EXAMINATION NUMBER: _____________________




This examination has 21 pages, including this cover page.  Please make sure that you have all pages before beginning.


You must return the entire examination (all 21 pages) along with your completed blue books at the end of the exam.  I will not submit a grade for any student whose examination booklet is not returned.


This examination is administered on a "limited open book" basis.  That means that during the examination, you may consult your casebook, your statute book, any class handouts, your notes, and any outline or other written document that you have personally prepared in whole or in part.


The examination consists of three essay questions (each of which has multiple sub-parts) and sixteen multiple choice questions.  You must write your answers to the essay questions in blue books, skipping every other line. 

For the multiple choice questions, mark the number corresponding to the best answer on your scantron sheet.  Each multiple choice question has one single answer that is best; no question is intended to be ambiguous.  If you nevertheless find a question ambiguous, mark on the scantron sheet the response you think is best and then, in the margin of the examination itself (not on the scantron sheet), briefly explain why you believe the question to be ambiguous.


Unless otherwise specified, assume that the governing corporations statute is the Delaware General Corporation Law, the governing partnership statute is the Uniform Partnership Act, and the common law of agency is as stated in the Restatement (Second) of Agency.


You have a total of four hours to take the examination.  Please attempt to allocate your time wisely.  I have indicated how I will weigh each portion of the examination in determining grades (e.g., Essay I is worth 25% of the examination grade), as well as what I believe is approximately the amount of time that should be devoted to each section of the examination (e.g., Essay I should take about one hour).  My time suggestions are merely suggestions.  Feel free to disregard them, but do keep in mind how I will allocate points among questions.


Best of luck!


ESSAY I (60 minutes, 25%)


            J. Peterman, Inc. ("Peterman") is a Delaware corporation with its principal place of business in New York City.  The 105-year-old company, a manufacturer and retailer of men's clothing, is publicly traded on the New York Stock Exchange and has 10 million shares of common stock outstanding.  While Peterman used to sell only traditional outdoor clothing such as khaki pants, corduroy shirts, and leather and canvas field jackets (a la L.L. Bean), it has in recent years expanded its clothing line to include a few items designed to appeal to the "sophisticated urban adventurer" (e.g., the "Urban Sombrero," the "Shang Dynasty Caftan").


            The Peterman board, which consists of four inside directors (Peterman's CEO, CFO, COO, and general counsel) and five directors who are not part of Peterman's management, held its regularly scheduled board meeting in February 2003.  At that meeting, the board considered a management proposal to cut back on Peterman's traditional line and launch a new line of clothing during the fall season.  The new clothing line was to be based on the elaborate costumes worn by Samurai warriors and would include, among other things, "kimonos" (silk robes), "hakamas" (wide trousers secured with leggings below the knee), and "fundoshis" (loin cloths).  Management assured the board that the so-called "Urban Samurai" line was virtually guaranteed to be popular because of the upcoming release of a Tom Cruise film based on the life of a Samurai warrior.


Manufacture of the exotic clothing, though, would require retrofitting of much of Peterman's sewing equipment, so Peterman would have to cut back significantly on production of its standard line (i.e., khaki trousers, corduroy shirts, field jackets, etc.).  Fortuitously, the wife of Peterman's CEO is the president of a kimono manufacturing business called Kimonos-R-Us Corporation ("KRU").  Moreover, Peterman's CFO, COO, and general counsel each hold substantial quantities of KRU stock and are friendly with the management of the company.  Accordingly, Peterman could easily outsource production of kimonos for the Urban Samurai line to KRU, which would likely be willing to cut a mutually beneficial outsourcing deal with Peterman.


