1 (C) An agency relationship requires a manifestation of consent by the principal that the agent shall act on the principal’s behalf and subject to the principal’s control, as well as the agent’s consent to so act. (A) suggests that Jane has agreed to act pursuant to David’s control. (B) shows the manifestation of consent by the principal, as well as the consent by the agent. (D) shows the agent’s consent to act on behalf of the principal. (C) might help David, because it tends to show that she was a nonagent independent contractor. 2 (D) Under Cohen v. Beneficial Industrial, a statute such as Montana’s is applicable in federal court under Erie because it creates a new liability and is therefore substantive. But whether Montana or Florida law applies is a choice-of-law issue, not an Erie issue, and the result thus depends on application of Montana choice-of-law principles. 3 (A) Like debtholders, former partners would like to see the partnership operated in the usual conservative way, since they receive no upside from the transaction. Current partners may be less risk averse, because they receive upside benefits from the transaction. 4 (D) Because Zappos is being merged into the new corporation, this is a forward triangular merger. Its purpose is to freeze out the minority shareholders, who are cashed out. 5 (D) (A) and (B) are relevant to the Forman test, but this test is applicable only to an instrument that is called stock. The contracts may nonetheless be investment contracts under the Howey test, and the question of whether there is “a common enterprise” becomes relevant. The definitions of horizontal commonality, which is sufficient to show a common enterprise, are generally uniform, and because different acres will produce different value, it seems highly unlikely that horizontal commonality will be found here. Courts do differ on whether vertical commonality is sufficient, and there is a chance that Quasar could argue that his fortunes were linked with those of the promoters, so the jurisdiction may turn out to be an important predictor of whether this will count as a security. 6 (A) This is testing a concept that was discussed in the context of discussion on raising additional capital. 7 (A) Reverse veil piercing allows the plaintiff potentially to go after assets of other corporations owned by the defendant. By going after these assets directly, the plaintiff becomes a judgment creditor of those corporations. The alternative would be to levy the defendant’s shares and thus become a mere holder of equity, subordinated to other debtors of the corporation. (B), (C), and (D) make no sense. 8 (B) There appears to have been no contact between Arlene and Tax Software. Some courts might find implied apparent authority by virtue of Arlene’s placing Jamila in the manager position, but other courts would not (for example, in the Kidd case). The implied actual authority argument, however, is straightforward, and requires no manifestation from Arlene to Tax Software. 9 (C) Under Zapata, a court first inquires in to the independence and good faith of a special litigation committee, as well as the bases supporting the committee’s recommendations, and then applies its own business judgment to whether the case should be dismissed. The decision of a special litigation committee is thus not entitled to the protection of the business judgment rule. 10 (C) (A), (B), and (D) are all from Justice White’s opinion. (C) is from the majority opinion and is the only statement that is consistent with the majority’s approach adopting the fraud-on-the-market theory. 11 (D) Laura is a temporary insider, but she is an insider of Apple Computer, not Microsoft. “Outsider trading” is not illegal, and so Laura has not violated the traditional theory of insider trading. Moreover, she has not violated the misappropriation theory, because she has notified all the relevant individuals, which O’Hagan indicates is sufficient to eliminate liability. Laura may be liable for usurping a partnership opportunity, but not for insider trading. 12 (C) Disclosure must be made 10 days from the date that a purchaser acquires 5% of the shares. The courts will count coordinated purchases together, so Francophile reaches the 5% target on June 12 and must disclose by June 22. 13 (D) (A) is wrong because a written agreement is not required. (B) is wrong because sharing profits and losses are not the only factors. (C) is wrong because sharing profits is not sufficient. 14 (D) There is no apparent authority, because Molly has made no manifestations to DeLux. Even placing Bob in the position as manager would not be sufficient to make a manifestation that he could make a contract of this nature. There is no inherent authority, because this is not a transaction that is usual in the business and on the principal’s account. 15 (C) The facts here parallel those in Brehm. (A), (B), and (D) represent reasons that a Board of Directors’ section 141(e) defense of reliance on an expert can be rebutted. (C), however, is parallel to the fault of the expert in the Brehm case, which was not enough to rebut section 141(e). 