Final Exam, UWLA, 2019



Final Exam, UWLA, 2019University of West Los Angeles School of LawFINAL EXAMBusiness OrganizationsDecember, 2019Professor M. Jonathan HayesQUESTION 1. (50%)Beth, Charles, and David are musicians who have decided to start a blues band. They have some shows coming up but are hoping to do big shows and make lots of money. Beth meets with Manager Mike and falsely tells him they have played for five years throughout the world. Mike agrees with Beth that he will be their manager and get paid 20% of all the band's income for two years. She tells Charles and David about the deal but they are mad at her because they don't think they should have to pay 20% commission. Manager Mike refuses to reduce the rate and says he will sue them if they try to back out of the agreement. Ignoring Manager Mike, Charles gets the band a show at Staples Center that will pay them $100,000. They form a corporation and agree that each of them will own one third of the stock and each will be on the Board of Directors. The corporation is not a close corporation. Later, they do the big show and divide up the $100,000 equally among themselves. They have a board meeting and decide to enter into a lease with a recording studio for $10,000 a month for one year. Unfortunately, they don't get any more shows and after two months decide to disband. David is upset with Beth and Charles since he didn't want them to enter into the lease because he said they couldn't afford it. He thinks that's why the band failed. Who can Manager Mike sue to collect his commission and what is the likelihood of success? Who can the landlord sue for the rest of the lease and what is the likelihood of success? Who can David sue and what is the likelihood of success?Analysis1. The three of them appear to have entered into an agreement to operate a business together for a profit. Therefore there is a partnership, whether they did any paperwork or not. The answer is then that Michael entered into a contract with a partnership and he can sue IT for breach of contract. He will win if Beth had authority to entered into the contract on behalf of "them." She had authority if the partnership gave her authority, i.e., express authority. There are no facts suggesting that. So there is no express or implied authority. As a general partner however she is presumed to have authority to act on behalf of the partnership. Apparent authority is when the principle, here the partnership, did something which caused the third party to believe Beth had authority. As Beth was a general partner, Michael probably had the right to assume she had authority simply because she was a general partner. So I suspect that the contract is enforceable against the partnership. If Beth did not have authority, Michael can sue her for misrepresentation of her authority. If the partnership is liable to Michael, then all the partners are liable also. Michael can also sue Beth for fraud. She lied to him. If he can show reasonable reliance on her false statement and damages, he will win. 2. The landlord can sue the corporation for breach of contract. The landlord will win since there is no authority issue and clearly a breach of the lease. They all agreed to the lease. The landlord may also be able to collect from the shareholders of the corporation using alter ego, by piercing the corp veil. He would have to establish that there was a unity of interest between the corp and the shareholders such that there was no separateness between them and that it would be unfair to treat them as separate. The only facts we have that could be used to try to pierce the corp veil is that they took money from the corp without paying the debt. I'm not sure that's enough. They did the show, they have the right to be paid. Landlord could also argue that the corp was undercapitalized since it seems to have no money and once it had money, they took it. There is a decent chance a court would pierce the corp veil on that basis. 3. David cannot sue anyone that I can see. As it is a corp, the other two individuals don't owe fiduciary duties to him. He could bring a derivitive suit against them on behalf of the corp for some sort of breach of fiduciary duties but the business judgment rule would save them. As long as they did reasonable due diligence when figuring out whether to enter into the lease, they win because there are no facts that suggest a conflict, fraud, illegality or waste. At least they met which is probably enough since courts should not simply second guess the decisions made the BOD. Especially since he was apparently at the meeting when the decision was made. There might be a duty of loyalty issue since they took the corp's money, but if that works, David would have to give back his share as well. The three would have to give back the portion of the $100,000 that was not "fair" to the corp. That doesn't do David any good. Comments1. Most students saw that there was probably a partnership formed by these three which I was happy to see. Most students then went on and told me all about corporations and by-laws and minority shareholders and lots of things that have nothing to do with who Michael can sue. The corp formed after the contract was entered into might be liable but only if it ratified the agreement. There are no facts to suggest that happened. There is no promoter liability here because Beth did not enter into the agreement on behalf of a corp. The promoter is only liable when the parties to the contract are the corp (which doesn't exist) and the third party. Few students said that Michael could sue Beth for fraud which I thought was important. Many commented that she lied or made a misrepresentation but then would discuss the business judgment rule or how she owes fiduciary duties to the others which again doesn't answer the question. As to authority, about half the class saw that there might be an issue. Many said apparent authority is when the third party reasonably believes the agent has authority. That's not the rule. The principle has to do something that gives the third party the reasonable belief. 