FINAL EXAMINATION

BUSINESS ORGANIZATIONS

SPRING, 1995

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 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.

Applicable Law and Related Matters

Unless a problem 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.

Part One

A. 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, is served 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 the 50¢ saved plus another 50¢. Assume that the restaurant owner considers her waiters and waitresses to have the right to receive tips in the ordinary course of their work for the restaurant, but had no prior knowledge of this waiter's action or attitude concerning the 50¢ charge. What amount, if any, may the owner recover from the waiter?

B. Marlon and Stella⁽¹⁾ form a partnership for the business of loan sharking (i.e., loaning money at extremely high interest rates and collecting from customers through, when necessary, violence and threats of violence).⁽²⁾ The partners' agreement is oral, informal, but definite on these points: (1) Marlon's role is limited to the physical -- namely, collecting from customers, using violence when necessary. (2) Marlon is not to speak for the partnership on any matter, other than to remind customers of the amount owed and the consequences of nonpayment.

One day Marlon confronts Clint, a customer, and says, "Stella sent me. We're partners. I'm in charge of enforcing and I'm gonna have to break your knee caps because that's the way we do business with people who don't pay."

Clint subsequently brings an action for assault and battery against Marlon. Invoking UPA § 13, the suit also names the partnership as a defendant. Clint attempts to use Marlon's comments to prove that: (a) Marlon and Stella had formed a partnership, (b) Marlon was acting "with the authority of his co-partners," UPA § 13 and (c) Marlon was acting "in the ordinary course of the business of the partnership." Id. For which, if any, of these purposes are Marlon's comments admissible?

C. On April 13, 1995 William Mitchell College of Law publicly announced that Harry Haynesworth would become Dean and President of the College effective July 1, 1995. Shortly after the announcement, a member of the fulltime faculty approached the Dean designate and told him, "For my new research project I desperately need permission and funding to go to a conference in Colorado. The conference is in mid-July, but space is filling up very quickly." The faculty member and the Dean designate discuss the matter for a few minutes, and the Dean designate says, "Sounds like a worthwhile project to me. When you get back, stop by and let me know what you learned."

Within a week of that conversation, the faculty member reserves a space at the conference, buys a nonrefundable airline ticket and seeks reimbursement from the College for the ticket price. On May 1, 1995, the College rejects the reimbursement request on the grounds that the faculty member had not obtained proper, advance approval. The faculty member acknowledges receiving "sometime in the past" a memo from the Associate Dean for Academic Affairs which stated that "All out-of-town travel must be approved in advance by the Associate Dean. No exceptions!" The Associate Dean for Academic Affairs is appointed by the Dean of the College, performs those tasks delegated by the Dean and serves at the Dean's pleasure.

The faculty member believes that Harry Haynesworth gave the necessary advance approval. As of May 1, 1995, can the faculty member use Harry Haynesworth's April 13 comments to obligate the College to provide reimbursement?

D. William Mitchell College of Law employs P.T. Angry as the Associate Dean of Academic Affairs.⁽³⁾ Angry is also a member of the faculty. Angry's duties include developing the schedule of classes (i.e. which classes are to be taught when) and assigning faculty to teach those classes (i.e. who teaches what); allocating funds among the faculty for research assistance and travel; approving faculty requests for out-of-town travel; chairing faculty meetings when the Dean is unavailable; representing the College at various meetings; reviewing and deciding all student requests for independent study. Before beginning work as Associate Dean, Angry had been a fulltime faculty member for eight years, with an unblemished record.

Last week Angry participated in a day-long faculty retreat at a retreat center in rural Minnesota. (All members of the faculty, including Angry, were invited and encouraged to attend.) During the lunch break Angry participated in an informal basketball game, which also included employees from the retreat center. During the game Angry and one of the center's employees, I.M. Plaintiff, disagreed vehemently over an alleged foul. As Plaintiff turned away from Angry, Angry struck Plaintiff on the back of the head, causing severe injury.

Plaintiff subsequently sues Angry and William Mitchell, and the jury finds Angry liable to Plaintiff in tort for both compensatory and punitive damages. The jury also assesses punitive damages against William Mitchell. William Mitchell asks the trial judge to set aside the award of punitive damages, invoking Minn. Stat. § 549.20, Subd. 2 (attached as Appendix A). According to that statute, is the award of punitive damages against William Mitchell valid?

Part Two

ScienceTech, Inc. ("ST") is a corporation organized 15 years ago by four research scientists ("the founders"). Originally the founders were ST's only shareholders. Five years ago ST "went public" -- i.e. jumped through the regulatory hoops necessary to allow ST shares to be issued to members of the public and to be publicly traded. At that time the founders sold much, although not all, of their stock. Two years later each founder resigned his or her position as a fulltime ST employee.

ST has always had one class of stock and now has approximately 500 stockholders. The founders hold the largest blocks of shares. The founders' individual holdings combine to constitute 18% of all of ST's outstanding shares.

