Substantive Questions

Question 1

A and B, who have not previously been directors, seek to be elected to the board of directors of Olympia Corporation. In addition, two of Olympia’s current board members (C and D) run for reelection to the board. There are only two director spots open. A and B win, and all four seek to have Olympia Corporation reimburse them for the costs they incurred seeking election to the board. Whose expenses will Olympia Corporation be likely to reimburse?
A. A and B only, because they are the challengers.
B. C and D only, because they were already directors.
C. A, B, C and D, because incumbent and successful insurgent directors can have their expenses reimbursed by the corporation.
D. None of them, because directors cannot be reimbursed for personal expenses.

Answer 1

Correct Answer: C. A, B, C and D, because incumbent and successful insurgent directors can have their expenses reimbursed by the corporation.
Explanation: A corporation may pay the expenses incurred by an incumbent director seeking reelection, and may also pay the expenses of a successful challenger for a director seat. In this case, the corporation may end up paying everybody.

Question 2

A, B and C are in an at-will partnership that owns a shopping center. A and B do not get along with C and consistently out-vote C with respect to management decisions. C fails to contribute funds to the partnership to cover operating losses of the partnership that are required to be contributed by the partnership agreement. Upon application by A and B, a court dissolves the partnership. The shopping center, the partnership’s only asset, is sold at a public auction so that the proceeds can be divided among the three partners. Can A and B form a new partnership (without C) and purchase the shopping center at the auction?
A. No, because partners may not bid on partnership assets at an auction following dissolution.
B. No, because A and B behaved wrongfully in consistently out-voting C.
C. Yes, because C forfeited his right to the partnership assets when he failed to make the agreed contribution.
D. Yes, because the question includes no facts that suggest that A and B’s behavior in seeking dissolution was wrongful or oppressive, and if they make the high bid at auction, C will not be damaged.

Answer 2

Correct Answer: D. Yes, because the question includes no facts that suggest that A and B’s behavior in seeking dissolution was wrongful or oppressive, and if they make the high bid at auction, C will not be damaged.
Explanation: Without information that A and B excluded C from management of the partnership for the wrongful purpose of obtaining the partnership assets in bad faith, the court may order dissolution and sale of the partnership assets. When that sale is a public auction, former partners are free to bid on the assets.

Question 3

Shareholder would like to sue the directors of a corporation in which he owns stock, L Corporation, for violation of their duty of loyalty. Specifically, he alleges that the directors recently decided to have L Corporation contract with ABC Company instead of DEF Company for construction of a new facility that L Corporation is about to build. Shareholder says that the L Corporation directors made a bad decision (DEF was a much better choice), that several of the L Corporation directors are shareholders of ABC Company, and that the L Corporation directors are too involved in micromanaging matters at L Corporation. You agree with Shareholder and help him sue. You think Shareholder has a cause of action based on the fact that:
A. The L Corporation directors made a poor business decision by picking DEF Company.
B. The L Corporation directors’ approval of the contract with ABC Company constituted self-dealing.
C. The L Corporation directors’ micromanagement of the company constituted a sustained and systematic example of director oversight.
D. The L Corporation directors had no authority to contract with ABC Company.

Answer 3

Correct Answer: B. The L Corporation directors’ approval of the contract with ABC Company constituted self-dealing.
Explanation: Several of the L Corporation directors are shareholders of ABC Company. This places those directors on both sides of the transaction.

Question 4

Acme, LLC, is a limited liability company. Its proposed members include the following: Juan Lopez (a natural person); Gold, LLC; Silver, Inc.; and Bronze Associates, a general partnership. Which of those proposed members can properly be members of an LLC?
A. Juan Lopez only, because an LLC member must be a person.
B. Juan Lopez and Bronze Associates, because an LLC member cannot itself be a limited liability entity.
C. Juan Lopez; Silver, Inc.; and Bronze Associates, because an LLC cannot be a member of another LLC.
D. All four can be members.

Answer 4

Correct Answer: D. All four can be members.
Explanation: A member of an LLC must be a “person,” which may include a natural person (Juan Lopez), a partnership (general or limited) (Bronze Associates), another LLC (Gold, LLC), or a corporation (Silver, Inc.).

Question 5

M, T and S are stockholders of Corporation. M owns 25% of the outstanding common shares, T owns 20% of the outstanding common shares and S owns 55% of the outstanding common shares. The three shareholders hold a shareholder meeting where they vote on who will serve as director (only one director spot is open). M and T both vote for T. S votes for herself. M and T claim that T is the new director. S objects. Who will win?
A. M and T, because they outvoted S, two to one.
B. M and T, because they and S own only the outstanding common shares, not all of the authorized shares, which are likely to dilute their ownership interests.
C. S, because when M and T ally against S, S becomes a minority shareholder and is protected by the doctrine of oppression.
D. S, because shareholders are entitled to one vote per share on any matter submitted to a vote of the stockholders, and she owns 55% of the shares.

Answer 5

Correct Answer: D. S, because shareholders are entitled to one vote per share on any matter submitted to a vote of the stockholders, and she owns 55% of the shares.
Explanation: Common shares are entitled to vote, one share, one vote, on matters submitted to the stockholders. S, by holding over 50% of the outstanding common stock, will outvote the other two. Cumulative voting is not relevant here as only one seat is open, and there are no facts suggesting cumulative voting was applied.

Question 6

Nancy applies for a job at a printing and photocopying store as a cashier. Nancy is an experienced cashier. During the interview, the store owner asks Nancy if she has any other skills. Worried that she might not get the job, Nancy claims to have computer skills. Nancy knows nothing about computers. Nancy gets the job. She is an excellent cashier, but when she is called upon to help with the computer system, Nancy accidentally damages the system when she fails to perform a routine computer virus scan first. Did Nancy violate her fiduciary duty to the store?
A. No, Nancy worked as a cashier and acted with the care, competence and diligence normally exercised by cashiers.
B. Yes, Nancy claimed to have special skills or knowledge, and therefore had a duty to act with the care, competence, and diligence normally exercised by agents with such skills or knowledge.
C. Yes, because Nancy’s mistake benefitted the store’s competitors, and therefore Nancy was acting on behalf of an adverse party.
D. No, because although Nancy claimed to have computer skills, she did not actually have such skills, and an agent’s performance should be evaluated consistently with the agent’s actual level of skill or knowledge.

Answer 6

Correct Answer: B. Yes, Nancy claimed to have special skills or knowledge, and therefore had a duty to act with the care, competence, and diligence normally exercised by agents with such skills or knowledge.
Explanation: An agent is held to the standard of care that corresponds to their claimed level of skills or knowledge, not their actual level unless the principal knew the claim was false.

Question 7

Corporation has a 15-person board of directors. The board holds quarterly meetings, but has unexpectedly been presented with a merger proposal from a rival corporation. On Wednesday, February 1st, the chairman of the board sends the following notice to the other 14 board members: ‘Notice of Special Board Meeting of Corporation: Saturday, February 4th, at 2:00 p.m., Corporation Headquarters at 123 Corporation Street, Room 100.’ Seven board members, including the chairman, attend the meeting in person. Two attend using live videoconferencing technology. The board votes 5-4 to forward the proposal to the shareholders for a vote. One of the four board members who was outvoted objects to the result. Does the objecting board member have a valid basis for her objection?
A. No, the special meeting was properly called and a simple majority of directors voted in favor of forwarding the proposal to the shareholders.
B. No, the board member cannot object to a vote taken by the board of directors because of her duty of confidentiality.
C. Yes, the special meeting was not properly called.
D. Yes, five out of 15 total board members is insufficient to take board action.

Answer 7

Correct Answer: A. No, the special meeting was properly called and a simple majority of directors voted in favor of forwarding the proposal to the shareholders.
Explanation: A special meeting requires at least two days’ notice of the date, time, and place. With 9 out of 15 board members present, a quorum was met, and the majority vote was sufficient to pass the resolution.

Question 8

Elion owns shares of Recycling, Inc., a closely held corporation that provides recyclable materials collection services at small businesses and private homes. Recycling, Inc., has been operating in violation of several environmental and money-laundering laws and is facing prosecution by the Department of Justice. In response, it has donated a significant amount of money to Citizens for Environmental Freedom, a non-profit organization that supports candidates who promise to oppose environmental regulations. In addition, as part of its effort to avoid future legal violations, Recycling, Inc., has become a limited partner of a new consulting firm, Environmental Compliance Services LP. Recycling, Inc., is thinking about hiring Environmental Compliance Services LP at some point in the future. On a parallel track, Recycling, Inc., has been elected to the board of directors of Anti-Money Laundering Experts, Inc. Recycling, Inc., also plans to hire Anti-Money Laundering Experts, Inc., at some point in the future. Elion challenges all of the foregoing activities as impossible for Recycling, Inc., as a corporation. On which challenge will Elion prevail?
A. Recycling cannot be held criminally liable under environmental and money laundering laws.
B. Recycling cannot make a political contribution to Citizens for Environmental Freedom.
C. Recycling cannot serve as a limited partner of Environmental Compliance Services LP.
D. Recycling cannot serve as a member of a board of directors of Anti-Money Laundering Experts, Inc.

Answer 8

Correct Answer: D. Recycling cannot serve as a member of a board of directors of Anti-Money Laundering Experts, Inc.
Explanation: A corporation cannot serve as a member of the board of directors of another corporation. Board members must be natural persons.

Question 9

Member 1 and Member 2 establish an LLC that provides catering services. Member 1 and Member 2 elect to establish a manager-managed LLC (they are chefs and have no interest in running the business). They engage Manager to run the LLC. Manager is paid a salary, but does not own any of the membership interests in the LLC. Manager, with Member 1 and Member 2’s agreement and assistance, arranges a $50,000 loan to the LLC from Local Bank. The LLC signs up hundreds of customers but cannot deliver the food as required and the business fails. When it fails, the LLC still owes Local Bank $47,500. To whom can Local Bank look for payment of the outstanding debt?
A. The LLC, because the loan was to the company.
B. Manager, because she had control of the company.
C. Member 1 and Member 2, because they owned the company.
D. The LLC, Member 1 and Member 2, because the company is primarily liable and the owners of the company are responsible for any residual debts.

