1. This is an open book examination. You may bring in and use the
Hamilton textbook, a statutory supplement containing the RMBCA and your
2. You are also permitted to bring into the examination any outlines
that you played a substantial part in preparing. Nutshells, treatises,
black letter law guides and the like may be used in preparing your own
outline, but may not be brought into the examination.
3. If you leave the examination room for any reason during the course of
the exam, you may not take anything with you. Any materials you bring
into the room must remain there until the examination is over.
4. You will have three (3) hours to complete the examination. Blue books
will not be passed out for thirty (30) minutes. This time should be
spent reading the examination and outlining your response on the scratch
paper provided. All scratch paper must be turned in with your
5. DO NOT CITE A CASE OR STATUTE WITHOUT FURTHER DISCUSSION! There is no
presumption that use of a case name or statutory section indicates
familiarity with its contents. Discuss and analyze any cases or
statutory provisions you plan to use in your answer.
6. For purposes of this examination, assume that all relevant conduct
has occurred in a state which has no corporate law of its own, so that
its courts are free to borrow the law of any other state. All federal
securities laws apply in this state.
7. If you believe that additional facts are required for your answer,
state specifically what additional information is required, why it is
needed, and how it would impact upon your answer.
8. Be sure to turn in your examination copy with your answers. You
should write your exam number on this examination now.
DO NOT TURN TO THE NEXT PAGE UNTIL INSTRUCTED TO DO SO. GOOD LUCK!
On a dark and stormy night in Ada, during an unusually cruel and frigid
winter, George Vaubel and Bruce French sat down together at their
regular table in the Regal Beagle and decided to create a corporation.
"We'll call it French-Vaubel Enterprises," said Bruce; "it'll make a
fortune." "What'll we sell?" asked George. "Anything we need," replied
Bruce. "How about high speed transcription machines for a start? People
can't keep up with a normal conversation anymore."
"Just think of the cheap source of labor at the law school," George
mused. "Do you think we could sell umbrellas and key rings that beep
when their owner whistles? Even if the whistle is tuneless?" "Of
course!" said Bruce. "We'll expand as we identify new target markets and
products." "Just so I don't have to deal with the paperwork," said
George. Bruce said he'd take care of all the corporate formalities.
Bruce's first task was to negotiate a lease with Sherry Young, a well-
known Ada slumlord, for a decrepit downtown office building to use as
their corporate headquarters. Sherry drove a tough bargain, insisting on
the right to inspect the premises monthly and providing that, at her
option, the rent could be increased each year by a factor that reflected
any increase in the corporation's annual profits. Bruce initially
resisted these terms, but finally capitulated. He figured that Sherry
had no right to inspect the corporation's books, and thus would never
know how well the business was doing. Bruce also signed the lease in his
own name, without any reference to the corporate entity.
Two weeks after the lease on the building was signed, Bruce mailed the
incorporation papers to the Secretary of State's office, where they were
duly accepted and filed. The corporation was authorized to "engage in
any lawful activities," and to issue up to 500,000 shares of common
stock and 250,000 shares of preferred. French-Vaubel Enterprises ("F-V")
was off and running. Bruce was appointed President, and George was the
Secretary and Treasurer. The corporation issued 100,000 shares of common
stock, which were divided equally between George and Bruce.
F-V Enterprises operated very simply. Bruce and George would decide what
products they wanted to offer and which markets to target. They located
a variety of vendors to manufacture those products cheaply. They then
sold the products by mail order, targeting their catalog to small
university communities. Law students created and published the catalog,
and packaged the products for shipment to customers.
F-V Enterprises took off, largely due to the fabulous success of the
umbrella line. It seemed that every professor in America wanted an
umbrella that beeped in response to a tuneless whistle. Within 2 years,
the corporation was bringing in net profits of $85,000 annually.
At this point, Bruce and George decided that it was time to take the
corporation public. They arranged for a public offering of the
corporation's shares, issuing 200,000 new shares of common stock and
100,000 shares of preferred. These shares were registered under 12 of
the Securities Exchange Act of 1934.
When the public offering was announced, popular interest ran high. And
in fact, the new stock sold like wildfire. CREF, a College Retirement
investment fund that managed assets of $400 million bought 30,000
shares. Within 5 years of the public offering, the corporation's annual
sales rose to $450,000. A Board of Directors was elected, consisting of
local community leaders and officers of various Ohio corporations. Bruce
and George continued as President and Secretary/ Treasurer,
Bruce and George were beginning to enjoy their position as corporate
executives of a successful, growing organization. Bruce decided that the
corporation should make two substantial charitable bequests: one to his
alma mater, Antioch College, and a second to the Democratic Leadership
Committee. Both bequests were over $75,000. Bruce and George also voted
themselves a generous retirement package, including $50,000 annual
"consulting fees" payable over their lifetimes, and stock options to
purchase 20,000 shares of the corporation's common stock at the then-
current market price of $30/share. The Board of Directors approved both
of these matters without question or discussion.
About one year after the public offering, George was approached by
Richard Haight, a local businessman, who indicated that he knew where to
find a warehouse full of umbrellas that could be purchased for pocket
change. Apparently, the Pentagon had ordered 300,000 umbrellas for
military personnel. The Government Supply Office (GSO) had then changed
the relevant specifications to require that all umbrellas had to be a
larger size than the type the Pentagon had ordered. The Pentagon was now
stuck with these useless umbrellas, and was eager to get rid of them.
