ÿWPC5 Ø„äN†oYÿßdwÌ'¦F£c+143?ó¾ÖÒ÷B›¥HpŠ P×Ej;Û‚ ˜ŽÊ×N°»ÜÛŒ}’¾d6ƒ‹GJ9WÁ½ä_þ_ŒCb.áÊ{’Ë÷!Â|tÒ“#º-ó4œgúzpœpج1×9ÜÂ`$‚¼Ûè|Åa£«ƒ&®È‹ãõ°»‰ªÔð}:µN ¨i&(D?ò,aK…âToÃA²À7^:Gùâ]Mô@l‹¥&`&)ÃÈáØq`þ“hdÜ¥´y¬ùvÂÒ†Ï0È™mpöb™Z¨ Œ‘Æ‹§/¸Š¬ø¢ùŠÒô‰ÊJ28 ßõ| Re”‰e‰âÝØº;Ðg oƨ¢Î2O;UŠ/%ªXŒRÝ}ôzþçLrÏû‹(x<Ùó¼jÿu¯ß–'É©«¤‚ñmŽ™ )i!ÝR}ýüh©x.ÈÚ¢_'Qì làè:ÃSVó”¾ wUbcBð@ ;~ .>8†à“x`ú˜ùŸiÓbè)F>‡å8à²Ë;@a^‹4< µ¤"»Nçñ;HÑàìyøé¼‚g_—žÕ ãŽcÁm¹[Ù奓‰f5Ñ86JŽo2ÖÆhtO¡ð #ÁšUN[ %© 0:¯^ éwõ4ù  m˜HP DeskJet 820C Series Printer,(,,,,,(0(ÖÃ9 Z‹6Times New Roman RegularX(üœ$¡¡ÔUSUS.,ÔvŠl* ¦zj*bk1Ľ¨3|x ÿU‹ÿÀÀÀÝ ƒüœ!ÝÔUSUS.,ÔÝ  ÝÔ_Ôò òó óCorporationsÐ ° ÐProfessor€Steve€BradfordÐ œì ÐFall€2000Ð ˆØ ÐÌà@ø ø #ìàÔ‡°-ŰXXÔò òFINAL€EXAMð!ð2000ó óÔ#†XòÇX°°-ÅÂ#ԈР`° ÐÌÌà  àThe€following€answer€outlines€are€not€intended€to€be€model€answers,€nor€are€they€intendedÐ  ` Ðto€include€every€issue€that€students€discussed.€€They€merely€attempt€to€identify€the€major€issues€inÐ ü L Ðeach€question€and€some€of€the€problems€or€questions€arising€under€each€issue.€€They€shouldÐ è 8  Ðprovide€a€pretty€good€idea€of€the€kinds€of€things€I€was€looking€for.€€If€you€have€any€questionsÐ Ô$  Ðabout€the€exam€or€your€performance€on€the€exam,€feel€free€to€contact€me€to€talk€about€it.Ð À  ÐÌà  àI€graded€each€question€separately.€€Those€grades€appear€on€the€front€cover€of€your€blueÐ ˜è  Ðbooks.€€To€determine€your€overall€average,€each€question€was€then€weighted€in€accordance€withÐ „Ô  Ðthe€time€allocated€to€that€question.€€The€following€distribution€will€give€you€some€idea€how€youÐ pÀ Ðdid€in€comparison€to€the€rest€of€the€class:Ð \¬ ÐÌQuestion€1:€Average€6.04;€Range€3€to€9Ð 4„ ÐQuestion€2:€Average€5.88;€Range€2€to€8Ð  p ÐQuestion€3:€Average€5.13;€Range€0€to€8Ð  \ ÐQuestion€4:€Average€4.87;€Range€0€to€8Ð øH ÐQuestion€5:€Average€5.00;€Range€0€to€9Ð ä4 ÐGrade€for€course:€Average€6.14;€Range€3€to€Ô_Ô8ò òÔ_ÔÐ  Ð  ÐÓ  ÓQUESTION€1ó óÐ ° ÐÓ¤ÓÌò òRule€10b„5ó óÐ ˆØ ÐÌò òòòBreach€of€Duty€Requiredó óóóÐ `° Ðà  à„Violet€is€liable€only€if€her€insider€trading€involves€a€breach€of€fiduciary€duty.€€òòÔ_ÔChiarellaÔ_Ôóó;Ð L œ ÐòòDirksóó;€òòÔ_ÔOððHaganÔ_Ôóó.à ¸ àà  àà h àà À àà  àà p àÐ 8 ˆ Ðà  à„The€breach€can€be€either€her€own€breach€of€duty,€òòTexas€Gulf€Sulphuróó;€òòÔ_ÔOððHaganÔ_Ôóó,€or€aÐ $ t Ðbreach€of€fiduciary€duty€by€the€source€of€the€information.€€òòDirksóó.Ð  ` ÐÌò òòòDid€Violet€Breach€a€Fiduciary€Duty?óóó óÐ è 8  Ðà  à„Violet€is€not€guilty€of€ð ðclassicalðð€insider€trading.€€She€has€no€relationship€with€BF€andÐ Ô$  Ðowes€no€duty€to€BF€or€its€shareholders.€€òòSeeóó€òòTexas€Gulf€Sulphuróó;€òòÔ_ÔChiarellaÔ_Ôóó.€€She€also€has€noÐ À  Ðtemporary€relationship€with€BF€that€would€make€her€a€ð ðtemporary€insider.ðð€€òòSeeóó€òòDirksóó,€n.€14.Ð ¬ü  Ðà  à„Violet€can€also€be€liable€if€she€trades€without€disclosure€in€breach€of€a€duty€owed€to€theÐ ˜è  Ðsource€of€the€information,€in€this€case€Mary€or€George.€€òòÔ_ÔOððHaganÔ_Ôóó.Ð „Ô  Ðà  àà ` à„Violet€has€no€connection€to€Mary,€so€she€owes€Mary€no€duty.Ð pÀ Ðà  àà ` à„€Violet€owes€no€legal€duty€to€George€merely€because€she€is€his€masseuse.€€Even€ifÐ \¬ Ðthe€doctor„patient€privilege€applied,€the€information€really€was€not€provided€for€the€purpose€ofÐ H˜ Ðtreatment.Ð 4„ Ðà  àà ` à„Violet€could€owe€a€duty€of€confidentiality€if€she€agreed€to€keep€the€informationÐ  p Ðconfidential.