University of Nebraska–Lincoln



Business AssociationsProfessor BradfordFall 2020Exam Answer OutlineThe following answer outlines are not intended to be model answers, nor are they intended to include every issue students discussed. They merely attempt to identify the major issues in each question and some of the problems or questions arising under each issue. They should provide a good idea of the kinds of things I was looking for. In some cases, the result is unclear; the position taken by the answer outline is not necessarily the only justifiable conclusion.I graded each question separately. Those question-by-question grades are available to you. To determine your overall average, each question was then weighted in accordance with the time allocated to that question. The following distribution will give you some idea how you did in comparison to the rest of the class:Question 1: Range 0-8; Average = 4.74Question 2: Range 0-8; Average = 5.87Question 3: Range 0-8; Average = 4.22Question 4: Range 0-9; Average = 5.39Question 5: Range 2-9; Average = 6.30Question 6: Range 0-8; Average = 6.57Question 7: Range 0-9; Average = 4.96Question 8: Range 0-9; Average = 5.17Question 9: Range 0-9; Average = 4.35Total (of unadjusted exam scores, not final grades): Range 1.95-7.97; Average = 5.13All of these grades are on the usual law school scale, with 9 being an A+ and 0 being an F.If you have any questions about the exam or your performance on the exam, feel free to contact me to talk about it.Question 1As partners of ABC, Betty and Carla are personally liable for any debts of the partnership. RUPA § 306(a). Thus, if ABC is liable on the contract, Betty and Carla are also personally liable.However, to enforce that liability Omega must first obtain a judgment against the partnership and be unable to satisfy that judgment from partnership assets. RUPA § 307(d)(1). However, that doesn’t appear to be a problem because ABC has insufficient assets to pay the contract. Omega must also have judgments against Betty and Carla personally. RUPA § 307(c).Ace did not have actual authority to enter into the contract. The partnership agreement makes it clear that no partner may enter into a contract that involves an expenditure above $1,000. Ace also did not have apparent authority. A person’s own statement does not create apparent authority; the statement must come from the principal, which in this case would be the partnership itself. See Third Restatement of Agency §§ 2.03, 3.03.However, RUPA § 301(a) would appear to make ABC, and thus Betty and Carla, liable. It says the partnership is bound by acts of a partner “apparently carrying on in the ordinary course the partnership business.” ABC’s business is metalwork using a lathe; buying a lathe is part of the ordinary business of such a business; in fact, ABC already owns one lathe. Thus, § 301 would appear to bind ABC unless the exception applies. ABC is not liable under 301(a) if two requirements are met: (1) “the partner had no authority;” and (2) the third party “knew or had received a notification that the partner lacked authority.” There’s nothing in the facts to indicate that Omega either knew or had received a notification that Ace lacked authority. Thus, ABC is liable under § 301.However, § 301 says it is “[s]ubject to the effect of a statement of partnership authority under Section 303.” ABC properly filed such a statement that included the limitation on partners’ ability to enter into contracts. However, that filing has no effect on ABC’s liability. Except for transfers of real property, RUPA § 303(e), “a person not a partner is not deemed to know of a limitation on authority of a partner merely because the limitation is contained in a filed statement.” Thus, unless Omega had actual knowledge of the filing, ABC would be liable, and thus Betty and Carla would be personally liable.Question 2Del. § 170 provides two possible tests for the payment of dividends. The second one, the nimble dividends provision, § 170(a)(2), doesn’t apply here because it only applies “in case there shall be no such surplus,” and Bradford has a surplus, In any event, Bradford has had not net profits this year or last year, so even if it applied, it wouldn’t help.Thus, the test is in Del. § 170(a)(1). Bradford may pay dividends out of its surplus. The term “surplus” is defined in § 154 as “the excess . . . of the net assets of the corporation over the amount so determined to be capital.” “Net assets,” in turn, is defined as the amount by which total assets exceeds total liabilities.The net assets here are the total assets, $1,240,000, less the total liabilities, $380,000. The difference, which is net assets, is $860,000.Surplus is the difference between this number and the amount determined under section 154 to be capital. Section 154 requires the board to determine the amount of capital when the stock is issued, and says it must be at least the par value of the shares, if the shares have par value. Here, that determination is apparent from the common stock account on the balance sheet, $10,000.Bradford’s surplus is thus $860,000 - $10,000 = $850,000. Under Del. § 170(a)(1), the maximum amount of dividends Bradford may pay is $850,000.Question 3Fiduciary Duties in a Delaware LLCThe Delaware LLC statute does not itself provide for fiduciary duties, but it does say that the rules of law and equity relating to