FINAL EXAMINATION

BUSINESS ORGANIZATIONS

SPRING, 2001

PROFESSOR KLEINBERGER

General InstructionsThis is an open book examination. You may use the agency and partnership book, the assigned photocopied materials and photocopied problems, any additional photocopied materials distributed by the professor during the semester, and any notes you have made or developed in studying for the course or the exam. You may use outlines or other notes developed by a group of students enrolled in this course this semester if you played a substantial role in the development of the group outline or notes. Except as stated in the second and third sentences of this paragraph, you may not use treatises, hornbooks, commercial outlines, other commercial works or any other materials prepared by others.

This examination lasts three hours and has two parts. Part One consists of five separate questions, each based on a separate fact pattern and each requiring a relatively short answer. All questions in Part One have approximately the same weight, although the precise allocation of points among the Part One questions is within the professor's sole discretion.

Part Two consists of a single fact pattern, with several questions pertaining to that pattern. The allocation of points among the Part Two questions is within the professor's sole discretion.

Part One is worth 40 points. Part Two is worth 60 points.

Please keep in mind that "spotting issues" is only the first step in doing a legal analysis. You must also take the issues you identify and organize them into a coherent structure. Then, within that structure, you must examine those issues (by applying the law you see as relevant to the facts you see as relevant) and argue for some conclusion.

Please do not write about subjects that are not germane to your analysis. Writing a "treatise" on some area of law which the question does not put in issue wastes your time and conveys the unfortunate impression that you do not understand which issues are relevant.

To the extent that your analysis involves a particular statutory provision, you MUST cite that provision. Do not, however, use citations as a substitute for stating the law.

If your analysis involves the construction (as distinguished from mere application) of a particular word, phrase or provision, it may make sense to quote that word, phrase or provision. Otherwise, do not waste your time quoting a statute at length. (On the other hand, if you can quote a piece of a statute faster than you can paraphrase it, feel free to do so.)

There is no need to cite case names. If citing case names helps you, feel free to do so. Do not, however, use case names as a substitute for stating the law.

The grading rewards coherence. It will probably be worth your while to take some time to think about the organization of your answer before you begin writing. Ask yourself:

• whether you have identified all the necessary parts to your analysis;

• whether all the issues you have identified are actually necessary; and

• whether you have organized your issues in a way that is likely to make sense to your reader.

Please write legibly. Please write on only one side of each page. If legibility is not your strong point, please skip every other line as you write.

Budget your time.

BUDGET YOUR TIME.

BUDGET YOUR TIME.

BUDGET YOUR TIME.

Applicable Law

Unless a problem specifically indicates to the contrary:

1. Any reference to a partnership means an ordinary general partnership - i.e., not a limited liability partnership.

2. General partnerships are governed by the Revised Uniform Partnership Act ("RUPA").

3. Corporations are organized under the law of a state ("State") that has adopted the Revised Model Business Corporation Act, except as to derivative lawsuits, the special law applicable within close corporations, and the duties of directors.

a. As to derivative lawsuits, State slavishly follows Delaware law.

• As to the special law applicable within close corporations:

i. the following sections of Minnesota Statutes apply: 302A.455, 302A.457 and those portions of 302A.751 contained in the handout distributed in class; ⁽¹⁾

ii. the courts of State apply § 302A.751 in light of the case law assigned in this course.

c. As to the duties of directors, 302A.255 (1992 version; Photocopied Materials, at 97) applies; otherwise, except as to close corporations, State slavishly follows Delaware law.

Mention of these particular statutes does not necessarily mean that they will be relevant to any of your answers.

Part One

A. Tenant moves into an apartment in an old building in St. Paul. The building was once a single family house but has been converted to include four separate apartments. Tenant goes down to the basement and smells gas. Tenant immediately calls Excel Energy, which comes out, turns off the gas and identifies several small gas leaks in the furnace. Tenant calls Landlord, who agrees that the matter must be dealt with immediately. Landlord has just recently bought the building and does not have any ongoing relationship with any companies that fix furnaces. Tenant suggests a local company ("the Furnace Company"). Landlord agrees and instructs Tenant to call the Furnace Company. Tenant does so, explaining only that the work needs to be done at the building where Tenant lives. The Furnace Company sends a worker promptly. Tenant meets the worker, explains the problem, and signs the work order request. The work order request lists Tenant's name as the customer. The Furnace Company does the work satisfactorily and later bills the Tenant. Tenant declines to pay the bill, explaining that Tenant was acting only on behalf of Landlord and that Landlord is obligated, not the Tenant. Is the Tenant obligated to pay the bill? Is the Landlord?