€€Rule€10b5„2(b)(1).€€George€asked€Mary€not€to€tell€anyone,€but€is€mere€silence€onÐ  \ ÐMaryððs€part€an€agreement€to€this€request?Ð øH Ðà  àà ` à„Violet€could€owe€a€duty€of€confidentiality€if€she€and€George€have€a€history€ofÐ ä4 Ðsharing€confidences,€such€that€Violet€knows€George€expects€this€to€be€kept€confidential.€€RuleÐ Ð  Ð10b5„2(b)(2).€€Whether€Violet€breached€such€a€duty€depends€on€her€past€history€with€George.Ð ¼  Ðà  àà ` à„If€all€that€is€required€under€10b5„2(b)(2)€is€knowledge€that€the€communicatingÐ ¨ø Ðperson€expects€confidentiality,€is€Georgeððs€request€enough€even€in€the€absence€of€past€history,€orÐ ”ä Ðis€the€past€practice€required€to€create€what€is€a€tacit€agreement€to€keep€information€confidential?Ð €Ð ÐÌò òòòIs€Violet€Liable€as€a€Tippee?óóó óÐ X ¨ Ðà  à„A€tippee€is€liable€if€(1)€the€tipper€breaches€a€fiduciary€duty€in€providing€the€information,Ð D!” Ðand€(2)€the€tipper€knows€or€should€have€known€of€the€breach.€€òòDirksóó.€€Furthermore,€the€tipperÐ 0"€  Ðmuch€provide€the€information€for€personal€gain,€although€that€could€include€a€gift€to€friend€orÐ #l! Ðfamily.Ð $X" Ðà  à„There€is€no€indication€that€Mary€intended€for€the€information€to€go€to€Violet,€or€even€thatÐ ô$D # Ðshe€provided€it€to€George€for€personal€gain.Ð à%0!$ Ðà  à„George€breached€a€duty€to€Mary€by€disclosing€the€information,€since€he€agreed€to€keep€itÐ Ì&"% Ðconfidential.€€Rule€10b5„2(b)(1).€€However,€George€did€not€do€so€for€personal€gain.€€Getting€aÐ ¸'#& Ðfaster€massage€might€be€personal€gain,€but€it€seems€rather€trivial.€€And€Georgeððs€instruction€toÐ ¤(ô#' ÐMary€to€keep€the€information€confidential€probably€negates€any€gift,€even€if€they€were€closeÐ )à$( Ðenough€to€otherwise€suppose€a€gift.Ð |*Ì%) Ðà  à„Rule€10b5„2(b)(1)€says€nothing€of€personal€gain.€€Was€it€meant€to€negate€the€personalÐ h+¸&* Ðgain€requirement?€€If€so,€can€it€lawfully€do€so,€given€the€Supreme€Courtððs€interpretation€of€theÐ T,¤'+ Ðstatute€in€òòDirksóó?Ð @-(, Ðà  à„Even€if€George€breached€his€duty€to€Mary,€did€Violet€know€or€should€she€have€known€ofÐ ° Ðthat€breach?€€George€didnððt€tell€Violet€he€agreed€to€keep€the€information€confidential.€€VioletÐ œì Ðknew€of€Maryððs€position;€should€she€have€known€that€George€must€have€breached€a€duty€ofÐ ˆØ Ðconfidentiality€by€passing€on€the€information?Ð tÄ ÐÌòòò òThe€Timing€of€Violetððs€Tradingó óóóÐ L œ Ðà  à„Violet€did€not€place€her€order€until€after€the€public€announcement.€€However,€this€will€notÐ 8 ˆ Ðprotect€her€from€liability.€€A€person€under€a€duty€to€disclose€or€abstain€must€delay€trading€until€theÐ $ t Ðpublic€announcement€has€become€available€to€the€investing€public.€€òòTexas€Gulf€Sulphuróó.€€ThreeÐ  ` Ðminutes€is€not€a€sufficient€delay.Ð ü L  ÐÌÌò òRule€14e„3ó óÐ À  Ðà  à„Only€applies€if€the€information€relates€to€a€tender€offer.€€Rule€14e„3(a).€€Here,€theÐ ¬ü  Ðinformation€actually€relates€to€a€merger.Ð ˜è  Ðà  à„Violetððs€belief€that€it€is€a€tender€offer€is€irrelevant.€€The€rule€only€applies€ð ð[Ô_Ôi]fÔ_Ô€any€personÐ „Ô  Ðhas€taken€a€substantial€step€or€steps€to€commence,€or€has€commenced,€a€tender€offer.ðð€€Rule€14e„Ð pÀ Ð3(a).€€That€hasnððt€happened.