Reference no: EM132511221

1. Sally and Tom decide to go into business, which they call "Pelatone," which manufactures and sells exercise bicycles. They sign a partnership agreement that requires Sally to contribute $100,000 and Tom to contribute $140,000 in capital to start the firm. The partnership agreement says nothing about the management of the firm or the division of profits. Without Sally's knowledge, Tom informs the owner of United Wheel Co, that he represents the Pelatone and signs a large contract with United to buy wheels to be used on Pelatone's bicycles. In its first year of operations, Pelatone makes a profit of $240,000.

i. What are the Tom's and Sally's rights with respect to the management of the firm?

i. Is Pelatone bound to the contract with United? Why or why not?

i. How should Pelatone's first year's profits be divided between Tom and Sally? Why?

2. Larry and Gary are two of the three directors of Scary Inc., a corporation which owns a local music club. Without informing Scary's third director, they secretly vote to enter into a very lucrative contract to purchase all of the club's alcoholic beverages from "Bloody Mary's Inc.," a liquor distributor owned by their sister, Mary. Relying solely on Mary's representations, Larry and Gary believe that Mary's prices are fair and competitive. In fact, her prices turned out to be higher than most other local distributors, resulting in significant lost profits for Scary. When Scary's shareholders learned of the contract with Mary, they sued Larry and Gary personally for damages. If Larry and Gary raise the Business Judgment Rule as a Defense: