Business Associations E&e

Front 1

A & B are coaches at different universities. C is a businessman looking to sell Z shoes. C provides his warehouse and invests $200K to finance an inventory of Z shoes. A and B agree to sell the shoes. All will receive % of the profits. What type of relationship did they form?

Back 1

Partnership, but could be classified as C lender to the business.

Front 2

Promoter enters into K's thinking its a corp but lawyer never files. P's "corp" is now bankrupt. Can creditors go after P personally? Under the MBCA?

Back 2

Probably not personally. P can argue de fact corporation or corporation by estoppel De fact: Since P made an attempt to incorporate before signing, common law should probably could P de facto corporation. Under estoppel doctrine, so long as third party thought it was dealing with a corporation, P was ignorant of lack of corporation, third party will be estoppel from denying that a corp existed.

P won't be liable under the MBCA. MBCA 2.04 insulated liability against anyone who acts o behalf of a corp without knowing about the defect of the corp.

Front 3

Who is liable for unpaid corporate debts in a defectively formed corporation?

Back 3

Only shareholders who are active in the corporation's management. That excludes passive investors. MBCA 2.04.

Front 4

B Inc. is in the catering business. Its articles authorize 100,000 shares of common stock. There are 20,000 shares issued and outstanding.
An amendment to B's articles authorize 50,000 shares of new convertible preferred stock, each share convertible into two shares of common stock. Are there any problems?

Back 4

Yes. There are insufficient authorized common shares to handle all of the possible conversion. Before issuing the new convertible preferred, the articles must be amended to authorize additional common shares.

Front 5

Is a corporation bound by the actions of a shareholder (i.e. buying goods/products for the corporation w/o the corp's permission?)

Back 5

No. Shareholders have no authority to conduct corp business. So, a shareholder who is not an officer or director cannot either enter into a K on the corp's behalf unless the board has explicit given him authority to do so.

Front 6

If there are five board of directors, and three die together, can the remaining two vote on new board directors?

Back 6

In most states yes, even though they don't have a quorum. Most states have an exception: when # of directors remaining in office is less than a quorum, each vacancy can be filled by a majority vote of the remaining directors.

Front 7

President wants to buy product for the corp, but thy're all out of town. The director has called each one and four out of the five say yes to buying the product. Does the president have the authority to buy the product?

Back 7

No. Even though a majority said yes, ALL MUST BE SIMULTANEOUSLY PRESENT on the phone.

Front 8

Same as before, but now all five have said yes. Now can President buy product?

Back 8

YES, if President can get all five to sign a unanimous consent to the purchase.

Front 9

Can a shareholder hold a "surprise" removal of a director? (the original purpose of the meeting was NOT to removal director?)

Back 9

NO. Removal can only occur at a meeting called for the purpose of removing him and the meeting notice must state that the purpose, or one of the purposes, of the meetings removal of the director.

Front 10

At common law, can directors be removed by shareholders w/o cause?

Back 10

NO

Front 11

Betty is hired as treasurer with the express authority to handle corporate funds, and no express authority to do anything else. However, she often fills in for others can orders products for the corp. The board of directors now want to cancel an order. Are they bound by Betty's order?

Back 11

YES, under either implied actual authority or apparent authority. Implied: implicitly granting authority: Apparent authority: officer has authority to act on his belief, and third person believes in good faith that such authority exists.

Front 12

Is a shareholder allowed to request account records?

Back 12

YES, as long as: 1) made in good faith and for a proper purpose; 2) purpose of inspection described w/ reasonable particularity; 3) records are directly connected with purpose

Front 13

Directors want to make a dividend, so they ask the accountant if they can do so and still meet their financial obligation. Expert says yes, and directors are surprised, but go ahead and distribute. Shareholder brings action against directors claiming violation of duty of care. Who is correct?

Back 13

Shareholder. Directors can violate their duty of care through inactivity, as by failing to inform themselves of their corp business. The reliance on an expert must be reasonable. Here, directors knew they hadn't met their payroll, so reliance was NOT reasnable.

Front 14

A majroity shareholder wants to use #1million of corp funds to acquire an island. 2 other board members ask number of questions, to which the director gives superficially reasonable answers. The other director says he'd rather save the money. A reasonable real estate investor would probably vote against it b/c the property was 25% above normal price. Causes company to go broke. The director who voted against the decision sues director who wanted to buy island. What doctrine would you use to defend director? What would be the result of the lawsuit?

Back 14

BACK
Business judgment rule bars liabilty. Under the business judgment rule, a director or officer who makes a business judgment in good faith fulfills the duty of care if the directors has no conflict of interest concerning the transaction, is reasonably well-informed about the transaction, and rationally believes that business judgment is the corps best interests.

Front 15

Corp has a clause that says, "No director shall be liable for money damages of any sort, arising form the violation of the duty of care, regardless of the nature of the act or omission giving rise to the violation" Is the clause enforceable?

Back 15

No, most states would not allow the duty of care to be nullified COMPLETELY.

Front 16

Corp has a clause that says, "No directors shall be liable for money damage arising from the violation of the duty of care, so long as the director acted in good faith w/o knowingly violating an statue or other law, and w/o obtaining an improper personal benefit." IS the clause enforceable?

Back 16

YES.

Front 17

Does a 5% shareholder owe a duty to a corp?
Outside director? VP in charge of sales and marketing?

Back 17

NO, NO, and YES

Front 18

A senior executive of a pharmaceutics company discovers a fairy dust that can help reduce cancer. Tells chairman & 5% owner about this opportunity and she says she's not interested. Senior executive buys an interest in the fairy dust. Has senior executive usurped a corporate opportunity?

Back 18

Probably. Under the ALI, he has disclosed, but the issue is whether the corp has adequately rejected the opportunity. Most courts would hold that rejects does not occur unless either a majority of the disinterested directors or a majority of the shareholders have rejected it. Since no disinterested directors other than Wendy have rejected it, true rejection did not occur here.

Front 19

A potato growing company has hit hard times. A director sees that a tract of land great for growing potatoes is being sold at a low price, but company cannot even afford the low price. So, director buys it himself without telling the company. Has director breached his duty of loyalty?

Back 19

Director should argue that corp did not have the money. Courts are split on the test to use. If the DE line of business test is being use, better argument for director. If ALI test is being used, better argument for corp.

Front 20

In return for $5,000, corp issued an unsecured promissory note of $5K for 500 shares of $100 par value. Can Corp request to return shares/void issuance?

Back 20

In some states, yes. Because the majority view in CA is that an unsecured promissory note does not constitute money paid, transaction is voidable (not void) by ABC. BUT WHAT ABOUT THE WATERED STOCK ISSUE????

Front 21

A corp issues $12K of stock in exchange for property it in good faith believes is worth $12K. But the property is actually worth $10K. Can copr demand $2K from stock holder?

Back 21

No, transaction cannot be rescinded, nor an any sum be recovered from Jackie. If stock is issued in good faith and with reasonable belief that the stated par value is equal to the value of property received in exchange, the shares are not watered.

Front 22

In exchange for property worth $10K, Corp issues stock worth $12K. Shares are designated fully paid. Transferee of stock sells it for $15K. Can corp recover any money? How much?

Back 22

BACK
$2K. The watered amount of shares can ordinarily be recovered by judgment creditors of the corp. Under the trust fund theory, all judgment creditors of a corp can usually recover the watered amount of shares measured at time of issue.

Front 23

Z enters into a K with P to purchase widgets. Z signed agreement, "Z, n behalf of Amco a corp to be formed." Amco ratified K. Who is liable to Amco.

Back 23

Both Z and Amco. DONT YOU NEED P's CONSENT/K FOR AMCO TO BE LIABLE?????

Front 24

John enters into K with Alice, where Alice will serve as a consultant to Exco Copr for $2K/mo for one year. Singed as "John, on behalf of Exco, a corp to be formed but not for himself personally." Exco is formed. K is not ratified by board but board members see Alice working at Exco's premises for corp. Who is liable to Alice?

Back 24

Exco is liable to Alice. When a corp knowingly accepts benefits of a K, it may have impolicitly approved the agreement.

Front 25

A, B, and C formed Exco Corp. Lawyer forgets to pay fee so corp is not formed. A K's w/ Billie to purchase $20K worth of widget components to be delivered inf our months. A expected to be incorporation in two months. A signs, "A, future president of Exco Corp." Then B collied w/ Chuck while dirivng her personal vehicle ot pick up Exco's office supplies.

Does a corp structure exist?

Back 25

No corporate structure exists. Cannot be de-facto because there has not been a significant use of the corporate form.

Front 26

Same fact patterns as above, but Exco is now subsequently properly formed. If Billie commences action against A, personally, for the $20K owed under K, A's strongest argument to avoid or minimize personal liablity would be...

Back 26

Corp by estoppel doctrine. Under corp by estoppel doctrine, if a personal reasonably believes he is dealing w corp, a corp structure is deemed to exist for purposes of that transaction. Problem: in this A uses the word future, but still best means to avoid liability.

Front 27

Exco is subsequently properly formed. IF Chuck sues A, personally for injuries sustained in accident w/ B, what is A's liability?

Back 27

Personal liability. Can't use estoppel b/c there is no reason Chuck would have believed he was dealing w/ a corp.

What about de facto?

Front 28

Promoters filed for "Cut and Curly, Inc," but "Cut and Curly, Corp." already exists. Can Cut and Curly, Inc. still be formed in CA or MBCA?

Back 28

In CA. WHY??

Front 29

R, owner of R's Service Station, promotes S to position of general manager and puts him in charge of station's daily operations. Although service station managers ordinary place order for batteries, tires, and other accessories, Rachel instructs Sam to leave that ordering to her. Nonetheless, Sam orders batteries. Is the agency bound by Sam's order?

Back 29

Under the doctrines of apparent authority and inherent agency power, Rachel is bound, even though Sam had no right to place the order.

Front 30

Bank teller accepts a customer's deposit of $9K cash, deciding at that moment to pocket the cash for himself. Teller prints the customer her receipt and the goes on break and never returns. Is the bank liable to the customer?

Back 30

When the teller accepted the deposit, he lacked the actual authority to act for the bank. But he continued to have apparent authority by position, and the bank must credit to the customer's account with $9K.

Front 31

What should you consider when dealing w/ and agency and TP liability?

Back 31

1) manifestation had occurred that was attributable to the apparent principal; 2) manifestation had reached the third party; 3) manifestation caused the third party to believe that the apparent agent was authorized; 4) the third party's belief was reasonable

Front 32

Noam purchases Eli's Dry Cleaning, does not chagne the business name, and hires Eli to manage the dry cleaning store. Although dry cleaning stores customiarly order celaning oslvent in large quantities, Noam intsructs Eli never to buy more than $50 worth of solvent at a time and has no reason to believe that ELi will disregard the instructions.
Eli does disregard them and places a phone order for solvent costing $450. The seller believes Eli is still the owner. Eli has acted w/o actual authority and w/o apparent authority (there can be no apparent authority by position when the principal is undisclosed)? What doctrine can TP use to recover?

Back 32

Inherent agency power: places the loss on the enterprise that stand to benefit from the agency relationship the most. Here the principal would be liable. Limitation: not liable of NOT acting in principal's interest OR TP knows agent is acting w/o authority.

Front 33

R decides to open a burger joint. She signs a lease as Sam's Place LLC before forming the LLC. She purports to act as president of LLC and neglects to inform lessor that it hasn't come into existence. Who is liable at this point. When Rachel does form the LLC, how can the LLC then become liable?

Back 33

At that point, Rachel is liable.
For the LLC to become liable i/o Rachel, ratification would have to occur.

Front 34

What's the diff b/w ratification, novation, and adoption? See pg 71 of E&E

Back 34

Ratification is the retroactive approval of a previously unauthorized act. Bind the principal and the TP to original undertaking.
Adopting occurs when an agent purports to bind a principal to an agreement while lacking the power to do so.
Novation is a new, independent agreement b/w principal and the third party.

