WILLIAM MITCHELL COLLEGE OF LAW

FINAL EXAMINATION

BUSINESS ORGANIZATIONS

Professor Niels Schaumann

Friday, May 6, 1994 - 1:00 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 Boyum) 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 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.

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.

WRITE ON EVERY OTHER LINE.

2. Try to write legibly. I cannot give credit for an answer I cannot read.

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

4. 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--Essays

(65%)

Karl and Erik went into business together. Their venture was a retail food store, specializing in imported gourmet items not available elsewhere in their community, which is located in the State of Mitchell. Mitchell has adopted the Revised Model Business Corporation Act as its corporation law, but follows the law of Delaware as to the director's duty of care, and as to the principles governing shareholder derivative suits.

Karl and Erik began business as a partnership, but the business was so successful that they soon opened several more stores and incorporated the business, using the name "K&E Markets" (hereafter "K&E"). Because Karl contributed most of the cash to the business, they agreed that he would receive 75% of the profit, and Erik would receive the remaining 25%. They also agreed, however, that each of them would have an equal say in the corporation's affairs.

Question 1. Describe one technique by which Karl and Erik can divide profits unequally (75%-25%), but divide control equally (50%-50%). (For purposes of this question, consider only the above facts and disregard the facts given below.)

K&E was a big success, and soon Karl and Erik took the corporation public--that is, they sold shares of K&E stock to several thousand investors and became a publicly held corporation. They also abandoned their earlier arrangement (referred to in Question 1 above). Immediately after the corporation became publicly held, Karl and Erik each owned 10% of the single class of outstanding K&E stock; the public shareholders owned the remaining 80%. Karl and Erik were both directors of K&E, and Karl was the Chairman of the Board. Neither one, however, was an officer of K&E.

Not long after K&E "went public," Karl and Erik started a new business--a general partnership wholesaling gourmet foods, primarily to grocery stores. The partnership, which operated under the name Food United Brokers and Resellers (hereafter "FUBAR"), had only two partners, Karl and Erik. Each was an equal owner, and each had an equal say in the conduct of the partnership affairs. Concerned about appearances, Karl and Erik obtained an opinion of independent counsel before FUBAR commenced operations, to the effect that FUBAR's business was not an opportunity belonging to K&E (and you may assume that counsel was correct in this determination).

After operating profitably for two years, FUBAR began to have difficulty finding customers. In an attempt to keep FUBAR's business going, Karl and Erik proposed to the K&E board of directors that K&E should buy groceries exclusively from FUBAR--without, however, disclosing to the other board members the identity of FUBAR's owners. Before making a decision on this proposal, the K&E board took all steps that any prudent board of directors would take under the circumstances. It did not, however, discover the identity of FUBAR's owners. When the time came to vote on the matter, Karl and Erik were the first to vote in favor of it; the rest of the board agreed with them and the K&E board approved unanimously a contract with FUBAR, under which K&E agreed to buy groceries exclusively from FUBAR for a period of four years.

The prices K&E pays FUBAR for groceries are the same as those charged by local wholesalers generally. Nevertheless, certain K&E shareholders have discovered that Karl and Erik own FUBAR, K&E's sole supplier, and are unhappy with the arrangement.

Question 2. The unhappy shareholders consult you, a prominent corporate lawyer. Advise them of their rights in this matter. (For purposes of this question, you may consider all the facts given in Part I.)

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 (1.09 points).

3. 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 "UPA" are to the Uniform Partnership Act.

