Business Organizations
Final Exam (Take-Home) -- Summer, 1995(Professor Kleinberger)
Exam Available: In Student Services, during regular office hours, beginning July 21, 1995.
You are responsible for learning what those hours are.
Time Limit: 72 hours from the time you pick up the exam, but in any event no later July
28, 1995. Submit your answer to Student Services during that office's normal business
hours. You are responsible for learning what those hours are. Late submissions are
subject to being downgraded. You need not turn in this document. Keep a copy of your
answer for your records. Make sure to put your exam number on your answer.
Page Limit: Fourteen (14) pages, double-spaced. (See additional details below, in the
section captioned "Instructions.")
Role of Exam in: As you elect, the exam will count either 50, 60, 70 or
Course Grade 80 percent of your grade. Class participation will count for the rest. To
make your election, complete the form at the back of this exam and submit the form to the
Registrar by the deadline that applies for submitting your exam answer. Separate the form
from this document before submitting the form to the Registrar. Do not put your exam
number on the form. If you fail to make a proper election, this exam will count for 70% of
your grade.
Instructions
Your answer must be typed, double-spaced and may not exceed fourteen pages. Use reasonable
margins and do not use unusually small type sizes. If you have any questions about the
reasonableness of your margins or the size of your type, contact Professor Kleinberger well in
advance of the deadline for submitting your answer. Professor Kleinberger's office is room 313A.
His office telephone number is 290-6387, and his home telephone number is 681-0018. The
office phone has voicemail. The home phone has an answering machine.
This exam consists of four questions, two of which have several subparts. Following each
question or subpart a number in brackets indicates the points available for that question or
subpart.(1) You must decide how to allocate space among the questions and subparts. Point value
is not necessarily an indicator of how much space to allocate. Points have been assigned in terms
of the intricacy, complexity and sophistication of the analysis necessary to solve each problem or
subpart. A question or subpart might be "a tough nut to crack," but the analysis, once found,
might be quite succinct.
This is an individual, solitary exercise. Once you have picked up this document or have any
knowledge of its contents, you may not discuss the exam with anyone other than Professor
Kleinberger. If you have any questions about the examination, you must contact Professor
Kleinberger without delay and well in advance of your deadline for submitting your answer.
This is a limited open book exam. You may use only the following materials ("Permitted
Materials"):
the Agency and Partnership book, the assigned photocopied materials (including the
photocopied problems), and any additional photocopied materials distributed by the professor
during the semester,
any notes you have personally made or developed in studying for the course or this exam, and
outlines or other notes developed by a group of students enrolled in this course this semester if:
(a) the group outline or other notes were developed before any participant in the group picked up
this document or had any knowledge of its contents, and (b) you played a substantial role in the
development of the group outline or notes.
Once you have picked up this document or have any knowledge of its contents, you may not do
any research beyond the Permitted Materials. Except for Permitted Materials, you may not use
treatises, hornbooks, commercial outlines, other commercial works or any other materials
prepared by others.
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 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.
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.
If you rely on a statute, you must cite that statute. If you are relying on a subdivision or a
paragraph, your cite should include that subdivision or paragraph. Do not worry, however, about
"blue book" form. For example, for the purposes of this examination "Minn. 302A.565, subd. 1,"
"UPA sec. 18(f)" and "Del. 144(e)" are all in adequate form.
The grading rewards coherence. It will probably be worth your while to take some time to think
about the organization of your answers 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.
It is possible that your analysis for one question or subpart will be relevant to a later question or subpart. If so, you may incorporate your earlier analysis by reference.
Applicable Law and Related Matters
Unless a question or subpart specifically indicates to the contrary:
1. Any reference to a partnership means an ordinary general partnership.
2. General partnerships are governed by the Uniform Partnership Act as included in the materials.
3. Limited partnerships are governed by the Revised Uniform Limited Partnership Act, with 1985
amendments.
4. Corporations are organized under the law of a state that has adopted the Revised Model
Business Corporation Act, except as to the duties of directors, derivative lawsuits and rules
applicable to closely held corporations.
a. As to the duties of directors, Minn.Stat. § 302A.255 applies; otherwise the state slavishly
follows Delaware court opinions.
b. As to derivative lawsuits, the state slavishly follows Delaware court opinions.
c. As to closely held corporations, the state follows the case law covered in this course.
1. The menu at a local Vietnamese restaurant states: "All items available with oil-free cooking.
50¢ extra." A customer orders an item to be cooked oil-free, receives the meal, consumes it and
receives the bill from the waiter. The customer notices that the bill does not include the 50¢ extra
charge and mentions the omission to the waiter. The waiter responds, "I won't charge you for
that. It's not fair to charge you extra for giving you less." Impressed by the waiter's attitude, the
customer increases the tip by that 50¢ plus another 50¢. The restaurant owner had no prior
knowledge of the waiter's action or attitude and discovers the omitted 50¢ charge only after the
customer leaves the restaurant. May the owner successfully recover the 50¢ from the customer?