Front 35

Can a partnership form even if there is an express proviosn in the agreement stating there is NO partnership?

Back 35

YES

Front 36

C opens an art supply store in a building she rents from S. A spar to fher rent, C pays S 30% of C's monthly revenues. Is there a partnership?

Back 36

NO. They do not share profits. Sharing in revenues doe snot satisfy the profit sharing requirement. A business' profit equals the amount of its revenue, less the amount of expenses the business has incurred in generating that revenue.

Front 37

Consider two entreprenuers who go into buisnes together. They agree that they will jointly control whatever property the business uses ("the assets"). That is they will decide together which assets to selected. They also agree that they will share the economic benefit or detriment that results from their control of those assets. Is this agreement a co-ownership-->partnership?

Back 37

Yes. they have agreed to two main characteristics of property ownership: 1) right to control use and disposition; 2) right to benefit or suffer economically from exercise of that right of control.

Front 38

Under the partnership agreement, L, M, and C agree to share losses 60/20/20. S has $100K claim against the partnership which each partner is jointly and severally liable. But S sues only L. What is L liable for?

Back 38

Everything. Can't just claim $60K if he is the only one named in the judgment.

Front 39

R, S, and C form a chicken farming partnership, but the partnership agreement doe snot specify who may commit the partnership to sell chickens. One day C overhears S discussing a sale of 500 chickens to an established customer. Before S can close the deal, C says, "I don't think we should sell to that customer. They're on the verge of bankruptcy." What should C do?

Back 39

Sam has no authroity to amke the deal. He must refer the matter ot a decison by the partners.
Ryle: If a partner knows or has reason to know that another partner would object to a proposed commitment, the first partner has no actual authority to commit the partnership, unless the partnership agreement provides otherwise or the partners have already voted on the matter.

Front 40

B has operated a landscaping business, Good Earth Landscaping, as a sole proprietorship. he has done most of the work himself and financed the business out of his own pocket. B wants to expand by taking on regular employees and purchasing new equipment. His sister P is willing to put up some money, but she wants to be sure seh won't be at risk for more than what she invests.
a) P invests on the understand that she will sahre hin the parfoits, will help B run the buisnes,s and wil nto be liable beyonder her investment. Are her understandings valid?
b) What forms of business organization might accommodate P's multiple wishes?
c) Is P assured of limited liability if she is a limited partner? An LLC? a Corp shareholder?
d) For P, what is the difference between being partner in an LLP, a limited partner in a LLP, a partner in a LLC, or a shareholder in a corp?
e) Pear will contribute cash, while B will manage the business. If the business suffers losses, will B have to bear them?

Back 40

a) No. When B and P agreed to carry on as co0onwer sof a buiness for profit, the formed a generla partenrship. As a partner, P is liable fo rthe busness' K debts, even if they exceed the amount of her investment.
b) P wants limited liability. She can be: 1) partner in an LP; 2) partner in a LP; 3) member in an LLC; 4) shareholder in a corp. In each case, she will be shielded against personal liability if business debts exceed business assets. She will be liable only to the extent that the business suffers losses, in which case she may lose her investment.
c) No. These organization forms provide some, but not complete assurance that participants can limited their losses to the amount they invested.
As a LP, P would not be liable for business debts and obligations beyond her investment unless she participates in the management of the business.
As LLP parnter, an LLC member or a corp shareholder P would not be liable for business debts or obligations beyond her investment unless the corporate veil is pierced.
d) As previous answer illustrates, limited liably is something similar to LLP, LP LLC, and corp. But tax implications are different.
e) If they organize a limited liability entity either paticiapt will be liable for business losses. But if their agreement constitutes a partnership, there is some question whether the capital partner and labor partners share losses equally.

Front 41

X, Y, and Z went to incorproate their palm-reading business. They file articles i nNew Colombia, a MBCA Jx.

Articles of Incorp:
First: Name of corp is XYZ, Inc.
Second: Corp registered address is (ADDRESS).
Third: Corp is authorized to issue 3,000 shares of common stock
Fourth: Any sharehodler of the corp must be a cosmologist certified by the Universal Association of Cosmologists.
Fifth: All voting by sharehodlers must be unanimous.
Sixth: Corp will have a term of ten years.
Seventh: Incorp is Abner Zeb, (ADDRESS).
a) Are these articles sufficient?
b) Secretary of state's records show that two other New Colombia corp shave similar names (XYZ Universal Inc, a well known spa chain) and (XYZ Palm Reading Inc). Can the state official reject these articles?
c) Another XYZ, Inc operates a well known chain of camera shops in an adjoining state. Can the New Colombia official reject the filing on this basis?
d) X, Y, Z have been sued for defrauding bereaved widows with promises that they could communicate w/ the deceased. Can state officials reject filing on this basis?
e) New Colombia cases hold that req's of unanimous shareholders approval are invalid. If the secretary of state's office accepts the XYZ articles for filing, does this affect Article 5's validity?
f) Can XYZ, Inc. articles specify a term of ten years? (Article 6)?

Back 41

a) Yes, the articles are sufficient.
b) Probably not. Articles an be rejected if they are not distinguishable upon the records of the secretary of state. XYZ Universal and XYZ Palm Readings are distinguishable for purposes of identify the corporations and sending notice. The similarity in names may work a deception, but this is a matter for the law of unfair competition/deceptive advertising/
c) No. XYZ, Inc. must be reserved, registered in New Colombia.
d) No. State officials have no discretion to reject articles that comply with technical filing requirements.
e) No. The proper filing of a document does not affect its validity. (Invalid for substantive not procedural reasons)
f) Yes. MBCA will assume perpetual duration but permits limitations such as duration.

Front 42

Suppose XYZ, INc is incorproated in DE even thought it conduts its pal-reading business in New Colombia. New Colombia's corp statute, unlike MBCA, permits removal of directors only for cause. DE statue permits removal with or without cause. X and Z call a special shareholder's meeting and remove Y from the XYZ board.
a) New Colombia' statute states: This act does not authorize the state to regulate the organization or internal affairs of an authorized foreign corp. Should Y sue in DE or New Colombia to get his seat back?
b) Assume New Colombia has follow CA's lead and regulates pseudo foreign corp under New Colombia corp standards. Does New Colombia's for cause only standard apply?
c) XYZ articles state that directors cannot be removed for any reason during their term. Now which law governs: the articles, DE law, or New Colombia law?

Back 42

a) It shouldn't' matter b/c either way DE's law is going to apply under the internal affairs doctrine.
b) Perhaps. Choice of venue now may make a differenc.e New Colombia court would seem bound to apply the New Colombia standard. Not surprising, DE courts have declared the virtual inviolancy of the internal affairs doctrine and would likely apply he law of DE, state of incorp. This means that two courts might answer the same corp law question in two different ways.
c) It may depend on the court where the suit is brought. Would DE or New Colombia law permit the parties to choose a extra-statutory standard? DE courts have been jealous in apply DE law to DE corp's.

Front 43

S and T opened a small printing shop. Fearful that S would have grandiose plans, he insisted on this provision in the articles: "The corp shall engage only in the business of printing unless all the shareholders agree otherwise."
S and T enter into a joint business venture w/ computer priting. Sa, SH, files suit AFTER the joint ventuer agreement is signed.
a) Assume the joint venture co (DT)'s management did not know about the charter limitation, but could easily have found out. Can Sa prevent futher performance?
b) If DT's management ignorance precludes a shareholder's suit, does S have any other recourse?
c) Assume DT management knew about the charter limitation, and the court enjoins the venture. Can DT recover the profits it would have made had the venture gone forward?

Back 43

a) No. Once the parties enter into the trnsaction, the third party DT must be made a party to the proceeding and any injuction must also be euqitable as to it.
b) Yes, but it won't be easy. S can sue the directors who approved the transaction in a derivative action. A claim of fiduciary breach may be difficult. IF there was no conflict of interest and if there was a rational business purpose for the transaction, BJR may shielded directors from liability.
c) No. Although MBCA allows a court to award damages for losses caused when an ultra vires transaction is enjoined, the damages are meant only to put the parties into a position they would have been in had the transaction not occurred. Anticipated profits are specifically disallowed.

Front 44

See above fact pattern: the joint venture uses printing software it bought from a copyright pirate. When Sara leans of this, she wants to sue to enjoin the agreement as ultra vires. Can she?

Back 44

No. If entering into a joint venture agreement is w/in the corp's lawful purposes and powers, it cannot be enjoined as ultra vires. The ultra vires doctrine only enforces limitations in the articles.

Front 45

The computer printing business proves to be highly profitable. The S-T printing board considers getting out of the joint venture to get into the business on its own. Can it use an ultra vires theory?

b) D-T also considers abandoning the joint venture. Can it avoid the agreement as ultra vires?

Back 45

No. MOdern statues make clar the copr cannot challenge the validity of copr action on the theory it lacks power. This evisceration of the ultra vires doctrine prevents precisely the kind of contractual weaseling that the S-T directors are contemplating.
Although the board might enlist a shareholder to seek to enjoin the corp, the injunction would have to be equitable. Avoiding legitimate K's through the artifice of a shareholder suit hardly seems equitable.

b) No. The third party can do more avoid its obligations on an ultra vires theory than can the corp.

Front 46

The S-T printing board authorizes a large cash "Xmas gift" to Sa. Maybe she will stop being so critical of the company! IS this gift ultra vires?

Back 46

Probably not. Although some courts continue to frame the issue of corporate giving as one of corp power, the real issue is one of fiduciary duty and corporate waste.

Front 47

B Inc is a ctaering ubsiness. Its articles authorize 100,000 shares of common stock. There are 20,000 shares issued and outstanding.
a) Most B shares are owned by the firm's managers who invested their life savings in the business. What are the advantages and disadvantages of their investment in common stock?
b) B board declares a stock dividend that entitles each shareholder to receive one additional common share for every common share she holds. Are these new shares validly issues?
c) An amendment to B articles authorizes 50,000 shares of new convertible preferred, each share convertible into two shares of common stock. Any problems?
d) Another amendment to B articles authorizes a new class of nonvoting redeemable common shares under which holder an redeems their shares for $25/share at any time. Any problems? Hint: Redemption right will have much the same effect as a forced dividend payment.

Back 47

a) Pro: Broad participation, liquidity, and voting rights.
Con: any returns come after firms' creditors and senior shareholders are paid. No fixed right to dividends.
b) Yes, these shares are validly issues if the articles authorize them and the board approves their issuance.
c) Yes, there's a problem. There are insufficient authorized common shares to handle all of the possible conversions, up to 100,000 common shares. Before issuing the new convertible preferred, the articles must be amended to authorize additional common shares.
d) A problem. Staturoy limits on dividends also cover the corp's repurchase of its own shares. The redemption right must depend on meeting the relevant test for corp repurchases. Moreover, the possibility of a massive redemption makes business planning difficult. A sinking fund, into which the corp makes regular contributions of anticipation of redemption, would alleviate some of the uncertainty.

Front 48

Suppose B has two classes of stock outstanding: 100,000 shares of common stock and 6,000 shares of 10% cumulative preferred stock (stated value $100). IN year 1 B has sufficient earnings to pay only $100,000 in dividends.
a) In Year 1 the board chooses not to pay dividends. Can it?
b) The board does not declare dividends in Year 1 or 2. In Year 3 the board declares $10/share in dividends on the preferred of each of Year 1 and 2. It does not pay any interest on these arrearge payments. Any problems?
c) In Year 1 the board declares a dividend of $5/share on the cumulative preferred. In Year 2 the board does not declare dividends. In Year 3 there are are $100,000 in distribute assets, and the board declares a dividend of $10/share on the preferred and $0.40 share on the common stock. Can it?
d) In Years 1 and 2 the board does not and could not declare a dividend on the cumulative preferred. Year 3 B has $200,000 in distributable assets. The board declares a dividend of $30/share on the preferred and $0.20/share on the on the common. Can it?
e) In Year 3, with no earnings on the immediate horizon, B receives an offer from an outside investor interest in acquiring common shares--but n the condition the company engage in a recapitalization in which preferred shareholders agree to convert their shares into common shares. Can this be done?

