Mixed Practice of BA MC Qs

Question 1

1. Isaac Insider, the Company CEO, bought Company shares with non-public knowledge of a yet-to-be-issued favorable earnings report. Two months later, after the report was issued, Isaac sold the same stock at a profit of $100,000. Can Sam Shareholder, who neither bought nor sold stock during this period, bring a suit on behalf of Company to acquire this gain for the corporation?
   a) No, Sam did not buy or sell stock during the relevant period;
   b) Yes, under Rule 10b-5;
   c) Yes, under 16(b) of the 1934 Securities Act;
   d) Yes, under Rule 10b-5 and under ˜16(b) of the 1934 Securities Act.

Answer 1

c) Yes, under 16(b) of the 1934 Securities Act

While 10b-5 requires a purchase or sale.

Under 16(b), If the issuer (corporation) doesn’t bring action w/in 60 days of a demand by a security holder (SH) (or fails to prosecute action diligently), the security holder (SH of the issuer/ corp) can sue on the issuer’s (corporation’s) behalf under 16(b).

Under 16(b), insider if: officer, director, or 10+ SH

Question 2

2. Geezer and Jones each own half the shares in G Corp., a closely held corporation. The corporation is financially secure but pays no dividends. Instead, Geezer and Jones receive substantial salaries and bonuses. The corporation has built up substantial good will. Geezer is terminally ill and seeks your advice on how to ensure that his wife will be financially secure following his death. Geezer’s wife has no business experience. Which of the following amendments to the articles would likely best provide for Geezer’s spouse?
   a) provide for arbitration should the board of directors have a standoff;
   b) allow any shareholder holding 50% of the shares to petition the court for dissolution;
   c) require the corporation to purchase a deceased shareholder’s stock at a price set by an independent appraiser;
   d) Provide preemptive buying rights to every stockholder.

Answer 2

c) require the corporation to purchase a deceased shareholder’s stock at a price set by an independent appraiser;

Dissolution sales are fire sales.

or a Share Repurchase Agreement?

Question 3

3. The Delaware Supreme Court’s decision in Smith v. Van Gorkom was controversial. Each of the following criticisms of the decision could be offered except:
   a) It will make recruitment of qualified directors more difficult;
   b) It will encourage a board of directors to leave all decisions to the CEO;
   c) It will encourage the board to engage in expensive formalism that adds little to the decision-making process;
   d) It will make it more difficult to obtain liability insurance covering directors.

Answer 3

b) It will encourage a board of directors to leave all decisions to the CEO;

Because Van Gorkom held the board liable for leaving too many decisions to the CEO.

Question 4

4. Stockholder G sold his 55% holdings in X Corp for $3 per share above the market price. The sale included an agreement that G’s directors would resign and be replaced by the buyer’s candidates. In a derivative action against G brought by shareholders for violation of state law,
   a) G will likely be liable for the $3 share premium above market price;
   b) the resigning directors will be liable for resigning for improper purposes;
   c) G will likely prevail;
   d) Choices (a) and (b) are each correct.

Answer 4

C) G will likely prevail;

The 55% stake guarantees that the new owner could dominate the board even without the agreement bc controlling SH

Question 5

5. Security for expense statutes are designed to:
   a) encourage any injured shareholder, no matter how small, to bring suit;
   b) protect all shareholders from a diminution in value of their shares based upon nuisance lawsuits;
   c) indemnify directors for the costs associated with derivative litigation;
   d) make derivative litigation available only to institutional investors.

Answer 5

b) protect all shareholders from a diminution in value of their shares based upon nuisance lawsuits;

Security for expenses rules are designed to deter frivolous suits by making it more difficult and expensive to bring a derivative action.

Question 6

6. Which of the following matters do not require shareholder approval?
   a) A merger of a 90%-owned subsidiary into a parent;
   b) Dissolving the corporation;
   c) Selling the corporate assets for cash, not in the normal course of business;
   d) Eliminating cumulative dividend rights of preferred shareholders.

Answer 6

a) A merger of a 90%-owned subsidiary into a parent;

A short-form merger does not require shareholder approval by either entity’s shareholders.

