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Black Letter Law Questions Flashcards

1
Q

A general partnership is defined as:
A. An association of two or more persons to carry on, as co-owners, a business for profit.
B. A business owned by a single individual that is not operated as a corporation or other special legal form.
C. A business formed by filing an organizational document with the state.
D. A business formed with limited and general partners.

A

Correct Answer: A. An association of two or more persons to carry on, as co-owners, a business for profit.
Explanation: This is the definition in UPA § 6.

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2
Q

Partnership income:
A. Flows through to the partners who pay tax on it.
B. Is taxed at the partnership level and its partners also pay on it.
C. Is never taxed.
D. Is only taxed if the partnership is formed with the state.

A

Correct Answer: A. Flows through to the partners who pay tax on it.
Explanation: Corporations are directly taxed and so are its shareholders. Partnership income flows directly to the partners.

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3
Q

What are the elements of an agency relationship?
A. Consent, action, control.
B. Consent and action.
C. Action and control.
D. Employer, employee, and a written agreement.

A

Correct Answer: A. Consent, action, control.
Explanation: See Rest. 2 Agency § 1.

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4
Q

When it comes to analyzing whether a creditor-debtor relationship is also an agency relationship, the most important factor is?
A. The amount of money lent.
B. The purpose of the loan.
C. Affirmative control.
D. Passive control.

A

Correct Answer: C. Affirmative control.
Explanation: A creditor who assumes control of his debtor’s business and activities for the mutual benefit of himself and his debtor risks the establishment of an agency relationship.

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5
Q

Liability may be imposed on a principal for torts of an independent contractor in the following circumstance:
A. A tort authorized by the principal.
B. A mere departure from an assigned task.
C. Any tort committed within the scope of his work.
D. Never.

A

Correct Answer: A. A tort authorized by the principal.
Explanation: When a principal authorizes a tort, the law holds him liable.

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6
Q

A principal will be liable on a contract between the agent and a third party when the agent acts with:
A. Actual authority.
B. Apparent authority.
C. Inherent authority.
D. All of the above.

A

Correct Answer: D. All of the above.
Explanation: All of these ‘authorities’ are sufficient enough to bind the principal.

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7
Q

Apparent authority arises from certain manifestations by:
A. A principal to a third party.
B. A principal to an agent.
C. An agent to a third party.
D. A third party to an agent.

A

Correct Answer: A. A principal to a third party.
Explanation: The relationship is formed because the principal creates the impression that authority exists in the agent, even if it does not.

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8
Q

P employs A to manage his guitar store. He directs A to represent to all parties that A is actually the owner of the guitar store. He also directs A to purchase only two brands of acoustic guitars: Taylors and Martins. Nonetheless, A contacts 3P, a guitar distributor, and purchases several Yamaha guitars. What kind of authority does A most likely possess in this situation?
A. Actual authority.
B. Apparent authority.
C. Inherent authority.
D. None of the above.

A

Correct Answer: C. Inherent authority.
Explanation: Inherent authority is the power of an agent not derived from actual authority or apparent authority, but that accompany to or are incidental to transactions which the agent is authorized to conduct, although they may be forbidden by the principal.

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9
Q

The doctrine of estoppel generally focuses on what kind of situation?
A. A situation where a person relies to her detriment on another person’s representations.
B. A situation where actual authority is present.
C. A situation where apparent authority is present.
D. A situation where inherent authority is present.

A

Correct Answer: A. A situation where a person relies to her detriment on another person’s representations.
Explanation: One can be bound by a transaction to persons who have changed their position in reliance on that person. Thus, a principal can be held responsible because the principal contributed to the third party’s belief and failed to dispel it.

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10
Q

In order for a principal to be liable under the doctrine of ratification, what must he be aware of at the time of affirmance?
A. The material facts.
B. The legal ramifications of an agency relationship.
C. The difference between estoppel and ratification.
D. None of the above.

A

Correct Answer: A. The material facts.
Explanation: If the principal is ignorant of the material facts involved in the transaction, he should not be bound by any ratification.

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11
Q

When will a third party not be liable to the principal for a contract executed by the agent and the third party?
A. When the agent acted with actual authority.
B. When the agent acted with apparent authority.
C. When the agent of an undisclosed principal falsely represents that he is not acting for a principal.
D. When the agent acted with inherent authority.