16 (B) Tender offers may be made conditional on a sufficient number being tendered. Shares may be redeemed on a pro rata basis. 17 (B) Rudolph has breached no fiduciary duty, and certainly not his duty of loyalty, so there can be no violation of the traditional theory. However, their relationship does have an expectation of confidentiality, and one would be presumed anyway under Rule 10b5- 2. Randy has violated that duty of confidentiality and, because this is material nonpublic information, he has violated insider trading rules under the misappropriation theory. 18 (C) The facts of the case closely follow those of Zahn v. Transamerica (although the share classes are reversed). The court ruled that the minority shareholders had to be provided information with which to make a share redemption decision, but if they chose not to redeem, the Board could choose to redeem the shares for cash, because this was specifically negotiated for. 19 (A) The Orioles faced liability because Grimsley’s conduct was designed to benefit the Orioles by improving his concentration, but this argument would be considerably weaker if Grimsley were warming up for the next season. (B) is irrelevant, because a promise by an employee not to cause injuries cannot absolve the employer. (C) and (D) are irrelevant, because the issue in the case was not the negligence of the Baltimore Orioles. 20 (C) Courts do presume transaction causation but not loss causation. Note that this is intertwined with but separate from the issue of reliance, which is not the question here. 21 (C) Both statements are true. 22 (B) There appears to be a fairly strong argument for actual authority, given that the agreement did authorize Minute Maid to enter into endorsement contracts for the brand. There is no argument, however, for apparent authority, as Coca-Cola made no manifestations to the Houston stadium authority. The inherent argument is strong, as Coca-Cola is an undisclosed principal, and the ratification argument is also strong, because Coca-Cola did not try to prevent the Minute Maid signs from being put up around the stadium. 23 (B) This is a test of Restatement section 14 O. 24 (A) (A) approximates the facts of Paramount v. Time, in which the Court concluded that there were no Revlon duties. (B) approximates the facts of Paramount v. QVC, in which the Court concluded that there were Revlon duties, because of the switch from a public to a privately held corporation. (C) and (D) are also identified in Time as situations in which Revlon duties come into play. 25 (C) The significant propensity test is developed in Mills v. Electric Auto-Lite Co. The Virginia Bankshares (discussed in class) court, however, noted that if the majority shareholder had sufficient votes on its own to accomplish its goal in a proxy, then a misstatement cannot cause the loss. 26 (A) The discounted cash flow approach requires a projection of future cash flow, but the multiple of earnings method, which involves calculating value based on a comparison of earnings with another corporation whose value is known, does not. The weaknesses of the multiple of earnings approach relate to the difficulty of ensuring an adequate comparison. 27 (C) The question is whether a partnership or a partnership by estoppel existed at the time of the sale, since that is the point in time at which liability could be incurred. (A) and (B) might be relevant to establishing a partnership at that time, and (D) might be relevant to establishing a partnership by estoppel. Whether there was a partnership when she sought service later on is irrelevant. 28 (B) The Delaware courts have rejected the de facto merger doctrine in Hariton. The second statement is true, and the essential nature test was adopted by the Farris court. 29 (D) Under Francis, ignorance is not an excuse. Nor is the possibility of being outvoted, since there are more drastic remedies, such as contacting the authorities, that a director who recognizes wrongdoing could take. 30 (D) As Prentiss v. Sheffel makes clear, a partner can use “paper dollars” in bidding for a partnership. (A) is an accurate statement, because one of the consequences of wrongful dissolution is not being allowed to bid for the partnership. (B) is an accurate statement of the dicta in Page v. Page. (C) is an accurate description of how Barney can use paper dollars. 31 (C) Even if a corporation adopts a contract, the promoter remains liable on the contract unless the other party to the contract releases him from liability. The promoter is also liable if the articles of incorporation are never formed. 32 (B) Dissolution by operation of law occurs due to the death or bankruptcy of any partner, or due to bankruptcy or unlawfulness of the partnership. 33 (C) In Cinerama, the CEO did investigate carefully and negotiate hard, and there was a substantial premium. But the court still concluded that this did not relieve the Board of its own duties. 