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These are sample answers to the questions in the exam. Many of the issues discussed in the questions are recurring…for example jurisdictional issues could be discussed in all cases. I have given you points for a discussion even if it is not made in the same question where I have discussed the issue…for example, you might have discussed personal and subject matter jurisdiction in another question than what I have. Also, these answers are more extensive than needed for full points… Question 1 Question 1concerns a contract for the sale of goods. a) According to general contract law principles a contract consists of an offer, acceptance and consideration. However, common law principles can be superseded by legislation. All states except for Louisiana, have accepted UCC, article 2 (concerning sale of goods) why the UCC is applicable. Therefore, if UCC regulates the matter, common law principles are not applicable. According to art. 2-‐102 UCC the regulation is applicable to sale of goods (the lobsters in this case). Section 2-‐206 governs offer and acceptance in formation of contract: (1) Unless otherwise unambiguously indicated by the language or circumstances • (a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances; • (b) an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-‐conforming goods, but such a shipment of non-‐conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer. (2) Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance. Peter did not unambiguously indicate how the acceptance was to be made, why the acceptance could be made by any manner and by any medium reasonable in the circumstances. The question is therefore if it is reasonable to mail an answer when it comes to perishable goods such as lobsters. This factual question can only be answered with more information about business practices, the relationship between Peter and his supplier etc. If it is reasonable, the acceptance was sent before the revocation of the offer, why the mailbox rule applies (Adams v. Lindsell, 106 Eng. Rep. 250 (1818)(Common law applies since this is not regulated in the UCC) A contract was therefore formed when the acceptance was put in the mailbox by the supplier and Peter has to accept the lobsters. (see p. 91-‐92 BL, 117–122 ACL) (3 points) b) If the acceptance was mailed after the revocation of the offer it becomes important to determine if it was possible for Peter to revoke the offer although the heading stated that the offer was irrevocable. According to common law and offeror can revoke an offer if no consideration is paid, even if the offer states that it irrevocable, see p. 117 ACL. According to UCC 2-‐205: An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror. Peter did not state any time for his irrevocable offer why it is important to determine if a time frame of irrevocability of three weeks is reasonable. Again, this factual question can only be answered with more information about business practices, the relationship between Peter and his supplier etc. It could be argued that lobsters are perishable, need to be delivered quickly, restaurants normally do not wait for fresh food orders for more than three weeks…As a conclusion it is probably not reasonable why the offer could be revoked on March 19th (You will get full points even if you argue that it is a reasonable period of time). The supplier could also accept the offer by shipping the lobsters according to 2-‐206 (1) (b) UCC but the contract is in that case formed when the lobsters are delivered (see 2-‐206 (2) UCC) so the reasoning about “reasonable time” applies. (3 points) c) Subject matter jurisdiction Contract claims normally fall under state court jurisdiction unless it is a diversity suit. The supplier from Maine might opt for a federal court under the diversity jurisdiction, 28 USC §1332 (supplier from Maine, Peter from New York state), but the monetary threshold (75 000 USD) is most likely not met (depending on what the total loss would be) why the case will likely be litigated in state courts. Personal jurisdiction Peter is a resident of New York why New York state courts have general jurisdiction over him. The supplier is resident in Maine why New York courts do not have any general jurisdiction over him. However, according to International Shoe Company v. State of Washington, 326 U.S. 310 (1945) the supplier has minimum contacts with the state of New York since it deliberately and purposefully entered into a contract with a customer in New York (see p. 63 ACL & N.Y. CVP. LAW § 302) The Supreme Court , Commercial division is the court of first recourse in New York for commercial litigation. Breach of contract claims can be heard by the court if they are above a monetary threshold (25-‐150K depending on county, excluding interest, punitive damages etc.) (see section 202.70 Uniform rules for N.Y.S. trial courts). The amount is dispute would thereforeof the if the case is litigated in the counties with the lower threshold. Since Peter’s business is located on Manhattan (higher threshold apply in N.Y. city) there is a great likelihood that the monetary threshold is not met. In conclusion, the case will likely be litigated in the state court system, if the monetary thresholds for diversity suits in federal courts are not met. The likelihood that the case will be litigated in the Supreme Court, Commercial division is small, because of the monetary thresholds applicable for the court’s jurisdiction. (2 points) Question 2 The question concerns liability for defective goods distributed to customers in the United States. a) Firstly, the Swedish corporation could face liability if it is deemed to be a partner in a general partnership. According to section 201 in the Uniform Partnership Act a general partnership can be formed even without a formal agreement or a