A

Correct Answer: C. When the agent of an undisclosed principal falsely represents that he is not acting for a principal.
Explanation: The transaction can be avoided by the third party if the principal or the agent had notice that the third party would not have dealt with the principal.

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12
Q

When will the agent be liable to the third party under a contract?
A. In a disclosed principal situation.
B. In a partially disclosed and undisclosed principal situation.
C. In a situation where the agent lacks the power to bind the principal.
D. Both b and c.

A

Correct Answer: D. Both b and c.
Explanation: When the principal is partially disclosed, undisclosed, or the agent lacks the power to bind, the expectations have changed and the agent may be liable.

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13
Q

Which of the following is a duty the principal owes to the agent?
A. The duty of care.
B. The duty of loyalty.
C. The duty to refrain from competing.
D. The duty to indemnify the agent with respect to actions taken by the agent in carrying out the principal’s instructions.

A

Correct Answer: D. The duty to indemnify the agent with respect to actions taken by the agent in carrying out the principal’s instructions.
Explanation: The principal owes no fiduciary duties to the agent, but indemnification exists.

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14
Q

Hagop hires Elmo as his bodyguard and authorizes Elmo to select a contractor to install the security system of his choice. Elmo selects a high-end security system, which requires city licensure. Is Elmo authorized to get a required license from the city for the security system?
A. Yes, under the theory of actual authority.
B. Yes, under the theory of apparent authority.
C. Yes, under the theory of inherent authority.
D. No, not under any theory of authority.

A

Correct Answer: A. Yes, under the theory of actual authority.
Explanation: This is an implied part of the actual authority granted Elmo.

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15
Q

Which of the following is most important in determining whether two or more people have formed a partnership?
A. Sharing of Control.
B. Sharing of Profits.
C. A Written Partnership Agreement.
D. Intent.

A

Correct Answer: B. Sharing of Profits.
Explanation: The definition of partnership comes from UPA § 6.

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16
Q

Who is entitled to make a partnership by estoppel claim?
A. Existing Partners.
B. Prior Partners.
C. Third Parties.
D. All of the above.

A

Correct Answer: C. Third Parties.
Explanation: Partnership by estoppel arises from a third party’s reliance on a representation.

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17
Q

What kind of authority does a partner have to act for a partnership?
A. Inherent.
B. Reticulated.
C. Apparent.

A

Correct Answer: C. Apparent.
Explanation: UPA and RUPA indicate partners bind the partnership to transactions within business.

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18
Q

How do partners split profits?
A. Based on contribution.
B. Equally.
C. Based on how they split losses.
D. Based on whoever works the most.

A

Correct Answer: B. Equally.
Explanation: UPA § 18 and RUPA § 401(b) state partners split profits equally.

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19
Q

Are partners liable for the obligations of the partnership?
A. Yes.
B. No.
C. Only up to the amount of their contribution.

A

Correct Answer: A. Yes.
Explanation: Partners are liable for contractual and tort-based obligations of the partnership.

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20
Q

If a partner in a two-person partnership incurs $100 in expenses in the ordinary course of partnership business, how much does the partnership owe him?
A. $0.
B. $50.
C. $100.
D. None of the above.

A

Correct Answer: C. $100.
Explanation: A partnership must indemnify a partner for such expenses.

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21
Q

What is the common law fiduciary obligation of partners to each other?
A. There is no independent obligation of behavior.
B. To treat the other no worse than you would treat someone in an arms’ length transaction.
C. To not do anything for the purpose of harming the other.
D. To place the interests of the other before your own.

A

Correct Answer: D. To place the interests of the other before your own.

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22
Q

Which of the following can partners not do in their partnership agreement?
A. Limit the duty of loyalty by identifying specific acts that do not violate that duty.
B. Ratify a specific act that would otherwise violate the duty of loyalty.
C. Reduce the duty of care.
D. All of the above are permissible.

A

Correct Answer: D. All of the above are permissible.

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23
Q

What is a partnership interest?
A. The partner’s share of the profits and surplus of the partnership.
B. The partner’s right to participate in management decisions.
C. Both of the above.
D. Neither of the above.

A

Correct Answer: A. The partner’s share of the profits and surplus of the partnership.

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24
Q

If a third party receives a partnership interest, do they automatically become a partner in the partnership?
A. No.
B. Yes.
C. Only in the first six months after a partnership is established.
D. Only if a majority of the partners agree.

A

Correct Answer: A. No.

