Question 6 =42 points '

Transcription

1 " EXAM NO. BUSINESS ASSOCIATIONS Professor John Orcutt Spring, Semester 2010 FINAL.EXAMINATION -IN CLASS INSTRUCTIONS: 1. This is a closed-book examination. You may not bring any materials to the examination with the exception of ESL students who are allowed to bring and use a Home Language/English dictionary. 2. This examination is worth 425 points (or 85% of your final grade) and consists of 8 essay Ulo~...,...,... U...'UI ~I'...- IVllv"'I,jlU U...,II~... Question 1 =100 points Question 4 =28 points Question 7 =35 points Question 2 =92 points Question 5 =64 points Question 8 =7 points Question 3 =57 points Question 6 =42 points ' I have written this examination to be a 211, hour (150 minutes) examination. It is your resp0n.sibility to apportion your time appropriately amongst the questions. If you base your time on the possible points per question, the time apportionment should be' Question 1 =35 minutes Question 4 =10 minutes Question 7 =12.5 minutes Question 2 =32.5 minutes Question 5 =22.5 minutes Question 8 =2.5 minutes.. Question 3 =20 minutes Question 6 =15 minutes To provide some cushion in your taking of the exam. however. I am giving you an extra 30 minutes. so you will in fact have 3 hours (180 minutes) for the exam. 3. The grading of examinations is anonymous. So, you must write your!3xamination number on the examination and your blue book. YOU MAY NOT WRITE YOUR NAME ON ANYTHING - YOU MAY ONLY USE YOUR EXAM NUMBER. 4. Please write your answers ina blue book. The only answers that will be graded are the answers written into a blue book. While you are free to use scratch paper, answers written on scratch paper; or anything else other than a bluebook, will not be read and will not be counted for any credit. Please write only on the front side of the pages in the blue book. Please rem!3mber that organization,persuasivene,ss, neatness and legibility all c;ount in determining your grade on the essciy Cinswers. To improve th!3 organization of an answer, you may wish to quickly outline the answer on a separate sheet of paper prior to writing your full answer in the blue book. 5. I have tried my best to write and proofread the exam so that there are no distracting typos or other errors - but, I may not have been totally successful. If you believe there is a typo or other error that makes it difficult to answer a particular question,' please provide your best answer and explain any assumption you used to answer the question. 6. For those ofyou who are taking this exam on,a laptop computer, the above rules are modified to p!3rmit usage of a laptopcind aresupplel'11ented by the laptop excim rules that have <ire provided to you by the Registrar, Good luck on the examination! DO NOT TURN TO PAGE 2 UNTIL THE PROCTOR TELLS YOU TO BEGIN Page 1.of8

2 Question No.1 (100 points possible: 35 minutes suggested) Certain shareholders ("Plaintiffs") of Acme Corporation,a Delaware corporation ("Acme"), brought a derivative lawsuit against Acme's directors alleging a breach of fiduciary duties. The lawsuit stems from the following controversy: Acme, which is in the business of producing and marketing crude oil and oil products, entered into a five-year purchase and sale contract (the "Contract") with Chaney Corp. ("Chaney") in late Under the Contract, Chaney promised to purchase from Acme, and Acme promised to sell to Chaney, aminimum of 50 million barrels of crude oil each year from 2008 through The Contract also provided that Chaney would pay Acme upon receipt of any crude oil deliveries. Plaintiffs allege that Chaney has breached the Contract in two ways: (1) Despite the requirement for immediate payment, Chaney's payments, on average, lagged by 60 days; and (2) Chaney did not comply with the minimum purchase requirement in either 2008 or Chaney purchased 45 million barrels in 2008 and 40 million barrels in Acme stipulates that Chaney has in fact breached the Contract in the manner alleged by Plaintiffs. Acme's directors are well aware of Chaney's Contract breaches; In January 2009, Acme's CFO first reported to the board of directors on Chaney's breach of the Contract. The CFO, who had not consulted with a lawyer before making the report (and told the board such), explained that breach of contract suits are very expensive and difficult to win. As a result, thecfo recommended that a lawsuit not be filed. Instead, thecfo offered to talk informally with Chaney about complying with the Contract going forward and "making Acme whole." Following the CFO's report, Acme's directors voted not to pursue a lawsuit against Chaney for breaches of the Contract that took place in In January 2010, Acme's CFO once again reported to the board of directors on the Contract. Based on a conversation with Acme's in-house counsel, who was never a litigator and had almost no expi:lrtise in litigation matters, the CFOopined that the breach of Contract was not that serious, and not worth all the trouble of a lawsuit. Acme's directors again voted not to pursue a lawsuit against Chaney for breaches of the Contract that took place in Acme's board of directors consists of 11 directors. Acme's current directors were also directors in January 2009 and 2010 at the time of the votes not to pursue a breach of Contract lawsuit against Chaney. Of those 11 directors, 5 are directors of Chaney and have been directors of Chaney since There has been no allegation made that the Contract is not a good one for Acme. For purposes of your analysis,please assume that the terms of the Contract itself are entirely fair to Acme. Plaintiffs' lawsuit does not challenge Acme's decision to enter into the Contract in late Plaintiffs' lawsuit is limited to the directors' failure to sue Chaney for the 2008 and 2009 Contract breaches. Page 2 of.8