Ð  \¬ ÐÓ  Óò òQUESTION€2ó óÐ ° ÐÓ  ÓÌà@ìì*ìàˆÌò òòòType€of€Entityóóó óÐ tÄ Ðà  à„Ames,€Burns,€and€Carter€have€taken€no€steps€to€incorporate€Ô_ÔWUSÔ_Ô€or€to€make€the€filingÐ `° Ðrequired€for€other€types€of€entities.€€This€is€the€association€of€two€or€more€persons€to€carry€on€asÐ L œ Ðco„owners€a€business€for€profit,€so€Ô_ÔWUSÔ_Ô€appears€to€be€a€partnership.€€Ô_ÔRUPAÔ_Ô€ðð€202(a).Ð 8 ˆ Ðà  à„However,€the€Business€Agreement€says€nothing€about€sharing€profits€or€losses.€€CarterÐ $ t Ðcontributed€nothing€to€the€business,€and€the€Agreement€provides€that€she€will€be€a€generalÐ  ` Ðmanager.€€It€is€at€least€arguable€that€Ô_ÔWUSÔ_Ô€is€a€partnership€between€Ames€and€Burns,€and€Carter€isÐ ü L  Ðmerely€employed€as€a€manager.€€However,€if€no€salary€is€provided€for€Carter,€that€would€beÐ è 8  Ðevidence€of€a€non„employment€relationship.€€The€agreement€is€probably€ambiguous€enough€that€aÐ Ô$  Ðcourt€would€consider€evidence€of€the€partiesðð€intent.Ð À  Ðà  à„If€Carter€were€only€an€employee,€she€would€not€have€any€of€the€remedies€specified€below,Ð ¬ü  Ðbut€she€also€would€not€have€any€potential€liability€to€Burns.Ð ˜è  ÐÌò òòòTerm€of€Partnershipó óóóÐ pÀ Ðà  à„There€is€an€argument€that€this€is€a€term,€rather€than€an€at„will€partnership.€€The€threeÐ \¬ Ðpartners€appear€to€contemplate€at€least€an€18„month€duration€in€their€acknowledgment€that€itÐ H˜ Ðwould€take€18€months€to€get€the€business€going€before€it€became€profitable.€€Carterððs€agreementÐ 4„ Ðin€the€Business€Agreement€to€manage€the€business€for€two€years€might€also€be€seen€as€specifyingÐ  p Ða€term;€of€course,€it€could€also€be€only€Carterððs€commitment€for€that€long€if€the€businessÐ  \ Ðcontinues.€€This€is€much€more€specific€than€the€general€hope€for€profits€that€led€òòPage€v.€Pageóó€toÐ øH Ðreject€the€term€partnership€argument.Ð ä4 ÐÌòòò òDissociationó óóóÐ ¼  Ðà  à„Ames€and€Burns€clearly€dissociated€from€the€partnership€on€November€14€by€tellingÐ ¨ø ÐCarter€that€they€were€ending€their€relationship.€€This€clearly€expresses€their€will€to€withdraw€asÐ ”ä Ðpartners.€€Ô_ÔRUPAÔ_Ô€ðð€601(1).€€This€dissociation€is€effective€even€if€this€is€a€term€partnership.€€Ô_ÔRUPAÔ_ÔÐ €Ð Ððð€602(a).Ð l¼ ÐÌòòò òWrongful€Dissociation/Dissolutionó óóóÐ D!” Ðà  à„ò òòòTerm€Partnershipóóó óÐ 0"€  Ðà  àà ` à„If€this€is€a€term€partnership,€the€dissociation€is€wrongful€because€the€18„month€orÐ  #p! Ð2„year€term€has€not€ended.€€Ô_ÔRUPAÔ_Ô€ðð€602(a)(2).Ð  $\" Ðà  àà ` à„Ames€and€Burns€are€liable€to€Carter€for€any€damages€caused€by€their€wrongfulÐ ø$H # Ðdissociation.€€Ô_ÔRUPAÔ_Ô€ðð€602(c).Ð ä%4!$ Ðà  àà ` à„The€partnership€is€not€dissolved,€Ô_ÔRUPAÔ_Ô€ðð€801(2),€but€Ames€and€Burns€lose€theirÐ Ð& "% Ðright€to€participate€in€the€management€of€the€business.€€Ô_ÔRUPAÔ_Ô€ðð€603(b)(1).€€Carter€has€the€rightÐ ¼' #& Ðto€continue€the€business.Ð ¨(ø#' Ðà  àà ` à„Ames€and€Burns€are€entitled€to€payment€for€their€interest€in€Ô_ÔWUSÔ_Ô€now€only€ifÐ ”)ä$( Ðthey€can€establish€that€payment€now€will€not€cause€undue€hardship€to€the€business€of€theÐ €*Ð%) Ðpartnership.€€Ô_ÔRUPAÔ_Ô€ðð€701(h).€€Otherwise,€they€must€wait€until€the€term€of€the€partnership€ends.€Ð l+¼&* ÐIn€either€case,€the€damages€they€owe€for€wrongful€dissociation€are€offset€against€the€amounts€theyÐ X,¨'+ Ðare€owed.