law final

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Professor Gentile Fordham University School of Law

Corporations

Fall 2015

Examination Date: Examination Number: This is a three hour examination. This examination is administered on an open book basis. You may review any written material you wish during the examination. You may not, however, at any time during the examination, (1) utilize any computer-based reference source or search engine or (2) consult with any person. This examination consists of ten pages. Instructions You must insert your examination number on this first page of this examination, and you must return this entire examination with your response. Please also submit any scrap paper you use in preparing your response. If you are typing your response, you must insert (1) my name (Professor Gentile) and (2) your examination number on each page of your document. In addition, please begin your response to each question on a separate page. If you are writing your response by hand, you must insert (1) my name (Professor Gentile) and (2) your examination number on each exam book you use to write your response. In addition, in writing your response, please use only one side of the paper. Please begin your response to each question in a separate exam book, and please number your exam books. This examination consists of two questions. Be sure to answer each question, and each part of each question, completely. If additional factual assumptions are required for any part of any of your answers, be sure to state both the factual assumptions that are necessary and the reasons the assumed facts are relevant. As a general matter, include in your answers specific references to relevant case law and statutes as well as a discussion of the reasoning you have used to reach the conclusions you have drawn. Avoid general statements of legal principles and unsubstantiated conclusions. I have allocated one hour and thirty minutes to the first question, and I have also allocated one hour and thirty minutes to the second question – a total of three hours. The relative weights of the questions

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for grading purposes roughly corresponds to the hours (and fractions thereof) I have allocated to the questions. Remember that you must not make any remark, in the context of the examination or in any other context, that might compromise your anonymity (or the anonymity of any other student) before grades for the course are posted by the Registrar’s Office. Good luck!

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Question One (one hour and thirty minutes) Imagine that you are an associate at Buckeye & Buckeye LLP, a law firm located in New York City. Further imagine that Scarlet Grey, a senior partner in the firm, phones you in your office and asks you to come to her office. Now imagine that, as you enter her office, Ms. Grey says to you:

Have you ever been to Gaeta, Italy? It’s a beautiful port city on the Tyrrhenian Sea with breath-taking beaches. And, I’ve just learned from my newest client, Margret Margherita, it is also the birthplace of pizza! She discovered this important fact while touring the city’s ancient sites during her recent vacation there. Unfortunately, the relaxed reverie of her trip ended as soon as she arrived home, because she returned to a stack of vexatious letters in her mailbox. Please, have a seat, and I’ll tell you everything that has transpired in the past several years so that you can assist me in restoring Ms. Margherita to a state of relaxed repose. In January of 2010, Ms. Margherita and her college roommate, Lana Lasagna, realized their dream of opening a restaurant together, which they named Pomodoro Place. They each contributed $100,000 to the venture, and they used the money to lease a bistro in the West Village, as well as all of the accoutrements – the pots and pans, the tables and chairs, and the tableware and linens. Ms. Margherita was (until her vacation in Gaeta) the chef during lunchtime, which features classic pizzas. Ms. Lasagna is the chef for dinnertime, the hallmark of which is trendy adaptations of traditional lasagnas. The next month, Delvin Delivery joined Pomodoro Place. He uses his own red scooter to deliver the restaurant’s pizzas and lasagnas throughout all of Manhattan. In addition to permitting him to keep all of the tips he receives from customers, Pomodoro Place pays him $45,000 per year. Recently, while Mr. Delivery was delivering pizza and lasagna to Gracie Mansion, he ran over Walter Walker, who was walking on the sidewalk in front of the mansion. Mr. Walker wasn’t hurt in the accident, but he was angry about it. He began yelling insults at Mr. Delivery, who then punched him, giving him a black eye. Upon staggering to his feet Mr. Walker yelled, “We’ll finish this in court!” The next morning, Mr. Delivery realized that his scooter was badly scratched in the accident. Concerned that delivering pizzas and lasagnas on a damaged scooter would reflect poorly on Pomodoro Place, Mr. Delivery drove the scooter to Regal Repairs Company, and he said to the manager, “I’m the delivery person for Pomodoro Place, and I need this scooter to be looking brand new by lunchtime. Please paint it red and replace the tires.” The manager replied, “Wow. That’s not much time at all. We can get it done, but the cost – because we’ll have to charge a rush fee – will be $3,000 – nearly the price of a new scooter.” Mr. Delivery then said, “Great! As long as you can get it done in time, everything will be fine. I’ll be back to get the scooter in a few hours.” When he returned later that morning, he declared, “The scooter looks brand new!” and then he said “Everything is fine. Please send the bill to the restaurant for payment.” The manager replied, “I’m glad you’re happy with the repairs. I’ll send the bill to the Pomodoro Place today.” In January of 2011, Homer Host joined Pomodoro Place. Mr. Host, a former reporter for Vainglory Here (the monthly magazine covering fashion, Hollywood,