34 (A) Seventy percent of shareholders did approve the merger, so this wouldn’t have made much difference; the problem, according to the court, was that shareholders were insufficiently informed. (B) would have alleviated the concern that the Board acted too hastily. (C) would have alleviated some of the problems with the market test. (D) would have provided better information about whether negotiating further with Pritzker would be feasible. 35 (B) Even though tree cutting is an inherently dangerous activity, making the defendants liable for the torts of the independent contractor, that does not mean it is an ultrahazardous activity, which would create strict liability. Negligent selection of an incompetent independent contractor, however, is sufficient for liability. 36 (B) The liabilities of a partnership of highest rank are those owing to creditors other than partners, and then those owing to partners other than for capital and profits. A retired partner is not a member of the partnership. 37 (B) An inside director has the burden of proving a proper business purpose in approving greenmail. 38 (B) Under Sinclair Oil Corp. v. Levien, a parent corporation has no obligation to enter into contracts with a non-wholly-owned subsidiary. But when it does enter into such contracts, the conflicts of interest mean that the parent corporation has the burden of proof of establishing that the contracts are intrinsically fair. 39 (C) (A), (B), and (D) are all the opposite of considerations that led the court to conclude that there was no insider trading liability. Because the initial news was negative, selling before that news would have caused less harm and certainly would not have increased liability. Note that the chronology of the case indicates that the defendants had their theory even at the time of this news. 40 (A) (A) suggests that the franchise has a relatively high degree of control over its own operations, supporting the chain’s potential argument that the franchise is an independent contractor. (B) and (D) both indicate greater degrees of central control, and (C) reduces the franchisee’s risk, consistent with the franchises being more like employees and less like independent contractors. Short answer The following are sample answers. They are not necessarily the only answers, but they are designed to give some idea of the types of issues that the question implicated, and of relatively strong answers. There may well be additional issues or points that you might bring up in addition to the points raised here or instead. Wherever tests are subjective, you could receive just as much credit by arguing the reverse of what the answers here suggest; the key is that you identify both halves of the argument. 1. Porsche Repair’s strongest argument for piercing the corporate veil is that Darth has failed to follow formalities with respect to Daver Industries. Receipt of zero-interest loans was found in Sea-Land to amount to a commingling of funds and assets, supporting the court’s conclusion that the separate personalities of the corporation and the individual no longer existed. Darth’s repayment of the loans, however, may tend to rebut the notion that the corporation was merely his alter ego. The failure to hold the annual meeting on time may also be relevant, although a court might well conclude that an occasional inadvertent omission is insufficient for veil piercing. If $10,000 is undercapitalization for a business of this type, that may be a relevant factor, but it will not generally be sufficient for veil piercing in most jurisdictions. Finally, many jurisdictions require that failing to pierce the corporate veil would sanction fraud or promote injustice. Here, Daver Industries is a contract creditor, and Porsche Repair arguably should have done a more thorough credit check. Breach of contract by itself probably will not be sufficient for veil piercing. 2. There are several possible benefits to a regime permitting insider trading. First, insider trading tends to increase market efficiency, as private information is more likely to affect stock prices. Second, insider trading may serve as an efficient form of employee compensation that reduces agency costs, though only to the extent that executives are allowed to bet that the stock value will increase. Third, the insider trading enforcement regime itself requires expenditure of enforcement resources. There are potential disadvantages, for example that insider trading may be viewed as unfair, and that insider trading may reduce liquidity in a stock. But this proposal would allow shareholders to consider whether insider trading regulation makes sense for the particular security at issue. Corporations that would prefer not to allow insider trading could retain current regulation. Because insider trading regulation ultimately is designed to protect shareholders, enhancing shareholder power at least should not cause any harm. 3. A rule of pro rata dilution, in which each partner can purchase additional partnership points at their original price or have their partnership share diluted, may work effectively as long as the partnership increases in value, ensuring proportional rewards to additional