Back 48

a) Yes. Declaration of dividend on common and preferred shares generally is w/in the discretion of the corp's board of directors.
b) No. Payments on preferred shares are a matter of K. But preferred shareholder can protect against this opportunism by demanding interest, securing voting rights or representation on the board, or acquiring rights to resell their shares.
c) No. before dividends can be paid on the common, the board must declare and pay the preferred a total of $150,000 in dividends ($30K from year 1 plus $60,000 from Year 2, plus the current $60,00 preference). NO dividends can be paid on Year 3 on the common shares.
d) Yes, unless the preferred is participating. After paying the preferred dividends, both in arrears and current, the board can declare up to $20K in dividends.
e) Yes. Even if the preferred shares do not carry conversion rights, the preferred shareholders can make a conversion by tendering their preferred shares and receiving common share in exchange.

Front 49

The articles of B Inc specify that the common stock has a par value of $5/share. At the beginning of Year 1 the board approves the issuance of common stock for $10/share. It issues as follows:
A: 1,000 shares at $10,000 consideration
B: 1,000 shares at $7,000 consideration
C: 1,000 shares at $3,000 consideration
a) after Year 1 the business is still solvent. Is any shareholder liable? To whom?
b) After Year 2 the business is insolvent. Is any shareholder liable? To whom?

Back 49

a) B and C may be liable tot he copr. B's stock is above par, but below the authorized price. B may be contractually liable if he agreed to pay the $10 price. C's stock is $3 below par and below authorized price. C may be liable or the difference between the purchase price and par value.
b) liabilities are the same for a)

Front 50

2. B Inc. articles specify that the common stock has no par value. At the beginning of Year 1 the board issues 20,000 shares of common stock to A and 10,000 to B. Anna pays $50K in cash. B agrees to work for the corp for two years. The board values his agreement at $50K.
a) Is A liable for having paid $2.50/share while B paid $5.00/share?
b) After Year 1 A and B have a falling out. Using her control, A has the corp sue B to pay for his shares. Can the corp recover?
c) In Year 2 A and B reconcile. B has not completed his two years of service. Can B nonetheless vote and receive dividends on his 10,000 shares?

Back 50

a) Absent par value, there is no req that hte board issue stock for a particular prcie. However, B amy not mislead B about the price or value of his shares. B could recover under anti-fraud statutes.
b) Depends on the Jx. B's K for future services constitues eligible consideration for shares and the board's aluation of the K is conclusive. Under other statues, Benny's promise of future services is considered too uncertain and not eligible for consideration. The corp can seek to cancel his shares or assess him for any shortfall in consideration. Cases are split on whether B can choose to pay or return the shares.

Front 51

3. Instead of promising future services, B offers a sketchy business plan for his 10,000 shares. HE assures the board he will know how to carry it out. The board determines the plan has value of $50K but doe snot seek an independent valuation. The board issues the shares to B. ON the corp's financial statements, the board carries B's business plan as an asset worth $50K.
a) IN Year 1 Anna sells some of her shares to D, who later finds out how B got his shares Can D sue to have B's shares cancelled?
b) D is also furious the board was so naive to think B's business plan was wroth $50K. Experts tell David the plan is worthless. Can D sue to have B's shares cancelled?
c) In Year 3 B's business plan flops and the business becomes insolvent. Creditors sue B to compel him to pay for his stock. Is B liable?

Back 51

a) Probably No. If David sues deriviately on behalf of teh copr ot cancel B's shares, he will have to argue that the business plan is inelible consideration under the statue. Under MBCa the board can accpet any tangible or intangible property or benefit.
b) No. The board valuation of the business plan is conclusive, absent fraud or bad faith.
c) No. Although on insolvency creditors can enforce shareholder payment obligations, the creditors will run into the same problems if the corp were suing. W/o more, the board's valuation is conclusive.

Front 52

L and M want to start a construction business. It will be incorporated. L has equipment (with an appraised value of $60,000) and some cash ($30,000). M has a little cash ($10,000) and will manage the business with L.
Each wants an equal voice in the copmany. To relfect larger contribution, L wants a larger return and priority over M. L also wants to get her investment back if the business fails, a common occurrence for construction firms.

a) What financial arrangement would work for them?
b) Assume L takes an $80K unsecured note from the corp. Must this be authorized in the AOI?

Back 52

a) The two should recieve an equal number of common voting shres to ensure an equal voice in electing the boared and voton in other shareholder matters. Although some states permit dbt securiteis to have voting rights, many do not. Common shares have qual voting righs, unless different classes of common shares are specifically authorized in the articles. L's interest in larger returns and priority can be accomplished by giving her additional financial rights (such as preferences share or debt securities) not given to M.
b) No. Only equity securities need to be authorized in the articles.

Front 53

The two agree. L and M will each reiceved 10,000 sahres of common stock at $1 per share. What financial instrument should be used to reflect the remaining $80,000 contributed by Lina? Consider the pros and cons of the following:
a) Lina takes an unsecured note for $80K. Consider the debt equity ratio.
b) Lina takes 8,000 shares of nonvoting common stock at $10/share.
c) Lina takes a combination of 300 shares of nonvoting preferred stock at $100/share and a $50,000 unsecured note. consider the debt-equity ratio.

Back 53

a) Pros: Interst on notes is deductibe, and note-holdrs aren ot taxed on repayment sof the principal. noteholders ahre with other unsecred creditors on insovlency. debtholders havan enforceable K cliam to payments. OUtsdie debt, so his equity investment will be subject ot hte up-side and down-side effects of leverage.
cons: inside debt equity ratio is 4:1, and it is possible that IRS might seek to re characterize the notes a capital contribution, making interest on the note non-deductible and payment to L taxable dividends. M's investment is at greater risk b/c of company's heavy debt burden. L's claim as a unsecured creditor may be equitably subordinated to those of other unsecured creditors b/c of the business's thin capitalization.
b) Pros: Lenders will flock to such a well-cpatilzied company. If the corproation is successful, L will participate fully in the sucess (while shoudl would not in the case of preffered stock or debt).
Cons: Any payments to L will be subject to double taxation. L will have no assured return (as owuled b the case for debt). L will have tno dividend or liquidation preference (as would be the case for preferred stock). L will have no priorty with or over creditors on insovlency.
c) W/ a ninside debt equity ration of 1:1, the IRS would proably not challenge interest dectibility on the note. Lina proably also would have unsecred creditor status on the note in a bankrupcty or insolvency proceeding. The note would provide Lina enforceable K rights. L would have payment and liquidation preference over M on both the note and the preferred stock. L's assumption of debts gives M some leverage. The capital structure provides lenders a pretty decent equity cushion.
Cons; More debt would have been better for L, but then more debt would have been less likely to withstand tax and insolvency priority scrutiny.

Front 54

Graphic Designs, incorporated in an MBCA Jx, designs and produces commercial art. Shirley is the majority shareholder and the board's dominant director. The company president is Buck. Shirley offers her friend Jenny, a highly qualified commercial artist, a job at Graphic Designs.
a) If Jenny accepts the offer, is the corp bound under the agreement?
b) Shirley, a majority shareholder, instructs the board and Buck to hire Jenny, but they balk. How can Shirley force the board or Buck to follow her instructions?

Back 54

a) No. As a shareholder S has no authority to act on behalf of the corp or to bind the corp contractually.
b) She cannot. Shirley is limited to electing directors and hoping that they do what she wants.

Front 55

Graphic's five person board authorizes Buck to fire all of the company's commercial artists and replace them with a computer that would generate graphic designs. Shirley is upset about the board's action.

a) As majority shareholder, she signs and submits a written consent that purports to remove all of the directors. Will this work?
b) She calls a special shareholder's meeting to remove the incumbent directors and Buck. Will this work?
c) She calls a shareholders meeting to vote on a shareholder resolution requiring the board to reverse its decision. Will this work?

Back 55

a) No. The MCArequires that the consent be unanimous.
b) In part. As the holder ofmore than 10% of Grpahic's shares, she can demand a special shareholde'rs meeting. S he must have a proper purpose for the meeting. Removal of directors is a proper purpose, but rmeoval of officers is not. The MBCA permits sahroelders to reomvoe driecotrs w/ or w/o cuase. Theo removal or appointment of officers, hoeve,r is within the sole discreiton of teh board of directors.
c) No. Some courts have held that shareholders can approve non-binding request/precatory resolutions concerning the management of the corporation. Shirley's resolution, however is not phrased as a request, but a demand. This shareholders cannot do.

Front 56

Graphic's articles specify a board of b/w three and seven directors, the exact number to be fixed by the board of directors in the bylaws. The current bylaws call for five directors. Shirley wants to charge the balance of power on the board at the next annual shareholder's meeting by proposing: a) an amendment to the articles that would fix the number of directors at seven, with any vacancies to be filled by the shareholders. Is this proper?
b) an amendment of the bylaws that would increase the number of directors from five to seven. Is this proper?
c) An amendment to the bylaws that mandates that any shareholder must give notice of nominations to the board at least 60 days before the shareholder's meeting. Is this proper?

Back 56

a) No. Amendments to the articles must be recommend by the board of directors for approval by shareholders.
b) Yes. Shareholders have an inherent power ot amend the bylaws.
c) Probably. Courts have permitted shareholder proposed bylaws to amend the procedures by which directors are elected. In fact, advance-notice bylaws are common, and their validity has not been questioned.

Front 57

Mildred, a minority shareholder of Graphic, is convinced that Shirley's new directors, who dutifully rescinded the computer decision, were duly influenced by the company's commercial artists. Mildred is considering a derivative suit against directors.
a) She ants to inspect minutes of last year's board meetings. Must the corp provide the minutes?
b) She want to inspect Graphic's list of shareholders so she can contact them about joining her suit. Must the corp provide the list?
c) She wants the board to summarize its reasons for rescinding the computer decision. Must the board summarize its reasons?

Back 57

a) Perhaps not. MBCA permits shareholders to demand experts from minutes of board meetings if the demand is made for a proper purpose. Bringing a deviate action for the benefit of the corp and the shareholders as a group would seem to be such a purpose. Nonetheless, her request as currently formulated may be too broad in that it seeks all board minutes for the past year and thus goes beyond the shareholder's interest in challenging the board's rescission of its computer decision. The MBCA requires that the records be described with reasonable particular and that they related directly to the stated purpose.
b) Perhaps. A shareholder demand to inspect the shareholder's list must be for a proper purpose. Courts have held that the burden to show an improper purpose is on the corp. The copr may argue that a shareholder's list is not relevant to bring a derivative action. Courts, however have interpreted the proper purpose test broadly. Unless MIldred seeks to use the list only to harass or advance her own personal interest, which would be enough if she argued that additional shareholder P's will help defray the cost of the derivative and add weight to the challenge of the directors' action.

Front 58

Graphic's articles are silent on the question of how director are elected. Nine directors sit on Graphic's board.
a) How are Graphic's directors elected?
b) Shirley owns 78 of Graphic's 100 shares. Mildred owns the remaining 22. How many directors can Mildred elect under a straight voting scheme?

Back 58

a) Straight voting, each year. Under MBCA, unless the articles specify otherwise, all directors are up for election at each annual shareholder's meeting.
b) None. Under straight voting, Shirley and Mildred each will case their vote nine times for nine candidates.

