FINAL EXAMINATION

BUSINESS ORGANIZATIONS

FALL, 1994

PROFESSOR KLEINBERGER

General Instructions

This is an open book examination. You may use the photocopied agency and partnership 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 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 that are not germane to your analysis. Writing a "treatise" on some area of law that 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. 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 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.

Part One

A. Aslan, Inc. is a Delaware corporation, whose stock is publicly traded and which has a nine-member board of directors. Last year, Edmund acquired a substantial block of Aslan stock and then led a proxy fight that resulted in Edmund and eight hand-picked associates gaining seats on the board. Each of those eight associates is an employee of some business owned or controlled by Edmund. Among its first official actions, the new board adopted a resolution calling for Aslan to reimburse all of Edmund's expenses in the proxy fight. A disgruntled shareholder has filed a derivative suit, alleging that the reimbursement constitutes a waste of corporate assets. Is demand excused?

B. Narnia, Inc. ("Narnia") is a Minnesota corporation. As part of its efforts to be "a good corporate citizen," Narnia encourages its employees to volunteer their services to community organizations. Many of Narnia's top executives serve in prominent volunteer positions for organizations such as United Way. Narnia's public relations department regularly informs both Narnia's employees and the general public of the public-spirited activities of Narnia's employees.

Lucy is a mid-level management employee of Narnia, who serves as a volunteer member of the board of directors of Shelter Group, a nonprofit corporation that provides temporary housing to battered women.⁽¹⁾ Lucy's supervisor at Narnia is aware of Lucy's involvement with Shelter Group, has occasionally given her "release time"⁽²⁾ to attend important Shelter Group meetings and has included in Lucy's periodic performance appraisals favorable comments about Lucy's "public spirited volunteer activities with Shelter Group."

Shelter Group and all of its directors have been sued by a woman who was attacked while in Shelter Group housing. Lucy wants Narnia to indemnify her against the suit. Assume that (i) in all matters described in this question Lucy's supervisor has acted with actual authority, and (ii) Minnesota corporate law provides in relevant part that:

a [Minnesota] corporation shall indemnify a person made . . . a party to a proceeding [including a lawsuit] by reason of the former or present official capacity of the person . . .

"Official capacity" means . . . (3) with respect to a director, officer, or employee of the corporation who, while a director, officer, or employee of the corporation, is or was serving at the request of the corporation or whose duties in that position involve or involved service as a director, officer, partner, trustee, employee, or agent of another organization or employee benefit plan, the position of that person as a director, officer, partner, trustee, employee, or agent, as the case may be, of the other organization or employee benefit plan.

Is Narnia obligated to indemnify Lucy? Answering this question requires no knowledge about nonprofit corporations beyond the information provided in footnote 1. Do not concern yourself with whether the suit against Lucy will succeed.

C. You enter a sporting goods store and see the owner talking to a pleasant-looking individual who is standing near the cash register. You hear the owner say, "Okay, I'll be right back." The owner then goes into the back room. You select a pair of high-priced athletic shoes, bring them to the cash register and offer the money to the pleasant-looking individual. The individual takes your money, and puts your purchase in a bag. You leave, only to discover later that the individual was not an employee of the store but rather another customer who pocketed the money you paid and left the store immediately after you. The store demands that you either return the shoes or pay for them. Are you obliged to?

D. A uniformed, on-duty police officer threatens to arrest a woman for violating the law prohibiting prostitution and then offers to relent if the woman has sexual intercourse with him. The woman accedes. She later sues and holds the police officer for battery, successfully arguing that her consent was coerced and therefore ineffective. According to the doctrines studied in this course, can the woman also hold the police department liable?

Part Two

In answering the questions in this Part, assume that (i) Minnesota has adopted the UPA without changes, (ii) Minnesota's corporate statute consists of all Minnesota corporate statutes included in the materials (including class handouts), plus any provisions of the Revised Model Business Corporation Act assigned during the semester, and (iii) Minnesota's courts would follow all corporate cases assigned this semester, if relevant. DO NOT CONSIDER TAX ISSUES. IN FACT, ASSUME THAT THERE ARE NO TAXES INVOLVED.

The following fact pattern is intricate, and there are numerous questions to answer. BUDGET YOUR TIME.

