CLOSELY HELD BUSINESSES

SPRING, 1994

PROFESSOR KLEINBERGER

General Instructions

This is an open book examination. You may use 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 two hours and thirty minutes and has two parts. Each part is of equal weight in the grading. Although I have assumed that you will need 30 extra minutes for Part One on account of the detailed fact pattern, how you allocate your time between the two Parts is your decision. Remember, however, that the two Parts count equally.

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.

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.)

You are not required 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.

Part One

See Appendix A, an excerpt from Nixon v. Blackwell. If the E.C. Barton & Co. ("the Corporation" in the excerpt) were a Minnesota corporation and had no more than 35 shareholders, how would this case come out?

The facts are intricate, but -- given the allotment of extra time -- you have time to make sense of them.

Part Two

Two years ago a group of six lawyers broke away from a large Minneapolis law firm and organized their own firm as a general partnership with each of them as a partner. The six "got out clean" from their old law firm -- i.e. they neither breached that firm's partnership agreement nor any fiduciary duties. Their new firm specializes in collections work, featuring high volume and much repeat business from major clients.

In order to get the new firm up and running, all six partners had to make major financial commitments. The type of collections work they do is very capital intensive. They had to buy high powered computers and lots of printers and had to pay for the customization of some already very expensive software. Although each of the partners is drawing a decent salary from the firm, none are making near what they were making when they left the old firm. They believe that the pay back on their investment will take another 3-5 years, assuming no significant defections from their client base.

The six partners had thought through this situation in advance, and their partnership agreement contains language reciting the economic facts just described and includes Article IX, as follows:

Article IX.

A. Each Partner's willingness to leave their former firm, to form the Partnership, and to make the necessary commitments to obtain the necessary facilities, hardware and software, is based on shared expectations that the Partnership will continue for at least seven years and that during that time each Partner will exercise the utmost diligence and good faith to preserve and expand the Partnership's client base.

B. All Partners recognize, however, that each Partner's personal situation may change at any time, and, accordingly, this Partnership is a partnership at will. A withdrawing Partner shall receive as final settlement of all amounts due from the Partnership the sum calculated under Article X of this Agreement. [Article X was included in the partnership agreement but is NOT provided to you.] However, to make possible the commitments and investments necessary to initiate the Partnership's business and so that those commitments and investments are economically rational, each Partner agrees that if:

1. any Partner withdraws from the Partnership during the seven years immediately following the execution of this Agreement, and

2. during the one year following the withdrawal the former Partner represents in any collections matter any individual or organization which has been represented by the Partnership at any time,

then the sum due the former Partner under Article X shall be reduced by 80% and upon demand the former Partner shall immediately repay the Partnership any amount received under Article X in excess of the reduced amount.

Is Article IX enforceable?