fiduciary duties govern Delaware LLCs. Del. § 18-1104. Thus, the managers of Delaware LLCs owe duties of care and loyalty to the LLC. See William Penn P’ship v. Saliba; Feeley v. NHAOCG, LLC. The Effect of Paragraph 10 of the Operating AgreementThose fiduciary duties may be limited or eliminated by the LLC’s operating agreement. Del. § 18-1101(e). Acme has such a provision in its operating agreement, Paragraph 10, but that provision does not appear to protect Smith with respect to this transaction. It eliminates the duty of care violations, so Smith cannot be liable for violating the duty of care. It also eliminates liability for two types of duty of loyalty violation: taking a business opportunity or competing with the LLC. But it does not eliminate or limit liability for a third type of duty of loyalty violation: self-dealing.Liability for Self-DealingThe transaction between Acme and Land is a self-dealing transaction. Smith, because of his 5% ownership of Land, has a personal interest on the other side of the transaction. It doesn’t matter that Smith has no control over Land; any benefit to Land will also benefit Smith as a shareholder, even as a minority shareholder.Under the common law, once the manager’s personal interest in the LLC’s transaction is shown, the burden is on the manager to show entire fairness. That has two elements, fair dealing and fair price. See Feeley. Smith may have problems proving either of those elements. In terms of fair dealing, although Smith himself was not involved in the negotiations, the contract was negotiated by an employee of the LLC. As manager, Smith has control over that employee and thus the employee really is not independent. That creates an issue of fair dealing, although we really need to know about the negotiations.There’s also an issue of fair price. One of the appraisals indicates that the property is worth less than what Acme paid for it. The other appraisal indicates a higher value, but the burden of proof is on Smith, the interested manager. Smith may not be able to prove fairness.The Effect of the Member VoteIn the corporate setting, approval by disinterested, independent shareholders after full disclosure is sufficient to cleanse a transaction of any self-dealing taint and allow directors to avoid liability. A vote by the disinterested members of the LLC should similarly cleanse a self-dealing transaction, but the vote here was insufficient. First, it’s not clear if Marty made full disclosure of the conflict prior to the vote. More importantly, to properly cleanse the transaction, a majority vote by the disinterested, independent members would be needed. Paragraph 6 of the operating agreement says that voting is in proportion to the members’ capital contributions. Excluding Smith’s 30% interest, the vote of the disinterested members was 40%-30% against the transaction. Thus, this approval has no effect on Smith’s liability. Whether he is liable turns on the application of the entire fairness test.Question 4Paragraph 4.1.1 of the Certificate of Designation says that each Series A share shall be convertible into a number of common shares that is equal to the Series A Original Issue Price divided by the Series A Conversion Price. The Original Issue Price is $1,000 per shares. Certification § 1. The beginning Series A Conversion Price was $10, but it’s subject to adjustment, and the question indicates it was adjusted to $5 as of August 1.Section 4.4.4 says the price is adjusted if Riffpad issues Additional Shares of Common Stock for a price less than the Conversion Price then in effect. The shares sold to the employee were issued for $4, less than the $5 Conversion Price then in effect. But “Additional Shares of Common Stock” is a defined term; it is defined in § 4.4.1(d) of the Certificate. The issue to the employee is excluded from the definition by 4.4.1(d)(iii) because the shares were issued to an employee pursuant to a plan approved by Riffpad’s board of directors. Thus, these are not Additional Shares of Common Stock, and no adjustment is necessary.The shares issued pursuant to a stock split were issued for no additional consideration, but these are also excluded from the definition of Additional Shares of Common Stock. Certificate § 4.4.1(d)(i) excludes shares of common stock “issued by reason of a . . . stock split that is covered by Subsection 4.5, 4.6, 4.7, or 4.8.” Section 4.5 provides for an adjustment in the event of a stock split. It provides that, in the event of a stock split that increases the number of outstanding shares, the Conversion Price then in effect shall be “proportionately decreased so that the number of shares of Common Stock issuable on conversion . . . shall be increased in proportion to such increase in the aggregate number of” common shares outstanding. Because the number of common shares outstanding has double, that means the Conversion price must be cut in half, which will proportionately increase (double) the number of shares received on conversion. Thus, the new Conversion price must be $2.50.Thus, applying the formula in § 4.1.1, each Series A share would be entitled to 1,000/2.50 = 400 shares. Since Jenny owns a total of 10,000 Series A shares, the total number of shares she would be entitled to upon conversion is 10,000 x 400 = 4,000,000 shares.Question 5Wade is not liable under Rule 10b-5. For insider trading to violate