Business Associations

Clifford
INSTRUCTIONS FOR PART THREE: 11:25-l :00

April 29, 1996

11:25-l:oo

1. Do Not Turn This Page Until Told to Begin.

2. The same rules for using outside materials apply to this Part as in the first Two Parts:
During this examination, you may refer to your casebook, the casebook supplement, any
materials distributed in class, your class notes, any materials prepared by you and any
materials jointly
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copies of notes taken by someone else; more may be used only if initialed by the Professor.
You may n$ use cans, outlines, copies of old exams or other materials not prepared by you.
3. This part has two questions, each of which has sub-parts. The relative weight of each
question is indicated by the following suggested time table:
Read instructions
Question I
Question 2

5 minutes
60 minutes
30 minutes

The relative weight of each sub-part is indicated by the number of stars in the margin. Do
not spend too much time on some questions at the expense of others; a superlative
performance on one will not excuse failure to answer others. Reasons should be given for
all answers! Answer the questions asked; do not simply copy excerpts from your personal
outlines or class notes. Deductions may be made for regurgitated material that is not
relevant to the questions asked.
4. You may answer these questions in any order you please. Write on the outside of each
bluebook what question you are answering.
5. When you are finished, put these questions in your bluebooks and bring them to the table
in the front of the room. All papers and exams must be turned in at or before l:OO. Papers
turned in later will be graded down at the discretion of the instructor.
6. Execute the following honor pledge with your number (not your name):
On My honor, I pledge that I have neither given nor received aid in taking this
examination and that I have not used materials not authorized in paragraph 2 above.
(full social security number)
THIS IS A RESTRICTED EXAM. IT IS AN HONOR CODE VIOLATION TO KEEP OR
COPY ANY PORTION OF IT. PUT THESE QUESTIONS INSIDE YOUR BLUEBOOKS
ANDBRINGTHEMTOTHETABLEINFRONTOFTHEROOMWHENYOUARE
FINISHED.

I (60 minutes)
Alan, Bert and Carol started a new corporation with equity and debt capital of
$350,000 cash and a promissory note of $50,000 as follows:
-Alan was issued 1,000 shares for his payment of $100,000 in cash;
-Bert was issued 1,000 shares for (a) his $50,000 promissory note payable to the
corporation in installments over 5 years and (b) his payment of $50,000 in cash;
-Carol was issued 1,000 shares for her payment of $100,000 in cash; Carol QQ
received $100,000 subordinated 5 % notes from the corporation for her additional cash
payment of $100,000; (the notes were subordinated to claims of outside creditors)
The corporate charter provided for a 4 person board of directors.
Before incorporating, the three entered into a written and signed agreement which
provided that
(a) each would cast shareholder votes to elect all of them to the board and a fourth
board member to be designated by Carol; and
(b) the board would pay out l/3 of the net profits of the corporation each year.
It was understood from the outset, although not written into the agreement, that Alan
would be elected president and chief executive officer and Bert vice-president and chief
fmancial officer. At the organizational shareholder meeting, the three shareholders and
Carols nominee (Debrah) were elected to the board. The board at its first meeting voted
unanimously to enter into 3 year employment contracts with Alan as President at $50,000 per
year and Bert as Vice president at $35,000 per year.
After two years, Bert and Carol had become dissatisfied with Alans performance,
believing he was indecisive and had serious personality clashes with Bert and Carol as well
as two key employees. Alan maintained that the corporate problems were due to temporary
market conditions unrelated to his performance.
At the next board meeting, Bert and Carol and Debrah (Carols nominee) voted to
(a) remove Alan as officer and employee; and
(b) make Bert president at a salary of $60,000; and
(c) terminate dividends for the foreseeable future in order to have funds for future
business development.
Assume the latest RMBCA provisions are in force (those in the statutory supplement). You
may, of course, refer to appropriate common law. Do NOT discuss non-substantive
derivative suit issues such as demand, independent litigation committees etc.

c*

1) Indicate what colorable actions--other than for dissolution--Alan has against the
corporation and/or the other shareholders and directors. [Dissolution issues are considered
sub-part 3 below .]

in

+A

2) Assume this alteration of the above facts. Bert strongly supported Alan and
refused to support Carols demand for his removal. So, Alan remained in office. Thereafter,
Carol and Debrah voted against all proposals brought before the board. At the next
shareholders meeting, Alan and Bert voted to elect themselves, Carol and Ellen--their own
nominee--and refused to vote for Debrah. Since they owned 213 of the shares, their
candidates were elected (meaning that Debrah was off and Ellen was on).
Indicate what colorable actions--other than for dissolution--Carol has against the
corporation and/or the other shareholders and directors.

drb

3) Indicate whether dissolution would be available under RMBCA provisions in (a)

situation one (where Bert and Carol had voted to fire Alan) and (b) the alternative situation
two.

Go on to next page for Question II.

II (30 minutes)
Client, a small shareholder in Zorro, Inc., a medium size corporation whose shares
are traded in the over-the-counter market, has consulted you about several of his concerns
about the corporation. (He is a pain in the posterior, but he pays his bills and does not
expect free advice.)
I3 +

1) [Short answer with brief explanation] He bought his shares ten days before the meeting.
When he tried to vote them at the meeting, he was told he could not because he had bought
them after the record date had been set. He wants to know:
a) Does he have some sort of claim against the corporation for not counting his vote?
b) If he had acted before the meeting had been held, could he have obtained a court
order directing the corporation to count his vote?

la ;brr

2) [Short answer with brief explanation] He has heard on good authority that an important
Zorro contract had been approved by individual members of the board in separate telephone
conversations with the President without a meeting. He wants to know if that is legal?
3) He has heard on good authority that the Board had been discussing for more than a year
an opportunity to buy Green carp. and that 4 of the 9 directors considered it very risky. At
the next shareholder meeting, 3 new directors not previously connected with Zorro were
nominated by the board to fill 3 seats vacated by retirement. The board voted at the next
directors meeting to delegate to the three new directors the duty to study the Green carp
proposal and to make the fmal decision on whether Zorro should act on it.
After several meetings, the 3 director Committee voted that the corporation not buy
Green carp and so reported to the board. Three weeks later, the Zorro president and two
friends not connected with Zorro bought Green carp.

-bc

a) Discuss the issues that must be resolved in determining whether suit could be
brought against the Zorro board or the committee for not buying Green Corp? Explain.
b) Discuss the issues that must be resolved in determining whether suit could be
brought against the Zorro president? Explain.