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Business AssociationsProfessor BradfordDecember 7, 2012

8:30 a.m.

Part I: 1 Hour and 15 Minutes(Closed Book)

GENERAL INSTRUCTIONS

1. The exam has two parts. This is Part I. Part I is closed book. You may not consult any sources. You may not use or possess a cell phone or any other electronic device other than the computer on which you are taking the exam. You may not consult with or communicate with any other person during the exam. If you have any books, notes, briefcases, book bags, cell phones, electronic devices, or other items, you must bring them to the front of the room now. You may not keep these items by your side or take any of them to another designated exam room.

2. Part I of the exam has seven (7) 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. You have one hour and 15 minutes (1:15) to complete Part I. You must turn in your answers in the designated room, even if you are taking the exam somewhere else. If you finish more than five minutes early, you may turn in your answers in the Dean’s Office.

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

Question 1……..…...25 MinutesQuestion 2…..…..….15 MinutesQuestion 3 ………….10 MinutesQuestion 4……….....25 Minutes

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Each question will be weighted in accordance with its recommended time.

5. 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” everything you know into your answers rather than answering the question posed.

6. For each question, if the facts of the question do not indicate otherwise, assume that the Revised Uniform Partnership Act, the Revised Uniform Limited Partnership Act, the Revised Uniform Limited Liability Company Act, and the Revised Model Business Corporation Act apply.

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.

EXAM 4 INSTRUCTIONS

9. You must take the exam on a computer that has the latest version of the Exam 4 software installed. If you have not previously installed the Exam 4 software, please notify the exam administrator immediately. You must take Part I of the exam in the CLOSED MODE.

10. Be sure to enter your exam number in the Exam ID field. (Do not use your NU Card ID number or your social security number.) You will be required to enter your exam number twice. Select the course name from the drop-down box. Be sure you find the folder for this course, because

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that is where your exam will be stored. Verify that the information is correct just before you select “Begin Exam.”

11. Do not worry about headers, footers, page numbers, or double-spacing your exam; the software does all that for you when the exam is printed.

12. When you are finished, please submit your exam electronically. A pop-up box will show the status of your exam. It should show a black bar with 100% in it and a message that says, “Your file has been successfully stored.” If you do not get this message, please see Vicki Lill in the Dean’s office immediately. After successfully submitting your exam, exit Exam 4 before leaving the classroom.

13. 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 you reported them. Be prepared to finish your exam by writing it. (Regular notebook paper is O.K.)

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Question 1(25 Minutes)

Your friend Frieda Friend has been asked to join the board of directors of a large public corporation. Frieda has never been on a board of directors before. She has heard many horror stories about plaintiffs’ lawyers and is concerned about possible liability for breach of duty.

Frieda is not worried about liability for any conflicts of interest; she is certain she can steer clear of any such problems. But she has heard that corporate directors can be liable even when they have no personal conflicts of interest. She has asked you to advise her about the legal rules.

Prepare a brief summary for Frieda of the circumstances in which directors can be liable for breach of the duty of care and the standards courts apply to such cases. Frieda is not a lawyer, so be sure to phrase the discussion in terms a layperson can understand.

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Question 2(15 Minutes)

Discuss why a general partnership might want a provision in its partnership agreement allowing it to expel a partner, and the dangers such a provision poses to a general partner of the partnership.

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Question 3(10 Minutes)

Both Delaware section 144(a)(1) and RMBCA section 8.61(b)(1) provide that a director will not be held liable for breaching his duty of loyalty in a self-dealing transaction if the transaction is approved by disinterested directors after full disclosure of all material facts.

Briefly explain the theory underlying this exception to what would otherwise be a breach of duty.

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Question 4(25 Minutes)

Smith and Jones are organizing a corporation in which Smith will own 55% of the stock and Jones will own the remaining 45%. The corporation will have five directors.

A. Discuss how many of the five directors Jones, the minority shareholder, will be able to elect under the default rules of Delaware corporate law and the MBCA.

B. Discuss possible ways to change this default outcome to guarantee greater board representation for Jones. (Discuss as many different ways as you can think of and explain how they would work. Assume that changing the 55-45% ownership split is not an option.)

