QUESTION #1(50 POINTS)

You have been consulted by CYBERFILMS.com, a new Internet start-up company, for legal advice. The company, based in San Francisco, proposes to create a website that offers free downloads of copies of feature motion pictures, produced between 1920 and 1980, to anyone in the world who visits the website and registers by listing their name, physical address, and email address. Adult films will also be available for downloading. The names of the studios that produced the films, such as Universal, 20 Century Fox, and MGM will be displayed on each film and on CYBERFILMS' advertising materials. CYBERFILMS does not plan to obtain permission from anyone before offering these films, based on its understanding that all films released more than 20 years ago are in the public domain, and because no fee is charged to download. CYBERFILMS plans to make money by selling advertising for their site.

CYBERFILMS asks you whether it is likely to be sued for operating this website, and if so what kind of claims are likely to be filed, and what defenses are available. The company also wants to know if it can limit jurisdiction in any lawsuits to San Francisco. What is your response?

 

QUESTION #2 (50 POINTS)

A new online bookseller, TUBULAR BOOKS, has contacted you for advice regarding several e-commerce questions. How do you respond?

a. In connection with their contracts with book publishers to buy books for resale on their website, what methods are available to certify the authenticity of e-mailed contracts?

b. As to each method you identify, what are the weak points and strengths of the method?

c. Does the Statute of Frauds still apply to e-commerce done via electronic communications? Explain how the rule has been adapted to fit e-commerce situations.

d. What methods of electronic payment are available, or will soon be available, to consumers who purchase books from the site?

e. In addition to mailing out actual books to purchasers, TUBULAR BOOKS also proposes to send purchasers their books via e-mail as files to be downloaded. What intellectual property law issues does this method present?

 

On 5/1/00, Ralph Beaverton, CEO and majority shareholder of Greenmail Corporation ("Greenmail"), a Texas publicly held corporation, sent a "bear hug" letter to Mae Wonderful, Board Chairman, CEO and President of Simply Wonderful Corporation, a Delaware publicly trade corporation ("Wonderful"). The letter from Beaverton indicated that Greenmail would be willing to take either of the following actions with regards to Wonderful:

1) Form a "strategic alliance" in a friendly merger, on terms acceptable to Greenmail, at a price valued at "no greater than $200 per share." This offer would also allow Wonderful's core management group to continue as division managers in Greenmail, with substantial annual cash awards based on reaching defined productivity and growth targets and, at the same time, permit Greenmail to distribute, market, license and otherwise exploit certain Wonderful patents and products derived therefrom. In addition, Beaverton would be willing, as a "special accommodation," to make a one-time "welcome" cash payment of $250,000 to each inside director and/or member of senior management joining Greenmail's new team. Further, Greenmail would guaranty payment, on a private purchase basis, $300 per share for each share of director's and management's "inside" so-called restricted shares held back from the IPO in a "lock-up" arrangement (described below), or

2) Engage in a hostile tender offer for control of Wonderful shares, with a likely offer of $160 per share, and a subsequent "freezeout merger" of Wonderful into Greenmail and ultimately, the tremination from employment of all Wonderful senior officers.

Finally, Beaverton's letter states that Wonderful must respond to his letter by meeting with him and greenmails counsel no later than 5/15/00 to sign a binding Letter of Intent, or else, the hostile tender offer will be commenced.

Currently, having just concluded its initial public offering (IPO on 4/25/00. Eighty percent (80%) of Wonderful's common shares are listed on the New York Stock Exchange. Due to underwriter demands that management maintain a substantial share ownership stake in Wonderful after the IPO, the remaining twenty percent (20%), or approximately 10,000,000 shares of Wonderful common stock, were not sold in the IPO, but were held back by senior management of Wonderful in a special "lock-up trust." These senior management comprise 4 out of the 7 total members of the board. The other 3 board members are "outside" independent directors with no financial stake in Wonderful. Pursuant to a registration rights agreement in favor of the Wonderful Senior management, upon demand of at least 5 managers possessing beneficial rights with respect to at least 2,000,000 shares in the aggregate held in the trust, a subsequent offering of Wonderful (a "demand offering") will be held permitting the senior personnel to cause a sale of the locked-up when the "lockup period" expires 180 days after the IPO date. Consequently, the shares of senior management cannot be sold for at leas 180 days after the IPO date (4/25/00). Of course, the locked-up shares would be sold at the New York Stock Exchange share price available after the lock-up period expires, likely to result in management receiving a significantly different cash price for their shares than currently available trading prices.

