FINAL EXAMINATION

BUSINESS ORGANIZATIONS

FALL,1992

PROFESSOR KLEINBERGER

General Instructions

This is an open book examination. You may use the case book, the statute book, the assigned photocopied materials, 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 four separate questions, each based on a separate fact pattern and each requiring a relatively short answer. Part Two consists of a single, lengthier fact pattern, requiring a more intricate answer. Each Part of the examination is equal in weight to the other Part. That is, the four questions in Part One, taken together, have the same weight as the one question in Part Two. 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. For the questions in Part One, your analysis will be less complicated than in your answer for Part Two. But for both Parts, your answers must reflect a coherent analysis.

Please do not write about subjects which 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. If your analysis involves statutory provisions, you MUST cite those provisions. 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 the statute at length. (On the other hand, if you can quote a piece of the 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.

GOVERNING LAW

Unless a question indicates otherwise, assume that all corporations are incorporated under the law of a state that has adopted:

the Minnesota corporate statute on director self-dealing, and

the Revised Model Business Corporations Act in all other respects.

As to any partnership, the provisions of the Uniform Partnership Act apply.

BUDGET YOUR TIME.

Part One

A. SE, Inc. is a publicly traded corporation, subject to the Rule 14a-8 of the Securities Exchange Commission. Martha is a director of SE, Inc. and owns 1000 of the 5 million shares of common stock outstanding. Martha's shares have a market value of $10,000.

Martha has tried to convince the SE board of directors to have SE purchase its office supplies from George, Inc., a office supply wholesaler owned by Martha. Although Martha has offered to beat any price available to SE from other vendors, the board of directors has declined. Martha's fellow directors have been concerned about "the appearance of impropriety."

Martha has now notified the board that she intends to present a proposal at the next shareholders' meeting, asking the shareholders to make the decision to have SE, Inc. buy its office supplies from George, Inc.

Assume that Martha's proposal complies with Rules 14a-8(a), 14a-8(b) and 14a-9. May SE, Inc. properly omit Martha's proposal from the proxy statement and form of proxy?

B. The William Mitchell Exam Conflict and Make-Up Policy (1992-3 Handbook, p.19) states in part:

Students will take exams at the time and place announced in the exam schedule unless:

(1) A student is prevented from taking the exams because of his or her illness or illness or death in the student's immediate family;

(2) A student has two exams scheduled on the same day;

(3) A student has three exams scheduled within a period of three calendar days. ....

(4) A student has two exams scheduled to begin within 23 hours of each other;

(5) A student has exceptional circumstances that, in the discretion of the Dean of Students, justifies [sic] a rescheduling. Exceptional circumstances must relate to personal situations not to a burdensome examination schedule.

....

No make-up exam will be given more than one week after the end of the regular exam period, except when such a delay is necessitated by illness or other exceptional circumstances.

No student shall take any exam before the regularly scheduled time for the exam.

On account of a serious illness in the immediate family, a student requests permission to reschedule an exam. Due to long-standing and significant employment responsibilities, the only practical time for the make-up exam is three days before the regularly scheduled time. The Dean of Students grants the request, and the student buys two nonrefundable airline tickets. Subsequently, the professor whose exam is involved learns that an unidentified student will take a make-up in advance of the rest of the class. The professor objects and asserts that an advance make-up violates the Policy quote above. Has the action of the Dean of Students bound the College to allow the advance make-up?

C. This problem requires you to analyze and apply a statute that we did not study this semester. DON'T PANIC. We have spent time developing skills in statute reading. Apply those skills.

The Background: This question concerns a Minnesota limited liability company (LLC) -- a new form of entity that is a mix between a partnership and a corporation. In answering this question you may find the following background helpful:

In a corporation, the owners' interests are called "shares" or "stock." In a partnership, the owners' interests are usually called "partnership interests." In an LLC, the owners' interests are called "membership interests."

The Minnesota Limited Liability Act bifurcates "membership interests" into two parts:

-- financial rights, consisting essentially of the right to share in profits; and

-- governance rights, consisting essentially of the right to vote and otherwise influence the management of the entity.

Minn.Stat. § 322B.31, subd. 1 states in part:

Assignment of financial rights permitted. ... a member's financial rights are transferable in whole or in part.

