WILLIAM MITCHELL COLLEGE OF LAW

FINAL EXAMINATION

BUSINESS ORGANIZATIONS

Professor Niels Schaumann

Tuesday, December 20, 1994 - 6:30 p.m.

3 Hours

STUDENT TEST NO.

1. For anonymity, use your assigned test number which was mailed to you.

2. Put your test number on this page and on all bluebooks.

3. If you do not know your test number, you may obtain it at the Communication Center or in the Records Office (Cindy Egeness) during the first 30 minutes of the exam period.

4. If you do not use your test number, you will be deemed to have waived your privilege of anonymous grading.

5. TURN IN YOUR BLUEBOOKS AND THIS EXAM AT THE END OF THE PERIOD.

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STUDENT CONDUCT CODE

IT IS A VIOLATION OF THE CODE:

1. To use any sources which are forbidden by the instructor to complete an exam.

2. To submit as one's own work the work of another.

3. To engage in any conduct which tends to give an unfair advantage to any student in any academic matter.

Knowledge of any violation should be promptly reported.

VIOLATION OF THE STUDENT CONDUCT CODE MAY RESULT IN EXPULSION

OR SUSPENSION FROM THE COLLEGE OR DISMISSAL FROM THE CLASS.

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GRADUATING SENIORS: If you are a graduating senior, note this fact on all bluebooks and this exam paper. DO SO CONSPICUOUSLY.

TYPING AREA: If you are going to type your examination, the typing area is located in the old Boardroom. You must return the exam to this room at the conclusion of the exam period.

GENERAL INSTRUCTIONS

MATERIALS PERMITTED FOR THIS TEST: Cary & Eisenberg, Corporations (concise 6th Ed. 1988), with statute supplement. In addition, you may use class notes, outlines and other materials prepared by you or by other students, and any material distributed by the instructor. NO OTHER MATERIAL IS PERMITTED.

ANSWER ALL QUESTIONS USING A PEN.

DO NOT ANSWER ANY QUESTION IN PENCIL!

This examination consists of two Parts, numbered I and II. Below the heading for each Part there appears, in parenthesis, the percentage of the total test score attributable to that Part. Keep in mind that no matter how long you spend on a question, you can earn no more than the specified percentage of the total test score for your answer.

Instructions for Essay Questions

1. Write on only one side of the page.

2. Write on every other line.

3. Try to write legibly. I want to give you as much credit as possible, and I cannot give credit for an answer I cannot read.

4. Citations to specific cases are not necessary. You should, however, cite relevant statutes and rules.

5. Take some time to organize your answer. All other things being equal, a coherent response will earn more credit than one that rambles aimlessly.

Part I--Essay

(65%)

The Board of Model Industries, Inc. was in turmoil. In recent weeks, several newspapers had printed allegations of fraud and incompetence among Model's management. Model's board had split into two factions. One faction, led by Billy Keen (an outside director and holder of 100 shares of Model stock), insisted that the board investigate the allegations made in the newspapers. The other, led by Mortimer McMire (also an outside director, and the holder of 50 shares of Model stock), was equally vehement that the allegations were baseless and that an investigation would merely use up valuable corporate resources that could be better used elsewhere. Mortimer continually reminder the directors that it was, after all, the shareholders' money that would be spent on, in his words, "this ridiculous wild goose chase."

Model was incorporated in the State of Grace, which has adopted the RMBCA in its entirety -- a fact that Billy Keen used to rhetorical advantage, by pointing out at every opportunity that "we're under some legal obligations here, you know. How can we face the shareholders if we simply ignore these reports?" One attempt to reconcile the factions, by seeking the advice of Model's counsel (the eminent firm of Dewey, Cheatham & Howe) failed when the firm resigned as counsel after the second news story appeared. But before resigning, one of the firm's lawyers informed the board that the Supreme Court of the State of Grace had just ruled that all matters pertaining to the standard of care applicable to directors, the business judgment rule, and shareholder derivative litigation are to be decided under the law of Delaware.