€€Ô_ÔRUPAÔ_Ô€ðð€701(c).Ð D-”(, Ðà  à„òòò òAt„Will€Partnershipó óóóÐ ° Ðà  àà ` à„If€this€is€an€at„will€partnership,€the€dissociation€is€probably€not€wrongful.€€It€is€notÐ  ð Ðin€breach€of€an€express€provision€of€the€partnership€agreement€and€it€is€not€before€the€expirationÐ ŒÜ Ðof€a€specified€term€or€undertaking€(assuming€itððs€not€a€term€partnership).€€Ô_ÔRUPAÔ_Ô€ðð€602(b)(1),(2).Ð xÈ Ðà  àà ` à„The€timing€of€the€dissociation,€just€as€the€partnership€is€becoming€profitable,Ð d´ Ðappears€opportunistic.€€òòPage€v.€Pageóó€held€that€such€an€opportunistic€withdrawal€could€be€aÐ P   Ðwrongful€dissolution,€even€in€an€at„will€partnership.€€However,€section€602(b)(1),€in€requiring€aÐ < Œ Ðbreach€of€an€express€provision€of€the€agreement,€seems€to€reject€that€idea.Ð ( x Ðà  àà ` à„If€this€is€an€at„will€partnership,€the€partnership€is€dissolved.€€Ô_ÔRUPAÔ_Ô€ðð€801(1).Ð  d ÐÌò òòòDistribution€Upon€Dissolutionóóó óÐ ì <  Ðà  à„Upon€dissolution,€each€partner€is€entitled€to€receive€to€a€settlement€of€partnershipÐ Ø(  Ðaccounts.€€Ô_ÔRUPAÔ_Ô€ðð€807(b).€€Partnership€profits€and€losses€are€credited€and€charged€to€theÐ Ä  Ðaccounts€and€a€partner€receives€any€positive€amount€in€his€account€or€must€pay€any€negativeÐ °  Ðamount€in€his€account.€€Ô_ÔRUPAÔ_Ô€ðð€807(b).Ð œì  Ðà  à„Since€there€is€no€agreement€to€the€contrary,€profits€and€losses€are€shared€equally.€€Ô_ÔRUPAÔ_ÔÐ ˆØ  Ððð€401(b).Ð tÄ Ðà  à„Each€partnerððs€account€is€credited€with€the€amount€of€any€money€or€property€contributedÐ `° Ðto€the€partnership.€€Ô_ÔRUPAÔ_Ô€ðð€401(a).Ð Lœ Ðà  àà ` à„Burnsðð€account€will€have€a€$50,000€credit€for€the€cash€she€contributed.€€AmesððÐ 8ˆ Ðaccount€will€have€a€$50,000€credit€for€the€value€of€the€machine€he€contributed;€this€value€is€basedÐ $t Ðon€the€specification€by€the€partners€in€the€Business€Agreement.Ð ` Ðà  àà ` à„The€value€of€Carterððs€services€as€manager€do€not€appear€to€constitute€propertyÐ üL Ðwithin€the€meaning€of€section€401.€€òòSeeóó€Ô_ÔRUPAÔ_Ô€ðð€101(11).€€Partners€generally€are€not€entitled€toÐ è8 Ðcompensation€for€services€performed.€€Ô_ÔRUPAÔ_Ô€ðð€401(h).€€However,€òòÔ_ÔKovacikÔ_Ô€v.€Reedóó€held€that€aÐ Ô$ Ðservice€partner€was€entitled€to€credit€for€the€value€of€his€services,€which,€in€an€equal€sharingÐ À Ðsituation,€were€presumed€to€equal€the€value€of€the€other€partnersðð€capital€contributions.Ð ¬ü Ðà  à„ò òRejecting€òòÔ_ÔKovacikÔ_Ôó óóóÐ ˜è Ðà  àà ` à„The€total€loss€was€$15,000,€if€we€assume€the€contract€is€enforceable€($100,000Ð ˆØ Ðcontributed;€$35,000€cash€plus€the€$50,000€from€the€sale€of€the€machine€left).€€If€the€contract€wasÐ tÄ Ðnot€enforceable,€the€loss€might€be€more;€Ames€and€Burns€have€hinted€that€the€machineððs€marketÐ ` ° Ðvalue€is€less€than€$50,000.Ð L!œ Ðà  àà ` à„This€loss€is€split€equally€among€the€three€partners.€€Burns€has€a€positive€balance€inÐ 8"ˆ  Ðher€account€of€$45,000€($50,000€„€$5,000).€€Ames€has€a€positive€balance€in€his€account€ofÐ $#t! Ð$45,000€($50,000€„€$5,000).€€Carter€has€a€negative€balance€in€her€account€of€„€$5,000.€€Thus,Ð $`" ÐCarter€owes€$5,000€and€Ames€and€Burns€are€each€entitled€to€receive€$45,000.Ð ü$L # Ðà  à„ò òAccepting€òòÔ_ÔKovacikÔ_Ôóóó óÐ è%8!$ Ðà  àà ` à„The€total€loss€was€$65,000,€including€the€value€of€Carterððs€services.