Business Associations Professor Murphy

Business Associations Professor Murphy Final Examination Spring 2015 (2 Hours total) Part II - 60 minutes

INSTRUCTIONS: This is a closed-book examination. This part of the examination consists of 33 multiple-choice questions worth 10 points each for a total of 330 points. They are mostly designed to test your diagnostic skills - namely, applying legal principles to factual situations, although some may just be testing your knowledge of a legal concept. You have 60 minutes to complete this part of the examination, so you may be time-constrained, depending on how quickly you work through the questions. Pace yourself so that you will have adequate time to cover all the questions. For reference, the multi-state bar examination pace is one multiple-choice question every 1.8 minutes. At that pace, you should complete the multiple-choice section in just under 60 minutes.

For the multiple-choice questions, only the answers marked on the Scantron answer sheet will be graded. Select only one answer for each question and clearly mark your choice on the provided Scantron answer sheet. Please use care in marking your Scantron answer sheet, since unclear, double, or ambiguous answers may be counted as incorrect. Be sure your exam number is on the Scantron sheet.

You must stop writing as soon as the proctor announces that the examination is over or you run the risk of a conduct code violation. Do not open your examination or start reading the questions until you are instructed to do so.

In that there may be students who will be taking the exam at a different time, it is to your benefit not to discuss the examination content or format with others.

I have tried to proofread the exam so that there are no distracting grammar, spelling or other errors, but I may not have been totally successful. If you believe there is a grammar, spelling or other error that makes it difficult or impossible to answer a particular question, make your best selection and then explain the problem on the back of the Scantron answer sheet and any assumptions you used to answer the question. Be sure to indicate the number of the question involved.

BA Final Exam Spring 2015 Page 1 of 18 DO NOT TURN THIS PAGE UNTIL INSTRUCTED TO DO SO. Good luck, and have a safe and enjoyable summer.

BA Final Exam Spring 2015 Page 2 of 18 Part II: 33 multiple choice questions worth 10 points each. 1. Actimus Corporation is a New Hampshire corporation active in the medical device market. Years ago it gained control of the start-up company Batlor, Inc., also a New Hampshire corporation. Actimus currently owns 75% of the outstanding shares of Batlor, Inc.. The remaining 25% of the shares in Batlor are held by 50 individuals. Actimus wants to eliminate the minority stockholders of Batlor before entering into a transaction with Batlor regarding the transfer and management of significant intellectual property assets. Actimus creates a new wholly owned subsidiary corporation, Conventi, and merges Batlor into Conventi. The merger agreement provides that the minority shareholders of Batlor are to receive $60 per share in cash, a fair price, and that the transaction is to be approved only if a majority of the shareholders approve it. The required approval is obtained but a group of the minority shareholders are dissatisfied with the $60 price. Which of the following is most correct regarding this situation? a. The dissatisfied shareholders have a statutory right of dissent and appraisal. b. The dissatisified shareholders have no choice but to accept the $60 price since a majority of the minority approved. c. Because this is a freeze-out merger the dissatisified shareholders can enjoin the transaction. d. The dissatisified shareholders have the preemptive right to become shareholders of Conventi.

2. On October 6, 2014, the directors of Osterlink Corporation, a New Hampshire corporation, learned that one of their employees embezzled corporate funds in the amount of approximately $65,000 over a two year period. At the next board meeting on January 15, 2015, which was properly noticed and conducted, the board decided 5-4 to decline to seek recovery of the embezzled funds from the employee. This decision was premised on the directors' good faith belief that (1) the corporation would be adversely affected by the litigation publicity, and (2) any judgment, which might be obtained, would be difficult to collect. Tanya, a dissenting director and shareholder who believed that an action against the employee was warranted, wanted to commence a derivative action against the embezzling employee. Tanya made a demand on the corporation to pursue the embezzler. In response, the board appointed an independent outside attorney to study the situation and make a recommendation. The attorney advised against the lawsuit finding that the costs would probably exceed the benefits. Based on this fact situation, which of the following statements is the most correct? a. Tanya cannot commence a derivative action since the decision not to pursue the embezzler is protected by the business judgment rule.

BA Final Exam Spring 2015 Page 3 of 18 b. A derivative action can be commenced, since directors cannot condone criminal conduct. c. Tanya cannot commence a derivative action, since she was present and voted at the board meeting, which declined to seek recovery from the employee. d. A derivative action can be commenced, if a majority of Osterlink shareholders vote to pursue it.