Question 7

7. X and Y each own 50% of the stock in Blah Corp., which has operated profitably for 20 years. In June of 1995, they arrange for the corporation to buy back one-half of the stock held by each. The corporation has only $10,000 in readily available funds, so the corporation issues each a promissory note for $50,000. Two months later, Blah corporation files for bankruptcy because of its inability to meet current obligations. You represent a general creditor who seeks to maximize its recovery from the bankruptcy estate. What is your best argument?
   a) That Blah Corp. was inadequately capitalized from the outset, allowing the court to pierce the corporate veil;
   b) That the court should equitably subordinate the notes to X and Y;
   c) That X and Y would be unjustly enriched if the promissory notes are recognized;
   d) That X and Y, as sole owners of Blah Corp., cannot be creditors of the firm.

Answer 7

b) That the court should equitably subordinate the notes to X and Y;

While we lack some relevant information, it seems unlikely the corporation was undercapitalized given its long history of profitability, and the repurchase of the owners’ equity looks suspiciously like a preferential payment arranged by the owners because they knew the company was in financial trouble. This sort of inequitable conduct could justify equitably subordinating the debt held by the shareholders.

Question 8

8. Low Corp., which earns several billion dollars a year in profits, signs a contract promising to donate $1 million to the Red Cross. Low Corp’s articles of for charitable donations. Assuming that Delaware law applies, who could sue successfully to enjoin performance of the contract on ultra vires grounds?
   a) Low Corp.;
   b) the majority shareholder of Low Corp.
   c) a minority shareholder of Low Corp.;
   d) No one.

Answer 8

d) No one.

Del Corp. §122(9) provides that corporations have the power to make donation for the public welfare or for charitable, scientific or educational purposes.

but they don’t have to?…

Question 9

9. In response to a proxy solicitation seeking shareholder approval of a merger, Bela signs a proxy to vote her 100 shares in favor of the merger. The merger is approved by a substantial majority. The proxy materials disclose that substantial fees would be paid to an investment banking firm, but fail to disclose the identity of the firm (Barrell & Lynch). A few years earlier, Bela had been fired from her job at Barrell & Lynch. Because of this unhappy experience, Bela would have voted against the merger had she known of Barrell & Lynch’s involvement. Based on these facts, has any federal security law or regulation been violated?
   a) Probably, federal securities law requires full disclosure of all payments made in connection with a merger;
   b) Probably, disclosure of the fee paid to Barrell & Lynch is material because it affected how Bela would cast her votes;
   c) Probably not, disclosure is not required because a change in Bela’s vote would not have altered the outcome;
   d) Probably not, there is no substantial likelihood that the omission would have altered a reasonable investor’s vote.

Answer 9

d) Probably not, there is no substantial likelihood that the omission would have altered a reasonable investor’s vote.

The standard is objective, what a reasonable investor would want to know in making his or her investment decision.

Question 10

10. Each of the following factors may have contributed to the decrease in hostile takeover activity in the 1990s EXCEPT:
    a) institutional investors dislike of hostile takeovers;
    b) higher stock prices;
    c) poison pills;
    d) changes in state law.

Answer 10

a) institutional investors dislike of hostile takeovers;

Institutional investors, like other investors, often benefit from the large control premiums paid in hostile takeovers.

Question 11

11. Sara is the President of Service Corp. Sara learns that Service’s most important customer is not renewing its contract. Without disclosing this, she asks her broker to sell a block of stock in Service Corp. to Vera, a business acquaintance of Sara’s. Service Corp. is not registered under §12(g) of the 1934 Securities Act. Does Vera have a remedy against Sara?
    a) Yes, under state common law or under §10(b);
    b) Yes, under state common law, under §10(b) or under §16(b);
    c) Yes, only under state common law;
    d) No, only Service Corp., or a shareholder suing on its behalf, can sue Sara to recover any improper profit from the sale of stock.

Answer 11

Institutional investors, like other investors, often benefit from the large control premiums paid in hostile takeovers.

§16(b) requires that the corporation be publicly traded (registered under §12(g) of the ’34 Act).

