5 Additional Minutes for Those Downloading the Exam

CORPORATIONS Professor Bradford

December 11, 2004 9:00 a.m.

3 Hours and 15 Minutes (5 additional minutes for those downloading the exam)

INSTRUCTIONS

(You have already been given a copy of these instructions and you should have already read them. No additional time is allotted for reading the instructions again.)

General Instructions for Everyone

1. This is a partially open book exam. You may use the Epstein casebook, the Bradford & Ames book, the statutory supplement required for this course, the course handouts, and any materials, such as notes or outlines, prepared exclusively by you. You may not use any other materials and you may not consult with or communicate with any other person during this exam.

2. This exam has nine (9) pages, including the instructions. The page numbers appear on the top right-hand corner of each page. Please check to be sure that this copy has all the pages.

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

Question 1………………..50 Minutes Question 2………………..80 Minutes Question 3………………..20 Minutes Question 4………………..45 Minutes

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

5. For each question, assume, unless the question indicates otherwise, that the Revised Uniform Partnership Act, the Revised Uniform Limited Partnership Act, and the Revised Model Business Corporation Act apply.

6. If one of the statutes we have studied applies, cite the relevant sections and subsections and explain how those provisions apply to the facts of the problem. 2

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

8. The Honor Code is in effect.

9. Good luck and have a pleasant holiday. 3

Instructions for Those Taking the Exam at the Law College

1. If you are taking the exam at the Law College, you may take the exam in this room, in another designated room, in a typing room if you are typing, or in the computer lab if you previously reserved a spot.

2. You have three hours and fifteen minutes (3:15) to complete the exam. You must turn in your answers in the designated room, even if you are taking the exam somewhere else in the building. If you finish more than five minutes early, you may turn in your answers in the Dean’s Office.

3. If you are taking the exam on a computer, your answers must be formatted either for WordPerfect or Microsoft Word, and turned in on a disk. Your exam number must be on both the disk and the top of your answers. The file name should be your exam number. For example, if your exam number were 666, the file name would be 666.doc or 666.wpd. Double space. Do not put your name on the disk or anywhere on the answers.

4. Be sure to save a copy of your answers on your computer or on another disk, just in case it is needed. Do not delete it until the beginning of next semester.

5. If you are typing the exam, your exam number should appear on the top of each page of typing paper. Double space. Do not put your name anywhere on the answers.

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

7. Save your answers often, and set your computer to back up every five minutes. No allowances will be made for problems you could have avoided by saving your answers regularly. 4

Instructions for Those Downloading the Exam

1. If you are downloading the exam, you may take the exam anywhere you wish. The exam is available at the following URL at exactly 9:00 a.m. on December 11: www.unl.edu/bradford/Final Exam.htm. That page also has a link to the official exam clock. Please use that time to determine when you must return your exam answers.

2. You have three hours and twenty minutes (3:20), until 12:20 p.m. to complete and return the exam. This includes additional time to download and print the exam. You must send an e-mail, with the exam attached, to the Dean’s Office by no later than 12:20 p.m. official exam time. E-mail the exam to the following address: [email protected]. Put “Corporations Exam” and your exam number on the subject line. For example, if your exam number is 666, the subject line would read, “Corporations Exam—Exam No. 666.” Vicki Lill will notify you by e-mail when your file is received and printed, but it may take a few minutes. Please wait for her e-mail confirmation.

3. Your answers must be formatted either for WordPerfect or Microsoft Word. Your exam number should be on the top of your answers. The file name should be your exam number. For example, if your exam number is 666, the file name would be 666.doc or 666.wpd. Do not put your name anywhere on the answers.

4. Be sure to save a copy of your answers on your computer or on a disk, just in case it is needed. Do not delete it until the beginning of next semester.

5. If you have any technical problems during the exam, please contact Glenda Pierce at 472-8264 or Vicki Lill at 472-8262 immediately. We will assume you had no technical problems until you reported them. Be prepared to finish your exam by writing it. (Regular notebook paper is O.K.)

6. Save your answers often, and set your computer to back up every five minutes. No allowances will be made for problems you could have avoided by saving your answers regularly. 5

Question One

(50 Minutes)

Digito, LLC is a manager-managed limited liability company, organized in a state that has adopted the Uniform Limited Liability Company Act. Digito has twenty members. Its two managers are Tom Tech and Katie King.

Tech is a software expert and handles the technical side of Digito’s software business. Under Digito’s operating agreement, Tech’s management authority is limited to technical decisions, such as setting technical specifications or hiring software engineers. He has no other authority. All other decisions, including administration and entering into contracts, are within King’s exclusive authority.

Floyd Flunky is a member, but not a manager of Digito. He also works part-time for Digito as a secretary/receptionist. On December 1, Flunky was sitting at Digito’s reception desk talking to Tech when Sophie Sales, an office equipment salesperson, dropped in. Sales asked Tech if Digito was interested in buying a new laser printer for $1,500. “I’m one of the managers, but I have nothing to do with office decisions like that,” Tech told Sales. “King usually takes care of those decisions, but she’s gone today. Flunky can take care of you.” Tech then left the room.

