1. You have three (3) hours to complete this exam.

2. This is a closed book exam.

3. This examination consists of 3 questions, each with the weight indicated. Although it appears long, you ought to have adequate time in which to complete it and do a good job. Please remember that I want and value short, not long, answers. Please just answer the call of the question; do not give me anything that I have not asked for. If there is any fact that you believe is either missing or ambiguous, and without which you cannot answer the question, please assume whatever you believe is necessary, tell me what your assumption is, and answer the question.

4. Please answer these questions in the blue books provided to you. Write only on the right hand side of the page (skipping a page each time) and double-space your work. Please write legibly.

5. Write your exam number on your exam envelope. Put student exam # at the top of this page, each page of questions, and each blue book. Do not use your name, student ID number, Social Security Number, or in any other way identify yourself on any exam materials.

6. At the conclusion of the exam, return all exam materials to the exam envelope and submit it to the proctor. Do not seal the envelope. Students who do not return all exam materials at the end of the exam may not be graded.

GOOD LUCK!

Question I
( 50 %)

Paul, an electrical engineer, has, through the dint of hard work, invented a new type of cell phone that eliminates all of the problems encountered with cell phone use. He decides to exploit his invention by forming a corporation to which he will transfer his technology, taking back as consideration for the transfer a substantial number of shares. The Corporation is to be called Celles, Inc. (“Celles”). Paul lives in, and Celles will be governed by, the law of the state of Magenta. The only provision in the Magenta law that has application to Paul’s travails reads as follows:

“For all purposes other than an action in the nature of quo warranto, a copy of the articles of a corporation duly certified by the Secretary of State is conclusive evidence of the formation of the corporation and prima facie evidence of its corporate existence.”

As a test of the financial viability of forming such a corporation, Paul intends to initially (before filing the articles and incurring any expenses with respect to corporate formation) enter into a lease agreement for the corporate offices, and to hire a CFO. His notion is that if he can accomplish these two transactions there is reason to believe that the enterprise can be successful; at that stage he intends to actually form the corporation and issue shares. Accordingly, Paul enters into the following two transactions:

1. He leases a building for the corporate offices from his Uncle, at the rate of $8,000 per month. His Uncle has been his financial advisor, and is aware of Paul’s plans and the manner in which he is proceeding; and

2. He hires Jeff as CFO; Jeff believes that Celles is a viable corporation, and agrees to work for $100,000 per annum. Jeff’s employment is on the basis of an oral agreement that he will work for Celles for a period of 24 months.

Now convinced that his concept is sound, Paul retains August (a lawyer) to form a corporation. August prepares the Articles, and tells Paul that he will promptly send the articles to the Secretary of State for filing, and that Paul ought to wait for 15 days before he enters into any transactions on behalf of the Corporation. After that, he assures Paul, the Corporation will be perfectly formed.. Accordingly, Paul waits for 15 days and then, in the good faith belief that Celles has now been properly formed, enters into the following two transactions on 12/4:

3. He causes Celles to enter into an valid agreement for $100,000 with Hypertronics for the purchase of a magnetron used in Paul’s invention; and

4. He causes Celles to enter into a construction contract with Rick in the amount of $500,000 to remodel the corporate quarters.

No sooner than having consummated the above two transactions Paul, on 12/5 gets a call from August who says that that the articles were filed that morning and that Celles is now a viable corporation. Paul’s response is to merely groan, and then to follow through by completing the organization of the corporation by causing Celles to issue shares as follows:

5. He issues 10,000 shares of no-par value stock to himself in consideration of the transfer to Celles of his intellectual property rights to his invention;

6. He issues a further 10,000 shares of no-par value stock to himself in consideration of his work in connection with the formation of Celles;

7. He issues 2,000 shares of no-par value stock to Jeff as a bonus for Jeff’s agreement to work for Celles for 24 months;

8. He issues 2,000 shares of no-par value stock to his Uncle as consideration for the financial advice given to Celles in connection with its formation;

9. He issues 2,000 shares of no-par value stock to Glinda in return for a secured Promissory note;

Unfortunately, Celles doesn’t last for than 6 months, when it collapses financially. Paul thereupon shuts down the business and announces to all of those who been participants in the enterprise that it is insolvent and cannot meet any of its obligations. He informs you of each of the above transactions and asks whether or not (i) each of those persons to whom shares have been issued are valid shareholders, and (ii) whether he has any personal liability with respect to any of the above transactions.

What advice do you give Paul? (In answering your question, please number each of your responses to indicate which of the above transactions you are responding to).