The situation was becoming desperate: The warring board factions showed no signs of coming closer to an agreement, and angry letters were starting to arrive from shareholders demanding to know when the board was going to at least take a position on the allegations. At this crucial moment, Billy had a flash of inspiration: he suggested to the board that the question whether an investigation should take place be turned over to a shareholder referendum.

This idea met with the unanimous approval of the directors, and the approximately 200 shareholders were immediately summoned by post and telegram to Model headquarters. Twelve days later, the shareholders able to attend on such short notice--barely 51.5% of the shares outstanding--convened in the Great Hall of Model's headquarters. After inspiring and persuasive presentations by both Billy and Mortimer, the moment of truth arrived. When the votes were tallied, they showed that the overwhelming majority favored an investigation to be conducted by "such directors as the board shall designate."

But Mortimer was not finished yet. Exactly one week after the first shareholder meeting, Billy was surprised and upset to learn that he, and three other members of his faction, had been removed without cause from Model's board, at yet another shareholder meeting--one to which Mortimer neglected to invite him. When Billy protested, Mortimer pointed out that of the shares represented at the meeting, 90% voted to remove Billy and the other directors. "Pretty overwhelming, I'd say," Mortimer sneered as Billy, dejected, prepared to leave the Great Hall for the last time.

Unsurprisingly, when the investigation was completed, the report of the investigating directors concluded that the allegations made in the newspapers were false. Billy, however, received a telephone call yesterday from an anonymous source. The caller told Billy that: 1) Mortimer some time ago discovered that Mel Feasance, the President of Model, had some deep, dark secrets (unfortunately too controversial to repeat here); 2) ever since he learned Mel's secrets, Mortimer had been blackmailing Mel by threatening to "go public" with them; (3) the allegations in the newspaper were true, and were the result of Mel's deteriorating performance caused by the stress of Billy's blackmail; and (4) Mortimer had used his influence on the investigating directors to try to keep them from discovering the truth.

Billy has verified all this information, and has consulted you, the region's preeminent corporate lawyer, for advice. In particular, Billy wants to know the following:

A. Is there any way that Billy and his allies can regain their seats on Model's board of directors?

B. What legal actions might be brought against Mortimer? By whom? Are they likely to succeed?

C. What legal actions might be brought against the directors who served on the investigating committee? By whom? Are they likely to succeed?

D. What legal actions might be brought against Mel Feasance? By whom? Are they likely to succeed?

Billy is in a real hurry, and he can't sit in your office for hours while you go on and on about corporate law. He has about an hour and a half, tops, so you should make an effort to be concise.

Part II--Multiple Choice

(35%)

Instructions for Multiple-Choice Questions

1. For each question in Part II, choose the most accurate answer (whether or not you think it fits perfectly). Print (do not write in script) the letter for your answer on the examination paper in the space provided immediately to the left of the question.

2. Each question in this Part is worth the same number of points (1.00 points).

3. Although an incorrect answer will not earn any points, no points will be deducted for an incorrect answer. This means that if you are unsure of the correct answer, it is to your advantage to guess. An answer left blank counts as an incorrect answer.

4. Although I have tried to make the questions as clear as possible, objective questions are very difficult to write. Moreover, law students under exam pressure are extraordinarily adept at spotting lurking ambiguities.

For these reasons, below each question there are three lines. If you consider it necessary to qualify your answer, you may use those lines to write in any additional information that you believe I should have.

The foregoing should not be construed as encouragement to qualify your answer. No "extra credit" will be given for material written in these spaces. Similarly, no points will be deducted for incorrect statements made in a qualification. If, however, students identify a material flaw in a question, I may allow more than one answer or, if necessary, not score the question at all.

NOTE: References to the "RMBCA" or to the "Revised Model Act" are to the Revised Model Business Corporation Act.