2. As to the landlord, again many students went on and on about corporations and how they work, how they are formed, and who is who and what duties the directors owe, and loyalty and the safe harbor rule. What does that have to do with the landlord? Many talked about authority again - they all agreed to the lease! How could there be an authority issue? About half the class discussed piercing the corp veil and those who did actually did a reasonable job at it. 3. As to David, most students accepted that he was probably out of luck as far as suing anyone. The student should think of what would be the cause of action? If he is suing the corp - for what, breach of contract? breach of fiduciary duties? no to either of those as there is no contact and no fiduciary duties. If he is suing the other two directors, they too have no co0ntract with him and do not owe him fiduciary duties. So all that's left is a derivative suit against the directors. But they are saved by the business judgment rule. QUESTION 2. (50%)Rolz Royce, Inc. (“Rolz”) is a public corporation that manufactures engines for automobile and airplane manufacturers. Its biggest customer is Boeing, which accounts for 60% of its total annual business. Rolz is profitable but some minority shareholders, including Otto, have been complaining about the respectable but slowing profit and lack of dividends. Before last month’s Board meeting, Rolz had a $112,000,000 surplus. At the regular Board meeting last month, Bill, one of the nine Board members of Rolz, proposed that Rolz raise the prices it charges Boeing by 20%. There was a lot of discussion, but the price hike proposal was approved by the Board 5 to 4. The Board agenda also included a vote on shareholder dividends, and the Board rushed to vote without any discussion because 51% majority shareholder Ric Rolz flatly told the Board dividends would not be issued until every American could afford a Rolz engine-driven car in the family garage. Dividends were voted down 9-0. Bill, unaware that Otto also owned 5% of Boeing’s shares, called Otto after the meeting to advise him about the Rolz price increase, thinking Otto would be happy with him.Otto owns 1.5% of the outstanding stock of Rolz and 5% of the outstanding stock of Boeing. He is not on the Rolz Board of Directors. Otto became angry when Bill told him about the price increase as well as the dividend rejection and concluded that Bill and the rest of the Board are incompetent. The same day, Otto demanded that Rolz immediately allow Otto to see all of its corporate records, financial records, and Board emails that afternoon. When Rolz refused to let Otto review records so abruptly on the same day, Otto lost his temper. The very next day after his inspection request was rejected, Otto called his broker and directed the broker to sell all Rolz stock Otto owned.One month later, Boeing announced that it would no longer purchase anything from Rolz, causing Rolz’s stock price to fall dramatically. Rolz is in difficult financial condition without its best customer. Otto ultimately wants to sue Rick personally as well as the Rolz Board of Directors for the decision to raise the prices to Boeing and the ensuing loss of Boeing’s business, as well as regarding the refusal to issue dividends. The Securities and Exchange Commission ("SEC") is investigating Otto's sale of his stock. What is the likely result of the investigation? If Otto files a derivative suit against the Board of Directors for breach of fiduciary duties as to the price hike strategy, what would be the likely result and why? Assume all derivative rules are met. If Otto files a derivative suit against both Rick personally as well as the Board of Directors for breach of fiduciary duties as to the dividend rejection, what would be the likely result and why? Assume all derivative rules are met.Analysis1. The SEC could claim that Otto sold his stock in violation of securities laws. Stock is a security and therefore if he sold it to "the public" and it was not registered, he violated securities laws. Sales of stock on a national stock market is always exempt and it appears that's what happened here. If it was not sold on a national stock market, Otto violated securities laws because the sale was clearly to the public and there is no suggestion Otto registered the shares before selling them. The sale was to someone whom Otto did not know and who had no advance information about anything, as far as we know. The SEC might also claim that Otto violated rule 