School of Law
Corporations Examination
Spring, 2002
This examination consists of Three (3) questions. Please note that they are not of equal
weight. This is a closed book examination; you may not use either your notes, the
casebook, or the Code. Please answer all questions in the blue books provided.
If you think that any question is ambiguous, or that some fact is missing which is
necessary to answer the question, please make whatever assumption you think is
necessary to clear up the ambiguity or to supply the fact that you believe is missing, tell
what your assumption is, and continue to answer the question.
Please answer the call of the question, but do not discuss abstract principles of law
which do not directly relate to the issues raised by the question. I want short, not long,
answers. Although the examination appears long you should have adequate time in
which to do a good job.
Remember to use your exam number only (not your name) to identify blue books,
answer sheets and exam questions, and to turn in all questions, blue books and scratch
paper at the end of the exam.
I will not be present during the administration of the examination.
Good Luck!
QUESTION I
(45%)
Art and Baker and Collin are the three directors of ABC, Inc.; they also each own one-third of the
shares. Art is President; Baker and Collin are not employed by the corporation. Although Art and Baker
and Collin were firm friends at the time of the formation of ABC, the three have had a falling out; Art
and Collin remain good friends, but Baker has become a bitter enemy of the other two. Art and Collin
decide that they must do something to sever their - and the corporation's - relationship with Baker.
Accordingly, they take the following steps:
First, they call a special meeting of the board and, over Baker's objection, cause the corporation to
issue a sufficient number of shares to themselves to reduce the pro-rata portion of shares owned by
Baker to slightly less than 10%;
Second, they offer to purchase all of Baker's shares for $22.50 a share (the book value of the
shares); Baker, realizing that there is little purpose in his continuing to play a role in the corporation,
accepts, not realizing that Art, on behalf of ABC, has just entered into a long term sales contract
which will signifcantly increase the book value of ABC shares. Although Baker accepts the deal, he
(over the bitter objections of both Art and Collin), retains one share;
Third, having purchased the Baker shares and wishing to avoid comparable problems in the future,
enter into an agreement between themselves, styled "Shareholder's and Director's Agreement", in
which they agree as follows:
i. as shareholders they will vote their shares as a block and elect themselves (who now each own 50% -
minus Baker's one share - of the Corporation)
directors, and replace Baker on the board with Daniel, Art's cousin;
ii. as shareholders, they agree that neither one will sell, transfer, or in any manner alienate his shares; and
iii. as directors, they will elect themselves as President and Secretary/Treasurer of the corporation, and
neither will take any action inimical to the interests of the other.
After all of this has been done, Art, concerned about threats of litigation made by Baker, consults you and, reviewing all of the above actions, asks for your advice with respect to the validity of each of the above actions.
What advice do you give to Baker?
QUESTION II
(40%)
Identify functionally each of the following terms. Do
not write abstract definitions. Be concrete, dealing with such questions as what is going
on? who is doing what? to whom? in what
circumstances? for what purpose? involving what problems?
a. Power coupled with an interest
b. Triangular merger
c. Birnbaum rule
d. Equal opportunity doctrine
e. Due diligence
f. Corporate opportunity
g. Stock for Stock transaction
h. Reorganization under the California GCL
i. Self-implementing pooling agreement
j. Stock for Assets type fusion
k. Right of first refusal
I.
S Corporation
m. LLC
n. Statutory Close Corporation
o. Ratification
p. Upside down sale
q. Special litigation committee
r. Misappropriation theory
s. Appreciation surplus
t. Paid-in surplus
u. Constituent
QUESTION III
(10%)
Your first assignment from your new employer is to prepare a brief memorandum with respect to
the pros and cons of forming a California statutory close (as opposed to a non-close) corporation.
The reason for the request is that your boss has been asked to form a corporation on behalf of a
client who will own 18% of the shares of the corporation; the balance of the shares will be owned
by one other person.
1. Response?