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politics, and society), serves as the restaurant’s host and manager. He uses his connections to the stylish, the famous, and the rich to make Pomodoro Place the, well, local it place. In addition to permitting him to keep the tips that customers slip to him to dine at the best tables, each month Pomodoro Place pays Mr. Host 10% of the restaurant’s total sales for that month. Mr. Host also receives a commission of $500 from Vainglory Here every time he shares with the magazine gossip he learns while working at the restaurant. Recently, while Mr. Host was preparing the restaurant for the dinner crowd, he realized that the fresh floral arrangements on the tables were drooping. Concerned that the wilted flowers detracted from the ambiance, he phoned Fabulous Florist Company, and he said to the manager, “I’m the host at Pomodoro Place, and I’m responsible for managing the restaurant. We need to double our usual order so that we receive two deliveries every day – one before lunch and one before dinner. This way our dinner customers, like or lunch customers, will have fresh floral arrangements on their tables.” The manager replied, “No problem at all. We’ll begin making the additional daily delivery tomorrow, and we’ll include the increased cost in the bill we send to Pomodoro Place each month.” Mr. Host replied, “Terrific! And, yes, please send the monthly bill with the doubled cost to the restaurant for payment.” In January of 2012, Rordon Gamsay, the world-renowned chef, ate dinner at Pomodoro Place with five of his closest celebrity friends. Upon finishing his meal, he leapt from his seat at one of the best tables and dashed into the kitchen. Pointing at Ms. Lasagna he exclaimed, “Your trendy adaptations of traditional lasagnas are stupendous! I am going to make you a star!” The next day, Ms. Lasagna, accompanied by Ms. Margherita, met with Chef Gamsay on the set of his weekly television show, Maven Cook. They all agreed that, beginning the next week, Ms. Lasagna would be a regular guest on the show, for which she would receive an appearance fee of $25,000. They also agreed that, during her appearances, Ms. Lasagna would wear a red apron emblazoned with the logo for (and name of) Pomodoro Place so as to generate widespread publicity for the restaurant. Within the year, Pomodoro Place grew from a local it place to an international It Place – that is, from a favorite haunt for New York celebrities to a destination spot for the stylish, the famous, and the rich around the globe. Concerned that their informal way of doing things was inadequate for their burgeoning business, Ms. Margherita and Ms. Lasagna sought the legal advice of their college roommate, Atta Attorney. She agreed that Pomodoro Place needed a formal organizational structure. So, in January of 2013, after a series of meetings among Ms. Attorney, Ms. Margherita, Ms. Lasagna, Mr. Delivery, Mr. Host, and his wife, Hosa Hostspouce, Pomodoro Place was incorporated. Each of Ms. Margherita and Ms. Lasagna was given 35% of the outstanding shares of common stock (a total of 70% of the outstanding common shares), Mr. Host was given 20% of the outstanding shares of common stock, and each of Mr. Delivery and Ms. Attorney was given 5% of the outstanding shares of common stock (a total of 10% of the outstanding common shares). Ms. Margherita, Ms. Lasagna, Mr. Host, and Ms. Attorney were unanimously elected to the Board of Directors. But, Mr. Delivery declined to serve as a director. To avoid the possibility of a tie (among the four directors), Ms. Hostspouce was unanimously elected to the Board of