Question 12

12. Irma is a secretary in Drug Corp. On May 5, Victoria, a corporate Vice President, instructs Irma to type a press release to be read the following day, announcing a Drug Corp. research breakthrough in an anti-cancer drug. As soon as she is alone, Irma calls her stock broker and buys 400 shares of Drug Corp. On September 10, she sells the shares at a large profit. Irma has probably violated:
    a) Section 16(b) of the Securities Act of 1934;
    b) Section 10(b) of the Securities Act of 1934;
    c) Both Section 16(b) and Section 10(b);
    d) Neither Section 16(b) nor Section 10(b).

Answer 12

b) Section 10(b) of the Securities Act of 1934;

Irma is not an “insider” under §16(b) – she is not a director, officer, or 10% owner.

Question 13

13. A, B, and C form a general partnership governed by the Revised Uniform Partnership Act to run a bar exam preparation course. C steals a past multi-state portion of the bar examination and incorporates it into the course materials. In an action by the National Bar Examiners for copyright infringement:
    a) Only C is liable because his action was unlawful;
    b) Only C is liable for damages, but the entire partnership can be enjoined from making use of the materials;
    c) The partnership is liable;
    d) The partnership is liable, but A and B cannot be held personally liable.

Answer 13

c) The partnership is liable;

RUPA employs an entity theory of partnership, so that the partnership itself can be sued. Since C was acting in the scope of his partnership duties, and as a general partner has authority to act on behalf of the partnership, the partnership would be liable. All partners in a general partnership are personally liable for partnership obligations.

Question 14

14. The law governing the relations among the partners in a general partnership under RUPA is the law of:
    a) The state in which the partnership does the most business;
    b) The state where the partnership has filed its partnership agreement with the Secretary of State;
    c) The state where the partnership is registered;
    d) The state where the partnership’s chief executive office is located.

Answer 14

d) The state where the partnership’s chief executive office is located.

General partnerships do not file formation documents with the state. In the absence of a choice of law provision in the partnership agreement, RUPA § 106 provides that the partnership’s internal affairs are governed by the law of the state in which the partnership has its chief executive office.

Question 15

15. The CEO of Megabucks, Inc., a $1 billion Delaware corporation, is considering two actions: (1) having Megabucks give $50,000 to the CEO’s favorite charity (an organization that provides homes for greyhounds that have grown too old to race) and (2) closing down a factory in New Jersey, where the labor costs are extremely high, and opening up a new factory in Taiwan, where the labor costs are very low. Megabucks’ customers do not care about greyhounds or dog racing. The savings in labor costs from closing the New Jersey factory will more than pay for all related expenses within one year. The CEO would like to give the money to charity. She would prefer not to close the factory, because she does not relish the thought of firing U.S. workers. Megabucks’ product is primarily sold in South America, whose people do not care about U.S. jobs. Which of the following are true?

I. She may give the money to charity.

II. She must close down the New Jersey factory.

a) I only;
b) II only;
c) Neither I nor II;
d) Both I and II.

Answer 15

d) Both I and II.

Under Delaware § 122(9), corporations are permitted to give money to charity. Delaware has no “other constituency” statute, so the CEO must act in the best interests of the stockholders, closing down the expensive factory.

Question 16

16. Castles, Inc., a New York corporation, is a close corporation that builds castles for wealthy merchants who want to pretend they’re members of the aristocracy. The original stockholders of Castles, Inc. were Buttercup, Inigo, and the Dread Pirate Roberts. In order to ensure that no one untrustworthy becomes a shareholder, the board of directors of Castles, Inc. passed a by-law providing that shares in the corporation could only be sold to Castles, Inc. for the original purchase price of $20/share. Castles, Inc. was an enormous success, growing from profits of $2/share in the year it was founded, to $40/share today. The Dread Pirate Roberts, badly in need of cash to finance ship repairs after his last sea battle, decided to sell his shares in Castles, Inc. to Andre the Giant. Andre paid $300/share. The restriction on sale was not noted on the stock certificates. When Castles, Inc. learned of the sale, it immediately sued Andre, demanding that he sell the shares back to the corporation for $20/share, as provided in the sale restriction. Castles, Inc. will:
    a) Win, because under Delaware law, the board always wins in a suit against shareholders;
    b) Win, because the sale was in violation of the by-law restricting sale. But the Dread Pirate Roberts will have to reimburse Andre for his damages;
    c) Lose, because the restriction was not noted on the stock certificates and Andre had no actual knowledge of the restriction;
    d) Lose, because the restriction provided for an unreasonably low repurchase price.

