PACE UNIVERSITY SCHOOL OF LAW

CORPORATIONS AND PARTNERSHIPS

PROFESSOR FISHMAN
FINAL EXAMINATION

MAY 12, 2000

TIME LIMIT: 4 HOURS
OPEN BOOK
Page 1 of 9

IN TAKING THIS EXAMINATION, YOU ARE REQUIRED TO COMPLY

WITH THE SCHOOL OF LAW'S RULES AND PROCEDURES FOR FINAL
EXAMINATIONS.
YOU ARE REMINDED TO PLACE YOUR
EXAMINATION NUMBER ON EACH EXAMINATION BOOK AND SIGN
OUT WITH THE PROCTOR SUBMITTING TO HIM OR HER YOUR
EXAMINATION BOOK(S)
AND THE QUESTIONS
AT THE
CONCLUSION OF THE EXAMINATION.
DO NOT UNDER ANY CIRCUMSTANCES, REVEAL YOUR IDENTITY
ON YOUR EXAMINATION PAPERS OTHER THAN BY YOUR
EXAMINATION NUMBER. ACTIONS BY A STUDENT TO DEFEAT THE
ANONYMITY POLICY IS A MATTER OF ACADEMIC DISHONESTY.
INSTRUCTIONS
1.

All answ ers must be written in ink. Pleas e USE ONLY ONE SIDE OF
THE PAGE and make an effort to WRITE LEGIBLY. You may refer to
parties by initial.

2.

This is an 'open book' exa min a tion. You may refer to the assign e d
cas eb ook, the statut ory volume s and supple m e n t a r y mat erials, to your
class notes, and to any outline prep ar e d by you in whole or in part in
connection with this cours e. You may not use any 'cann e d ' outlines or
briefs or any treatis e s, hornbooks or other forms of com m e r cially
prep ar e d synth e s e s .

3.

Be certain to turn in your copy of the exa min a tion itself with your
answ ers to the exa min a tion.

4.

The exa min a tion consists of thre e questions of differing point values.
BUDGET YOUR TIME ACCORDINGLY.

5.

You will be judged on the basis of organization and clarity of

pres e n t a tion as well as your ability to identify and intelligently discuss
the issues. Be concise. WRITE LEGIBLY.

6.

No ambiguity is intend e d in any ques tion. If you believe any ques tion to
be unclear, make any assu m p tion of addition al fact, consist e n t with the
facts given, which you think neces s a r y for clarity.
State any such

assu m p tion at the beginning of your answ er to that question.

QUESTION I
(30 poin t s , 72 minu t e s )
The first five ques tions should be answ er e d in no more than two or
three sent e nc e s . Question 6 is a multiple choice question. All of the questions
are worth five points each. (Your moth er would advise: Budget your time!
Don't spend too much time on this question, and stop chewing on your pen.
You'll hurt your teet h.)
Assum e the following facts for Questions 1 and 2:
Manny, Moe and Jack have forme d a gener al partn ers hip (MMJ) in a
jurisdiction which has adopt e d the Uniform Partners hip Act. The busines s
involves selling plumbing supplies. The agre e d- upon interes t s of Manny, Moe,
and Jack and their respec tive contributions to the capital of MMJ are as follows:
Partner

Capital Contribution

Percent a g e

Manny
Moe
Jack

$240,00 0
$220,00 0
$140,00 0

60%

of

Profits
30%
10%

There are no other agre e m e n t s amon g the partn ers relevan t to the
questions below.
1. After a few years of operation, the partn ers decide to dissolve the
firm, pay off all creditors, and distribut e the remaining ass et s to the partn ers.
MMJ realizes $900,00 0 from the sale of its ass ets and pays out $200,00 0 to its
creditors. How much is Manny entitled to receive?
2. Assum e the sam e facts as in Question 2, excep t that the firm only
realized $700,00 0 on the sale of its ass ets .
Therefore, after paying out
$200,00 0 to its creditors, the firm has only $500,00 0 to distribut e to the
partn ers. How much is Manny entitled to?
3. The Doernb er g corpora tion has a nine person board of directors, with
three directors electe d each year for a thre e year term. The certificat e of
incorpora tion provides for cumulative voting. The certificate of incorpora tion
and the bylaws are silent on the issue of remov al of directors. There are 100
shares outst a n ding. Sherlock Doernb er g owns 51 share s. His cousin Mycroft
Doernb er g owns 49 shares. Can Sherlock remov e any of the directors without

