Rules on Past Exams

Question 1

Shareholders have broad latitude to enter into agreements concerning, among other things, corporate governance, distributions and the relationship among the shareholders, including…

Answer 1

entering an agreement allocating liability for unpaid taxes, so long as the agreement is in Articles/bylaws/a written agreement signed by all shareholders.

Question 2

Under the fiduciary duty of loyalty, directors may not take a business opportunity in which…

Answer 2

the corporation may
reasonably be interested without first offering the opportunity to the corporation.

Question 3

The procedural steps that must be taken in order to perfect the right to sue in a derivative suit are:

Answer 3

(1) a standing requirement and (2) demand.

Question 4

To have standing to bring a derivative suit, the shareholder
must have…

Answer 4

owned stock at the time of the alleged wrongdoing and he or she must fairly and adequately represent the interests of the corporation.

Question 5

What are the demand requirements?

Answer 5

• The shareholder must make written demand on the corporation prior to bringing the suit.
• After making the demand, the shareholder must wait until the demand is rejected or until 90 days pass, unless he or she can show irreparable injury to the corporation.
• If the demand is rejected, the shareholder may file the suit only if he or she alleges that the demand was not properly rejected by a disinterested decision-maker.

Question 6

Generally, shareholders are not personally liable for debts of the corporation. What is the exception to this?

Answer 6

When shareholders have controlled or used the corporation to evade a personal obligation or perpetrate a fraud or crime, to commit an injustice or to gain an unfair advantage, the court may pierce the corporate veil and hold shareholders liable for the debts of the corporation.

(extremely rare)

Question 7

Piercing the corporate veil is justified when…

Answer 7

the unity of interest is such that the separate personalities of the corporation and the individual no longer exist and to adhere to that separateness would work an injustice.

Question 8

Virginia is an at-will employment jurisdiction. Under the doctrine of employment-at-will, an employment contract for an indefinite period is…

Answer 8

terminable at any time, after reasonable notice, by either party for any reason or no reason at all.

Question 9

Although employment-at-will is the law in Virginia, there are exceptions to the doctrine for at-will employees who are…

Answer 9

discharged in violation of an established public policy.

Question 10

A shareholder is entitled to one vote, for each outstanding share of stock held, on
each corporate matter submitted to a vote at a shareholder meeting. To
effectuate this statutory goal and public policy…

Answer 10

the shareholder must be able to exercise this right without
reprisal from corporate management.

Question 11

Virginia recognizes a tort claim for conspiracy to induce the breach of a contract. To be successful in this claim, what must the plaintiff prove?

Answer 11

That there was a conspiracy to procure the breach of contract and that pursuant to such conspiracy the contract was breached.

Question 12

A conspiracy requires two persons, and a corporation, like an individual,
cannot…

Answer 12

conspire with itself.

Question 13

A member of a nonstock corporation may inspect the minutes of Board of Directors’ meetings and obtain a list of the members, as long as…

Answer 13

the member acts with a proper purpose and gives the requisite notice.

Question 14

The members of a nonstock corporation (may/may not) remove a
director with or without cause at a meeting specially called for that purpose.

Answer 14

may

Question 15

A ____________ vote would be sufficient to remove a director, again, unless otherwise provided in the articles.

Answer 15

simple majority

Question 16

if there is a right to indemnification under a company’s Articles of Incorporation, the company must…

Answer 16

pay for or reimburse an officer’s reasonable expenses, including counsel fees and any judgment against them, in connection with a lawsuit.

Question 17

If there is a right to indemnification under a company’s Articles of Incorporation, the company must indemnify a director regardless of whether or not…

Answer 17

the corporation subsequently decided to remove the director.

Question 18

Under the Virginia Stock Corporation Act (VSCA), upon dissolution of a corporation, the Board of Directors is required to pay __________________ before distributing assets to the shareholders.

Answer 18

creditors’ claims

Question 19

Under securities law, directors are liable for wrongful _____________.

Answer 19

distributions.

Question 20

Distributions are wrongful when the corporation is…

Answer 20

insolvent.

Question 21

A director may avoid liability for corporate decisions by…

Answer 21

objecting to the meeting at which the decision is made, and by abstaining or dissenting from the action.

Question 22

Directors have the duty to ensure that the winding up was

Answer 22

completed correctly.

Question 23

Shareholders are not liable for a wrongful distribution, but they are not…

Answer 23

entitled to keep the proceeds of a wrongful distribution.

Question 24

Virginia follows the rule of joint and several liability with the right of contribution. This means that…

Answer 24

Joint wrongdoers are liable severally for their share of the judgment and jointly for the entire amount, subject to the right of contribution.