10(b)(5) by selling a security without disclosing material non-public information. The SEC would win if Otto is a "certain person" and if the info is material non-public info. Otto is apparently not on the BOD of Rolz nor an officer and therefore owes no fiduciary duties to Rolz. He also did not steal the info and therefore the only way he is a "certain person" is if he is a tippee. He is if he got the info from a person who was breaching his fiduciary duties to Rolz by disclosing the info, and the disclosure conferred a benefit on the tipper, and was "in connection with the sale of a security." Here Otto got the info from Bill, a member of the Rolz BOD. Was the disclosure a violation of Bill's fiduciary duties to Rolz? The info belongs to Rolz so I believe it violated Bill's duties to Rolz. Did Bill get, or even expect to get, a benefit from telling Otto or did he expect that Otto would buy or sell stock based on the disclosure? I don't see it. But the benefit doesn't have to be monetary. But also the decision to sell doesn't seem to be based on the price increase but on his view of the board competence. So I don't think Otto is a tippee. Finally, was the info "material, non-public info"? "We're raising our prices." It is material if a reasonable person would think it's important before making a buy-sell decision. I think it's probably material. On these facts, I think Otto wins if the SEC charges him with insider trading. 2. The BOD of Rolz would win if Otto files a derivative suit against the five members who voted for the price hike. As to care, the BJR protects them because they did at least some due diligence, they all showed up and there was "a lot of discussion." And there is no conflict, fraud, illegality or waste in the facts. How much the corp's product should be sold for must be left to the BOD as long as they tried to do their jobs and there is no conflict etc. There is no duty of loyalty issue as the BOD was not receiving something from the corp as part of the decision. If Otto files the suit, the BOD would likely form a special litigation committee which would "investigate the claims" and then recommend dismissal which the court would probably do. 3. As to the dividends, the suit could be brought as a derivative suit or as a direct suit. If brought as a derivative suit, the BOD would win again if it did sufficient due diligence and there was no conflict etc. Here there was no discussion and they simply did what Rick told them to do - so no due diligence - so no BJR. Are there any damages? The corp still has all the money? How did the decision hurt the corp? As to Rick, he not only did no due diligence but seems to have a conflict or is maybe acting in bad faith since the basis for his decision seems to be the good of "the people" instead of the corp. The court could order the BOD to issue dividends on these facts - along the lines of Dodge v. Ford. As to a direct suit by Otto against the BOD and Rick, he would have to show that the decision was a bad faith failure to declare dividends, in other words, an act directed specifically at Otto for some improper purpose. Since Otto only owns 1.5% of the stock and there are no facts to suggest that that is what the BOD intended, Otto would lose his direct suit. Comments1. Most students saw that there was probably a 10(b)(5) issue and that Otto might be a tippee. Only about half the class saw that the sale of the stock might be a problem for Otto, i.e., did it need to be registered or not? No discussing one or the other was a big problem for students as far as the grade goes. 2. As to Otto and the price hike, I saw the issue as pretty straight-forward. The BJR protects them. Again, many if not most students threw out every rule they could remember about corporations. It is especially harmful to talk about Otto piercing the corporate veil (he cannot since he is not a creditor of the corp), or Rick's action as a majority shareholder selling control since he is not selling anything. There is also no possible loyalty issue. As I have said before, it was fine with me if you decided that there was insufficient due diligence because all they did was talk about it. In that case, Otto would win as the decision was a mistake apparently and caused harm to the corp. 3. The suit re dividends is a little different. It is almost always in the best interest of the corp not to declare dividends since the corp keeps the money. But here there was no thought when making a decision not to do something. So the BJR doesn't apply, but where does that leave Otto? The corp has a ton of money - how does that hurt shareholders? As I explained in class, many corporations do not declare dividends, for one thing the income is taxed twice. The only way the withholding of dividends is actionable is if the withholding decision is directed at shareholders, i.e., bad faith withholding (which it is not here), or is for some reason which is not based on the corporation but for some other reason (here the public). If Rick really did say "no divs" based on his view of the public welfare and he owns control of the stock, I think the court would order at least some dividends. The point about the direct action, very few students discussed - with any clarity certainly. ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download