            The Peterman directors spent five hours considering the Urban Samurai venture.  They heard from three board-selected experts:  (1) fashion expert Clinton Kelly, co-host of The Learning Channel's hit television program, "What Not to Wear";  (2) Elena Howard, a highly regarded marketing expert who focuses on fashion trends and offers advice to a number of mass market clothing retailers; and (3) financial analyst Paul Van Der Werf, a partner at McKinsey Consulting (an elite management consulting firm) and an expert on the financial aspects of business ventures within the fashion industry.  Mr. Kelly reported that "Japanese warrior"-inspired clothing was becoming popular with the entertainment elite, who generally set fashion trends for the rest of the nation.  Ms. Howard confirmed that observation and reported that she had heard "through the grapevine" that other retailers were considering similar clothing lines.  Mr. Van Der Werf reported that most of the clothing articles in the proposed line could be cheaply produced and would likely retail at a relatively high price, generating substantial profit margins.  At first, a number of the directors were skeptical of the information Mr. Kelly and Ms. Howard were reporting, and several of the directors peppered those experts with questions.  Eventually, though, the directors came to believe that the clothing in the proposed Urban Samurai line - while undoubtedly on the cutting edge - was consistent with current fashion trends.  The directors asked no questions of Mr. Van Der Werf. 


            At the close of the five-hour board meeting, the Peterman directors conducted two votes on the Urban Samurai proposal.  First, the directors voted six to three in favor of adopting the Urban Samurai proposal.  (The dissenters consisted of three outside directors.)  The directors then took a separate vote on whether to outsource kimono production to KRU.  A separate vote was necessary, the directors believed, because the wife of Peterman's CEO is the president of KRU.  To avoid a conflict of interest, Peterman's CEO abstained from the latter vote.  The remaining directors voted five to three (same dissenters) in favor of outsourcing kimono production to KRU.


            The release of the Urban Samurai line was disastrous for Peterman.  The fashion and financial media were merciless.  In a cover story entitled "What Were They Thinking?!", the weekly fashion business magazine Fashion Week polled six noted fashion designers and six fashion industry analysts about the Urban Samurai line and reported that ten of the twelve experts agreed or strongly agreed with the statement, "Peterman's decision to produce the Urban Samurai line was objectively unreasonable."


Indeed, Peterman's retail sales dropped precipitously following release of the Urban Samurai line.  Fourth quarter earnings for 2003 were a measly $960,000, as compared to $10.5 million for the fourth quarter of 2002.  Peterman's stock price also plummeted.  Between May 1, 2003 and December 1, 2004, the stock price fell from $16 per share to just over $4 per share.


            Given Peterman's business failures and depressed stock price, T-Bone Pickens - a stockholder who held five percent of Peterman's outstanding common stock and owned his own clothing company, T-Bone Designs, Inc. ("TDI") - decided that Peterman could be better managed in other hands.  Accordingly, he proposed a friendly merger of Peterman and TDI, where TDI would be the surviving corporation but would continue to market Peterman's traditional clothing under the Peterman label.  When Pickens's advances were rebuffed, he decided to launch a hostile tender offer for the company.  On December 10, 2003, he announced that he would purchase up to 50.5% of the common stock outstanding for $6 per share - a nearly 50 percent premium over the market price - and would then merge the company into TDI, paying Peterman shareholders with subordinated debt securities worth $5 per share (still substantially above market price).


            On December 15, 2003, the board of Peterman convened for an emergency meeting to discuss Pickens's tender offer.  At the four-hour board meeting, the directors heard from Peterman's investment banker, Goldman Stanley & Lazard ("GSL"), and from its lawyers, Wachtel Skadden & Cravath ("WSC").  GSL informed the directors that $6 per share was at the low end of value for Peterman, which had a liquidation value of $5 per share but would be worth between $5.75 and $8 per share as a going concern.  WSC then advised that Peterman's board adopt a "Note Purchase Rights Plan" that would give each common stockholder a "right" to exchange any share of common stock for a note worth $10 per share if any person or corporation acquired 20% of Peterman's common stock.  Prior to anyone acquiring the requisite 20% of Peterman stock, the rights would be redeemable by Peterman's board at five cents per right.  The Peterman board voted unanimously to adopt the plan.


            T-Bone Pickens wants to bring a lawsuit challenging the Peterman board's decisions to adopt the Urban Samurai clothing line, to outsource kimono production to Kimonos-R-Us, and to implement the Note Purchase Rights Plan.  Your assignment is to draft a memorandum addressing the following issues:


(1)   What procedures must Pickens follow in asserting his claims?  (i.e., Must he make demand on the directors that they file suit before he does so himself?  Why or why not?)