Question 25

What is the right of contribution?

Answer 25

A right of contribution exists in favor of a defendant required to pay more than his proportionate share of a judgment. The defendant can sue his co-defendants to contribute to the plaintiff’s damages.

Question 26

A sale of all, or substantially all, the assets of a corporation is a fundamental corporate change and generally there are certain procedural steps that a corporation must adhere to when effecting a fundamental corporate change. However, under the Virginia Code, there is an exception that allows this sale if..

Answer 26

all of the shareholders approve the sale of assets.

Question 27

Purchasing assets of another corporation (is/is not) a fundamental
corporate change.

Answer 27

Is not. There is, accordingly, no requirement of shareholder approval.

Question 28

In Virginia, directors are protected by the good faith business judgment rule, and they are liable for breaches of their fiduciary duties only when…

Answer 28

they fail to exercise their good faith business judgment when making decisions on behalf of the corporation (e.g. fail to do due diligence, breach duty of C/L).

Question 29

An interested transaction is not a breach of the duty of loyalty when..

Answer 29

The transaction was disclosed to and approved by a sufficient nyumber of disinterested directors.

Question 30

The duty of care requires that…

Answer 30

directors act in accordance with their good faith business judgment of
the best interests of the corporation

Question 31

The duty of loyalty concerns directors’ conflicts of interest and generally
requires that…

Answer 31

directors refrain from self-dealing, competing with the corporation and usurping corporate opportunities.

Question 32

Under the Virginia Code, the circuit court may dissolve a privately held corporation if the plaintiff shareholders can prove that…

Answer 32

the controlling shareholder(s) are engaging in oppressive conduct.

Question 33

In a proceeding for judicial dissolution, the corporation or a shareholder can elect to…

Answer 33

purchase, at fair value, the shares of the shareholder(s) seeking judicial dissolution.

Question 34

A personal creditor of a LLC member can attach any income that the member receives from the LLC through a charging order, but…

Answer 34

such a creditor cannot reach the member’s ownership interest in the
LLC.

Question 35

Any property owned by a corporation that has been involuntarily dissolved passes automatically to…

Answer 35

the directors as trustees in liquidation. The directors then pay off
any creditors and then distribute any remaining assets to the shareholders.

Question 36

The duty of loyalty is owed to the __________ not the _________.

Answer 36

Corporation; shareholders themselves. There is no exception for small, closely-held corporations.

Question 37

To the extent that a director is not making decisions on behalf of the corporation…

Answer 37

the business judgement rule is inapplicable.

Question 38

The Virginia Code allows corporations to cap liability of officers and directors in the corporation’s Articles. However, caps do not apply to…

Answer 38

willful misconduct.

Question 39

How is each form of business entity governed?

Answer 39

• A corporation is governed by a Board of Directors and Officers
• A general partnership is governed by its general partners
• A limited partnership is governed by its general partners.
• A limited liability company is governed by its members unless the Articles or an operating agreement provides in writing for management by a manager or managers.

Question 40

What is the liability for each business entity’s debts?

Answer 40

• A corporation is generally protected against liability for the corporation’s debts.
• General partners are liable for partnership debts.
• Limited partners are liable for the partnership’s debts only up to the amount of their capital contributions, so long as the limited partners are not involved in the day to day operation of the business.
• A limited liability company’s members are not liable for the debts of the limited liability company.

Question 41

What is the taxation law on each corporation?

Answer 41

• If the corporation is a C corporation, the corporation pays tax on income earned and the shareholders also pay tax on dividends when paid. The income is taxed “twice”. If an S corporation, the corporation pays taxes through its owners.
• General partnership, limited partnership, and LLC: not taxed. Net income is passed onto and taxed ot the partners.

Question 42

A pledge of one’s stock in a corporation will not restrict their voting rights until and unless..

Answer 42

the shares are transferred into the name of the person to whom the stockholder pledged.

Question 43

Stockholders with no involvement in a corporation’s day-to-day operations have a right to inspect and copy the corporation’s books of account, but…

Answer 43

they have no right to have the copies sent to them.

Question 44

A stockholder’s attendance at a meeting will not constitute a waiver of any objections over lack of written notice so long as…

Answer 44

at the beginning of the meeting, the stockholder objects to holding the meeting or transacting business.

Question 45

A stockholder’s attendance at a meeting waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless…

Answer 45

the shareholder objects to considering the matter when it is presented.

Question 46

In order to obtain judicial dissolution, the plaintiff shareholders
must prove:

Answer 46

(1) deadlock in the management of the corporation,
(2) oppressive or illegal conduct by the majority, or
(3) waste of corporate assets.