3. Smaltime, Inc., is a partner in the Northern Concord Real Estate Partnership and assigns its interest in the partnership to Othercorp, a New Hamsphire corporation, which is not made a partner. After the assignment, Othercorp asserts: I. The right to receive Smaltime’s share of the partnership’s profits. II. The right to inspect the partnership books and records. Which of the following is correct regarding the status of Othercorp’s rights? a. Othercorp has I only. b. Othercorp has II. c. Othercorp has both I and II d. Othercorp has neither I nor II.

4. John Nolan was a general partner with Jeb Stein, & Oscar Wo, in Soft Solutions, a business to create custom software that operated as a partnership. John transferred his interest in the partnership to Simon and withdrew from the partnership. Although Stein and Wo will continue the business under the same name they have refused to admit Simon as a partner. Subsequently, Soft Solutions appointed Ed Lemon as its agent to market its various software services. Lemon entered into a two-year written agency contract with the partnership that provided that Lemon would receive a 10% sales commission. The agency contract was signed by Lemon and, on behalf of the partnership, by Wo. After six months, Lemon was terminated without cause. Lemon sues the partnership for reinstatement and for damages he has suffered as a result of the termination. a. Lemon will prevail with regard to reinstatement because he has an agency coupled with an interest that may not be terminated without cause prior to the expiration of its term. b. Lemon will prevail with regard to the damages he has suffered as a result of the termination under a breach of contract theory.

BA Final Exam Spring 2015 Page 4 of 18 c. Lemon will fail to win both reinstatement and damages because an agency of this type can be terminated at will. d. Lemon will fail in his claims against the partnership because only Wo signed the contract, but he may have a cause of action against Wo individually.

5. Lakeside Properties, Inc. is in the business of real estate development in the Lake Sunapee area and has a 5 member board of directors. The corporation has 1,000 shares authorized, issued and outstanding, held by 40 shareholders. The corporation’s accountants made a presentation to the Board, proposing a change in the method of accounting for various assets. Under the proposed method, the corporation would receive an extra $5 million per year in tax benefits. However it would also reduce the corporation’s reported profits, possibly making the directors look, to uninformed shareholders, as if they were poor managers. The board voted 5-0 to reject the proposal. Shortly thereafter, a lawsuit is brought by a shareholder on behalf of the corporation against the directors. What is the most likely outcome of the lawsuit? a. The directors will prevail because the business judgment rule applies. b. The directors will not prevail because of the inherent conflict of interest. c. The directors will prevail because the transaction was ratified by the accountants. d. The directors will not prevail because they put the corporation into a no-win situation.

6. Bjorn Toulouse operates a small convenience store that occupies the lower floor of his home in Salem, New Hampshire. He has formed a corporation to handle the business of the convenience store. Bjorn is the sole shareholder and the only employee of the corporation. The corporate veil is most likely to be pierced if:

a. An ultra vires act has been committed. b. The corporation has elected S corporation status under the Internal Revenue Code. c. Bjorn incorporated the business solely to limit his potential liability. d. Bjorn has commingled his personal funds with those of the corporation.

The following fact situation applies to questions 7 and 8: In 2010 Andrew Alpho, Betty Bolpow and Carl Millton formed Lightsmor, a partnership to provide electric lighting advice to parking lot developers. Andrew, Betty and Carl were general partners sharing profits equally. On January 1, 2014 Carl contracted with Michele Mensa for Michele to receive Carl’s share of any future

BA Final Exam Spring 2015 Page 5 of 18 partnership profits. Betty and Andrew have continued to conduct business under the Lightsmor name but they have refused to admit Michele as a partner. In 2014 Lightsmor entered into an agency relationship with Bob Smith to market Lightsmor’s services to parking lot developers in Vermont. Bob agreed to a two-year written agency contract with the partnership that provided that Bob would receive a 15% commission on any fees generated from sales in Vermont. The agency contract was signed by Bob and, on behalf of Lightsmor, by Andrew.

7. Michele sues Lightsmor, and Andrew and Betty individually, for their refusal to admit her as a partner and for her share of the partnership profits for the years 2013 and 2014. With regard to Michele’s lawsuit which of the following are correct? a. Michele will fail to win admission as a partner and will fail to recover any profits from Lightsmor, Andrew or Betty because a partnership is a voluntary association. b. Michele will fail win admission as a partner but will be entitled to recover Carl’s share of the 2013 and 2014 profits from Andrew and Betty. c. Michele will win admission as a partner of Lightsmor because Andrew and Betty elected to continue the business with knowledge of the arrangement between Carl and Michele. d. Michele will prevail with regard to reinstatement because she has an agency coupled with an interest that may not be terminated without cause prior to the expiration of its term.