caus e? Does Sherlock have sufficient shares to remov e Mycroft's directors for
caus e if Mycroft objects?
4. Parent owns all of the class X voting share s of sub, a Delawar e
corporation. Class Y share s of sub are owned by minority share h old ers. If sub
at the direction of the parent declares a dividend on class X stock only, what
would be the test to judge the trans a c tion?
5. Shrub, Bore, and Gladly are partn ers in a construction mat erials
busines s.
They agre e that they should not order more than $50,000 in
mat erials from wholes alers without approv al without approv al of the others.
One of its regular wholes alers is having a sale on treat e d lumb er studs. On his
own initiative, Gladly orders $100,00 0 of the treat e d lumber studs. The store
has never ordere d more than $10,00 0 from this supplier. Shrub and Bore
refus e to authorize the busines s ' s paying for the lumber, and the wholes aler
sues the partn er s hip and all of the partn ers for paym e n t.
What is the
proba ble outco m e ?

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Professor Fishma n
May 12, 2000

Page 4 of 18

QUESTION II
(40 poin t s , 1 hour, 36 minu t e s )
Sobie Industries, Inc. (SI), a New York corpora tion, eng a g e s in a numb e r
of busines s e s throug h unincorpor a t e d divisions, most of the m relating to
textile man ufact uring. The preside n t, CEO and a director is Vaness a Sobie,
who owns 20% of the com mo n stock. Her adult children, Orest es and Tiffany,
each own 10% of the stock. The remaining share s (60%) are held by the
public. The commo n stock is trad e d on the Atlantic Stock Exchang e.
SI's board of directors consists of five individuals, all of whom are
electe d annu ally: Vaness a, Orest es and Tiffany, as well as two non- family
me m b e r s , Denise Rodma n, a former athlet e, and Romulus Stein, a retired
entre pr e n e u r. Except for Vaness a, none of the directors is employe d by the
corporation.
Orest es and Tiffany have beco m e dissatisfied with the current
profitability and future prosp ect s of the comp a n y' s retail stores division. A
few years ago Vaness a caus e d SI to invest large sums of mone y into acquiring
sever al parcels of land and building retail stores to sell exces s merch a n dis e
produc e d by the textile factories. SI has not been succes sful in comp e ting
profitably with other retailers and has annoye d some wholes ale custo m e r s
becau s e of the comp e tition. While the stores account for 60% of SI's ass e ts,
in the past five years the retail stores division has account e d for none of its
profits. Orest es and Tiffany believe that with the retail stores project, Vaness a
has divert e d mon ey from its core profit center, man uf act uring textiles such as
she et s , towels, blanket s, and beds pr e a d s . Oreste s and Tiffany have discuss e d
betw e e n the m s elv e s that "it's time for moth er to retire."
At a recent board me e ting, Oreste s and Tiffany pres e n t e d a propos al
from a French conglom e r a t e to purcha s e the retail stores division for $50
million, a figure just slightly great er than SI's capital invest m e n t in the
division. They argu e that SI needs the cash in order to renov at e its factories.
Vaness a and Rodma n believe, on the other hand, that SI's retail stores are on
the verge of developing a "breakt hro u g h" and oppos e the sale. The fifth
director, Stein, is undecide d. The Board decided to take up the matt er at its
next me e ting in February 2000.
Vaness a has consulte d you for advice. She wants to preve n t the sale.
In addition, she worries that Orest es and Tiffany will try to fire her as

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Professor Fishma n
May 12, 2000

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preside n t at the next board me e ting. She does not know how the public
share h old er s would feel about the sale. Many of the m, though, are former or
current employe e s whom, she thinks, have a high regard for her
man a g e m e n t .
The next annu al mee ting of the share h old er s is not schedule d until
October 2000. The bylaws provide that a special share h old ers ' mee ting can
be called by any two directors.
There are no provisions in either the
certificat e of incorpor ation or the bylaws dealing with the remov al of directors
or officers, ame n d m e n t of the bylaws, or filling vacancies on the board. The
certificat e of incorpor ation does not provide for cumulative voting.
Part One
1. What if Oreste s and Tiffany persu a d e Stein to vote in favor of the
sale?
Would share h old er approv al of the trans ac tion be required?
If
share h old er approv al is not required, could the share h old er s adopt a
resolution forbidding the sale of the retail stores division?
2. What if, on the other hand, Vaness a can persu a d e Stein to vote
against the sale? If Orest es and Tiffany could get a significant percen t a g e s of
the share h old ers on their side, could they force a sale over the opposition of
the majority of the current directors? Specifically, (a) could the share h old er s
pass a resolution directing the sale of the division? (b) could the share h old er s
remov e the directors who oppos e the sale and replace the m with others who
favor the sale? (c) could the board of directors be "packe d" by ame n din g the
bylaws to increa s e the numb e r of directors and adding new directors who
would vote in favor of the sale?
3. Regardles s of how the sale of the retail stores division is resolved, if
a majority of the board votes to termin a t e Vaness a ' s employm e n t, could the
share h old er s act to reinst at e her as presiden t or to expres s their approval in
some other way of her corporat e man a g e m e n t ?
How could this be
acco mplishe d?
Part Two
Assum e now that Vaness a has succes sfully defe at e d the propos al to sell