(2)   What must Pickens prove to prevail on each of his three challenges?


(3)   What are Pickens's chances of success on each challenge?



ESSAY II (60 minutes, 25%)


Fed up with the declining coffee quality at their regular hang-out, Central Perk, Monica and Phoebe decide to start a new café and wine bar, the Pick Me Up Café.  Monica, a successful chef, agrees to provide $40,000 in start-up funds but will not work at the café.  Phoebe, a struggling singer/songwriter, has no cash to contribute to the venture but will contribute her labor and will provide nightly concerts for Pick Me Up patrons.


To memorialize their agreement, Monica and Phoebe execute a "Joint Venture Agreement."  The somewhat "bare-bones" agreement specifies what each will contribute to the venture, states that Phoebe shall manage the day-to-day affairs of the café, and provides that profits will be split so that Phoebe will receive 75% of the profits, with Monica receiving the remaining 25%. 


Prior to the Pick Me Up's grand opening, Phoebe hires Rachel and Ross to work as servers.  They (Rachel and Ross) are each to be paid minimum wage plus four percent of net sales.  In order to give Ross and Rachel a sense of "ownership" in the venture, Phoebe invites the two to make suggestions about how the Pick Me Up should be run.  More often than not, Phoebe deems the suggestions made by Ross and Rachel to be good ones and adopts them.  For example, Rachel suggests - and Phoebe adopts - a policy requiring anyone working at the Pick Me Up to wear a uniform consisting of white cargo pants and a tie-dyed t-shirt bearing the air-brushed phrase, "Pick Me Up!", as well as the wearer's assigned nickname.  (Rachel's is "Sugar"; Ross's is "Slick"; Phoebe's is "Miss Kitty.") 


Because the café is in a rough neighborhood and sells alcoholic beverages, Phoebe decides to procure security services for weekend evenings.  After researching various security firms, Phoebe causes the Pick Me Up to enter an agreement with Joey, an independent contractor who provides security services during the week for several department stores.  Normally, Joey wears his own policeman-like uniform, complete with a fake badge.  Phoebe, however, does not want to intimidate customers (or scare them away) by having an obvious security officer on the premises.  Accordingly, she requires Joey to wear the standard Pick Me Up uniform.  Joey's tie-dyed t-shirt bears the assigned nickname, "The Boss."  In addition to dictating Joey's uniform, Phoebe requires Joey to follow a detailed list of procedures.  For example, he must sit at a table pretending to review documents related to the business (e.g., financial documents, coffee and wine catalogs, etc.), and he must rotate tables every half hour.  The idea is that he should appear to be a manager of the café, so that patrons will act orderly in his presence.  (Since he is out on the floor rather than behind the bar, he can break up any physical altercations that might occur, but since he is disguised as a store manager, his presence will not detract from the "homeyness" of the establishment.)    


For several months, all is bliss at the Pick Me Up.  But things begin to unravel when Ross starts dating Janice, whom the other workers find irritating.  Janice is a busybody and insists on hanging out at the Pick Me Up every night.  She even starts wearing her own Pick Me Up uniform (which she made).  The uniform is identical to those worn by Phoebe, Rachel, Ross, and Joey, except that it includes Janice's self-chosen nickname, "Baby Girl."  While Rachel and Joey are incensed by Janice's uniform, Phoebe (a big softy) feels sorry for Janice and decides not to prohibit her from wearing the uniform to the café.  Although Phoebe finds it irritating that Janice sometimes talks to the other patrons as if she really were a Pick Me Up employee (e.g., she sometimes takes other customers' orders and passes them on to one of the real employees), Phoebe just doesn't have the heart to tell Janice to stop the pathetic charade.  Accordingly, Phoebe allows dissension to brew between Ross, on the one hand, and Rachel and Joey, on the other.


Joey doesn't handle the tension well and begins to get rough with the customers.  One evening, he completely overreacts when a regular customer named Chandler complains to Rachel that his low-foam latte has too much foam.  Joey, believing that Chandler's frequent complaints disturb the other customers and drive away business, leaps from the table where he is pretending to review business documents and punches Chandler in the face, breaking his nose and jaw.  The force Joey uses is completely unreasonable and unjustified and would constitute a battery under tort law.


