SAMPLE EXAM QUESTIONS

I. Short Answer Questions

The instructions for the short answer questions on the exam will look very much like this:

Part I of this exam contains ________ brief fact scenarios. One to ___ questions follow each
scenario (___ questions in all in Part I). Please answer these questions. To receive credit, you
must
(1) answer the question correctly and
(2) in ten words or fewer justify your answer.
At least one law we have studied resolves each question. Justify your answer by identifying the
applicable law(s) or rule(s) (by writing it out or by reference using case name, statute subsection,
or the like, if applicable). Occasionally you may have to explain briefly the law’s application.
Each question is designed to require fewer than ten words of justification; most require only one
to four words. I recommend that you spend not more than _____ hours (____ minutes)
responding to these questions (that is just ___ minutes per question not counting time to read the
fact scenarios—you will have to hurry). Your answers to them will be worth approximately
___% of your grade.

1. Willard filled out an Articles of Incorporation form that he obtained from a formbook, signed and dated
it, and sent it by U.S. mail with a check for the filing fee to the Secretary of State's office. The corporate
name he chose and placed on the form was “Wahzu, Inc.” Three days later, Willard received back in the
mail from the Secretary of State an acknowledgment stating that the Articles of Incorporation for Wahzu,
Inc. had been filed by the Secretary of State's office the day after Willard sent them in. Willard checked
with the Secretary of State’s office and found that Wahzu, Inc. was in good standing, and a copy of the
Articles appeared in the files. That afternoon, Willard and his friend Bob, the initial board of directors
named in the Articles, at a board meeting resolved that Willard was Wahzu, Inc’s agent for all purposes
including signing a certain lease. Then Willard signed the lease for Wahzu, Inc.; he signed it, “Wahzu,
Inc., by Willard Smith as agent of and for Wahzu, Inc.” Two days later, Willard's Articles of
Incorporation and check were returned in the mail with a notice stating that the name and filing of Wahzu,
Inc. would not be allowed because it was too similar to another corporate name. Willard called the
Secretary’s office, where a minor bureaucrat explained that the filing had been a mistake and had been
withdrawn. When later Willard is sued in court on the lease, can he defend himself by claiming it was a
corporate obligation? Please answer and briefly justify.

[You should be able to answer this question after Syllabus Day 4.]
2. Marne was voted in as director of Vando Corporation. She was nominated by her cousin Hector, who
was CEO and also a director. Marne did not know much about Vando’s business, and initially she was
inclined to refuse to serve, but Hector persuaded her to accept. One week after Marne became a director,
information came to her from a former employee indicating that Hector had committed fraud on Vando
Corporation. Hector denied this when she confronted him, but she considered the documentary evidence
against Hector irrefutable. Hector himself refused to discuss the documents. Instead, he asked her who
she thought she was, and what did she know about his business. Please answer the following and briefly
justify your answer:

A) Can Marne herself remove Hector as an officer?

B) Assuming for this question only that Hector has a three-year contract to serve as CEO and he is only
one year through this contract, do Hector’s contract rights prohibit his removal?
C) Can the directors at a board meeting remove Hector from the board?
D) When the board finally meets to discuss this matter, Marne is detained elsewhere (she’s in an auto
accident). Can she authorize another director to act for her as proxy?
E) After three months, Marne finally gets a group of shareholders together to discuss Hector at a special
shareholders meeting. But only persons representing 35% of the shares show up. Can the meeting
proceed?

[You should be able to answer these questions (A)-(D) after Syllabus Day 5, and question (E) after Day
7.]

3. Phil and Lois were married. Phil was an entrepreneur who started up company after company that
either failed or sold. Finally, he settled on a technology manufacturing firm, Philois, Inc., that he wanted
to grow long-term. He loved Lois and wanted her to feel part of this long-term enterprise. After Phil
came to own a controlling block of stock, he told Lois at the annual shareholders meeting that he wanted
to nominate her to the Philois board of directors. Lois is a professor of English literature and has no
interest in either business or the technology that Philois manufactures. She loves Phil but told him she
wouldn’t be of any value as a director. She doesn’t have any time for or interest in the job. “That’s ok,”
Phil said, “you don’t even have to come to meetings or really do anything. I just want the world and the
people I work with to know I love you and respect you.” Should Lois accept a board position? Please
answer and briefly justify.