B. Two entrepreneurs are planning to form a new business. They expect to generate large profits from the outset. They intend for the first several years to reinvest all those profits in the business and take only small salaries for themselves. They want their business to provide a full liability shield for them as owners and think they want to use a limited liability company rather than a "one of those old fashioned, C Corporations." Based on the limited facts provided here, and this course's limited treatment of LLCs, to what consequence would you draw their attention as they make their choice of entity?

C. A corporation is planning to lease five company cars from Acme Auto Leasing Company ("Acme"), a limited liability partnership. One of the corporation's directors is a partner in Acme, with the right to receive 30% of Acme's profits. As corporate counsel to the corporation, you have suggested that the proposed transaction might constitute self-dealing under applicable law. The director has responded, "Nonsense. Acme does literally thousands of leases a year. Five leases are a drop in the bucket. They are simply not material to me or to Acme." Evaluate the director's statement in light of applicable law.

D. HardLuck Company ("Company") is a general partnership governed by the UPA. Company is not an LLP and has two partners: Hard and Luck. Company owns a delivery van, which is regularly driven by Company's only employee ("Employee"). In the scope of employment, Employee drives the van and causes a serious accident. Company has insurance, but no significant assets, and the insurance is insufficient to cover the damages. The accident victim therefore sues Hard and Luck, each of whom turn to their respective, personal liability insurance policies. Their respective auto insurance policies do not apply, because each applies only to vehicles specifically listed on the policy and the van is listed on neither policy. However, Hard and Luck each have an "umbrella" policy, and each umbrella policy applies inter alia to "liability arising from any vehicle owned by the insured." Hard and Luck each claim coverage under their respective umbrella policies, asserting that as co-owners of Company they are co-owners of its assets, including the van. Are they right? ⁽²⁾

E. Three years ago Acme International Inc. ("Acme"), a publicly traded corporation, adopted and embarked on what turned out to be a disastrous new business plan. The value of Acme's stock soon dropped precipitously. Ten months ago, after a bitter proxy fight, the shareholders of Acme replaced Acme's entire board of directors with new directors. None of the new directors are in any way connected with the ousted directors. None of the new directors were involved in the disastrous business plan. As one of its first acts, the new board investigated whether it should have Acme sue any or all of the ousted directors for breach of fiduciary duty in connection with the adoption and implementation of the business plan. After five months of careful study, the new board decided not to bring suit. One particularly disgruntled shareholder ("Disgruntled") considered this decision "outrageous" and filed a derivative suit on behalf of Acme against all of the former directors. Disgruntled's suit alleges that demand on the current board is futile. When the court decides the demand futility issue, will it matter whether the court adopts the Easterbrook view or your instructor's view of the Aronson test?

Part Two

Twenty years ago, Humperdink and Fezzik formed a manufacturing business. Humperdink provided $30,000 in start up funds, and Fezzik provided $15,000. Both individuals worked full time in the business. Initially, the entire business was "housed" within one corporation, with Humperdink owning 60% of the stock and Fezzik owning 40%. The corporation never paid dividends but instead paid salaries and, when possible, bonuses to its two shareholder employees. By tacit agreement, Humperdink and Fezzik always received equal payments from the corporation.

The business prospered, largely because both Humperdink and Fezzik worked very hard. Initially the business had to rent manufacturing facilities. Ten years ago, the business had enough money to buy land and erect its own manufacturing plant. For tax reasons, Humperdink and Fezzik chose to form a general partnership to own the land and plant. They did not, and do not, have a written partnership agreement but agreed to split partnership profits 50/50. They did, however, cause the partnership to enter into a written 20 year lease with the corporation, under which the partnership agreed to rent the land and plant to the corporation. The lease specifies an initial rental rate and calls for annual adjustments according to inflation.