Front 59

Graphic's articles specify that the corporation's board is to be elected by cumulative voting. The bylaws specify a board of nine directors.
a) With 22 of 100 shares, how many directors is Mildred assured of electing to the board?
Shirley has heard that Mildred plans to cast her 198 cumulative votes in teh following manner: Mary (66), Manny (66), Morton (66). Can Shirley take advantage of this information to increase her representation on the board?

Back 59

a) Two directors The cumulative voting formula provides the answer:
NS = (NDxTS)/(TD +1) +1 or some fraction
NS=# of shares needed to elect desired # of directors
ND=Number for directors that shareholder desired to elect
TS=Total number of shares authorized t vote
TD=total number of directors to be elected
1 director = 11 shares [(1x100)/(9+1) +1)
2 directors= 21
b) Yes. Shirley can distribute her 702 votes among nine candidates, casting 78 vote for each. Shirley will elect all nine directors in this way--the top nine vote-getters will all be her candidates. By spreading her votes among three candidates, Mildred dilutes her cumulative voting power.

Front 60

Shirley becomes unhappy with the directors Mildred has elected to Graphic's board. With six of her nominees on the nine-person board, Shirley considers some strategies for the board to pursue. Consider the legality of:
a) an amendment to the articles that would eliminate cumulative voting
b) an amendment to the articles that would reduce the number of directors to three
c) an amendment to he articles classifying the nine-person board into three groups, each group members coming up for election once every three years.
d) an amendment to the bylaws to stagger the board in this way

Back 60

a) Legal. Assuming the board proposes the amendment and shareholders approve it, the articles may be amended to delete a provision not required by the articles. Cumulative voting under the MBCA is an opt-in right and can be removed by action of the board.
b) Legal. As a practical manner, the reduction in board size will destroy the effectiveness of cumulative voting. Even though Mildred can continue to accumulate her votes her 22 shares are no longer sufficient to elect a director.
c) Legal. The effect would be similar to reducting the size of teh board. Mildred would no longer be assure dteh ability to elect a director despite her continuing right to accumulate her votes.
d) Not legal. Shirley cannot adopt a classified board through a bylaw amendment. The MBCA requires that a staggered board be provided for in the articles.

Front 61

Milton, one of the Graphic's directors elected by Mildred , has begun completing graphic design business using secret customer lists he obtained as a director of Graphic.
a) Before he does further damage, Shirley wants him removed from the board and calls a special meeting for that purpose. If Graphic's articles state that directors can only be removed for cause, can she remove Milton?
b) At the meeting, Shirley votes her 78 shares to remove Milton, and Mildred votes her 22 shares against removal. Is Milton removed?
c) Shirley considers other options to remove Milton. What other recourse does she have?
d) Milton resigns. Graphic's articles state that the board of directors still have the authority to fill any midterm vacancies on the board. Shirley nonetheless calls a special shareholder's meeting to fill the vacancy left by Milton's resignation. Can she?

Back 61

a) Yes. Milton's misappropriation of the company's trade secrets is not only illegal under state law, but also a breach of his fiduciary duties.
b) No. Under MBCA, Milton cannot be removed if the number of shares needed to elect him under cumulative voting are voted against his removal. Eleven shares would have been sufficient to elect Milton, and Milton cannot be removed if eleven or more votes are cast against his removal.
c) Shirley can seek to have Milton removed by judicial order. Under the MBCA, a 10 percent shareholder can have a director removed if the court finds the director engaged in fraudulent or dishonest conduct or gross abuse of authority or discretion.
d) Probably. Even though the provision might be read to give the board exclusive authority to fill vacancies, a strong argument can be made that shareholders nonetheless retain an inherent authority ti fill vacancies. The MCBA is ambiguous. It specifies that board vacancies can be filled by shareholders or directors, unless the articles provide otherwise.

Front 62

EnTrade, a publicly traded company incorporated in an MBCA Jx offering electricity natural gas. Offers customers "risk management" products that allow customers to buy financial K to protect themselves against price fluctuations. EnTrade has competitors offering similar energy trading systems, often at less cost. Net income has grown slowly. EnTrade's management proposes a bold strategy: expand its energy trading operations and being to trade non-energy commodities. The board approves the expansion plan.
a) Sherron, an Entrade shareholder, learns of the board's approval of the expansion and thinks it is a huge business mistake. Sherron wants to stop the expansion in court. How and on what theory?
b) The company spends $1.2 billion on fiber optic network t run the company's expanded trading system. Sherron believes the money has been misspent and wants the directors to reimburse the corporation. On what theory?
c) Despite the state of the art computer network and the 1,700 new employees, the expansion project shows no signs of profitability. Six months after the expansion plan is put into effect the company's stock has lost 40% of its value. W/o knowing more, what chance does Sherron have of succeeding on either of these two claims?

Back 62

a) Sherron could bring a derivative action on behalf of the corporation to enjoin the directors from carrying out their expansion plan. Violation f duty of care to the corp. Or, not sufficiently informed.
b) Same avenues as a)
c) Next to none. BJR protects company.

Front 63

As Sherron delves into the board's approval of EnTrade's expansion plan, she learns more. Which will support her challenge of the plan?
a) Industry's is adverse to investments in telecommunications.
b) CEO failed to tell directors that telecommunications companies had considered the idea of creating a bandwidth brokerage service and rejected it.
c) Survey board relied on used surveyors who were not part of the market.
d) Acosta owns a majority interest in a company that will offer consulting services w/ EnTrade's bandwidth trading operations. Acosta revealed his interest and plan to hire company as part of company's expansion.
e) Deere & Carbo, company's outside lawyers, opined that they Mastico deal is fair to EnTrade even though the lawyers failed to question or review the way in which EnTrade has guaranteed Matisco's obligations.

Back 63

a) Probably not support. BJR protects corp.
b) Probably not support. BJR rule says courts should not second guess process of business decision making.
c) Probably not support. Even though Acosta' s failure to mention the surveys may have been fraudulent, Sherron would have difficulty showing the board's reliance was unwarranted. She would have to argue that the board's approval of the expansion was tainted by fraud and unprotected by the BJR.
d) Probably support. BJR does not protect conflict of interest.
e) Probably support. Failure of outside counsel to fulfill its professional duties into self-dealing and fairness can have repercussion on the transactions' validity.

Front 64

Problems for EnTrade. Entrade is not well hedged and lacks adequate reserves. CFTC investigates and threatens to sue EnTrade for engaging in the business of commodity futures trading w/o satisfying regulations.
a) EnTrade board approves further steps in the company's expansion plan, including more aggressive long term risk management programs that put the company at even greater risk of energy prices fall. The board does not seek authorization from the CFTC. If Sherron sues to enjoin the company's risk management program, is the board's decision to continue it protected by the BJR?
b) The CFTC obtains a court injunction against Entrade's continuing to offer risk management. Court imposes a fine. Are EnTrade directors liable to the corp for approval the illegal conduct?
c) EnTrade's risk management practices were more aggressive than authorized by the board. But the board never instituted a report system to keep track of the value of the company's prosperity risk management products. Are the EnTrade directors liable for not monitoring the company's risk management business?

Back 64

a) Perhaps. To overcome the BJR presumption, a shareholder would have to show that the board's decision to expand the risk management program either was so improvident as to be beyond explanation or was grossly uniformed. The possibility of illegality does not mean the directors violated a duty. Sherron would have to show the board proceeded w/o a rational business purpose.
b) Perhaps not. A shareholder could argue the directors are liable for not acting in good faith by approval illegal behavior. BUT at the time the directors approved the risk management expansion, it was not certain that CFTC approval was required to off "hedge" K's in its energy trading business.
c) Yes. A failure to be attentive to corporate illegality may breach a directors duty of good faith (a subset of the duty of loyalty).

Front 65

The courts uphold the CFTC assertion of Jx over EnTrade's risk management business and Congress does not provide an exception. Company loses $150 million. Shareholders bring a derivative suit against EnTrade board for failing to become adquate informed about the legality of teh company's risk managment business.
a) The minutes of the meeting which the board decided to continue in the risk management business despite the CFTC's position reveal 6 out of 9 directors voted on decision. Who can be held liable?
b) Director Rowland, how recused herself at the meeting,now claims that even if she had voted against the decision her dissent would not have changed the outcome. Does that effect her liability?
c) At the time of the board's decision, the EnTrade articles exculpated directors from personal liability to the corp to the full extend permitted by law. Does this provision insulate the EnTrade directors from liability?
d) Assuming directors are not exculpated, are they liable for all of EnTrade's risk management losses?

Back 65

a) Each director who was present at the meeting and failed to object or abstain from the action is assumed to have assented. These directors may be held jointly and severally liable for the resulting loss suffered by the copr.
b) No, director needed to dissent!
c) Perhaps, under the raincoat protection.
d) Not necessarily. Even if the directors breach a duty for not inquiring sufficiently about the legitimacy of the risk management business, their liability is not automatic. MBCA places the burden on the challenging shareholder to show that the directors' inattention was a proximate cause of any corporate injury.

Front 66

EnTrade also owns natural gas utilities and pipelines. EnTrade has leverage its own stock to create cash in teh affiliates, which cash then comes pouring into EnTrade. Only if EnTrade's stock price falls below preset thresholds will there be a problem.
a) EnTrade fails to become fully informed about the contingent liabilities or mention them to shareholders in a merger. Is this a breach of the director's fiduciary duties?
b) The court finds EndTrade breach their fiduciary duties to become informed int the merger. Are the directors liable for the shareholder's losses when teh contingent liabilities, which DueNergy assumed in the merger, force the acquiring company into bankruptcy?

Back 66

a) Perhaps. Seems to be a breach of fiduciary duty of care.
b) Not necessarily. Even though the EnTrade board should have become informed about EnTrade's liabilities when it sold the company, the shareholder's losses are not the result of the merger, but rather the earlier leverage of the company's assets using company stock as collateral.

Front 67

There is a baseball team named the Cuba Libres. The shareholders are Silvio, Alejandro, Bobby, Camilo, and Duncan.
a) Salsa services operates a successful food concession business on the East Coast and has bid to operate food and beverage concession for the Libres. Alejandro is a director and 25% shareholder of Salsa. Any problem if the LIbres accept the Salsa bid?
b) Garcia calls a board meeting to consider the Salsa bid. Only C and D attend the meeting. The LIbres bylaws specify that three directors constitute a quorum at board meetings. Do the two constitute a board quorum?
c) Both Camilo and Dunan had been personally invited to join the LIbres board by Garcia. Either own shares in the team. Are the two qualified to approve the Salsa K?
d) The two directors adjourn their meeting to ask Garcia for info about the other bidders seeking the concession business. Garcia attend their convened meeting, answers their questions, and joins Camilo and Duncan in approval the Salsa bid. Does Garcia's presence and participation affect the validity of the board's action?

Back 67

a) Yes the concession could be rescinded as a directors' self-dealing transaction b/c A and G's conflicting interests.
b) Yes. Under Sub chapter F, as under most modern statues, a majority of disinterested directors (but not less than two) constitute a quorum for purposes of considering a self-dealing director transaction.
c) Perhaps. It depends on whether Camilo (the Cuban businessman) and Duncan (the company's outside lawyer) are sufficiently disinterested and independent. D may be disqualified if he or his law firm expects fees b/c of his work connected to the Salsa deal. If Garcia dominates his activities as a creditor, perhaps b/c he feels beholden to him for continuing fees his independent would be in doubt.
d) Yes, under the MBCA. The MBCA "afe harbor" for board action applies only if the qualified directors deliberate and vote outside the presence of and w/o the anticipation by any other director. Other "interested director" statues however are not as strict and specifically do not invalidate action by the board just because of the presence or participation of an interested director.