[You should be able to answer this question after Syllabus Day 9.]
4. Despite the urging of many shareholders, Amazon’s board once again met without declaring a
dividend. Bob bought 1,000 shares of Amazon in 1998. Bob is no insider of Amazon, just a member of
the wealthier “general public.” Despite Amazon stock’s increase in value over the years, Bob was hoping
to profit from owning the shares without having to sell them. After all, Amazon makes all kinds of
money and doesn’t really need all of it to run its business. Bob is considering suing Amazon for failure to
pay a dividend. Please answer the following and briefly justify:

A) Just based on these facts, will Bob’s suit against Amazon’s board likely succeed?
B) Bob sued Amazon’s board in a single claim for failure to pay dividends. In a motion to dismiss, the
board suggested that Amazon does not pay dividends because most of its shareholders would prefer to
pay taxes at a capital gains rate (that applies to sales of stock) rather than the ordinary income rate that
would apply to dividends. Would this rationale justify dismissal?
C) Assuming for this question only that the motion to dismiss mentioned in (B) is successful, will
Amazon pay the directors’ legal bills?

[You should be able to answer these questions after Syllabus Day 24.]

5. Y Inc. is a public company whose stock has been falling. The CEO, Karen, owns 25% of the stock, and
the public owns the remainder. Because the stock was falling, some shareholders suggested putting up
their own slate of directors. In response, Karen and the Y Inc. board proposed an amendment to the
Articles of Incorporation vesting exclusive control of the bylaws in the board, and for cumulative voting.
This amendment passed a shareholder vote. The board of Y Inc. then passed a bylaw providing for three
classes of three directors each. At the next annual meeting, Karen had herself and her friends elected to
all nine of the new director posts. A few months after that, shareholder Larry investigated whether to try
to take control of Y Inc. Please answer the following and briefly justify:

A) Can Larry initiate an amendment to the Articles?

B) Can Larry initiate an amendment to the bylaws?

[You should be able to answer question (B) after Syllabus Day 4 and question (A) after Syllabus Day 25.]

6. Lioness Corporation, a public company, owns a subsidiary, Cub, Inc. Lioness owns 91% of Cub’s
common shares. The remainder of Cub’s shares are owned by the public. Lioness’s board approved a
plan of merger merging Lioness and Cub. Under the plan, the public shareholders of Cub would become
shareholders of Lioness, which would issue already authorized shares equal to 6% of its currently
outstanding shares, and Lioness would survive. Please answer the following and briefly justify:

A) Must shareholders of Cub vote on the merger?

B) Must shareholders of Lioness vote on the merger?

[You should be able to answer this question after Syllabus Day 25.]
II. Essay Questions

The instructions for essay question credit will look much like this: “I will give credit to (i) each issue
identified, (ii) each relevant rule stated correctly (or by clear reference), (iii) each relevant fact reasonably
discussed in your explanation of why and how a rule does or does not apply, and (iv) each reasonable,
relevant policy or jurisprudential argument.” I mean that quite literally; each of these things gets one raw
point each time I find one of them in your answer.

1. (12 minutes) Bob sets up a corporation, EyeGlass, Inc., to make and sell contact lenses. He becomes
EyeGlass’s sole director and officer. He causes the corporation to issue shares to himself. After Bob has
operated EyeGlass profitably for seven years, he is approached by Big Corp., which wishes to buy
EyeGlass from him. Bob sells EyeGlass to Big in a transaction in which Big purchases from Bob all
EyeGlass shares and Bob signs a non-compete agreement with EyeGlass, now a Big subsidiary, in which
agreement Bob promises not to compete with EyeGlass for two years. After a month, Bob is bored and
wanting to get back into the business. He sets up a contact lens shop and goes back to work, forming an
LLC through which to operate. Big Corp. then sues Bob and the LLC, claiming breach of the non-
compete agreement. In defense, Bob claims that EyeGlass never formed because its Articles were
defective and its organizer was a defunct corporation and thus not a real person. Will Bob’s defense
succeed?

[You should be able to answer this question after Syllabus Day 4.]

2. (12 minutes) Louise, a successful businesswoman, was asked to serve as CEO of a start-up company
called Wender, Inc. Louise met with Wender’s lawyer and its chief engineer, who was creating products
for it. The lawyer told her that Wender, Inc., had formed four months ago to bring these products to
market, and that she would serve as CEO. The engineer and lawyer were enthusiastic about her service.
She took the position. The lawyer showed her the corporate books and introduced her to a person who
was called the corporate secretary. He had her meet the board at the first meeting. One of her first acts as
CEO was to lease a computer system. Wender paid the lease payments for eight months before the
business went bankrupt. Then Louise learned for the first time that Wender, Inc. had never formed. Now
the lessor of the computer system claims that Louise is liable for the lease payments herself, either as an
agent without a principal or as a general partner in what amounts to a partnership. Is Louise liable on
these grounds?