Answer 9

Correct Answer: A. The LLC, because the loan was to the company.
Explanation: An LLC provides limited liability for its members, meaning creditors can look only to the company’s assets for satisfaction of debts. The members are only liable to the extent of their contributions to the LLC.

Question 10

Investor owns common (voting) stock in Corporation. Corporation is run by a somewhat surly CEO and Chairman of the Board of Directors, M. M and his fellow board members are uninterested in shareholder input, and refuse to call and hold regular shareholder meetings because, as they explain, ‘Shareholder meetings are a waste of time and money.’ Investor would like to sue. You are advising her. Which of the following is the best advice you could give her?
A. Investor should file a direct suit, to enforce her right to vote, and not a derivative suit, which would be filed on behalf of the corporation.
B. Investor should not file a direct suit, because it requires a 5% shareholding; a derivative suit, which does not require the ownership of the actual shares, is a better idea for her.
C. Investor should file a derivative suit, on behalf of the corporation, against the stakeholders for breach of their fiduciary duties.
D. Investor should file a direct suit against the corporation, to extract a remedy for harm to the corporation, as opposed to a derivative suit, which would seek a remedy for harm to the shareholders.

Answer 10

Correct Answer: A. Investor should file a direct suit, to enforce her right to vote, and not a derivative suit, which would be filed on behalf of the corporation.
Explanation: A direct suit allows a shareholder to enforce duties owed specifically to them. Investor is suing on her own behalf to protect her individual rights as a shareholder.

Question 11

A owns and operates a pet ‘hotel’ where dogs can be housed while their owners are out of town. B lives next door to A and often comes over to play with the dogs in the fenced-in yard while A has them out of their kennels. One day, B comes over to play with the dogs while A has them out for exercise. While A is in the storeroom getting extra dog food, B takes two of the dogs out of the gate for a walk. During the walk, the dogs get loose and damage a neighbor’s flower garden. The neighbor sues A. Was B acting as A’s agent?
A. Yes, because A manifested assent that B should take the dogs on a walk.
B. Yes, because B consented to take the dogs on a walk.
C. No, because B undertook to walk the dogs gratuitously.
D. No, because A did not manifest assent that B should take the dogs on a walk, and A did not exercise control over the walk.

Answer 11

Correct Answer: D. No, because A did not manifest assent that B should take the dogs on a walk, and A did not exercise control over the walk.
Explanation: An agency relationship requires the principal to manifest assent and control over the agent’s actions. Neither condition is met in this case.

Question 12

Bellweather Corporation is properly formed and its articles of incorporation authorize 2000 shares but do not specify any rights related to the shares. Bellweather Corporation issues 1000 shares, of which Angelica purchases 100 at $20/share. Bellweather Corporation also borrows $100,000 from Bank. After a few months, Bellweather Corporation becomes insolvent and has $50,000 in assets. Bank claims it has the right to those assets. Angelica claims that, as an initial purchaser, she holds preferred stock that must be paid off before the loan is repaid. Who will prevail?
A. Angelica, because stockholder rights cannot be subordinated to the Bank.
B. Angelica, because she holds preferred stock.
C. Bank, because Angelica holds common stock and her rights come after debt satisfaction.
D. Bank, because Bellweather Corporation’s capitalization was incomplete.

Answer 12

Correct Answer: C. Bank will prevail because Angelica holds common stock, which reflects a residual interest in Bellweather Corporation, and therefore her rights to the company’s assets come after the debt to Bank has been satisfied.
Explanation: Common stockholders have a residual claim on corporate assets, meaning their claims are satisfied only after all debts are paid.

Question 13

Harry, Stanley, and Fred establish an LLC. Harry and Stanley travel frequently. Fred acts as the member-manager and is solely responsible for finances. One year, the annual distribution to members is much lower than usual. Fred emails Harry and Stanley, explaining that profits were down. Alarmed, they return immediately (on a Saturday) and demand to inspect the LLC’s books. Fred refuses. Who wins?
A. Fred, because he is solely responsible for finances.
B. Fred, because it is a Saturday.
C. Harry and Stanley, because each member is entitled to inspect the books and records.
D. Harry and Stanley, because the LLC is member-managed.

Answer 13

Correct Answer: B. Fred, because it is a Saturday.
Explanation: While LLC members have the right to inspect records, they must do so during regular business hours. Fred lawfully refused the request.

Question 14

Alex is a minority shareholder of Corporation, which manufactures bicycles. Corporation has been highly profitable and pays large dividends. Cole, the majority shareholder, is also CEO and Chairman. Cole starts making erratic decisions: destroying every third bicycle, ceasing operations on certain days for amusement park trips, and dropping $100 million in cash over the ocean. Alex sues Cole and Corporation. Cole argues he can run the company as he sees fit. Who wins?
A. Alex, because Cole and Corporation’s actions are contrary to the purpose of a business corporation.
B. Alex, because Corporation’s actions were extraterritorial.
C. Cole and Corporation, because Cole owns the majority of shares.
D. Cole and Corporation, because Cole is CEO and Chairman.

Answer 14

Correct Answer: A. Alex, because Cole and Corporation’s actions are contrary to the purpose of a business corporation.
Explanation: Business corporations exist to generate economic value for shareholders. Cole’s decisions were reckless and not aligned with shareholder interests.

Question 15

The board of directors of Corporation, a manufacturer of building materials, decides to invest its earnings in mutual funds while awaiting a business acquisition. Before the acquisition occurs, the market crashes, and Corporation loses the entire value of its investments. The stock price drops from $60 to $5 per share. Shareholders sue the board. Are they likely to prevail?
A. No, because the business judgment rule prevents suits by directors and officers.
B. No, because the business judgment rule will protect the board’s business decision.
C. Yes, because the investment was poor and resulted in significant losses.
D. Yes, because earnings must be distributed as dividends.

Answer 15

Correct Answer: B. No, because the business judgment rule will protect the board’s business decision from judicial second-guessing.
Explanation: Courts defer to business decisions made in good faith by the board unless there is evidence of fraud, self-dealing, or gross negligence.

Question 16

Reliable Delivery hires Jennifer to drive one of its delivery trucks. Each day Jennifer arrives at work at the delivery warehouse at 5:00 am and is given a stack of packages and envelopes to deliver within a 50-mile radius. Sometimes parcels arrive late, and Jennifer receives a call to return to pick up additional packages. One day, just after Jennifer has made her last delivery and is heading back, she receives a call about another package. Frustrated, she bangs her hand on the steering wheel, causing the van to swerve and hit a pedestrian, Leslie. Leslie sues Reliable Delivery. Who is liable?

Answer 16

Correct Answer: D. Reliable Delivery is liable because Jennifer was acting within the scope of her employment.
Explanation: Under the doctrine of respondeat superior, an employer is vicariously liable for the torts committed by employees acting within the scope of their employment. Jennifer was still on duty, driving a company vehicle, and discussing a work-related matter when the accident occurred.

Question 17

Corporation has four shareholders, each owning 25% of the outstanding voting stock. Corporation’s bylaws include an 80% quorum and voting requirement for all decisions, including issuing additional shares. One shareholder, A, refuses to vote in favor of any dividends, repairs, or expansion, causing excessive retained earnings and tax penalties. The other three shareholders sue A for breaching his fiduciary duty. What argument will the plaintiffs likely use to support their claim?

Answer 17

Correct Answer: B. A had a de facto controlling interest in Corporation and violated his fiduciary duty to his fellow shareholders.
Explanation: The 80% voting requirement effectively gave A veto power over major decisions, making him a de facto controlling shareholder. Courts often impose fiduciary duties on controlling shareholders in closely held corporations.

Question 18

X, Y, and Z form a general partnership to operate a food truck. They take turns running the truck. One day, while X is working, the truck’s parking brake suddenly disengages and rolls into a group of bystanders, causing injuries. No mechanical fault is found. Y and Z sue X, claiming he violated his duty of care. What is the likely outcome?

Answer 18

Correct Answer: B. Y and Z lose because X did not violate his duty of care to the partnership.
Explanation: A partner’s duty of care is limited to refraining from gross negligence, recklessness, or intentional misconduct. There is no evidence that X acted negligently or recklessly, so he did not breach his duty of care.

Question 19

Tyrone purchases 1000 stock call options for $1 each, with a strike price of $50/share. The options can be exercised before December 31st. On December 30th, Chi Corporation’s stock trades at $55/share. What is likely to happen?

Answer 19

Correct Answer: D. Tyrone will exercise his options, because they are in the money and will otherwise expire.
Explanation: The market price ($55) exceeds the strike price ($50), making the options profitable. Tyrone should exercise the options before they expire to realize a gain.

Question 20

Corporation X is properly formed with articles of incorporation authorizing 1000 shares. Its bylaws originally reflected this but were later amended to allow 2000 authorized shares. After issuing 1000 shares, Corporation X issued an additional 500 shares based on the bylaw amendment. Shareholders challenge the issuance. Do they prevail?

Answer 20

Correct Answer: B. Yes, because the articles of incorporation, which were not amended, trump the bylaws.
Explanation: The articles of incorporation set the maximum number of authorized shares. A bylaw amendment alone cannot override the articles, so the issuance of additional shares was improper.

Question 21

Reliable Delivery hires Jennifer to drive one of its delivery trucks. Each day Jennifer arrives at work at 5:00 am and is given a stack of packages to deliver within a 50-mile radius. Sometimes, parcels arrive late, and she is asked to return to pick them up. One day, at 3:05 pm, just after her last delivery, she receives a call asking her to pick up a late package. Frustrated, she hangs up, hits the steering wheel, causing the van to swerve and hit a pedestrian, Leslie. Leslie sues Reliable Delivery. Who is liable?
A. Reliable Delivery is not liable because the accident took place outside Jennifer’s normal working hours and was therefore not within the scope of her employment.
B. Jennifer is vicariously liable for the torts she commits.
C. Reliable Delivery is directly liable because they cannot delegate performance of an ultra-hazardous activity to an agent.
D. Reliable Delivery is liable because Jennifer was acting within the scope of her employment.