8. After six months, Bob was terminated without cause. Bob sues Lightsmor for reinstatement and for damages he has suffered as a result of the termination. With regard to Bob’s lawsuit which of the following are correct? a. Bob will fail to win damages because a principal has a right to terminate an agency relationship. b. Bob will fail to win both reinstatement and damages because an agency of this type can be terminated at will. c. Bob will prevail with regard to the damages he has suffered as a result of the termination under a breach of contract theory. d. Bob will prevail with regard to reinstatement because he has an agency coupled with an interest that may not be terminated without cause prior to the expiration of its term.

9. On April 1, 2015, Sosumi, a Delaware corporation with its principal place of business in Portsmouth, New Hampshire, become a takeover target of Moppilum Inc. Moppilum made a tender offer to the shareholders of Sosumi offering $10 per

BA Final Exam Spring 2015 Page 6 of 18 share for each the outstanding shares of Sosumi. Prior to the offer Sosumi stock had been selling in a range of $4 to $6 per share. On April 15, 2015, the board of directors of Sosumi met and passed a resolution granting significant stock options to the current managements of Sosumi. Lauren Order, one of your clients and a relatively minor shareholder of Sosumi, is outraged by the board’s action and would like to have the stock options nullified. Which of the following would be the best legal assessment of the situation? a. The business judgment rule prevents a court from assessing the actions taken at the April 15th board meeting. b. The actions of the board may be judicially reviewed if there is a showing of a breach of the duty of care or the duty of loyalty. c. If both Moppilum and Sosumi are publicly traded companies the actions taken by Sosumi’ board on April 15th will be viewed as a response to a hostile takeover and as such will be illegal under the Williams Act. d. After the hostile tender offer was made the board of directors’ sole duty was to maximize shareholder value in accordance with the Revlon doctrine.

10. Frank Fowler, Peter Pitt and Anne Ashley are the sole partners of Fowler, Pitt & Ashley. After five years they have decided to dissolve the partnership. The partnership owns no property other than $2000 of various office supplies and used equipment. In addition to this $2000 of assets the partnership has $9,000 in the bank. At the time of dissolution the partnership owes their landlord, Charlie Creditor, $4000 and Peter Pitt, a partner, $1000 on a loan he made the partnership last year. The capital accounts of each of the three partners lists the capital for each at $2000. The partnership agreement is silent with regard the distribution of profits and losses. When all the partnership assets are properly distributed which of the following will not be correct? a. Charlie will receive $4000. b. Peter Pitt will receive a total of $3000. c. Each partner will receive over $2000 as his or her share of the partnership profits. e. Anne Ashley and Frank Fowler will receive identical amounts.

11. Elaine is a chemical engineer who works for X-Cars, Inc., a manufacturer of electric cars that was founded by an Internet billionaire. The company’s shares are traded on the New York Stock Exchange. One night Elaine was working late in her lab and realized she had achieved an important technical breakthrough. This discovery would enable X-Cars to manufacture electric car batteries that would last twice as long as any of the other electric car batteries currently available. The next morning Elaine attended a meeting of 25 senior managers and informed them all

BA Final Exam Spring 2015 Page 7 of 18 about her discovery. She waited four hours and then called her broker to order 1,000 shares of X-Cars’ stock at the market price. In a subsequent enforcement action brought by the S.E.C. under rule 10b-5, which of the following would a court most likely hold? a. Since Elaine is neither an officer nor a director of X-Cars she had no fiduciary duty to X-Cars’ shareholders and therefore has not violated rule 10b-5. b. Since Elaine made a disclosure and waited a reasonable time she has not violated rule 10b-5. c. Elaine has violated rule 10b-5. d. Elaine has not violated rule 10b-5 because X-Cars’ stock was publicly traded and she purchased the shares at market price.

12. The Flatland Corporation has two shareholders, Alan and Barbara. Alan owns 60 shares and Barbara owns 40 shares. The articles of incorporation for Flatland Corporation establish five directors and permits cumulative voting. In an attempt to intimidate Barbara, Alan announces that he is casting 60 votes for each of his candidates for the board (Alice, Alex, Alonso, Alfred and himself). Barbara comes to you seeking advice on how she should vote. Based on these facts which of the following would be most correct? a. Barbara should concentrate her votes on two candidates since two is the greatest number of directors she can elect under the circumstances. b. Barbara will be out-voted 60 to 40 on each candidate so her best alternative is to seek an accommodation with Alan. c. It doesn’t matter what Barbara does since Alan will control the corporation no matter what Barbara does. d. Barbara can elect three directors by casting 67 votes for her two favorite candidates and 66 votes for the third.