3 In filing the derivative lawsuit, Plaintiffs did not make a demand on Acme's board of directors alleging that demand would have been futile. For purposes of this question, please assume that the court has already ruled that Plaintiffs were not required to make a demand on Acme's board of directors, and that the court is ready to consider the merits of Plaintiffs' complaint. Please answer.thefollowing questions: (a) Please explain why Plaintiffs' lawsuit is a derivate suit rather than a direct suit? (accounts for 10 of the 100 points) (b) Please provide an analysis of what Plaintiffs must prove in order to prevail in their breach of fiduciary duty lawsuit against the Acme directors. In conducting your analysis, please discuss how the directors will likely defend themselves and what the defendants must do to avail themselves of such defense(s). Finally, please evaluate Plaintiffs' chance of success. (accounts for SO ofthe 100 points) (c) Acme is a Delaware corporation. The Plaintiffs are residents Of a variety states, including California, Illinois and. New York. The Contract inc:luded a choice of law clause that stated that New York law would govern the Contract. In conducting the fiduciary duty analysis called for in Question 1(b), the court will apply the law of which state? Please explain. (accounts for 10 ofthe 100 points) Question No.2 (92 points possible: 32.5 minutes suggested) A group of four wealthy citizems of Xanadu, USA formed Xanadu Hockey Limited, LLC ("XHL") in order to bring a professional hockey franchise to their city. The.ownership structure for XHL was as follows: XHL issued a total of 100 LLC membership interests to its four members Alfred and Beatrice each purchased 30 membership interests (i.e., each owned 30% of XHL) Corinne and David each purchased 20 membership interests (i.e., each owned 20% of XHL) XHL's operating agreement sets forth the agreement between XHL's four members. The operating agreement does not name any person or entity as the managing member of XHL. Instead, section 3.1 of the operating agreement provides that no member was permitted to take any action on behalf of XHL unless such action was approved by a majority of XHL's membership interests. As a condition to securing a hockey franchise, XHL needed an arena that it could use for hockey games. XHL was in negotiations to lease an available arena in Xanadu from Pierce Properties ("PP"). With the approval of each of the other XHL members, Alfred took the lead for Page 3 of8

4 negotiating the lease on behalf of XHL. Alfred took a very aggressive negotiating position with PP and rejected a very reasonable lease offer from PP (the "PP Offer 1 "). In fact, Beatrice and David were willing to accept PP Offer 1 and told Alfred they were very upset that he turned it down. At that point, the following events took place: Beatrice and David told Alfred that they were rescinding his authority to negotiate the lease with PP and ordered him to stop negotiating. Corinne decided to remain out of the dispute. Alfred ignored the rescission order and continued to negotiate on behalf of XHL. PP made an even more generous lease offer ("PP Offer 2"), which Alfred again rejected. After Alfred rejected PP Offer 2, Beatrice and David decided they were done with Alfred. Beatrice and David formed a separatellc, Puck LLC ("Puck"), to obtain the hockey franchise for Xanadu... Alfred told Beatrice and David that it would be a breach of their fiduciary duties to compete with XHL for the hockey franchise. Beatrice and David responded that the XHL operating agreement did not contain a non-compete clause, so they were free to compete with XHL. Afterthe non-compete conversation, Puck entered into a lease with PP and ended up winning the hockey franchise. Please answer the following questions: (a) Please analyze whether XHL's membership interests were a security under federal law. (accounts for 30 of the 92 points) (b) After Beatrice and David told Alfred that they were rescinding his authority to negotiate the lease with PP, please analyze whether Alfred still had authority to negotiate the lease on behalf of XHL. (accounts for 20 of the 92 points) (c) Please analyze whether Beatrice and David breached their fiduciary duties to XHL by competing with XHL for the hockey franchise. (accounts for 42 of the 92 points) Page 4 of 8