Front 68

Ibrahim, a Libres shareholder, has waited his whole life for baseball in Cuba. When he learns of the Salsa K, he shouted, It's a sweetheart deal." Salsa's 3 yr K calls for Salsa to make default payments to the LIbres of $20 million/yr for the right to be the team's exclusive concessionaire.
a) I wants S K invalidated. Assuming the bid was approved by the C-D committee, who should he sue and what will he have to show?
b) I discovers that A, though he disclosed his directorship and 25% interest, never disclosed to the committee his inside knowledge that S would have agreed to pay $24 million/yr. Does A's failure to disclose S's reservation price nullify the committee's approval?

Back 68

a) I should bring a derviate aciton on behalf of the copr and name the interested direcotrs, Garica and Aljeandro and the aprpoving directors, Casmilo and Dunanc. The challenger must prove the direcotr's conflicng interest and must establish taht board approval was falwed. IF he does, the redictors then bear the burden to show the trasnaction was fiar. And the directors may be individually liable. BJR would not apply.
b) Probably not. Safe harbor for self-dealing approved by disinterested director requires that the interested directors disclose the existence and nature of their conflicting interest and all facts know to them. The duty to disclose material info puts the director in the uncomfortable position of a fiduciary and self-interested count-er party. Director need not disclose all material information, but only that information the corporation would normally ascertain in an arm's length negotiation. Thus, the director need not reveal person or subjective info like the lowers price he would be willing to accept.

Front 69

At the next Libres shareholder's meeting, the board submits a shareholder resolution to ratify the Salsa K. The company's proxy statement sets forth the terms of the K and describe the interest in Salsa and state S K assures company a fixed payment not dependent on attendance figures.
a) W/ Garcia's 40% voting for the resolution it's approved by 55% of the outstanding shares. Most of the public shareholders vote against it. What effect does this shareholder ratification have on I's challenge to the K?
b) The Libres AOI provide any conflict of interest transaction between Corp and any director is conclusively valid if approved by a vote of a majority of the outstanding shares. The shares of any interested director may participate fully in such a vote.
Does this affect the outcome of I's case?
c) Assume G did not vote and a majority of public shareholders ratified the S K, though their shares did not constitute a majority. Would this vote affect I's challenge to the K?

Back 69

a) Very little. A majority of disinterested shares were cast against the resolution. So, the burden will fall on Garcia and other D's to show the transaction's fairness (using the entire fairness rule).
b) Perhaps, but only mildly. The Libres proivison would efectivley cut judicial reivew of sel-dealing if the itnerested director, as here, controls the proxy mechanics or holds a significant block of stock.
c) Yes. I would have to show some defect in the process of shareholder approval, such as failure to disclose the terms of the competing H bid or describe the internal study estimating large attendance figures for the first three years.

Front 70

The court rules that shareholder ratification was defective b/c the proxy statement failed to disclose the H bid, thus making the S transaction unfair to Libres.
a) I wants the court to modify the S K to conform to the Payment schedule offered by H, which the court had found was fair. Will the court order S to make these payments?
b) I had also sued Camilo and D, the disinterested directors who approved the S K. Are they liable for the damages the S ZK caused the corp?

Back 70

a) Probably not. The usual remedy for unfair self-dealing is rescission of the transaction. This assures the self-dealing insider that the corp cannot unilaterally revise the terms of the transaction in a judicial fairness challenge.
b) Probably not. B/c they were not interested in the transaction, they were liable only if they violated their duties of care. If they rationally believed that they were acting in the corps best interest and sought to inform themselves about the S K, their liability for approving the K is protected under the BJR.

Front 71

The compensation committe, at More's request, also provided for his retirement. After the three-year K term, More can retire from teh company and by making himself aviaable excusivley to the company, recieve a guaranteed annual consulting fee of $400,000/year wehther or not he actually performs constituent services.
a) C is even more irritated when she learns of the consulting arrangement. Will she succeed if she challenges the consulting arrangement as a waste of corporate assets?
b) The directors are worried about Cheryl's challenge. How might they change the consulting agreement to bolster its validity?

Back 71

a) Probalby not> C would aruge the consulting fee, byt its terms is unrealated to any services to teh coprration. She coudl assert tha there is no assurance More would actually provide the services. There is no indication the corporation will actually consult him. And whatever services he provides will be of little value ad would be available from other sources for less money.
Despite these arguments, C will have an uphill fight. Directors can argue the uniqueness of his services.
b) Condemnation committee could provide that the consulting fee is contingent on More's agreement not to complete with the corporation. The committee should also make clear that the consulting fee is not necessarily elated to future services, but rather the non-compete agreement or the 5 year K.

Front 72

The Mor Parking Corp (MPC) forms a cmpensation committee of three outside directos who aprove a five-year compensation package for More of $400K in annual salary and a bonus of 5% of net earnings. The committee knows the package is generous. At current earning levels, More will make $650,000 each year, compared to the $200,000 per year that top executives in the parking garage industry are paid.
a) Cheryl, a long-time MPC shareholder, is outraged and wants to challenge More's compensation. She brings a derivative suit. What must she allege?
b) Is there other action she can take?

Back 72

a) She must rebbutt the BJR by indicating 1) directors failed to become informed; 2) directors failed to act in good faith; 3) directors were dominated by the interested director; 4) compensation was wasteful. Cheryl might also allege that the compensation was specifically forbidden in the articles of incorporation or the compensation was illegal.
(analysis of each on pg 316-317)

Cheryl might allege the committe failed to act w/ good faith. If the committee approved the pay package, while consciously disregarding whether it was justified in light of comparable pay for comparable services, it would violate its duty of good faith.
b) Cheryl might submit a shareholder proposal on executive compensation to be included in the company's proxy statement. Under Rule 14a-8, the proposal cannot demand the directors set a given pay, but can make precatory (advisory) recommendations or ask for the compensation committee to report on why More's compensation is more than three times higher than that of comparable executives.

Front 73

Atlantis Bottling is the authorized bottler of Gusto Cola on the Atlantic seaboard. Corp is owned and operated by the Garret family. Ruth Garret, one of the founders, brought her unemployed brother who is now the CEO of a successful dessert shop chain.
a) Percy set up dessert shops w/ his own loans that Atlantis guarantees under Percy's unauthorized signature. Can Ruth force Percy to share in his profits of the dessert chain? Under what theory?
b) Percy actually set up the dessert shop on his own time and w/ his own money w/o using the company's credit. Atlantis had no plans to diversify into the dessert business. Can Percy be forced to share his profits?
c) Ruth points out that form the beginning the Garret family understood everyone would pitch in and everyone would be taken care of. Does this understand affect whether Percy must share his profits?

Back 73

a) Yes, under a misappropriation theory. Percy's unauthorized use of Atlantis' credit is as much diversion of assets as if he had misappropriated money.
b) Unlikely. Percy's business is not a corp opportunity under any of the definitions applied by the courts.
c) Perhaps. Ruth could argue that Percy had a duty to share the opportunity because of the special expectation in this close corporation.

Front 74

Atlantis managers have been considering installing new lighting at the company's dingy bottling plant. Sally Garrent (Rught's niece and supervisor of the plan) has drawn up a new lighting design which she plans to submit to the board.
a) Before submitting her plan, Percy receives a letter from DustriLite that is going out of business and liquidating its industrial lighting inventory. Without telling anyone, Percy uses his own money to buy a boxcar of Dustrilite. When the board approves Sally's plan, Percy resells to Atlantis at the market price. Must Percy share his profits? Under what theory?
b) What it make a difference if Percy had originally disclosed the DustriLite offer to Atlantic's board and the board had at first turned down the offer?
c) What if DustrLIte sold its inventory to Percy at a discount as a way to express its thank for steering Atlantis business to Dustrilite. Must Percy share a personal gratuity?

Back 74

a) Yes, under the expectancy theory. The DustriLite opp was n existng expectancy of Atlantis because Sally's plans for new lighting at the plant. It makes no dfiferent that hte boad had not yet approved Sally's plans.
b) Yes, if the board had also known of Sally's lighting plans. Under most judicial approaches, reject of the opportunity by informed, independent, disinterested directors relinquishes corp's claim to it, freeing Percy to take it for himself.
c) Probably, because the gratuity was for past business with Atlantis, not with Percy.

Front 75

Atlantis sales have fallen.
a) Percy is successful and want to get the banks off A's back. He believes that A's credit is basically sounds, and he buys A's loans from the books at a discount. Can he be forced to share the discount w/ Atlantis?
b) Percy believes the banks would not have been willing, on principle, to allow Atlantis to renegotiate its debt. Does this affect Percy duties?
c) Percy claims that everyone else at Atlantis knew about the banks' nervousness and did nothing. Does this affect Percy's duties?

Back 75

a) Perhaps. Purchase of the debt would mean that Atlantis would ow him 100% principal and interest under its loans even though Percy had paid less than 100% for these rights. Atlantis could use an expectancy theory to characterize Percy's purchase of its discounted debt as a corp opportunity and compel Percy to share the profits from his refinancing of the debt. On the other hand, Percy could argue that he was simply assuming A's credit risk from the bank and purchased the debts at market value. His argument would be buttressed if Percy, not the banks, initiates the idea of refinancing or repurchase of the debt.
b) Perhaps. If the banks would have been unwilling to sell back their loans to Atlantis at a discount, Atlantis lacked the corporate capacity to take the opportunity itself.
However, if court follows modern ALI principles Percy would have to get rejection from the corporation first.
c) Perhaps. Percy might be able to characterize the Atlantis inaction as an implied rejection of the opportunity to refinance its debt. (But NOT ALI!)

Front 76

Ofelia, a nationally known beverage consultant and an outside director on Atlantis' board, read in the newspaper that Tanfa Beverages is going out of business. Tafna is a bottle of fruit flavored soda in CA, and Ofelia calls Tanfa's president who confirms teh company is for sale.
a) A's board has never discussed expanding outside the Atlantic region. Ofelia figures A would not be interested in Tanfa. She wants to buy Tanfa for herself but without disclosing her plans to A. Can she?
b) Atlantis' board has lately had extensive discussion about the company's cash flow difficulties. Ofelia figures Atlantis lacks the funds to buy Tanfa. Does this affect her duties?
c) Ofelia buys Tanfa and convinces Jack Garret (A's promotional director) to leave A and work for Tanfa. Do you see any problems?

Back 76

a) Perhaps not. T opportunity may be an opportunity w/in A's line of business expansion potential, but not necessarily one that outside director O must disclose. The line of business test doe snot depend on actual expediencies. T is in the same business. Some courts would consider Ofelia's position as a non-executive outside director. Her entrepreneurial interest are greater because she is not an employee. Under ALI, a line of business opportunity is not considers a corp opp when an outside director learns of it in a non-corp capacity.
b) Perhaps. If the opp were considered a corp opp, Ofelia's incapacity defense depends on whether a court would require the board to make the call or whether the court would decide the issue on its own. (DE vs. ALI).
c) Yes, three.
1) Whether or not the acquisition of Tanfa is a corp opportunity. Jack's continues employed w/ Atlantis might be seen as a opp.
2) T is now competing with A and O under a board duty not to harm A competitively.
3) If Jack is under K and particularity if he is subject to non-compete covenant, O may be notoriously interfered w/ A's K relationship by wooing Jack away.

Front 77

Company buys back shares from T for $10/share over the market value for a total $100 million profit. Shareholder finds out.
a) What can shareholder do?
b) SH sues to hold directors liable for improvidently approve the repurchase. Walden owns $2,000 in corp. How much can he recover?

Back 77

a) Derivative action (sue on behalf of copr) alleging corp directors breach fiduciary duties. OR direct action claiming repurchases were an illegal distribution under an insolvency or balance sheet test. Otherwise, the transaction did not dilute SH's voting rights.
b) Nothing. This is a derivative suit b/c the allegation is that the directors violated their fiduciary duties. Sh can only recover directly if corp is closely held or no longer in existence.