Ð Ø&("% Ðà  àà ` à„This€loss€is€split€equally€among€the€three€partners,€with€each€entitled€to€receiveÐ Ä'#& Ð$28,333.33€($50,000€„€$21,666.67).Ð °($' ÐÌÐ  ˆ*Ø%) Ðòòò òApproval€of€the€Sales€Contract€by€Ô_ÔWUSÔ_Ôóóó óÐ ° Ðà  à„It€is€not€clear€that€the€contract€with€XYZ€was€validly€approved€by€Ô_ÔWUSÔ_Ô.€€The€usual€ruleÐ œì Ðfor€partnership€operation€is€majority€rule.€€Ô_ÔRUPAÔ_Ô€ðð€401(j).€€However,€acts€outside€the€ordinaryÐ ˆØ Ðcourse€of€business€require€the€unanimous€consent€of€all€the€partners.€€Ô_ÔRUPAÔ_Ô€ðð€401(j).Ð tÄ Ðà  à„The€Business€Agreement€contemplated€the€sale€of€the€machine€when€the€business€wasÐ `° Ðcompleted,€but€it€does€not€specify€a€voting€rule.€€It€merely€says,€ð ðif€approved€by€Ô_ÔWUSÔ_Ô.ððÐ L œ Ðà  à„The€sale€of€a€widget€manufacturerððs€only€widget„making€machine€appears€to€be€outsideÐ 8 ˆ Ðthe€ordinary€course€of€business,€and€Carter€did€not€approve€the€sale.€€Thus,€the€contract€probablyÐ $ t Ðshould€not€bind€Ô_ÔWUSÔ_Ô.Ð  ` ÐÌò òòòDefective€Incorporationð!ðEffect€of€the€Contract€on€XYZó óóóÐ è 8  Ðà  à„The€contract€was€made€before€XYZ€was€incorporated,€so€it€is€binding€on€XYZ€only€ifÐ Ô$  ÐXYZ€adopts€it.Ð À  Ðà  à„Ames€and€Burns€are€personally€liable€on€the€contract€if€they€purported€to€act€on€behalf€ofÐ ¬ü  Ða€corporation,€knowing€there€was€no€incorporation.€€Ô_ÔMBCAÔ_Ô€ðð€2.04.€€Burns€was€clearly€purportingÐ ˜è  Ðto€act€on€behalf€of€the€corporation€when€she€signed€the€contract,€but€this€was€9€days€after€theÐ „Ô  Ðarticles€were€mailed€and€before€they€were€returned.€€She€did€not€know€there€was€noÐ pÀ Ðincorporation.€€Itððs€not€clear€that€Ames€ever€did€anything€purporting€to€act€on€behalf€of€XYZ€but,Ð \¬ Ðin€any€event,€at€the€time€of€the€contract,€he€did€not€know€there€was€no€incorporation.€€Thus,Ð H˜ ÐAmes€and€Burns€appear€to€have€no€personal€liability€on€the€contract.Ð 4„ ÐÌòòò òBreach€of€Partnersðð€Fiduciary€Dutyð!ðSale€of€the€Machineó óóóÐ  \ Ðà  à„Partners€owe€a€duty€of€loyalty€to€the€partnership€and€to€the€other€partners.€€Ô_ÔRUPAÔ_Ô€ððÐ øH Ð404(b).€€The€attempted€sale€of€the€machine€by€Ames€and€Burns€to€a€corporation€they€own€appearsÐ ä4 Ðto€be€a€clear€duty€of€loyalty€violation.Ð Ð  Ðà  à„The€partnership€may€identify€specific€activities€that€do€not€breach€the€duty€of€loyalty€ifÐ ¼  Ðthose€categories€are€not€manifestly€unreasonable.€€Ô_ÔRUPAÔ_Ô€ðð€103(3)(Ô_ÔiÔ_Ô).€€The€Business€AgreementÐ ¨ø Ðsays€that€any€of€the€partners€may€buy€Ô_ÔWUSÔ_Ôððs€property€when€the€business€is€completed.€€Ames€andÐ ”ä ÐBurns€might€argue€that€this€indicates€that€their€purchase€of€the€machine€was€not€a€breach€of€duty.€Ð €Ð ÐIf€read€this€way,€the€question€is€then€whether€this€provision€is€manifestly€unreasonable.Ð l¼ Ðà  à„In€any€event,€if€the€sales€contract€is€unenforceable,€the€partnership€does€not€appear€toÐ X ¨ Ðhave€any€damages.Ð D!” ÐÌò òòòBreach€of€Partnersðð€Fiduciary€Dutyð!ðContinuation€of€Business€without€Carteróóó óÐ #l! Ðà  à„òòÔ_ÔMeinhardÔ_Ô€v.€Salmonóó€held€that€it€was€a€breach€of€a€partnerððs€fiduciary€duty€not€to€shareÐ $X" Ðwith€a€partner€the€opportunity€to€continue€the€business€in€a€substantially€different€form€after€theÐ ô$D # Ðexpiration€of€the€partnership€term.Ð à%0!