tempo- rary insider (attorney, accountant, consultant, banker) to whom material non-public in — or- mation may be entrusted, but only — or corporate purposes. Answer (B) is incorrect. Martha would only be a tippee i — Peter Finch were a tipper. He would be a tipper only i — he breached his — iduciary duty in providing the in — ormation to Mar- tha. He would have breached his — iduciary duty i — he received some sort o — bene — it, broadly de — ined, — or providing the in — ormation to Martha. He neither provided the in — ormation nor breached any duty. Answer (D) is incorrect. The last category o — persons against whom the “disclose or abstain” rule is invoked comprises persons who — lat out steal (misappropriate) in — ormation, but they must do so in violation o — a — iduciary or similar duty to someone ( — ormer employer, law
irm). Martha violated no such duty when she purloined the ticker symbols — rom the Finch linen drawer.
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184. CHC Oppression.
Answer (D) is correct. The most drastic, and e ---
ective, close corporation remedy is a suit — or involuntary dissolution o — the corporation on oppression grounds. The evolving test in U.S. courts has been merely that the plainti —
minority shareholder has been denied his “reason- able expectations” (o — a job, o —
ringe bene — its, o — participation in governance). Answer (A) is incorrect. It re — ers to an older test o — oppression. It may be alleged in addition to “denial o — reasonable expectations” but today would not be the primary allegation. Answer (B) is incorrect. It re — ers to an older test o — oppression. It may be alleged in addition to “denial o — reasonable expectations” but today would not be the primary allegation. Answer (C) is incorrect. A derivative suit would only result in a payment back to the cor- poration. It may well leave Jack in a worse position, with brother Zach still in control and angrier than ever. 185. SOX. Answer (D) is the best answer. These are — ederal law remedies made available to/against publicly-held companies by the Sarbanes-Oxley Act o —
- A U.S. attorney might well seek to invoke these remedies as part o — a criminal prosecution. Answer (A) is incorrect. This remedy would lie, but in a state court proceeding — or breach o —
iduciary duty (or as a pendent claim in a civil suit in — ederal court). Answer (B) is incorrect. This classic remedy — or breach o —
iduciary duty would lie as well, but, again, in state court. Answer (C) is incorrect because it is incomplete. Because management has done this be — ore, a li — etime or similar ban — rom serving as a director or o —
icer o — a public company would be in order.
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Topic Question
Agency
Attribution o --- Liability (Contract) 8
Attribution o --- Liability (Tort) 4
Authority (Actual) 5
Authority (Apparent) 6
De --- inition 1
Duties Owed 9, 10
Employee v. Independent Contractor 2
Estoppel to Deny Agency 6
Exercise o --- Control 3
Formation 2, 3
Termination o --- Authority 11
Closely-Held Corporations
Actions by Written Consent 75
Quorum 79
Record Dates 80
Shareholder Agreements 81
Special Meetings 76, 83
Staggered Boards 82
Supermajority Requirements 78
Trans --- er Restrictions 175
Vote by Proxy 77, 84, 168
233
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Topic Question
Corporate Fiduciary Duty
Becoming Reasonably In --- ormed 114
Breach o --- Fiduciary Duty 110, 111
Business Judgment Rule 108, 119
Competition 130, 181
Con --- licts o --- Interest 124, 126, 165
Corporate Opportunity 128, 129, 174
De --- inition 106
Director Participation 113
Duty o --- Care 107, 118
Duty o --- Loyalty 122, 123
Entire Fairness 125
Exculpation 116, 182
Hostile Takeovers 120, 121
Independence 117
O ---
icer Fiduciary Duty 115 Oppression o — Minority Shareholders 184 Oversight 109, 112 Remedies 127, 185 Shareholder Rati — ication 180 Corporate Finance Authorized Stock 68 Capital Structure 70, 71, 72, 158 Common Stock 67 Distributions and Dividends 69, 74, 167 Trans — ers 73
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Topic Question
Corporate Governance
Attorney Pro --- essional Responsibility 163
Board Meetings 87, 104, 105
Board o --- Directors 88
Committees 89, 94, 95
Directors 99, 100, 176
Hostile Takeovers 103
Indemni --- ication 102
O ---
icers 98, 101 Removal o — Directors 90 Removal o — O —
icers 91 Shareholder Agreements 92, 93 Shareholder Proposals 96, 97 Special Meetings 85 Ultra Vires Actions 169 Vicarious Liability 86 Corporate Incorporation Administrative Dissolution 60 Choice o — Entity 51, 52 Corporate Purpose 56, 179 De — ective Incorporation 57, 59 Incorporation 54 Organization 55 Promoter Liability 58, 160, 177 State o — Incorporation 53
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Topic Question
General Partnerships
Authority o --- Partners 23
Dissociation 22, 25
Expulsion 29
Fiduciary Duty 17, 19, 28
Financial Attributes 30, 31, 32
Formation 12, 13
Liability 33, 172
Ordinary Course o --- Business 21
Partner as Agent 20
Partnership Agreements 14, 15
Partnership as Separate Entity 18
Settlement o --- Accounts 24
Termination o --- Partnership 16
Winding Up o --- Partnership Business 26
Wrong --- ul Dissociation 27
Insider Trading
Claims 154, 166
Misappropriation 156
Tipper/Tippee Liability 155, 157, 183
LLCS and Other Unincorporated Entities
Choice o --- Entity 34, 36, 39, 170
De --- ective Formation 37
Dissociation 45
Distributions 46, 48
Fiduciary Duty 42, 43
Indemnity 49
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Topic Question
Limited Liability 39
Limited Partnerships 35, 38
Loans 50
Management 161
Managers o --- LLCs 41
Pro --- essional Entity 47
Trans --- erable Interest 44
Mergers and Acquisitions
Buy-Sell Agreements 144
De --- ensive Measures 151, 152, 162, 171
Fiduciary Duty 153
Preemptive Rights 141, 143
Shareholder Rights Plans 142, 178
Staggered Boards 150
Structures 145, 146, 147, 148, 149
Piercing the Corporate Veil
De --- inition 61
Enterprise Liability 65
Factors 62
LLCs 66
Parent-Subsidiary 64
Sole Shareholder 63
Shareholder Litigation
Attorneys’ Fees 140
Board Review o --- Demands 138
Claims 164
Demand Futility 136
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Topic Question
Demand Requirement 134, 137
Derivative Actions, Commencement 133
Derivative Actions, De --- inition 131
Direct v. Derivative Claims 135
Inspection o --- Records 132
Motions to Dismiss 139
Settlement 173
Shareholder Activism 159
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