“We really need a new printer,” Flunky told Sales, “and that’s a good price for that unit. Sure, why not?” Flunky signed the contract to purchase the printer as follows: “Digito, LLC. By: Flunky.”

Discuss whether Digito is liable on the contract to buy the printer. 6

Question Two

(1 Hour and 20 Minutes)

Zeta Corporation is a Delaware corporation. It has five directors: Anna, Bob, Cindy, Don, and Ellen. Don is also Zeta’s CEO; the other board members are outside directors. Zeta’s balance sheet as of September 1, 2004 appears below:

Zeta Corporation Balance Sheet As of September 1, 2004

Assets Liabilities and Shareholders' Equity

Cash $ 70,000 Liabilities Equipment $ 10,000 Accounts Payable $ 34,000 Building $ 65,000 Note Payable $ 94,000 Land $ 15,000 Total Liabilities $ 128,000

Shareholders' Equity Common Stock $ 12,000 Additional Pd.-In Capital $ 15,000 Retained Earnings $ 5,000 Total Shareholders' Equity $ 32,000

Total Liabilities and Total Assets $160,000 Shareholders' Equity $ 160,000

Zeta’s board met on September 1 to consider paying dividends to Zeta’s shareholders. Each of the board members had a copy of the balance sheet shown above.

Anna argued for a fairly substantial dividend because some of Zeta’s shareholders were unhappy with the returns they were earning. Bob supported Anna’s position, arguing for a dividend of at least $50,000.

Cindy contended that $50,000 was too much. She pointed out that Zeta had been negotiating with Sandra Smart, an inventor, to buy an important patent for around $40,000 to $50,000, and a dividend of that amount would leave Zeta with insufficient cash to buy the patent.

“That’s not a problem,” Don replied. “ I have checked with three different banks 7 and they’re willing to lend us enough to acquire the patent, even if we pay $50,000 to the shareholders. A $50,000 dividend won’t keep us from buying the patent.”

“What about our creditors?,” asked Ellen. “Won’t they object if we pay out these dividends?”

“That shouldn’t be a problem,” Don replied. “Look at the assets on our balance sheet. Most of the items are worth about what the balance sheet shows, but our land is worth a lot more than what we paid for it. Its market value now is about $60,000. There are plenty of assets left to pay creditors. Plus, once we acquire the patent, our income should improve a lot.”

At the conclusion of the discussion, the Zeta board voted 4-1, with Cindy opposed, to pay a $50,000 dividend to the Zeta shareholders.

On October 1, Smart offered to sell the patent to Zeta for $45,000. When Don tried to obtain financing for the purchase, the banks refused to lend the money. They pointed out that the economy had worsened over the past month and, since the real estate market was particularly bad, Zeta’s land wasn’t as valuable. Don called Smart and told her he couldn’t accept her offer yet because he was still working on financing.

On October 5, Don called the other board members in a conference call and told them about the problem. “We really need to have this patent,” he told them, “but I can’t figure out how to finance it.” No one offered any suggestions on the phone, but everyone agreed to think about it over the next few days.

On October 8, Anna and Bob contacted Smart and offered to buy the patent themselves for $50,000. Smart agreed and the contract was signed the next day. On November 15, Anna and Bob sold the patent to another company for $75,000.

Discuss the potential liability of the Zeta directors arising out of these facts. (Discuss only the substantive liability issues, not procedural issues, such as the demand requirement, that might arise in asserting liability.) 8

Question Three

(20 Minutes)

Briefly discuss why a publicly owned company (one with thousands of investors) might prefer not to be organized as a general partnership, even if it modifies the partnership default rules as much as possible to fit its public nature. In other words, don’t discuss default rules that could be modified to fit a publicly owned company. Limit your answer to the two non-tax reasons that you think are most important. Do not discuss any reasons related to tax law. 9

Question Four

(45 Minutes)

Fred Fanatic is a common shareholder of Husker Corporation, whose common stock is registered pursuant to section 12 of the Securities Exchange Act. The price of Husker’s stock has been dropping and Fanatic is disgusted with the performance of the company’s board of directors.

Husker’s next annual meeting is scheduled to be held on December 15, 2004. Husker sent out its annual report and proxy solicitation for the annual meeting on October 20.

On November 1, Fanatic published a full-page ad in the Wall Street Journal stating that he intended to vote his shares against Husker’s directors. In the ad, he accused the directors of poor leadership and claimed they were responsible for the drastic decline in Husker’s stock price. On the same day, Fanatic mailed a letter to Husker’s fifteen largest shareholders repeating many of the statements in the ad and strongly urging the shareholders to vote their shares against the existing directors.

On November 15, Fanatic received a letter from Carla Corn, one of the fifteen shareholders Fanatic’s letter went to. Corn said she agreed with Fanatic and intended to vote against the directors. However, Corn had lost the proxy form sent to her by the company; she asked if Fanatic could find her another one. Fanatic promptly obtained a Husker proxy form from his broker and mailed it to Corn.

Discuss whether the federal proxy solicitation rules apply to any of Fanatic’s actions (not whether he violated them, just whether his communications are covered by the rules).