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

____ 1. George hired a mechanic to repair his truck, while it was parked in his garage. The mechanic:

A. Might have been George's agent, but only if the mechanic was not an independent contractor.

B. Might have been George's agent, but only if the mechanic was an independent contractor.

C. Might have been George's agent, but only if the mechanic was George's servant.

D. Might have been George's agent, but only if George exercised sufficient control over the mechanic.

E. None of the above.

____ 2. Allie said to Bert, "Please register me for Business Organizations next week; I will be on vacation in Hawaii." Bert replied, "Sure, no problem." Allie didn't give Bert any credentials, but the Registrar permitted Bert to register Allie for the class when Bert explained that Allie was on vacation. Bert had:

A. Incidental authority to sign required registration forms in Allie's behalf.

B. Implied authority to purchase a Business Organizations casebook in Allie's behalf.

C. Apparent authority to register Allie for Business Organizations.

D. All of the above.

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

____ 3. Bill tended bar in an establishment owned by Stephanie. Stephanie determined Bill's hours of employment, made policies concerning what types of liquor were to be purchased and served, and in general ran the business of the bar. During the hours that Bill was working, however, Stephanie was not usually on the premises. When Bill started work several years ago, Stephanie required him to sign a document stating that Bill was leasing the bar from Stephanie; rent was fixed at the total dollar sales each night, less $145 (which Bill was to keep). The last sentence in the lease read: "The parties agree that under no circumstances shall either of them be considered the agent or employee of the other." The relationship between Stephanie and Bill was:

A. Probably an agency relationship, notwithstanding the lease agreement, because agency does not depend on the parties' intention to create it.

B. Probably not an agency relationship, because the status of landlord and tenant is fundamentally inconsistent with that of principal and agent.

C. Probably an agency relationship, because in most cases a tenant is the agent of the landlord.

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

E. None of the above.

____ 4. Agency law:

A. Requires that each party receive consideration before an agency relationship can exist.

B. Requires that there be mutuality of obligation before an agency relationship can exist.

C. Requires that there be an enforceable contract between the parties before an agency relationship can exist.

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

E. None of the above.

____ 5. An agency relationship cannot exist unless there is:

A. Mutual consent to the relationship by the principal and the agent.

B. Consent to the relationship by the agent, but not necessarily by the principal.

C. Consent to the relationship by the principal, but not necessarily by the agent.

D. A manifestation of consent by each of the parties, made to, and perceived by, the other party.

E. None of the above.

____ 6. [DELETED]

____ 7. Which of the following situations is sufficient to cause apparent authority to arise?

A. A fully disclosed principal, knowing of an agent's unauthorized actions concerning T, fails to object to T.

B. A partially disclosed principal, knowing of an agent's unauthorized actions concerning T, fails to object to T.

C. An undisclosed principal, knowing of an agent's unauthorized actions concerning T, fails to object to T.

D. All of the above.

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

____ 8. When an agency relationship is established by contract:

A. The principal may have the right, and does have the power, to terminate the relationship.

B. The agent may have the right, and does have the power, to terminate the relationship.

C. Neither the principal nor the agent has the right, and only the principal has the power, to terminate the relationship.

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

E. None of the above.

____ 9. A partner:

A. Lacks the power to leave her interest in specific partnership property to a family member, by will.

B. Lacks the power to pledge her interest in specific partnership property to a bank, as collateral for a loan.

C. Lacks the power to assign her interest in the partnership to another, for any reason.

D. All of the above.

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

____ 10. A verbal statement made by an agent to a third party:

A. May be relevant to the question whether the agent is under a fiduciary duty to the principal.

B. May be relevant to the question whether the third party reasonably relied on the agent's having authority.

C. May be relevant to the question whether the agent is under a duty of care to the principal.

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

E. None of the above.

____ 11. A agreed to work for P for five years, as P's sales agent; in exchange, P promised to pay A a salary plus a commission. After two years, A said to P, "I quit." Immediately after A made this statement to P:

A. The agency relationship was terminated, and A may be liable to P for damages suffered as a result of A's quitting, because A had the power (but lacked the right) to terminate the agency.

B. The agency relationship was terminated, and A will not be liable for any damages, because principals must bear the risk that their agents will quit.

C. The agency relationship continued, and A may be liable to P for damages suffered as a result of A's attempting to quit, because even if A had the right and the power to terminate the agency, public policy dictates that agents not be released after a breach of contract.