Answer 21

Correct Answer: D. Reliable Delivery is liable because Jennifer was acting within the scope of her employment.
Explanation: Under the doctrine of respondeat superior, employers are vicariously liable for the torts of employees acting within the scope of employment. Jennifer was still engaged in company-related activities, making Reliable Delivery liable.

Question 22

Corporation has four shareholders, each owning 25% of the voting stock. The bylaws require an 80% quorum and voting approval for all decisions, including issuing additional shares. One shareholder, A, refuses to vote in favor of dividends or reinvestment in the business, causing excessive retained earnings and a tax penalty. The other three shareholders sue A, claiming he breached his fiduciary duty. What is the best argument supporting their claim?
A. Shareholders in closely held corporations may own de jure controlling interests and, if they do, they are considered directors.
B. A had a de facto controlling interest in Corporation and violated his fiduciary duty to his fellow shareholders in his refusal to deploy Corporation’s earnings.
C. The duties of stockholders to one another in closely held corporations are like those of proxies, and may be revocable or irrevocable depending on the arrangements made by the parties.
D. Shareholders in closely held corporations who have complied with the corporate formalities are entitled to the benefit of the corporate form and may not have fiduciary duties imposed after the fact.

Answer 22

Correct Answer: B. A had a de facto controlling interest in Corporation and violated his fiduciary duty to his fellow shareholders.
Explanation: Because of the 80% approval requirement, A’s 25% gave him a veto over major corporate decisions, functioning like a controlling shareholder. Courts may impose fiduciary duties on shareholders in closely held corporations when they exercise de facto control.

Question 23

X, Y, and Z form a general partnership operating a food truck. They take turns managing the truck. One day, while X is serving lunch, the parking brake fails, and the truck rolls into a crowd, injuring bystanders. Police and mechanics find no cause for the brake failure. Y and Z sue X, claiming he violated his duty of care to the partnership. What is the likely outcome?
A. Y and Z lose, because partners are jointly and severally liable for partnership debts.
B. Y and Z lose, because X did not violate his duty of care to the partnership.
C. Y and Z win, because partners are strictly liable for the torts of the partnership.
D. Y and Z win, because X violated his duty of loyalty to the partnership.

Answer 23

Correct Answer: B. Y and Z lose, because X did not violate his duty of care to the partnership.
Explanation: A partner’s duty of care is limited to avoiding gross negligence, reckless conduct, intentional misconduct, or knowing violations of the law. No evidence suggests X acted negligently, making him not liable to his partners.

Question 24

Tyrone purchases 1000 stock options at $1 each for Chi Corporation stock. The strike price is $50/share, and the options expire on December 31st. On December 30th, Chi stock is trading at $55/share. What is likely to happen?
A. Tyrone will not exercise his options, because the strike price is $50 and the share price is $55.
B. Tyrone will not exercise his options and will wait until the price increases.
C. Tyrone will exercise his options, because the contract requires him to do so before December 31st.
D. Tyrone will exercise his options, because they are in the money and will otherwise expire.

Answer 24

Correct Answer: D. Tyrone will exercise his options, because they are in the money and will otherwise expire.
Explanation: The stock price ($55) is above the strike price ($50), making the options profitable. Since they expire on December 31st, Tyrone must exercise them before expiration to realize a gain.

Question 25

Corporation X is properly formed with articles of incorporation providing for 1000 authorized shares. Initially, its bylaws also provided for 1000 shares, but after issuing 1000 shares, the bylaws were amended to provide for 2000 authorized shares. Corporation X then issued an additional 500 shares. Shareholders challenged the issuance of these shares. Do they prevail? A. Yes, because the bylaws cannot be amended. B. Yes, because the articles of incorporation, which were not amended, trump the bylaws. C. No, because the bylaws, which were properly amended, trump the articles of incorporation. D. No, because a corporation has the innate right to issue as many shares as it wants.

Answer 25

Correct Answer: B. Yes, because the articles of incorporation, which were not amended, trump the bylaws. Explanation: The articles of incorporation set the maximum number of authorized shares. While bylaws may provide additional provisions, they cannot override the articles. Until the articles are amended, the corporation may not issue additional shares beyond the original limit.

Question 26

Publicly traded Corporation grants B 6,000,000 stock options for its common stock with today as the grant date, and the stock ends today's trading at $14.50/share. The options vest in six months and expire a year from today. If B exercises in full eight months from today, and the stock is trading at $17.00 that day, which of the following must be true? A. The strike price will be $14.50. B. B cannot exercise in eight months because the options will not have vested. C. The exercise price will be $17.00. D. B's obligation to buy the stock will depend on the price on the exercise date.

Answer 26

Correct Answer: A. The strike price will be $14.50. Explanation: The strike price is the price at which B has the right to buy shares, typically set at the grant date price. If the market price is higher, the option is 'in the money,' making it profitable to exercise.

Question 27

Sam, Sandra, and Sal decide to establish a limited liability company. Each wants management rights and protection from personal liability. They file articles of organization and draft an operating agreement providing equal capital contributions and a two-thirds majority vote for decisions. They elect partnership tax treatment and establish a profit distribution system. Which statement is most likely true? A. They have established a member-managed limited liability company. B. A limited liability company will not shield its members from personal liability. C. The constitutive documents can allocate how profits are allocated but not how they are distributed. D. The company will have corporate tax treatment, not partnership tax treatment.

Answer 27

Correct Answer: A. They have established a member-managed limited liability company. Explanation: By filing articles of organization and drafting an operating agreement, they have created an LLC, which offers limited liability and management rights while allowing for partnership tax treatment.

Question 28

Manuel is the majority shareholder (60%) and chairman of the board of Funtime, Inc., an amusement park company. Manuel objects to operating at night, citing concerns for the neighborhood, despite all other amusement parks generating most of their profits from nighttime operations. Lights are cheap and easy to install, but Manuel and his elected board members refuse to consider them. A minority shareholder sues, alleging the board is not acting in the corporation's best interest. Who prevails? A. The plaintiff minority shareholder, because the decision not to install lights is putting Funtime, Inc., at a competitive disadvantage. B. The plaintiff minority shareholder, because the board's decision has frustrated the reasonable profit expectations of the minority. C. Manuel and the board, because they acted in accordance with their fiduciary duty towards the surrounding neighborhood stakeholders. D. Manuel and the board, because their decision is protected by the business judgment rule.

Answer 28

Correct Answer: D. Manuel and the board, because their decision is protected by the business judgment rule. Explanation: The business judgment rule protects directors from liability for business decisions, even if they result in losses, as long as they act in good faith and within their authority.

Question 29

Beta, Inc., was incorporated a year ago, authorizing 5000 common shares. Currently, 2000 shares are issued and outstanding, with preemptive rights. Amir owns 500 of these shares. The board votes to issue 1000 additional shares, selling them to Gamma, Inc. Amir challenges the sale. Will he succeed? A. Yes, because Amir's preemptive rights entitle him to purchase 250 of the additional 1000 shares to avoid dilution. B. Yes, because one corporation (Gamma, Inc.) cannot be a shareholder of another corporation (Beta, Inc.). C. No, because the board of directors of Beta, Inc., had the power to issue additional common shares. D. No, because the board of directors can preempt a shareholder claim regarding the sale of shares.

Answer 29

Correct Answer: A. Yes, because Amir's preemptive rights entitle him to purchase 250 of the additional 1000 common shares in order to avoid dilution. Explanation: Preemptive rights allow shareholders to maintain their proportional ownership when new shares are issued, preventing dilution.

Question 30

Homeowner hires an agent to sell her house for $100,000. The agent, believing it's a good deal, arranges to purchase the house for the full asking price through an intermediary without informing the homeowner until after the sale. Did the agent breach a fiduciary duty? A. Yes, because the agent was acting as an undisclosed adverse party. B. Yes, because by purchasing the house, the agent failed to sell it to a third party. C. No, because the agent paid full price, so the homeowner benefitted.... D. No, because the agent disclosed the purchase after the fact.

Answer 30

Correct Answer: A. Yes, because the agent was acting as an undisclosed adverse party. Explanation: The agent breached the duty of loyalty by engaging in self-dealing without prior disclosure and consent from the homeowner.

Question 31

Corporation owns 100% of Subsidiary, which operates a chemical plant causing environmental damage. Subsidiary lacks assets to compensate affected property owners. Is Corporation liable for the shortfall? A. Yes, because it owns 100% of the shares. B. Yes, because Subsidiary's assets are inadequate. C. No, if Corporation actively participates in and controls Subsidiary. D. No, unless the corporate veil is pierced.

Answer 31

Correct Answer: D. No, unless the corporate veil is pierced. Explanation: Mere ownership of a subsidiary does not impose liability. The corporate veil must be pierced, typically requiring fraud, commingling of assets, or undercapitalization.

Question 32

Corporation is incorporated in State A but operates entirely in State B. Nan, a shareholder, objects to management transparency and requests access to board meeting minutes, but is denied. She sues. Which law applies? A. Nan can sue for defective incorporation because the corporation should be in State B. B. The court applies State A law due to the internal affairs doctrine. C. Nan is unlikely to win because the internal affairs doctrine prevents disclosure. D. The court applies State B law instead.

Answer 32

Correct Answer: B. The court applies State A law due to the internal affairs doctrine. Explanation: The internal affairs doctrine dictates that a corporation's internal matters are governed by the laws of its state of incorporation.

Question 33

Wendy, a loan officer, approves a loan against Bank policy. The Bank President later finds out and, after hearing details, smiles and says, 'Finally, some good news,' before walking away. What is the status of the loan? A. The Bank President can later demand full repayment. B. Wendy is responsible for repayment. C. The loan automatically changes to fit Bank's policies. D. The loan has been ratified, making Wendy's authority retroactive.