registration. There are several factors, which the courts have deemed important in determining if a partnership exists; the intention of the parties, capital investment by each party, joint ownership of business property, sharing of profits or losses and equal management rights (see also ABL p. 317). In this case the intention of both parties is not to form a partnership. The parties furthermore do not own any property together. However, the parties have both made a capital investment. Also, they are sharing profits as well as jointly managing the expansion. There is therefore a risk that the Swedish corporation will be deemed to have entered into a partnership with the sole proprietor. A general partner is liable in tort and in contract for all partnership debts. (2 points) Secondly, the Swedish corporation could face liability under tort law. A manufacturer is strictly liable for unreasonably dangerous products. A product is unreasonably dangerous if it does not meet customer expectations or if the risks outweigh the utility of the design of the product. Adding a preservative to lollipops, which causes severe allergic reactions, even death, is not what customers expect from lollipops, which are generally consumed by small children. The risks of adding such a preservative clearly outweigh the benefits of a longer shelf life. (2 points) b) The Swedish corporation has no defenses for liability as a partner of a general partnership. Under tort law, it could argue that the product was substantially altered after it left the manufacturer in Sweden, see the Autoliv-‐case in the supplement & Restatement of Torts, Third § 1 (Second § 402A )(2 points) c) Punitive damages can be awarded in tort actions if a tort feasor has been engaged in intentional, outrageous conduct, has an evil motive, or shows reckless indifference to others welfare(see the BMW-‐case, 517 U.S. 559, in the supplement). The Swedish corporation has not engaged in any conduct causing the allergic reactions and there is no mention that they knew that the U.S distributor was adding a preservative to the lollipops. The corporation would therefore likely not face punitive damages. (2 points) Question 3 This question tests your knowledge of vocabulary as well as business knowlege. Option 1 includs 1000 common shares, which you do not know the value of (par value or face value does not say anything about the price of the shares-‐ how much are the shares sold for? Par value: specified in the articles of incorporation, the value which must be paid for shares to be fully paid and where the shareholder knows that she has paid appropriate consideration for her shares. Does not have any significance today, already in the 1930-‐
1940 companies started to issue watered stock, which means that shareholders receiving the stock did not pay par value but less than that (which they could be liable for later. In the 1950’s states started to allow companies to issue no par value stock, for example MBCA does not mandate par value but lets companies voluntarily set par value for their shares if they want to. Delaware and New York also let their companies choose between par value stock or no par value stock (in Delaware you have to do this in the company’s articles of incorporation. The shareholders who have bought watered stock are liable for the amount up to par, which the company can demand anytime within 6 years of issue). It also includes non-‐cumulative preferred shares redeemable at the option of the corporation (non-‐cumulative shares are disadvantageous since you do not get any accrued profits, also the corporation can redeem the shares whenever they want if the value increases from current market value). Also included in option 1 are 1000 debentures, redeemable within one year (very soon for an investment, but you get a high return…However there is no information about market value/ sale price of the debentures). Generally, you have too little information to make an informed decision about option 1. Also, many of the terms are unfavorable to investors why this option should not be recommended. Option 2 included 2000 preferred shares, with high yearly dividends (25 USD for a market value of 100 USD), redeemable at the option of the holder (for a low value however) and 1000 bonds (debt secured by any specific corporate asset). The bonds have a high interest rate (10 %) and are redeemable in May 2020, which make them a good long-‐term investment. In general, this option is the best option. Option 3 includes 1000 debentures (unsecured corporate debt) for a high interest rate as well as 1000 bonds (secured corporate debt) for very high interest rate (35 %). However, the bonds are redeemable in May 2012. Also, you do not know the price of the bonds why this option is the second worst option after option 1, and should not be recommended. Question 4 a) The kitchen aid has committed the intentional tort assault and could face both criminal and civil liability for the attack. Embassy might face liability for the intentional tort of the kitchen aid under the respondeat superior doctrine. The respondeat superior doctrine becomes applicable (an employer could be held liable for the actions of an employee) if the actions are committed “in the scope of employment”, see Merchants’ Bank v. State Bank, 77 U.S. 604 (1870). It could be argued that the actions of the kitchen aid were not committed in the scope of his employment, since he was not in the kitchen when the actions took place. Embassy is therefore unlikely to be held liable under the respondeat superior doctrine. Embassy might also face liability for a negligent tort if: 1) The hotel had a duty towards the plaintiff ”reasonable & prudent person standard” 2) A breach occured Burden of proof on plaintiff 3) The breach was the proximate cause of the harm ”natural & probable cause of the harm Palsgraf v. Long Island R.R., 