13. The CEO of the Henrin Corporation is concerned that her company will soon be a target of a hostile tender offer from the notorious takeover artists, B. Ron Krabits. With her encouragement, the board of directors of Henrin, at a duly convened meeting, adopts a defensive poison pill that would essentially give away the company’s most significant assets in the event of a successful takeover by Krabits. The poison pill further provides that it can only be rescinded or modified by the current board of directors. What is the most likely status of such a measure? a. It is valid under the business judgment rule. b. It is valid because of federal preemption by the Williams Act.

BA Final Exam Spring 2015 Page 8 of 18 c. It is invalid because all poison pills are invalid under a Unocal standard of duty. d. It is invalid as preclusive and coercive because it effectively forces shareholders to re-elect the current directors.

14. Lois Jackman and Kelly Peterson are recent graduates of UNH’s marine science program and have decided to start an eco-friendly, off-shore fish farming business specializing in cold water species. They have decided to form a benefit corporation or B-Corp to pursue this opportunity. If they choose this form of business organization which of the following would not be a requirement for the B-Corp? a. It must qualify as a non-profit organization under IRS rules. b. It must have an explicit social or environmental mission. c. It must have a legally binding fiduciary responsibility to take into account the interests of workers, the community and the environment as well as its shareholders. d. It must publish independently verified reports on its social and environmental impact alongside its financial results

15. Tom, a cinematographer is desperately looking for work. He calls Roseanne, a Hollywood producer and says, “Roseanne love, I hear you’re going to be making another one of your fantastic movies. I would just love to work for you on it if I can fit it into my schedule.” Roseanne, who detests Tom but doesn’t like to be the one to say no to anyone, replies, “Tom darling, I would just love to be able to work with you some time, but I have turned over to Amy the job of hiring our camera people. Let’s do lunch some day. Bye now. Kiss, kiss.” Amy happens to be in Roseanne’s office during the conversation. Upon hanging up the phone, Roseanne turns to Amy and says, “Do not, under any circumstances, hire Tom. I loath him.” A week passes and Amy agrees to have lunch with Tom. Tom convinces Amy that he would be perfect for the cinematographer position. Amy tries to call Roseanne but she is spending the week with her “spiritual advisor” at a remote location in Montana and cannot be reached. Amy offers Tom the job and he accepts. When Roseanne returns and discovers that Amy has hired Tom she fires Amy and informs Tom that there is no job for him. Tom immediately sues Roseanne. What is the most likely outcome? a. Tom will lose in his suit against Roseanne because Amy lacked authority. b. Tom will prevail against Roseanne on a theory of apparent authority. c. Tom will lose his suit against Roseanne but can recover from Amy. d. Tom will prevail against Roseanne on a theory of implied authority.

BA Final Exam Spring 2015 Page 9 of 18 16. Home Supply, Inc. is a chain of stores that operates in New England selling lumber and supplies to the do-it-yourself market. Carl (Crash to his friends) Gordon was employed by Home Supply as a delivery person for their Concord, New Hampshire store. Under the terms of his employment, he made deliveries daily along a designated route using a company owned truck, and brought the truck back to the store’s garage for overnight storage. One day, instead of returning to the garage as required, he drove the truck to Weirs Beach, some 20 miles north of the area he covered, expecting to attend a social function unrelated to his employment or to his employers affairs. Through his negligence in operating the truck while in route, Gordon seriously injured Betty Larner in a multi-vehicle accident on Interstate 93. It is admitted that Gordon caused the accident and was solely at fault. Larner brings a lawsuit against Gordon, as part of the suit brings a tort claim against Home Supply for damages for personal injuries, alleging that the store, as principal, was responsible for the tortious acts of its agent, Gordon. Under these circumstances, what is the most likely result of Larner’s litigation? a. Home Supply is not liable because Gordon was an independent contractor. b. Home Supply is liable based upon the doctrine of respondeat superior. c. Home Supply is not liable because Gordon had abandoned his employment and was engaged in an independent activity of his own. d. Larner can recover damages from both Gordon and Home Supply.

17. Louise Makem is a stockholder in the Jalpin Corporation owning 10% of the outstanding stock. Unless otherwise restricted or mandated by contract, the articles of incorporation or the corporate by-laws, as a shareholder of Jalpin Louise is entitled to which of the following rights? a. Right to receive annual dividends. b. Right to approve a sale of the corporation. c. Right to elect officers of the corporation. d. Right to approve corporate borrowing that is in excess of 25% of the corporation’s capitalization.