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Business AssociationsProfessor BradfordDecember 7, 2012

8:30 a.m.

Part II: 2 Hours and 5 Minutes(Partially Open Book)

GENERAL INSTRUCTIONS

1. The exam has two parts. This is Part II. Part II is partially open book. You may use the casebook, the required statutory supplement, any handouts provided by the professor, and any materials, such as notes or outlines, prepared exclusively by you. You may not use any other materials, written, digital, or recorded. You may not use or possess a cell phone or any other electronic device other than the computer on which you are taking the exam. You may not consult with or communicate with any other person during this exam. If you have any other books, notes, briefcases, book bags, cell phones, PDAs, or other items, you must bring them to the front of the room now. You may not keep these items by your side or take any of them to another designated exam room.

2. Part II of the 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. You have two hours and five minutes (2:05) to complete Part II of the exam. You must turn in your answers in the designated room, even if you are taking the exam somewhere else. If you finish more than five minutes early, you may turn in your answers in the Dean’s Office.

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4. Part II of the exam consists of five (5) questions. The recommended time for each question is as follows:

Question 1……...30 MinutesQuestion 2……...20 MinutesQuestion 3……...20 MinutesQuestion 4……....30 MinutesQuestion 5……....25 Minutes

Each question will be weighted in accordance with its recommended time.

5. 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” everything you know into your answers rather than answering the question posed.

6. For each question, if the facts of the question do not indicate otherwise, assume that the Revised Uniform Partnership Act, the Revised Uniform Limited Partnership Act, the Revised Uniform Limited Liability Company Act, and the Revised Model Business Corporation Act apply.

7. If one of the statutes or regulations we have studied applies, cite the relevant sections and subsections and explain how those provisions apply to the facts of the problem. An answer that doesn’t cite and analyze relevant statutes or regulations is incomplete and will not receive full credit.

8. 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.

9. The Honor Code is in effect.

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EXAM 4 INSTRUCTIONS

10. You must take the exam on a computer that has the latest version of the Exam 4 software installed. If you have not previously installed the Exam 4 software, please notify the exam administrator immediately. You must take Part II of the exam in the OPEN MODE.

11. Be sure to enter your exam number in the Exam ID field. (Do not use your NU Card ID number or your social security number.) You will be required to enter your exam number twice. Select the course name from the drop-down box. Be sure you find the folder for this course, because that is where your exam will be stored. Verify that the information is correct just before you select “Begin Exam.”

12. Do not worry about headers, footers, page numbers, or double-spacing your exam; the software does all that for you when the exam is printed.

13. When you are finished, please submit your exam electronically. A pop-up box will show the status of your exam. It should show a black bar with 100% in it and a message that says, “Your file has been successfully stored.” If you do not get this message, please see Vicki Lill in the Dean’s office immediately. After successfully submitting your exam, exit Exam 4 before leaving the classroom.

14. 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 you reported them. Be prepared to finish your exam by writing it. (Regular notebook paper is O.K.)

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Question 1(30 Minutes)

Arnie, Bettie, and Cookie are the only partners in a general partnership that operates an Italian restaurant, Leonardo’s. Under the terms of their partnership agreement, Arnie and Bettie have “the exclusive authority to manage the partnership and make all business decisions for the partnership.” Cookie, the restaurant’s cook, is authorized to “make ordinary decisions related to cooking,” but otherwise “has no management or agency authority.”

Emeril, a famous chef, heard about Leonardo’s and arranged to tour the restaurant. Emeril arrived at the restaurant on November 1, 2012, just as Arnie and Bettie were leaving. Arnie told Emeril, “Cookie is our partner. She can take care of you on our behalf.” Bettie nodded her agreement.

Leonardo’s uses a special pizza oven hand-made by Cookie and contributed to the business as part of her capital contribution when the three partners formed Leonardo’s. When Emeril saw the oven, he offered to buy it for $120,000. Cookie decided that was too good a deal to pass up, so she quickly agreed to the sale. She drew up a short contract selling the oven to Emeril and signed it, “Leonardo’s, By: Cookie.”

Later that night, when Arnie and Bettie found out what Cookie had done, they notified Emeril that they would not honor the contract.