investments. This approach, however, may not work well if the business underperforms and additional capital is needed to salvage the investment. In that circumstance, a penalty dilution rule, in which each partner can purchase additional partnership points at less than their current value, may ensure that each partner will have an incentive to contribute. This regime, however, may be problematic if some partners may face liquidity problems and accentuates the risk of two partners acting to the disadvantage of the third. Fiduciary duties may limit the ability of two partners to exploit the third, but it may be hard for the courts to distinguish cases of such exploitation from cases in which the two partners are making legitimate business decisions. Perhaps one approach here might be to combine a rule of penalty dilution with a buyout right for any partner who opposes a decision to issue additional capital. 4. After Smith v. Van Gorkom, the Delaware General Corporate Law was amended to allow corporations to include in its certificate of incorporation provisions that limit the liability of directors, subject to exceptions for the duty of loyalty, for “acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law,” and “for any transaction from which the director derived an improper personal benefit.” It is thus generally permissible for articles of incorporation to save directors from liability for violations of the duty of care. Conceivably, limiting liability in this way might enable the firm to attract better directors, allow the directors to seize business opportunities more swiftly, and save the corporation from expenses that merely reflect attempts by the directors to immunize themselves from potential liability. On the other hand, a duty of care may lead directors to make more careful and potentially better decisions, and Delaware law rarely finds breaches of the duty of care, so the duty ordinarily would become relevant only in egregious cases. 5. The Delaware courts have been inconsistent in their analysis of the extent to which corporations legitimately may take nonshareholder interests into account in deciding whether and how to resist a takeover. In an early case, Cheff, the Delaware courts focused considerably on employee concerns, and the employee unrest that occurred following rumors of the possible takeover. Although the court did not make clear why employee unrest was an issue, possibly the court found it relevant only insofar as it indirectly affected shareholder interests. But the court’s emphasis on Maremont’s reputation as a liquidator, and the court’s failure to assess whether employee dismissals might be in the corporate interest given the extensive fraud at Holland Furnace, suggests that the court thought employee interests were relevant in and of themselves. In Unocal, the court explicitly indicated that the Board might take into account the impact on constituencies other than shareholders, specifically naming “creditors, customers, employees, and perhaps even the community generally.” The Revlon court, however, later indicated that nonshareholder interests could be taken into account only to the extent that there would be a resulting benefit to shareholders. Nonetheless, the Paramount v. Time court seemed to consider relevant the corporation’s efforts to maintain a “corporate culture,” without any explanation of how the corporate culture ultimately would benefit shareholders. 6. The International House of Pancakes, Inc., may be able to defeat liability either by demonstrating that the franchise was an independent contractor, an issue addressed in the Humble Oil and Hoover cases, or by showing that Pam was not acting within the scope of her employment, an issue addressed in cases such as Bushey and Manning. The consistency of the restaurants, including their hours, menu, and design, suggests that each franchise is subject to the chain’s control and unlikely to be an independent contractor. That each franchisee is ultimately responsible for loss or profit, however, points in the opposite direction, and other factors indicating greater degree of franchisee risk or franchisee operational independence might be sufficient to make the franchise an independent contractor. Pam was likely acting within the scope of her employment, because while her conduct was not of the same nature as she was employed to perform, it occurred while she was on duty in the restaurant and may have been actuated out of concern for the franchise. On the other hand, employers are liable for employees’ intentional torts only if use of force is “not unexpectable by master.” Part 3: Essay There are a large number of approaches to this question (whose fact pattern is loosely based on the television show Arrested Development), so I won’t offer a specific sample answer. The question tests issues including the duty of care, duty of loyalty, the demand requirement, and poison pill defensive tactics. You are encouraged not only to apply the law to the case, but also to offer relevant policy arguments about what the law should be in these areas.