Phoebe, of course, is stunned by what has just happened.  Realizing that Chandler is in need of medical attention, she drops what she's doing and rushes him to the hospital.  While Phoebe is gone, Rachel and Ross, who are engaged in a screaming match, realize they're making a scene and retreat into the kitchen, leaving Joey and Janice in the customer portion of the café.  While they are alone up front, a milk distributor comes into the shop, approaches Joey, and asks whether the Pick Me Up will be ordering its usual monthly supply of milk.  Knowing that he is on the verge of losing his contract with the Pick Me Up and wanting to be as helpful as possible, Joey tells the distributor that the Pick Me Up will take the same quantity of milk it took the previous month.  Joey then signs a purchase agreement stating that the distributor will provide, and the Pick Me Up will pay for, the same quantity of milk that was purchased last month.  (Unbeknownst to Joey, Phoebe decided to switch milk distributors and has actually entered a contract with another distributor.)


While Joey is occupied with the milk distributor, a regular customer approaches Janice.  The customer says, "I've seen the sign in here that says, 'Ask Us About Catering Your Event!' and I wonder if the Pick Me Up would be willing to cater my wife's birthday party?  There will be 500 guests."  Janice, delighted to have been mistaken for a staff member, immediately grabs a catering contract form from behind the counter (she's seen the real staff members do this numerous times) and makes all the arrangements with the customer.  The contract she negotiates requires the Pick Me Up to serve a sit-down dinner for 500 guests.  After Janice completes all the necessary documents, the customer asks if he needs to put down a deposit.  Janice tells him that won't be necessary.                


Eventually, Chandler sues the Pick Me Up to recover for the injuries Joey inflicted; the milk distributor sues the Pick Me Up to enforce the milk contract Joey entered; and the catering customer sues the Pick Me Up for enforce the catering contract executed by Janice.


Part One:

(a)    Is the Pick Me Up Café liable for Chandler's injuries?  Why or why not?

(b)    Is the Pick Me Up Café bound by the milk contract?  Why or why not? 


(c)    Is the Pick Me Up Café bound by the catering contract?  Why or why not? 


Part Two:  Assume that a plaintiff procures a $125,000 judgment against the Pick Me Up and that the Pick Me Up's assets are worth only $25,000. 


(a)    How much of the remaining $100,000, if any, may the plaintiff recover from Phoebe's personal assets?  State the basis for your answer.


(b)    May the plaintiff recover from Monica, Rachel, or Ross?  If so, how much may the plaintiff recover from each?  State the basis for your answer.


(c)    If Phoebe did have to cover some portion of the judgment rendered against the Pick Me Up, would she be entitled to recovery from Monica, Rachel, and/or Ross?  If so, how much could she recover from each?




ESSAY III (45 minutes, 18.75%)


In an article entitled, "The Case Against State Antitakeover Statutes," Columbia University Law Professor Jeffrey Gordon wrote:


In April 1990, the Pennsylvania legislature concocted a particularly noxious brew of antitakeover provisions that distort traditional corporate law norms in far-reaching directions.  Two provisions are especially noteworthy.  First is a provision that would require an unsuccessful hostile bidder to disgorge to the target company any profit made on a subsequent sale of the target stock that it acquired in the course of the bid. . . . The second provision rewrites the directors' conception of fiduciary duties . . . [by saying] that directors can consider the interests of these other constituencies [such as employees, suppliers, and communities] on the same footing as shareholder interests.


Answer the following questions:


(1)   How does the Pennsylvania statute described by Professor Gordon alter traditional corporate law norms? 


(2)   Why might Professor Gordon be critical of the statute as described?



MULTIPLE CHOICE (75 minutes, 31.25%)


Questions 1-4 relate to the following hypothetical:


Stan Walker is CEO and Chairman of the Board of Walker Products, Inc. ("WPI"), which manufactures "Herbitux."  Herbitux prevents Desert Flu, a virus that is prevalent in the Middle East during the spring months and is easily spread among individuals living in close quarters.  The only other currently available Desert Flu vaccination is "Herbitrol," which is made by Pharma, Inc. 


