FINAL EXAMINATION

BUSINESS ASSOCIATIONS

LAW 802A- SECTIONS LS1 and LS2

PROFESSOR BENEDETTO

FALL 2006

You have three (3) hours for this examination.

This is a closed book examination.

This examination has ten (10) pages. Please check to ensure you have all ten pages.

Please do not write on both sides of the page, and skip lines if your handwriting is hard to read.

This examination contains two parts: multiple choice questions and essay questions. The examination will be worth a total of 100 points.

Part I consists of 20 multiple-choice questions. Correct multiple choice answers are to be marked on the separate ParSCORE test form using pen or pencil and following the instructions on that form. If you change your answer, place a clear “X” through the wrong answer and mark the correct answer. A machine will score the exam and any ambiguities will be counted as a wrong answer. Each multiple choice question is worth 2 points. Part I will be worth a total of 40 points.

Part II consists of two essay questions. I strongly encourage you to spend at least 15 minutes outlining each answer before writing. Read the questions carefully to ensure you address all the issues identified. Essay Question 1 is worth a total of 25 points, and Essay Question 2 is worth a total of 35 points. You should allot your time according to the weight given to each essay.

Write your student exam number on your exam envelope. Put your student exam number at the top of this page, each page of questions, each blue book, and the ParSCORE test form. Do not use your name, student ID number or Social Security Number on any exam materials.

At the conclusion of the exam, all examination papers—including the Part I ParSCORE test form, your answers for Part II, the examination questions, these instructions, and all notes—must be placed back in the exam envelope. Failure to return all materials will result, among other sanctions, in a failing grade of “F” for the course. Do not seal the envelope.

PART II- ESSAY QUESTIONS

ESSAY QUESTION 1 (Total: 25 points)

Ben and Jerry are old friends from summer camp in Vermont. Ben’s grandfather died and gave him a $100,000 inheritance. Jerry does not have any money, but he has a great deal of experience serving ice cream at large events. In 2006, Ben and Jerry decide to start a business with Ben’s inheritance funds and Jerry’s expertise. They both believe they can make a lot of money when the 2008 Winter Olympics come to Vermont in two years. They decide to create a business specifically to serve ice cream at the 2008 Winter Olympics. Both agree they will go their separate ways immediately after the Olympics.

They each sign a written agreement with a provision that they will put all of their efforts into making the business successful for two years. Ben believes the business will soon make a profit, and therefore agrees to furnish all funds necessary to build the business and keep it running. Jerry agrees to manage the day-to-day operations of the business. Neither expects the business to fail.

Ben contributes $20,000 to start the business. They spend $10,000 on start-up costs, including obtaining permits as food vendors for the Olympics and signing contracts with ice cream suppliers.

To make money before the Olympics, Ben and Jerry’s business is serving ice cream at weekend street fairs in Vermont. Unfortunately, Jerry is grumpy with customers, and the street fair vending is not earning a significant profit. The business has already lost $10,000, and owes an additional $5,000 to ice cream suppliers.

Jerry is concerned that the business has no assets and owes $5,000 in debt to ice cream suppliers. He asks Ben to contribute an additional $20,000 to keep the business afloat. Ben does not want to sink any additional funds into a struggling business, but he wonders whether he can avoid personal liability if the business fails. Ben is also concerned that if he leaves the business, he will be liable to Jerry and the creditors.

Ben comes to your law firm and asks for advice. Assume you are working in a jurisdiction that has adopted neither the UPA nor applicable caselaw, but is willing to consider such authorities. What risks does Ben face if he chooses not to invest further in the business? What claims can be brought against Ben if he (1) refuses to contribute further funds and/or (2) leaves the business? What are Ben’s potential defenses? Who is likely to prevail?

ESSAY QUESTION 2 (Total: 35 points)

George Costanza is a director on the board of Yankees, Inc., a publicly traded Delaware corporation that operates the New York Yankees baseball club. George’s friend, Smith, owns the Brooklyn Uniform Factory, a company that manufactures baseball uniforms. One night at a neighborhood block party, Smith asks George to persuade the Yankees to adopt cotton uniforms. George hesitates, telling Smith “The polyester uniforms have worked well for a long time. No ball club uses cotton uniforms, since they will likely shrink. If the uniforms shrink, they will fit poorly and affect the players’ ability to play well.” Smith offers George $10,000 as a thank-you gift if George can convince the Yankees to use cotton uniforms from Smith’s Brooklyn Uniform Factory. George agrees to do so.

At the next Yankees, Inc. board meeting, George adamantly proposes a change to cotton uniforms. He tells the board he can get a “great deal” on new uniforms, and suggests that cotton is a “more comfortable” fabric than polyester for players on the field. Despite his knowledge that cotton uniforms would likely shrink and affect players’ performances, George does not mention the problem of shrinking uniforms to the board. The board members are eager to get to the next item on the agenda, a potential trade for San Francisco slugger Barry Bonds. They briefly discuss the possibility of commissioning a study on cotton uniforms, but decide it would be too much work. The board members unanimously approve George’s proposal to adopt cotton uniforms, and further approve a contract with the Brooklyn Uniform Factory. The board decides to announce the uniform change at a press conference in 2 days.

After the meeting, George places two long-distance phone calls. The first is to his California broker, Newman. George directs Newman to sell 90% of George’s stock in Yankees, Inc., by the end of the day. George then calls his girlfriend, Elaine, and states “I just left a board meeting that was closed to the public. If you can believe it, those gullible board members just approved cotton uniforms. The Yankees won’t win a single game this season when those uniforms shrink, which means Yankees, Inc. is about to lose a lot of money. Make sure you sell your Yankees, Inc. stock within the next 2 days. Oh, and go ahead and buy that TV you wanted. Now I can afford it.”

Has George violated any federal securities laws? Discuss.

What, if any, liability will George and/or Elaine face if Elaine sells her Yankees, Inc. stock before the press conference?

Has George violated any duties to Yankees, Inc., and/or its shareholders?

Has the board violated any duties to Yankees, Inc., and/or its shareholders?

END OF PART II

END OF EXAM