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25
What does a creditor get when she obtains a judgment against a partner, with respect to the partner’s partnership interest? A. The creditor can seize the interest and become a partner. B. The creditor can seize the interest and succeed to all future profits and distributions. C. The creditor can seize the interest and convert the entity to a corporation. D. A charging order.
Correct Answer: D. A charging order.
26
Dorie convinces Wendy to go into a joint venture with her creating and selling study guides to law students. Wendy is to put up all of the capital, and Dorie is to manage the venture – in fact, Wendy affirmatively does not want to take part in the management. The two agree to split profits equally. Dorie subsequently breaches a contract with a paper supplier when she fails to pay for the goods. Who can the supplier go after to satisfy the debt? A. The supplier can go after Dorie and Wendy personally as well as the joint venture under UPA but can only go after the joint venture under RUPA. B. The supplier can go after Dorie and Wendy personally as well as the joint venture under both UPA and RUPA but must attempt to satisfy the debt from the joint venture’s assets first under RUPA. C. Dorie and Wendy have created a de facto limited partnership with Dorie as the general partner. Thus, the supplier cannot go after Wendy but can go after the joint venture and Dorie under ULPA or RULPA. D. The supplier must go after the joint venture first and if the judgment is not satisfied may then proceed to go after Dorie and Wendy under both UPA and RUPA.
Correct Answer: B. The supplier can go after both under UPA and RUPA but must attempt to satisfy the debt from the joint venture’s assets first under RUPA.
27
You practice in a state that has adopted RUPA. A partner, by reason of being or acting as a partner in a limited liability partnership, is personally liable for: A. Tort claims. B. Contract claims. C. Claims resulting in equitable relief. D. None of the above.
Correct Answer: D. None of the above. Explanation: Under RUPA § 306, a partner is not personally liable for any obligations solely by reason of being or so acting as a partner.
28
Which of the following is a creditor with a charging order not entitled to? A. To participate in the management of the entity. B. Distributions made to the creditor-partner.
Correct Answer: A. To participate in the management of the entity. Explanation: A charging order is essentially a lien on the partner’s transferable interest – i.e., his financial interest in the partnership.
29
Which of the following is the definition of 'dissolution' under UPA? A. The final termination of the entity. B. The summary payment of all outstanding creditors of the entity. C. The end of the initial phase of partnership formation wherein subsequent partners accede to voting majority rights. D. The change in relation of the partners caused by any partner ceasing to be associated with the entity.
Correct Answer: D. The change in relation of the partners caused by any partner ceasing to be associated with the entity. Explanation: This is a quote from UPA.
30
Can partners leave a partnership at any time they like? A. Yes. B. No. C. It depends.
Correct Answer: A. Yes. Explanation: Partnerships allow easy exit, though partners may still have liability if they leave prematurely.
31
What happens under RUPA if a partner’s dissociation does not result in a dissolution and winding up? A. The dissociating partner forfeits her interest. B. All partners dissociate and the partnership dissolves. C. The remaining partners assume all obligations of the departing partner. D. The dissociating partner is entitled to a buyout of her partnership interest.
Correct Answer: D. The dissociating partner is entitled to a buyout of her partnership interest. Explanation: Partnerships allow easy exit, but damages may offset the buyout price if the dissociation is wrongful.
32
What document must be publicly filed to incorporate a business? A. Bylaws. B. Minutes of Meetings. C. Articles of Incorporation. D. All of the above.
Correct Answer: C. Articles of Incorporation. Explanation: This AOI is the only public document that must be filed. See MBCA § 1.20.
33
True or false. A corporation is its own entity, liable for its contracts, torts, and debts. A. True. B. False.
Correct Answer: A. True. Explanation: A corporation is an entity, legally distinct from the persons who own it and run it.
34
Ultra vires means: A. Unauthorized; beyond the scope of power allowed or granted. B. Authorized, unless otherwise stated in the articles of incorporation. C. Acting within the scope of a business’s purpose and power. D. None of the above.
Correct Answer: A. Unauthorized; beyond the scope of power allowed or granted. Explanation: The concept is that a corporation cannot act beyond the scope of its purpose and powers.
35
Who of the following has standing to challenge ultra vires activities of a corporation? A. The shareholders of the corporation. B. The corporation itself. C. The attorney general. D. All of the above.