In light of the danger of a Desert Flu outbreak among American soldiers in Iraq, the U.S. Department of Defense has decided to vaccinate soldiers in anticipation of the spring Desert Flu season.  For several weeks, it has been considering whether to use WPI's Herbitux or Pharma's Herbitrol.  Given the number of vaccinations that will be administered, a favorable decision from the Defense Department will tremendously benefit the selected vaccine manufacturer.  Accordingly, the stock prices of both WPI and Pharma have increased since the Defense Department announced its intention to vaccinate soldiers.   

On January 1, 2003, Stan learned from a friend at the Defense Department that the Department would soon announce that WPI's Herbitux had been selected as the vaccination of choice. 


When Stan arrived home on the night of January 1, he shared this news with his wife, Karen, but told her not to tell anyone.  Rosario, Stan and Karen's housekeeper, was in the next room and overheard Stan say that Herbitux was going to be selected.  Rosario did not hear Stan tell Karen not to tell anyone this news. 


After talking to Karen, Stan called WPI's lawyer (and Stan's personal friend), Will, just to inform him of the good news about Herbitux.  Although Stan didn't seek Will's advice, Will reminded Stan of his (Stan's) legal obligation not to purchase WPI stock on the basis of this information. 


The following morning, Stan - aware of his obligation not to buy WPI stock - engaged in a "short sale" of Pharma's stock (i.e., he borrowed shares of Pharma's stock from his broker, promised to return the stock later, and sold the shares, planning to re-purchase and return them when the price of Pharma fell upon announcement of the Defense Department's decision).


Karen also made stock trades on January 2:  She bought stock of WPI and engaged in a short sale of Pharma's stock.  Just before these transactions, she called Stan and told him what she was going to do.  He told her not to engage in either trade, but she did so nonetheless.


Rosario and Will also engaged in trading on January 2.  Will purchased WPI stock and short sold Pharma stock.  Rosario merely purchased WPI stock; she did not short sell Pharma stock.

Assuming the satisfaction of all jurisdictional requirements, etc.:


Question 1:  Is Stan liable under Rule 10b-5?


(1)   Yes.  His short sale of Pharma was based on material non-public information and therefore violated the classical theory of insider trading.


(2)   Yes, but only for tipping Karen and Will, both of whom later purchased WPI stock.


(3)   No, unless he was a fiduciary of the Defense Department employee who told him that Herbitux would be selected.


(4)   No, but he is liable under SEC Rule 14e-3.


(5)   No, because Rule 10b-5 is an anti-fraud provision, and Stan did not make any affirmative misrepresentation to his trading partner.



Question 2:  Is Karen liable under Rule 10b-5?


(1)   Yes, she is liable under both the "classical" and "misappropriation" theories of insider trading.


(2)   Yes, but only under the misappropriation theory.


(3)   No, if Stan did not receive a personal benefit in exchange for sharing with her the information regarding the selection of Herbitux.


(4)   Yes, because the receipt of material non-public information from a corporate insider, is, by itself, enough to make her a tippee, subject to her tipper's fiduciary duties.


(5)   No, because Karen's information about Herbitux was received second-hand from Stan and was therefore merely a rumor that could not be deemed material.



Question 3:  Is Will liable under Rule 10b-5?


(1)   Yes, he is liable as a tippee.  Because he received material non-public information from Stan, he inherited Stan's duty not to buy WPI securities without disclosing the material non-public information to his trading partner.


(2)   Yes, he is liable for classical insider trading because he is a constructive insider of WPI.


(3)   Yes, he is liable on a misappropriation theory because he was Stan's fiduciary and did not inform Stan of his (Will's) intention to trade.


(4)   Both B and C are correct.


(5)   No, the stated facts are inconsistent with a finding of liability under Rule 10b-5.



Question 4:  Is Rosario liable under Rule 10b-5?


(1)   Yes, she is liable for classical insider trading because she was a tippee and therefore inherited Stan's duty not to purchase WPI securities without disclosing the material non-public information.


(2)   Yes, she is liable on a misappropriation theory because she "stole" the material non-public information from Stan and/or Karen.


(3)   Both A and B are correct.