____ 1. In agency law, independent contractors:

A. Are sometimes agents, and sometimes are not agents.

B. Are always agents.

C. Are never agents.

D. Are always servants.

E. None of the above.

____ 2. Incidental authority:

A. Is the authority to do what is reasonably necessary or usual to accomplish the goal of the agency.

B. Is a variety of implied authority.

C. Is a variety of actual authority.

D. All of the above.

E. Both A. and B. above, but not C. or D.

____ 3. In order to create an agency relationship:

A. Both the principal and the agent must subjectively consent to the agency.

B. The agent must subjectively consent to the relationship, but the principal need not subjectively consent.

C. The principal must subjectively consent to the relationship, but the agent need not subjectively consent.

D. Neither party needs to consent subjectively, as long as a reasonable person would have understood the party's words or actions to signify consent.

E. None of the above.

____ 4. Donna agreed to watch Patty's house for a week, while Patty was away. Just before she left, Patty told Donna, "I'm expecting an important delivery of wallpaper at 3:00 p.m. on Wednesday. Would you please keep an eye open for it, and instruct the driver to unload it into the garage?" Donna said, "Sure." Patty left. Unfortunately, when the wallpaper arrived, Donna forgot what she was supposed to tell the driver. The driver unloaded the wallpaper in Patty's driveway, and all of it was ruined when it rained that night. Assuming that Donna was doing Patty a favor, without any payment:

A. Donna probably breached her fiduciary duty to Patty.

B. Donna probably breached her duty of care to Patty.

C. Had she been paid, Donna probably would have breached her fiduciary duty to Patty, but because she was a gratuitous agent, no fiduciary duty was breached.

D. Had she been paid, Donna probably would have breached her duty of care to Patty, but because she was a gratuitous agent, no duty of care was breached.

E. None of the above.

____ 5. A gratuitous agent:

A. Has both the right and the power to terminate the agency relationship at any time.

B. Has the power to terminate the agency relationship at any time, and may in addition have the right to do so.

C. Has the right to terminate the agency relationship at any time, and may in addition have the power to do so.

D. Has neither the right nor the power to terminate the agency relationship.

E. None of the above.

____ 6. "Agency by estoppel" is a term sometimes used by courts to refer to:

A. Actual implied authority.

B. Actual express authority.

C. Incidental authority.

D. Inherent authority.

E. Apparent authority.

____ 7. Anthony worked for Gasco, a gas utility company, as a furnace inspector. In 1988 Anthony used his Gasco identification badge to gain entry to the home of Tim, stating that he needed to get in to inspect Tim's furnace. Once inside, Anthony knocked Tim unconscious and stole cash and other valuable property. In a civil lawsuit by Tim against Gasco for the value of the stolen property:

A. Gasco would probably not be liable, because there is no evidence that Gasco authorized Anthony to use his ID card to facilitate a robbery.

B. Gasco would probably not be liable, because Gasco had no reasonable opportunity to prevent Anthony from committing the robbery of Tim.

C. Gasco would probably be liable, because it must bear the risk that one of its agents will misuse the credentials issued by Gasco.

D. Gasco would probably be liable, because there is no evidence that Gasco gave Anthony express instructions to use its credentials only for lawful activity.

E. None of the above.

____ 8. [DELETED]

____ 9. Ratification by the ostensible principal, of an unauthorized act by the alleged agent:

A. Results in a binding contract unless the third party has withdrawn.

B. Must be communicated to the third party in order to be effective.

C. Must be in writing in order to be effective.

D. All of the above.

E. Both A. and B. above, but not C. or D.

____ 10. The UPA:

A. Preempts the common law of partnership as to matters that are addressed in the statute.

B. Preempts all doctrines of equity.

C. Preempts all common-law doctrines, in all matters.

D. Preempts all common-law doctrines, but only to the extent such doctrines have an impact on partnerships in general, or on a particular partnership.