[You should be able to answer this question after Syllabus Day 4.]
3. (20-30 minutes) Eats, Inc. was a small public company traded on the pink sheets. Eats owned and
managed three restaurant chains in three different segments of the restaurant market: fine French dining,
Tex-Mex, and what Eats called “aquarium style,” which was a sea-food restaurant with live animals
inside that could be chosen, cooked, and eaten. Mo was hired as its CEO 3.5 years ago for a three-year
term. Mo was a long-time restaurant executive. Mo expanded Eats’s business from 200 to 300 total
stores. Mo used proprietary artificial intelligence software to calculate optimal restaurant locations. He
also prepared to launch a new type of restaurant for families with small kids called “Playing with Food.”
It served better-than-fast-food hamburgers and the like, and each restaurant had large play structures for
kids under 46 inches.
Seven months ago, Mo attended a restaurant convention in San Antonio. He was approached on
the second day in the convention hotel restaurant by Bruce, who had seen Mo’s nametag (which said “Mo
Eats, Inc.”). Bruce told Mo he had a wonderful idea for a restaurant and wanted to pitch it to Eats. Mo
met with Bruce the next day for lunch. Bruce brought samples of wonderful “best-of-Asia” food to share
with Mo and showed Mo a slide-show entitled “Heart of Asia, presented to Eats, Inc.,” which outlined a
restaurant concept design. The chain would be called “Heart of Asia” and feature the best of foods (for
the American palate) from Hokkaido to Bali to Nepal. Mo liked the food a lot, and he could see the
concept succeeding especially in large metropolitan areas. At the end of the conversation, Mo said to
Bruce, “I am sorry to say that Eats would not be interested in this concept. The board has its hands full
with current expansion plans. But I would like to do this myself.”
In the end, Mo and Bruce agreed to become members of Asian Heart LLC. Mo provided
financing and management, and Bruce provided creative works including food. Mo used Eats’s software
to determine where to locate the first six stores. He was able to bring two small (under 5%) but wealthy
Eats shareholders along to back Asian Heart. Soon Mo’s three-year contract with Eats ended, and Mo
devoted full time to Asian Heart.
Four months ago, two Heart of Asia restaurants opened in Houston and one in Dallas. Thus far,
the restaurants are profitable—the most profitable restaurant start Mo has ever done. In fact, one of them
in Houston is located near an aquarium-style Eats restaurant and is pulling customers away from it.
Choosing your own eel is fairly common in Asian eateries, and the Asian Heart locations have fish tanks,
too. Plus, the food is better at Asian Heart. Bruce turned out to be a great chef with a talent for helping
others prepare his recipes. Mo feels lucky to hitch his management skill to Bruce’s food talents. Mo is
already raising money to expand Asian heart to ten more locations in Austin, New Orleans, and Memphis.

Recently, Julia, Eats, Inc.’s auditor, saw Mo walking about in an Asian Heart as if he owned the
place. Julia did some checking into when Asian Heart opened. She checked the Eats software and saw the
“Asian concept restaurant” data from seven months earlier. She then phoned Bruce, who told her the
whole story. Julia now has asked you, the Eats associate general counsel, whether Mo did something
wrong. What would you say?

[You should be able to answer this question after Syllabus Day 13.]
4. (25-30 minutes) Campbell Farming Corporation (CFC) has eleven shareholders. Rob and Joan own
49% of the shares. The nine other shareholders are members of the Gately family. Steph Gately controls
the voting of these shares, however, through a voting trust. Steph's son Will is a director and CEO of
CFC. Will is not, however, a shareholder. Rob, Joan, Steph, and Will are directors of the CFC board.
CFC's board has, according to bylaw, four members.

Four months ago, Steph in a board meeting proposed that Will be paid a bonus in the form of company
stock and cash valued at $1.2 million "to compensate him for past service to the company and to prevent
him from resigning." Will was not required to sign an agreement or fulfill any conditions to receive the
bonus. Discussion during the board meeting included the fact that Will's salary was below market and
also that CFC had had three straight successful years. As the meeting progressed, it became apparent that
Joan and Rob opposed the bonus. Will was in favor, as was Steph. Rob asked that the board's vote be
registered as unclear and that the vote instead be put to the shareholders for the sake of avoiding
deadlock. All four directors voted to put the measure before the shareholders and let that control, though
Rob and Joan continued to dissent.

The shareholder vote, held the same day, was 49% against and 51% for the bonus. Steph voted all the
shares she controls in favor of the bonus.

Rob and Joan then demanded that CFC sue Steph and Will for breach of loyalty, waste, and failure of the
duty of care. CFC did not respond to the demand.

Last week, Rob and Joan filed suit against CFC and Steph and Will, alleging breach of loyalty, waste, and
failure of the duty of care. Now Steph and Will have come to you and want to know your unbiased
opinion on the lawsuit's chances. What is your opinion?

[You should be able to answer this question after Syllabus Day 17.]