Correct Answer: D. All of the above. Explanation: A corporation’s power to act may be challenged by shareholders, the corporation itself, or the attorney general in limited circumstances.
36
True or false. A corporation must have a board of directors. A. True. B. False.
Correct Answer: A. True. Explanation: Each corporation must have a board of directors. See MBCA § 8.01(a).
37
What is the general common law liability rule when a promoter enters into a pre-incorporation contract? A. He is personally liable, unless the other party agreed to look to some other person or entity for payment. B. He is never personally liable. C. He is always personally liable.
Correct Answer: A. He is personally liable, unless the other party agreed to look to some other person or entity for payment. Explanation: The promoter is liable because there is no corporation when he enters into the contract.
38
If you are a registered shareholder on the 'record date,' you are entitled to: A. Notice of shareholder meetings. B. The right to vote on matters at shareholder meetings. C. The right to receive declared dividends. D. All of the above.
Correct Answer: D. All of the above. Explanation: These are some of the benefits of being a shareholder.
39
Companies registered under which of the following Sections of the Securities Exchange Act of 1934 are subject to the proxy governance provisions set forth in Section 14(a) of the Securities Exchange Act of 1934? A. Section 1. B. Section 12. C. Section 14. D. None of the above.
Correct Answer: B. Section 12. Explanation: See Section 14(a) of the Securities Exchange Act of 1934.
40
Corporation has 30,000 outstanding voting shares. Corporation has 1,000 shareholders. To have a quorum, at least how many shares must be represented at the meeting? A. 501. B. 15,001. C. 500. D. 1,000.
Correct Answer: B. 15,001. Explanation: Unless the articles provide otherwise, a quorum consists of a majority of the outstanding voting shares (i.e., 51% of 30,000).
41
Stewie and Brian are the sole shareholders of B.S. LLC. Stewie has 700 shares and Brian has 300. There are 3 directors. With cumulative voting, how much voting power does Brian have for 1 candidate? A. 300 votes. B. 600 votes. C. 900 votes. D. 1,200 votes.
Correct Answer: C. 900 votes. Explanation: Under cumulative voting, Brian has a total of 900 votes because 3 directors are being elected and Brian owns 300 shares—i.e., 3 x 300 = 900.
42
What is a safe way to determine whether the board of directors approved of a supposed transaction? A. By asking a shareholder. B. By asking a lawyer. C. By asking for a certified copy of the board’s resolution authorizing the transaction. D. None of the above.
Correct Answer: C. By asking for a certified copy of the board’s resolution authorizing the transaction. Explanation: A resolution is how a board takes action at a meeting. A certified resolution would be evidence that the board approved a transaction.
43
Who elects the board of directors? A. The shareholders. B. The officers. C. The directors.
Correct Answer: A. The shareholders. Explanation: See MBCA § 7.28.
44
Which of the following is not a fiduciary in a publicly held corporation? A. Officers. B. Directors. C. Shareholders.
Correct Answer: C. Shareholders. Explanation: Shareholders do not manage publicly held corporations, so they do not have any fiduciary responsibilities.
45
How can a shareholder rebut the business judgment rule presumption? A. By proving that a fiduciary acted in bad faith. B. By proving that a fiduciary acted without the requisite diligence. C. By proving that a fiduciary acted without the requisite disinterest. D. All of the above.
Correct Answer: D. All of the above. Explanation: These constitute the relatively narrow alternatives available to one claiming breach of the duty of care.
46
Does the business judgment rule apply to the duty of loyalty? A. Yes. B. No. C. It depends on the situation.
Correct Answer: B. No. Explanation: The BJR only applies to the duty of care.
47
What standard is used to assess executive compensation? A. Clear and convincing. B. Reasonableness. C. Normal in the relevant field. D. Waste.
Correct Answer: D. Waste. Explanation: In this context, the waste standard supplants the business judgment rule.
48
Which of the following is the best description as to when the Business Judgment Rule will protect a director’s conduct? A. To be entitled to protection, a decision must involve a question as to the duty of loyalty. B. To be entitled to protection, a decision must be the result of a unanimous vote of the board of directors. C. To be entitled to protection, a decision has to be made on the basis of an informed judgment and not involve gross negligence. D. To be entitled to protection, a decision must be based on the advice of an expert in which the relevant director has placed his or her trust.
Correct Answer: C. To be entitled to protection, a decision has to be made on the basis of an informed judgment and not involve gross negligence. Explanation: Business judgment rule applies when a decision is made with due diligence and without gross negligence.
49
Which of the following tests is used to assess whether a project is a corporate opportunity? A. Interest of Expectancy Test. B. Line of Business Test. C. Fairness Test. D. All of the above.