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May 12, 2000

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the retail stores division, and Tiffany and Oreste s have resigne d from the
board and have been replace d by two SI vice preside n t s who have worked for
Vaness a for years.
In addition, Vaness a signed a ten- year employm e n t
contract as preside n t and CEO, with an annu al minimu m salary of $250,00 0
with additional amou n t s payable as bonus e s, perform a n c e incentives and
deferre d comp e n s a tion. The contract also provides that, as CEO, she has
complet e discretion and authority to man a g e the day- to- day operations of the
corporation and that if she and the board disagr e e over her man a g e m e n t , the
matt e r will be sub mitt e d to arbitration. Further, if the arbitrator deter min e s
that the board has unduly interfere d with her powers, she can leave the
corporation and receive the balanc e of the comp e n s a tion due her under the
contract.
SI executive s are atte m p tin g to develop new opportu nities. Edwardo
Casper, vice preside n t for new products, believes that SI is nearing a
breakthrou g h on a new product: skirts and trous er s mad e out of a new fabric,
crush e d soybe a n shells, that' s light, rainproof, rugge d and can be eat e n if one
is starve d. Casper, concern e d that other textile firms will learn of their new
product, sent a me mo r a n d u m to the new products dep art m e n t ordering
complet e silence on the project. Oprah Wester m a n , chief technician in the
special products dep art m e n t , consults with Dr. Kobe Madden, an agrono mis t
at Faber University, who had experim e n t e d on uses of soy beans. Madden
surmis e d that SI was considering soyb e a n clothing and purcha s e d 500 share s
of SI stock.
At a recent
lunch
me e ting
at comp a n y
head q u a r t e r s
with
repres e n t a tiv e s of SI's principal bankers about arranging a refinancing of the
comp a n y' s debt (neces s a r y in order to develop the new concep t), Vaness a
outlined the new project to persu a d e the m that SI could pay off increas e d
amou n t s of debt in the future. Lorraine Fentima n, one of the bankers pres e n t,
purch as e d 1,000 shares of SI stock after the me e ting, beca us e she was
impres s e d with Vaness a ' s financial acu m e n. One of the waiters pres e n t also
purch as e d 100 shares becaus e he though t the idea sound e d terrific.
At a board me e ting Stein sugge s t e d that a textile mill of which he was a
director and small share h old er might be the ideal man ufact uring plant for the
new clothing. The board voted 3 to 1 in favor of purch asing the plant, with
Rodma n dissenting. That evening, a janitor picked out of the trash can a
me mo r a n d u m that outlined he new project and anoth er one that discuss e d
the textile mill. He then purcha s e d 100 share s each of SI and of the Textile
Mill corporation.

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Professor Fishma n
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Vaness a was alerte d to unusu al trading activity in SI stock and rumors

about the new develop m e n t and decided to releas e a press releas e. It read:
"SI has been working to develop a new concept in textiles.
SI has purcha s e d a textile plant to further this idea."
Many investors beca m e interes t e d in SI stock as a result of the press releas e,
and the price of the stock rose. Wester m a n , Fentima n, the janitor and the
waiter all took advan t a g e of the price increas e and sold their holdings.
Edwardo Casper' s wife works for the Food and Drug Administration
(FDA) and also saw the press releas e. When she mention e d it to her husba n d,
he told her about the soybe a n project. She exclaime d: "You must be kidding
sweet h e a r t, don't you know crushe d soyb e a n s caus e extre m e itching? The
FDA will not allow this." Mrs. Casper knew what she was talking about and the
soybe a n project was abort e d. SI issued a second press releas e stating that it
was writing off $10 million in develop m e n t of new project expen s e s . It did not
mention the proble m with the soybe a n s .
The price of SI stock then
plum m e t e d .
1. Discuss any violations of federal securities laws. Pleas e be specific.
2. Orest es and Tiffany are very unhap p y share h old ers; they always
knew that Vaness a would ruin the comp a n y! Are there any com mo n law
breach of fiduciary duty claims that could be ass ert e d against Vaness a or the
other me m b e r s of the board?
You may assu m e that SI's certificate of
incorpora tion does not limit directors' liability under BCL 402(b).