Answer 33

Correct Answer: D. The loan has been ratified, making Wendy's authority retroactive. Explanation: The Bank President's approval after the fact constitutes ratification, conferring retroactive authority on Wendy's actions.

Question 34

A, B, and C form a member-managed LLC. A purchases a delivery truck for the company, but B and C object, claiming A had no authority. Who wins? A. A, because the truck has already been purchased. B. B and C, because only managers, not members, can act as agents. C. B and C, because a delivery truck is personal property. D. A, because members in a member-managed LLC have authority to act as agents.

Answer 34

Correct Answer: D. A, because members in a member-managed LLC have authority to act as agents. Explanation: In a member-managed LLC, each member has authority to bind the company in matters of ordinary business.

Question 35

A is a partner in an investment management company facing bankruptcy. A arranges for X to loan $1,000,000 to the firm, with terms restricting further borrowing and prioritizing repayment from profits. When the firm collapses, creditors argue X was a partner. Was X a lender or a partner? A. Partner, because X received a share of profits. B. Partner, because X controlled business decisions. C. Lender, because X received payments in satisfaction of a debt. D. Lender, because X contributed $1,000,000.

Answer 35

Correct Answer: C. Lender, because X received payments in satisfaction of a debt. Explanation: Receiving a share of profits does not automatically establish a partnership; in this case, payments were clearly structured as debt repayment.

Question 36

Jorge is forming Corporation and arranges for Malia to invest in 100 shares at $5/share before incorporation. After Corporation is formed, Malia refuses to purchase the shares. Is her preincorporation subscription enforceable? A. Yes, it was irrevocable when Corporation was formed. B. Yes, because she is an accredited investor. C. No, because Corporation did not yet exist. D. No, because there was no consideration.

Answer 36

Correct Answer: A. Yes, it was irrevocable when Corporation was formed. Explanation: Preincorporation stock subscriptions are enforceable and irrevocable for six months unless stated otherwise.

Question 37

A, B, and C form a limited partnership for a strawberry farm. A and B, limited partners, manage finances and make decisions while C, the general partner, handles daily operations. After a drought, the farm goes insolvent, and C has no assets. Who is liable? A. The farm will be reorganized as an LLC. B. C, as limited partner, is solely liable. C. The limited partnership provides full liability protection. D. A and B forfeited their limited liability due to their management activities.

Answer 37

Correct Answer: D. A and B forfeited their limited liability due to their management activities. Explanation: Limited partners who take substantial control over operations risk being treated as general partners and losing liability protection.

Question 38

Corporation's 21-person board delegates business decisions to the CEO. The CEO presents a new rubber supplier offering a price half that of the current supplier. Without investigation, the board approves the switch. The supplier defaults, causing major losses. Did the CEO and board violate their fiduciary duties? A. Yes, because their decision led to losses. B. Yes, because they failed to exercise due care. C. No, because they acted in good faith. D. No, because only the board has a fiduciary duty.

Answer 38

Correct Answer: B. Yes, because they failed to exercise due care. Explanation: The duty of care requires informed decision-making. Neither the CEO nor the board investigated the new supplier, breaching their fiduciary duty.

Question 39

Centennial Corporation has 100 common and 100 preferred shares, with typical rights and preferences. After a profitable year, preferred shareholders receive dividends first. The next year, the company becomes insolvent, and liquidation payments are made to preferred shareholders, leaving nothing for common shareholders. Common shareholders sue. On which claim do they prevail? A. Dividend payments should be pro rata. B. Liquidation assets belong to common shareholders after debts are paid. C. Common shareholders should be paid before preferred shareholders. D. Neither, because preferred shareholders have priority in both dividends and liquidation.

Answer 39

Correct Answer: D. On neither claim, because preferred shareholders are entitled to dividend priority and preferential liquidation payments. Explanation: Preferred shareholders have priority in receiving dividends and liquidation proceeds before common shareholders.

Question 40

Ana and Nina form an LLC for a restaurant. After years of success, Ana wants to dissolve the LLC and sell its assets. Nina insists that the operating agreement requires a buyout at fair value instead. What happens in court? A. The court balances fiduciary duties and determines the best course. B. The LLC act governs, overriding any contract. C. The operating agreement controls, and Nina can buy Ana out. D. The court will disregard the exit mechanism in the agreement.

Answer 40

Correct Answer: C. The operating agreement controls, and Nina can buy Ana out. Explanation: LLC statutes provide contractual freedom, meaning the operating agreement's buyout mechanism governs rather than default LLC act provisions.

Question 41

Professor A is a law professor. He hires an assistant, B. Professor A tells B, “Please hire a student research assistant for me. But do not hire student C.” Student C calls Professor A and asks for the job. Assistant B is in the office when the call comes in. Professor A says to student C, “I would love to hire you, but I have put B in charge of the hiring. Talk to him.” When Professor A hangs up he reminds assistant B not to hire student C. Assistant B hires student C anyway. Professor A finds out and fires assistant B and refuses to honor the commitment to student C. Student C sues. Did assistant B have authority to hire student C?

Answer 41

Correct Answer: A. Yes, B had apparent authority to hire student C. B did not have actual authority to hire student C, but he did have apparent authority and Professor A's manifestation on the phone to student C was clear. Apparent authority is the power held by an agent or other actor to affect a principal's legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal's manifestations.

Question 42

A, a promoter, claims to be acting on behalf of a company that will operate a shoe repair business, Cobbler, Inc. Promoter A leases space for the business from Landlord. Promoter A signs a two-year lease for the space as 'A, on behalf of Cobbler, Inc., a corporation to be formed.' Both parties know, however, that Cobbler, Inc. has not been formed. After a few months, payments on the lease fall into arrears. Landlord discovers that Cobbler, Inc., was never formed, and seeks to hold promoter A, who never took any steps to form the corporation, liable for the lease payments required by the contract. Promoter A refuses to pay. Who wins?

Answer 42

Correct Answer: C. Landlord wins because A signed on behalf of a corporation that did not exist when the contract was signed. When a person signs a contract for the benefit of a corporation that is contemplated but not yet organized, she is personally liable on the contract in the absence of an agreement otherwise.

Question 43

F operates a store and C is the cashier. F pays C $500/week. C wants a raise and instead F offers to make C a partner in an arrangement in which F will maintain all control and management and C will get $500/week plus 20% of the profits. What is the result of the new arrangement?

Answer 43

Correct Answer: B. F is an employer, and C is an employee. The new arrangement, regardless of what F is calling it, is a simple employer-employee arrangement in which some of the employee's pay is based on profits.

Question 44

A works as a university security guard during the week. On the weekends, however, A wears his university security guard uniform while accompanying several of his friends into the campus buildings. A's friends remove recyclable materials from campus building trashcans, and then sell the recyclable materials for a profit. A does nothing except walk next to his friends, usually making small talk. At the end of each weekend, A's friends pay him $500. A's weekend activities with his friends are:

Answer 44

Correct Answer: B. A violation of his fiduciary duty to the university. A as agent of the university (the principal) has violated his fiduciary duty not to acquire a material benefit arising out of his position (sometimes called secret profits).

Question 45

A, B, C and D form a closely held corporation to operate a nursing home. They each invest the same amount of money, and they each receive a quarter of the corporation's shares in return. For several years, four shareholders work there and earn salaries. The four shareholders decide not to pay dividends on the stock of the corporation. Eventually, however, A, B and C have a falling out with D. A, B and C, a majority, fire D from his job at the corporation and discontinue his salary. They begin distributing all the profits of the corporation to themselves in the form of salaries and bonuses. When D complains, they offer to buy back his shares at a price substantially below their value. D files suit against A, B and C, alleging that their actions constituted a 'freeze out.' What should D argue?

Answer 45

Correct Answer: A. That the actions of A, B and C were designed to pressure D into selling his shares to the corporation at a price below their value. If the court finds that A, B and C were attempting to 'freeze out' D (to pressure him into selling his share to the corporation at a price below their value), the court will be more likely to find that A, B and C violated a duty to their associate, D.

Question 46

Employee has just gotten a job as a clerk at an insurance company, Employer. Employer sends Employee to the annual insurance conference for their region. At the conference, Employee makes numerous derogatory comments about the Employer, calling it a company 'full of morons' and 'the worst place to work in the world' in conversations with other insurance company representatives. Has Employee violated a duty to Employer?

Answer 46

Correct Answer: C. Yes, Employee has violated the duty to refrain from conduct likely to damage the Employer's enterprise. An employee/agent has a fiduciary duty, within the scope of the agency relationship, to act reasonably and to refrain from conduct that is likely to damage the employer/principal's enterprise.

Question 47

Mikayla objects on purely ethical grounds to a product manufactured by Corporation. She wants to publish the names of all the shareholders of Corporation in a full-page newspaper ad in order to shame the shareholders into demanding that Corporation cease making that product. Mikayla buys 100 shares of Corporation (1% of the total outstanding shares), and asks Corporation for a copy of its shareholders list. Corporation refuses, and Mikayla sues. Who will win?

Answer 47

Correct Answer: B. Corporation wins because a shareholder must have a proper purpose to exercise such inspection rights. A shareholder must demonstrate a proper purpose before exercising his or her right to inspect the shareholders list. A proper purpose is related to an investment objective, not based solely on ethical grounds.

Question 48

X and Y are general partners in a candy store and take turns working at the store. One day, investor Z comes into the store while X is working and says, 'It looks like you have a pretty nice business here. Would you like to help me start up another candy store?' They talk for a while and arrange to meet later after X gets off of work. In the course of several weeks X and investor Z decide to open a new candy store, organized as an LLC, with X and investor Z as the sole members. X will only contribute a small amount of the startup capital, however, with investor Z and several other members shouldering the bulk of the costs. The day before the new shop opens, X discloses the new venture to Y. Y is angry and sues X. What happens?