Discuss whether Arnie, Bettie, or Cookie are liable for damages resulting from breach of the contract. (Do not discuss any procedural issues related to the enforcement of any liability.)

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Question 2(20 Minutes)

You are a legislative aide for a U.S. Senator. He believes the law of insider trading under Rule 10b-5 should be codified so it is clear to defendants exactly what is and is not prohibited. He does not want to change the existing law, just to put it into statutory form. He tells you not to worry about codifying any special rules the SEC has adopted, such as Rules 10b-5-1 and 10b-5-2, as those will remain in place. He’s only interested in codifying the case law.

Draft the statute. Be as precise, clear, and succinct as possible, but also be thorough. Try to leave as little ambiguity and uncertainty as possible. Do not change the existing law.

(Obviously, there is a lot of case law we haven’t looked at. Limit your codification to the major federal cases we covered.)

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Question 3(20 Minutes)

Arnie is a member of a member-managed limited liability company, Magna, LLC, that is organized under the Revised Uniform Limited Liability Company Act (2006). Magna has three other members: Barney, Conan, and Delilah.

Arnie has been unhappy with the business for some time. He has been outvoted on several questions of business strategy and has had an ongoing personality conflict with Conan, who Arnie thinks is a real barbarian.

On November 1, 2012, at a meeting of the members, Arnie’s dissatisfaction finally boiled over. “That’s it,” he said. “I don’t want to be part of this business anymore. I quit.”

Discuss the consequences of Arnie’s action. Assume there is nothing in Magna’s certificate of organization or operating agreement that deals with the withdrawal of a member or the termination of the business.

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Question 4(30 Minutes)

Alpha Corporation is a Delaware corporation. Alpha is a reporting company under the Exchange Act; its common stock is traded on the New York Stock Exchange and is registered pursuant to section 12 of the Exchange Act.

Jones owns 10,000 shares of Alpha common stock. On March 20, thirty days before Alpha’s upcoming annual meeting, Smith mailed a letter to each of Alpha’s common shareholders. He did not file a proxy statement or include a proxy statement with the letter.

In the letter, Jones criticized the leadership of the current Alpha directors and urged Alpha shareholders not to vote for the incumbent directors at the upcoming meeting. Jones did not include a proxy form with the letter and did not ask shareholders to give Jones their proxies.

Jones also stated in the letter that one of the directors, Doe, was not trustworthy because he was convicted of an honor code violation while in business school. In fact, this was untrue. Doe was accused of an honor code violation, but the honor court acquitted him.

Discuss whether Jones has violated the federal proxy rules.

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Question 5(25 Minutes)

Beta Corporation is a Delaware corporation. It has ten shareholders, one of whom, Manny Major, owns a majority of the stock. Its balance sheet as of December 1, 2012 appears on the following page.

A. What is the maximum amount of dividends Beta may distribute to its shareholders as of December 1? Explain. (Assume that: (1) the fair market values of the items listed on the balance sheet are the same as their balance sheet values; (2) the directors make no changes to the terms of the common stock before Beta pays the dividend.)

B. On December 2, Beta sold 1,000 shares of common stock to Smith for $15,000 cash. Explain how this transaction will change Beta’s balance sheet.

C. Assume that Beta’s board decides not to pay any dividends. One of Beta’s minority shareholders sues, claiming that the failure to pay dividends is a breach of fiduciary duty. The shareholder-plaintiff argues that Beta has no legitimate need for the cash it is holding and that the failure to pay dividends unfairly deprives the shareholders of a return on their investments. Discuss how the court will evaluate this claim and its likely response.

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Beta CorporationBalance Sheet

As of December 1, 2012

AssetsCash $ 2,594,000Accounts Receivable 23,000Inventory 249,000Equipment 143,000Land 157,000

TOTAL ASSETS $ 3,166,000

Liabilities and Shareholders' EquityLiabilities

Accounts Payable $ 134,000Notes Payable 217,000

Total Liabilities $ 351,000

Shareholders' EquityCommon Stock $ 200,000Additional Paid-In Capital 650,000Retained Earnings 1,965,000

Total Shareholders' Equity $ 2,815,000

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,166,000

NOTES Re: Common Stock1. Four million shares authorized. 200,000 shares issued and outstanding.2. Par value is $1 per share.