D. The agency relationship continued, and A will not be liable for to P for damages suffered as a result of A's attempting to quit, because agents under contract have neither the right nor the power to terminate the agency.

E. None of the above.

____ 12. When an agent breaches the duty of loyalty to her principal:

A. The principal is entitled to recover fees paid to the agent, unless that recovery would exceed the amount of the principal's out-of-pocket damages.

B. The principal is entitled to recover fees paid to the agent, regardless of whether the principal has been compensated for out-of-pocket damages.

C. The agent is usually permitted to retain fees paid by the principal, on the theory that the principal should bear the risk that the agent will be faithless.

D. The principal is entitled to recover fees paid to a third party, regardless of whether the principal has been compensated for out-of-pocket damages, on the theory that the third party is derivatively liable for the principal's loss.

E. None of the above.

____ 13. P requested A to sell P's antique 1955 Jaguar automobile. After A agreed, P provided A with a letter stating that "A has full authority to sell my 1955 Jaguar." The following week, A called P on the telephone and said, "I think I may have a buyer for the Jaguar." P replied, "Great. Just don't take less than $22,000 for it, OK?" A said, "OK." The next day, A, on behalf of P, entered into a contract to sell the Jaguar to T for $19,000. As among the parties:

A. If T did not see the letter that P gave to A, P is not obligated to sell the Jaguar to T for $19,000.

B. A is liable to P for any damages P suffers as the result of A's entering into the contract with T.

C. A had actual authority to sell the Jaguar to T for $19,000.

D. All of the above.

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

____ 14. A, a carpenter, took a job as a fine art refinisher with Museum Corp., a company specializing in refurbishing old oil paintings. In order to get the job, A lied about his experience and skill in refurbishing paintings, claiming expert knowledge of the field when in fact he knew nothing about oil paintings. A:

A. Will be held to the level of skill of an expert in refurbishing oil paintings.

B. Will be held to a reasonable level of skill in refurbishing oil paintings.

C. Will be held to the level of skill he actually has (i.e. none) in refurbishing oil paintings.

D. Will be held to the level of skill of a reasonable carpenter in refurbishing oil paintings.

E. None of the above.

____ 15. Under the UPA:

A. The common law does not apply to matters expressly covered by the UPA.

B. Principles of equity supersede the default rules, but not the mandatory rules, provided by the UPA.

C. A statutory outcome may be varied by application of the common law of partnership, but only if the interests of justice are served thereby.

D. The RMBCA governs matters of partnership law, in jurisdictions that have adopted both the RMBCA and the UPA.

E. None of the above.

____ 16. P, a promoter, purporting to act in behalf of C, a corporation to be formed under the RMBCA, entered into an agreement with T. Which of the following statements is true regarding this transaction?

A. If C is not in fact formed, P will be liable under the "failure to form" doctrine of promoter liability.

B. Even if C is formed, it cannot ratify the contract made by P with T, because of the doctrine of "aequiparatur": every ratification relates back and is equivalent to a prior authority.

C. Even if C eventually becomes liable on the contract, P will remain personally liable on the contract, unless it expressly and unequivocally provides that P is discharged.

D. All of the above.

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

____ 17. In general, under the UPA:

A. Statutory rules that affect only partners inter se may be changed by agreement of the partners.

B. Statutory rules that affect third parties may not be changed by agreement of the partners.

C. Both the law of agency and the law of estoppel apply.

D. All of the above.

E. None of the above.

____ 18. Techno Corp. and RCM Corp. (each a corporation organized under the RMBCA) agreed to embark on a business venture together. Under their agreement, each will share certain aspects of its technical expertise with the other, to determine whether it is possible to manufacture a new kind of heat-resistant tile. If the tile proves feasible to manufacture, each of the companies will contribute half of the cost of establishing and equipping a manufacturing facility, and will receive half of the profits. If a patent results from their efforts, each company will own half the patent. The arrangement between the corporations most probably:

A. Does not make them partners of each other, because under the UPA a corporation cannot be a partner in a partnership.

B. Does not make them partners of each other, because under the RMBCA such an arrangement would be ultra vires each corporation.