Answer 48

Correct Answer: A. Y wins: a partner must hold as trustee a partnership opportunity. This is an example of a partnership opportunity (X got the chance to invest in the new venture because she was working in the store the day that investor Z came in) and a partner's duty of loyalty to the partnership and the other partners includes accounting to the partnership and holding as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business, or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity.

Question 49

Corporation's proposed articles of incorporation include a provision to eliminate the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty of the director. The provision as drafted would not apply if the liability results from (i) a breach of the director's duty of loyalty to the corporation or its stockholders, (ii) an act or omission not in good faith or involving intentional misconduct or knowing violation of law, or (iii) a transaction from which the director derives an improper personal benefit. Can Corporation include this clause?

Answer 49

Correct Answer: C. Yes, because a corporation can eliminate director liability for breaches of duty of care in its articles of incorporation. Although the clauses cannot exculpate directors for duty of loyalty violations, they can exculpate directors for duty of care violations.

Question 50

Big Corp is a large, publicly traded corporation with subsidiaries and offices in every country of the world. You own 500 shares of Big Corp. Because of some less-than-terrific decisions of the board of directors, Big Corp has debts that total more than its cash on hand. Several Big Corp creditors contact you and explain that you owe them payment for your pro rata share of the Big Corp debts. You disagree. Who will prevail?

Answer 50

Correct Answer: A. You will, because your liability as a shareholder is limited to the amount of your investment. It correctly states that doctrine of shareholder limited liability for a corporation's debts.

Question 51

A and B form Corporation. No specific share transfer provisions are included in Corporation's constitutive documents. Each of A and B holds 50% of the shares of Corporation and they serve as its two-member board of directors. Corporation is managed by professional managers who are put into place by the board. After 19 years of successful operation, A and B are elderly and in poor health. They consult an attorney who advises them to sell their shares as soon as possible, before the corporation is dissolved and loses its value because of their deaths. Is their attorney correct?

Answer 51

Correct Answer: B. No, because Corporation has a perpetual existence unless otherwise agreed and put into the articles of incorporation, and their shares are inheritable. Corporations are perpetual, and their shares are freely transferable and inheritable, unless other, specific, provisions are made in the constitutive documents.

Question 52

Corporation's articles of incorporation authorize 4000 common shares, and the board approves issuance of 3200 shares. Corporation sells 3200 shares to investors. As soon as Corporation makes that sale, how many authorized shares, issued shares and outstanding shares does it have?

Answer 52

Correct Answer: A. Corporation has 4000 authorized shares, 3200 issued shares, 3200 outstanding shares and 800 authorized but unissued shares. It identifies the right number of authorized shares (the number of shares that Corporation, in its articles of incorporation, specified it can create and sell), issued shares (shares that have been sold to investors) and outstanding shares (shares that are currently in the hands of investors).

Question 53

Kiki Corporation would like to merge with another corporation and must recapitalize to do so. As part of that effort, Kiki Corporation's board of directors resolves to offer to buy back 50% of Kiki Corporation's outstanding shares. Kiki Corporation releases a pro forma balance sheet that shows that the merger and self-tender offer would result in a deficit to surplus on Kiki Corporation's books of over $10 million. Shareholder challenges the buyback. Who will prevail?

Answer 53

Correct Answer: A. Shareholder, because a corporation cannot make a distribution that would render the corporation insolvent. A corporation cannot make a distribution to shareholders that will render the corporation unable to pay its debts or will make the corporation insolvent. Insolvency would result if the amount used in a repurchase of company stock exceeds the corporation's surplus (the excess of the net assets of the corporation over the corporation's capital). Here, the repurchase will result in a deficit to surplus.

Question 54

E, F, G and H establish a limited partnership to run a lemonade stand. G is the general partner. E, F and H are limited partners. Each of E, F and G contributes $100 in cash to the limited partnership. H contributes no cash, but instead provides the lemons to be used to make the lemonade. Each month G distributes a share of the profits to each of the three limited partners. H, however, thinks that the amount of lemons he is providing should be producing more lemonade than the stand seems to have, and therefore more distributions than G is making. H writes a letter to G, asking G to provide him with a copy of the sales data for the last quarter. H asks for the data to be provided within 60 days. G refuses. Who will win if H sues G?

Answer 54

Correct Answer: D. H, because he made a reasonable demand for information regarding the business and financial condition of the limited partnership. Each limited partner has the right to obtain from the general partner from time to time upon reasonable demand true and full information regarding the state of the business and financial condition of the limited partnership.

Question 55

P, her husband, and her two sons own 95% of the shares of, and are the four sole directors of, Corporation. Insurance Company owns the remaining 5% of the shares. P, who works full time as a chef at a local restaurant, has nothing to do with Corporation. P's husband and sons manage everything and provide her with no information about Corporation. P considers it her husband and sons' business. P's husband and sons embezzle and spend all the funds from Corporation and drive it into insolvency before all three perish in an accident. When the embezzlement comes to light, the Insurance Company shareholder sues P, alleging that P failed to fulfill her duty to oversee the operations of Corporation. Insurance Company shareholder alleges that an examination of Corporation's financial statements would have raised red flags and put P on notice of the embezzlement going on. P responds that she made none of the questionable or illegal decisions relating to Corporation and that, as a chef, she could not reasonably be expected to seek out and detect irregularities in Corporation's financial statements. Which side is more likely to prevail?

Answer 55

Correct Answer: A. Insurance Company shareholder, because of P's sustained failure to fulfill her duty as a director to oversee the business and affairs of Corporation. A director may be held liable to a corporation or its shareholders for any failure to take any action as a director if the challenged conduct consisted of or was the result of a sustained failure of a director to devote attention to ongoing oversight of the business and affairs of the corporation.

Question 56

The board of directors of Corporation, which has shares traded on the New York Stock Exchange, votes unanimously to hire C as Chief Executive Officer. In order to persuade C to accept the position, the board authorizes a compensation package that includes a base salary, an annual bonus based on Corporation's annual profits, and stock options. The package is on the high end of customary arrangements. Corporation shareholders file suit to challenge the package. What is the likely outcome?

Answer 56

Correct Answer: A. Directors win, because the package is within the customary range and includes common arrangements. The board of directors sets the CEO compensation, and salary, bonuses based on profits, and stock options are common. Although the package is described as being at the high end of the customary range, it is nevertheless in the customary range, and so is not so excessive as to constitute waste.

Question 57

A, B, and C establish an LLC. They will each own one-third of the membership interests. A contributes $10,000 cash. B has already set up the store and created a marketing plan for the company, and estimates the value of her services to be $10,000. C contributes a used delivery truck, with a value of $10,000. Which of the three have made a permissible capital contribution to the company?

Answer 57

Correct Answer: A. All three. All three contributions are permissible. A member's capital contribution may be in cash, property or services already performed.

Question 58

Corporation X issues common stock as well as preferred stock with a $10 cumulative dividend. Corporation X makes no dividend payments for five years, and then in the sixth year, it declares a dividend and pays $60 to the preferred shares before making a $7 dividend payment to the common shares. The common shareholders challenge the dividend decisions that were made. Who will prevail?

Answer 58

Correct Answer: D. Corporation X, because it did not have to declare a dividend, but when it did, it had to satisfy the outstanding (cumulative) debt to the preferred shareholders first. It states the rule about the payment of dividends (generally a matter of board of directors discretion) and the payment of cumulative preferred dividends (all back preferred dividends must be paid, then current preferred dividends must be paid, and only then may any dividends be paid to the common shareholders).

Question 59

S is a receptionist at a law firm. His boss tells him to go to the office supply store and buy more legal pads for the firm. His boss gives him no other instructions. S goes to the office supply store, purchases 100 legal pads, and charges them to the company account. S has done this several times before. What kind of authority did S likely have to do what he did?

Answer 59

Correct Answer: B. Actual express authority to purchase the customary number of legal pads. Actual implied authority to charge them to the company account. S has actual authority to buy legal pads (S as agent reasonably believes, in accordance with his boss's manifestations to him, that his boss wishes him to buy legal pads). Therefore, S has authority to take action designated or implied in his boss's manifestations to him and acts necessary or incidental to achieving the boss's objectives, as S reasonably understands the boss's manifestations and objectives when S determines how to act. In other words, S has actual express authority to buy the pads and actual implied authority to do what is necessary to effect the purchase, i.e., charge them to the company account.

Question 60

A, Inc., has many separately incorporated subsidiaries, which are also established as corporations. All corporate formalities are scrupulously observed. One of the subsidiaries, F, Inc., engages in manufacturing. One day, a chemical tank at F, Inc., ruptures, leaking into the water supply of a nearby town. The damages are substantial. Although insured and adequately capitalized, F, Inc., is unable to cover the cost. Is A, Inc., liable for the remainder?

Answer 60

Correct Answer: A. No, normal rules of limited liability allow the separation of assets and risks within corporate groups. The fact that the shareholder is itself a corporation does not preclude limited liability. Here there is little to suggest that a court would engage in the equitable remedy of piercing the corporate veil and deny A, Inc., the benefit of corporations law, which limits its liability for the debts of F, Inc., to the value of its investment.

Question 61

Corporation has 50,000 shares of its common stock outstanding. At the annual shareholder meeting, 35,000 of the shares are represented and are voted to reelect the incumbent directors. Of those 35,000 shares, 10,000 shares are voted by a single representative who has proxies from those shareholders; 15,000 shares are voted by the board itself which has proxies from those shareholders; and the remaining 15,000 shares are voted by shareholders physically present at the meeting. A shareholder who did not attend the meeting, and did not grant a proxy for his shares to be voted for him, challenges the result. Corporation defends the meeting and the voting process that was carried out. Who is likely to win?

Answer 61

Correct Answer: A. Corporation, because the vote at the annual meeting was taken in accordance with the rules. Board elections are held at the annual shareholder meeting, with a quorum normally being a majority of the outstanding shares. Shares may be represented either in person or by proxy. A shareholder's proxy may designate an agent to vote his/her shares at the meeting, and that agent may be the board itself or third party.