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Professor Fishma n
May 12, 2000

Page 8 of 18

QUESTION III
(30 poin t s , 72 minu t e s )
E-bagel is an on- line bakery that distribut e s baked goods from
warehou s e s . The corpora tion is owned by the Mushlin family. Sever al years
ago, Latrell Mushlin, the comp a n y' s founder, Chairma n of the Board and
larges t share h old er, brough t his une m ploye d broth er, Marcus, into the
busines s.
When Marcus Mushlin joined the busines s he signed an
employm e n t contract with the comp a n y that all Mushlin family employe e s
enter e d. This agre e m e n t provided in part:
Upon termin a tion of any employm e n t with the
Corporation...for any reason, including resign ation,
discharg e ,
death,
disability or retire m e n t ,
the
individual whose employm e n t is termina t e d or his
estat e
shall sell to the Corporation and the
Corporation shall buy, all shares of the Corporation
then owned by such individual or his estat e .
The
price to be paid for such share s shall be equ al to the
adjuste d book value (as herein aft er defined) of the
shares on the Dece m b e r 31 which coincides with, or
imme dia t ely prece d e s , the date of termin a tion of such
employe e ' s employm e n t .
Marcus Mushlin is now presiden t and chief executive officer, and owns
25 percen t of the stock or 1000 shares with a book value of $100 per share.
As part of his comp e n s a tion for 1999 he also received options to purcha s e
5,000 shares of stock at $200 per share. Marcus has often stat e d, "I owe
everyt hing to Latrell."
Latrell said that from the beginning it was the
unders t a n din g of the Mushlin family that "this was a family busines s and
everyo n e would pitch in and would be taken care of." Marcus recently hired
Yogi Cohen as gener al man a g e r and chief opera ting officer of the distribution
center at a salary of $40,00 0 per year and 15% of the gross profits.
Larry Mushlin, Latrell's cousin, is one of the directors of e- bag el. He has
had a great deal of experienc e in the comput e r busines s and was placed in
charg e of e- bag el's comput e r and intern e t technology. His duties included
supervising the consulting firm that maintains e- bagel's web site and
develop e s the comput e r technology neces s a r y for the comp a n y. Larry was

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Professor Fishma n
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Page 9 of 18

not impres s e d with the consulting firm used. He though t he knew freelanc er s
who could do a better job at a lower price.
Larry establish e d e- bialy
technologies (EBT) which offered its services to e- bag el at a price lower than
the current consulting firm. Larry retain e d the m. Larry's interes t in EBT was
commo n knowledg e to the other directors of e- bagel.
Another board me m b e r, Mariah Mushlin, who is also e- bag el's financial
vice preside n t, read in the newsp a p e r that Concord Bakeries of New York City,
a wholes aler of muffins, bagels, and other bread s , was going out of busines s.
E-bagel has no plans to expan d beyon d the cyber world at this time, and
Mariah does n' t believe that e- bagel has the funds to purcha s e Concord.
Mariah buys the comp a n y hers elf and convinces her cousin, Aretha, e- bag el's
promotion al director, to work for Concord.
Latrell learn e d that Marcus had open e d a chain of coffee shops that
have been very popular and profitable. When confront e d, Marcus said he had
set up the coffee shops on his own time and with his own mon ey, and had
raised capital throug h the sale of $7,000,00 0 of promissory notes to friends
and investors to use to expa n d the chain. The notes paid an interes t rate of
9% and were rede e m a b l e on dem a n d. Latrell was so angry that he called a
board mee ting and the board agre e d to fire Marcus. Latrell told Marcus: "You
rotte n ingrat e, clear out your office today and be gone." A few days later he
mailed Marcus a check for $100,00 0 for his stock and cancelled Marcus's stock
certificat e s. At the board mee ting, Latrell sugge s t e d that he was underp aid.
The Board grant e d him an additional 10,000 options at a price of $200. Three
days later, after secret negotiations by Latrell and approval by the board the
night before the announc e m e n t , e- bagel issued a press releas e stating that it
was to be purcha s e d by Mega Bakeries for $500 per share. Marcus protes t s
and atte m p t s to exercise his options.
Mega Bakeries is listed on the New York Stock Exchan g e . The purch as e
of e- bag el when annou nc e d should boost Mega's stock subst a n tially as a
major comp e titor will be out of the way and Mega will have an intern e t
pres e nc e for the first time.
There had been some rumors and sever al
newsp a p e r articles indicating that e- bag el might be subject to purch as e or
takeov er. Maurice Miller's wife June was a secret a r y in the executive offices of
Mega.
Miller was a building contractor who did some work on Mega's
executive offices. During a Christm a s party Maurice Miller overh e a r d talk
about an acquisition.
During the construction work Miller bega n
eaves dr o p ping and guess e d that e- bagel would be the targ et. He asked his
wife who said, "none of your busines s". Maurice Miller purch as e d sever al

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Professor Fishma n
May 12, 2000

hundr e d share s of Mega.

rose subst a n tially.