(4)   Yes, she is liable by virtue of the fact that she possessed material non-public information not available to her trading partners and therefore was not on a "level playing field" with them.


(5)   No, because the facts as stated do not support a finding of deception on Rosario's part.



* * * *


Question 5:  Felicia is a director of ABC Corporation.  ABC has over 10 million shares outstanding.  Prior to the following transactions, Felicia owned 1,000 ABC shares, which she had held for five years.  Felicia made the following transactions in ABC stock:


  •  February 1, 2003:  bought 200 at $10/share;
  • March 1, 2003:  sold 200 at $5/share;
  • April 1, 2003:  bought 200 at $20/share;
  • May 1, 2003:  sold 100 at $15/share.

    Which of the following statements best describes Felicia's legal situation?


    (1)   Felicia has no liability under Securities Exchange Act § 16(b), because she never owned more than 10% of ABC's stock.


    (2)   Felicia has no liability under Securities Exchange Act § 16(b), because § 16(b) requires disgorgement of profits, and she lost a total of $1,500 on this series of transactions.


    (3)   Felicia is liable under § 16(b) for $500 in profits from her transactions.


    (4)   Felicia is liable under § 16(b) for $1,000 in profits from her transactions.


    (5)   Felicia cannot be liable under § 16(b) absent some evidence that her trades were based upon material non-public information.



    Question 6:  Kopperman's, a restaurant located in St. Louis, Missouri, has been in operation since 1890.  Since 1970, it has been managed by Myron Kopperman.  It is no longer owned by the Kopperman family, however.  In 1985, Myron sold the business to a local St. Louis restaurateur, Sanford Greeley.  At the time of the sale, Greeley and Myron agreed that Myron would remain as manager of the restaurant and that the restaurant would retain the name "Kopperman's."  Greeley and Myron also agreed, though, that Myron would have no authority to purchase alcohol for the restaurant.  Four months ago, Myron placed an order with "the Wine Merchant," a local importer, for 100 cases of various wines.  The Wine Merchant promptly delivered the wines, which have now been served to customers.  The Wine Merchant is demanding that Greeley pay the purchase price of the wines.  Greeley is:


    (1)   Not liable, because Myron lacked authority to enter the contract on Greeley's behalf.


    (2)   Liable on an apparent authority theory.


    (3)   Liable on an actual implied authority theory.


    (4)   Liable on an inherent authority theory.


    (5)   Not liable, because Myron acted beyond the scope of his employment in entering the Wine Merchant contract.


    Question 7:  Jack is executive vice-president of Creative Designs, Inc., a small graphic design company that designs annual reports and similar documents for corporations.  While manning the Creative Designs booth at a trade show, Jack is approached by Samantha, who says, "I know your company primarily produces annual reports and corporate documents, but I've heard good things about you personally and I assume you are proficient in graphic design in general.  I'm publishing a glossy calendar next year and would be interested in hiring you to do the layout."  Jack takes Samantha's card and says he'll get back to her.  He then returns to the office, tells his boss (the CEO) about his conversation with Samantha, and asks whether the opportunity is one Creative Designs would like to pursue.  The CEO says, "No.  You go ahead and take that one on your own."  Under the ALI (American Law Institute) principles governing corporate opportunities, Jack is:


    (1)   Not liable, because the opportunity was not a corporate opportunity.


    (2)   Not liable.  While the opportunity was a corporate opportunity, it was rejected by an appropriate corporate decisionmaker.


    (3)   Liable, because the opportunity was a corporate opportunity and Jack was therefore required to procure an informed rejection of the opportunity from either the disinterested directors or a majority of the disinterested shareholders.


    (4)   Liable, because when a corporate officer learns of an opportunity that could be pursued by the corporation, he has an absolute duty to refrain from personally pursuing the opportunity in any fashion.


    (5)   Not liable, because Samantha's statement did not suggest that she was offering the opportunity to the corporation.  



    Question 8:  In a lawsuit commenced by a shareholder, which of the following most likely would not need to be brought as a derivative suit?