Question 62

Kim and Maria form a general partnership to run a grocery store. Kim tells Dairy Company that she will not be personally liable for the cost of any more milk Dairy Company sells to the store. Maria orders more milk from Dairy Company. Dairy Company delivers it. The store bank account is insufficient to pay for the milk, and Dairy Company sues Kim for payment for the milk. What is the likely outcome?

Answer 62

Correct Answer: B. Kim is liable for the cost of the milk because a majority of the partners did not vote to end Maria's authority to buy milk from Dairy Company. Absent an agreement to the contrary all partners have rights in the management and conduct of the partnership business, and all partners can act as agents of the partnership. Here, a majority of the partners did not vote to end Maria's authority, as an agent of the partnership, to buy milk from Dairy Company, therefore the partnership was bound.

Question 63

J decides to form a corporation to operate a bike rental business, Vacation Bike Rentals, Inc. He reserves the name of the corporation with the secretary of state but, before he makes any attempt to incorporate, he purchases 25 bicycles from Bike Supplier. All purchase contracts for the bicycles are between Bike Supplier and 'Vacation Bike Rentals, Inc.,' and are signed by J in his own name. Vacation Bike Rentals, Inc., is later formed and it adopts the contract, but no explicit provisions are made regarding J's role in signing the contract, and no payment is made for the bikes. Bike Supplier seeks payment for the bicycles. Who is liable for the debt?

Answer 63

Correct Answer: C. Vacation Bike Rentals, Inc., and J, because J signed the contract and the corporation adopted it. J contracted for the benefit of Vacation Bike Rentals, Inc., which was not yet organized, and so he became personally liable on the contract in the absence of an agreement otherwise. J was not discharged from liability when Vacation Bike Rentals, Inc., was subsequently formed and received the benefit of the contract, even though Vacation Bike Rentals, Inc., adopted the contract, because the parties made no agreement to discharge J from liability (which would have required a novation).

Question 64

Q owns 100% of the shares of a corporation that provides bus rides for people arriving at the airport. The company is called Shuttle, Inc. Shuttle, Inc., does a lot of business, but Q consistently pays all of the profits made by the company to himself in the form of dividends, leaving no cash in the company bank accounts. Shuttle, Inc., operates seven vans, but all are leased from a local dealership. Shuttle, Inc., has no other assets. A Shuttle, Inc., van gets into a traffic accident with a small car holding Plaintiff. Plaintiff successfully sues Shuttle, Inc., for damages (the accident was the Shuttle, Inc., driver's fault) but after Shuttle, Inc.'s, insurance policy pays its maximum amount, money is still owing and Shuttle, Inc., has no assets with which to pay her. Plaintiff then petitions the court to pierce the corporate veil of Shuttle, Inc. Which of the following is true?

Answer 64

Correct Answer: B. If the court pierces the corporate veil it will provide a remedy for a creditor like Plaintiff in a case where the corporate assets are insufficient. Piercing the corporate veil is used by courts in situations in which the corporate assets are insufficient to satisfy creditors' claims and the facts of the case warrant the imposition of such an equitable remedy. Factors that have been shown to correlate with the use of a piercing remedy include: a closely-held corporation, deceit of creditors by insiders, failure to observe corporate formalities, commingling of personal and corporate assets, inadequate capitalization, and active participation by the defendant in the business.

Question 65

Shawn and Steve operate a lemonade stand. Over the years, the stand has become a thriving business. Shawn and Steve both work at the stand. They make management decisions together. They divide the profits equally. They have never filed any documents with the state. They do not have a written partnership agreement of any kind. In fact, they have never even discussed what kind of operation they are running. Are Shawn and Steve partners?

Answer 65

Correct Answer: A. Yes, they are general partners. A partnership is an association of two or more persons to carry on as co-owners a business for profit, and is created by agreement. The partnership agreement, however, can be written, oral or implied, and here it is implied.

Question 66

Corporation is founded in 1915 and operates successfully for over a century. Times change, however, and eventually its business no longer makes sense. The board of directors resolves to dissolve the corporation, and the required majority of shareholders approves the dissolution. When Corporation is dissolved, it has 1000 common shares outstanding, 250 preferred shares with a liquidation preference outstanding, and both secured and unsecured creditors to whom Corporation owes debts. In what order should Corporation's assets be distributed?

Answer 66

Correct Answer: B. First to the secured creditors (to the extent of their secured interest), then to the unsecured creditors, then to the preferred shareholders, and then the remaining assets are to be divided pro rata in accordance with their shareholding to the common shareholders. It recognizes that debt is paid before equity (so the secured and then the unsecured creditors are paid first), and that preferred equity with a liquidation preference comes before common equity.

Question 67

A Corporation is a large multinational corporation operating in over 100 countries worldwide. A owns 90% of the voting shares of B Corporation. A also owns 100% of the voting shares of C Corporation. A sends out a press release discussing its plans to acquire 75% of the voting shares of D Corporation. The press release reads: 'A Corporation announces its pending acquisition of a new subsidiary, D Corporation, which will work closely with its affiliates, B Corporation and C Corporation.' Is the press release correct?

Answer 67

Correct Answer: B. Yes, because A Corporation will now control, through ownership of all or a controlling number, of the voting shares of the other three corporations. A Corporation, the parent corporation, will own 90% of the voting shares of B Corporation, 100% of the voting shares of C Corporation, and 75% of the voting shares of D Corporation, giving it full or effective control of each of the three.

Question 68

Michael owns 100% of the membership interests of an LLC that makes lift gates that go on the back of trucks. Michael says to his agent, 'Go down to company's showroom, put up a sign that says LIFT GATES FOR SALE – EVERYTHING MUST GO, and sell all of the lift gates for $2500 each.' The agent does this. Later that day, a customer comes into the showroom where the agent is selling liftgates. After negotiations between the customer and the agent, the agent sells the customer a lift gate for $2000. Michael is angry and claims the agent did not have authority to sell the lift gate for $2000. Did the agent have authority to sell the lift gate for $2000?

Answer 68

Correct Answer: B. Yes, the agent had apparent authority to sell the lift gate for $2000. The agent was working in the store and he negotiated the sale of the lift gate. From the perspective of the third party (customer), which is the perspective that matters in determining apparent authority, the agent had all of the trappings of authority to make such a sale.

Question 69

Slate Corporation produces materials for roofing. The company has a board of directors that includes 15 inside directors and 15 outside directors. One of the inside directors is Smith, who is also the CEO of the company. Smith works closely with the company's CFO, who is Jones. Which of the following is the best description of the way the company works?

Answer 69

Correct Answer: D. The board runs the company, and delegates its power over day-to-day operations to executive officers like Smith and Jones. This is a true statement of the role of the board of directors, which manages the business and affairs of the corporation, and delegates power over day-to-day operations to executive officers.

Question 70

Alpha, Beta, and Gamma form a limited partnership. Alpha contributes $100, Beta contributes $100 and Gamma contributes $500. Alpha is the general partner. Beta and Gamma are limited partners. The limited partnership agreement makes no provision for the division of profits and losses. The limited partnership earns $2100 in the first year. How are the profits allocated among the partners?

Answer 70

Correct Answer: A. Alpha is allocated $300, Beta is allocated $300 and Gamma is allocated $1500. If the limited partnership is silent as to the allocation of profits and losses, they are allocated on the basis of the value of the contributions made by each partner.

Question 71

Alice works as a sales person for an industrial supply company. Alice is authorized to sell some of the company's goods on credit, after an extensive credit check of the customer. The company policies on the extension of credit are clear: a credit check must be performed on the customer before any goods can be sold to that customer. Alice sells goods to a new customer. Alice, an experienced salesperson, is sure that the new customer will be a major buyer of the company's goods, and the new account will benefit the company. Because the new customer is in a hurry, Alice sells the goods to the customer on credit without a prior credit check. The new customer fails to pay for the goods and the company suffers a loss. Did Alice breach a fiduciary duty to the company?

Answer 71

Correct Answer: D. Yes, Alice has breached her duty to comply with the principal's lawful instructions. Alice has breached her duty of obedience (to act only within the scope of her actual authority and to comply with her principal's lawful instructions).

Question 72

Xerxes Corporation has a 12-person board of directors who are elected to three-year terms, with four directors up for reelection each year. This year, only the four incumbent directors are running for election to the four available seats. The shareholders are very unhappy with the board's performance. The common shareholders decide to boycott the shareholder meeting and vote. As a result, only the incumbent directors up for reelection themselves vote. Each of the incumbent directors owns a single share of the corporation's 100 shares of outstanding common stock. Each of the incumbent directors votes for himself. Each director therefore receives a single vote in favor. What is the result?

Answer 72

Correct Answer: C. None of the directors is reelected, because there was not a quorum for the shareholder meeting and vote. A shareholder meeting at which only four out of 100 shares are represented lacks a quorum (usually defined as a majority of the shares eligible to vote) and action cannot be taken in the absence of a quorum.

Question 73

Judah purchases redeemable, convertible preferred stock from Corporation for $100/share. The shares are redeemable at the option of Corporation for $120, and convertible at the option of the holder into common stock at a ratio of 1 preferred share to 5 common shares. Current market value of the preferred shares is $130, but Corporation is planning on going public soon and the initial price is expected to be approximately $40 for the common stock. What should Judah do?

Answer 73

Correct Answer: C. Convert his shares into common. At $40/share for the common, each one of Judah's preferred shares that is converted to common can realize $200. One preferred share is worth $130, but 5 common shares will be worth $200, not to mention the benefit of the added liquidity because of the public offering.

Question 74

Ali and Ben form a general partnership to provide landscaping services. They decide that the partnership needs a truck to haul its equipment. Ali goes to the local dealership and purchases a truck. Ali writes a check from the partnership's business account for the full cost of the truck. The truck's certificate of title shows Ali as the owner of the truck. Later, Ali and Ben decide to dissolve the partnership. Ali points out that the truck is in his name, and is therefore his. Ben disagrees. Who is correct?