Page 10 of 18

When the merg er was mad e public, Mega's stock

Discuss any legal issues.

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Professor Fishma n
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CORPORATIONS EXAMINATION - SPRING 20 0 0

S AMPLE A NSWERS
Que s ti o n I
(30 poin t s )
1)
Manny would receive a total of $300,00 0. After paying off creditors,
there is $700,00 0 left. $600,00 0 is distribut e d as a return of capital, $100,00 0
is the profit. Manny gets 60% of the profit for $60,000 plus $240,00 0, return
of capital.
2)
Under 18(a) of the Uniform Partners hip Act, each partn er must
contribut e towards the losses, wheth er capital or otherwis e, sustain e d by the
partn ers hip according to her share of the profits. There is a loss of $100,00 0
for this partn ers hip. If there had been no loss and the partn ers hip had broken
even, Manny would get back $240,00 0. Since there is a $100,00 0 loss, Manny
must contribut e toward losses according to his share of the profits. He must
bear 60% of the loss or $60,00 0. Thus, he gets back $180,00 0 ($240,00 0 60,000 = $180,00 0).
3)
Sherlock cannot remov e any of the directors without caus e except if the
certificat e of incorpor ation or the bylaws so provide. BCL 706(b). Here, there
was silence in the certificat e and bylaws. Nor could Sherlock remov e Mycroft's
directors for caus e since under 706(c), no director may be remov e d when the
votes cast against his remov al would be sufficient to elect him cumulatively.
Sherlock can elect one director.
X=

SxD+ 1 =
100.1 + 1 = 26
N+ 1
3 + 1

It takes 26 share s to elect one director, so if Mycroft oppos e d

Sherlock couldn't remov e one of Mycroft's directors.

remov al,

4)
The test would be the intrinsic fairnes s test under the principles
enunciat e d in Sinclair Oil v. Levian. There is a conflict of intere s t becau s e
paren t is receiving a ben efit and other share h old ers are not. Thus, there is a
conflict of intere s t becau s e the paren t controls the sub.
Therefore, the
intrinsic fairnes s test is used. The burde n is on the paren t to prove the
fairnes s of the trans a c tion.

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5)
UPA 9(1): "every partn er is an agen t for the partn er s hip for the
purpos e of its busines s, and the act of every partn er ... binds the partn er s hip
unless the partn er so acting has in fact no authority to act for the partn ers hip
in the particular matt e r, and the person with whom he is dealing has
knowledg e of the fact that he has no such authority." Although Gladly does
not have actu al authority, he would have appar e n t authority (this is an
ordinary trans a c tion for a construction mat erials busines s) which binds the
partn ers hip, unless the supplier has notice of Gladly's limitation on actual
authority. Could the partn ers hip claim supplier is on notice becaus e of the
amou n t of the purch as e ?

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Professor Fishma n
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Que s ti o n II
(40 poin t s )
Part One
1)
Sale of ass et s of retail stores division.
This requires share h old er
approv al. Under BCL 909 for corps. forme d pre- 1998, it requires a vote of
2/3 of the share h old ers entitled to vote. For thos e forme d post- 1998 if the
certificat e so provides, a 1/2 vote is neces s a r y for the sale of all or
subst a n ti ally all of the ass et s.
If the sale of the retail stores division is not a sale of all or subst a n tially
all of the ass ets (ther e is a lot of litigation on what is a sale of all or
subst a n ti ally all ass et s), then approval by a majority of the directors is
sufficient to approv e the trans a c tion (Oreste s , Tiffany, and Stein if he agre e d).
The proble m state s that the retail sales division accounts for 2/3 of ass et s but
1/3 of profits. This sounds like a major ass et, but not "all/subst a n tially all", but
it's your call.
If the sports club division is not the sale of all/subs t a n ti ally all of the
ass ets , then a share h old er' s resolution forbidding he sale would not be
effective, since the board of directors is charg e d with responsibility of
man a ging the busines s BCL 701.
2)
(a) Shareh old ers cannot adopt a resolution directing the sale of the
division. It would violate BCL 701. They can adopt a precat ory resolution,
i.e., non- binding.
(b) Under BCL 706(a) and (b), while a majority of share h old ers can
always remov e directors for caus e, directors can be remov e d without caus e
only if the certificate of incorpora tion or bylaws explicitly authorize this. From
the facts, there is no possible basis for remov al for caus e; this is a busines s
policy disput e.
According to the facts, there is no provision in the certificate of
incorpora tion or bylaws dealing with remov al.
The majority of the
share h old er s can always ame n d the bylaws, BCL 601, and so they could
ame n d the bylaws to provide for remov al without caus e and then proce e d to
remov e the directors. Then they could vote to fill the vacancies on the board.
Since two directors can call a special share h old ers mee ting, this could happ e n
prior to the next schedule d me e ting.