18. Clarence, Paul and Larry formed a partnership. Clarence contributed $13,000 in capital and loaned the partnership $10,000. Paul contributed $5,000 in capital and some part-time services, and Larry contributed only his full-time services. The partnership agreement was silent on the distribution of profits and losses. Four years after its formation, the partnership was voluntarily dissolved by all three partners and liquidated. There are $155,000 of assets to be distributed to creditors

BA Final Exam Spring 2015 Page 10 of 18 and partners. Outside creditors of the partnership have valid claims of $55,000. When the assets are distributed which of the following is most correct? a. Clarence will receive $47,000 in total. b. Paul will receive $30,000 in total. c. Each partner receives one-third of the remaining assets after all firm creditors, including Clarence, have been paid. d. Larry receives nothing since he did not contribute any property.

The following fact situation applies to questions 19 through 21: Wally is the owner and operator of Wallywalls, incorporated in New Hampshire, that specializes in the sale and installation of a unique type of drywall known as Wall-X. His two most trusted employees are Beavis and Bud. Beevis is Wallywalls’ purchasing agent and bookkeeper while Bud is Wallywalls’ manufacturing and installation supervisor. Over the last several years, Wally has been spending less and less time looking after the business, leaving most of the day-to-day operations to Beavis and Bud. During this time, Bud has discovered a method to make low-cost drywall using materials salvaged from decommissioned nuclear power plants. This drywall costs Wallywall $5.00 per sheet rather than the $10.00 per sheet that Wallywall used to pay. This reclaimed material is the key component of Wall-X. 19. Since he discovered this source for $5.00 per drywall sheet, Beavis has been charging customers the same price that Wallywall has always charged for drywall, $20.00 per sheet, creating a windfall at $5.00 per sheet of drywall. Beavis has been splitting this windfall with Wallywall, keeping a $2.50 “finders fee” for each sheet at $5.00 drywall that Wallywall sells, while passing along $2.50 in extra profit to Wallywall. Legally speaking, Beavis is: a. on solid ground; he fulfilled his duty and loyalty by looking out for Wallywall and earning his employer an extra $2.50 per sheet of drywall. b. required to give Wallywall all the $2.50 “finders fees” he collected. c. on shaky ground, but only because he overcharged customers. d. on shaky ground, but only because he should have split the windfall so that his principal got at least 51% rather than just 50%.

20. Wally is getting along in years, and is not as healthy as he once was. If he should happen to die while Bud has drywall installation projects still going on, what is the status of the agency relationship? a. Wally’s death dissolves the agency, but it is not completely terminated until Bud winds up the work that was unfinished at the time of Wally’s death.

BA Final Exam Spring 2015 Page 11 of 18 b. The agency continues beyond Wally’s death as a de facto agency until Beavis and Bud are able to fully liquidate the assets of Wallywall. c. Wally’s heirs step into Wally’s shoes and assume his status as principal by operation of law. d. The agency relationship terminates upon Wally’s death, regardless of whether Beavis and Bud have knowledge of Wally’s death.

21. The sale of Wall-X drywall is Wallywall’s only business. A recent 60 Minutes exposé claims that Wallywall’s Wall-X drywall is contaminated with toxic chemicals and is radioactive. The federal government is now considering a complete ban on the manufacturer, sale, and installation of any Wallywall drywall. If this ban goes into effect, how will it affect the relationship between Wally and Beavis and Bud? a. It will have no effect, so long as Wallywall is registered with the state of New Hampshire to undertake any and all lawful activities. b. Beavis and Bud will no longer be empowered as agents of Wallywall to purchase or sell Wall-X drywall. c. Beavis and Bud will no longer be agents of Wally because of revocation. d. It will have no effect, because Beavis and Bud are not just agents, they are employees, which creates a power coupled with an interest.

22. Alice and Bob are struggling software entrepreneurs doing business as Softwarz. In addition to themselves, their business employs three others; a software programer, a shipping clerk, and an administrative assistant. All work together in an office located in a renovated house in Laconia, New Hampshire. Softwarz leases the house from Office Properties, a limited partnership. Due to the tight financial times facing their company, Alice and Bob have convinced Office Properties, to accept an amount equal to 20 percent of Softwarz’ monthly receipts, which average around $5000 per month, instead of a fixed monthly rental. If this arrangement is examined by a court, the court would most likely find that Softwarz and Office Properties: a. are tenants in partnership of the renovated house. b. have created a landlord-tenant relationship and nothing more. c. have formed a limited partnership, with Softwarz as a limited partner and Office Properties as the general partner. d. are general partners in the operation of the building.

