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Business AssociationsProfessor BradfordDecember 9, 2016

3 Hours and 30 Minutes

1. This is a partially open book exam. You may use the casebook, the Bradford accounting book, the required statutory supplement, any handouts provided by the professor, and any materials, such as notes or outlines, prepared exclusively by you. You may not use any other materials, written, digital, or recorded. You may not use or possess a cell phone or any other electronic device other than the computer on which you are taking the exam. You may not consult with or communicate with any other person during the exam. If you have any other books, notes, briefcases, book bags, cell phones, electronic devices, or other items, you must bring them to the front of the room now. You may not keep these items by your side or take any of them to another designated exam room.

2. The exam has seventeen (17) pages, including the instructions. The page numbers appear on the top right-hand corner of each page. Please check to be sure that this copy has all the pages.

3. You have three hours and thirty minutes (3:30) to complete the exam. You must take the exam and turn in your answers in the assigned room. If you finish more than five minutes early, you may turn in your answers in the Dean’s Office.

4. The exam consists of eleven (11) questions. The recommended time for each question is as follows:

Question 1…...…...15 MinutesQuestion 2……......10 MinutesQuestion 3…...…...25 MinutesQuestion 4……......10 MinutesQuestion 5…..…....35 Minutes Question 6…...…...10 MinutesQuestion 7…...…...25 MinutesQuestion 8…...…...15 MinutesQuestion 9…..…....15 Minutes

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Question 10….......10 Minutes Question 11….…...40 Minutes

Each question will be weighted in accordance with its recommended time.

5. Do not spend all of your time writing. Think about the issues and organize your answers before writing. Be concise. Be organized. Long, disorganized, rambling answers will be penalized, as will merely “dumping” everything you know into your answers rather than answering the question posed.

6. For each question, if the facts of the question do not indicate otherwise, assume that the Revised Uniform Partnership Act (1997), the Revised Uniform Limited Partnership Act (1985), the Revised Uniform Limited Liability Company Act (2006), the Revised Model Business Corporation Act, and the principles in the Restatement (Second) of Agency apply.

7. If one of the statutes or regulations we have studied applies, cite the relevant sections and subsections and explain how those provisions apply to the facts of the problem. An answer that doesn’t cite and analyze relevant statutes or regulations is incomplete and will not receive full credit.

8. If you believe that additional facts are needed to answer a question, state exactly what those facts are and how they would affect your answer. If you believe that a question is ambiguous or unclear, note the ambiguity or lack of clarity and indicate how it affects your answer.

9. The Honor Code is in effect.

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EXAM 4 INSTRUCTIONS

10. You must take the exam on a computer that has the latest version of the Exam 4 software installed. If you have not previously installed the Exam 4 software, please notify the exam administrator immediately. You must take the exam in CLOSED MODE.

11. Be sure to enter your exam number in the Exam ID field. (Do not use your NU Card ID number or your social security number.) You will be required to enter your exam number twice. Select the course name from the drop-down box. Be sure you find the folder for this course, because that is where your exam will be stored. Verify that the information is correct just before you select “Begin Exam.”

12. Do not worry about headers, footers, page numbers, or double-spacing your exam; the software does all that for you when the exam is printed.

13. When you are finished, please submit your exam electronically. A pop-up box will show the status of your exam. It should show a black bar with 100% in it and a message that says, “Your file has been successfully stored.” If you do not get this message, please see someone in the Dean’s office immediately. After successfully submitting your exam, exit Exam 4 before leaving the classroom.

14. If you have any technical problems during the exam, please report them immediately to the Dean’s office; we will assume you had no technical problems until you reported them. Be prepared to finish your exam by writing it. (Regular notebook paper is O.K.)

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Question One(15 Minutes)

Beta Corporation is a closely-held corporation incorporated in a state that has adopted the latest version of the Revised Model Business Corporation Act. Beta has two classes of stock, Class A and Class B. There are 100 shares of each class outstanding.