C. Makes them partners of each other in a general partnership, even though each of the partners is a corporation whose shareholders have limited liability.

D. Makes them partners of each other, but because each of the partners is a corporation whose shareholders have limited liability, their partnership is a limited partnership.

E. None of the above.

____ 19. Anne, Bob and Cathy were partners in ABC Partners. Donald, an employee of the partnership, had been doing exceptionally good work, and at the May partnership meeting, Anne and Bob proposed that Donald be made a partner, effective in December. If Cathy disagreed, and the partnership agreement did not address the issue:

A. Donald will become a partner, because the making of a new partner is an "ordinary matter" as to which only a majority vote of the partners is required.

B. Donald will become a partner, but only if he is willing to "continue the partnership business under the same name," i.e. ABC Partners.

C. Donald will not become a partner, because the parties are estopped from arguing that only a majority vote is necessary to admit a new partner to the partnership.

D. Donald will not become a partner, because of the principle of delectus personae codified in the UPA: no person can become a partner without the consent of all the partners.

E. None of the above.

____ 20. Jane and Hugo formed an association to clean their street of litter. Eventually, most of their neighbors on the street joined the association. Each member contributes 4 hours per month, during which they patrol the street, picking up litter. No charge is made for the association's services, which are limited to the street on which the members all live. Likewise, the members do not receive any payment for their services except the satisfaction of living on a clean street. The association:

A. Is a de facto corporation.

B. Is a corporation by estoppel.

C. Is a general partnership.

D. Is a limited partnership.

E. None of the above.

____ 21. A, B and C were partners in a general partnership. A contributed 60% of the partnership's capital and worked full-time in the partnership business; B and C contributed 20% each and neither worked in the partnership business at all. In the absence of an agreement to the contrary:

A. A, B and C each have an equal vote in the conduct of partnership affairs.

B. A, B and C each receive an equal share of the partnership's profits.

C. A, B and C are each responsible inter se for an equal portion of the partnership's losses.

D. All of the above.

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

____ 22. A, B and C were equal partners in a partnership. The partnership business was not a success, and eventually the partnership dissolved. Unfortunately, the partnership assets were insufficient to pay all the partnership's creditors. Second Bank, a major creditor of the partnership, sued A personally, alleging A's liability as a partner for the partnership obligation to the bank. With respect to the action by Second Bank against A:

A. A is liable for the partnership obligation, but A will have a defense against the bank as to two-thirds of the liability, because B and C are each liable to the same extent as A.

B. A is liable for the partnership obligation, but if A has to pay all of the partnership's obligation to the bank, A will have an action for indemnification against B and C for their proportionate share of the obligation.

C. A is liable for the partnership obligation, and A has neither a defense against the bank nor an action for indemnification against A's former co-partners.

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

E. None of the above.

____ 23. G, H and I were partners in a partnership at will. Business was not good, and H said "I quit." If there was no partnership agreement:

A. H may demand liquidation of the partnership assets, but only if G and I do not continue the business under the same name.

B. H may demand liquidation of the partnership assets, regardless of whether G and I wish to continue the business under the same name.

C. There are no circumstances under which liquidation of the partnership assets can be avoided.

D. Liquidation can occur, but only if all three partners agree that the assets are to be liquidated.

E. None of the above.

____ 24. Anne, Betsy and Cathy were partners in a partnership for a term of five years. After the second year, Cathy quit. About a week after quitting, Cathy hired an appraiser to assess the value of certain real estate owned by the partnership, which would need to be valued in the event of a dissolution of the partnership. The appraiser's fee:

A. Is an obligation of the partnership only if Anne and Betsy did not intend to continue the business under the same name.