Answer 74

Correct Answer: B. Ben, because the truck was purchased with partnership assets. Property is presumed to be partnership property if it is purchased with partnership assets, even if it is not acquired in the name of the partnership or in the name of a partner with an indication that he or she is acting as a partner.

Question 75

Corporation, which is publicly traded, operates a chain of sporting goods stores. Corporation has an eight-person board of directors who have guided the company from its first store to its current multi-million dollar status. The directors have always employed a 'hands off' approach to their stores, which enables the directors to spend all of their time traveling and playing golf. Unknown to the directors, store managers at several of the west-coast stores begin selling all of their inventory to North Korean clients. The North Korean sales, which suddenly quadruple revenues at those stores without explanation, persist for several years but eventually result in prosecution of Corporation by U.S. government authorities for violation of the U.S. sanctions against North Korea. Corporation settles with the government, and pays a $100,000,000 fine. Corporation's share price plummets. Shareholders of Corporation file a derivative suit, arguing that the directors breached their oversight duties as directors. The directors claim they did not breach their duties. Did the directors breach their duties?

Answer 75

Correct Answer: B. Yes, because they failed to put into place a reporting system and knew they were not discharging their obligations. In order to show that directors breached their duties by failing adequately to control employees of Corporation, the shareholders have to show that: (i) the directors utterly failed to implement any reporting or information system or controls, or that, having implemented such a system or controls, they consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention; and (ii) the directors knew they were not discharging their fiduciary obligations. This failure must be sustained and systematic.

Question 76

For several years A, B, and C have been operating a business as an ordinary general partnership. They have no formal partnership agreement and haven't previously agreed how to go about changing their relationship. On February 1, B suggests that the partnership become a limited liability partnership (LLP). C agrees, but A is unsure and wants to think it over. After a week, B and C have not heard back from A, so they file the statement of qualification, the filing fee, and information about the partnership's name and address with the state, as required to become an LLP. Is the LLP properly formed?

Answer 76

Correct Answer: A. No, because there was not unanimous consent to formation of an LLP. Formation of an LLP requires the same amount of consent as is required for amending the partnership agreement, and because no agreement regarding what vote is necessary to form an LLP exists, there needs to be unanimous consent.

Question 77

X owns 100% of the shares of two companies: B, Inc., and E, Inc. The two corporations share space, staff, their delivery service and advertising. However, B, Inc., is profitable and E, Inc., is not. E, Inc., defaults on a debt to its supplier, and the supplier goes to court to get the debt enforced. Because it is clear that E, Inc., will not be able to pay, the supplier wants to collect from B, Inc. The supplier comes to you for advice. In providing advice to the supplier, you should mention that:

Answer 77

Correct Answer: C. The court may provide a remedy if B, Inc., and E, Inc., were operated as a single entity and integrated their resources to achieve a common purpose. When corporations are not operated as separate entities, but integrate their resources to achieve a common business purpose, each corporation may be held liable for the debts incurred in pursuit of that business purpose.

Question 78

Ann lends her boat to Beth. Beth uses the boat to take her friend Cate fishing. When Ann lends the boat to Beth, Ann tells Beth that only Beth can drive the boat. Beth complies, and drives the boat herself. Nevertheless, Beth and Cate are involved in a boating accident. Beth is killed, and Cate is injured. If Cate wants to sue Ann, what does Cate need to show to be successful?

Answer 78

Correct Answer: B. That Beth was acting as the agent of Ann. If Beth was Ann's agent, then Ann may be liable for the accident.

Question 79

XYZ Corporation was properly formed by X, Y and Z. However, X, Y and Z were very poorly organized and failed to file annual reports as required by state law. XYZ Corporation was eventually dissolved by administrative order on January 2nd, though X, Y and Z did not notice. In February, X, as CEO of XYZ Corporation, signed several contracts. In March, X realized XYZ Corporation had been dissolved, made the required filings, and applied for reinstatement of XYZ Corporation, which was granted by the state in April. After XYZ Corporation is reinstated, what is the status of the contracts made in February while XYZ Corporation was dissolved?

Answer 79

Correct Answer: C. The contracts are enforceable against XYZ Corporation. The effect of reinstatement is retroactive recognition of the corporation, along with its corporate attributes, including limited liability.

Question 80

Corporation has 10,000 common shares issued and outstanding. For the last three years, Corporation has made little profit and has not paid a dividend to its shareholders. This year, however, Corporation made a significant profit. Nevertheless, the board of directors does not declare a dividend or other distribution to the shareholders. Shareholder Sally, who owns 499 shares of Corporation, objects to the lack of a dividend. The board claims that it is not required to pay a dividend. Who is right?

Answer 80

Correct Answer: B. The board is right, because shareholders have a right to a dividend or other distribution only if the board decides to declare one. Corporate shareholders only share in the business profits if the board of directors declares a dividend or other distribution.

Question 81

A and B form a general partnership to operate a business. A provides most of the funding. B has a lot of experience and runs the business. They make no provisions for how long the partnership will last. After a few months, the business struggles to make a profit. A and B begin to argue. B stops showing up for work, and when he is there he is verbally abusive towards their customers. After about six months of declining revenues and increasingly erratic behavior by B, A files an action to have the partnership dissolved. What is the court likely to do?

Answer 81

Correct Answer: A. The court is likely to find that B's bad conduct toward the business makes it not reasonably practicable to carry on the business in partnership with A, and therefore grant A's petition. On a partner's application, a partnership may be dissolved if there is a judicial determination that one partner's bad conduct relating to partnership business makes continuing the partnership impossible.

Question 82

John and Jacob would like to establish a small business. They will be the sole owners of the entity, and will each contribute 50% of the capital. They would like to manage the business jointly, and would like to share in the profits jointly. They are optimistic about their new venture but, just in case, they would like to protect their personal assets from any liability that results from the debts of the business. What do you advise them to do?

Answer 82

Correct Answer: D. Establish a member-managed limited liability company and file articles of organization with the state. A member-managed LLC form provides them with the management power as well as the limited liability that they seek.

Question 83

Corporation has 5 directors. After decades of profitable operations, Corporation begins to suffer heavy losses. Shareholders of Corporation file a derivative suit against the directors, which focuses on the behavior of three directors. Director 1 has an ethical objection to the business of Corporation and has been making decisions with an actual intent to do harm to Corporation. Director 2 could not care less about Corporation and has behaved with a lack of due care in fulfilling his responsibilities, but without any malevolent intent. Director 3 is very busy with another job, and has been deliberately shirking his responsibilities in an intentional dereliction of his duties as a director. Which of Directors 1, 2 and/or 3 has/have failed to act in good faith such that they may be subject to liability in the shareholder derivative suit?

Answer 83

Correct Answer: B. Directors 1 and 3 only. Director 1 has behaved with subjective bad faith, and Director 3's intentional dereliction of duty is a violation of his duty to act in good faith. Director 2, however, has behaved without malevolent intent and his behavior, without more, does not constitute bad faith.

Question 84

Dan owns a dog walking business, which employs a receptionist, Ron. Ron would like to set up his own dog walking business. Ron takes a printout of Dan's client list home with him, and makes a few calls to the dog owners to see if they are happy with the service or might be interested in switching to a new service run by Ron. Several clients have complaints about Dan's service. Encouraged that he can run a better dog walking business, Ron goes to work the next day, quits, and then leaves the office. Ron then calls all of Dan's clients and convinces many of them to hire him instead of Dan to walk their dogs. Has Ron violated his fiduciary duty to Dan?

Answer 84

Correct Answer: C. Yes, because Ron violated his duty not to use confidential information of the principal, Dan, for his own purposes. An agent has a duty not to use confidential information of the principal for the agent's own purposes. Ron's use of Dan's client list violated that duty.

Question 85

On January 1, Leslie, Maria and Carla decide to form a limited partnership to run a florist business with Carla as the general partner and Leslie and Maria as limited partners. Maria is in charge of filing the proper forms with the state. Maria tells the other two that she has filed the forms, but actually she forgets to file anything. The florist business starts operating, with Carla running the store and all three women sharing in the profits it generates. On December 1, the florist business becomes insolvent and Creditor, who is a good faith, arms-length creditor, seeks payment of a debt owed to it by the business. Leslie, Maria and Carla find out at that point that their limited partnership was never formed. Leslie immediately files with the state a certificate of withdrawal from future equity participation in the florist business. Is Leslie liable for the debt to Creditor?

Answer 85

Correct Answer: C. Yes, because Creditor transacted business with the florist business before Leslie withdrew and filed the appropriate certificate. A person erroneously believing herself a limited partner is still liable as a general partner to any third party who transacts business with the enterprise before the person withdraws and files the appropriate certificate.

Question 86

Adam, an agent, has been negotiating with Terry, a third party, on a sales contract. Adam has been specifically authorized by Principal to negotiate the contract. Terry, however, has no idea that Adam is working on behalf of Principal. Terry thinks Adam is the principal on the other side of the contract. When the sales contract is signed, who are parties to the contract?

Answer 86

Correct Answer: C. Principal, Adam and Terry. When an agent acting with actual authority makes a contract on behalf of an undisclosed principal, unless specifically excluded by the contract, the principal is a party to the contract, and the agent and the third party are also parties to the contract.