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Directors (so that there are five directors). She has, however, never attended a single meeting of the Board of Directors. In January of 2014 at the regularly-scheduled meeting of the Board of Directors, Ms. Margherita expressed her discontent with her role in the company, stating that she was overworked, because she was the chef during lunchtime and she was also the chef for dinnertime on the days that Ms. Lasagna makes her weekly television appearances. In addition, she complained, she was underpaid, because she received only her salary from Pomodoro Place while Ms. Lasagna receives both her salary from Pomodoro Place and her appearance fees from Maven Chef. In response, Ms. Lasagna first proposed that she serve as the chef during lunchtime on the days after her weekly television appearances (so that Ms. Margherita would not need to work on those days). Second, Ms. Lasagna proposed increasing Ms. Margherita’s salary by one million dollars (roughly the amount she earns in appearance fees). Mr. Host expressed his concern that Pomodoro Place lacked the funds to pay sums equivalent to those paid by Maven Chef, and then Ms. Attorney offered to take the lead in securing the funds necessary for the salary increase. After a brief debate, all four directors voted in favor of the first proposal, and Ms. Lasagna and Ms. Attorney voted in favor of the second proposal, with Mr. Host objecting and Ms. Margherita abstaining. The next morning, Ms. Attorney contacted Lotsa Loans, N.A., stating that she represented Pomodoro Place. The company, she said, was seeking to borrow ten million dollars. A representative of Lotsa Loans sent Ms. Attorney the loan application, which she quickly completed on behalf of Pomodoro Place. After reviewing the completed application, Lotsa Loans agreed to lend the money, and Ms. Attorney signed the loan agreement on behalf of Pomodoro Place. Last year (in 2014), Ms. Margherita was paid her salary plus a bonus of one million dollars. Yet, this past January (of 2015), she remained discontent. While she was relieved to be working a bit less and earning quite a bit more, she was concerned that Pomodoro Place would not be able to make the required monthly interest payments on the loan from Lotsa Loans. So, she contacted Pizza Shack, Inc., the international restaurant chain featuring new twists on classic pizzas (like hot dog stuffed crusts). After several months of negotiations, on Monday, November 2nd, she sold her 35% stake in Pomodoro Place to Pizza Shack for fifteen million dollars. On Tuesday, November 3rd, as she was driving to the airport to begin her four-week vacation in Gaeta, she stopped to mail a letter to the Board of Directors, advising them of the sale of her shares and resigning her positions as director and chef. Finally, on Tuesday, December 1st, Pomodoro Place failed to make the required monthly interest payment on the loan from Lotsa Loans.

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As I said, when Ms. Margherita returned from her vacation, she found a stack of vexatious letters in her mailbox. In a failed – and, frankly, ridiculous – attempt to recover the state of relaxed repose she found in Gaeta, she discarded the letters immediately after she read them. Now the task of restoring the relaxed reverie of her trip falls to us. I’ve made arrangements to meet her for brunch tomorrow at Relaxed Repast. So that I can provide her with calming counsel, please prepare a memo for me that identifies any claims that:

(1) may be brought against Pomodoro Place, analyzes the strengths and

weaknesses of each of these claims (including any defenses), and evaluates the likelihood of the success of each of these claims;

(2) may be brought against the Board of Directors, analyzes the strengths and

weaknesses of each of these claims (including any defenses), and evaluates the likelihood of the success of each of these claims;

(3) may be brought against Ms. Margherita, analyzes the strengths and

weaknesses of each of these claims (including any defenses), and evaluates the likelihood of the success of each of these claims;

(4) Pomodoro Place may bring, analyzes the strengths and weaknesses of each of

these claims (including any defenses), and evaluates the likelihood of the success of each of these claims; and

(5) Ms. Margherita may bring, analyzes the strengths and weaknesses of each of

these claims (including any defenses), and evaluates the likelihood of the success of each of these claims.