162 N.E. 99 (N.Y. 1928) 4) Plaintiff suffered damages (this is one of the tort ppt:s) The hotel had a duty to keep Conrad safe in the hotel since he was a guest at the hotel. It is however questionable if this duty was breached. It depends on if the hotel made a background check when they hired the kitchen aid, was there a history of violent behavior, what areas did the kitchen aid have access to, was the knife taken from the hotel kitchen, was there any safety measures in place to keep knifes in the kitchen and so on…. generally, the standard of care is higher in fancy hotels (such as Embassy) compared to less fancy establishments and a fancy hotel should probably keep track of unauthorized persons on property. It should also be mentioned that it is questionable if the breach was the proximate cause to Conrad’s wife divorcing him… (5 points) b) Board members of corporations have a duty of care as well as a duty of loyalty (see Smith v. Van Gorkom or Walt Disney-‐case for a legal reference). Since Sally has accepted the position as a board member she may not contact Conrad and induce him to file a law suit against the corporation without breaching her duty against Embassy. (3 points) Written Exam in American Business Law 2012-‐09-‐21 These are sample answers to the questions in the exam. I am not expecting you to quote the legal rules (you need to refer to the appropriate legal rules though) but I am including them for the sake of clarity. Q1 a) Issue: The first issue is if the contract can be modified against the wishes of one party. The second issue is who is responsible for the risk of loss of the BMW’s. Rule: The contract cannot be modified if both parties cannot agree on it. See 2-‐204 UCC: (1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract. The two relevant sections discussing risk of loss in UCC are: § 2-‐509. Risk of Loss in the Absence of Breach. (1) Where the contract requires or authorizes the seller to ship the goods by carrier (a) if it does not require him to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier even though the shipment is under reservation (Section 2-‐505); but (b) if it does require him to deliver them at a particular destination and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are there duly so tendered as to enable the buyer to take delivery. (2) Where the goods are held by a bailee to be delivered without being moved, the risk of loss passes to the buyer (a) on his receipt of possession or control of a negotiable document of title covering the goods; or (b) on acknowledgment by the bailee of the buyer's right to possession of the goods; or (c) after his receipt of posession or control of a non-‐negotiable document of title or other direction to deliver in a record, as provided in subsection (4)(b) of Section 2-‐503. (3) In any case not within subsection (1) or (2), the risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant; otherwise the risk passes to the buyer on tender of delivery. (4) The provisions of this section are subject to contrary agreement of the parties and to the provisions of this Article on sale on approval (Section 2-‐327) and on effect of breach on risk of loss (Section 2-‐510). § 2-‐510. Effect of Breach on Risk of Loss. (1) Where a tender or delivery of goods so fails to conform to the contract as to give a right of rejection the risk of their loss remains on the seller until cure or acceptance. (2) Where the buyer rightfully revokes acceptance he may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as having rested on the seller from the beginning. (3) Where the buyer as to conforming goods already identified to the contract for sale repudiates or is otherwise in breach before risk of their loss has passed to him, the seller may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as resting on the buyer for a commercially reasonable time. Analysis: In this case Luxury Cars (LC) wanted to modify the delivery date in the contract. There is nothing in the case suggesting that they have the right to modify the contract unilaterally and there is no agreement between the parties. Therefore the original contract terms should apply. Also, there is nothing in the question suggesting that LC is in breach of the contract when the ship sinks. (You could however argue that LC might be in breach if they have agreed to pay beforehand…in that case it has to be clear from your answer that it is an assumption on your part). Therefore section 2-‐509 UCC is applicable in the case. The next question is if the agreement to “ship the goods across the Atlantic” falls under section 2-‐509 (1) (a) (no delivery to a particulate destination), under section 2-‐509 (1) (b) (delivery to a particulate destination) or under subsection (3) (no carrier involved, risk passes to the buyer on receipt of the goods). If (1) (a) is applicable the risk passes on to the buyer when the goods are delivered to the carrier, while if (1) (b) is applicable the risk passes to the buyer when the carrier is tendering the goods at the particular destination. I would argue that the phrase “ship the goods across the Atlantic” is not specific enough to fulfill the criteria in section 2-‐509 (1) (b) of a particular destination. Therefore either subsection (1) (a) or subsection (3) is applicable in this case. Conclusion: In conclusion, the risk passes to the buyer when the seller duly delivers the goods to the carrier. LC is therefore responsible for the loss of the cars if a carrier shipped the cars (and there is no agreement to ship the goods to a particular destination). If there is no carrier, the risk passes on to the buyer when he receives the goods. GAG is in that case responsible for the loss of the cars. b) Issue: The issue is who bears the risk of loss if the contract between Galaxy AG (GAG) and Luxury Cars (LC) is an oral contract Rule: According to the New