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MGT393H5F2006APR - UNIVERSITY OF TORONTO Faculty of Arts...

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Unformatted text preview: UNIVERSITY OF TORONTO Faculty of Arts and Science APRIL/MAY EXAMINATIONS 2006 MGT 393HIS Duration - 2 hours NO AIDS ARE ALLOWED FOR THIS EXAMINATION Total marks = 100 This examination paper must be returned with the examination booklet. Please print your name and student number in the spaces provided below. ‘ Student name (LAST NAME FIRST) Student number CASE QUESTION (THERE IS ONE QUESTION TO THIS EXAMINATION) Kenny Pay, Jeffrey Killing and Andy Fastblow are best friends and fellow graduates of the Commerce Program at a world-class university in Toronto. Their favourite pastime is watching sports on TV with pizza and beer. When they feel particularly energetic, they play “remote wars”. This is a game they have invented, which involves each taking their own TV remote, and then seeing who can click channels the fastest. They are proud of their manual dexterity, which is obviously the result of many gruelling hours of intense “hands-on” training. One day while watching the Toronto Craptors lose (again), Kenny comes up with a brilliant idea for a new business. He knows there are lots of guys like them across Canada who are “handy” with a remote. He envisions a new kind of sports league, involving interactive internet-based TV “remote wars”. He has even thought up a name for it: the Canadian League of Accomplished Sofa Spuds (CLASS). In this league, players will log onto an interactive website and compete in TV remote-related dexterity contests. Players will be ranked according to number of wins, and the top-ranked person at the end of the season will be crowned the new “Canadian Idle”. He can imagine some of the brewery companies taking an interest and maybe becoming sponsors, and he thinks they might even get a slot on the Sports cable channel one day. Jeffrey and Andy can see the potential here. In an uncharacteristic burst of physical activity, they “high- five” Kenny for his brilliance. A short while later, the three friends visit their accountant, Arthur Panhandlersen, who advises them to incorporate a new company, which they do. The company is called Endrun Corporation (Endrun). They issue an equal number of commons shares to each of them, and all become directors. To attract investors for their business, Endrun decides to hire Wayne and Janet Betsky, successful high- risk alternative-investment strategists who specialize in tax-free income opportunities (with a focus on sporting events). MGT 393HlS Final Examination PAGE 1 of 5. The Betskys do a “Google” intemet search using the key words “remote wars”, and up pops the United Shotgun Association (USA) at the top of the list. So they decide to approach USA’s Vice-President Dick Spraymee about having the USA invest in Endrun. It turns out that there’s been some confusion on the part of the Betskys over what the USA means by “remote wars”, which doesn’t appear to involve TV- remotes at all. However, Dick is very interested in Endrun’s business concept and says he might personally invest in the company. The Betskys assure Dick that Endrun is being run by people “highly experienced in interactive intemet-based games”. The Betskys in fact have no idea whether this is true or not, but it seems to impress Dick and he agrees to buy Endrun shares. Although the Betskys know nothing about shares and share structures, they suggest that Dick might want to buy preferred shares, which sound way better than run-of-the-mill “common” shares. Because Dick likewise knows very little about share attributes, he thinks this makes sense, and writes Endrun a cheque for $1 million for 1 million preferred shares. The Betskys later turn the cheque over to Kenny, who deposits it in Endrun’s bank account. To ensure that CLASS is “high-CLASS”, Endrun needs powerful, highly realistic background settings for its contests. It will take a very experienced film director to get this right. But Jeffrey Killing knows just who to approach. In his spare time, Jefirey sings in an award-winning amateur choir led by film and choir director Ann Glee. Ann is best known for directing the blockbuster hit “Smokestack Mountain” (about life in downtown Hamilton). So Jeffrey approaches Ann about the CLASS filming, and much to his surprise Ann is interested. Ann wants a fee of $250,000, and owing to other commitments is not available to start until June of 2007. Given her credentials, Jeffrey is willing to wait, and accepts these terms. A formal contract is drawn up and signed by Endrun and Ann. Jeffrey realizes that Endrun should have a “theme song” for its website. He gets this notion from watching “Hockey Night in Canada”, which in his mind has one of the catchiest darn theme songs he has ever heard. He knows there are some very talented musicians and composers singing right there in his choir. So at the start of choir practice the following week, he gets up and armounces what he is looking for. Amazingly, Diana Floss and Roberta Plaque (who have won “Grammy” awards for best female vocalists over age 65) are keen to sink their teeth into this work. However, they are interested because they are ardent anti-war political activists and they think Jeffrey said that Endrun is developing a remote wars “plebiscite” (rather than “website”, which is what he actually said). So they agree to write and compose the theme song, and after some haggling settle on a fee of $50,000. They agree to have the song ready by the time the website filming is finished. When Jeffrey suggests having a formal contract drawn up by Endrun’s lawyers, they tell him they trust him, and to go spend the money elsewhere. Endrun needs software programming to run the CLASS website, so Kenny posts an ad in some IT magazines