As to its business prospects, Wonderful has just been granted valuable patents with respect to certain biotechnology research associated with genetic engineering. Upon publicly announcing the patents, the stock price of Wonderful tripled in one day. The current common stock price of Wonderful is $150 per share, while the IPO issuance price was $40 per share. Consequently, Wonderful is currently enjoying its status as a "darling of Wall Street."

Finally, other than one of its outside directors, none of the other directors or officers of Wonderful has had any experience in managing a public company, as all of them are engineers and research scientists. In addition to your firm serving as counsel to Wonderful. Wonderful has retained a well-known independent public accounting firm as its auditors. Wonderful also continues to be in close contact with the investment banking firm that financially assisted and advised Wonderful and served as its lead underwriter in its IPO. You have been asked by Mae Wonderful to advise her of your initial views of the following matters prior to the emergency board meeting scheduled in two days to discuss the Greenmail letter:

Question 1: To your knowledge, is Wonderful required by federal securities laws or Delaware law to meet with Greenmail? Please discuss. (8 points)

Question 2: In assessing the alternatives offered by Greenmail, are there any actual or likely conflicts of interest of the board or senior management that are problematic? If so, list them and two possible solutions to deal with these conflicts on a go-forward basis. (10 points)

Question 3: Assuming your law firm is asked by Wonderful to draft a reply letter to Greenmail conditionally consenting to a meeting with Beaverton, list two (2) demands that Wonderful may reasonably make of Greenmail prior to entering into any meaningful discussions regarding a strategic alliance by merger (the first choice offered by Greenmail). Further, under each listed item, in no more than two or three sentences , clearly describe your rationale for making the particular demand. (10 points)

Question 4: (a) Assume that, in response to the Greenmail "bear hug" letter, Wonderful's board meets and engages in a heated discussion regarding the proposed meeting with Beaverton. In the course of the board discussion, the company's investment banker discloses that, given the recent run up in value of Wonderful's stock, he would recommend going forward with a "quick merger" closing with Greenmail since: "its likely that the Greenmail offer of $200 per share greatly exceeds the market value of Wonderful, which should be around $85 per share by the time the deal closes." Based solely upon this advice, Wonderful proceeds to quickly sign a binding letter of intent with Greenmail, following shortly thereafter by signing definitive merger agreements committing Wonderful to a merger closing on or before 9/30/00, subject only to approval by a majority of Wonderful's common shareholders, such approval to include the consent of shares held in the senior management lock-up. At the request of the Wonderful board of directors, no review of the financial condition of Greenmail was performed by Wonderful or any of its representatives. On 7/31/00, a majority of the Wonderful shareholders approve the merger after the board strongly recommends the merger transaction in consent solicitation materials filed by Wonderful with the SEC and submitted to the shareholders. Notwithstanding, on 9/15/00, a significant shareholder of Wonderful (a large, nationally known mutual fund) brings an action to enjoin the merger. List three assertions that, based upon applicable laws, the shareholder might reasonably and properly make in support of obtaining the injunctive relief sought. In a sentence or two, discuss the basis for making each assertion. (15 points)

4(b) Assuming all the facts under Question 4A, list two reasons why you might reasonably assert the injunction should not be issued and the merger should be permitted to proceed. Describe briefly. (10 points)

4(c) As noted in the facts stated in Question 4(A), at the request of the Wonderful Board, no review of the financial condition of Greenmail was performed by Wonderful or any of its representatives at any time. If, prior to the Letter of Intent execution by the parties, you persuade the Wonderful board that it is necessary to perform some review, list three matters that you would likely undertake to do (or cause to do or assure that other Wonderful representatives do) at each of the following stages in the transaction:

(I) Pre-Letter of Intent stage (5 Points)

(II) Post-Execution Date of Merger Agreement (during the "Due Diligence" Period) (5 Points) and

(III) Closing Date of Merger (5 Points)

4(d) As noted in the facts stated in Question 4(A), the only condition to be satisfied in favor of Wonderful in regards to effectuating the merger Greenmail as to receive the approval of its shareholders. If you are counsel assigned to draft the merger agreement, list two additional conditions precedent to effectuating a merger closing. In a sentence or two, describe why you would demand the condition precedent in favor of Wonderful. (10 points)