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(c) The facts do not tell us wheth e r the numb e r of directors is fixed in
the certificat e of incorpor ation or in the bylaws. If in the certificate, then
share h old er s cannot, on their own initiative, seek an ame n d m e n t . BCL 803.
If in the bylaws, then share h old ers may ame n d; see discussion above in (b). If
the numb e r of directors is increas e d, share h old ers can proce e d to fill new
positions.
3)
Vaness a is preside n t and CEO and holds thes e positions at the will of the
board; therefor e, a majority of the board can dismiss her at any time. BCL
716(a).
While the certificate of incorpora tion may provide that the
share h old er s elect and remov e officers, BCL 715(b) and 716(a), the facts do
not tell us that there is any such provision in this case.
Therefore,
share h old er s do not have the power to reinst at e her.
However, according to Auer v. Dress el , share h old er s have the power to
expres s their opinion and make their views known to the board about
corporat e matt e r s, and a share h old er s mee ting called for this purpos e would
be appropriat e. Share hold er s could vote on a nonbinding resolution to that
effect and could also seek to use the man a g e m e n t ' s proxy state m e n t (which it
would be required to send out to notice the special mee ting) to solicit proxies
under Rule 14a- 8, but as I said, there' d be no questions on the proxy rules,
the 14a- 8 issue does n' t count.
Part Two
1)

Federal Securities Laws Violations

Oprah Consults with Madde n.

Oprah Wester m a n , head of special projects, did not trad e, but

"consulted" with Dr. Kobe Madden. Is she liable as a tipper? Dirks v. SEC says
that insider must breach duty in disclosing informa tion and focuse s on the
motivation of the corporat e insider tipper in disclosing informa tion. Here, we
do not know why Wester m a n told Madde n. She did disreg a r d a corporat e
me mo ordering complet e silence. On the other hand, Wester m a n ' s consulting
with a colleagu e enga g e d in similar rese arc h may have been for a proper
corporat e purpos e - to further develop m e n t of the product. No evidenc e that
she tipped Madden for any person al gain, either direct or indirect, which was
the import a n t factor in Dirks.

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Dr. Madden, outsider who purchas e d shares after West er m a n consulted

with him.
Under Dirks, wheth e r he is liable dep e n d s on: (1) did Wester m a n breac h
a duty? Unclear - see above discussion; and, if so, (2) did Madden know or
should he have known that Wester m a n breac h e d her duty? This is unlikely,
unless he knows about corpora t e me m o.
If Wester m a n did not breach her duty in consulting with Madden, it is
still possible to hold Madden liable as a tempor ar y insider under note 14 of
Dirks. He was given the informa tion with an unders t a n ding that it was
confidential and would only be used for appropriat e corpora t e purpos e.
Lorraine Fentim an, inves t m e n t bank er.
Under Dirks, she would not be liable as a tippe e since Vaness a' s reas on s
in disclosing informa tion to him was for an appropriat e corporat e purpos e.
She may be found liable as a temp or a r y insider.
The disclosur e of the
soybe a n project was at a time when there was no public disclosur e and may
be equivalent of the miner al find in TGS. Vaness a disclose d the informa tion to
her to persu a d e her to arran g e debt financing for the corporation. On the
other hand, Fentima n may argue that he purch as e d the share s, not becau s e
of any inside informa tion learn e d at the me eting, but becau s e she was
impres s e d with Vaness a ' s busines s acum e n .