York General Obligations law, section 5-‐701: “a. Every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking: 1. By its terms is not to be performed within one year from the making thereof or the performance of which is not to be completed before the end of a lifetime;” Also, according to the N.Y. UCC section § 2-‐201: (1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing. (2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within ten days after it is received. (3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable (a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller's business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; or (b) if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or (c) with respect to goods for which payment has been made and accepted or which have been received and accepted (Section 2-‐-‐606). (4) Subsection one does not apply to a qualified financial contract as that term is defined in paragraph two of subdivision b of section 5-‐701 of the general obligations law if either (a) there is, as provided in paragraph three of subdivision b of section 5-‐701 of such law, sufficient evidence to indicate that a contract has been made or (b) the parties thereto, by means of a prior or subsequent written contract, have agreed to be bound by the terms of such qualified financial contract from the time they reach agreement (by telephone, by exchange or electronic messages, or otherwise) on those terms. According to §1-‐103 UCC “Unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions.” so you can use both NYGOL and NYUCC in this case. The doctrine of promissory estoppel in § 90 Rest. 2d Contracts (you could use the definition in your course books too) states that: ”(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.” Application: In this case, the cars are worth more than 500 USD and the contract is not to be performed within one year, why both the NYGOL and the UCC are applicable. According to the merchant exemption in the UCC (section 2-‐201 (2)) a contract between merchants is valid if a confirmation is sent to the other party, and that party does not object to it’s contents within ten days after it is received. In this case there is no record of a confirmation. If a confirmation has been sent (and not objected to) the contract is valid. However, if a confirmation has not been sent, the contract is not valid. The contract cannot be held valid under section 2-‐201(3) c) UCC, since the cars were never delivered to LC. (Partial payment means acceptance of that part of goods, not the whole contract). You might try to argue that the contract is valid according to the common law doctrine of promissory estoppel depending on the specifics of the case. Conclusion: If a confirmation was sent, the contract is valid under the merchant exemption in the UCC (see answer (a) for risk of loss analysis). If no confirmation was sent, the contract is not valid, and GAG bears the risk of loss. Q2 Issues: • The first issue is if Sarah meets the tests for personal and subject matter jurisdiction. • The second question is if Sarah needs to pay for the chicken twisters even though cockroaches contaminated the food. • The third issue is if Benny did something wrong when he a) refused to let Sarah go for several hours and b) pushed her. • The fourth issue is if ChickenQueen Inc. is liable for the actions of Benny. • The fifth issue is if there was a proximate cause to the harm Sarah suffered as a result of Benny´s actions. Rules: First issue: A matter can be litigated in the federal court system if the rules on subject matter and personal jurisdiction are fulfilled. Subject matter jurisdiction: According to 28 USC 1331: The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States. According to 28 USC 1332: (a) The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between— (1) citizens of different States; (2) citizens of a State and citizens or subjects of a foreign state, except that the district courts shall not have original jurisdiction under this subsection of an action between citizens of a State and citizens or subjects of a foreign state who are lawfully admitted for permanent residence in the United States and are domiciled in the same State; (3) citizens of different States and in which citizens or subjects of a foreign state are additional parties; and (4) a foreign state, defined in section 1603 (a) of this title, as plaintiff and citizens of a State or of different States. Personal jurisdiction: See pages 60-‐68 in Introduction to American Business Law with references to case law. Second issue: According to §2-‐314 N.Y.UCC: ”(1) Unless excluded or modified (Section 2-‐-‐316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale. (2) Goods to be merchantable must be at least such as (a) pass without objection in the trade under the contract description; and (b) in the case of fungible goods, are of fair average quality within the description; and (c) are fit for the ordinary purposes for which such goods are used; and (d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and (e) are adequately contained, packaged, and labeled as the agreement may require; and (f) conform to the promises or affirmations of fact made on the container or label if any. (3) Unless excluded or modified (Section 2-‐-‐316) other implied warranties may arise from course of dealing or usage of trade.” Third issue: See page 444 in Barron’s Business Law (battery & false imprisonment) Fourth issue: See the Merchant’s Bank-‐case in the legal supplement Fifth issue: See the Helen Palsgraf-‐case discussed in class and referred to in Introduction to American Commercial Law page 256. Analysis: First issue: A matter can be litigated in the federal court system if it is a federal question or if diversity jurisdiction exists. In this case there is no federal question, so it all depends on