(Assume that, as a matter of contract law, the statement in the menu, followed by the customer's
order, initially obligated the customer to pay the 50¢.) [3]
2. In preparation for this examination, a student in the class copies previous exams given by the
same professor, studies those exams and annotates them substantially. According to the
instructions given for this examination, may the student use those old, annotated exams in
answering this examination? [3]
3. A law firm practices as a partnership at-will, and the partnership agreement calls for each
partner's compensation to be set under a formula that depends largely on billable hours and fees
collected. Through no one's fault the firm finds itself on both sides of a complicated piece of
litigation. The court gives the firm the option to withdraw from representing either client
(building a wall separating the lawyers who have worked on opposite sides of the case).(2)
Whichever client is dropped, the partners who represented that client will suffer substantial
prejudice with regard to fee generation and at least temporary prejudice with regard to billable
hours.
The partnership agreement does not expressly consider how to decide which client to drop or
detail any circumstances under which the compensation formula can be waived. The agreement
does provide that it can be amended by a 2/3 majority vote of the partners.
a. What vote is necessary to decide which case to drop? [3]
b. In light of the special circumstances, do the partners whose client is dropped have a right to a
change in or waiver of the compensation formula? [4]
c. Can the partners whose client is dropped improve their financial situation by withdrawing from
the partnership? [3]
4. Regional Hospital, Inc. ("Regional") owns and operates a hospital that has served a rural
region for the past fifty years. The hospital is and always has been Regional's sole business.
Although Regional seeks to operate the hospital at a profit, the corporation also has a
longstanding tradition summed up in its motto: "A hospital for the people."
Regional has approximately 2000 shareholders, and its stock is publicly traded. The articles of
incorporation authorize 5 million shares. To date 1 million shares have been issued, and all are
still outstanding. The board of directors has seven members, that number having been fixed in
Regional's articles of incorporation.
Over the past several years changes in the health care market have put significant financial
pressure on Regional. Regional has responded in various ways, including the Emergency Room
Subcontracting and the Refinancing, both described in detail below.
The Emergency Room Subcontracting
To cut costs and increase profits Regional stopped operating its emergency room. Instead it
contracted out the management and operation of the emergency room facility to Emergency
Services LLC ("ES LLC"), a limited liability company owned and operated by a group of ten
physicians. Under the contract between Regional and ES LLC: (1) Regional provides the
emergency room facility, including all necessary equipment; (2) ES LLC provides all personnel
and supplies, except that (3) at ES LLC's request, at times of peak demand, Regional assigns
some of its employee nurses to work under the direction of ES LLC's physicians; (4) any assigned
Regional nurse is subject to being recalled by Regional at any time, but Regional must
concomitantly substitute another nurse; (5) ES LLC physicians must comply with Regional's rules
and protocols regarding the admission of patients from the emergency room into the hospital; (6)
any services performed on an emergency room patient by a regular Regional department (e.g., X-ray) are billed directly to the patient by Regional; (7) as payment for rent and for the use of the
emergency room equipment, ES LLC pays Regional 35% of ES LLC's net profits, calculated and
paid quarterly; and (8) each week Regional's chief administrator and Regional's chief of medicine
meet with two of ES LLC's physician members to "discuss the interaction between ES LLC and
Regional, to resolve any problems and to make whatever decisions may be necessary to
coordinate activities between the emergency room and the rest of the hospital." From time to
time these weekly meetings result in policy changes which Regional and ES LLC then implement.
Although Regional and ES LLC have made no effort to keep their arrangement secret, neither
have they publicized it. ES LLC uses a patient payment agreement and assignment of benefits(3)
that mentions, in small print, that "The emergency room is operated by Emergency Services, LLC
and not by Regional Hospital." However, the signage, furnishings and furniture in the emergency
room are just like the signage, furnishings and furniture in the rest of the hospital building.
The Refinancing
Two years ago it became apparent that to survive Regional would have to substantially modernize
its facilities and aggressively market its services. As Regional began to look around for capital,
Large National Hospital Chain, Inc. ("LNC") learned of Regional's situation. LNC approached
Regional's board of directors and proposed a friendly takeover, with Regional being merged into
LNC and each share of Regional stock being replaced with 1/2 share of LNC stock. Regional's
board met quickly and announced:
This corporation is not for sale -- not under any circumstances and not at any price. For half a
century Regional has served this region, and this board is unalterably committed to that tradition
of service. To sell Regional to LNC would inevitably dilute or end that tradition.