    (1)   A lawsuit to require a member of the board of directors to account for profits resulting from a corporate opportunity


    (2)   A lawsuit under Delaware General Corporation Law § 144 to void a contract between a director and the corporation


    (3)   A lawsuit against a director under Section 16(b) of the Securities Exchange Act of 1934


    (4)   A lawsuit to enforce a right to vote by the shareholders


    (5)   A lawsuit alleging corporate waste in connection with allegedly excessive executive compensation



    Question 9:  Adam owns a home in Columbia, Missouri, but has taken a job in Los Angeles.  He wants to sell his Columbia home and therefore asks his friend Betsy, a Columbia realtor, to try to sell his house for him.  Betsy agrees to do so.  She puts ads in the local newspaper, posts information about the house on various Internet websites, and even arranges for the house to be featured on a local television program featuring available real estate.  In addition, she hosts an open house.  Unfortunately, the open house occurs during a rainstorm, and visitors track mud throughout the home.  Accordingly, Betsy, who knows that the house will not show well with stained carpets, hires a professional steam cleaner to clean the carpets.  Betsy represents to the steam cleaner that the house is hers.  When the steam cleaner attempts to collect the fee for cleaning the carpet, Betsy refuses to pay.  The cleaner then learns that the home is owned by Adam and attempts to collect the cleaning fee from him.  Is Adam liable for the fee?


    (1)   Yes, because Betsy had apparent authority to enter the cleaning contract on Adam's behalf.


    (2)   Yes, because Betsy had actual authority to enter the cleaning contract on Adam's behalf.


    (3)   No, because Betsy, in entering the contract, acted beyond the scope of her employment.


    (4)   No, because Betsy, a realtor, was an independent contractor, not a servant-type agent.


    (5)   Yes, because Adam's failure to monitor Betsy was negligent, and he is therefore estopped from denying liability for the contract that she entered.




    Question 10:  Acme Corp. has 999,999 shares of common stock outstanding.  Sometime in 2001, Helen became the owner of 200,000 of the Acme shares.  Then:


  • On January 1, 2003, Helen sold 150,000 shares at $20/share.
  • On February 1, 2003, Helen bought 50,000 shares at $10/share. 
  • On March 1, 2003, Helen bought 100,000 shares at $10/share. 
  • On April 1, 2003, Helen sold 50,000 shares at $30/share. 
  • On May 1, 2003, Helen sold 80,000 shares at $50/share. 

    Under Section 16(b) of the Securities Exchange Act of 1934, Helen's liability is:


    (1)  $3,000,000.


    (2)  $4,500,000.


    (3)  $3,600,000.


    (4)  $7,000,000.


    (5)  None of the above.



    Question 11:  David and Nate Fisher are partners in a funeral home business called Fisher & Sons.  Rico is a mortician who works for the funeral home but is not a partner (although he badly wants to be made one).  One afternoon, David, Nate, and Rico go to the funeral supply store to stock up on embalming fluid.  David and Rico have just worked a funeral and are therefore wearing dark suits.  Nate, on the other hand, has been working in the yard and looks like a bum.  While David is off buying embalming fluid, Nate and Rico check out the new caskets.  Fisher & Sons' casket supply is low, but the business does not have much cash on hand, so it would have to re-stock its supply using credit.  When a salesman approaches, Nate identifies himself as Nate Fisher, a partner in Fisher & Sons, and asks if the funeral supply business would sell him and his partner a few caskets on credit.  The salesman is less than impressed with Nate's attire (Nate looks and smells terrible), but he notices that Rico is wearing a beautiful black Armani suit and obviously has access to some cash.  Nodding toward Rico, the salesman asks Nate, "Is he your partner?"  Nate says yes, and Rico simply smiles, delighted to have been called "partner."  The salesman agrees to sell the caskets on credit.  When the bill comes due, Fisher & Sons is unable to pay the bill, and David and Nate skip town.  May the funeral supply business recover the amount due from Rico?


    (1)   Yes, because David was an undisclosed principal, so his agent, Rico, remained liable on the contract.


    (2)   No, because, absent express authorization to do so, a salesman lacks authority to extend credit.


    (3)   No, because Rico was not a partner; only David and Nate were partners.


    (4)   Yes, on an estoppel theory.


    (5)   Yes, because Rico was a servant-like employee and was acting within the scope of his employment.