where the corporation is incorporated. If the corporation is not incorporated in New York (Sarah is living nearby so she is a resident of New York) and the amount in controversy exceeds 75 000 USD, the matter can be litigated in the federal court system. The matter can be litigated in the New York federal courts if the courts have personal jurisdiction over the parties. Since the ChickenQueen Inc. is doing business in New York, and Sarah is residing there, the N.Y. courts likely have personal jurisdiction over the parties. Second issue: As mentioned in § 2-‐314 UCC, the serving of food, as in this case, is considered a sale. Also, fungible goods, like the chicken twisters, must at least be of 1) fair average quality within the description and 2) fit for their purpose, in this case edible. Since the food was contaminated by cockroaches, it could not be qualified as fit for consumption by humans. Third issue: By stopping Sarah at the door, Benny wrongfully detained Sarah’s freedom of movement and is guilty of the intentional tort false imprisonment. There was no reason for him to detain her for hours, since she was not liable for the contaminated food. Also, he pushed her, and therefore is guilty of the intentional tort assault (unjustified contact with her body). Fourth issue: Benny was an employee at ChickenQueen and according to the doctrine of respondeat superior (arguments from the case needed, for example…he acted within the scope of his employment, for the benefit of the corporation) Chicken Queen Inc. is liable for the actions of Benny. Fifth issue: Sarah’s injuries are not uncommon for a person who has been falsely imprisoned and assaulted (she stayed home from work during one morning). The question is if the false imprisonment is the proximate cause to her losing her job…. Arguments (based on the Palsgraf-‐case) stating that it is a foreseeable effect/not foreseeable effect are equally relevant. Conclusion: Depending on your answer regarding proximate cause, ChickenQueen Inc. is liable to Sarah/not liable to Sarah. Q3 Issue: The issue is if the corporation can do something about the judgment from the Supreme Court of New York. Rule: See the BMW-‐case in the legal supplement (517 U.S. 559) Analysis: The damage award was: 1) 5 000 USD in compensatory damages and 2) 50 million USD in punitive damages. The compensatory damages sound reasonable, taking into account that Sarah was held in the store for several hours, Benny caused her emotional distress and she lost her job. However, you would most likely want to appeal the verdict concerning punitive damages. Punitive damages are only available if the misconduct was 1) intentional 2) outrageous 3) caused 4) severe emotional distress. According to the BMW-‐case an excessive damage award could violate the due process clause of the Fourteenth amendment. In this case there exists a disparity between the compensatory and the punitive damages. The ratio between the compensatory and the punitive damages cannot be breathtaking. In the BMW-‐case a ratio of 500 to 1 was seen as excessive. In this case the ratio is 1 to 10 000, which is excessive compared to the reprehensibility of the conduct. Conclusion: The compensatory damage award is justified in this situation. However, the corporation should appeal to the New York Court of Appeals and argue that the punitive damage judgment is excessive. Q4 Issue: The issue is if Cecilia, David and Emma have breached their fiduciary duties to the corporation when they a) booked a trip to Las Vegas, b) hired David’s four-‐year-‐old brother and c) signed a non-‐profitable contract with Papple. Rule: According to case law the board of directors (BOD) have a duty of loyalty and a duty of due care to the corporation. Also, they may not waste corporate assets. The duty of loyalty is breached if the BOD acts 1) fraudulently 2) in bad faith or 3) acts in his own interests rather than corporate interests (self-‐dealing) The duty of due care is breached if the BOD is not acting in good faith or if the BOD does not make an informed judgment. The business judgment rule principle means that the court will not question the business judgment of a BOD if the decision was an informed decision. There has been a waste of corporate assets if the other party’s consideration is so insufficient that no reasonable man would accept it. Application: The trip to Las Vegas: No specifics are given in the case but it seems like the trip to Las Vegas is not made for a corporate purpose. In that case it fulfills the waste standard. A similar argument could be made for the hiring of David’s four-‐year-‐old brother (David might be liable for a breach of the duty of loyalty, since he acted in his own interest-‐
family). David’s brother cannot possibly contribute anything of value to the corporate enterprise (compare with the Walt Disney case, where the President who was fired actually contributed in some ways to the corporate enterprise.). The employment agreement does not therefore meet the “reasonable man standard”. The BOD might also have breached their duty of loyalty if they acted in bad faith. The contract with Papple does not seem to breach the fiduciary duty of loyalty. Also, it would not be categorised as waste, since they received something in return. However, you could argue that the duty of due care have been breached if the decision was ill informed or not made in good faith. Otherwise, the BOD is protected by the business judgment rule. Conclusion: The BOD has breached their fiduciary duties to the corporation by employing David’s brother and by flying to Las Vegas on vacation. However, it is not clear if they have breached their fiduciary duties when they signed the agreement with Papple. It all depends on if they made an informed decision and acted in good faith. If that is the case, the BOD is protected by the business judgment rule.