************************************************************************************ For your answer to Question One, write the memorandum Ms. Grey has requested. In writing the memorandum, be sure to draw upon specific elements of the relevant materials included among the readings or the discussions that comprised our course in Corporations. ************************************************************************************

End of Question One

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Question Two (one hour and thirty minutes) Founded in 1995 by the Calbot Brothers, Calbot Corporation, a Delaware corporation whose shares of common stock are traded on the New York Stock Exchange, is a retailer headquartered in New York City and specializing in classic clothing and shoes that are designed to appeal to women who work in corporate offices. The company has 450 stores located in suburban shopping centers throughout the United States, Canada, and Mexico. For the past two years, the average price of one share of the company’s common stock has fluctuated between $14 and $16, having recovered from a historic low of $9 in 2008 during the Great Recession. The Board of Directors comprises seven members. They are:

Calvin Calbot, who serves as the Chair of the Board of Directors and the President and Chief Executive Officer, and who holds 8% of the company’s outstanding shares of common stock; Fiona Finance, who serves as the Chief Financial Officer, and who holds 4% of the company’s outstanding shares of common stock; Oona Operations, who serves as the Chief Operating Officer, and who holds 3% of the company’s outstanding shares of common stock; Barbara Banker, the Chief Executive Officer of Best Bank, N.A., the bank that provides the revolving loans the company uses to purchase inventory; Mallory Mall, the Managing Partner of the Miracle Mall Group, the largest owner of malls in the United States; Donnatella Karan, the founder of the fashion house DKOHIO; and Ray Traderep, the former United States Trade Representative.

At the regularly-scheduled meeting of the Board of Directors in January of 2014, Mr. Calbot proposed that the company expand its offerings to include clothing designed to appeal to women who are interested in adventure. He showed the directors samples for this new line of clothing, called Warrior Woman, inspired by the garments worn by Samurai Warriors – a long-sleeved silk robe paired with wide- legged pants gathered at the ankles and covered by a decorative sleeveless gown with winged shoulders. To avoid the expense of modifying the company’s machines to make them suitable for cutting and sewing silk, Mr. Calbot also proposed that the company procure the robes from Classy Kimonos Corporation, which is owned by his sister, Cassi Calbot, at a price of $500 per robe. Rather than debating the proposals, the directors voted to adjourn the meeting and to reconvene in a week, after they had a chance to engage experts in fashion and finance to advise them as to their merits. As planned, the Board of Directors met the next week. After Mr. Calbot reviewed the two proposals for Warrior Woman, the directors listened to reports from the three experts they had hired.

Mark Marketer, a leading marketing expert who focuses on fashion trends in women’s clothing, advised the Board of Directors that his most recent market research reveals a strong preference for functional clothes that serve multiple

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purposes – for example, athleisure yoga pants that can be worn from the gym to brunch – rather than decorative outfits for special occasions. Stacy Kelly, the host of the hit television show What To Wear, advised the Board of Directors that very few women look good in gowns with winged shoulders or wide-legged pants gathered at the ankles. Silas Silverman, the founder of the investment banking firm Silverman Baggs LP, advised the Board of Directors that adding a new line of clothing to the company’s existing offering would significantly increase the company’s costs, as employees would require additional training and the company would need to purchase new inventory (in addition to kimonos), new store displays, and a new advertising campaign. Mr. Silveman also advised the Board of Directors that the average price of a silk kimono is less than $250.