BA Final Exam Spring 2015 Page 12 of 18 23. Stanley Allen, a famous writer, decides to write a book detailing a famous corporate takeover case and entitles it The Visigoths Sack JRJ. The book is a runaway best- seller. Stanley is approached by Kyrin Karuso, a famous Hollywood agent, who tells Stanley that she represents Tru-Star Pictures, a major film studio. Stanley and Kyrin work out the details and each sign a contract that would give Tru-Star the exclusive rights to produce a film version of Stanley’s book in exchange for $150,000. Which of the following is an incorrect statement? a. If it turns out that Kyrin Karuso was an agent of Tru-Star pictures at the time she made the deal but, unknown to Stanley, her agency arrangement with Tru-Star limited her authority to deals of less than $125,000, Stanley will, nonetheless, be able to enforce the contract against Tru-Star Pictures for the full $150,000. b. If it turns out that Kyrin Karuso was a fully authorized agent of Tru-Star pictures at the time she began negotiations, but, unknown to Stanley, her agency is terminated by Tru-Star prior to the time she signs the deal with Stanley, Stanley may, nonetheless, be able to enforce the contract as negotiated by Kyrin against Tru-Star Pictures. c. If it turns out that Kyrin Karuso was not an authorized agent of Tru-Star pictures at the time she made the deal, Tru-Star may, nonetheless, ratify the deal as made by Kyrin and Stanley will then be able to enforce the contract against Tru-Star Pictures. d. If it turns out that Kyrin Karuso was not an authorized agent of Tru-Star pictures at the time she made the deal, and Tru-Star subsequently informs Stanley of this fact when they find out what Kyrin has done, there is no contract that Stanley can enforce to get the $150,000 as originally promised.

24. Hector entered into a partnership with Achilles to purchase a retirement community in southern New Hampshire. While Hector and Achilles were searching for investors, Achilles approached Helen, the principal of Achaean Investors, and provided her with a copy of Hector’s personal financial statement. Hector, Achilles, and Helen met together repeatedly thereafter. At the meetings, Achilles referred to Hector as a partner in the project. Helen committed Achaean Investors to providing $150,000 to the venture. Achilles gave Helen a written receipt stating that the money would be paid back pursuant to a note that Helen would hold. The note had lines for the signatures of Hector and Achilles, but only Achilles’ line contained a witnessed signature; Hector’s line was blank. Later, when the partnership defaulted on the loan, Achaean Investors sued Hector for payment. Based on these facts, what is the most likely outcome of the lawsuit between Achaean Investors and Hector? a. Hector will be liable to Achaean Investors because he stood to benefit from the original investment had the venture been successful.

BA Final Exam Spring 2015 Page 13 of 18 b. Hector will be liable to Achaean Investors under a theory of apparent authority. c. Hector will be liable to Achaean Investors because he had constructive notice of the written receipt that Achilles gave Achaean Investors. d. Hector will not be liable to Achaean Investors because Achilles had no authority to bind Hector to the terms of the Achaean Investors note.

25. Stan Wurks is the CEO of Apricot Inc., a computer company, and Raxip Corporation, a media production studio. The board of Apricot authorizes Stan Wurks to negotiate an advertising contract with Hanna Ri, a famous recording artist, as part of a new ad campaign, and Wurks does so. Hanna Ri believes that Stan Wurks is representing Raxip, not Apricot, at the time she agrees to the ad campaign. Hanna Ri completes her obligation as agreed and now wants to receive her pay. Which of the following is correct? a. Hanna Ri can enforce the contract against Apricot even though Hanna Ri did not know that Wurks had been acting on behalf of Apricot at the time of the agreement. b. Hanna Ri can enforce the contract against Wurks but not against Apricot nor Raxip because of the misunderstanding regarding the principal. c. Hanna Ri can enforce the contract against Apricot only if she was aware that Wurkss was both the CEO of Apricot and Raxip. d. Hanna Ri can only enforce the contract against Raxip, but not Apricot.

