CLOSELY HELD BUSINESSES

SPRING, 1996

PROFESSOR KLEINBERGER

General Instructions

This exam is a limited open book exam. You may use only the following materials ("Permitted Materials"):

the assigned photocopied materials (including the Supplemental Materials) 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 the exam (including notes you have made while studying the Supplemental Materials), and

outlines or other notes developed by a group of students enrolled in this course this semester if: (a) you played a substantial role in the development of the group outline or notes, (b) neither the group outline nor other notes discuss or make reference to the Supplemental Materials or their subject matter, and (c) the group discussions that led to the group outline or notes strictly excluded any consideration of the Supplemental Materials and their subject matter.

Except for Permitted Materials, 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. Each part is of equal weight in the grading. 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

Our client is a minority shareholder in a corporation organized under the laws of the state of Wisconsin. Although the corporation only has four shareholders, it has not elected statutory close corporation status. The corporation was organized approximately 12 years ago, and all the current shareholders have held their respective interests since that time.

Our client owns 15 percent of the outstanding stock. Two other shareholders each own 15 percent, and the majority shareholder owns the remaining 55 percent. For the past two years, our client has been suffering through what appears to be at least a mild case of corporate mistreatment and has voiced objections to the pattern of behavior. The mistreatment has certainly never reached the Pedro level; our client still has her job at the corporation. The majority shareholder has insisted that the complained-of conduct is merely a reflection of a difference in business judgment, and the other two 15 percent shareholders have sided with the majority shareholder.

Our client would like to force the corporation to purchase her stock. This desire raises two related, threshold legal questions for us, which are stated below. Please answer these questions, keeping in mind that (i) Wisconsin allows corporations to elect close corporation status and provides a panoply of remedies for oppressive conduct within statutory close corporations, (ii) the corporation in which our client owns stock has not elected statutory close corporation status, and (iii) Wisconsin has no relevant case law and the universe of relevant legal precedent is confined to materials assigned during this course, including the Supplemental Materials.

Question 1 -- In asserting our client's claim for mistreatment, may we invoke the broad range of cases involving close corporations, or are we for some reason required to meet some different (and probably higher) standard applicable to all corporations?

Question 2 -- Assuming that we can sufficiently state and prove a claim of oppression, are we restricted in our remedies to dissolution or will we be able to prevail upon the court to grant a buy-out?

Part Two

Our client, Eli, is one of three shareholders in a Minnesota corporation. The corporation is planning to reconstitute itself as a Delaware corporation, and our client believes that the planned change threatens his interests. He has provided us the following background information.

A. The corporation was founded 10 years ago by four individuals, with the understanding that each would own one-quarter of the stock, serve on the board of directors and be employed full-time by the company.

B. Three years ago, Ilan, one of the shareholders, expressed an interest in changing careers and leaving the company. Without consulting anyone else, Paul, another shareholder, arranged to buy all of Ilan's stock. This transaction gave Paul 50 percent of the stock.

C. Last year, Paul approached Suzanne, another shareholder, and offered her a significant premium for the purchase of one share of her holdings. Initially Suzanne balked, recognizing that one share would give Paul majority control and might jeopardize her continued job security. She expressed this concern to Paul who responded by offering to enter into a shareholder agreement with her, guaranteeing her a job for the next 20 years. On that basis Suzanne agreed to sell one share of stock of Paul.

D. Our client, Eli, was never informed of any of these stock transactions until after they had occurred.

E. Paul has now informed Eli that Paul considers the management structure of the company to be "too top heavy" and has told Eli that the corporation will be engaging in some "downsizing." Eli, who knows a little bit about Minnesota corporate law, has told Paul, "You won't be able to get away with much. Remember the story of the Pedro brothers."

F. Paul (or his lawyers) apparently know something about Minnesota law too, because Paul has informed Eli of the plan to reconstitute the corporation as a Delaware corporation. The plan has the following essential elements:

1. A Delaware corporation will be formed, and that Delaware corporation will not elect close corporation status under Delaware law.

2. The Minnesota corporation will merge into the Delaware corporation, with each current shareholder obtaining holdings in the new, Delaware corporation exactly identical to what they now hold in the Minnesota corporation.

3. At the first possible moment after the consummation of the merger, the majority shareholder will cast his votes at a meeting of shareholders so that Eli will no longer serve on the board of directors. Then the majority shareholder, acting as a member of the board of directors at a properly called board meeting, will move that Eli be terminated from his employment in the company. The majority shareholder anticipates that the board will adopt that resolution.

This plan is obviously dangerous to Eli's interests. Under ordinary choice-of-law principles, Delaware law will probably apply to any claims Eli may make within the context of the new, Delaware corporation. Nixon v. Blackwell reveals Delaware's approach to shareholder rights in corporations that have not elected close corporation status; it is at least possible that under Delaware law Paul will be able to terminate Eli's employment with impunity.

In light of this information and these concerns, please advise me on the following two questions:

a. Assuming that Eli dissents from the proposed merger and seeks appraisal, will the fair value of his shares include the value of his soon-to-be-lost employment or will the fair value be confined merely to Eli's interest as an owner (i.e., his capital interest)?

b. In light of Paul's fully-disclosed purpose for instituting the merger and assuming that the merger is approved and implemented in full compliance with applicable law, is Eli limited to the appraisal remedy? If not, on what basis(ses) and with what claim(s) can he bring an independent action? What remedy(ies) should he seek in that action?