The corporation has always had a three person board of directors, and until three years ago Humperdink, Fezzik and the corporation's CFO served as directors. Humperdink served as CEO and chair of the Board. Fezzik served as COO. Until three years ago, the Board met only a couple of times each year. Humperdink and Fezzik handled all important decisions informally, by consensus.

Three years ago, Humperdink brought his adult daughter ("Buttercup") into the business, giving her 9/60 of his stock (i.e., 9% of the outstanding stock of the corporation), leaving him with 51%. With Fezzik's consent, Buttercup also became a partner in the partnership, taking a 19% interest in the partnership's profits (leaving her father with 31%).

Once Buttercup became a shareholder, Humperdink called a special shareholders meeting, and he and Buttercup voted to remove the CFO as director and replace her with Buttercup. Fezzik voted against this change, and that vote triggered a rapid deterioration in relations between Humperdink and Fezzik. In particular:

• Humperdink immediately began to use the Board of Directors to actually control the corporation. He scheduled regular weekly meetings of the Board, but never gave Fezzik any advance information about the agenda. After a few months, Fezzik realized that each meeting was nothing but a formality, intended to rubber stamp whatever decisions Humperdink and Buttercup had already made in secret. When Fezzik asked any questions about the decisions, Humperdink and Buttercup took turns attacking him as "obstructionist."



• Three months ago, Humperdink and Buttercup voted, over Fezzik's dissenting vote, to remove Fezzik as COO and to terminate his employment. They informed him that "for the foreseeable future" they intend to continue the corporation's practice of paying no dividends.



• Last month, Humperdink and Buttercup voted, over Fezzik's dissenting vote, to renegotiate the lease with the partnership in order to reduce the monthly rent payments by 1/3. As partners in the partnership, Humperdink and Buttercup voted, over Fezzik's dissenting vote, to accept that reduction.

A. What, if any claims, does Fezzik have relating to the corporation? For each claim, identify the relevant rule(s) of law and the facts that pertain to the claim and state whether the claim is direct or derivative. Do not concern yourself with what remedies might be available.

B. What, if any claims, does Fezzik have relating to the partnership? For each claim, identify the relevant rule(s) of law and the facts that pertain to the claim. Do not concern yourself with what remedies might be available.

C. The partnership is an ordinary general partnership. If Fezzik wants to cause the partnership to become a limited liability partnership, does he need the consent of his co-partners? If they refuse to give that consent, without good cause and motivated merely by antagonism to Fezzik, does Fezzik have any claim against them? Do not concern yourself with what remedies might be available.

D. In light of the RUPA provisions provided in Exhibit A:

1. Is there some lawful way that Fezzik might be able to get rid of Humperdink and Buttercup as partners and run the partnership's business himself?

2. Assuming Fezzik did get rid of Humperdink and Buttercup as partners without thereby causing a dissolution of the partnership, would he have to buy them out right away or could he wait until the lease with the corporation ends?

3. Assuming Fezzik did get rid of Humperdink and Buttercup as partners without thereby causing a dissolution of the partnership, if Fezzik wishes to continue running the business as a partnership what will he have to do? (Reason from what you know about the nature of a partnership.)

Exhibit A

SECTION 601. EVENTS CAUSING PARTNER'S DISSOCIATION. A partner is dissociated from a partnership upon the occurrence of any of the following events:

(1) the partnership's having notice of the partner's express will to withdraw as a partner or on a later date specified by the partner;

(2) an event agreed to in the partnership agreement as causing the partner's dissociation;

(3) the partner's expulsion pursuant to the partnership agreement;

(4) the partner's expulsion by the unanimous vote of the other partners if:

(i) it is unlawful to carry on the partnership business with that partner;

(ii) there has been a transfer of all or substantially all of that partner's transferable interest in the partnership, other than a transfer for security purposes, or a court order charging the partner's interest, which has not been foreclosed;

(iii) within 90 days after the partnership notifies a corporate partner that it will be expelled because it has filed a certificate of dissolution or the equivalent, its charter has been revoked, or its right to conduct business has been suspended by the jurisdiction of its incorporation, there is no revocation of the certificate of dissolution or no reinstatement of its charter or its right to conduct business; or

(iv) a partnership that is a partner has been dissolved and its business is being wound up;

