Business law questions

| August 31, 2016

Question 5.5. (TCOs A, B, F, H)
Paul and Thomas Hamilton, brothers, are college students and web designers. While at the University of Megalopolis, a private, for-profit college in the “Quad State” area, they started an online chat service called LinkTime. Paul attended and resided at the college’s campus in the State of Quadrahenria. Thomas, who was on probation during college for a low level felony drug conviction, could not be a resident student and took classes at the campus in the Commonwealth of New Guernsey campus. The chat service began by putting information from the school’s student directory online, and offering blog, chat and message board features. LinkTime was such a hit that within a year, the school advised the brothers that they had to remove LinkTime from the university’s server as it was utilizing too many resources. This was not a problem as the Hamilton found advertisers, so they were able to move LinkTime to a private server without charging user fees. In fact, LinkTime was earning so much revenue that the Hamilton brothers were able to pay themselves and the six friends who helped them operate it salaries. The Hamilton brothers are graduating from the University of Megalopolis and will be attending separate graduate programs. Paul will attend Quadrahenria State University, and Thomas the College of New Guernsey. As LinkTime is so successful, the brothers not only plan to expand it to the two new colleges that they are attending, but to as many other colleges within the four states comprising the “Quad State” area as possible. They even have hopes of “going national.” As part of their plan to expand to other campuses, they expect to recruit a student from each of the new schools “to get them in.” They wish to formalize LinkTime by organizing it as a proper business. The brothers would like to maintain a majority interest in the business, give about 20 percent to the six friends from their undergraduate days who helped them run the service, and use the remaining interest in the business to attract other investors and use employee incentives.
They seek your advice on (a) the form of business they should use, (b) who might have a claim on the business, and (c) how they might protect themselves from claims regarding a computerized internet platform?

LinkTime has been a phenomenal success for over ten years. They are now a worldwide social networking phenomenon. Over the years and the various incarnations of the business enterprise, they are now a corporation with just under 100 shareholders. In anticipation of a public offering, they have just completed a private stock offering and allowed several of the initial equity owners to exercise stock options. The Hamilton brothers each exercised options to purchase 10,000 shares for $5 a share. Also in anticipation of the public offering, pursuant to the early intervention drug plea he made while in college, Thomas Hamilton had his conviction expunged. In addition, LinkTime sold $10 million in two year advertising contracts, which would allow the clients to back out for a 90 percent refund. These unusual contracts increased their current revenue by 15%. As LinkTime is such a phenomenon, the hype regarding the public offering has been enormous. Even college students are attempting to buy the stock. Days before the public offering, the following occurred: (a) a broker at their underwriter, Silversmith & Baggs, showed a pension fund director a draft version of the prospectus; (b) Paul sold 1000 shares of the stock that he purchased through the stock option plan for $45 a share, telling the private investor that the issue price for the public offering would be at least $60 a share; and (c) several of the people who bought stock in the private offering sold it at a nice profit. The initial public stock offering had many problems. The NASDAQ computer system, which was implemented pursuant to a recent regulation change by the Securities And Exchange Commission (SEC), could not keep up with the demand. The system could not accurately report the price, and many day traders, including Big Profit Hedge Fund, lost money. Big Profit had formally filed its opposition to the SEC’s regulation when it was proposed. After the public offering was completed, LinkTime stock stabilized at $40 a share, well below the initial offering price of $70 a share. In light of the fiasco of the public offering and the bad press that it generated, users began to drop LinkTime in favor of a new, upstart rival service offered by TronCom. Fearful that the new advertisers would back out of their contracts, the Hamilton brothers sold a great deal of their stock.
What issues does LinkTime, its officers, and stockholders face under (a) state securities law, (b) the Securities Act of 1933, and (b) the Securities and Exchange Act of 1934? (Points : 60)

Question 6.6. (TCOs A, D, E) Woody worked at the local country club pool as a lifeguard, not a swim teacher, for the summer of 2013. Woody was a public school physical education teacher. The country club did not do a background check or confirm any references when they hired him. They relied on the “say-so” of Woody’s brother, a member of the country club board of directors. The country club only did a cursory internet search of the state’s Department of Education website to verify that he had a valid teaching certificate. When one of the swim instructors unexpectedly quit one day, he took over the class. Initially, the class went well. Eventually, Woody also took over coaching the club’s competitive swim team. When he became the swimming coach, Woody effectively stopped “teaching” the swim classes. Instead, he had all the swimmers in the classes do races and train for competitive meets during the 30 minute lessons. Woody had done this many times during the summer. His boss, the country club director, knew this and, as the swim team was winning, ignored complaints from parents and students. Woody raced with the swimmers and pushed the winners out of the way when they tried to touch the side of the pool so that Woody’s team would win each time. This was not the first time that Woody had injured swimmers. Last year, he was arrested for physically abusing a child he coached at his school. Although the criminal charges were dropped, Woody is on administrative leave from his public school job until an administrative hearing with the state Department of Education can be held in the fall. The incident was reported in several local papers, and his administrative suspension is listed on the state’s database.
Several of the children, ages 6-8, reported to their parents that they had been physically assaulted by Woody while in swim class for not “working hard enough!” The children had bruises on their shoulders. In addition, Woody began “kidding” an 18 year old black college student who worked as a lifeguard and assisted Woody with the coaching. Over time, Woody’s “jokes” toward the young man became very aggressive. Woody continued even though the young man asked him to stop. In fact, after the young man told Woody to stop as he felt harassed, Woody hired another lifeguard to assist him with the coaching. The country club director was aware of this situation, but as the swim team was winning, he took the position that it was an interpersonal issue that the two should workout among themselves.
Several parents brought suit against the local country club, Woody, and the country club director. The young lifeguard has also brought suit. The local country club pool alleges that they are not liable. Discuss the ethical, liability, and agency issues presented by this matter, and all defenses available to the local country club pool. (Points : 30)