ST has a nine-person board of directors, consisting of the founders (4), ST's CEO (a fulltime employee of ST), ST's CFO (also a fulltime employee of ST), and three additional directors who neither work for ST nor have any large holdings of ST shares.

ST provides high-tech, high-quality, high-price testing services to various customers. The corporation's greatest assets are its technology, its customer base and its well-trained workforce. ST's business has been lucrative and the corporation currently has very substantial cash reserves (i.e. cash or cash equivalents, not committed to any particular purpose).

ST owns some of its testing equipment, but leases the most costly and important equipment from The Founders Partnership ("TFP"), a general partnership co-owned by the founders. TFP also leases to ST the building in which ST houses almost all of its operations.

The relationship between TFP and ST dates back to the beginning of the business and the incorporation of ST. While the founders were ST's only shareholders, ST leased the equipment and building on a simple, one-page lease, subject to termination without cause by either party on six months written notice. Just prior to ST "going public," TFP and ST entered into a 20 year Lease of Equipment and Facilities ("the Lease"). On ST's behalf, the Lease was approved by a committee of the board, composed of three directors. None of those three directors were founders and none were employees of ST. The Lease has 15 years remaining.

Several years ago, the board of ST adopted a poison pill that prohibits a variety of business combinations between ST and any shareholder or affiliate of any shareholder, unless the combination is approved by 80% of the votes cast at a properly called shareholder meeting with a quorum present. The poison pill defines business combinations and affiliates very broadly, so that -- unless the acquiring party can muster the necessary 80% vote -- the pill effectively precludes any of the post-acquisition maneuvers that normally follow a hostile takeover.

When the board adopted this poison pill, there was no hostile bid pending or even rumored. Now, however, ST is facing a potential hostile takeover. Although the current bid is 15% above the pre-bid market price for the stock ("the old market price"), ST's board believes that selling the company is not in the long-term best interests of either the shareholders or ST's employees. In response to the hostile bid, the board is considering two alternative defensive measures:

The Buy Back Plan -- ST would buy back a significant number of its own shares, at a price 25% above the old market price. The founders have individually announced that, although they favor this plan, they would not sell any of their stock back to the corporation. Each founder has stated, in effect, that she or he believes in ST's long- term profitability.

If fully implemented, the Buy Back Plan would have several effects. It would: (i) decrease the pressure to sell the corporation, by providing a lucrative "out" for shareholders interested in a short-term gain; (ii) decrease the attractiveness of the corporation as a take-over target, by eliminating some of the cash reserves that first attracted the hostile bidder; and (iii) raise the founders' aggregate holdings to 21% of ST's outstanding stock.⁽⁴⁾

The Asset Acquisition Plan -- ST would acquire from TFP the building and equipment covered by the Lease. Implementing this plan would decrease the attractiveness of the corporation as a take-over target, by eliminating some of the cash reserves that first attracted the hostile bidder.

A. ST's board of directors has retained you as special counsel to provide legal advice concerning the two plans. As to each of the plans, identify any potentially problematic legal issues, explain why those issues might be problematic, and suggest, if possible, means for eliminating or reducing the problems.

B. The board has also asked your opinion on some of the mechanics for implementing the Asset Acquisition Plan. For various reasons, the board wishes to merge TFP into ST, with ST paying cash as the merger consideration. Assume that the applicable corporate law is as stated in the section of this examination captioned "Applicable Law and Related Matters," except that the corporate statute's merger provisions allow a general partnership to be merged into a corporation if the corporation approves the merger "as if the merger were with another corporation" and the partnership approves the merger "according to the law applicable to the partnership." TFP has no partnership agreement. Its partners share profits equally. The sole business of TFP has been and is owning and leasing to ST the property covered by the Lease.

1. How many of TFP's partners must approve the merger?

2. Would a single partner of TFP have the power (as distinguished from the right) to bind TFP to the merger agreement?

3. Do the shareholders of ST have a right to vote on the merger?

Appendix A -- Minn. Stat. § 549.20, Subd. 2

Punitive damages can properly be awarded against a master or principal because of an act done by an agent only if:

(a) the principal authorized the doing and the manner of the act, or

(b) the agent was unfit and the principal deliberately disregarded a high probability that the agent was unfit, or

(c) the agent was employed in a managerial capacity with authority to establish policy and make planning level decisions for the principal and was acting in the scope of that employment, or

(d) the principal or a managerial agent of the principal, described in clause (c),

ratified or approved the act while knowing of its character and probable consequences.

1. Use of this name is in no way a reference to any member of the present class but rather harks back to a character in a Marlon Brando movie.

2. For the purposes of this problem, do not take not take into account that these practices are unlawful.

3. No resemblance is intended between this purely imaginary Associate Dean and any past or present incumbent and the same is expressly negated, disclaimed and denied.

4. This last effect follows from the founders' announced intention not to sell any of their stock. As the corporation buys back stock from other shareholders, the total number of outstanding shares will decrease, and the percentage held by the founders will increase.