Front 78

If the corp offers to repay 10% of premium, and corp board settles, can
a) SH continue lawsuit?
b) Is there another course open to SH?
c) Can attorney for SH seek attorneys fees?

Back 78

a) Probably not. Walden's derivative suit is brought to n behalf of the copr. IF the corp settle, the settlement is binding on SH's suit.
b) SH could bring a fiduciary challenge. W might be able to challenge directors decision to enter into the settlement as a breach of their duty of care or loyalty.
c) Perhaps. Attorney has to argue that SH suit goaded Corp board to act. SH attorney can often recover in SH suits.

Front 79

Consoldiated senior executives propose a management buyout. Under the terms of the buyout merger, SH ans would receive $80 for their shares.
a) SH thinks $80 is inadequate. Proxy materials fail to disclose that corp's board considered the company was worth at least $100/share. Sh wants to enjoin merger. What kind of suit would you advise?
b) SH bring both direct and derivative claims. Board agrees to settlement by amending its proxy material and paying SH $500,000 on the condition she dismiss all her claims. Are there any problems if SH accepts?
c) SHs approve merger. SH amend her complaint to claim damages. Court hold directors liable for gross negligent in approving merger. What is the appropriate remedy?

Back 79

a) SH can chose a director suit, derivative suit, or a suit w/ both direct and derivative claims. She has a direct claim under the federal proxy rules under the statue duty of disclosure doctrine that the corp failed to adequately disclose the terms of the merger.
b) Yes. Payment appears to be a bribe.
c) Recovery by the SHs, whether claim is derivative or direct. SHs would recover in proportion to their shareholdings.

Front 80

OI, a public company incorporated in an MBCA Jx, manufactures glass containers. Last year OI's board unanimously approved a $5 million loan to glass advocates committee, a PAC set up to state a state referendum to ban disposable soda bottles. GAC was organized by Frank, son of OI's CEO, Frank Sr. There were reports that GAC spend most of the funds paying its organizers. GAC loan is now delinquent, and OI has done thing. Dottie, a long time OI shareholder, wants OI to collect the loan.
a) Must Dottie first make a demand on the SHs?
b) Must Dottie first make a demand on the board?

Back 80

a) No. MBA has no requirement of a demand on SHs.
b) Probably. MBCA requires a complaining SH to exhaust internal remedies by making a pre-suit demand on the board. Dottie can avoid making demand if there would be irreparable injury during the 90 day waiting period. Dottie might argue ongoing dissipation of funds by GAC makes time of the essence.

Front 81

Kerning International is a holding company incorporated in DE. Among its subsidiaries is wholly owned Derning Glass, a glass container manufacturer incorp in DE. The Kerning Glass board also approved a loan to GAC, which is now delinquent. Phil, a long time Kerning International SH, wants Kerning Glass to collect. He asks you for litigation advice.
a) Must Phil first make a demand on SHs?
b) Must Phil first make a demand on Kerning Intl or Kerning Glass board?
c) What litigation strategy do you recommend?

Back 81

a) Probably not. If SH can show such demand would be expensive or delay the action, or fi the wrong is non-ratifiable, courts have excused deamnd on SHs.
b) Not necessarily. DE law permits a SH to bring a derviate suit and argue that demand was excused as futile. In a double drviate suit, such as this one, in which teh SH seek to have the parent exercise the subsidiary litigation rights, DE courts have focused thier demand analysis on the subsidiary's board. Phil would have to plead particular facts that create reasonable doubts about either the lack of independent of the subsidiary current directors or the validity of the loan and its forgiveness. Although the sketchy pleadings are insufficient under DE case law to create doubts about the subsidiary's independence, subsidiary forgiveness of a political loan may be illegal and thus unprotected under the BJR. Demand would be excused.
c) Phils should file suit and not make a demand. If Phil makes a demand, he can continue his claim only if he shows the board's response to the damn was not protected by the BJR.

Front 82

Dottie and Phil do not make demands on the relevant boards, an each files a derivative suit naming the board's directors. IN response, each board considers whether to request dismissal. After a cursory presentation by the company's inside attorney who scoffs at the suit, each board moves to dismiss the suit.
a) Under MBCA, how will the court respond the OI's board's request?
b) Under DE law, how will the court respond to the Glass board's request?

Back 82

a) Under MBCA, assuming demand was excused because otherwise there would be irrevocable harm, the court must dismiss the suit if a majority of the board is independent and sought dismissal in good faith after a reasonable inquiry.
b) If demand was required, the court will dismiss the action unless Phil can show the board's decision to dismiss was grossly uninformed or irrational, thus not protected by the BJR.
If demand was excused, board's dismissal request wil have no effect. Demand excusal carries w/ it the assumption that the board lacks teh independence to make a dismissal request.

Front 83

After Dottie files her complaint, the OI board considers appointing an SLC to investigate the claims of the complaint. This will avoid any questions about the role of Frank Sr.
a) What should the board do to maximize the effect of teh committee recommendations?
b) What should the committee do to maximize the chances that its recommendation will be listened to?
c) The SLC issues a report recommending that Dottie's complaint be dismissed. IS the recommendation binding on the court?

Back 83

a) Committee should be composed of directors who have no connection to the loan approval.
b) Committee must create the appearance that it has fully investigated the charges of the P's complaint. Should conduct discovery, hire a special counsel, interview relevant people, seek expert advice.
c) Probably. If a majority of the whole board was independent when the SLC made the recommendation, Dottie would have the burden to overcome a BJR presumption and show SLC members acted insincerely or w/o adequate info.

Front 84

Three family members go into the pizza business. Bob has some pizzeria experience. HIs uncle Rich is willing to invest. Bob's cousin Sal ahs some spare cash and spare time. Rich, who knows nothing about pizza, puts up $80K and hopes for a steady 10% return on his investment. Bob contributes only $5K but he wants an annual pay of $40K. Sal invest $15K and agrees to e part time bookkeeper. The three incorporate the business as Pizza Chateau, INc.
a) Is Pizza Chateau a close corp?

Back 84

a) Yes. First, it is a corp organized under a state incorp statute. Second, it has the defining characteristics of a close corp: only a few shareholders.
BUT IN CA...Articles must include sentence that this is a closed corporation + 35 SHs or less

Front 85

After its incorporation, Pizza Chateau issues 500 shares to Rich and 250 shares to Bob and Sal. The articles provide for three directors, and at the first meeting the three shareholders elect themselves.
a) Rich assumes he will have a veto over any corporate matter. Is he right?
b) Rich assumes he can replace any director who turns on him. IS he right?
c) TO assure each party a veto power over management mater, Rich and Bob propose the following bylaw: On any matter that comes before the board, the directors shall act only by unanimous vote. Does this accomplish their apparent objective?
d) Bob and Sal distrust each other. Each worries that the other might join forces with Rich.

Back 85

a) No. As structured, Rich only has a veto at the shareholder level. No shareholder action can be taken w/o his shares being represented at a meeting b/c a majority of the quorum is needed.
b) No. Although his 50% ownership allows him to block shareholder action, he cannot elect a board majority. Under straight voting, there would be a deadlock. Under cumulative voting, he can elect only one director. Rich needs some of Bob's or Sal's votes to choose the board.
c) Perhaps not. At first glance, the provision looks because because it allows any objecting director to block any action by simply not voting, thus preventing unanimity. But the provision may be flaws b/c it can be amended ore deleted by a shareholder majority.
d) Bob and Sal each want their individual 25% voting interest to block any shareholder action. A high quorum requirement, such as 80% theoretically would allow either simply not to show and block any action by the others. Problem: Bob or Sal might be unable to break the quorum and could then be outvoted. Second, some courts might not enforce the quorum requirement on the theory that a shareholder cannot challenge a quorum defect of her own making.

Front 86

From the beginning the parties follow the practice of voting each other to the board. After three years, R and B have a falling out with Sal. They sign an agreement to elect themselves and Rich's trusted friend Ruth to he board. At the next shareholder's meeting, Sal is voted off the board. She challenges the voting agreement on the ground it is precluded by earlier practice. Is it?

Back 86

Probably not. Although the parties vote-pooling practice may have reflected an implicit proper agreement, the agreement was not in writing--a requirement of many statutes authorizing vote-pooling agreements. Even if the prior practice did not creating a binding agreement, it might have created a reasonable expectation to enforce as a fiduciary duty or in an action based on oppression.

Front 87

The three shareholders patch up their difference and agree in wring to vote their shares to assure that each is elected as director. The agreement has no term. Soon after, Sal and Bob propose at a board meeting to pen a second pizzeria. Rich objects, but is outvoted.
a) At the next shareholder's meeting, Rich refuses to abide by the pooling agreement. The corporation has cumulative voting, and Rich divides his 1,500 votes between himself and his trusted friend Ruth. Bob and Sal cast their votes according to the agreement, 500 votes for rich and 500 votes each for themselves. Absent the agreement, who is elected?
b) Bob and Sal sue to enforce the agreement. Is it valid?
c) If the agreement is valid, can Bob and Sal have the election set aside and compel Rich to comply with its voting provisions?

Back 87

a) The three top vote getters are elected: Rich (1,25)), Ruth (750) Sal & Bob (500)
b). Vote pooling agreements for the election of directors are generally valid.
c) Yes. Vote pooling agreements are specifically enforceable.

Front 88

Pizza Chateau is a succes, and RIch is delighted with BOb's able managment. Rich suggest that he and BOb consolidate and thier voting power. Rich owns 500 comon shares, Sal 250, and Bob 250. They consider a voting trust under which BOb would have full voting authority over their 750 shred. Each would retain a beneficial interest in all dividends and distributions. The agreement would have a term of ten years, automatically renewable for another ten years unless either object in writing. Bob would send a copy of the agreement to Sal.
a) Do you see any problems?
b) Rich, although he trusts Bob, is cautious. He wants a provision that he can remove and place Bob as trustee upon the majority vote of the beneficial interests represented by the voting trust certificates outstanding. Do you see any problems?

Back 88

a) Yes, Rich and Bob may not have complied with the voting trust statute. Disclose to Sal may not satisfy the requirement of disclose to the corporation's principal office. Such disclosure provides notice not only to other shareholders, but directors and officers, and possibly creditors of the special control arrangement.
In addition automatic extension may violate the spirit of the statutory provisions allowing extension after reexamination and voluntary consent by the parties.
b) No. This provision would undermine some of the certainty for Bob, but there is nothing that prevents the trust agreement from specifying the responsibilities or term of the trustee. Except for limitations imposed by statue, a voting trust agreement can contain any proximity to which the parties agree.

Front 89

Rich goes to Europe for a few years. Bob wants to make sure things will run smoothly while Rich is gone and asks for a proxy to vote his shares. Rich agrees and hands over his share certificates. Two days later Rich has misgivings and signs a three year proxy appointment form naming attorney Conley has his proxy holder.
a) Who is Rich's proxy?
b) Upon hearing about this turn of events, Bob implores Rich not to leave the fate of the business in the hands of a lawyer. Rich understand and sings a proxy naming Bob his proxy holder during his absence. Who can vote Rich's shares?
c) Besides appointing Conley as his proxy holder before he left for Europe, Rich also authorized Conley to sell his shares with Conley to earn a 15% commission of the sales price. Further, the proxy naming Conley provided that it was irrevocable until Rich returned or the shares were sold. IS Conley's proxy irrevocable?

Back 89

a) Most probably Conley. Bob's assertion of a proxy has two problems: First his authority was no in writing and most statues require a proxy, whether or not revocable, be in writing. Second, even if an oral proxy were possible, a subsequent proxy revokes the first.
b) Probably Bob. Rich revoked Conely's revocable proxy when he named Bob in writing.
c) Probably. Conley's interest is probably sufficient under modern vies supporting irrevocably. This would mean Rich's attempt to give Bob his proxy was probably a nullity.