Rule 10b-5’s prohibition of fraud, the trader must owe a fiduciary duty. Chiarella. This does not fit within the classical theory of insider trading because Wade owes no fiduciary duty to Magna, the company whose stock he purchased. He also owes no fiduciary duty to Amazon. He has no relationship of any kind with either company.Wade is not liable under the O’Hagan misappropriation theory for the same reason. He does not owe a duty of trust or confidence to the source of the information. He has no connection at all to Amazon, Magna, or Bezos.Rule 10b5-2 does not create any relevant duty. Wade has not agreed to keep the information in confidence. Rule 10b5-2(b)(1). He has no history or pattern of sharing confidences with Bezos. (b)(2). And the information did not come from anyone with a family relationship to Wade as specified in (b)(3).Wade is also not liable as a tippee under Dirks. To be liable as a tippee, the tipper (in this case Bezos) must breach a fiduciary duty for personal gain and Wade must know or should have known of that breach. Bezos arguably breached a contractual duty to keep the information confidential, but he did not do so for personal gain (not even as a gift), so it doesn’t satisfy the first prong of Dirks. Since there was no breach of duty, Wade is not liable. It doesn’t matter that he knew this was confidential information that wasn’t supposed to be disclosed. Not all trading on nonpublic information violates Rule 10b-5.This is not a violation of Rule 14e-3 because that rule only relates to information about tender offers, and this transaction was a merger, not a tender offer.Question 6Jones does not have any preemptive rights. MBCA 6.30(a) says that shareholders do not have preemptive rights “except to the extent the articles of incorporation so provide.” The preemptive rights provision is in Zippo’s bylaws, not its articles. Section 6.30(a) does not allow the bylaws to change the statutory default rule. Therefore, the statutory default rule still applies. The Zippo shareholders do not have preemptive rights.Question 7The term “qualified director” is defined in MBCA § 1.43. For purposes of section 8.62, § 1.43(a)(4) says it means any director except one as to whom:“as to whom the transaction is a director’s conflicting interest transaction;” or“who has a material relationship with another director as to whom the transaction is a director’s conflicting interest transaction.”HenryHenry is probably a qualified director. The Omega contract is a DCIT as to Henry if Henry knew that a related person had a material financial interest. Henry’s spouse is a related person under the first prong of the definition of related person in 8.60. Her company (Supplies) is a related person of Henry under part (iv) of the definition: an entity controlled by any person specified above, which would include his spouse in (i). She controls Supplies because she owns a majority of the voting stock of Supplies. Thus, the transaction is a DCIT as to Henry if his wife or Supplies had a material financial interest. Neither the spouse nor Supplies has a direct interest in the transaction itself, but Supplies arguably does have a financial interest in Omega, because of the business it does with Omega. This interest probably does not create a DCIT because it’s not an interest in the Delta/Omega transaction itself. Even if it was covered, it is probably not a material financial interest. According to section 8.60, a material financial interest is one “that would reasonably be expected to impair the objectivity of the director’s judgment.” Supplies only does a small amount of business with Omega ($500 out of total sales of $400,000). Even if Omega cut off Supplies, it wouldn’t have a significant impact on Supplies or Henry’s wife, and is therefore unlikely to affect Henry’s objectivity when evaluating the contract. But that’s a judgment call.IreneIrene is probably a qualified director. Irene is not a party to the transaction, so she doesn’t fall within subsection (i) of the definition of DCIT. Her ownership of 10% of Omega’s stock would probably give her a “material financial interest” in the transaction. If Omega does well on the transaction, the value of her investment increases. But the definition of DCIT in (ii) requires that the material financial interest be “known to the director” at the relevant time, which is defined to mean at the time the director’s action under section 8.62 is taken. See § 8.60, “Relevant time.” Irene does not know of her interest in Omega, and the question says she will not find out until after the directors approve the transaction. Thus, at the relevant time, subsection (ii) does not apply to her.Under part (iii) of the definition, the transaction is a DCIT as to Irene if she knows a related person has a material financial interest. Her grandmother clearly falls within part (ii) of the definition of “related person,” and a 10% stock interest would clearly give her a material financial interest. But her grandmother is dead at the relevant time, so a related person no longer has a material financial interest.JackJack is a qualified director. The Omega transaction is not a DCIT as to Jack. He is not a party to the contract. He has no material financial interest in the contract. No related person of Jack is a party or has a material financial interest in the contract. Even if Jack’s friend has a material