Answer 16

c) Lose, because the restriction was not noted on the stock certificates and Andre had no actual knowledge of the restriction;

Under New York law, a restriction on the transfer of stock is enforceable if it is reasonable and if the stockholder acquired such stock with notice of the restriction. The validity of the restriction does not rest on any abstract notion of intrinsic fairness of price. Allen v. Biltmore Tissue Corp. (N.Y. 1957).

Question 17

17. You represent a potential investor in a large corporation with widely traded securities. The investor tells you that he wants maximum protection from insolvency for his relatively small investment. Which of the following investment forms probably will best provide that security?
    a) Unsecured, junk bonds;
    b) Common stock with voting rights;
    c) Preferred stock convertible into common stock if the common stock reaches a minimum value;
    d) Preferred stock with guaranteed annual dividends.

Answer 17

a) Unsecured, junk bonds;

Debt interests stand ahead of all equity interests, including preferred, if the corporation becomes insolvent. Secured debt would be even better, but was not offered as an option.

If a loan is Fully Secured by the Cop’s assets, then no capital has been added to the Corp, and the loan will not contribute to Adequate Capitalization. But, an unsecured loan is considered adequate.

order of who gets $ after corp goes belly up: 
secured
unsecured
preferred 
common

Question 18

18. Jay Steward, a cabin attendant for Aardvark Airlines, is leaving the airport terminal after serving on an incoming flight. He’s still in uniform but on his way home. At an airport cross-walk, he recognizes an elderly lady from the flight. He offers his arm and picks up her luggage with the other hand. The pavement is wet and Jay loses his footing; they both fall to the pavement and she is injured. The injured lady sues Aardvark. Each of the following arguments is likely be helpful to the lady’s case EXCEPT:
    a) Steward was still in his Aardvark uniform;
    b) The accident occurred on airport premises;
    c) The airline business is inherently hazardous;
    d) The Plaintiff had just stepped off an Aardvark flight.

Answer 18

c) The airline business is inherently hazardous;

The other three factors all bear on the question of whether Steward was acting in the scope of his duties.

Question 19

19. A is a mechanic in P’s repair garage. When Kate brings her car in for repairs, A tells her to park it, asks her what needs fixing, and tells her “We’ll take care of it.” Kate’s car is stolen from P’s parking lot. P refuses to accept responsibility, pointing out that he had never given A authority to speak with customers or accept business. In a suit by Kate to recover damages from P, Kate argues that A possessed inherent agency authority. Kate’s argument
    a) may succeed if she offers evidence of practices of other repair garages;
    b) may succeed because A is not an independent contractor;
    c) will fail unless Kate shows P held out A as an agent;
    d) will fail because inherent agency requires a showing of actual authority.

Answer 19

a) may succeed if she offers evidence of practices of other repair garages;

Inherent agency authority is a type of apparent authority that stems from the position of the agent. If garages generally imbue their mechanics with authority to accept business, Kate will win.

Question 20

20. Acme Oil Company markets its petroleum products through service stations that the company owns and leases to operators. Orville Operator is one such lessee. Plaintiff customer is injured when hit by a vehicle driven by one of Orville’s employees. Plaintiff sues Acme Oil. Which of the following facts is most helpful to establishing Acme’s liability?
    a) Orville Operator must purchase petroleum products exclusively from Acme;
    b) Orville Operator pays monthly rent based on his sale of Acme petroleum products;
    c) Orville Operator must send employees to a one week safety course run by Acme;
    d) Orville Operator is required by Acme to carry liability insurance.

Answer 20

c) Orville Operator must send employees to a one week safety course run by Acme;

The required safety course indicates that Acme is asserting control over Orville’s employees in regard to their safety conduct, indicating that Orville and its employees are agents of Acme’s. (Agent is defined as one who acts on behalf of another and subject to their control).