Beta has a 15-person board of directors. Those directors have staggered terms; each year, five directors are elected to three-year terms. Nine of the directors are elected exclusively by the Class A shareholders (three each year). The other six directors are elected exclusively by the Class B shareholders (two each year).

Sadie Smith is one of the Class A directors. The corporation recently called a special meeting to vote on whether to remove Sadie as a director for cause. (Assume there is adequate cause.) The vote for removal was:

Class A: 73 Yes (for removal); 27 NoClass B: 95 Yes; 5 NoTotal: 168 Yes; 32 No

Sadie owns 27 Class A shares and 5 Class B shares. Her shares were the only votes cast against removal.

Discuss whether Sadie has been removed. Assume that there is nothing relevant in Beta’s articles of incorporation or bylaws.

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Question Two(10 Minutes)

Everyday Inn, Inc. is a Delaware corporation. Everyday owns a chain of luxury hotels across the United States.

Everyday’s board recently decided to sell its premier hotel, The Gambler’s Den, located in Las Vegas. The board hired an expert appraiser, who did a detailed valuation study of the Gambler’s Den and concluded that its fair market value was between $25 million and $27 million.

Everyday solicited bids to buy the hotel. The highest bid was from Clinton, Inc., which offered $27.1 million cash.

On November 1, the board met to discuss the sale. The directors reviewed the valuation study and the bids and were about to approve the Clinton contract when they received a last-minute offer from Trump Enterprises. Instead of paying cash, Trump offered to trade another hotel property, The Suave, located in San Francisco, for the Gambler’s Den. The Everyday board decided to adjourn the meeting until November 8 to give the directors time to evaluate the Trump offer.

The board met again on November 8. Everyday’s attorney explained the terms of the Trump contract and indicated that he saw no problems with the contract. The attorney also indicated that he had contacted Clinton and it refused to increase the amount of its cash offer. The Everyday directors then approved the deal with Trump, indicating that they thought the Trump trade was a better deal than the Clinton cash offer.

Briefly explain the strongest argument that the board failed to adequately inform itself before approving the Trump transaction.

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Question Three(25 Minutes)

Carla Creditor was injured in an accident involving a truck owned by Parker Partnership, a general partnership. Carla sued Parker and obtained a $50,000 judgment against the partnership. That judgment is now final. Carla knows that partners are personally liable for the debts of a partnership, but she has not yet sued Parker’s three partners—Betty, Della, and Ernie.

Parker has no cash in its bank account. Carla and her lawyer recently visited Parker’s factory and the only thing of value they saw was a large machine they think is worth about $30,000.

The machine was purchased a year ago. Betty, Della, and Ernie were discussing ways to do their work more efficiently and decided the machine would help. Betty said, “I’ll go buy it.” She went to the machine’s manufacturer and purchased the machine with her personal credit card. Betty received a bill of sale that said, “Purchaser: Betty; Deliver to 7521 Industrial Boulevard.” The address on the bill of sale is the address of Parker’s factory. The machine was delivered the next day and Parker has been using it ever since.

Discuss whether Carla can levy execution on the machine to help satisfy her judgment against the partnership.

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Question Four(10 Minutes)

Briefly explain the internal affairs rule to someone who knows absolutely nothing about corporate law.

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Question Five(35 Minutes)

Paula Plaintiff is a shareholder of Omega Corporation, a Delaware corporation. Paula has filed a shareholder’s derivative action on behalf of Omega in the Delaware Chancery Court. The complaint names all five of Omega’s directors as defendants and alleges that the directors breached their duties of care and loyalty when they recently voted to increase the compensation of Omega’s CEO, Carlos Chief.

Paula did not make a demand on Omega’s board of directors before filing the action. Omega has moved to dismiss the action due to Paula’s failure to make demand.

The relevant portions of Paula’s complaint are excerpted below. Discuss whether the Delaware Chancery Court will dismiss Paula’s derivative action.