Mr. Calbot concluded the presentations by stating that the athleisure market was saturated and that the high-quality kimonos from Classy Kimonos were sure both to arrive on time so as not to delay the company’s production schedule and to appeal to the company’s discerning customers. The directors spent the next two hours debating the merits of the proposals – asking the experts questions and discussing all the information among themselves. When they finished their debate, Mr. Calbot, Ms. Finance, Ms. Operations, and Ms. Banker voted in favor of the proposal to expand Calbot Corporation’s offerings to include Warrior Woman, while Ms. Mall, Ms. Karan, and Ambassador Traderep voted against it. In an identical manner (by a vote of four to three, with Mr. Calbot, Ms. Finance, Ms. Operations, and Ms. Banker voting in favor), the Board of Directors also approved Calbot Corporation’s procurement of the silk robes for Warrior Woman from Classy Kimonos. The next day, Mr. Calbot, Ms. Finance, and Ms. Operations worked together to develop a plan for the company to offer Warrior Woman alongside its typical offering of classic women’s clothing and shoes in the Fall of 2014. Ms. Operations was tasked with the responsibility of implementing the plan, which required her – and many employees – to work overtime for months. One night while she was working very late, Janet Janitor, a custodian working for Sparkling Clean Corporation, the janitorial company Calbot Corporation hires to clean its facilities, entered her office to empty the wastebasket. Upon seeing her, Ms. Janitor said, “Golly! You – and many employees – have been working so hard and generating so much trash lately that we are all exhausted.” Ms. Operations responded, “I know! And, I am very sorry. We are launching a new line of clothing in August, and it is keeping us very busy.” After exchanging a few pleasantries about the weather, Ms. Janitor turned to leave saying, “I’m sure I’ll be seeing you again, so don’t stay too late.” The next morning, Ms. Janitor phoned her son, Sonny Janitorson, who works as a securities analyst at Ferrill Mynch Wealth Management, and said “I am very sorry, but I am too exhausted to meet you for lunch today. The folks at Calbot Corporation are preparing to launch a new line of clothing, and they are generating so much trash lately that I have been working overtime every night.” Mr. Janitorson admonished her to be sure to nap, and he promised to make her dinner at her house every weekend until the launch. That afternoon, Mr. Janitorson purchased 10,000 shares of common stock of Calbot Corporation. As planned, in August of 2014, Calbot Corporation began offering Warrior Woman alongside its typical offering of classic women’s clothing and shoes. The launch of the new line of clothing was a disaster. The next week, the trade journal Women’s Wear Weekly published a lengthy article in which five famous fashion designers characterized the clothes in the new line as “clearly unsuitable for Calbot’s core customers,” and two hedge fund managers specializing in the fashion industry called Calbot’s