Just as quickly, LNC commenced a hostile takeover attempt, with a tender offer price 40% above
the current market price for Regional shares. Regional's board responded by implementing a
poison pill that caused LNC temporarily to suspend its tender offer. Regional's board then
arranged a refinancing deal with Health Investors Consortium, LLP ("HIC"), a Delaware
registered limited liability partnership.(4) Under the refinancing deal, (i) HIC loaned Regional a
substantial amount of money, secured by a mortgage on all of Regional's assets, including the
hospital, and (ii) Regional entered into a management contract with HIC, under which HIC took
over management of the hospital. The loan is for ten years, and the management contract is
coterminous with the loan. The loan ended Regional's attractiveness as a takeover target, and
LNC permanently withdrew its tender offer.
Under the management contract, HIC employees have assumed the top three administrative
positions at Regional's hospital. The rest of the hospital's personnel remain as Regional
employees. Formally, at least, HIC as manager is subject to the control of Regional's board.
However, the loan agreement provides that:
If at any time the board of Regional discharges HIC as manager, or if HIC has reasonable grounds
to believe that the board of Regional is interfering with HIC's orderly management of the hospital
and that interference continues 30 days after HIC gives Regional written notice of the
interference, then the entire amount of the loan becomes immediately due and payable.
The refinancing is at best a gamble. One of Regional's own investment bankers told the board,
"At best, you have a 50/50 chance of generating enough revenue to pay off this loan." If the loan
goes into default, HIC will foreclose on the mortgage, and will, most likely, sell the hospital's
assets to some large corporation that operates hospitals all around the country. In that event,
Regional's stock will become worthless.
a. Three weeks ago Polly Plaintiff was severely injured in a automobile accident and was taken
unconscious to the emergency room at Regional's hospital. During her treatment there, and while
still unconscious, she suffered permanent injury due to the injection of the wrong medication. The
mistake was committed by a nurse employed by Regional but at that moment on assignment to ES
LLC. The nurse was working under the direct supervision of an ES LLC physician, who had
instructed the nurse to inject "20 cc of XYZ med." Unfortunately, the nurse grabbed the wrong
vial and injected 20 cc of ABC medication.
Assuming the nurse was negligent and the negligence caused permanent injury to Polly Plaintiff,
can Plaintiff recover from:
i. ES LLC? [4]
ii. the members of ES LLC? [2]
iii. Regional? [9]
iv. HIC? [9]
v. the individual partners of HIC? [3]
Explain. If more than one theory plausibly applies, allocate appropriate space to each theory.
b. Angered by the lost opportunity to sell their shares to LNC at a premium, several of Regional's
shareholders wish to bring a lawsuit against Regional's board of directors.
i. Would such a lawsuit be direct or derivative? [2]
ii. What, if any, claims would such a lawsuit include? [10]
c. Suppose that several of Regional's directors wish to terminate the management contract with
HIC. A special meeting of the board is called, on 24 hours notice. All seven directors are present
at the time stated for the meeting. However, at the outset of the meeting one of the directors,
R.E. Calcitrant, announces, "This meeting is illegal. Proper notice was not given." One of the
other directors responds, "So leave then." Recalcitrant rejoins, "No way. I'm sticking around to
watch you snakes."
Recalcitrant does just that. She stays, watches and listens, but does nothing else. The other six
directors hotly debate the question of terminating the consulting agreement and eventually vote 4-2 to do so. Is the vote effective? [4]
d. Suppose that Regional does default on the loan and HIC does foreclose. If there are other
creditors of Regional still owed money, can these creditors collect from:
i. ES LLC? [4]
ii. HIC? [4]
iii. the individual partners of HIC? [3]
Grading Election: Exam/Class Participation
Business Organizations -- Summer, 1995
Professor Kleinberger
To: The Registrar
When my grade for Business Organizations is determined, the written exam should count for
_____________ percent(5) and class participation should count for _____________ percent.(6)
______________________________
signature
______________________________
print name
_________________________
date
1. The value in brackets assumes that the exam counts for 70% of a student's grade. For students who choose a greater or lesser role for the exam, the point values will be adjusted accordingly.
2. Assume that this decision is consonant with the applicable rules of professional responsibility.
3. Under an assignment of benefits, a patient assigns to a health care provider the patient's rights to insurance and authorizes the provider to bill and collect from the insurance carrier directly.
4. 0The shield language of the Delaware LLP provisions appears in Del. Code Ann., tit. 6, §
1515. That section first establishes the ordinary rules of general partner liability and then states::
(b) Subject to subsection (c) of this section, a partner in a registered limited liability partnership is
not liable, either directly or indirectly, by way of indemnification, contribution, assessment or
otherwise, for debts, obligations and liabilities of or chargeable to the partnership arising from
negligence, wrongful acts or misconduct, whether characterized as tort, contract or otherwise,
committed while the partnership is a registered limited liability partnership and in the course of the
partnership business by another partner or an employee, agent or representative of the
partnership.
(c) Subsection (b) of this section shall not affect the liability of a partner in a registered limited liability partnership for his own negligence, wrongful acts or misconduct or that of any person under his direct supervision and control.
5. Number must be 50, 60, 70 or 80.
6. Number must be 50, 40, 30 or 20. This number and the number for the written exam must total 100.