Correct Answer: D. All of the above. Explanation: These tests have been used by courts to assess corporate opportunities.
50
Who qualifies as a controlling shareholder? A. The first-in-time shareholder. B. Any shareholder that is also an officer or director. C. All shareholders in a closely held corporation. D. A shareholder who owns a majority of the voting stock.
Correct Answer: D. A shareholder who owns a majority of the voting stock. Explanation: This shareholder can control the corporation’s direction.
51
What is a common kind of restriction in a close corporation? A. An option. B. A right of first refusal. C. A buy/sell agreement. D. All of the above.
Correct Answer: D. All of the above. Explanation: These are common restrictions in close corporations.
52
Which of the following is NOT a necessary element of a private 10b-5 suit? A. Reliance upon a misrepresentation or omission. B. A connection between the misrepresentation or omission and the purchase or sale of a security. C. A fiduciary duty must be owed by the defendant. D. Scienter.
Correct Answer: C. A fiduciary duty must be owed by the defendant. Explanation: All of those listed except c are necessary elements.
53
In what kind of corporation is oppression particularly problematic? A. A publicly held corporation. B. A nonprofit corporation. C. A close corporation. D. All of the above.
Correct Answer: C. A close corporation. Explanation: There is no public market for shares in these kinds of corporations, so oppression is a potential problem.
54
A good example of wise leveraging would be: A. Only issuing equity. B. Only borrowing money. C. Borrowing money for the business when the interest rate is 4% and using that money to invest in a project that is providing a 6% return. D. Borrowing money for the business when the interest rate is 6% and using that money to invest in a project that is providing a 4% return.
Correct Answer: C. Borrowing money for the business when the interest rate is 4% and using that money to invest in a project that is providing a 6% return. Explanation: If a business can earn a greater return than it spends on interest, its earnings per share will be higher.
55
What are 'shares'? A. The units into which the proprietary interests in a corporation are divided. B. The measurement of corporate debt. C. The measurement of corporate shareholders. D. The measurement of the amount of interests the corporation sells.
Correct Answer: A. The units into which the proprietary interests in a corporation are divided. Explanation: See MBCA § 1.40 (22).
56
'Preferred' essentially means: A. Pay first. B. First right of refusal. C. Pay again. D. Pay second.
Correct Answer: A. Pay first. Explanation: 'Preferred' means a class of stock giving preferential claims to dividends and assets upon liquidation.
57
Which of the following is the best definition of par value? A. An arbitrary dollar value assigned to shares of stock, which, after being assigned, represents the maximum amount for which each share may initially be sold. B. A specific share price contractually agreed to by a corporation pursuant to a third-party extension of credit. C. An arbitrary dollar value assigned to shares of stock, which, after being assigned, represents the minimum amount for which each share may initially be sold. D. The share price settled upon by the market immediately after a corporation first offers its shares for sale on a public market.
Correct Answer: C. An arbitrary dollar value assigned to shares of stock, representing the minimum amount for which each share may initially be sold.
58
What is a subscription agreement? A. A written offer to buy stock from the corporation. B. A written offer to sell stock to the corporation. C. A written offer to lend money to the corporation. D. An agreement establishing the number of shares the corporation is allowed to sell.
Correct Answer: A. A written offer to buy stock from the corporation. Explanation: See MBCA § 6.20.
59
If XYZ issues 100 shares of $2 par stock, how much must it receive for this issuance? A. $2. B. $200. C. $1,000. D. $2,000.
Correct Answer: B. $200. Explanation: Par means the minimum price at which the stock must be issued. If the stock has a par value of $2 and the company issues 100 shares, it must receive $200.
60
John and Peter have formed Exacto Corp. and are now capitalizing it. Each intends to contribute $10,000 to the corporation. Under the MBCA, how many shares may Exacto Corp. issue? A. 1,000. B. 2,000. C. 20,000. D. All of the above.
Correct Answer: D. All of the above. Explanation: Under MBCA § 6.21, Exacto can issue any number of shares so long as the number of shares multiplied by the price thereof equals the capital input.
61
If XYZ Corporation issues 1,000 shares of $5 dollar par stock for $6,000, how much may be allocated to capital surplus? A. None. B. $1,000. C. $5,000. D. $6,000.
Correct Answer: B. $1,000. Explanation: 1,000 x $5 = $5,000. Thus, if the corporation received $6,000, it would have an extra $1,000, which could be allocated to capital surplus, which can be used to pay dividends.
62