E. Both A. and B., but not C. or D.

____ 11. In order for a partnership to exist:

A. The ostensible partners must intend to form a partnership de jure.

B. The ostensible partners must intend the venture to be profitable.

C. The venture must in fact be profitable, at least for one instant in time.

D. All of the above.

E. Both B. and C. above, but not A. or D.

____ 12. Marc and Joseph were considering becoming partners. When the two met to negotiate the terms of their partnership agreement, Marc said that in light of his knowledge and expertise, he would not accept any proposal pursuant to which his share of the profit was less than 70%. In fact, Marc did not have the knowledge and expertise he claimed, and he would have agreed to take as little as 50% of the profits. Joseph, however, didn't know that Marc lacked credentials and agreed that Marc could have 70% of the profits. Under the UPA:

A. Marc has not committed any legal wrong, because at the time he made the false statement, Joseph was not his partner.

B. Marc has breached his fiduciary duty, because the false statement was connected with the formation of the partnership.

C. Marc has breached his duty of care, because he was recklessly indifferent to the effect of his false statements on Joseph.

D. The partnership between Marc and Joseph is dissolved.

E. Both B. and D. above, but not A. or C.

____ 13. Frieda rented a building to two college friends, Mary and Beth, who operated a business together. Under the terms of the lease, Mary and Beth agreed to pay Frieda, as compensation for the use of the building, a sum equal to 20% of their net monthly profit. Under the UPA:

A. Frieda's receipt of a share of the profits is prima facie evidence that she is a partner of Mary and Beth.

B. Frieda's share of the profits was received as rent, and therefore Frieda cannot be the partner of Mary and Beth.

C. No inference can be drawn from Frieda's receipt of a share of the profits, but Frieda might nevertheless be the partner of Mary and Beth.

D. Frieda's receipt of a share of the profits is, as a practical matter, conclusive proof that she is the partner of Mary and Beth.

E. None of the above.

____ 14. Wilbur and Ed were co-owners of a business. The two had never formalized their relationship in writing, but they agreed orally that Wilbur had no right to participate in management, and that Wilbur's involvement would be limited to collecting his share of the business's profits four times a year. Wilbur:

A. Cannot be Ed's partner, because he has no management rights.

B. Is probably Ed's limited partner, because he is entitled to share in profits and is a co-owner, but he has no management rights.

C. Is probably Ed's general partner, even though he doesn't have management rights.

D. Is probably Ed's partner, and regardless of the agreement, has management rights under the UPA.

E. None of the above.

____ 15. Barry, Todd and Liz were partners in a partnership at will. Eventually Barry dissolved the partnership, because he wanted to retire. Over the next few months, Barry paid (out of his own pocket) numerous debts that the partnership owed to third parties arising from its activities before dissolution, totalling $62,000. None of the other partners paid any partnership debts. Neither Barry nor the other partners paid the partnership's debt to Charles, a former supplier of the partnership who was owed $40,000. If Charles is the last remaining creditor of the partnership, and he sues Barry personally for the $40,000:

A. Barry is not liable, because he has already paid more than his share of the partnership's debts and under the UPA partners inter se are liable only for their proportionate share of partnership losses.

B. Barry is not liable, because the partnership is dissolved and under the UPA he is no longer liable for its debts.

C. Barry is not liable, unless the partnership agreement expressly provides otherwise.

D. Barry is liable because he was a partner of the former partnership and as such is personally liable for the debts of the partnership.

E. Barry is liable, because he is the person responsible for the dissolution of the partnership and cannot be permitted to profit by his action.

____ 16. [Deleted]

____ 17. Joe, a partner in a real estate partnership, executed in the partnership's name a contract for the purchase of land. This action violated the partnership's written partnership agreement. When Joe's partners discovered what he had done, they expelled Joe from the partnership, as provided in the partnership agreement. Under the UPA:

A. The partnership may be bound to the purchase contract, if partnerships of this kind usually have individual partners execute purchase contracts in the partnership name.

B. Joe can demand liquidation of the partnership assets unless all the remaining partners decide to continue the partnership business in the same name.

C. The partnership is not bound to the purchase contract, unless Joe had actual or apparent authority to execute the purchase contract in the partnership name.

