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Rita and Fred wanted to form a corporation to be named “Rita’s Kitchen, Inc.” (RKI) for the purpose of opening a restaurant. They contacted 75 friends who agreed individually to become investors in RKI. Five of these investors also agreed to serve on the RKI Board of Directors with Rita and Fred. Rita and Fred entered into a five-year lease with Landlord for restaurant space, naming “Rita’s Kitchen, Inc., a corporation in formation” as the tenant. They signed the lease as “President” and “Secretary,” respectively. Rita and Fred retained Art as their attorney to form the corporation. They told Art that 75 of their friends had committed to invest and become shareholders of RKI. Irv was a duly appointed representative of the 75 investors. Rita, Fred and Irv met with Art, and they agreed that Art would represent Rita, Fred, and all the investors. After extensive discussions with Rita, Fred, and Irv about the operation of the proposed business, Art agreed to prepare the necessary documentation to incorporate RKI. Later, outside of Irv’s presence, Rita and Fred asked Art to draft a shareholder agreement that would specifically designate Rita and Fred as permanent directors and officers of RKI and set Rita and Fred’s annual salaries at 12.5% of the corporate earnings. Without further discussion, Art properly formed the corporation. He then prepared the shareholder agreement, including the terms that Rita and Fred had requested. The 75 investors each purchased their shares of stock and signed the shareholder agreement. RKI operated for one year but failed to make a profit. RKI ceased operations and currently owes three months of back rent under the lease. 1. Can Landlord recover the unpaid rent from Rita and Fred individually? Discuss. 2. Is the shareholder agreement valid? Discuss. 3. What ethical violations, if any, has Art committed? Discuss, including distinctions, if any, between the ABA Model Rules and California authorities. Do not discuss federal and state securities laws. Check out the Answer

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