You are a young associate working with a senior partner who represents a relatively small public company. The company has nine directors on its board but often has a hard time fielding reasonably professional people to serve, as they don’t pay any money. Your senior partner tells you to put yourself down as a director for the coming year. You ask him what you have to do, and he brushes you off, telling you that you do not have to do anything or pay attention to anything because the officers take care of everything. Your primary concern is liability based on which of the following? A. Duty of care. B. Duty of loyalty.
Correct Answer: B. Duty of loyalty. Explanation: The facts suggest a director who will not be monitoring the company at all. This sort of a total failure to monitor implicates the duty of loyalty.
63
Assume that TG, Inc., has only two shareholders, Herc and Carver, both living in San Antonio. The corporation’s business is entirely local. Herc (who is also the director and CEO of the corporation) finds out, in the course of his job, that TG is about to land a large government contract and so increase in value. Later that day, Herc happens to meet Carver at the local coffee shop and makes Carver an offer to buy Carver’s shares for their pre-appreciation price. Carver agrees, and Herc hands him cash on the spot. Rule 10b-5: A. Will impose liability if Carver can show that he relied on Herc’s failure to tell Carver about the government contract. B. Will impose liability if Carver can show a connection between Herc’s failure and the sale of Carver’s shares. C. Will not impose liability because Carver cannot establish scienter or fiduciary duty. D. Will not impose liability because Rule 10b-5 is inapplicable.
Correct Answer: D. Will not impose liability because Rule 10b-5 is inapplicable. Explanation: Rule 10b-5 is only applicable to interstate commerce, and there is nothing here implicating anything remotely interstate in nature – Herc meets Carver personally and hands him cash.
64
True or false. The board of directors may authorize shares to be issued for consideration consisting of services to be performed. A. True. B. False.
Correct Answer: A. True. Explanation: See MBCA § 6.21. Consideration is very broad.
65
The balance sheet: A. Shows the profit or loss for the entire year. B. Is a snapshot of the company’s financial position at one point in time. C. Tracks cash as it goes in and out of the business.
Correct Answer: B. Is a snapshot of the company’s financial position at one point in time. Explanation: The balance sheet does not tell the story of what happened over the past year. It simply shows the company’s financial position at one point in time.
66
What is the equal opportunity doctrine in corporate law? A. A doctrine that in closely held corporations, a corporation offering to buy back one shareholder’s stock must make the same proportional offer to others. B. A doctrine that states the board of directors must consist of men, women, and minorities. C. A doctrine that for every share of preferred stock issued, a share of common stock must be issued. D. A doctrine that the books and records of the corporation must be equally available to all shareholders.
Correct Answer: A. A doctrine that in closely held corporations, a corporation offering to buy back one shareholder’s stock must make the same proportional offer to others. Explanation: This is the common law’s way of keeping things fair in closely held corporations and maintaining shareholder expectations.
67
You represent a client attempting to pierce the corporate veil of Black Company, Inc., in order to get at the assets of Black Company’s only shareholder, Croaker. Which of the following facts would most help you do so? A. Croaker is extremely wealthy and has numerous other business interests. B. Black Company is a new company. C. Black Company is an old company. D. Black Company sells all of its products at a very thin profit margin to another company owned by Croaker.
Correct Answer: D. Black Company sells all of its products at a very thin profit margin to another company owned by Croaker. Explanation: This indicates both undercapitalization and, potentially, fraud.
68
Which of the following is an example of a derivative action? A. A suit to allow a shareholder to inspect books and records. B. A suit against a director for usurping a business opportunity. C. A suit to force the dissolution of a company. D. A suit to force a company to honor a preemptive right.
Correct Answer: B. A suit against a director for usurping a business opportunity. Explanation: It is derivative because the corporation suffered the harm and, therefore, it is the proper plaintiff.
69
If a derivative suit is successful, the recovery goes to: A. The corporation. B. The shareholder. C. The directors. D. All of the above.
Correct Answer: A. The corporation. Explanation: In order to qualify as a derivative suit, the corporation must have suffered the harm. Accordingly, a successful recovery should go to the corporation.
70
What is one way to determine if a case is derivative? A. Ask who the plaintiff is. B. Ask who the defendant is. C. Quantify the amount of damages. D. Ask whether the corporation could have brought the suit.