and gets several very impressive-looking applications. Although this task will be quite complex, because of the interactive gaming, the Betskys say they know just the person for the job: their long-time friend Rick Hock-It. “Rick made a lot of dough when he did similar work for a pro sports team called the Phoenix Thai Rotis” Wayne tells Kenny Pay. “Why gamble with an unknown when you can use Rick?!” So Kenny asks Rick about doing the website programming, which must be completed by November 2006. Because Rick is indebted to the Betskys for their friendship and support over the years, he tells Kenny that he’ll build the website and for free no less! Kenny almost cannot believe Endrun’s luck, and does not bother following up with any of the people who submitted applications. Meanwhile, Andy Fastblow is given the task of managing Endrun’s money (which at the moment consists of Dick’s investment). One day over lunch with the Betskys, Andy is complaining about the long slow drive to his cottage. “It’s even worse than rush hour on the Don Valley Parking Lot!” he exclaims. Wayne and Janet smile and nod sympathetically, but then Wayne starts looking distracted MGT 393HIS Final Examination PAGE 2 of 5. (which means he’s thinking of something). After a few minutes, Wayne suddenly fixes Andy with a piercing look and declares that with all those cottage-goers, there would be a huge market for boats and other watercraft. “I hear that everyone’s now into those new super-fast one-person sports boats. If anyone is looking for a way to make a quick buck, that’s the business to get into!” Andy chews on this for a few minutes while his teeth wrestle with a particularly rubbery piece of calamari. It occurs on him that Wayne is right. He knows that Endrun has over $900,000 in the bank right now. Endrun really only needs about $300,000 (between paying Ann and Diane and Roberta), and doesn’t really need that money right away. He quickly calculates that investing, say $700,000, in GICs for the next year will yield maybe $35,000 (at the current rate of 5% per year). So if, hypothetically speaking, he were to temporarily borrow $700,000 for use in a sports boat business, and then pay it all back with double the interest that the money would otherwise have earned for Endrun, everyone would be a winner! So Andy asks the Betskys if they might be interested in selling sports boats for the summer. The Betskys are surprised by this question, and ask Andy how he would finance such a venture. Andy assures them that he has access to the necessary cash. The Betskys are interested. Andy tells them he wants to create a limited partnership to run this business. He vaguely recalls this concept from a Commerce Program course he took. The Betskys think they have also read about the concept - in the parenting magazine Breeder’s Digest. (In fact, what they read about was “intimate partnerships” - they have just gotten the terms mixed up.) So they all agree that this is a good idea, because they believe it will protect them from personal liability (in the one-in-a-million chance that some sort of liability issue might come up). Andy ‘ wants to call it “Betskys’ Jet Skis Limited Partnership”. The Betskys are flattered, and agree to come on board (no pun intended). Andy generously offers to be the person “behind the scenes” in this venture and to let the Betskys run the business. The Betskys agree. So the limited partnership is registered, with Wayne and Janet as general partners, and Andy as the limited partner. The Betskys are in charge of sales, and Andy will do all of the accounting and bookkeeping. Andy also develops a standard sales contract for the business, which contains the following clause: 17. Betskys’ Jet Skis total liability to Customer for any loss or damage is limited to the amount paid by Customer for the boat. ~ The following month, “Betskys’ Jet Skis” is er, launched. The $700,000 is used to buy a large inventory of sports boats and to rent space at a marina near Barrie Ontario. As expected, business is great. The most popular seller is the “See Dew” line, so named because these boats are so fast they leave all the other sports boats behind in their wake. One day Betskys’ Jet Skis gets a visit from the President of Homeland Spycam Inc., George Ambush. George tells them that he is looking for a real “coup on water”, so to speak. A sports boat faster than any others, but stable enough to handle even the toughest turns. Wayne shows George the See Dew’s “No Dew Dew!” line, which is advertised for “serious racers only”, and tells George that this is the one he’s looking for. George is impressed (even though he is a novice boater), so he buys the boat and signs the standard sales contract. The following weekend, George launches his new No Dew Dew!, and goes jetting across the lake. He spies an Eye-Rack boat (so named for the shape of its protective windscreen visor) and decides to “play chicken” with it. So George bombs over to the Eye-Rack and then swerves away at the last minute. A very startled Madame Who’s-Sane, who is running the Eye-Rack, expresses her displeasure with George’s conduct through a series of vigorous finger and arm signals. George merely laughs and comes in for another run. At the last minute, George turns the See Dew sharply to the right, but this time the stress of the improperly executed manoeuvre causes the front left ski to sheer off. As a result, the See MGT 393HIS Final Examination PAGE 3 of 5. Dew does not complete its turn and slams into the back of the Eye-Rack, bursting the Eye-Rack’s gas tank. The gas then ignites and explodes, essentially blowing up the boat and Madame Who’s-Sane with it. This explosion sends George into an elliptical local orbit. He is bemused to realize that his See Dew can actually fly (at least for short distances), and then he crashes into the water. Needless