financial interest because of his position as CEO, he’s not a related person of Jack. The definition of “related person” includes family members, spouses, and even people living in the same household, but being a friend does not make one a related person.The second prong of the definition of qualified director in § 1.43(a)(4) also doesn’t exclude Jack. It only covers material relationships with other directors as to whom the transaction a DCIT. It doesn’t exclude Jack based on a material relationship with anyone else.KateKate clearly is not a qualified director because the Omega transaction is a DCIT as to her. A transaction is a DCIT as to a director if, among other things, “the director knew that a related person was a party or had a material financial interest in the transaction.” MBCA § 8.60, DCIT. Omega, a party to the contract, is a related person of Kate. Section 8.60 defines related person to include “a domestic or foreign (a) business or nonprofit corporation . . . of which the individual is a director. Kate is a director of Omega, and thus Omega is a related person of Kate. Because this is a DCIT as to Kate, she is not a qualified director because of the first prong of the section 1.43 definition.Question 8There is nothing in the partnership agreement giving the general partner the right to require limited partners to contribute additional capital. There is also nothing to that effect in the Uniform Limited Partnership Act.Paragraph 4 of the partnership agreement provides: “Each Limited Partner shall contribute capital to the Partnership in the amount set forth opposite each Limited Partner’s name on Schedule A of this Agreement.” The limited partners have already done that. To require them to contribute additional amounts, Paragraph 4, and the accompanying schedule must be amended.The ULPA provides that the “consent of each partner” is required to amend the partnership agreement. ULPA § 406(b)(1). However, this is subject to change in the partnership agreement; it is not one of the sections the agreement may not change. See ULPA § 110(b).The partnership agreement has changed the statutory requirement. Paragraph 11(a) says that the partnership agreement may be amended, generally “with the written consent of the General Partner and of a Majority Interest of Limited Partners.” Majority Interest is a defined term; it means “a majority of the Capital Contributions of all Limited Partners.” Paragraph 1(h).However, there is an exception to the general rule in Paragraph 11(b). It says that any amendments to certain sections “adverse to the interest of the Limited Partners” require the consent of limited partners holding 75% of the Capital Contributions made by all Limited Partners. One of those sections is section 4, dealing with capital contributions. Requiring the limited partners to contribute additional funds is undoubtedly adverse to their interest, and therefore triggers this 75% requirement.The general partner would have to get the written consent of limited partners who have contributed at least 75% of the total $135,000,000 amount indicated in Schedule A. This may be done either at a meeting called by the general partner, Paragraphs 10(a)(2), 10(b)(4), or through written consent of the required 75% interest. Paragraph 10(a)(7).Question 9Frieda clearly was acting as Henry’s agent. There was mutual consent on both sides; Henry asked her to perform the work on his behalf and she agreed by her conduct of beginning to do it. See Third Restatement of Agency § 1.01. But a principal is liable for the tort of an agent only if (1) the agent’s conduct is within the agent’s actual authority, Third Restatement § 7.04; (2) the principal ratifies the agent’s actions, § 7.04; or (3) the agent is an employee acting within the scope of employment. § 7.07(1). Actual AuthorityHenry did not give Frieda actual authority to throw the shingles on the roof. In fact, he provided her a ladder and showed her where to use it. Frieda could not reasonably believe, based on anything Henry said or did, that he wished her to throw the shingles on the roof. § 2.01.RatificationNothing in the question indicates that Henry ratified Frieda’s actions after the fact.EmployeeAn employee is an agent “whose principal controls or has the right to control the manner and means of the agent’s performance of work.” § 7.07(3)(a). Frieda appears to be an employee rather than an independent contractor. Henry furnished the ladder and gave her specific instructions concerning what to do. He clearly appears to be controlling the manner and means of her work. Frieda can be an employee for purposes of the Restatement even though she was acting gratuitously and was not paid. § 7.07(3)(b).Scope of EmploymentAssuming Frieda is an employee, Henry is liable if Frieda was acting within the scope of her employment when the tort occurred. She is acting within the scope of employment if she is “performing work assigned by the employer or engaging in a course of conduct subject to the employer’s control.” § 7.07(2). Frieda was performing the work Henry assigned her: putting the shingles on the roof. She was not doing anything “not intended to serve any purpose of the employer.” Id.Since Frieda was an employee acting within the scope of employment, Henry is liable to Vince for Frieda’s negligence. ................
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