Front 90

3. Rich returns from Europe and all proxies end. Rich says that he wants fluidity. Neither Bob nor Sal knows what he means, and they wonder about Rich's intentions and mental acuity. Rich still cotnrols 500 shares, and each of them controls 250. Worried about deadlocks, the two prpose tat each sharehodler turn over a nominal number of shares to attorney Conley. Rich will transfer two shraes, and Sal and Bob one each.
a) The corporation has four directors, elected by cumulative voting. What will be the effect of this arrangement/
b) Can Conley be a deadlock breaker at both the shareholder and board level, without any ownership interest?

Back 90

a) Transferring the shares to a new shareholder has the effect of anew class of shares with the power to break shareholder deadlocks between the Rich camp and Bob-Sal Camp. But unlike a nonparticipating class of shares, Conley will participate in dividends and distributions. IF the corporation is successful, this ownership interest may exceed the value of Conley's services as a stand-by deadlock breaker. The arrangement will not work to break deadlocks at the board level. Rich, even with 498 of 1,000 shares, will still have the power to elect two directors. Deadlocks among the directors reaming possible.
b) Yes. The parties could create a new class of shares that would have one vote on general shareholder matters and the power to elect a new fifth director. IF the new class of shares--Class D were made voting, but nonparticipating, the parties purpose would be accomplished. The articles of incorporation would have to be amended to provide for and specify the power sand rights of this new class. Although the validity of such a class of shares may have been questionable once, the ability to create such an arrangement is now generally recognized.

Front 91

When they incorporate Pizza Chateau, Rich, Bob, and Sal agreed not to sell their shares to any outsider unless the others first approved the sale. But they did not put their agreement in writing.
a) Rich takes out a bank loan and pledges his Pizza Chateau stock as collateral. If he defaults on his loan, can the bank foreclose on the pledged shares?
b) If the restriction satisfied the formal requirements would it be valid?

Back 91

a) Probably. The restriction suffers form two defects. First, it should have been noted conspicuously in writing on the share certificates. Second, even if the leg ending defect is excused b/c the bank had notice of the restriction,t eh restriction only covered sales and does not cover pledges of stock as collateral. For this reason, transfer restrictions are typically written to cover sales, exchanges, assignment, pledges, gifts, bequests, or other transfers.
b) Perhaps not. The restriction should probably have been less absolute. Allowing any shareholder to veto a transfer threatens stock liquidity and some courts have invalidates prior approval restrictions where consent can be arbitrarily withheld.

Front 92

Pizza Chateau has three shareholders: Rich has 500 common shares, Bob has 250, and Sal has 250. Rich and Bob agree that each will vote to assure that each is elected as director and as directors they will appoint Bob as general management at a guaranteed annual salary of $30,000. The agreement has no term.
a) IS the agreement valid under common law?
b) Is it laid under MBCA?
c) Under DE close corp provisions?

Back 92

a) Probably not. There are two aspects to this agreement. T he first, the agreement among SHs to elect an agreed-upon slate to the board, is a perfectly valid vote-pooling agreement standing alone. It affects who will be on the bard, not what the board must decide. BUT the other agreement among directors to appoint Bob as general manager at a specified salary is of dubious validity under modern common law rules.
b) Probably not. Although the vote-pooling agreement is valid, the management agreement may not be. MBCA safe harbor for special management arrangement requires agreement among all current shareholders.
c) Probably yes. If the copr opted into a close copr status, the shareholders who hold a majority of these shares can agree in wring to take action that restricts or interferes w/ the discretion or powers of the board. The agreement is valid as between parties to the agreement, suggesting that Sal could seek to invalidate it if it adversely affected her interests.

Front 93

All three SHs ener into a new agreement. They agree to elect thesmlsves to the bard and as directors to appoint Bob as gneral manger solonga she faithfully performs his duties. IN addition, Bob will receive an annual salary of $30,000 and annual bonuses equal to 50 perfect of profits.
a) Is this agreement valid under the common law?
b) MBCA?
c) DE closed corp?

Back 93

a) The vote-pooling agreemnt is valid.
Merits of agreemetn: 1) all SHs of teh close corp are parties; 2) condition requiring Bob's faithful performance gives board flexibility to deal with Bob's bad management; 3) deviation could be characterized as "slight" b/c the board structure remains and management discretion appears to relate only to a narrow range of issues.
Demerits: No assurance that salary and bonus will continue to be appropriate under changing circumstances. The board might at summer future time be compelled to abide by the agreement despite outstanding creditor claims or future plans for growth that should get priority. In addition, agreement is indefinite. On balance, particularly in a Jx w/ case law or statutory recognition of a close corp, the agreement probably would be enforceable.
b) Yes. MBCA specifically permits an agreement among all shareholders that restriction discretion of the board. Agreement must be made know to corp and conspicuously noted on share certificates.
c) Yes. SHs of a statutory close corp can restrict the discretion or powers of the board. The agreement is valid as between parties to the agreement.

Front 94

The three SHs want to do as they please. They revise the articles to do aay with teh board and set up a partnership =-type governance structure in which each SH can veto any fundmeantla business changes.
a) Is the arrangment enforceable under MBCA?
b) Pizza Chateau reincorproates in DE but the new articles inadvertenly do not choose close corp status. Bob plan to lease a new store, and Rich vetoes his action as the articles permit. Is teh veto provision enforceable?
c) After a couple years, Sal and Rich are chagrined at how often Bob uses his veto. They vote to amend the articles and delete the veto provision. Can they?

Back 94

a) Yes. All three approved the change tot eh articles which the MBCA authorizes as an agreement that governs the exercise of the corp powers or the management of the business.
b) Perhaps. The articles failure to elect close corp status is not necessarily fatal to the veto provision's enfrceabilty as against BOb. Requiring election in the articles provides notice to all interested parties. Although Rich's veto rights cannot undermine the third party's lessor expectations, Bob is bound by them. (Similar to Zion v. Kurtz)
c) Yes unless the articles have a super-majority voting requirement.

Front 95

Swamp Acres Inc (SAI) incorporated in an MBCA jx, buys and drains swampland for resale. Its president, Flimm, signs a sales K on behalf of SAI to sell Quagmire Estates to Priscilla. This is a major transaction for SAI.
a) Flimm tells Priscilla that he has full authority to sell Quagmire. Should Priscilla press for more info?
b) Three members of the five-person SAI board had signed a resolution that authorized Flim to sell Quagmire estates. Flimm had not shown Priscilla the resoultion. Is the corp bound?
c) At the properly called meeting only two directors had attended and a third was present through a conference phone call. T he three authorized Flimm to sell Quagmire estates. FLimm does not show Priscilla the minutes of the meeting. Is the corp bound?
d) One of the directors who had not attended the meeting now objects that none of the directors had received notice of the meeting. Does the lack of written notice undermine the validity of the Quagmire K?

Back 95

a) Yes, Flim as an agent of the corp cannot create his own authority.
b) Perhaps. It depends on whether the resolution was approved and signed at a properly noticed board meeting. The corp is bound even though P neithe rknew of the authroizng resolution nor believed FLim had authority.
c) Yes. A majority of directors present at a properly called and convened board meeting authorized the sale. P being unaware is irrelevant.
d) Yes. Although any notice defects are waived if the directors in attendance fail to object, an absent director does not waive notice defects.

Front 96

Flim signs a K on behalf of SAI to sell Bog Manor to Boyce. An SAI bylaw expressly states that all land sales require prior board approval. Although the 5 person board has in the past ratified Flimm's unauthorized sales, the board disavows the transaction w/ Boyce.
a) Boyce does not know about the bylaw or the company's past practice. Is the corp bound?
b) At an SAI board meeting two of the three directors present approval the sale of Bog Manor. IS this corp bound?
c) Boyce reads the minutes more carefully. The director who had not voted for the sale had in fact walked out before the vote was taken. Is the corp bound?

Back 96

a) Probably, under a few theories.
Implied actual authority: Corp can be bound by its past acquiescence in Flimm's practice of seeking after the fact board authorization.
Apparent authority: Flimm's statements may also have created apparent authority. Boyce can argue that the board, by naming Flimm as president, create the appearance that he had authority to bind the corp in the ordinary course of business, including the selling of corp property.
Inherent authority: Flimm's position as president, if known to Boyce, might be enough to infer inherent authority.
b) Yes. Three directors constitutes a quorum, and a majority vote of the directors president is sufficient for board action.
c) No, not on the theory of express actual authority. A quorum must be present when the vote is taken. However, some courts have not allowed directors to challenge a vote if they absented themselves or left during a meeting prevent a quorum.

Front 97

Flimm sings a K to sell Marsh Gourns to Naomi. He says SAI will accept an installment note form her. Inthe past, SAI has sold its properties under installment notes, and Naomi is aware of this.
a) Last week the SAI board voted to stop selling on credit. Flimm had nonetheless told N that he was fully authorized. IS corp bound under K?
b) N learns of the board's new policy and want to make sure her K will be honored. What should she do?

Back 97

a) Perhaps, under a theory of apparent authority or respondent superior.
b) She could seek board ratification. Although authority is measured at time transaction, board can create actual authority by ratifying the sales K.

Front 98

Flimm learns Naomi is worried the Marsh Grounds K may not be valid. To ally her cancers, Flimm undertakes to have the SAI board ratify the installment K. The board consist of 5 directors. Is SAI bound in the following situations?
a) Flimm calls the 3 directors who are intwon and asks them to attend an emergency board meeting. At the meeting the directors unanimously approve a resolution ratifying the K. Flimm presents N w/ a copy of this resolution certified by the company's secretary.
b) Flimm notifies all five directors of the situation by email. After exchanging a series of Internet instant messages, four directors send messages approving the K.
c) Flimm arranges for a six way telephone conference call that includes him and all the directors. The directors receive no notice and there is a heated discussion about his authority to enter the installment K. During the call 3 directors vote to ratify the K. Tow dissenting director hang up in disgust.
d) board appoints a committee consisting of two directors and the company's outside lawyer to negotiate w/ N. The committee is given full authority to bind the corp. The committee and N agree to a new K.

Back 98

a) Not bound. All directors must receive at least tow days notice of a special meeting.
b) Perhaps bound. W/o a meeting a board action is not valid. Although the board action by written consents is possible, MBCA requires it to be unanimous. Not all directors gave their written consent. It might be argued that their email communications constituted a meeting. Do persons "hear" each other in a series of Internet instance messages? arguably yest. (maybe if it was more like a chat room??)
c) Not bound. Meeting lacked two day notice requirement.
d) Perhaps bound. Although the board can delegate its functions to a committee, the committee must be composed of directors. The appt of a non-director may render the committee's action invalid. But it could be argued the two directors appointed to the committed constitute a proper committee. (as long as lawyer as viewed as an adviser).

Front 99

Flimm wants to hire a sales assistant. He offers the job to Wiley, who demands that in addition to regular commissions she receive 2% for every sale over $1 million. Flimm, who owns a majority of SAI stock and control he board, says it's a deal. But does not mention the deal to anyone.
a) WIley is hired and sells Sinkacre for $1.1 million. She demands her special bonus. Comparable bonuses are unheard of, and SAI bylaws specifically state the employee bonuses must be approved by board. Is corp bound?
b) Flimm pays Wiley the bonuses for Sinkacre and tells the board about their deal. A few months later, Wiley sells Sloughacre for $million and then demands her special bonus. Flimm and the board refuse. Is the corp bound?

