EXAM # ______________
Final Examination
Professor Michele Benedetto
You have three (3) hours for this examination.
This is a closed book examination.
This examination has 12 (twelve) pages. Please check to ensure you have all 12 pages.
This examination contains two (2) parts: multiple choice questions and essay questions. The examination will be worth a total of 1000 (one thousand) points.
Part I consists of twenty (20) multiple-choice questions. Each multiple choice question is worth twenty (20) points. Part I will be worth a total of 400 (four hundred) points. 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.
Part II consists of two essay questions. Essay Question #1 is worth a total of 250 (two hundred fifty) points, and Essay Question #2 is worth a total of 350 (three hundred fifty) points. You should allot your time according to the weight given to each essay. 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. Write on every other line and every other page to permit instructor comments.
Write your student exam number on your exam envelope. Put your student exam # 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, return ALL test materials, including blue books, the ParSCORE answer sheet, scratch paper, and this exam packet to the 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!
PART II: ESSAY QUESTIONS
(Question 1: 250 points)
Al, Ben, and Cathy Smith are siblings who have always loved books. Al and Ben have a very friendly relationship, but neither of them gets along well with their sister Cathy. When the siblings inherit $100,000 from their parents, they all decide to make amends and open a bookstore together. They agree to invest the entire $100,000 into the bookstore, and they properly incorporate to avoid personal tax liability. Al and Ben will be directors and officers in the corporation and will run the day-to-day operations. Cathy does not want to be involved in the details. At the organizational meeting, Al and Ben agree to purchase a storefront for $30,000 and spend another $10,000 to purchase books for sale. With their remaining $60,000, the siblings authorize and issue 6000 shares of stock at $10 per share. Al, Ben and Cathy each receive 2,000 shares of stock for a total worth of $20,000 each.
After one year, Al decides to bring his two sons, Derek and Eugene, into the business. Al nominates Derek and Eugene to be added the Board of Directors. As shareholders, Al, Ben and Cathy vote them onto the Board. For the next few years, the bookstore has an annual profit of about $90,000 and dividends are paid in the amount of $15 per share.
Four years later, Cathy and Al have an emotional argument about the merits of the Pulitzer Prize. Al decides he is ready to leave the book business altogether, and wants to sell his shares. Al calls a board meeting which is attended by Al, Ben, Derek and Eugene. As the first order of business at the meeting, Al informs his brother and sons that Cathy “has offended this family beyond repair.” Al resigns his directorship. Next, the remaining incumbent directors (Ben, Derek and Eugene) agree to increase Ben’s salary as an officer to $300,000 per year. The directors also agree to suspend all dividends for the coming year. Finally, the directors authorize an agreement between Al and the company in which the company would purchase Al’s 2,000 shares for $20 per share, for a total of $40,000. Two days later, a stock purchase agreement is formalized pursuant to these terms.
A few weeks later, Cathy learns that the corporation has purchased Al’s shares at $20 per share. She is angry about the suspension of dividends, and she believes that Ben’s salary is exorbitant. Cathy no longer wants to be a shareholder in this company, and she offers to sell her shares to the corporation on the same terms given to Al. In response, Ben replies by letter that the corporation will not purchase her shares because it is not in a financial position to do so. He adds that Cathy “should remember her place in this family and apologize for her fight with Al.”
You are an attorney at your own law firm. Cathy comes to you and asks whether the Board’s actions are improper. She also asks whether she has any legal rights. Please write a memorandum answering Cathy’s questions. You should assume that you are in a jurisdiction that has adopted neither the MBCA nor has any caselaw on these issues, but is willing to consider such authorities.
(Question 2: 350 points)
Eastlaw, Inc. is a Delaware corporation. The company specializes in legal software and its shares are traded on the New York Stock Exchange. Three of the company’s five directors (Angus, Betty, and Richard) are graduates of the Riviera Law School, a school in San Francisco which is nationally renowned for its business law program. The other two directors, Tom and Jerry, are computer experts. Angus, Betty and Richard recently proposed that the Eastlaw Board authorize a $1 million contribution to Riviera Law School, and all five directors agreed to do so. These three also contribute large percentages of their personal fortunes to the Law School each year.
Eastlaw is interested in acquiring a majority stake of ABM, a rival computer company. The Eastlaw Board will be meeting in two weeks to discuss authorizing a tender offer to ABM shareholders for $50 per share. ABM’s shares usually trade around $20 to $22, and the Eastlaw Board believes the ABM shareholders will be very receptive to the tender offer.
Angus calls his New York broker on a cell phone while he is ordering coffee at StarPeet’s. Angus orders the broker to purchase 10,000 shares of ABM stock immediately in Angus’ name because “this ABM tender offer is definitely going to be oversubscribed.” The broker does so. George, an out-of-work actor who was in line at StarPeet’s behind Angus, calls his own broker immediately after drinking his coffee. George tells his broker “I want you to purchase as many shares of ABM stock as you can find for me!”
Two weeks later, all five Eastlaw directors authorize the tender offer, and Eastlaw acquires a 51% majority stake in ABM stock. Angus personally makes a $3 million profit by selling his newly acquired ABM shares immediately after the tender offer was announced; he donates $1.5 million to Riviera Law School. George makes $1 million by selling his newly acquired ABM shares; he now tips his StarPeet’s baristas $10 for every cup of coffee.
The SEC soon learns about Angus’ profit, and initiates an investigation into Angus’ actions. The Eastlaw Board, concerned about the potential for bad publicity, nominates two new outside directors to the Board. The nominations are approved by a majority of the Eastlaw shareholders, and there are now seven people on the Board. Coincidentally, the two outside directors are faculty members from Riviera Law School who recently received funds from Eastlaw to start a new computer lab.
When the Eastlaw shareholders learn about the SEC investigation, they are outraged. The shareholders file a derivative lawsuit in Delaware for breach of fiduciary duty against the Eastlaw Board. In response, the Board creates a Special Litigation Committee (“SLC”) consisting of the two new outside directors to investigate the claims. Upon conclusion of its investigation, the SLC recommends that the derivative lawsuit should be dismissed because it is not in the best interests of the company. The shareholders wish to move forward with their lawsuit.
Did Angus and/or George violate any federal securities laws? If so, how?
Do the shareholders have a viable claim in their derivative suit against the Board? Why or why not?
Should the shareholders make a demand against the Board? Why or why not?