26. Mirabel Moblee is in the landscaping business and engages Gus Pilken to help in marketing her business to Humungus, Inc., a large local corporation, for work at their headquarters “campus.” In his efforts to secure the contract (and his commission) Gus fully discloses that he is acting as an agent for Mirabel but makes some unauthorized misrepresentations to Humbugs. As a general rule, Mirabel will be liable to Humbugs for Gus’ unauthorized misrepresentations if the Gus is an:

Employee Independent Contractor a. Yes Yes b. Yes No c. No Yes d. No No

27. Owings-New Hampshire, Inc. (ONH), is a public corporation in which no shareholder holds more than one percent of the outstanding shares. The company

BA Final Exam Spring 2015 Page 14 of 18 manufactures glass containers, including disposable beverage bottles. Tracy, a long-time ONH shareholder, recently learned that ONH's board of directors last year unanimously approved a $5 million loan to the Glass Advocates Committee (GAC), a political action committee set up to fight a state referendum to ban disposable glass beverage containers. GAC was organized by Frank Norenza, Jr., the son of ONH’s chairman, Frank Norenza, Sr., and commonly referred to as Junior. There have been allegations that GAC spent most of its funds compensating its organizers. The GAC loan is now delinquent, and ONH has done nothing. Tracy wants ONH to collect, and she has asked you for litigation advice. Which of the following would be incorrect advice? a. Tracy must make a demand on the board of directors of ONH unless such a demand would be futile. b. The corporation has a cause of action against Junior, for breach of his fiduciary duty. c. The corporation has a cause of action against GAC on the delinquent loan. d. The corporation has a cause of action against Frank Norenza, Sr., for breach of his fiduciary duty.

28. Renee Holden, the chief financial officer of Powerlis Corporation, withheld material financial information from Tom Torney, Powerlis Corporation's auditor. Torney knew or had reason to know that Holden had withheld material information from Torney, but certified the materially inaccurate financial statements for Powerlis Corporation anyway. Relying reasonably on Powerlis Corporation's financial statements, which Holden furnished to Sam Smith, and acting in good faith, Smith entered into a service transaction with Powerlis Corporation. Smith suffered loss when the true facts about Powerlis Corporation's financial condition become evident and Powerlis Corporation cannot pay for Smith’s services. Powerlis Corporation was successfully sued by Smith for the loss suffered by Smith, who received a judgment against Powerlis. Powerlis Corporation then sued Torney, claiming that Torney was subject to liability to Powerlis for the loss suffered by Powerlis Corporation due to its inaccurate financial statements. Which of the following is the most correct assessment of the legal situation described? a. Torney will be liable to Powerlis Corporation under Rule 10b-5. b. Torney has no obligation to Powerlis because the source of the problem was the withholding of material information by Powerlis Corporation’s CFO Holden. c. Torney may assert, as a defense to Powerlis Corporation’s claim, that Holden’s knowledge of Powerlis Corporation's true financial condition is imputed to Powerlis Corporation.

BA Final Exam Spring 2015 Page 15 of 18 d. Torney may not assert, as a defense to Powerlis Corporation’s claim, that Holden’s knowledge of Powerlis Corporation’s true financial condition is imputed to Powerlis Corporation.

29. Loki Thorson, the president, chief executive officer, and director of Valhalla Corporation, joined with several officers of the corporation to form Asgard Associates, LLC. Thorson and those Valhalla officers were the sole members of Asgard Associates, LLC. They formed the entity solely for the purpose of serving as one of two general partners in a partnership, AA Holdings, that was created to make a public tender offer to buy 60 percent of Valhalla’s common shares from the Valhalla shareholders. Freyja Gunnhild, a shareholder in Valhalla, sued Thorson, the other members of Asgard Associates LLC, and Asgard Associates, LLC, claiming that they had breached their fiduciary duty to Valhalla because they had a conflict of interest during the tender offer negotiations. Asgard Associates, LLC, moves to dismiss the claim against it. Regarding this fact situation, which of the following is most correct? a. The suit against Asgard Associates, LLC should be dismissed because the LLC is a separate legal entity from its members. b. The suit against Asgard Associates, LLC should be dismissed because the sole purpose of the LLC was to make a public tender offer for Valhalla common shares and that purpose is permissible under the Williams Act. c. The suit against Asgard Associates, LLC, should not be dismissed because Thorson and the Valhalla officers who were members of the LLC violated their duty of loyalty to Valhalla. d. The suit against Asgard Associates, LLC, should not be dismissed because the court will need to determine if the public tender offer was a wise business decision.

30. In 2009, three college friends and New Hampshire residents, Huey, Dewey and Bob, formed TortToons, a New Hampshire limited liability company, to produce computer animation for personal injury lawyers. The three formed the LLC as a pass-through entity for tax purposes. In 2012, the LLC produced no income, only losses due to the necessary investment in computer equipment. In 2013 and 2014, TortToons earned enough revenue to permit Huey and Dewey, who work as full- time employees for TortToons, to each take home $30,000 and $50,000 in 2013 and 2014, respectively, in salaries. Bob is not employed by the LLC and never received any money from the LLC. There have been no dividends and none are planned in the future. In 2015, the LLC signed a major contract with a large law firm to provide computer animation in support of a complicated patent infringement case. As a consequence, in 2015 the LLC will report a profit of nearly $1 million dollars. Based on these facts, which of the following is most correct?

