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 statute you obtained
in compliance with an assignment made during the semester;(1)
• 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, and within each part, 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.
Role of Exam in Course Grade
As you elect, the exam will count either 50, 60, 70, 80 or 90 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 turn in the form
when you turn in your exam answer. Separate the form from your exam
answer. Do not put your exam number on the form. If you fail to make
an election, this exam will count for 70% of your grade.
A. The Company is a Minnesota corporation with five shareholders, each
holding 20% of the corporation's one class of stock. The Company was founded
20 years ago by the five shareholders to develop and exploit a new technology.
The five shareholders had an informal "business plan" that called for all
of them to work full time in the business and projected that -- if all
went well -- after 15 years or so the business would be sold for enough
money to "make each of us independently wealthy and allow us to retire."
The plan was written down and reflected the consensus of the five shareholders
when they founded the Company. However, the plan was never signed by the
shareholders nor formally adopted by the Company.
Since its incorporation, the Company has been an S-corporation.(2)
According to federal tax law, making the S-election required the unanimous
consent of the shareholders. The Company's accountant, who had recommended
the election, undertook to educate the shareholders about S-corporations.
In so doing, the accountant not only informed the shareholders of the substantial
benefits of S status, she also explained the limitations of that status.
In particular, the accountant explained that the Company's S status would
be automatically terminated if a shareholder sold shares to a non-qualifying
corporation.
Having been fully informed about S-corporations, the shareholders unanimously
approved the Company's S-election and signed the consent forms necessary
to make the election.
The Company's technology has indeed been developed and the Company is
quite successful. It could easily be sold for $30 million. For the past
two years, one of the shareholders, Helen, has been pushing for just that
result. As she has repeatedly asserted to her fellow shareholders, "I want
to retire and I want my money out."
So far, however, her fellow shareholders have refused to sell the Company.
Each still enjoys working in the business, and each believes that in another
five or so years the Company will have increased significantly in value.
Angered and disappointed by what she sees as her fellow shareholders'
intransigence, Helen proposes to transfer a portion of her shares in the
Company to a shell corporation that she wholly owns. The Company's Restated
Articles of Organization (the "Articles") recognize that the shareholders
have the right to transfer their shares. The Articles require, however,
that a selling shareholder give the Company 30-days notice if the shareholder
is selling shares to a party other than one of the current shareholders.
The Company then has the right to avoid the sale by purchasing the shares
itself -- at "fair value, based on going concern value without discounts"
-- prior to the expiration of the 30-day period. Neither the Articles nor
any other corporate document impose other restrictions on the right to
transfer.
The four other shareholders believe it would significantly damage the
business to buy out Helen at this moment. The Company has insufficient
funds to purchase the shares without compromising what the other four shareholders
see as crucial development efforts. Moreover, because of the Company's
current credit arrangement, it cannot borrow that amount of money without
embarking on a disadvantageous refinancing agreement.
However, Helen's proposed transfer would automatically terminate the
Company's S status and impose significant tax disadvantages on both the
Company and its shareholders. Helen has offered to sell her shares to the
Company, or her fellow shareholders, on an installment basis, to ease the
financial burden.
1. The other shareholders
do not think Helen should be able use the Company's S-election as a means
of forcing a buy-out. They want a court to prevent Helen from selling to
the shell corporation. Will they succeed? Explain.
2. Assume both the following
changes to the above-stated facts.
a.
Another corporation ("the Offering Corporation") has previously offered
to purchase the entire Company. Helen strongly favored selling, but the
other shareholders rejected the offer (for the reasons stated above).
b.
Helen now proposes to sell her stock to the Offering Corporation. The Offering
Corporation will pay her a premium for her stock because the Offering Corporation
believes the demise of the Company's S-election will eventually lead other
shareholders to sell.
How, if at all, would the changed circumstances alter your analysis?
B. Our client is in the process of divorcing her husband, to whom she
has been married for twenty-five years. They have two children, both of
whom are adults. Throughout the marriage the husband has worked in the
construction business. Our client did not work until after the younger
of the couple's children turned 14. For the past five years our client
has worked as a secretary/bookkeeper in a dry cleaning company.
A major asset of the marriage is 100 shares of stock in GenCon, Inc.
("GenCon"). The shares of GenCon stock are in the husband's name, but they
are clearly marital property. GenCon was organized and the stock issued
after our client and her husband got married. Her husband did not use any
separate property (i.e. property he owned before the marriage) either to
buy the stock or to help GenCon operate or expand.
GenCon is a general contracting business owned in equal parts by our
client's husband and his two brothers. Although each of the shareholders
own an equal number of shares, our client's husband has always had the
dominant role in running the business. He is the CEO and chair of the board.
His brothers usually defer to him on major decisions. Much of the success
of the business is attributable to his skill in managing complicated projects
and to the many contacts he has personally built up in the business over
the past 20 years.
All shares of GenCon stock are subject to the following stock transfer
restriction:
17.1 Limitation on the Transferability of Shares -- No share
may be sold, pledged, given, alienated, hypothecated, or transferred in
any other fashion (whether voluntarily, involuntarily or by operation of
law) unless the share is first offered to the corporation at book value.
The offer must be made in writing and the corporation shall have thirty
days from the receipt of the offer in which to respond. No transfer of
any share, or of any interest in any share, shall be valid and binding
unless this Paragraph 17.1 was complied with. This limitation on transferability
shall apply to all attempted and purported transfers, including transfers
resulting or sought to result from the death or divorce of any shareholder.
Our client never agreed to the stock transfer restriction and indeed
was unaware of it until the divorce proceedings began.
The judge in the divorce matter has already decided to award all of
the stock to our client's husband. The judge will then make a compensating
monetary award to our client equal to one-half of the value of the stock.
1. What role should the price
stated in the stock transfer restriction play in determining -- for the
purposes of the divorce action -- the value of the stock being awarded
our client's husband? Explain.
2. The husband claims that
the value of the stock awarded to him should be discounted to take into
account the fact that much of the apparent value of the business (and indirectly
the stock) is due to his expertise, contacts and experience. He maintains
that these attributes are personal to him and not truly part of the value
of the business. How should we respond to this argument?
3. The husband claims that
the value of the stock awarded to him should be discounted to take into
account the fact that he is a minority shareholder in a closely held corporation.
How should we respond to this argument?
Grading Election: Exam/Class Participation
Closely Held Businesses -- Advanced Topics -- Spring, 1999
Professor Kleinberger
To: The Registrar
When my grade for Closely Held
Businesses -- Advanced Topics is determined, the written exam should
count for _____________ percent(3) and class
participation should count for _____________ percent.(4)
______________________________
signature
______________________________
print name
_________________________
date
1. If you obtained a statute as part of a compilation (e.g., the West Special Pamphlet of Selected Minnesota Statutes Relating to Corporations, Limited Liability Companies, and Partnerships), you may bring the entire compilation to the examination. There is no need to disassemble the compilation to extract the assigned statutes.
2. The income of C-corporations is taxed twice -- to the corporation and, then, to shareholders when they receive dividends. The income of S-corporations, however, is only taxed once -- to shareholders. The corporation, itself, is never taxed. A greater percentage of income is, therefore, available to an S-corporation and its shareholders.
3. aNumber must be 50, 60, 70, 80 or 90.
4. aNumber must be 50, 40, 30, 20 or 10. This number and the number for the written exam must total 100.