(5) on application by the partnership or another partner, the partner's expulsion by judicial determination because:

(i) the partner engaged in wrongful conduct that adversely and materially affected the partnership business;

(ii) the partner willfully or persistently committed a material breach of the partnership agreement or of a duty owed to the partnership or the other partners under Section 404; or

(iii) the partner engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with the partner;

(6) the partner's:

(i) becoming a debtor in bankruptcy;

(ii) executing an assignment for the benefit of creditors;

(iii) seeking, consenting to, or acquiescing in the appointment of a trustee, receiver, or liquidator of that partner or of all or substantially all of that partner's property; or

(iv) failing, within 90 days after the appointment, to have vacated or stayed the appointment of a trustee, receiver, or liquidator of the partner or of all or substantially all of the partner's property obtained without the partner's consent or acquiescence, or failing within 90 days after the expiration of a stay to have the appointment vacated;

(7) in the case of a partner who is an individual:

(i) the partner's death;

(ii) the appointment of a guardian or general conservator for the partner; or

(iii) a judicial determination that the partner has otherwise become incapable of performing the partner's duties under the partnership agreement;

(8) in the case of a partner that is a trust or is acting as a partner by virtue of being a trustee of a trust, distribution of the trust's entire transferable interest in the partnership, but not merely by reason of the substitution of a successor trustee;

(9) in the case of a partner that is an estate or is acting as a partner by virtue of being a personal representative of an estate, distribution of the estate's entire transferable interest in the partnership, but not merely by reason of the substitution of a successor personal representative; or

(10) termination of a partner who is not an individual, partnership, corporation, trust, or estate.

SECTION 602. PARTNER'S POWER TO DISSOCIATE; WRONGFUL DISSOCIATION.

. . . .

(b) A partner's dissociation is wrongful only if:

(1) it is in breach of an express provision of the partnership agreement; or

(2) in the case of a partnership for a definite term or particular undertaking, before the expiration of the term or the completion of the undertaking:

(i) the partner withdraws by express will, unless the withdrawal follows within 90 days after another partner's dissociation by death or otherwise under Section 601(6) through (10) or wrongful dissociation under this subsection;

(ii) the partner is expelled by judicial determination under Section 601(5);

(iii) the partner is dissociated by becoming a debtor in bankruptcy; or

(iv) in the case of a partner who is not an individual, trust other than a business trust, or estate, the partner is expelled or otherwise dissociated because it willfully dissolved or terminated.

. . . .

SECTION 701. PURCHASE OF DISSOCIATED PARTNER'S INTEREST.

(a) If a partner is dissociated from a partnership without resulting in a dissolution and winding up of the partnership business under Section 801, the partnership shall cause the dissociated partner's interest in the partnership to be purchased for a buyout price determined pursuant to subsection (b).

(b) [calculation of buyout price - omitted]

(c) [offsets from buyout price and interest on buyout amount - omitted]

(d) [indemnification for dissociated partner - omitted]

(e) If no agreement for the purchase of a dissociated partner's interest is reached within 120 days after a written demand for payment, the partnership shall pay, or cause to be paid, in cash to the dissociated partner the amount the partnership estimates to be the buyout price and accrued interest, reduced by any offsets and accrued interest under subsection (c).

(f) If a deferred payment is authorized under subsection (h), the partnership may tender a written offer to pay the amount it estimates to be the buyout price and accrued interest, reduced by any offsets under subsection (c), stating the time of payment, the amount and type of security for payment, and the other terms and conditions of the obligation.

(g) The payment or tender required by subsection (e) or (f) must be accompanied by the following [information - omitted]:

(h) A partner who wrongfully dissociates before the expiration of a definite term or the completion of a particular undertaking is not entitled to payment of any portion of the buyout price until the expiration of the term or completion of the undertaking, unless the partner establishes to the satisfaction of the court that earlier payment will not cause undue hardship to the business of the partnership. A deferred payment must be adequately secured and bear interest.

(i) [action to determine buyout price - omitted]

Exhibit B

1. In case you have neglected to bring to the exam the section 302A.751 handout, it is attached as Exhibit B.

2. Do not concern yourself with insurance law theories that might apply in interpreting the language of an insurance contract. Use principles encompassed in this course.