Hypothetical

Chucky Cheech, the owner of the Cheech Cheeseburger Restaurant inherited the business from his father. It was the premier cheeseburger restaurant in Small Town New York for over 50 years.

Frank Chong. Built his French Fry business from scratch and it was the largest French Fry business in Small Town New York.

While both businesses were successful on their own, their owners decided to pool their resources and expertise in a combined business to be known as Cheech and Chong Burgers and Fries Restaurants.

After their respective attorneys drew the proper legal documents, it was decided that Cheech would be a 50% owner and Chong would be a 50% owner of the business known as Cheech and Chong Burger and French Fries Restaurants.

After several successful years in business Cheech and Chong decided to take their business to the next level and so they drew up the proper documents forming the Cheech and Chong Restaurant Inc. The purpose of the corporation was the running and franchising the Cheech and Chong brand to the public.

Each of the parties assumed management levels in the new corporation as did their respective spouses. Cheech would become the President with 50% of the stock. Chong would become the Vice President with 50% of the stock. They each decided to gift their respective spouses a 25% interest in the business. Accordingly, Cheech gave his wife Chita a 25% interest and she was named Corporate Secretary and Chong gave his wife Ching a 25% interest and she was named Corporate Treasurer.

It was further agreed that none of the outstanding stock would be offered for sale to anyone outside of the foregoing parties without the stock first being offered to the foregoing parties. This is known as a "closed corporation."

While the business was running profitably for several years, Cheech was becoming disillusioned and wanted to partake in other business pursuits. He spoke with Chong and the other corporate directors.

Chong and the others tried to persuade Cheech not to leave but Cheech was insistent and named his price which was 50 % more than the value of the stock.

Accordingly, Chong and the others refused to buy Cheech's shares at the demanded price.

Cheech therefore offered and sold his 25% of the stock of Cheech and Chong Restaurants Inc to Rudy, an outsider, who knew nothing about the restaurant business. Rudy was a college administrator and wanted to place the restaurant in the college and staff it with college interns.

The rest of the shareholders refused to allow Cheech to sell his shares to Rudy. Cheech insists and completes the sale to Rudy. The rest of the shareholders refuse to allow Rudy to take part in the business despite his ownership of a 25% interest in the corporation.

Rudy takes legal action against the Corporation, the shareholders and against Cheech personally.

Referring to the fact pattern above, answer the following:

I

1. What are the legal entities in the foregoing hypothetical? (3)
2. How are those entities defined? (3)
3. What are the advantages of each entity? (3)
4. What are the disadvantages of each entity? (3)

II. Can Cheech sell his 25% interest to Rudy? Why or why not? What are the legal principles involved? (8)

III. If Rudy files a legal action:

1. What type of action can he file? (3)
2. Against whom can Rudy file and why? (3)

IV. Will Rudy be successful in his legal action:

1. Against the corporation? Why or why not? (3)
2. Against the directors/shareholders of the corporation? Why or Why Not? (3)
3. Against Cheech? Why or why not? (3)