$ Ðà  à„Here,€the€continuation€of€the€business€was€in€substantially€the€same€form,€andÐ Ì&"% Ðcontinuation€after€an€at„will€partnership€ends€seems€similar€to€continuation€after€the€term€of€aÐ ¸'#& Ðterm€partnership.€€In€fact,€given€the€opportunistic€timing,€this€seems€even€more€like€a€breach€ofÐ ¤(ô#' Ðfiduciary€duty.Ð )à$( Ðà  à„Part,€and€perhaps€all€of€the€problem€in€òòÔ_ÔMeinhardÔ_Ôóó€was€the€failure€of€the€breaching€partnerÐ |*Ì%) Ðto€disclose€what€he€was€doing€so€the€other€partner€could€also€bid€for€the€deal.€€Here,€Carter€wasÐ h+¸&* Ðaware€of€what€Ames€and€Burns€were€doing€before€they€signed€the€contract,€but€that€disclosureÐ T,¤'+ Ðwas€ineffective€to€allow€her€to€compete,€since€the€machine€could€be€sold€only€with€theÐ @-(, Ðcooperation€of€Ames€and€Burns.Ð  ° ÐÓ  Óò òQUESTION€3ó óÐ ° ÐÓ  ÓÌÌPRO:€Will€have€a€disciplinary€effect€on€the€board,€forcing€directors€to€focus€more€on€theirÐ tÄ Ðdecision„making,€even€when€they€have€no€conflict€of€interest.€€Outside€directors€wonððt€just€doÐ `° Ðwhatever€the€CEO€instructs€them€to€do.€€The€rule€also€has€an€evidentiary€functionð!ðdecisions€willÐ L œ Ðbe€documented€so€a€court€can€review€board€action€if€it€is€challenged.€€The€cost€wonððt€really€beÐ 8 ˆ Ðthat€great€because€the€demand€requirement€will€eliminate€much€of€the€litigation,€unless€thereððs€aÐ $ t Ðclear€violation.€€To€the€extent€there€is€an€additional€cost,€itððs€worth€it.Ð  ` ÐÌCON:€Wonððt€really€have€any€substantive€effect€at€all.€€Directors€will€still€make€the€same€decisions.€Ð è 8  ÐThey€will€just€be€forced€to€make€a€paper€trail€to€justify€those€decisions,€resulting€in€greater€legalÐ Ô$  Ðcosts€and€greater€decision„making€costs.€€In€many€cases,€given€directorsðð€expertise€and€knowledgeÐ À  Ðof€the€company,€they€donððt€need€the€information€flow€that€òòVan€Ô_ÔGorkomÔ_Ôóó€forces€the€company€toÐ ¬ü  Ðcreate.€€And,€in€addition,€the€corporate€world€moves€quickly€and€there€often€is€not€enough€timeÐ ˜è  Ðfor€the€relaxed€decision„making€process€the€court€envisions.€€The€rule€also€imposes€additionalÐ „Ô  Ðlitigation€costs,€allowing€shareholders€to€challenge€business€decisions€in€more€cases.€€Even€if€thoseÐ pÀ Ðcases€are€dismissed€because€of€lack€of€demand,€the€company€still€bears€an€additional€cost.€€Finally,Ð \¬ Ðthe€increased€chance€of€liability€may€make€some€qualified€people€reluctant€to€serve€as€directors.Ð  H˜ ÐÓ  Óò òQUESTION€4ó óÐ ° ÐÓ  Óà  àÌÌò òòòÔ_ÔFicuciaryÔ_Ô€Dutyð!ðSelf„Dealingóóó óÐ tÄ Ðà  à„This€is€clearly€a€directorððs€conflicting€interest€transaction.€€Ô_ÔMBCAÔ_Ô€ðð€8.60(2).€€A€director,Ð `° ÐÔ_ÔShempÔ_Ô,€is€a€party€to€the€transaction.€€Ô_ÔMBCAÔ_Ô€ðð€8.60(1)(Ô_ÔiÔ_Ô).Ð L œ Ðà  à„Neither€Larry€nor€Moe€has€a€conflicting€interest€with€respect€to€the€repurchase€and,€as€farÐ 8 ˆ Ðas€we€know,€neither€has€a€familial,€financial,€professional,€or€employment€relationship€with€Ô_ÔShempÔ_ÔÐ $ t Ðthat€would€reasonably€be€expected€to€exert€an€influence€on€their€judgment.€€Therefore,€they€areÐ  ` Ðð ðqualified€directors.ðð€€Ô_ÔMBCAÔ_Ô€ðð€8.62(d).Ð ü L  Ðà  à„Larry€and€Moe€are€a€majority€of€the€qualified€directors€on€the€board,€so€their€approval€ofÐ è 8  Ðthe€repurchase€is€effective.€€Ô_ÔMBCAÔ_Ô€ðð€8.62(a).€€Ô_ÔShempÔ_Ôððs€participation€has€no€effect€on€theÐ Ô$  Ðeffectiveness€of€their€action.