D. Both A. and B. above, but not C.

E. Both B. and C. above, but not A. or D.

____ 18. [Deleted]

____ 19. Under the UPA:

A. A partner's right to participate in the management of the partnership is a property right.

B. A partner's interest in the partnership can be transferred, but the transferee does not thereby become a partner.

C. A partner's interest in partnership property can be transferred, but the transferee does not thereby become a partner.

D. All of the above.

E. Both A. and B. above, but not C. or D.

____ 20. A, B and C were partners in a partnership at will. They had a written partnership agreement, which provided that A would contribute 50% of any partnership losses; B would contribute 30% of any partnership losses; and C would contribute 20% of any partnership losses. The agreement was silent on the division of profits. Under the UPA:

A. A, B and C share profits in the same proportion that they share losses.

B. A, B and C share profits equally, and share losses as provided in their agreement.

C. A, B and C share profits equally and, notwithstanding their agreement, they share losses equally as well.

D. The UPA provides no rules for determining how profits are to be shared in this case.

E. None of the above.

____ 21. In the majority view of partnership dissolution:

A. A provision in the partnership agreement purporting to divest all partners of the power to dissolve the partnership is enforceable.

B. A provision in the partnership agreement purporting to divest any one partner of the power to dissolve the partnership is enforceable, but a provision purporting to divest all partners of that power is not enforceable, because such a provision would contravene the UPA rules regarding dissolution.

C. A provision in a partnership agreement purporting to divest any partner of the power to dissolve the partnership is not enforceable, but it might make a particular dissolution wrongful.

D. A provision in a partnership agreement purporting to divest any partner of the power to dissolve the partnership renders the partnership agreement void, and the parties must look to the default rules of the UPA.

E. None of the above.

____ 22. Jack, Beth and Sue were partners in a partnership for a term of five years. After the partnership had been in existence three years, Jack quit. Beth took advantage of the situation and quit also. Under the UPA:

A. Jack has dissolved the partnership wrongfully.

B. Jack can demand liquidation of the partnership assets.

C. Jack cannot demand liquidation of the partnership assets.

D. Both A. and B. above, but not C.

E. Both A. and C. above, but not B. or D.

____ 23. The chief advantage(s) of a limited partnership over a general partnership is (are):

A. More flexible management structure.

B. More favorable tax treatment.

C. Limited liability for some, but not all, partners.

D. All of the above.

E. A. and C. above, but not B. or D.

____ 24. In most jurisdictions, shareholders in a corporation must approve:

A. A proposed amendment of the corporation's articles of incorporation.

B. A merger of the corporation into another corporation, with the other surviving.

C. The appointment of the corporation's president and chief executive officer.

D. All of the above.

E. Both A. and B. above, but not C. or D.

____ 25. ABC Corp. was incorporated in 1984 under the RMBCA. Its charter is silent as to its corporate purpose. Since its incorporation, however, ABC has engaged exclusively in the business of buying and selling real estate. If ABC last month signed a contract under which it is to provide a fishing guide service in the Boundary Waters Canoe Area:

A. The contract is probably not enforceable, because it is ultra vires the corporation.

B. The contract is probably enforceable, even though it is ultra vires the corporation.

C. The contract is probably enforceable, and it is not ultra vires the corporation.

D. The contract is probably not enforceable, because a corporation cannot legally agree to provide personal services.

E. None of the above.

____ 26. Joanne, an explosives expert, was hired by Sally, who was in the process of organizing a corporation to provide demolition services. Both Joanne and Sally understood that Joanne would work for the corporation, and not for Sally personally. The corporation was incorporated in March 1992. When Joanne submitted her first bill to the corporation, the corporation refused to pay for work she did in January and February of 1992. The work consisted of efforts to line up clients for the corporation. Joanne:

A. Could probably win a lawsuit against the corporation for payment for the work done in January and February, if Joanne intended the corporation to benefit from the work.

B. Could probably win a lawsuit against the corporation for payment for the work done in January and February, if the corporation adopted the agreement made between Joanne and Sally.