Relevant Excerpts from the Complaint

The Omega Board

5. Omega’s board of directors has at all times relevant to this action consisted of five directors: Carlos Chief; Molly Market; Allie Alpha; Bob Beta; and Danielle Delta.

6. Carlos Chief is Omega’s CEO. Molly Market is Omega’s Vice-President for Marketing. Allie Alpha, Bob Beta, and Danielle Delta hold no other positions with Omega.

7. Each of the three outside directors receives directors’ fees from Omega of $200,000 per year.

8. Molly was hired by Carlos four years ago. Omega pays her an annual salary of $300,000. Carlos is her immediate supervisor; he has the authority to fire Molly without board action.

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9. Carlos has been on the board of directors since he was hired as CEO twenty years ago. Molly has been on the board for three years. The other three directors have been on the board for the past twelve years. All of the directors other than Carlos were nominated by Carlos.

10. Over the years, Allie, Bob, and Danielle have become friends with Carlos. He invites them to his frequent parties. He plays golf regularly with all three of them.

11. Because Carlos nominated them to be on the board, because of their close relationship with him, and because they don’t want to give up their lucrative directors’ fees, Allie, Bob, and Danielle are under Carlos’ control.

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The Board’s Terrible Decision

18. On October 1, 2016, the Omega board voted unanimously to increase Carlos’ annual compensation as CEO from $1.5 million to $3.75 million, a 150% increase.

19. Carlos is being rewarded handsomely for mediocre performance. Since the board set Carlos’ compensation at $1.5 million five years ago, the company’s annual profits have increased by only 10%. Its percentage return on equity and its percentage return on assets have actually gone down. Several securities analysts have recommended that their clients sell Omega stock.

20. The CEOs of all of the other companies in Omega’s industry are being paid substantially less than Carlos. The average CEO pay in the industry is 40% less than Carlos’ compensation. Carlos makes 20% more than the salary of the next highest CEO in the industry. It is a waste of Omega’s funds to pay Carlos this much.

21. Other companies in Omega’s industry are more profitable than Omega. Omega’s earnings per share, return on assets, and return on equity place it at the very bottom

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of the industry. Thus, Carlos is being paid significantly more for doing a poorer job.

22. The Omega board was aware of these figures when it increased Carlos’ compensation, but still voted to increase Carlos’ salary by 150%.

23. A week after the board’s decision, the Wall Street Journal published a story on Overpaid CEOs. Carlos and his new salary figured prominently in the story. Two well-known executive compensation experts opined in the story that Carlos’ salary was excessive.

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Why Demand is Excused

37. All of the directors who approved the transaction are defendants in this action. That alone is sufficient reason to excuse demand; they obviously are not going to vote to sue themselves and expose themselves to liability risk.

38. In addition, the facts pled above clearly show that the directors violated their duties of care and loyalty. Demand is excused because of these violations.

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Question Six(10 Minutes)

ABC, L.P. is a limited partnership organized in a state that has adopted the 1985 version of the Revised Uniform Limited Partnership Act. ABC has one general partner, George General. It has two limited partners, Allie Alpha and Bob Beta.

When the partnership was formed, George invested $50,000 cash. Allie contributed machinery that the partnership agreement valued at $30,000. Bob contributed inventory that the partnership agreement valued at $20,000. Those were the only capital contributions.

The ABC partnership agreement says nothing about distributions or the allocation of profits.

A. What percentage of the partnership’s profits is each partner entitled to? Explain.

B. If this were a general partnership organized under the Revised Uniform Partnership Act and all three partners were general partners, would your answer be the same? Explain.

Please answer both parts of the question.

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Question Seven(25 Minutes)

Delta, Inc. is a publicly-traded corporation. Its stock is traded on the New York Stock Exchange.

Carol is Delta’s CEO. Anne is an accountant who works for Numbers ‘R Us, the outside accounting firm that Delta uses for all of its accounting work.

On November 1, 2016, Carol told Anne about a huge contract Delta was about to announce. Carol told Anne about the contract so Anne could do some preliminary accounting work on the transaction. Carol made it clear to Anne that the information was confidential.