    Question 12:  Carrie, Samantha, Miranda, and Charlotte are partners in dating service organized as a general partnership.  The women have executed a partnership agreement stating that the partnership shall last for five years.  In year four, Samantha becomes annoyed with the others and decides to leave the partnership.  The other three partners want to continue the partnership business, but Samantha demands that the business be liquidated.  What result?


    (1)   The other partners may continue the partnership business without providing anything to Samantha.  She is not entitled to anything because her dissolution was wrongful.


    (2)   The other partners may continue the partnership business, but only if they immediately cash out Samantha.


    (3)   The other partners may continue the partnership business if they either immediately cash out Samantha or secure her cash-out with a bond.


    (4)   The partnership business must cease, given Samantha's insistence that the business not continue.


    (5)   The partnership business may continue because at least two of the three non-dissolving partners (i.e., a majority) prefer continuation of the business.      



    Question 13:  Under Delaware law, which of the following is NOT relevant to a court's decision whether to pierce the corporate veil?


    (1)   Undercapitalization


    (2)   Commingling of personal and corporate assets


    (3)   Failure to maintain corporate records and books


    (4)   The sole purpose for incorporating was to obtain limited liability


    (5)   All of the above are relevant



    Question 14:  In a corporate veil-piercing case, which of the following types of creditors is most likely to be successful in holding a controlling shareholder personally liable for the corporation's obligations?


    (1)   A tort creditor of a closely held corporation


    (2)   A tort creditor of a public corporation


    (3)   A contract creditor of a closely held corporation


    (4)   A contract creditor of a public corporation


    (5)   All of the above are equally likely.  The type of creditor (tort versus contract) and the type of corporation (public versus closely held) are irrelevant considerations in a veil-piercing case.


    * * * *



    For Questions 15 and 16, the following facts apply:  Assume that T-Bone Pickens ("Pickens") owns 50.5% of the outstanding shares of voting stock of J. Peterman, Inc. ("Peterman"), a Delaware corporation.  All of Peterman's directors were his nominees.


    Question 15:  Pickens is in dire need of some quick cash for personal reasons.  He therefore proposes to the board of directors that Peterman institute a stock redemption plan.  Pursuant to the plan, Peterman will offer to repurchase up to 10 percent of the outstanding shares of Peterman stock, on a pro rata basis, from any shareholder who wishes to sell part of his or her holding.  The board adopts the plan.  Kramer, another shareholder of Peterman, objects to the plan.  If Kramer sues to block the plan from going forward, he will:


    (1)   win, because the corporation has no power to repurchase its own stock.


    (2)   win, because the transaction will be reviewed under (and fails to pass muster under) the business judgment rule.


    (3)   win, because the transaction will be reviewed under (and fails to pass muster under) the intrinsic fairness standard.


    (4)   lose, because the transaction will be reviewed under (and passes muster under) the intrinsic fairness standard.


    (5)   lose, because the transaction will be reviewed under (and passes muster under) the business judgment rule.




    Question 16:  Pickens is upset that recent decisions by Peterman's board have disparaged Peterman's traditionally respected, upper-crust brand image.  He therefore proposes to the Peterman board that it attempt to rehabilitate Peterman's brand image by spending several million dollars on an ad campaign in Town & Country Magazine, an exclusive society magazine published by Pickens's wife.  The board adopts the proposal.  Kramer, another shareholder of Peterman, sue to block the proposal, claiming (without proof) that the advertising rates Town & Country has offered Peterman exceed the market price for similar advertising.  If Pickens and the board cannot prove that the proposal is a fair deal for Peterman, Kramer will:


    (1)   win, because an advertising campaign benefiting a controlling shareholder's spouse would be per se improper.


    (2)   win, because the transaction will be reviewed under (and fails to pass muster under) the business judgment rule.


    (3)   win, because the transaction will be reviewed under (and fails to pass muster under) the intrinsic fairness standard.


    (4)   lose, because the transaction will be reviewed under (and passes muster under) the intrinsic fairness standard.


    (5)   lose, because the transaction will be reviewed under (and passes muster under) the business judgment rule.



    * * * END OF EXAMINATION * * *