BUSINESS ORGANIZATIONS

SPRING, 1994

PROFESSOR KLEINBERGER

General Instructions

This is an open book examination. You may use the case 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 five 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 five 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.

Part One

A. The William Mitchell Exam Conflict and Make-Up Policy (1993-4 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, justify a rescheduling. Exceptional circumstances must relate to personal situations, not to a burdensome examination schedule.

A student approaches her professor, complaining that she faces an exam in the professor's course beginning at 1 PM on the first day of the exam period and an exam in another course beginning at 6 PM of the next day. The professor looks at the exam schedule and the Exam Conflicts and Make-Up Policy and says, "Don't worry. You can move my exam." The student conducts her exam preparation accordingly. Can the student hold William Mitchell to the professor's undertaking? Explain.

B. Jack and Jill have a partnership at will that operates a commercial plumbing business in a large town in the middle of farming country. One day, Jack tells Jill that he wants to be in business for himself. He offers to buy Jill out. The two partners negotiate and agree on a price. They dissolve the partnership and wind up the partnership's business according to the buy-out agreement. Jack promises to hold Jill harmless from all of the business's liabilities, receives all of the business's assets and continues the plumbing business. Jill receives a cash payment.

Two months later Jill learns that a major regional mall is to be built in the town. This development will significantly increase the value of what is now Jack's commercial plumbing business. She confronts Jack, and the following conversation ensues:

Jill: Did you know the mall was coming when we negotiated our buy-out agreement?

Jack: Yes.

Jill: Why didn't you tell me?

Jack: You didn't ask.

Was Jack's conduct during the buy-out negotiations wrongful? Explain. [Do not discuss remedies.]

C. Two brothers, Caleb and Adam, operate a farm as a general partnership, known as AdCal Farming Company. They are well known in the community, and each regularly makes equipment purchases for the partnership business. One day, Caleb goes to the local Ford dealer and buys a $25,000 Ford pick-up truck on credit, signing the purchase agreement "AdCal Farming Company, by Caleb, general partner." In fact, the truck has nothing to do with the partnership business. Caleb has decided to give up farming and go "on the road." The truck is for his personal use. May the Ford dealer hold Adam liable on the purchase agreement? Explain.

D. In the case of Sieben v. Grose a Minnesota state court makes the following statement:

. . . the directors of a corporation are obligated to exercise their business judgment using reasonable care.

In another case, Von v. Holtum, the same Minnesota state court makes the following statement:

. . . the directors of a corporation are obligated to exercise their business judgment in a manner that avoids gross negligence.

On both occasions, the court is correct. How is that possible?

E. Travelling across country by car after the death of her husband, Alice stops at a roadside diner for lunch. The diner is in chaos. The sole waitress has just quit, and Mel, the owner and cook, has a room full of increasingly irate customers. Sensing a job opportunity, Alice says to Mel, "Hey, I can wait tables. Want some help?" Mel responds, "Four dollars an hour. You're hired. Your shift ends at 7 PM."

Alice works hard and extremely well. By the end of the day, she has collected $80 in tips. She is shocked when Mel says, "The tips belong to me. I didn't say nothing about you keeping the tips." Is Alice obliged to surrender the tips?

Part Two

Alpha, Inc. ("Alpha") is a corporation organized under the law of a state that has adopted the Revised Model Business Corporation Act, except as to the duties of directors and as to derivative lawsuits. On those two subjects, the state slavishly follows Delaware court opinions. Alpha has one class of stock, and that stock is traded on the New York Stock Exchange.

A shareholder of Alpha has approached you, complaining about "a mockery of a sham of a scam of an outrage," as follows:

i. Alpha has 10 million shares issued and outstanding, with the articles of incorporation authorizing a total of 20 million shares. The board of directors of Alpha is planning to issue 5 million new shares to Pick Holdings, Inc. ("Pick"), in return for all of Pick's stock in its wholly-owned subsidiary, Little-Pick, Inc. ("Little-Pick"). Little-Pick will become a wholly-owned subsidiary of Alpha. Pick already owns 2 million shares of Alpha stock. The transaction will leave Pick with 7 million of Alpha's shares, out of what will then be a total of 15 million shares outstanding.

ii. Alpha has an extremely lucrative subsidiary, Beta, Inc. ("Beta"), which accounts for 50% of Alpha's revenues and 55% of its profits. Alpha's board of directors is planning to sell Beta to Pick for $20,000,000. The price is grossly inferior to the value of the subsidiary.

It appears that seven of Alpha's nine directors will vote in favor of each transaction, and two directors will vote against each transaction. Assuming that the Board approves each transaction:

1. Can your client dissent from either transaction and seek appraisal? Explain.

2. What, if any, direct claims (other than the appraisal claims just mentioned) might your client have against the directors of Alpha? Explain.

3. What, if any, derivative claims might your client have against the directors of Alpha? Would demand be excused? Explain.