Bob is Anne’s husband. That evening, Anne told Bob about the Delta contract. Before she told him, she said, “Bob, I know you always blab about everything I tell you in confidence, but this one has to be different. You have to keep it confidential. If not, this is the last time; we’re done.”

Bob did not respond in any way. He just listened and, the next day, bought 100 shares of Delta on the exchange.

Delta announced the deal on November 10. Bob sold his Delta stock shortly afterwards, making a $500 profit.

Discuss whether Bob has violated Rule 10b-5.

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Question Eight(15 Minutes)

Omni, Inc. is a Delaware corporation. Omni’s balance sheet as of Dec. 8, 2016 appears on the next page. Shortly after this balance sheet was prepared, Omni sold 1,000 shares of common stock to Johnson for a total price of $200,000. Omni’s common stock has a par value of $1.00 per share. The balance sheet on the following page has not yet been adjusted to account for the stock sale.

Taking that stock sale into account and assuming that Omni’s balance sheet has not changed in any other way except for that transaction, what is the maximum amount of dividends Omni may lawfully pay? Explain your answer.

Assume that (1) there are no restrictions on dividends in Omni’s certificate of incorporation and (2) Omni incurred a net loss in 2015 and has incurred a net loss so far in 2016.

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Omni, Inc.Balance Sheet

As of Dec. 8, 2016

AssetsCash $ 175,000 Accounts Receivable 27,000 Prepaid Expenses 2,000 Inventory 95,000 Equipment 88,000 Building 190,000 Land 58,000

TOTAL ASSETS $ 635,000

Liabilities and Shareholders' Equity

LiabilitiesAccounts Payable $ 23,000 Expenses Payable 4,000 Notes Payable 173,000

Total Liabilities 200,000

Shareholders' EquityCommon Stock $ 4,000 Additional Paid-In Capital 208,000 Retained Earnings 223,000

Total Shareholders' Equity 435,000

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 635,000

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Question Nine(15 Minutes)

Zappa, LLC is a manager-managed limited liability company organized in a state that has adopted the Revised Uniform Limited Liability Company Act (2006). Zappa does not have an operating agreement. Zappa’s certificate of organization says nothing about the term of the LLC or its dissolution. The members never discussed these issues when they created the LLC.

Arnie is one of Zappa’s 10 members. Arnie has been unhappy with the management of Zappa for some time. He thinks Zappa could be making more money with better management. Yesterday, at a meeting of Zappa’s members, Arnie decided he was tired of fighting for better management. He said, “I quit. I’m no longer going to be a member of this business.”

Discuss the consequences to Arnie and Zappa of Arnie’s statement.

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Question Ten(10 Minutes)

Kanye West and Taylor Swift are well-known singers. On February 1, 2016, they formed a general partnership, KT Productions, to produce two duet albums on which they both would sing. They do not have a written partnership agreement.

On March 1, 2016, Kanye and Taylor were contacted by Warner Music Group, which wanted to distribute their first duet album. On March 2, Taylor and Kanye met to discuss the offer. Taylor told Kanye that she hates Warner and would never agree to allow Warner to distribute an album on which she sang. Kanye said he really wanted to sign with Warner, but Taylor absolutely refused, so they remained deadlocked.

On April 1, without any further discussions with Taylor, Kanye signed a contract with Warner on behalf of KT Productions. The contract gives Warner the right to distribute the first duet album to be produced by KT Productions.

When Kanye showed Taylor the contract, she was livid. Taylor has come to you for legal advice. She wants to know whether the contract is binding. Discuss.

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Question Eleven(40 Minutes)

In the Silicone Gel Breast Implants case [p. 155 of the casebook], Judge Pointer held that the plaintiffs had pled sufficient facts to avoid a summary judgment on the veil-piercing claim against Bristol. Assume that, in the subsequent trial, the plaintiffs proved all of the facts discussed in the case. You are the judge. Write the best opinion you can arguing that the veil should not be pierced.