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decision to introduce the new line alongside its typical line as “obviously reflecting no knowledge of, or concern for, the business of fashion.” More troubling, upon seeing the large displays for Warrior Woman as they entered the stores, customers assumed that Calbot’s no longer offered classic women’s clothing and shoes, and so they promptly left, causing sales to decline by more than fifty percent. By the end of the quarter (in December of 2014), the price of one share of Calbot Corporation’s common stock had fallen to $7. At the regularly-scheduled meeting of the Board of Directors in January of 2015, Mr. Calbot proposed that the company make a charitable contribution in the amount of five million dollars – approximately five percent of the company’s revenues – to co-sponsor with Classy Kimonos an exhibit on kimonos at The Museum at FIT (Fashion Institute of Technology). The exhibit, entitled Classy Kimonos for Women Warriors, would serve, Mr. Calbot said, to alert fashion designers and experts in the fashion industry to this new fashion trend. After debating the proposal among themselves for an hour, Mr. Calbot, Ms. Finance, Ms. Operations, and Ms. Banker voted in favor of it, while Ms. Mall, Ms. Karan, and Ambassador Traderep voted against it. The next day, Ms. Finance, on behalf of Calbot Corporation, made the donation to the museum. On June 1, 2015, Mr. Calbot received a telephone call from Gordon Gekko, the Managing Partner of Good Greed LP, a hedge fund based in Greenwich, Connecticut. Mr. Gekko advised Mr. Calbot that Good Greed had recently purchased 10% of the outstanding shares of Calbot Corporation (and that, earlier in the morning, it had made all of the requisite filings under the Williams Act). Mr. Gekko then suggested that they meet for lunch to discuss his plans to return Calbot Corporation to its essential – and profitable – business of classic women’s clothing and shoes. In response, Mr. Calbot said, “We have a long-term plan for the success of Warrior Woman. So, there’s no reason to discuss abandoning the line. If you would be patient for once, you’ll see that your firm’s shares will soon be worth three times the price it paid for them. Good day, sir.” Later that day, at the regularly-scheduled meeting of the Board of Directors, Mr. Calbot advised the other directors of his conversation with Mr. Gekko. He then turned to Mr. Wipton, a founding partner of Lachtell, Wipton, Kosen and Ratz and the company’s outside counsel, who he had invited to join the meeting. Mr. Wipton shared with the directors copies of a standard shareholder rights’ plan – that is, poison pill – with a 20% trigger that he had prepared for the company. The directors spent the next three hours debating the merits of the shareholder rights plan – asking Mr. Wipton questions and discussing all the information among themselves. When they finished their debate, the directors voted unanimously in favor of adopting the shareholder rights plan. After Mr. Wipton left the meeting, Mr. Calbot proposed that the company concentrate all of its advertising for Warrior Woman in Career Woman, a new magazine aimed at women who work in corporate offices published by Greata Gekkospouce, Mr. Gekko’s wife. In this way, Mr. Calbot said, the company would be able to alert its discerning customers of this new fashion trend. After debating the merits of the proposal among themselves for two hours, the directors voted unanimously in favor of it. They then tasked Ms. Operations with implementing the proposal. By the end of the week, Ms. Operations had made all the arrangements necessary to switch all of the company’s advertising for Warrior Woman to Career Woman. On July 6, 2015, Good Greed (having made all the requisite filings under the Williams Act) made a tender offer for any and all shares of Calbot Corporations that it did not already own at a price of $11 per share (nearly a 60% premium over the current stock price), conditioned on the redemption or invalidation of the company’s shareholder rights plan and at least 41% of the company’s outstanding shares being tendered. The next day, Good Greed filed a lawsuit in the Delaware Court of Chancery.

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Imagine that, upon graduating from the Fordham University School of Law last year, you elected to seek fame and fortune as a securities lawyer, representing shareholder-plaintiffs in suits against corporations. Imagine further that, on July 22, 2015, Ima Investor phones you in your office and says to you:

I really do try to be a savvy investor – buying stock in companies with good management teams and holding it for years without, well, doing anything else. Indeed, over the course of the ten years I’ve owned 10,000 shares of common stock of Calbot Corporation, I’ve never bothered to read the proxy materials or to vote in the annual meetings of shareholders. But, the company has lost its way, as the launch of Warrior Woman – and its impact on the stock price – plainly demonstrates. Gekko, it seems to me, is simply taking advantage of the situation. Sure, a tender offer price of $11 per share seems high now when the stock price is only $7 per share (so, nearly a 60% premium), but it’s only $2 more than the stock price during the Great Recession, and its $4 less than I paid for each of my shares. So, I think I may need to change my investment strategy and sue to get Calbot Corporation back on track. To help me make a decision, I need your advice. Please tell me:

(1) the claims that I may bring against the Board of Directors, the strengths and weaknesses of each of these claims (including any defenses), and the likelihood of the success of each of these claims;

(2) the claims that Good Greed (which Mr. Gekko manages) has

brought against the Board of Directors, the strengths and weaknesses of each of these claims (including any defenses), and the likelihood of the success of each of these claims; and

(3) the claims that are likely to arise from the investigation the

Securities and Exchange Commission is conducting regarding suspicious trading activity in shares of Calbot Corporation’s common stock, the strengths and weaknesses of these claims, and the likelihood of the success of each of these claims.

************************************************************************************ For your answer to Question Two, prepare the analysis that Ms. Investor has requested, including the advice you intend to give her. In preparing your remarks, be sure to draw upon specific elements of the relevant materials included among the readings or the discussions that comprised our course in Corporations. ************************************************************************************

End of Question Two End of Examination