Jill, a research biologist, developed technology with significant potential value in the biomedical field. Needing capital to develop her ideas, she approached Eustice and they decided to combine efforts to develop the technology. They formed a Minnesota corporation, named Dawntreader, Inc. ("Dawntreader") to house their business. They agreed that:

Eustice would put up $2 million of capital to be used in developing the business, would serve as CEO and would have day-to-day management responsibility for all aspects of the business other than the research work.

Jill would work fulltime in the research part of the business. Dawntreader would employ Jill as Vice President of Research and Development and pay her an annual salary of $75,000. Any technological developments made by Jill would belong to Dawntreader.

Dawntreader would have 100 shares of common stock, with Jill owning 40 shares and Eustice owning 60. Certain important decisions would require a vote of 65% of the shares. Those decisions would include: (i) terminating Jill's employment except for misconduct, (ii) selling the technology owned by the corporation; and (iii) commencing any litigation on behalf of the corporation.

Jill and Eustice memorialized their understanding about their corporation in a written agreement (the "Dawntreader Shareholders Agreement"), which they both signed. They then implemented their agreement. Eustice paid Dawntreader $2 million in cash for his shares of stock. Jill paid for her stock by assigning to Dawntreader the technology she had developed.

After about two years, the technology still looked promising but Jill and Eustice needed more capital. They approached a large, wealthy corporation, Scrubbs, Inc. ("Scrubbs"), and made the following arrangement:

Dawntreader and Scrubbs would form a general partnership to further develop the technology ("the D/S Partnership"). Dawntreader would contribute its technology to the D/S Partnership, as well as furnish the services of Dawntreader's employee, Jill. The partnership would value the technology at $2 million. Scrubbs would contribute $10 million in cash.

As partners in the D/S Partnership, Dawntreader and Scrubbs would each have a 50% profit share. Profits would be calculated and distributed annually, unless both partners agreed to the contrary.

The D/S Partnership would have a term of 25 years, but Scrubbs would have the right at any time to dissolve the partnership and acquire all its assets by paying its partner an amount equal to $25 million minus 1/2 of any outstanding debts or other obligations of the D/S Partnership ("the Buyout Option").

Dawntreader and Scrubbs memorialized the arrangement in a written partnership agreement and then implemented their agreement.

A. For Dawntreader to enter into and perform its part of the agreement, was it necessary for Jill to agree?

B. If Scrubbs wishes to exercise the Buy-Out option, who will Scrubbs pay?

C. Assume that in some year of its existence the D/S Partnership makes a profit of $2 million and Eustice wants to get his hands on "my share," what should he do? If successful, how much will he receive?

D. By its fifth year of operation, the D/S Partnership has made significant progress. A break-through appears close. The technology is now worth $18 million, but the D/S Partnership only has $1 million in cash left. Scrubbs and Jill hatch a plan to "run right over Eustice." As the first step of the plan, Jill quits as an employee and officer of Dawntreader and comes to work directly for Scrubbs. Scrubbs then formally notifies Eustice, in his capacity as CEO of Dawntreader, that (i) the dissociation of Jill has dissolved the D/S Partnership, (ii) Scrubbs has a right to a return of its contribution, (iii) since the Partnership cannot return the $10 million in cash, Scrubbs has lost far more than Dawntreader and has a right to receive in winding up all the Partnership's technology, plus additional funds from Dawntreader so as to equalize losses, and (iv) Dawntreader is liable for damages caused by the premature dissolution. Is Scrubbs correct?

E. Incensed at Scrubbs' conduct, Eustice wishes to have Dawntreader bring suit against Scrubbs to (i) determine that the D/S Partnership is not dissolved, and (ii) hold Scrubbs responsible for "sabotaging the D/S Partnership just when it was about to become profitable." Jill invokes the Dawntreader Shareholder Agreement, votes against Dawntreader bringing suit and asserts that the Agreement prevents Eustice from causing Dawntreader to sue. Does Eustice have any recourse that will allow him to cause Dawntreader to bring suit?

F. Assuming that Dawntreader does bring suit, what are Dawntreader's best claims against Scrubbs?

G. How, if at all, would your answer to Part F change if the D/S Partnership had been registered as a limited liability partnership?

1. Under Minnesota law, a nonprofit corporation is governed by a board of directors.

2. I.e. time away from work that does not cause any decrease in salary and does not count as vacation time.