BA Final Exam Spring 2015 Page 16 of 18 a. All three, Huey, Dewey, and Bob, will owe federal income taxes on their portion of the $1 million in profits for year 2015. b. Huey and Dewey will owe federal income taxes only on their salaries from the LLC for the year 2015. Bob will owe nothing. c. Huey and Dewey will owe federal income taxes on their portion of the $1 million in profits for year 2015, but not Bob because his portion would be considered "phantom income" and is not taxed. d. The LLC will owe federal income taxes on the $1 million in 2015 profits, but not Huey, Dewey and Bob individually.

31. Kosmic Koders, Inc., a Delaware corporation with its principal place of business in Concord, New Hampshire, is a highly successful company that produces specialized software for internet advertisers. On October 1, 2010 Kosmic Koders discovered that it was the takeover target of Gaggle Inc., one of the largest internet support companies in the world. Gaggle made a tender offer to the shareholders of Kosmic Koders offering $12 per share for each of the outstanding shares of Kosmic Koders. Prior to the offer Kosmic Koders stock had been selling in a range of $5 to $7 per share. On October 15, 2010, the board of directors of Kosmic Koders met and passed a resolution granting significant stock options to the current managements of Kosmic Koders. The Loyal Order of Ferrets, a local service organization and one of your clients and a relatively minor shareholder of Kosmic Koders, is very upset by the board’s action and would like to have stock options nullified. Which of the following would be the best legal assessment of the situation? a. The business judgment rule prevents a court from assessing the business wisdom of the actions taken at the October 15th board meeting. b. After the hostile tender offer was made by Gaggle the board of directors’ sole duty was to maximize shareholder value in accordance with the Revlon doctrine. c. The actions of the Kosmic Koder board may be judicially reviewed if there is a showing of a breach of the duty of care or the duty of loyalty. d. If both Gaggle and Kosmic Koders are publicly traded companies the actions taken by Kosmic Koders board on October 15th will be viewed as a response to a hostile takeover and as such will be illegal under the Williams Act.

32. Alex Brown was the president and director of Motel-7, a corporation engaged in owning and operating a chain of motels. Brown was advised, on what seemed to be good authority, that a superhighway was to be constructed through the town of Bow, which would be a most desirable location for a motel. Brown presented these facts to the board of directors of the motel corporation and recommended that the corporation build a motel in the town of Bow at the location described. The board

BA Final Exam Spring 2015 Page 17 of 18 of directors agreed, and the new motel was constructed. It developed that the superhighway plans were changed after the motel was constructed. The highway was never built. Later, a meat packing factory was built on property adjoining the motel, and as a result the corporation sustained a considerable loss. Edith Anderson, a widow whose sole assets consist of stock in Motel-7 brought an appropriate action against Brown, charging that his proposal had caused a substantial loss to the corporation. What is the most likely outcome of Edith’s lawsuit? a. Decision in favor of Edith because Brown is both an officer and a director and has an inherent conflict of interest. b. Decision in favor of Brown because the real cause of damage is the neighboring meat packing plant that was not foreseen. c. Decision in favor of Edith because Brown should not have relied on the information about the superhighway. d. Decision in favor of Brown because as an officer or director of a corporation he will not be personally liable for an investment loss that results from a poor or mistaken judgment such as this.

33. Paul Priscor retained Ann Archer to negotiate terms for the purchase of the Kowlin Family Farm (KFF) for Priscor, promising to pay Archer a percentage commission of the purchase price if Archer can persuade KFF's owner, Ted Kowlin, to agree to sell and if Archer finds no defects in Kowlin’s title to KFF. In investigating Kowlin's title, Archer discovered that Lynn Lee has an unrecorded equitable interest in KFF. Archer did not reveal Lee’s interest to Priscor, fearing that Priscor would not otherwise agree to buy KFF and, as a consequence, Archer would not receive her commission. Priscor agreed to buy KFF from Kowlin. Subsequently, Priscor found out about the defect in Kowlin’s title. Which of the following is the most correct assessment of the legal situation described? a. The agreement to purchase KFF is not valid because Priscor was unaware of the defect in title. b. The agreement to buy KFF is not binding on Priscor but is binding on Archer. c. Notice of the fact of Lee’s interest in KFF is imputed to Priscor. d. Archer’s failure to notify Kowlin of the defect when discovered was an act of disloyalty that terminated the agency.

END OF EXAM

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