Back 99

a) Perhaps, on theory of inerhent authority. It woudl seem there is neither acutal authority nor apparent authority (b/c such a bonis is uncommon).
But between SAI and WIley, SAI should bear the risk of Flimm's usupration of authority. Flimm's psoiton and WIley reliance on him presumable to protect shareholders from teh actions of rogue officers is not terribly compelling. Allow copr to avoid Flimm's promises would contradict corp authority rules, which are meant to protect the Shs from renegade agent. That is, to protect Flim from himself.
b) Probably, on a theory of implied ratification. The board acceptance of the special bonus can be seen as an implicit ratification the bonus K.

Front 100

BB, incorp in New Colombia, has one class of common stock w/ 3,000 shares authorized and 1,5000 issued and outstanding. The BOD wants to declare a dividend to $1.50/share.
a) B's AOI require that a SH majority approve dividends in any year greater than $2,000. The New Col statue would otherwise permit the dividend. Can the board declare the dividend?
b) BB's SHs approve the dividend. ON Sep 15 the board fixes a record date of Oct 1 for payment. On Oct 1 Anna owns 500 shares of BB stock, which she agrees to sell to B on Oct 10. The dividends are paid on Oct 31. Who is entitled to the dividends.
c) A week after the record date of Oct 1, the directors learn the corp's current earned surplus is smaller than they though. The board rescinds the dividend. Can the board?

Back 100

a) No. Even though th edividend is legally authoirzed by statue, additonal restricitons can be imposed by K or in the AOI.
b) Anna is entitled to dividends, as record owner on Coto 1. BY setting a record date, the board simplies the problem of identify who is paid dividends.
c) Probably, though it might depend on the statue. Although a declared dividend creates an obligation of the corp to pay, it may be weaker than a fixed debt obligation. Corps can also rescind payment that would be illegal.

Front 101

Five years ago Don incorp a clock repair business, TImend, Inc. The corp rented a downtown storefront from Metro reality under a ten year lease. During the first few years, the business did modesty well. Don drew salary that approximated net earnings (revenues less expenses). Although he kept meticulous records of receipts and payment, he did not observe any corporate formalities. He held no shareholder's or directors' meeting he adopted no corp resolution when he paid himself a salary. He authorized no dividends. Last year the business began to struggle, and Don's salary began to shrink.
a) Don closes the shop. HE tell Metro Realty that Timend can no longer make lease payments. I s Don personally liable under the lease?
b) Can Metro Realty pierce the corp veil to recover form Don personally?
c) When DOn signed the lease, he had told Metro Realty that he would stand behind it. Metro did not get DOn's guarantee in writing. Does the SOF prevent Metro from suing on the guarantee?
d) Last Year Howard, a Timed, employee, drove the company van over Petunia's prize flowers. Howard was acting win the scope of his employment, and Timed is liable to Pentuina. Can Pentunia recover from Don?
e) Last year Patrick brought his grandfather clock to Don's shop for repairs. Howard ruined it, and Timend's insurance does not cover the damage. Don admits he incorporated the business to shield himself from liability in these circumstances. Can Patrick recover from Don personally?
f) Suppose Don had set up a separate corp, Heirloom Timepieces, to repair clocks valued at more than $5K. Heirloom was wholly owned by Timend. Don used separate invoice forms for Helroolm, which subcontracted its work to Timend. If Patrick's repairs were on an Heirloom invoice, can he look to Timend's assets for recovery?

Back 101

a) No. DOn is not liable under the lease. Even though he signed it an stopped making payment, ha acted on behalf of the copr. The corp form provides limite dliablity to manager who act for and SHs who invest in the copr. Unless Don obligated himself thorugh a personal guarantee or court uses PCV, DOn is not liable.
b) Probalby not. the PCV are split.
For piercing: TImend is closely held, Don did not observe corp formalities, business was operated on a no-profit basis, DOn was an active participant
Against Piercing: Metro is a voluntary creditor, Dpn is an individual manager/shareholder, Don kept corp and personal assets separate, DOn did not deceive Metro or give any personal guarantees.
c) No. SOF is not a bar.
d) Maybe. DOn's liability will depend on the same piercing factors discussed above. Only significant difference is Petunia is an involuntary creditor.
e) Probably not. Don incorpratin solsey to avid personal liabilty is not relevant. Issue turns on whether Don is a involuntary or voluntary creditor. Other factors apply.
f) Perhaps not. Enterpise liability may end on wheter Patrick was aware fo teh fragmentation. If Patrickdid not know he wa sdelaing with an assetles shell, a court might well aggregate the assets of the two corp as though they were single entity. The actual enterprise was essential one. But if Patrick as aware of this separate, the might be seen as a voluntary creditor who assumed the risk of dealing with a corp shell.

Front 102

Ruper incorporates Exquisite Timepieces Ltd, a mail-order business that sells "designer" watches through TV infomercials. He capitalizes the business enough t buy TV time and an initial stock of watches. ETL gets off to a good starts. Rupert receives a general salary equal to 80 percent of gross receipts. He keeps meticulous records and observes corporate formalities to a tee. As new orders come in, he busy watches to fill prior orders. After a while, customer orders go unfilled. Soon there is a staggering backlog of unfilled orders.
a) Rupert writes expectant customers, "ETL has experienced a cash flow crisis and cannot fill your order." Can the customers PCV?
b) Paula, an ETL customer, says her watch has a corrosive backing that burned her skin purple Assuming ETL would be liable in tort, is Rupert liable?
c) Laura is Rupert's sister and a nominal ETL shareholder. She did not take a salary or participate in running the business. If the corporate veil is pierced b/c of Rupert's activities, is Laura also liable to the company's creditors?
d) ETL was one of many mail-order businesses set up by Rupert--all separate subsidiaries of a holding company, Moil Order Possibilities, Inc. Each subsidiary--one for watches, another for records, another for gold jewelry, another for vegematics, flowed through its profits to MOP. Are the assets of the MOP group available to cover ETL's debts?

Back 102

a) Probably. Rupert is less deserving of limited liability. But, as in Don's failed business, the piercing factors are less than clear:
For piercing: a) ETL is a closely held corp, mail order customer were involuntary victims, business was operated so that eventually orders could not be filled;, Rupert was an active participant
Against Piercing: Rupert is an individual manager/shareholder, he observed corp formalities, he kept corporate and personal assets separate, he never personally guaranteed that the orders would be fulfilled.
b) Probably. Paul is an involutery creditor and facors favoring piercing discussed above.
c) Probably not. The corp does not case to exist b/c some of its SHs are subject ot personal liability. PCV happens SH by SH. Only those SHs whose actions are related to the piercing factors or who dominated the business may be held personally liable for the corporations obligations.
d) The question of disregarding corp structure is a recurring piercing problem Much will depend on the traditional piercing factors, including whether the P acceded to the no-recourse structure and whether there was confusion as to the separateness of the many corporations. If MOP's mail order subsidiaries operate separately, so that it can be said they represent separate investment decision, the rule of limited availability teach use that a no =recourse structure deserves presumptive respect.

Front 103

Question 7 in KAPLAN
BMC is a corp in the state of M whose primary corp purpose is selling mountain climbing equipment. BMC's BOD decides to liquidate all of the corp's assets and donate proceeds to the Hare Krishna, a religious group of which the board's chair is ad voted member The SHs sue, claiming that his as an inappropriate action for the board to take. Who will prevail?

Back 103

SHs b/c the sale of substantially all of corp's assets normally requires SH approval.

Front 104

Question 11 in KAPLAN
DDI is a crop who sells deliver dinners. BOD JJ is first elected to board for a two year term. She decides to resign. What should DDI do to replace JJ?

Back 104

The majority of the BOD should elect someone to replace JJ for the months remaining until the next annual meeting, at which time the SHs should elect a director for a full term of office. (MAJORITY VOTE?)

Front 105

Question 12 in KAPLAN
Assume DDI's bylaws provide for cumulative voting. W owns 150 shares and she wants her friend P to win. M owns 350 shares and wants T to win. Total outstanding shares are 500. If three directors are up for election, can M prevent P's election?

Back 105

No b/c he does not own enough DDI to choose all three members of the board.

Front 106

Question 15 in KAPLAN
JAF is a corp distributing souvenirs. Board member bootlegs one of souvenirs for her own profit. Can a court intervene to remove Maria form JAF's board?

Back 106

Yes, if the SHs refuse to remove her.

Front 107

Question 19 in KAPLAN
LCI is a charity org. LCI's by laws allow for special meetings to be held w/in five days notice. T gave only three days notice for special meeting. Only three members attended, and they passed a resolution. Is resolution valid and enforceable?

Back 107

Yes, if another director subsequently ratifies and approves the resolution.

Front 108

Question 22 in KAPLAN
TTT has four directors agree among themselves to vote for a resolution. When the vote occurs, only three of them vote for it. May SHs sue to enforce agreement?

Back 108

No, b/c prospective agreements among directors to vote a certain way are ordinarily void.

SO ONLY SHs??

Front 109

X owns stock in a close corp. The stock is wroth $1,000. X tells a friend: I own stock in this corp. This compnay is about to take off b/c of a new product. I need soe cash right away, so I need to sell the stock, and b/c you are my pal., I'll let you have it for $10K. The friend buys the stock, which turns out to be wroth only $1K. The friend can sue X for fraud, and seek recovery of $9K.
What cause of action should friend bring?

Back 109

10b5 fraud cause of action. This is an example of securities fraud.

Front 110

D is playing golf w/ L, a Sh, who owns $10K worth of stock in company. L says, "I don't think the company's doing anything great; I'd like to sell my stock. D says, "Ok. I'll buy it from you for $10K. L sells to D. A month later, the new product hits the market and the value of everyone's stone doubles.
What cuase of action can L bring against D?

Back 110

Under CL, nothing.

Front 111

Corp is undercapitalized. Is that enough to PCV?

Back 111

No, few courts pierce veil based upon thin or inadequate capitalization alone.

Front 112

A business is compartmentalized so that several corp's are owned by an individual corporation. Is this enough to PCV using enterprise liability?

Back 112

If each tanker is put into a separate entity, adequately insure for most risks of normal operation, and other capital is contributed, separate "corproateness" may be upheld.

Front 113

In discovery, you find an email from the CEO of the big corp shortly after the big corp acquired the little corp. It says, "You know, Ken, this big corp has been in business for over 100 years. Don't be nervous about this lease. Big Corp stands by its commitments and will be good for it." What is the consequence of this email?

Back 113

Personal guarantee

Front 114

While on vacation, B meets an attorney who tells her that her absentee ballot as a SH is no good. Also, B begins to changer her mind about the merger She now opposes it. So she hops in a plane just in time to arrive to the meeting. She telephones her friend, who tells her that only 10 SHs will be present in person or by proxy (11 needed for quorum). What should she do?

Back 114

Stay away to prevent a quorum from assembling. As merely a SH, she does not have a fiduciary duty to the corp.

Front 115

On Jan 30, Tony, the board chari, discussed claling spedcial SH's meeting to dsicuss the merger. Assume that on Feb 1, the board of directors called a special SHs meeting for Feb 28. C acquired his shares at a very late date, Feb 20. Casey has some definite thoughts on the merger. Is there any chance he will be able to vote at the Feb 28 meeting, been though he acquired his shares only eight days earlier?

Back 115

He has a good chance of being able to vote. SHe should call up his seller, asking her to give him a proxy vote the shares at the meeting.
Board do set a record date a few weeks in advance of a SH meetings, but the proxy is a way to work around this.

Front 116

C Inc is a leading retailer based in Arkansas with a five person board, elected annually. The corp is privately held by two factions: Clinton who own 730 of 1,000 share sand Gores, who won 270 shares. C Inc has cumulative voting for the election of directors. Some years, Great Aunt Mary who owns 200 of Clinton's 730 shares doe snot show up. At tomorrow's meeting, five directors will elected.
How many directors will Gore family be able to elect?
If the AOI provide for a staggered or classified board, how many will the Gores be able to elect?

Back 116

If cumulative, 1.
If cumulative but staggered, none.