to say, George is injured, and starts to drown. At this precise moment, Bill Skinflinton comes by in his boat. George coughs, sputters, finally manages to clear some lake water out of his lungs, and then utters a hoarse cry for help. Bill points out that he is just on his way to a business meeting, and would probably ruin his very expensive Hugo Gloss suit if he got into the water to help George. After some more splashing around, George croaks out a promise to buy Bill a replacement suit. Bill still hesitates. George now sees that Bill’s accessories clash with his suit, so he sputters out an offer to also pay Bill $1,000 towards proper new accessories and a further $10,000 just to say thank-you. Bill accepts, and hauls George out of the water. A few weeks later, George gets out of the hospital and gets a lawyer. His lawyer sends Betsky’s Jet Skis a registered letter threatening to sue Wayne, Janet and Andy for a nice round figure (say ten million dollars). When George gets an e-mail from Bill about the new suit and $11,000 payment, George just forwards the e-mail to Betsky’s Jet Skis. Madame Who’s-Sane’s family also seems poised to sue someone, although they are still trying to “piece together” what happened. George is quoted in the local press as saying that Betsky’s Jet Skis staff are “incompetent imbeciles”, and that they are the real cause of the water accident. Because George is well-known in the area (and the water collision made a big ' er, splash in the local news media), in no time at all Betsky’s Jet Skis’s sales dry up so to speak. There is still well over $600,000 of inventory, which cannot be returned to the manufacturer. As a result, Andy can only pay back about $50,000 to Endrun. They say that when it rains, it pours. Shortly after the boating accident, Ann Glee calls Endrun to say that she has developed a form of sleep disorder and is no longer able to work. As a result, she will not be able to direct the filming for Endrun. Then Rick Hock-It calls to say that he’s just way too busy these days, and cannot do Endrun’s programming work. To make matters worse, it seems that there are no other qualified programmers who are available any more for this complex task. Then Diana and Roberta deliver their CD recording of the theme song for Endrun. The song is basically a passionate anti-war protest piece that urges peace, unity and a worldwide group hug. Clearly this isn’t going to work for a website dedicated to remote wars. But they still insist on being paid, saying that they’ve fulfilled their part of the bargain. Andy is not at his tactful best these days, so he curtly tells them that the CD is no good to Endrun, so they won’t be paid, and that’s final. At that point Diana and Roberta politely suggest to Andy that he try telling that to their lawyer! Finally Andy cannot hide what he has done any longer, and confesses all to Kenny and Jeffrey. At first, they are understandably quite stunned. But since they have all been best friends as far back as they can remember, they ultimately decide to stick by him. They figure that they are all safe from any personal liability because they are shareholders, not partners, in the Endrun business. They know now that Endrun will go bankrupt, but since they haven’t invested any of their own money (other than a few dollars for the common shares) they decide that that’s not such a big loss really. Around the same time, Dick gets curious about how his investment is doing, and calls up the Betskys. Still shell—shocked from George’s letter and the impressively abrupt collapse of the Betsky’s Jet Skis business, the Betskys tell Dick to call Andy. When Dick does so, Andy tells him that a series of MGT 393HlS Final Examination PAGE 4 of 5. unfortunate events has shut down Endrun. He adds that it is unlikely that any of the shareholders will get anyof their money back since the company’s assets are about equal to its debts. Dick is shocked, and wants to investigate further. But when he demands to see Endrun’s accounting books and records, Andy flat out says no. Furious, Dick hires a private investigator — former police officer Inspector Cluespro. Cluespro does some digging and finds out about the $700,000 that Andy used in Betskys Jet Skis. Now Dick is really blowing a gasket. In his mind he can picture the Betskys on the receiving end of his pump-action shotgun, but in the end he decides to call his lawyers. Shortly afterwards, Andy receives a registered letter from said lawyers in which they have planned out his entire financial future for him, and this mostly seems to involve paying Dick every penny Andy ever owns. Needless to say, Andy is very shaken by this letter. When he mentions it to Jeffrey and Kenny, the three of them decide to go see a lawyer of their own. On the recommendation of a good friend, they meet with Jock “Boom-Boom” Howitzer to assess their legal situation. Jock listens to their story, and takes careful notes (which basically look the same as the fact situation you have just read). He then turns to you for help. You are a lawyer in Jock’s office whose specialty is in business law. Jock asks you to prepare a detailed memorandum (using whatever format you like) that identifies all of the legal issues arising out of this fact situation, outlines the legal principles that must be applied to analyse each of these issues, and very briefly concludes as to the likely outcome of each issue. As you are leaving the meeting to start your work, Andy pipes up and says that he wants you to include the Betskys in your analysis (because Andy is - concerned about their well-being), and also George and Madame Who’s-Sane (because he is just plain curious). REQUIRED: Prepare the requested memorandum. END OF EXAlVflNATION Total marks = 100 MGT 393H1S Final Examination PAGE 5 of 5. ...
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