€€Ô_ÔMBCAÔ_Ô€ðð€8.62(c).Ð À  Ðà  à„Therefore,€the€transaction€is€not€subject€to€challenge€for€the€conflict€of€interest.€€Ô_ÔMBCAÔ_Ô€ððÐ ¬ü  Ð8.61(b)(1).Ð ˜è  Ðà  à„Given€the€earlier,€lower€appraisal,€Ô_ÔShempÔ_Ô€might€not€be€able€to€prove€that€the€repurchaseÐ „Ô  Ðis€fair,€but€he€doesnððt€have€to€if€the€qualified€directorsðð€action€is€valid.Ð pÀ ÐÌòòò òFiduciary€Dutyð!ðòòDonahue€v.€Ô_ÔRoddÔ_Ô€Electrotypeóóóóó óÐ H˜ Ðà  à„Some€courts€have€held€that€shareholders€in€closely€held€corporations€owe€each€otherÐ 4„ Ðfiduciary€duties€akin€to€those€owed€by€partners€in€partnershipsð!ða€duty€of€the€utmost€good€faithÐ  p Ðand€loyalty.€€òòDonahue€v.€Ô_ÔRoddÔ_Ô€Electrotypeóó.Ð  \ Ðà  à„òòDonahueóó€held€that,€when€the€corporation€repurchased€the€stock€of€a€controllingÐ øH Ðshareholder,€the€controlling€group€would€have€to€give€minority€shareholders€an€equal€opportunityÐ ä4 Ðto€sell€their€shares€as€well.Ð Ð  Ðà  àà ` à„Here,€unlike€òòDonahueóó,€the€seller€of€the€shares€does€not€control€the€corporation.€Ð ¼  ÐÔ_ÔShempÔ_Ô€has€the€same€25%€share€as€Curly.€€Would€òòDonahueóó€apply€to€any€repurchase,€or€just€aÐ ¨ø Ðrepurchase€from€the€controlling€group?€€Is€Ô_ÔShempÔ_Ô€a€member€of€the€controlling€group,€given€hisÐ ”ä Ðagreement€with€Larry€and€Moe€in€opposition€to€Curly?Ð €Ð Ðà  àà ` à„In€òòWilkesóó,€the€òòDonahueóó€court€said€that€unequal€treatment€was€justified€if€theÐ l¼ Ðcontrolling€group€could€demonstrate€a€legitimate€business€purpose.€€The€legitimate€businessÐ X ¨ Ðpurpose€here€is€to€get€Ô_ÔShempÔ_Ô€to€retire€because€of€his€declining€productivity.€€There€is€also€aÐ D!” Ðlegitimate€reason€to€distinguish€Ô_ÔShempÔ_Ô€and€Curly€because€Curly€is€still€productive.Ð 0"€  Ðà  àà ` à„òòWilkesóó€said€that€the€minority€shareholder€could€still€win€if€he€could€demonstrateÐ #l! Ðan€alternative€way€of€accomplishing€the€legitimate€purpose€that€is€less€harmful€to€the€minorityððsÐ $X" Ðinterests.€€Stooge€canððt€buy€both€shareholdersðð€shares€because€it€doesnððt€have€enough€money.€Ð ô$D # ÐCould€Curly€prove€that€Stooge€could€borrow€the€money?€€It€doesnððt€appear€that€there€is€any€otherÐ à%0!$ Ðway€to€get€rid€of€Ô_ÔShempÔ_Ô€other€than€to€repurchase€his€shares.Ð Ì&"% ÐÌÌò òòòDuty€to€Informð!ðòòVan€Ô_ÔGorkomÔ_Ôóóóóó óÐ )à$( Ðà  à„There€is€no€indication€that€Larry,€Moe,€or€Ô_ÔShempÔ_Ô€considered€any€information€about€theÐ |*Ì%) Ðvalue€of€the€shares€prior€to€approving€the€repurchase.€€This€could€violate€their€duty€to€informÐ h+¸&* Ðthemselves.€€òòSmith€v.€Van€Ô_ÔGorkomÔ_Ôóó.€€However,€given€their€active€participation€in€the€business€andÐ T,¤'+ Ðthe€small€size€of€the€business,€perhaps€less€information€is€required.Ð @-(, ЇÌòòò òÔ_ÔEnforceabilityÔ_Ô€of€Shareholder€Agreementó óóóÐ œì Ðà  à„Under€the€common€law,€shareholder€agreements€that€take€power€away€from€the€boardÐ ˆØ Ðand€place€it€directly€in€the€hands€of€shareholders€are€invalid.€€òòÔ_ÔMcQuadeÔ_Ô€v.€Ô_ÔStonehamÔ_Ôóó.Ð tÄ Ðà  à„The€Ô_ÔMBCAÔ_Ô€also€provides€that€the€business€and€affairs€shall€be€managed€by€the€board,Ð `° Ðsubject€to€any€restriction€in€the€articles€or€an€agreement€authorized€by€section€7.32.€€Ô_ÔMBCAÔ_Ô€ððÐ L œ Ð8.01(b).Ð 8 ˆ Ðà  à„This€shareholder€agreement€is€not€in€Stoogeððs€articles€of€incorporation.