FINAL
EXAMINATION
CORPORATIONS
PROFESSOR
LANI BADER
SPRING
2006
Good
Luck!
QUESTION I
(25%)
The Balance
Sheet of Preemptive Builders looks as follows:
PREEMPTIVE
BUILDERS
A Corporation
organized under the laws of the State of
Balance Sheet as of 12/31/05
ASSETS
Cash $32,000
Land $500,000
30 day Accounts
receivable $50,000
Note receivable
(due 5/1/2009) $50,000
Total Assets $632,000
LIABILITIES
Accounts payable
w/in 30 days $50,000
SHARE HOLDER’S EQUITY
Legal Capital (100,000
common
shares at $20
par value) $2,000,000
Deficit ($1,418,000)
Total
Liabilities and
shareholder's
equity $632,000
Please answer the following questions
with respect to the Preemptive Balance Sheet:
1.
Is
Preemptive solvent in the balance sheet sense?
2.
Is Preemptive
solvent in the Equitable sense? If you cannot tell, why not?
3.
What
is Preemptive's Net Worth?
4.
What
is the book value of the Preemptive shares?
5.
Based
on the Balance Sheet alone, can Preemptive declare a dividend if the State of
6.
Can
you tell whether or not Preemptive could declare a nimble dividend? If not, why
not?
7.
Could
Preemptive declare a stock dividend? Why or why not?
8.
Could
Preemptive effect a stock split? If it could and if it wished to issue ten more
shares for every outstanding share, what change (if any) would have to be made
to the balance sheet to reflect that?
9.
If Preemptive
were incorporated in
QUESTION
II
(25%)
Is there a Rule 10(b) 5 violation in any
of the following scenarios? Explain why or why not:
1. Sara, a mail room clerk employed by Z
Corporation, while at an office party, overhears a conversation between her
boss and the CFO from which she infers that quarterly profits to be announced
in a week will be significantly in excess of that which the market has
predicted. The next day she buys 1,000 shares of stock; when the new profit
number is announced one week later her shares rise 20%.
2. Mike, Sara’s boyfriend, who is employed
by a competitor corporation, overhears the same conversation that Sara hears.
Without telling Sara, Mike buys 500 shares of stock; when the new profit number
is announced one week later his shares (as with Sara’s shares) rise 20%.
3. John goes to the ball game and overhears
a conversation immediately behind him. He deduces from the tenor of the
conversation that S’s stock is in for a sudden rise. The minute the game is over;
he calls his broker and buys S stock, and makes a substantial profit.
4. Edgar writes a financial gossip column
called “Heard on the street”. He consistently purchases shares in various
corporations; he then reports false good news with respect to those
corporations whose stock he has purchased. When their stock rises on the basis
of the false good news, Edgar sells the stock he has purchased on the rise, and
makes a killing.
5. Tony, a psychiatrist, has a specialty
practice consisting principally of treating stressed out CEOs and CFOs. While
his clients are on the couch, he encourages them to talk about their
corporations and current good and bad financial issues. He then, based on those
conversations, purchases stock and makes a fair amount of money.
6. Malcolm, the CFO of Magtech, calls Nephew
in
7. Nephew tells Lori what Malcolm tells him,
without disclosing the source of what he knows. Lori, believing that Nephew has
“connections”, also trades, profitably.
8. Reporter who attends a press conference
at which a favorable development is announced and then immediately after the conference
but before news appears on the ticker services, telephones his broker and
places an order to purchase.
9. A restaurant employee hangs up a diner’s
coat and sees in the pocket a memorandum describing a tender offer that is
about to be made (but which has not yet been announced). She then purchases the
stock of the target; when the offer is announced one week later the target’s
shares go up 30%.
10. A restaurant employee hangs up a diner’s
coat and sees in the pocket a memorandum describing current quarter profits for
Zyclone, and which says that they will be 25% more than expected. She then
purchases Zyclone and makes a huge profit when the revised profits are
announced.
QUESTION III
(50%)
Roger, a
paralegal who lives and works in
1. On March 1, before filing the articles,
he orally on behalf of Zytech agrees to hire Alan as the CFO. Alan’s tenure is
to run for one year from April 1. Alan is Roger’s roommate and is completely
familiar with Roger’s plans.
2. On March 15, on behalf of Zytech, he
orally agrees to hire Bertram as the CEO. Bertram’s tenure is to run for one
year from April 1. Bertram agrees to become CEO because he believes that Zytech
is a functioning business.
3. On April 15, Roger files the articles. He then causes Zytech to issue 1,000 shares
to himself in consideration of his promotional services in forming Zytech. He also issues a second 1,000 shares to
himself for a promissory note secured by the shares. Zytech then in the normal
course of business issues 20,000 shares for cash to friends of Roger.
4. Move forward 1 year. While at a
non-business related cocktail party, Roger (who has become the chairman of the
Board), meets Alan, who is the CEO of Hitech, a competitor of Zytech. Alan
tells Roger that Hitech has developed a radical new technology that will
dramatically reduce production costs for Hitech’s (and also Zytech’s) product.
Alan says that Hitech is willing to license one producer to use the technology,
but one only. Roger, disenchanted with the direction that Zytech has taken,
makes a deal with Alan to personally license the Hitech technology.
5. Assume Zytech has been successful. It is
registered under §12 of the ’34
Act. Roger is still Chairman of the board. Zytech shares are trading for $22.
On January 1, 2012, Roger – who has been told that Zytech’s earnings are going
to be off prediction by 40% - sells
1,000 of his shares in a conventional market transaction for $22. Roger’s
information is correct and when, 6 weeks later, the earnings figure is
released, Zytech’s shares go down to $10.
Roger immediately purchases 500 shares for $10.
In each of the foregoing events, which of
the actions by Roger create potential liability for Roger, or Zytech? What is
the nature of the liability, if any, and if appropriate challenge was made to
any of the actions, what would the result be?
END OF EXAM