5 Question No.3 (57 points possible: 20 minutes suggested) Happy Donuts, Inc. ("HD") operates more than 1 0,000 donut franchises throughout the United States. The actual donut shops are independently-owned shops that operate through a franchise agreement with HD. In each case, the franchisee owns and operates the donut shop under a license agreement with HD (the "License Agreement"). Among other things, the License Agreement includes. the following agreements: HD agreesjo license the name "Happy Donuts" to each franchisee;. HD is required to conduct national and regional advertising for the benefit of its franchisees; Each franchisee agrees to operate the restaurant in a manner consistent with the "HD System." The HD System requires that all licensees operate their donut shops in a consistent manner. The HD System covers the operation of HD-branded donut shops in considerable detail, including setting forth required standards, policies, practices, and procedures for preparing and serving donuts and coffee; and The License Agreement also includes a disclaimer that expressly states that franchisees are not agents of HD for any purpose. The License Agreement does not, however, cover everything. For example, the License Agreement does not cover security measures that may be employed by franchisees. Each franchisee is free to pursue its own security measures without any guidance from HD. Willis was an employee of an HD franchise. While working the night shift at the franchise, the shop was robbed and Willis was assaulted and seriously injured. In considering this question, please assume that the franchise at which Willis worked was negligent in establishing security measures for protecting the night shift (i.e., the franchise has tort liability to Willis). Willis would like to file a lawsuit against HD for the injuries he received from the assault. Please analyze the strength of Willis' case against HD. Question No.4 (28 points possible: 10 minutes suggested) For plaintiffs seeking to bring a shareholder derivative action under Delaware law, we discussed in class that it is generally not advisable for the plaintiffs to make demand on the corporation's board of directors prior to bringing the lawsuit. Instead, it is preferable for plaintiffs to bring the lawsuit without making demand and instead plead demand futility. Please explain why that strategy is generally preferable under Delaware law. Page 5 of 8

6 Question No.5 (64 points possible: 22.5 ri1inutes suggested) Allison, Bill, Charles and Donna formed a partnership ("ABCD Partnership") about two years ago to open and operate a grocery store. In accordance with their initial understanding, Allison has served as general manager, Bill has served as assistant general manager and producer manager, Charles has run the meat department, and Donna has run the bakery. About six months ago, Charles decided that he needed help in the meat department so he hired Edgar to work under a one-year contract (the "Employment Contract"). Edgar knew that Charles was one of the partners for ABCD Partnership and Edgar had no reason to believe that Charles could not hire him. None of Allison, Bill or Donna ever approved Edgar's hiring. Allison and Bill believe that Edgar is surly and slow and that he is driving customers away. They have asked Charles to fire him, but Charles has refused to do so. He thinks Edgar is brash but lovable and that many customers like his style. Charles is satisfied that Edgar works fast enough to get his job done. Donna does not have a strong opinion on Edgar and wants to stay out of the matter. The partnership agreement for ABCD PartnershipincllJdes the following distribution of profits: Allison is entitled to 50% ofpartnership profits, Bill 30%, Charles 10% and Donna 10%. The partnership agreement, however, is silent as to both management and voting matters. Allison and Bill have come to you for advice on getting rid of Edgar. Please answer the following questions: (a) Is ABCD Partnership contractually bound by the Employment Contract? Please analyze. (accounts for 27 of the 57 points) (b) If it turns out that ABCD Partnership is responsible for the Employment Contract, Allison and Bill would like to terminate the Employment Contract and fire Edgar. Please analyze their ability to terminate the Employment Contract (e.g., Is itpossible to terminate the Employment Contract? If it is possible, what needs to be done to so terminate the contract?). (accounts for 30 of the 57 points) Page 6 of 8

7 Question No.6 (42 points possible: 15 minutes suggested) Hillary is a serial entrepreneur who has developed a number of successful start-up companies. Hillary just finished the business plan for her latest venture and plans on forming a corporation soon. Prior to forming the corporation, however, Hillary was presented with an opportunity to sign a 5-year lease (the "Lease") that Hillary found enticing for her new venture. Hillary told the Landlord that she was signing the Lease on behalf of Khosla Corp. ("Khosla"), a corporation that was "to be formed," and the Lease reflected this fact. A few weeks after the Lease was executed, Hillary formed Khosla, which immediately moved its operations into the leased premises. Khosla also paid the rent called for under the Lease. Khosla's board of directors, however, never took any formal action regarding the Lease. Roughly six months after the Lease was executed, Landlord decided that it was not happy with the Lease. Commercial rental prices have increased substantially in the last six months, so Landlord would like to get out of the Lease so that it can re-lease the premises for a better price. Please analyze whether Landlord is contractually bound to the Lease. Question No.7 (35 points possible: 12.5 minutes suggested) Jon and Kate formed a partnership to operate a bowling alley. The partnership agreement did not establish a specific duration for the partnership. Jon loaned $300,000 to the partnership, which was to be repaid out of the profits of the business. Kate turned out to be a terrible partner. She refused to do any meaningful work. She belittled and mistreated Jon in front of customer and employees. Moreover, Kate had a penchant for stealing petty cash out of the cash register. After three months of Kate's misbehavior, Jon decided he simply could not work with her any longer. Jon would like to dissolve the partnership. Please explain why it might be in Jon's best interests to pursue a judicial d,issolution of the partnership by decree of court under 32 of the UPA. Page 7 of 8

8 Question No.8 (7 points possible: 2.5 minutes suggested) What is the most significant difference between common stock and preferred stock? ** * * * END OF EXAM FOR THE 3Ls AND GRADUATING GRADUATE STUDENTS: Enjoy wonderful careers and please keep in touch. FOR THE 2Ls AND RETURNING GRADUATE STUDENTS: I look forward to seeing you next year. Page 8 of 8