Correct Answer: D. Ask whether the corporation could have brought the suit. Explanation: This tells us who suffered the harm and who would receive the benefit of a successful recovery.
71
What are common prerequisites for a derivative suit? A. Contemporaneous ownership. B. Adequacy of representation. C. Security for expenses and costs. D. All of the above.
Correct Answer: D. All of the above. Explanation: There are several hurdles to filing and pursuing a derivative action in order to curtail litigation abuse.
72
Under the MBCA/Universal Approach, what is always required to commence a derivative suit? A. A demand. B. An excuse. C. A special litigation committee. D. All of the above.
Correct Answer: A. A demand. Explanation: See MBCA § 7.42.
73
Under the Traditional/Delaware Approach, demand on the board is required, unless: A. The demand is excused. B. The board has appointed a special litigation committee. C. Irreparable injury would occur. D. All of the above.
Correct Answer: A. The demand is excused. Explanation: The demand is excused if the plaintiff can show that demand would be futile.
74
Assuming a demand is made and a disinterested board or special litigation committee determines not to bring suit, that decision will be analyzed: A. Under the intrinsic fairness test. B. Under the business judgment rule. C. Under the good faith rule. D. Under the objective reasonableness rule.
Correct Answer: B. Under the business judgment rule. Explanation: Because the board and/or the special litigation committee is disinterested, their decision is protected by the BJR. This makes it difficult to proceed with the litigation, because when a decision is protected by the BJR, it will not be second-guessed.
75
True or false. The power to exculpate directors is unlimited. A. True. B. False.
Correct Answer: B. False. Explanation: It is not unlimited. For example, directors should not be exculpated when they have breached their duty of loyalty.
76
How many limited partners must a limited partnership have? A. None. B. At least one. C. At least two. D. As many as there are general partners.
Correct Answer: B. At least one. Explanation: A limited partnership must have at least one general partner and at least one limited partner.
77
What document is required to properly form a limited partnership? A. None. B. A partnership agreement. C. Certificate of limited partnership. D. Bylaws.
Correct Answer: C. Certificate of limited partnership. Explanation: This must be filed with the secretary of state; a partnership agreement is recommended but not required.
78
Which of the following can manage a limited partnership? A. General partners. B. Limited partners. C. All of the above.
Correct Answer: C. All of the above. Explanation: General partners typically manage limited partnerships, but limited partners can as well (though they may expose themselves to liability by doing so).
79
If four individuals form a limited partnership – with contributions of $50,000, $30,000, $15,000, and $5,000, respectively – how will the distributions be shared? A. The distributions will be shared equally. B. The distributions will be shared pro rata, based on the parties’ contributions.
Correct Answer: B. The distributions will be shared pro rata, based on the parties’ contributions. Explanation: This is the default rule, under ULPA and RULPA.
80
To what extent do limited partners have liability for the debts of a limited partnership? A. Generally, to no extent, beyond the loss of what they have contributed. B. Generally, unlimited liability. C. Generally, liability equal to the outstanding obligations of the entity. D. None of the above.
Correct Answer: A. Generally, to no extent, beyond the loss of what they have contributed. Explanation: This is a core aspect of limited partnership law.
81
Which of the following can expose a limited partner to increased liability? A. Receiving distributions from the entity. B. Claiming tax losses due to entity ownership. C. Taking part in the control of the business. D. All of the above.
Correct Answer: C. Taking part in the control of the business. Explanation: See § 7 of 1916 ULPA and § 303 RULPA.
82
Under RULPA, can one eliminate fiduciary duties? A. Yes. B. No. C. Only for limited partners.
Correct Answer: B. No. Explanation: See RUPA § 103 (via linkage).
83
How can an assignee of a limited partnership interest become a limited partner? A. Pursuant to the partnership agreement. B. Unanimous consent of all partners. C. Both of the above. D. None of the above.
Correct Answer: C. Both of the above. Explanation: See RULPA § 704.
84
When can a general partner withdraw from a limited partnership? A. After one year. B. At any time, with six months’ notice. C. At no time. D. At any time.
Correct Answer: D. At any time. Explanation: See RULPA § 602. Note, though, that this does not mean that the general partner will never be liable for breach of contract.
85
When can a limited partner withdraw from a limited partnership? A. After one year. B. At any time, with six months’ notice. C. At no time. D. At any time.