Richard Haight offered these umbrellas to George at 5 cents apiece. This
price was 15 cents cheaper than what the corporation was paying. George
purchased the umbrellas from Richard, and, without saying anything to
Bruce or anyone else, sold them directly to London Fog, making a profit
of 20 cents per umbrella.
Six years after the company went public, on May 1, 1994, George was
approached by T. Boone Pickens, on behalf of Mesa Petroleum, who was
interested in taking over French-Vaubel Enterprises. Pickens told George
that he was willing to pay $65/ share for the company's stock, which was
still selling at a market price of $30/share. Pickens also told George
that he would break up the company, and sell off all the product lines,
keeping only the umbrella line, which would then be wholly controlled by
Mesa. Pickens promised to keep George and Bruce on as company officers,
in charge of the umbrella product line, and said he would quadruple
their current salaries. He also indicated that the company's corporate
headquarters would be moved to Dallas, Texas, where Mesa was
George and Bruce were thrilled with this prospect. They hurriedly
directed Walter Skyrider, an L-2 law student, to prepare a press release
indicating that merger negotiations were "pending" with Mesa. The
announcement disclosed the offered price of $65/share. Before passing
the announcement along to the papers, Walter cashed in his student loan
checks for the school year and bought all the F-V stock he could afford.
He also told his girlfriend Suzi (a fifth-year pharmacy student) about
the proposed merger, and Suzi passed the news on to her mother. Both
Suzi and her mother bought 4,000 shares of F-V stock on May 1. The
press release was made public early in the morning of May 2. Public
trading in F-V Enterprises was heavy all day, and the stock closed up at
$36/share. Bruce decided that this was a good time to increase his
stakehold, purchasing 1,000 shares just before the close of trading.
At this point, Sir James Goldsmith, the well-known British raider,
became interested in F-V Enterprises and purchased 1,000 shares. On May
6, Sir James approached George and Bruce on behalf of Crown Zellerbach
Corp, and offered to pay $70/ share for a controlling block of F-V
stock. He indicated that his intention was to sell off F-V's assets and
liquidate the company, and that George and Bruce would have no further
connection with Crown Zellerbach after the merger was completed. George
and Bruce conferred briefly, and told Sir James that they felt they had
to honor their arrangement (which they described as a "deal") with
Bruce and George called an emergency meeting of the Board of Directors
on May 8. Five of the nine Board members were able to attend this
meeting; the remainder did not attend and did not submit proxies. Bruce
described the terms of the Mesa deal, and indicated that he thought it
was an excellent offer and would be in the best interests of the
corporation. One director asked if there had been any other offers;
Bruce's response was "nothing worth mentioning." One Board member left
during Bruce's presentation, indicating that he had to pick up his
daughter from day care. He said that whatever the others wanted to do
was fine with him. The remaining members of the Board debated for
fifteen minutes, considered no written documentation and voted
unanimously to approve the merger.
Bruce and George then prepared a proxy solicitation seeking shareholder
approval of the merger. They described the deal as the "best available
offer" for the company's stock and a "once- in-a-lifetime opportunity"
for the shareholders. The proxy solicitation indicated that "the
business of the corporation would continue unchanged after the merger,"
and that there would be "no effect" on the company's "leadership,
salaries, product lines or employees."
At this point, Sir James decided to take his case directly to the public
and to the shareholders of F-V Enterprises. He prepared a press release,
announcing his interest in the company and indicating the share price he
had been willing to pay. He told a reporter from the Wall Street Journal
that the offer was "still open." He then prepared his own proxy
solicitation, indicating that he was willing to pay $70/ share for F-V
Enterprise stock, and indicating his willingness to make a tender offer
for 51% of the corporation's outstanding stock. He accurately described
his intentions regarding the corporation's future direction after his
takeover. Sir James submitted his proxy solicitation to Bruce and
George, indicating that they should include it with whatever proxy
solicitation they intended to distribute to their shareholders.
Bruce and George sent out their own proxy solicitation on May 10. They
did not include Sir James' proposal. While Sir James' press release was
noted by a few shareholders, the majority of F-V's shareholders relied
on the proxy solicitation materials and voted to approve the Mesa offer.
The Mesa deal was finalized on July 3. The New York Stock Exchange
suspended trading in F-V and Mesa stock for 48 hours, to stabilize
trading. To celebrate the deal, Bruce and George went out to dinner at
the Beagle and discussed their futures. "I've cashed in," said Bruce.
"Half my stock options were exercised just before the market closed.
I'll cash in the rest as soon as the market opens up, when the stock
hits its peak. No more 8 a.m. classes for us, George!"
"Can we do that?" asked George? "Who's to stop us?" queried Bruce.
"After all, we're lifetime consultants!" The following morning, Pickens
fired both George and Bruce, and refused to honor their consultancy
agreements. That same day, a group of disgruntled shareholders filed a
derivative suit, naming Mesa, F-V Enterprises, F-V's Board of Directors,
George and Bruce as defendants. No demand was made upon the corporation
prior to filing this action. Sherry Young also filed suit, seeking to
enforce the terms of her lease agreement.
Discuss the probable bases of these law suits, their chances for success
and the type of relief that may be available. You should also discuss
any other potential liability that George, Bruce, Mesa, F-V Enterprises
or F-V's Directors might encounter.
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