The Waiter.
He purcha s e d share s, beca us e he liked the idea. Is this trading on
inside informa tion? Perhap s - since the concept was not public knowledg e.
But it is unlikely that he would be consider e d a "tempor a r y insider" - Vaness a
did not disclose any informa tion to him with an unders t a n ding that he would
keep it confidential; he would not be liable under Dirks, since neither part of
the two- part test would be met. The proble m says that the luncheo n me e ting
was at comp a n y head q u a r t e r s . The waiter could be found liable under the
misap pro priation theory.
If the luncheo n occurre d at a resta ur a n t
unconn e c t e d with Sobie Industries, the waiter would be home free.
SI's first press releas e.

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TGS and Basic tell us that corpora t e press releas e s may violate Rule
10b- 5 if they contain any false and mislea ding stat e m e n t s or omissions of
mat erial facts neces s a r y to make stat e m e n t s not misleading. TGS tells us
that gen er al or conclusionary stat e m e n t s may be misleading. On the other
hand, there is nothing to sugge s t the press releas e was mad e for an improp er
purpos e or that it was intention ally mislea ding. Therefore, no scient er.
SI's second press releas e.
Here it see m s it may be an omission of a mat erial fact not to disclose
that the FDA would not allow the drooping of the new project. Again, there is
a question of scient er.
2.
Commo n law breach of fiduciary duty claims against Vaness a or other
me m b e r s of the board.
Vanes s a' s 10 year em ploy m e n t contract.
Do the provisions that she has complet e discretion and authority to
man a g e the day to day opera tions and that if an arbitrator finds that the
board has unduly interfere d with her powers she can leave and receive the
balanc e of her comp e n s a tion violate BCL 701 and amou n t to the board's
abdication of its duties to man a g e the corpora tion?
Stein's Textile Mill which is sold to SI.
Was this an intere s t e d trans ac tion? There was disclosur e by Stein of his
interes t in the corporation.
Approval of the trans a c tion requires a majority of the directors pres e n t
to approve an action (BCL 708(d)). Thus, thre e votes would be required.
Under BCL 713(a)(1) you need a vote sufficient to carry the action (3)
without counting the vote of the interes t e d director. If the votes of the
disinter e s t e d directors are insufficient to constitut e an act of the board,
unanimity of the disinter e s t e d directors is required.
Stein obviously was intere s t e d .
Rodma n, who was disinter e s t e d ,
dissen t e d . Thus, the votes were insufficient and Stein's vote was neces s a r y to
carry the action becau s e the disinter e s t e d directors were divided.

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Thus, the burde n of proof was upon the board to demo n s tr a t e

contract was fair at the time it was enter e d into.

the

The Janitor
He would be liable for a breach of rule 10b- 5 on the basis of the
misap pro priation theory. He owed a duty to his comp a n y. The janitor who
acte d like Chiarella would not be a traditional insider or a temp or a r y one.

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Que s ti o n III
(30 poin t s )
1)

Hiring of Yogi Cohen

Issue is wheth e r as Presiden t Shaquille Mushlin had the authority to hire

some o n e as gen er al man a g e r and to give 7% of the gross profits. In Lee v.
Jenkins, the court said that the preside n t only has the authority to bind his
comp a n y by acts arising in the usual and regular cours e of busines s but not
for contract s of an extraordin ary natur e.
I would sugg e s t that wheth er or not there was authority to hire
some o n e as gen er al man a g e r, there was no authority to offer a perce nt a g e of
gross profits without board approv al. See Parks v. Midland Ford Tractor, 416
S.W.2d 22 (1967). That confirms my view. That does n' t mea n yours is wrong.
The presiden t of a corpora tion has no implied authority to make a
contract on its behalf which is unusu al and extraordin ary. In Sacks v. Helene
Curtis, 340 Ill. App. 76, 91 N.E.2d 127 (1950) the court said that it was
univers ally held that a contract to pay as comp e n s a tion a perce nt of a
corporation is not a usual and ordinary contract. The board would have to
approv e such a contract.
A ques tion not raised from facts is wheth e r
corporation ratified the contract.
2)

Larry Mushlin's creation of EBT and Sale of Services to E-Bagel

Did Larry take a corpora t e opportu nity from Sobie Industries? Under
the ALI stand ar d s , it would see m that Larry should have brought this
opportunity to the corporation (S.I.) for approv al or rejection. However, since
everyo n e knew about it, the corporation can be seen to have ratified the
arran g e m e n t . It wasn't in e- bag el's line of busines s, nor did the corporation
have an expect a n c y. Depen ding upon the corporat e opportunity test used,
the opportu nity should be okay for Larry to take.
It was fair to the
corporation. This is somew h a t like the Cookies Warehous e case. Under the
safe harbor appro ac h of Broz v. Cellular Informa tion Syste m s , if Larry mad e
timely disclosure, the fiduciary would have discharg e d his obligation.
In the case on which the issue in Proble m III is bas e d, Robinson v. Brier,
412 Pa. 255, 194 A.2d 204 (1963), the court found that the corpora tion was