B. Is an obligation of the partnership whether or not Anne and Betsy intend to continue the business under the same name.

C. Is not an obligation of the partnership only if Anne and Betsy intend to continue the business under the same name.

D. Is not an obligation of the partnership whether or not Anne and Betsy intend to continue the business under the same name.

E. None of the above.

____ 25. Harry, the President of Mega Corp., arranged on behalf of the corporation for a landscaper to cut the lawn around the corporate headquarters. The board of directors of Mega Corp. had neither authorized nor disapproved the transaction, and had never expanded or limited the scope of Harry's duties. Mega Corp.:

A. Is liable for the landscaper's fee, because Harry had the power to bind the corporation.

B. Is liable for the landscaper's fee, because the corporation must bear the risk that its President will hire a landscaper to cut the lawn.

C. Is not liable for the landscaper's fee, because the business of a corporation is managed by the board of directors and the board did not authorize the transaction.

D. Is not liable for the landscaper's fee, because it was not reasonably foreseeable that Harry would hire a landscaper to cut the lawn.

E. None of the above.

____ 26. In most jurisdictions, shareholders in a corporation:

A. Have inspection rights relating to certain corporate property.

B. Have the right to vote in an election of directors.

C. Have the right to approve an amendment to the corporation's articles of incorporation.

D. All of the above.

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

____ 27. [Deleted]

____ 28. When the board of directors of a corporation makes an uninformed decision, the board has:

A. Breached its duty of loyalty to the corporation.

B. Breached its duty of care to the corporation.

C. Engaged in self-dealing.

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

E. None of the above.

____ 29. The business judgment rule:

A. Is a legal presumption that the board of directors acted in good faith, with full information, and in the belief that its action was in the best interest of the corporation.

B. Does not protect the board in the event that a breach of the duty of loyalty is established.

C. Does not protect the board of directors in the event that a breach of a director's duty is alleged.

D. All of the above.

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

____ 30. After a partnership is dissolved:

A. No partner has the right to bind the partnership to new business.

B. No partner has the power to bind the partnership to new business.

C. No partner has the right to bind the partnership to a transaction for winding up the partnership.

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

E. None of the above.

____ 31. Each partner in a partnership is liable:

A. For a tort committed by a co-partner in the ordinary course of the business of the partnership.

B. For a breach of a contract to which the partnership is a party, committed by a co-partner in the ordinary course of the business of the partnership.

C. For any debt of the partnership incurred after the partner joined the partnership.

D. All of the above.

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

____ 32. X, Y and Z were partners in a general partnership. Z contributed 50% of the partnership's capital, and X and Y contributed 25% each. Each partner, however, had an equal voice in management and received and equal share of the partnership's profits. Later, Z wrongfully dissolved the partnership. X and Y continued the business consistent with the UPA, but they were unable to reach agreement with Z on the value of Z's interest in the partnership. If all debts of the partnership existing at the time of dissolution were paid, the only assets remaining would be the capital accounts of the partners, which would then be as follows:

X ............$25,000

Y ............$25,000

Z ............$50,000

Z is entitled to receive:

A. An equal share of the profits of the partnership, until Z is finally paid the value of her interest in the partnership.

B. One-half of the profits of the partnership, until Z is finally paid the value of her interest in the partnership.

C. All of the profits of the partnership, until Z is finally paid the value of her interest in the partnership.

D. None of the profits of the partnership, because Z was a wrongful dissolver.

E. None of the above.

HAVE A GREAT SUMMER!!!!

MULTIPLE CHOICE ANSWER SHEET

Business Organization

Professor Schaumann

Spring 1994

1. D

2. A

3. A

4. E

5. B

6. A or E

7. E

8. D

9. E

10. B

11. A

12. B

13. E

14. A

15. A

16. E

17. D

18. C

19. D

20. E

21. D

22. B

23. B

24. B

25. A

26. D

27. not scored

28. B

29. E

30. A

31. D

32. B

[5/19/94 v.1]