Question 7.7. (TCOs G and I) In the 1930s, after immigrating to the U.S. from a region in central Europe threatened by the onset of World War II, Bruno and Helga Kreamie opened a bakery in Brooklyn. They specialized in snack cakes. Kreamie Cup Cakes became so popular in the area that the family stopped being actual bakers and became manufacturers/ food processors of the snack cakes on a regional basis. After returning from the war, their son Steve completed college and began working in television advertising in the early 1950s. Steve approached his parents and his older brother Tom, who was now running the business, about the possibilities of advertising and “going national.” The family liked the idea and began advertising and expanding. In addition, to fuel the expansion, they offered retailers price discounts and other incentives if they prominently positioned the store displays set-up by Kreamie rack jobbers. By the 1960s, they were a national brand, controlling over 80 percent of the snack food industry.
In the 1970s, with the advent of the hippie counter-culture and the back-to-Earth movement, a new competitor made an impact on the Kreamie business. The company, Granola Snacks, began advertising that their products only used natural ingredients. They even began running a commercial in which a mother and child compared their Granola Snacks with a lampooned product named “Cup Cake Creamies,” stating that it tasted like poison and dog food! Not-So-Tiny-Tim, a counter-culture pop star with a late night UHF and cable show, joined in on the controversy created by the commercial and stated that he did not understand how people, “could buy such poisonous dog food and serve it to their children as snacks!” Market studies showed that Kreamie Cup Cakes sales suffered. As a result, Kreamie began a more aggressive shelf space and display marketing campaign to combat Granola Snacks’s television advertising. Kreamie’s marketing efforts were successful. By also offering volume discount incentives, they had prevailed upon retailers in their traditional East Coast and Midwest markets to prominently display their products. To counter this strategy, Granola Snacks offered a deep discount to WackoMart, a Southwest and West Coast discount chain, in exchange for an agreement to exclusively sell only their snack foods.
In reality, Kreamie Cup Cakes used only FDA approved ingredients and preservatives and were made in American plants that always passed inspections. In contrast, although Granola Snacks’s pilot plant was in Arizona, it had subcontracted the bulk of its production to a plant in Mexico. As a result, to maintain a level of quality, Granola Snacks used the maximum amount of preservatives allowed under Mexican law for the imported product. The level was so high, reactions to the food were often reported. The levels were higher than those allowed by FDA regulations, but allowed per an agricultural import/export treaty between the United States and Mexico. Several people who ate these Granola Snacks required emergency room visits. A child in Oregon, with food allergy problems, even died. Her parents served her the snack, relying on the advertising, not knowing that some of the natural ingredients used in the Mexican-made product were dangerous to her.
The Kreamie family seeks your advice and opinion regarding:
(1) Granola Snacks’s advertising campaign.
(2) The marketing and distribution campaigns both companies have engaged in.
(3) The liability issues Granola Snacks faces regarding their use of food manufactured outside of the United States. (Points : 30)

Question 8.8. (TCOs A, E, F) John and Janet Fonda, siblings and actors, decide to retire after years on the road. They remember a town in New Jersey they were familiar with from their travels. From the internet, they learn of a farm a few miles outside of town that seems ideal. There is a great house and lots of land. The Fondas wish to convert the farm to a restaurant-hotel with a dinner theater. They contact the realtor by phone, and make arrangements to buy the parcel. The Fondas plan on traveling to New Jersey prior to the closing to look things over, but are unable to do so due to their touring schedule. The realtor, whose commission is technically paid by the proceeds to the seller, and who has a listing contract with the seller, advises the Fondas that she will handle everything. New Jersey custom, law, and practice does not require a purchaser of land to have an attorney. The realtor does only the bare minimum needed for title to transfer to the Fondas. On their behalf, she only has a minimal title search and minimal inspections done, and she obtains a minimal coverage title insurance policy. As the area near the farm was once occupied by a large chemical plant, when the realtor represents local purchasers, as a precaution, she advises the buyers to get the maximum possible title search and title insurance, and to get all possible inspections done. It is her regular practice to caution local purchasers who she represents about the former chemical plant.
After closing on the property, the Fondas learn of the old chemical plant. They seek your advice as to their liability and the liability of any other parties. (Points : 30)

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