C. Could probably win a lawsuit against the corporation for payment for the work done in January and February, if the corporation accepted the fruits of Joanne's efforts by doing business with the clients she lined up.

D. All of the above.

E. Both B. and C. above, but not A. or D.

____ 27. The doctrine of corporation by estoppel is:

A. A means by which a court can impose personal liability on would-be shareholders who failed, through their own negligence, to incorporate validly.

B. A means by which a court can render a dominant creditor liable for debts to third parties owed by an entity that, as a practical matter, was under the dominant creditor's control.

C. A means by which a court can require a corporation to perform in accordance with the terms of an otherwise valid contract.

D. Both B. and C. above, but not A.

E. None of the above.

____ 28. The de facto corporation doctrine is:

A. A means by which a court can accomplish the same result achieved under the ultra vires doctrine.

B. A means by which a court can accomplish the same result achieved under the doctrine of corporation by estoppel.

C. A means by which a court can require a corporation to perform in accordance with the terms of an otherwise valid contract.

D. Both B. and C. above, but not A.

E. None of the above.

____ 29. Equitable subordination is:

A. A means by which a court may hold a creditor liable for the debts, owed to third parties, of a person under the creditor's control.

B. A means by which a court may hold a debtor liable to pay certain debts, regardless of any bankruptcy filing the debtor may have made.

C. A means by which a court may reorder the priorities among creditors competing for a limited asset pool.

D. Both B. and C. above, but not A.

E. None of the above.

____ 30. Bondholders and shareholders of a corporation:

A. Have essentially identical rights vis-a-vis the corporation.

B. Differ primarily in that bondholders are entitled to receive dividends first, before the shareholders are entitled to receive any distribution.

C. Differ primarily in that bondholders are creditors of the corporation, while shareholders are the corporation's owners.

D. Differ primarily in that bondholders choose the officers of the corporation, while shareholders choose the directors.

E. None of the above.

____ 31. Under the corporation law of most states:

A. The president of a corporation may bind the corporation to anything that is in the ordinary course of business.

B. The board chair of a corporation may bind the corporation to anything that she is authorized to do by resolution of the board.

C. The secretary of a corporation may bind the corporation by certifying that the board took certain specified actions.

D. All of the above.

E. Both A. and C. above, but not B. or D.

____ 32. In most courts, a party attempting to establish the existence of apparent authority must prove, among other things:

A. That actual authority existed, or at least that the agent believed that actual authority existed.

B. That the principal made a manifestation.

C. That the third party relied on the existence of an agency relationship.

D. All of the above.

E. Both B. and C. above, but not A. or D.

____ 33. In most states, the rights of shareholders include:

A. The right to vote in an election of directors.

B. The right to vote in an election of officers.

C. The right to receive at least a small amount of information about the corporation's financial position.

D. All of the above.

E. Both A. and C. above, but not B.

____ 34. Cumulative voting is a technique whereby:

A. A minority faction of directors may obtain control over one or more decisions of the board.

B. A minority faction of directors may obtain a veto over one or more decisions of the board.

C. A minority faction of shareholders may elect one or more representatives to the board.

D. A minority faction of shareholders may obtain a veto over one or more decisions of the board.

E. None of the above.

____ 35. With regard to shareholder inspection rights:

A. The broadest rights are generally granted by state common law.

B. The broadest rights are generally granted by state statutory law.

C. The broadest rights are generally granted by federal common law.

D. The broadest rights are generally granted by federal statutory law.

E. The rights granted under each body of law above are generally the same.

The End

HAPPY HOLIDAYS TO ALL!

ANSWER SHEET

Business Organizations

Professor Schaumann

Fall 1994

Final Exam-PT II

1. A

2. D

3. B

4. B

5. B

6. E

7. C

8. A or B

9. A

10. A

11. B

12. B

13. C

14. C

15. D

16. not scored

17. A

18. A or B

19. E

20. B

21. C

22. D

23. C

24. E

25. C

26. C

27. E

28. B

29. C

30. C

31. D

32. E

33. E

34. C

35. A