Minn.Stat. § 322B.313, subds. 1 and 2 state in part:

Subdivision 1. Transfer of membership interests restricted. A member may assign the member's full membership interest only by assigning all of the member's governance rights coupled with a simultaneous assignment to the same assignee of all the member's financial rights. A member's governance rights are assignable, in whole or in part, only as provided in this section.

Subd. 2. When unanimous consent required. ... a member may, without the consent of any other member, assign governance rights, in whole or in party, to another person already a member at the time of the assignment. Any other assignment of any governance rights is effective only if all the members, other than the member seeking to make the assignment, approve the assignment by unanimous written consent.

The Problem: Narnia, LLC is a Minnesota limited liability company, with four members: Peter, Susan, Edmond and Lucy. The four members are all siblings. Based on the statutes quoted above, answer the following questions.

1. Peter wishes to sell his entire membership interest to Lucy. To make the sale effective, what consent, if any, does he need?

2. Susan wishes to assign half of her right to share profits to her adult son, Caspian. To make the assignment effective, what consent, if any, does she need?

3. Lucy is going away on vacation for six months and wants to authorize her adult daughter, Belle, to vote for her at meetings of the members of the LLC. To make the authorization effective, what consent, if any, does Lucy need?

D. Sanders, Inc. is a Delaware corporation with four shareholders: Pooh, Piglet, Rabbit, Kanga and Roo. Pooh, Piglet and Rabbit are all children of the founder of the business, and each owns 30% of the corporation's stock. Kanga and Roo are key employees of the corporation, and each owns 5% of the corporation's stock.

Sanders, Inc. has a three person board of directors. From 1955 (when the founder died, leaving her stock to her three children) through 1990, the board consisted of Pooh, Piglet and Rabbit. In 1991, the three siblings decided that, when they died, they would each probably bequeath their stock to a charitable institution, Eeyore Hospital. The three siblings also decided that it would be a good idea for employees of the Hospital to learn how to run the business. Since that time the three siblings have arranged to elect the president, the vice president and the treasurer of Hospital as the board of Sanders, Inc. None of those three Hospital employees own any stock in Sanders, Inc.

Kanga has just learned that in 1990 the board of Sanders, Inc. approved the sale of one of the corporation's major assets to a partnership owned by Pooh, Piglet and Rabbit (who were at the time still the directors of Sander's Inc.). She wishes to bring a derivative suit on behalf of the corporation and have the asset sale rescinded. Must she make demand on the board, or is demand excused? (Do not consider the issue of possible direct claims. Confine your analysis to the question asked.)

Part Two

For the past five years a partnership has periodically sold widgets to a corporation No ongoing agreement has existed. Instead, each transaction has reflected a separate, written contract. Various partners have negotiated and signed for the partnership. The Vice President of Purchasing (VP-P) has negotiated and signed each of the contracts for the corporation.

Two months ago, both businesses independently decided to abandon the relationship. The partnership has five partners, and the partnership agreement expressly allows a vote of the majority of partners to select the partnership's customers. The partners voted 4-1 to stop selling to the corporation. They did not, however, inform the corporation of the decision.

At about the same time, the corporation's board of directors resolved to make no further purchases from the partnership. The board communicated its decision to the corporation's CEO. Rather than passing the word immediately to the VP-P, however, the CEO telephoned Koestler, one of the partners. When the CEO explained the board's decision, Koestler said, "We just decided the same thing. It's stupid. The business is too good for both our firms to give it up."

When the CEO said that she shared that sentiment, Koestler made the following proposal to the CEO, who agreed:

The CEO would not inform the VP-P or anyone else at the corporation of the board's decision or of the partnership's decision.

Koestler would not inform the other partners of the board's decision.

Koestler would approach the VP-P and negotiate and sign another contract between the partnership and the corporation.

If the VP-P signed the contract, Koestler would give the CEO $5000 as a "signing bonus."

All went as agreed. The VP-P, ignorant of both the board's decision and the partnership's decision, signed another contract on behalf of the corporation.

1. Is the corporation bound to the contract?

2. Is the partnership bound to the contract?

3. Assuming that the corporation and the partnership are both bound to the contract and that each has been damaged by the contract:

a. Does the partnership have any claims against Koestler?

b. Does the corporation have any claims against Koestler? If so, can the corporation collect on that claim(s) from the partnership?

c. Does the corporation have any claims against the CEO?