Correct Answer: B. At any time, with six months’ notice. Explanation: See RULPA § 603. This difference in treatment, as between general partners and limited partners, reflects the limited, investor-like role of limited partners.
86
When can there be dissolution under RULPA? A. At the time specified in the certificate of limited partnership. B. With the consent of all partners. C. Upon the withdrawal of all general partners. D. All of the above.
Correct Answer: D. All of the above. Explanation: See RULPA § 801.
87
In a jurisdiction governed by RULPA, limited partners in a limited partnership: A. Are prohibited from participating in management. B. Are prohibited from participating in management only with respect to certain, specified actions. C. Can participate in management. D. Can only participate in management with respect to certain, specified actions.
Correct Answer: C. Can participate in management. Explanation: There is nothing in RULPA that prohibits a limited partner from participating in management, though doing so might expose the limited partner to increased liability. See RULPA § 302.
88
What are the default rules for distributions in an LLC? A. Pro rata. B. Per capita. C. It depends on whether the LLC is member-managed. D. None of the above.
Correct Answer: B. Per capita. Explanation: The ULLCA retains this aspect of partnership law.
89
What is the default management structure for an LLC? A. Member-managed. B. Manager-managed. C. There is no such default rule. D. It depends on the number of members.
Correct Answer: A. Member-managed. Explanation: This is the statutory default.
90
What is the default rule under the ULLCA regarding voting rights? A. Per capita. B. Pro rata. C. It depends on whether the entity is member-managed. D. There is no such default rule.
Correct Answer: A. Per capita. Explanation: See ULLCA § 404.
91
Are members agents of the LLC in which they have an interest? A. Yes. B. No. C. It depends on whether the entity is member-managed.
Correct Answer: C. It depends on whether the entity is member-managed. Explanation: If it is manager-managed, then members generally lack authority.
92
When can the members of an LLC escape liability for their own actions? A. Always. B. Never. C. It depends on whether the LLC is member-managed. D. It depends on the jurisdiction.
Correct Answer: B. Never. Explanation: There is no limited liability for your own actions – you are only limited as to your liability for the obligations of the entity.
93
Which of the following is least important in deciding whether to pierce the veil of an LLC? A. Commingling of funds. B. Ignoring restrictions in the articles of organization. C. Intentionally remaining undercapitalized. D. Ignoring formalities.
Correct Answer: D. Ignoring formalities. Explanation: Because LLCs are intended to be more flexible than corporations, the absence of minutes, meetings, and other aspects of corporate formality do not strongly support piercing the veil.
94
Do the members of an LLC owe each other a fiduciary duty? A. Yes. B. No. C. It depends on whether the LLC is member-managed. D. Only if there are at least 25 members.
Correct Answer: C. It depends on whether the LLC is member-managed. Explanation: In a manager-managed company, the member owes no duties solely by reason of being a member.
95
Does Delaware allow the elimination of the fiduciary duty of care? A. Yes. B. No. C. It depends on whether the LLC is member-managed. D. Only if there are at least 25 members.
Correct Answer: A. Yes. Explanation: The DLLCA permits the limitation or elimination of the fiduciary duties.
96
Can members of an LLC unilaterally transfer their full ownership interest to another person? A. Yes. B. No. C. It depends on whether the LLC is member-managed. D. Only if there are at least 25 members.
Correct Answer: B. No. Explanation: Financial rights can be assigned, but full membership rights cannot be assigned without approval (either in the operating agreement or from the other members).
97
What happens when a member transfers all of his transferable, or financial, interest in an LLC? A. Nothing. B. He also loses his member status. C. It depends on whether the LLC is member-managed. D. Only if there are at least 25 members.
Correct Answer: B. He also loses his member status. Explanation: See ULLCA § 601.
98
When can a member dissociate from an LLC? A. Always. B. Never. C. It depends on whether the LLC is member-managed. D. Only if there are at least 25 members.
Correct Answer: A. Always. Explanation: Members can always leave – but they may be liable for damages if they do so wrongfully.
99
When is dissociation from an LLC wrongful? A. Always. B. Never. C. Only in an at-will company. D. None of the above.
Correct Answer: D. None of the above. Explanation: Dissociation is only wrongful when it is done in violation of the company’s defined term.
100
Which of the following is the most correct term for an owner of a limited liability company? A. Manager. B. Member. C. Partner. D. Shareholder.
Correct Answer: B. Member. Explanation: This is the most often utilized term in both statute and practice.

A - Business Associations (10 decks)

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