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unable to avail itself of the opportu nity. This was probably true here too. EBT
provided informa tion technology services, about as far away from bagel
baking as one can imagine.
3)

Mariah Mushlin's Purchas e of Concord's Bakeries

The Concord Bakeries availability may be a corporat e opportu nity for ebagel under the line- of-busines s test. Although e- bagel has no pres e n t plans
to expan d to the West Coast, the line- of-busines s test does n' t depe n d on
actu al expect a n cie s.
This would be a logical expan sion for e- bag el. An
expect a n c y test would not find a taking of an opportu nity. Would Mariah's
belief that e- bag el lacked the funds to purch as e Concord matt er? Certainly
the burden would be on Mariah. The ALI and Northe a s t Harbor Gold Club v.
Harris would reject the incapacity defens e and require submission to a full,
informe d, disinter e s t e d board or share h old ers to make the decision as to
financial capability.
The test in Ostrowski v. Avery (1999 Casebook
Supple m e n t ) would use a wide- angled lens, so to speak, to take into account a
variety of factors.
4)

Mariah hires Cousin Aretha

Mariah see m s to have no R-e- s-p- e- c-t for e- bagel. Mariah is comp e ting
with e- bagel in hiring her away. E-bagel had an expect a n c y that Aretha would
continu e to work for the corpora tion.
5)

Marcus's Chain of Coffee Shops

Absent an agre e m e n t to bring any busines s opportunities to e- bag el,

the coffee shops are not a corporat e opportunity. There is no diversion of ebagels' ass et s, no expect a n c y, it's not within the comp a n y' s line of busines s,
Marcus start e d the busines s on his own time, nor did it comp e t e with e- bag el.
One could argu e that beca us e this was a close corporation and "everyon e
would pitch in and be taken care of" that Marcus has a duty not to take the
opportunity becau s e of the reason a bl e expect a tion s of the share h old er s of the
corporation. Becaus e this was a family busines s one might argu e that any
busines s opportunity should be mad e available to the family busines s. What
should be reco m m e n d e d in thes e kinds of situations is for e- bag el to develop
a "stand a r d of the corpora tion" which permits the taking or not taking of thes e
kinds of corporat e opportu nities.
6)

The Stock Rede m p tion Trigger

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Ingle v. Glamor e Motor Sales in the supple m e n t holds that an at will

employe e , like Marcus, acquires no extra rights due to his status as a
share h old er in the close corporation that has discharg e d him. The facts here
re closer to Gallagh er v. Lambert, also in the supple m e n t where the plaintiff
was fired prior to a particular date after which the buy back price would have
been higher. Though plaintiff allege d a breach of good faith and fair dealing
in his status as a share h old er, the court refus e d to read other than the literal
me a ning of the agre e m e n t . The fact patt er n in this proble m is somew h a t
different and similar to Jordan v. Duff + Phelps which I mention e d in class
while we were discussing the above two class e s.
In a split decision the
seven t h circuit found that the fact the comp a n y was going to be sold was
known to the employer and was a mat erial fact that should have been
disclos ed and crate d an issue of fact as to the issues of good faith.
7)

Granting of Stock Options to Latrell

According to Texas Gulf, the granting of the options by the corporation

to Latrell was a decep tive act. He should have not mad e the requ e s t at that
time becaus e he knew that the negotiations were going on. In a sens e this is
like Strong v. Repide and the special circums t a n c e s rule. If the options were
grant e d at the initiative of the board, Texas Gulf sugg e s t s Latrell should say,
"The time is not right" to the board.
8)

Marcus's Atte m p t to Exercise the Options

After Marcus was fired, he could not exercis e the options if they were
restricted. That is, they could not be exercis ed if they were conting e n t on
employm e n t , becau s e the corporation would not benefit.
It would also
depe n d on the price at which they were exercis ed.
If the options were
unres tricte d, they would have veste d and Marcus could have purch as e d the m.
9)

Maurice Miller's Purchas e of Mega Bakeries

This is bas e d on a true factual pattern that appe a r e d in the Wall Street
Journal in March of this year. This is a violation of 10b and rule 10b- 5 under
the misap pro priation theory.
The profit belong e d to Mega.
It is also a
violation of Rule 14e- 3.