LOUISIANA STATE BAR EXAMINATION

BUSINESS ENTITIES

FEBRUARY 2022

QUESTION 1

Ernest Smith was a successful sugar cane farmer. He had three children: Evan, William, and Molly. Ernest employed all of them in his business. In 2002, Ernest decided to retire and to hand over his farming business to his children. That year, Ernest formed Sugar Farm, Inc. The articles of incorporation provided only the following: (1) the corporation would have three directors; (2) the directors would be elected annually by a majority vote of the shareholders; (3) the articles named Evan, William, and Molly as the initial directors; (4) an authorization for Sugar Farm to issue 300 shares of stock; and (5) the election of preemptive rights.

At the first meeting of the board of directors, Evan, William, and Molly voted to appoint Evan as president, William as secretary, and Molly as treasurer. The directors also approved the issuance of Sugar Farm's 300 authorized shares to the directors, each receiving 100 shares.

Sugar Farm grew rapidly under the leadership of Ernest's children, and as the business grew, Ernest's children were able to employ their own children in the business. Evan, William, and Molly informally agreed that Sugar Farm would offer to each of their children, on his or her 18^thbirthday, full-time employment with Sugar Farm.

Ten years ago, Evan discovered that Molly had embezzled $5,000 from Sugar Farm's accounts. Evan and William voted to remove Molly as a director, and Evan terminated Molly's employment with Sugar Farm. Evan and William did not appoint or elect a new director to replace Molly.

One year ago, Molly died. She left all her shares in Sugar Farm to her only child, Elaine. Before Molly died, she told Elaine about the agreement she and her brothers had to offer full-time employment to each child in the Smith family on the child's 18^thbirthday.

Elaine turned 18 one month after Molly died. She wrote a letter to her uncles Evan and William asking if they would allow her to work for Sugar Farm. Evan and William were not receptive. After receiving Elaine's letter, Evan emailed William: "Just received a letter from Molly's kid asking for a job. I have no intention of allowing that brat to join our family business!

Hope you agree." William responded: "I agree completely! Let's discuss a more permanent solution to keep her out of our affairs. The brat currently owns one-third of our company!" Evan and William then sent a letter to Elaine, refusing her request for employment, providing no explanation for the refusal.

The following day, Evan and William convened a meeting of the board of directors and voted to approve the following resolutions: (1) to increase Sugar Farm's authorized shares from 300 to 1,000 shares; (2) to issue 150 shares each to Evan and William, as additional compensation for their employment with Sugar Farm; (3) to issue 100 shares each to four children of Evan and William who were currently employed by Sugar Farm, as additional compensation for their employment; (4) to amend the articles of incorporation to provide that no shareholder may inspect corporate records unless the shareholder is employed by the corporation; and (5) to discontinue annual dividend payments to shareholders and to apply the funds instead to increase the salaries of Evan, William, and the four children of Evan and William currently employed by Sugar Farm.

One month ago, Elaine signed and sent a letter to William requesting copies of, or access to, all written offers of employment sent by Sugar Farm to any member of the Smith family. Elaine stated in her letter that she seeks access to the requested documents in order to determine whether she was unfairly treated in being denied employment with the company. William sent a reply letter to Elaine denying her request, stating: "Although you are a shareholder of record holding more than five percent of Sugar Farm's issued shares, and you have held those shares for more than six months, you are not currently employed by Sugar Farm and, therefore, have no right to inspect any records of the corporation."

Yesterday, Sugar Farm held its annual shareholders' meeting at its principal office in Baton Rouge. Evan and William orally informed their children of the shareholders' meeting but did not provide written notice of the meeting to any shareholders.

Although Elaine did not receive written notice of the meeting, one of her cousins told her about the meeting. Elaine attended the meeting along with every other shareholder.

At the start of the meeting, William announced that the board of directors would be proposing two amendments to the articles of incorporation for approval by the shareholders: (1) an amendment to reduce the number of directors from three to two, and (2) an amendment to add a provision that "no director or officer of Sugar Farm, Inc. shall be liable to the corporation or its shareholders for any action taken, or any failure to take action, as a director or officer." Elaine shouted: "I was not provided written notice of this shareholders' meeting or of the proposed amendments. I object to this meeting and any voting on the proposed amendments." The meeting continued, and votes were taken on the proposed amendments. Elaine voted her 100 shares against the proposed amendments. The remaining shareholders voted their shares (900 shares) in favor of the proposed amendments. William then announced: "Both proposed amendments have been approved by a majority vote of the shareholders and are hereby adopted."

This morning, Elaine discovered that during the past several months, Evan and William, as directors, voted to authorize the use of corporate funds to pay for improvements made to their private residences.

1.1. What potential grounds, if any, does Elaine have for an action to invalidate the issuance of the 700 new shares to Evan, William, and their children or, alternatively, to require Sugar Farm to issue additional shares to her? What defenses might reasonably be raised, and is Elaine likely to succeed?

1.2. What rights, if any, does Elaine have to inspect Sugar Farm's corporate records? What steps, if any, must she take to obtain access to any written offers of employment sent by Sugar Farm to members of the Smith family? Explain fully.

1.3. Can Elaine bring an action to compel Evan and William to reimburse Sugar Farm for payments made for improvements to their private residences? Discuss fully what type of action(s); the requirements of any such action(s); and the likelihood of success of such action(s) that Elaine might bring and any defenses that Evan, William, or any other party might assert to any such action(s).

1.4. What action(s), if any, can Elaine bring to compel Sugar Farm to purchase her shares? What must Elaine establish to obtain that relief, and is she likely to succeed? Explain fully.

1.5. On what grounds may Elaine seek to invalidate the amendment approved by the shareholders reducing the number of directors from three to two, and is she likely to succeed? Explain fully.