(Posted 2/19/2009)
This second memo assignment, is designed to reinforce material discussed in class and to help you exercise analytical and practical skills in transactional planning, in preparation for the more complicated assignments we will undertake after we return from spring break. As indicated in the course syllabus, 10% of your final grade will be determined your performance on the memo assigments.
Please submit your memo via e-mail to Nick Harley, our TA, at nicholas.harley@law.columbia.edu. To help him keep track of all the files he receives, please give your memo a filename that includes your last name (e.g., myname.memo2.doc). Please also be sure to include your name somewhere in the memo text as well.
We will presume, unless you tell me otherwise in your cover message, that if we find your essay to be among the best we receive, we have your permission to post it [with your name deleted] as part of our feedback to the class. If you do not wish to grant such permission, please let us know expressly.
This assignment is due on or before Friday, February 27 at 5 pm. Extensions will not be granted absent compelling circumstances. You should not do any additional research in preparing your analysis, beyond the materials assigned for class and the link provided below.
With the experience of having analyzed the strategic alternatives posed by the put-call provision in the shareholders' agreement between the Marx and Wolf families, imagine yourself back in time before the present shareholders' agreement was adopted. Suppose the two families are concerned with what would happen if either of the managing officers (Gene or Brenda) dies or becomes too disabled to work, and have come to you for advice. (Can you represent both families? See ABA Model Rules of Professional Conduct 1.7, 2.2.)
Your assignment is to prepare a memorandum, no more than two pages long, outlining your recommendation and explaining how your proposal responds to the problems created by the original shareholders' agreement.
In developing your proposal, keep in mind that there may be a variety of mechanisms or procedures available to establish a valuation and determine who buys or who sells. For example:
- Should the surviving shareholder actually be obligated to buy the entire business? At what price? Can you imagine circumstances where this might be unfair to the surviving shareholder? To the family of shareholder who died?
- If a price is to be set by negotiation, how will the price be determined if the parties cannot agree?
- If a price is to be set by an arbitrator or other neutral party, what procedures should be used? For example, an arbitrator might be given unfettered discretion to set the price, required to choose between prices submitted by the parties, or merely told to facilitate the parties' negotiations. The parties must also decide how the neutral will be chosen and how many neutrals there will be.
You might also keep in mind the following more general issues:
- A solution should seek to constrain the opportunity for the family whose active member survives to take advantage of the other family's situation. What factors influence the potential for opportunism?
- Is there a trade-off between the even-handedness of the valuation and its expense? Remember that the put-call provision discussed in class did not require a third party valuation.
- How do you deal with the potential for opportunism created by the likelihood that the two parties would have different resources following the death of the active member of one family? Can life insurance help solve this problem?
Obviously, you will not be able in the limited space allotted to you to discuss all the issues mentioned above, so you should focus on those that are most important in your judgment.