€€It€also€does€notÐ $ t Ðcomply€with€ðð€7.32,€because€it€was€not€approved€by€all€persons€who€were€shareholders€at€theÐ  ` Ðtime.€€Ô_ÔMBCAÔ_Ô€ðð€7.32(b)(1).Ð ü L  Ðà  à„A€shareholder€agreement€which€does€not€comply€with€statutory€formalities€mayÐ è 8  Ðnevertheless€be€enforceable€if€the€parties€could€have€complied€with€those€formalities€and€there€areÐ Ô$  Ðno€intervening€rights€of€third€parties.€€òòZion€v.€Kurtzóó.€€Here,€the€three€shareholders€could€haveÐ À  Ðamended€the€companyððs€articles€by€majority€vote€without€Ô_ÔShempÔ_Ôððs€approval.€€However,Ð ¬ü  Ðenforcement€of€the€agreement€would€affect€the€rights€of€a€third€party,€Ô_ÔShempÔ_Ô,€because€it€wouldÐ ˜è  Ðinvalidate€the€repurchase€of€his€stock.€€Therefore,€a€court€might€refuse€to€enforce€the€agreement.Ð „Ô  Ðà  à„If€the€agreement€is€enforceable,€Curly€could,€at€a€minimum,€recover€damages€for€breachÐ pÀ Ðof€contract€from€Larry€and€Moe.€€Itððs€not€clear€if€he€could€reverse€the€transaction,€given€theÐ \¬ Ðintervening€rights€of€Ô_ÔShempÔ_Ô.Ð H˜ ÐÌò òòòInvoluntary€Dissolutionó óóóÐ  p Ðà  à„A€court€may€dissolve€Stooge€if€Curly€can€show€that€those€in€control€have€acted€in€anÐ  \ Ðillegal,€oppressive,€or€fraudulent€manner.€€Oppression€is€usually€defined€as€a€violation€of€theÐ øH Ðreasonable€expectations€of€the€parties.€€òòIn€Re€Kemp€&€Ô_ÔBeatleyÔ_Ô,€Inc.óó€€If€Curly€can€show€that,€whenÐ ä4 Ðthey€created€the€corporation,€the€parties€expected€to€be€able€to€withdraw€and€have€their€sharesÐ Ð  Ðrepurchased,€a€court€might€order€dissolution.€€Or€perhaps€the€denial€of€his€expectation€that€theÐ ¼  Ðthree€would€vote€the€same€way€could€be€oppression,€even€though€the€agreement€itself€isÐ ¨ø Ðunenforceable.Ð ”ä ÐÐ  €Ð Ðò òÓ  ÓQUESTION€5ó óÐ ° ÐÓ/xÓÌÌÌò ò1.€€Fair€Dealingó óÐ `° ÐÌà  àIn€Delaware,€the€test€for€fairness€encompasses€two€elements:€(1)€fair€price€and€(2)€fairÐ 8 ˆ Ðdealing.€€òòÔ_ÔOberlyÔ_Ô€v.€Kirbyóó€(citing€òòWeinbergeróó).€€Jackððs€argument€that€the€investment€is€fair€becauseÐ $ t Ðit€is€profitable€is€focusing€solely€on€fair€price,€and€ignoring€the€question€of€procedure.€€There€isÐ  ` Ðnothing€in€the€procedure€to€approximate€an€armsðð€length€transaction.€€Jack€set€the€priceÐ ü L  Ðunilaterally€and€approved€both€sides€of€the€deal.Ð è 8  ÐÌò ò2.€€Fair€Priceó óÐ À  ÐÌà  àò òòòA.€€Alternative€transactionsóóó ó.€€Fair€price€must€be€determined€by€comparing€the€investmentÐ ˜è  Ðwith€the€return€that€was€available€in€alternative€transactions.€€òòÔ_ÔOberlyÔ_Ô€v.€Kirbyóó.€€A€$4,000€profit€isÐ ˆØ  Ðnot€necessarily€fair€if€Acme€could€have€made€even€more€investing€the€money€somewhere€else.Ð tÄ ÐÌà  àò òòòB.€€Expected€Valueóóó ó.€€Jackððs€argument€assumes€that€the€$14,000€will€be€paid,€but€there€isÐ Lœ Ðno€guarantee€that€Jackððs€new€company€will€be€in€a€condition€to€pay€in€2005.€€There€is€a€possibilityÐ <Œ Ðit€will€fail,€and€that€possibility€needs€to€be€taken€into€account.€€We€need€to€know€the€likelihood€ofÐ (x Ðrepayment,€so€we€can€estimate€an€expected€value€for€the€investment.Ð d ÐÌà  àò òòòC.€€Present€Valueóóó ó.€€The€$10,000€is€invested€now;€repayment€comes€five€years€from€now.€Ð ì< ÐTo€compare€this€to€other€investment€opportunities,€we€need€to€calculate€the€present€value€of€theÐ Ü, Ð$14,000,€which€will€be€significantly€less.