Question 87

Corporation is in the business of property development. It purchases a piece of property located in a desirable location right next to an urban area, but the property includes a rock formation that prevents building there. Corporation cannot find a blasting company willing to take out the rock formation (all companies approached by Corporation turn down the job as too dangerous). Corporation decides to form Subsidiary, Inc., as a blasting company. Corporation will own 100% of the shares of Subsidiary, Inc. Subsidiary, Inc., is operated from Corporation's offices, and the boards of directors and executive officers of the two entities are identical. Corporation properly forms Subsidiary, Inc., but capitalizes it with $1, and purchases no insurance on its behalf. Implying (though not stating outright) that Corporation is the party to the contracts, the principals of Corporation and Subsidiary, Inc., cause Subsidiary, Inc., to lease heavy equipment, purchase explosives on credit, and hire operators to blow up the rock formation. Extensive damage is done to the heavy equipment and the surrounding neighborhood, and a number of people are hurt. Persons who suffered damage or injury from the blasting, as well as the companies that leased Subsidiary, Inc., the equipment and sold it the explosives on credit, sue Subsidiary, Inc., but Subsidiary, Inc., has no assets to pay a judgment against it. The plaintiffs then petition the court to pierce the corporate veil and hold Corporation liable for the debts of Subsidiary, Inc. Is the court likely to grant that equitable remedy against Corporation?

Answer 87

Correct Answer: D. Yes, because Subsidiary, Inc., was inadequately capitalized, operated as an alter ego, and its principals engaged in misrepresentation. Several key factors that are identified as often present in piercing cases are present here: a closely-held corporation/unity of ownership, deceit of creditors, inadequate capitalization, and active participation by the defendant.

Question 88

B and C are directors of Large Corp. In the last few months, the Large Corp. board has been called upon to make several decisions relating to Large Corp. transactions with other companies with which B and C have substantial relationships, and from which B and C have derived a personal benefit. In addition, it has come to light B is successfully exerting considerable pressure on C in connection with C's board decisions. Shareholder X argues that the decisions of B and C should be reexamined. B and C both disagree. Who is right?

Answer 88

Correct Answer: A. Shareholder X, because both B and C are interested directors, and C is not an independent director. An interested director is one who will receive a personal benefit from the challenged transaction. Because two interested directors participated in approval of those transactions, their approvals should receive additional scrutiny.

Question 89

T, R and H establish a general partnership to run a marine salvage business off the coast of the Florida Keys. They make no written partnership agreement. H has the most money, and contributes $50,000 in cash to the business. T owns a boat, which he claims has a value of $25,000, which he contributes to the partnership. R has no assets, but is an experienced diver and he says he knows where there is some sunken treasure. If they discover treasure, and make a $150,000 profit, how is that allocated between T, R and H?

Answer 89

Correct Answer: C. $50,000 to H, $50,000 to T and $50,000 to R. Absent an agreement to the contrary, each general partner is entitled to an equal share of the partnership profits.

Question 90

Concerned about the parking shortage on campus, the university hires Boom, Inc. to blow up and demolish several buildings so it can construct a new multistory parking garage. The Boom, Inc. employee, however, accidentally blows up and demolishes a privately owned home next to campus. The homeowner would like to sue the university, but the university argues that the homeowner can only sue Boom, Inc., which was functioning as an independent contractor. Is the university likely to be liable for the damage inflicted by the Boom, Inc. employee?

Answer 90

Correct Answer: C. Yes, the university will be directly liable for the tort of its independent contractor because demolishing things using explosives is an inherently dangerous, ultra-hazardous, activity. Liability may be imposed on a principal for the torts of a non-employee/independent contractor under a theory of direct liability in certain circumstances, including inherently dangerous or ultra-hazardous activities.

Question 91

Corporation is properly formed on May 31st and its articles of incorporation authorize 300,000 common shares. On June 1st, Corporation's board of directors approves issuance of 240,000 shares, which are sold to investors that day. On June 2nd, Corporation repurchases 30,000 of the outstanding shares. Which of the following statements is true at the close of business on June 2nd?

Answer 91

Correct Answer: D. Corporation has 210,000 issued and outstanding shares, and 30,000 treasury shares. It correctly identifies the number of shares that are still issued and outstanding on June 2nd (240,000 – 30,000 = 210,000) and correctly identifies the 30,000 shares that Corporation repurchased from investors as treasury shares.

Question 92

A and B decide to form Corporation. A and B will each own 50% of the outstanding stock. Both A and B will work at Corporation as their primary job. Corporation's bylaws require a simple majority shareholder vote for most decisions relating to Corporation, and a unanimous shareholder vote for fundamental changes. Corporation pays no dividends. After several years, A and B disagree about the management of Corporation, and A quits his job at Corporation. What is likely to happen next?

Answer 92

Correct Answer: B. B will continue to operate Corporation, and A will be deprived of any meaningful economic return from his investment. With neither A nor B able to outvote the other, Corporation will continue with B working there. A's investment will be 'stuck' in Corporation.

Question 93

Corporation has 150,000 common shares issued and outstanding. 80,000 shares are represented at the annual shareholder meeting. Two resolutions are subject to a vote. Resolution #1 requires a simple majority to pass and 50,000 shares are voted in favor. Resolution #2 requires an absolute majority to pass, and again 50,000 shares are voted in favor. Do Resolution #1 and Resolution #2 both pass?

Answer 93

Correct Answer: C. Resolution #1 passes but Resolution #2 does not. A simple majority is a majority of the shares represented at the meeting (40,001) and so Resolution #1 passes. An absolute majority is a majority of the shares outstanding (75,001) and so Resolution #2 does not pass.

Question 94

A, B, C and D form a general partnership that buys and sells parcels of land. There is no written partnership agreement, but they conduct their affairs in harmony and their business makes a profit. A, B and C work only at the business. D has a different job but also works part time at the business to keep the books for the partnership. An opportunity to purchase a parcel of land arises. A and B want the partnership to buy it. C does not. The three vote at the office when D is not present and it is 2-1 (A and B in favor, C against). C contacts D and finds out that D is also against purchasing that particular parcel. What happens?

Answer 94

Correct Answer: C. The partnership cannot purchase the parcel. An affirmative vote of a majority of the partners was not obtained. Absent an agreement to the contrary, decisions involving the ordinary business of a partnership can be controlled by a majority vote of the partners.

Question 95

Delinda is elected to the board of directors of Corporation. Corporation's general counsel briefs Delinda on her obligations as director, which he describes as the normal director obligations: to act on behalf of Corporation in good faith, not to work at Corporation as an employee, to attend or participate remotely in board meetings, and not to behave in a manner that will bring disrepute to Corporation. Delinda, properly, objects to which obligation?

Answer 95

Correct Answer: B. Not to work at Corporation as an employee. It is the problem, because normally nothing prohibits a member of the board of directors from also serving as an officer or executive of the company.

Question 96

A, B and C decide to form a corporation that will operate a car wash business. As incorporators, they file articles of incorporation with the secretary of state. The articles they file include the name of the corporation, 'Car Wash City,' the number of shares the corporation is authorized to issue, the names and addresses of A, B and C, and the registered office and agent. The secretary of state rejects the articles as improper. What is the problem?

Answer 96

Correct Answer: A. The name of the corporation must include some indication that the entity is a corporation, such as 'Incorporated,' 'Corporation,' 'Inc.,' or 'Corp.' The name of a corporation must identify the business as a corporation, so that other parties are put on notice of the limited liability nature of the entity.

Question 97

A, A's husband, B and B's husband form a corporation. Each person holds 25% of the shares. Each person sits on the board of directors of the corporation. The bylaws require a vote by a majority of the board to take action. The four work well together for a decade, and the corporation makes money. However, one day A and B have a falling out over the future of the corporation. All votes in board of directors meetings become ties: A and A's husband voting one way while B and B's husband vote the opposite way. These deadlocks persist for almost a year, and injury to the business of the corporation seems inevitable. A then petitions the court to dissolve the corporation. B objects, arguing that corporations are perpetual and that no term for the corporation had been specified in the constitutive documents. Who will prevail?

Answer 97

Correct Answer: A. A, because judicial dissolution is the proper remedy for a shareholder in a close corporation when the directors are deadlocked in the management of the corporation and injury to the corporation is threatened. It states one of the reasons for judicial dissolution of a closely held corporation (director deadlock with threatened injury to the corporation).

Question 98

Cindy is a director and an officer of Development, Inc., a large, national property development company. Development, Inc., is going to be merged into Wide, Inc. The Development, Inc., board of directors reviews the confidential merger agreement sent to them by Wide, Inc. One of the terms of merger agreement is that Cindy will be an officer in the surviving company, Wide, Inc. Maintaining her position as a corporate officer in the surviving company is very important to Cindy. The Development, Inc., board votes unanimously to forward the basic price facts relating to the merger to the Development, Inc., shareholders with their official board recommendation that the shareholders approve the merger. After the Development, Inc. shareholders approve the merger, a disgruntled Development, Inc., shareholder challenges, among other things, Cindy's board vote in favor of recommending shareholder approval. Who will prevail?

Answer 98

Correct Answer: C. The plaintiff shareholder, because Cindy is an interested director. Cindy is an interested director. She has a personal interest in the outcome of the vote.

Question 99

J owns a restaurant, J's Place, and secretly sells the restaurant to P. Everything in the restaurant remains unchanged, including the name on the door (J's Place). No one is aware P now owns the business. P instructs J to purchase all of his supplies from P's affiliate. J, however, continues to purchase soft drinks from a different company, Drinks Company, which J had been buying from before the sale. After a few months, J disappears and it becomes public knowledge that P actually owns the restaurant. Drinks Company tries to collect the money it is owed, but P argues that J had no authority to buy drinks from Drinks Company. Did J have authority to buy drinks from Drinks Company after the sale of the restaurant to P?

Answer 99

Correct Answer: B. Yes, J had inherent authority to buy drinks from Drinks Company. Inherent agency power may provide authority for acts done on the principal's account which accompany or are incidental to transactions that the agent is authorized to conduct if, although they are forbidden by the principal, the third party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized.

Question 100

Keisha, Jane and Mary formed an LLC. Their operating agreement contains only basic, customary provisions regarding the transfer of membership interests. Without informing Keisha and Jane, Mary assigns her membership interest in the LLC to Marcel. Marcel attends the next regular meeting of the members, and votes the assigned membership interests. Keisha and Jane object. Who wins?

Answer 100

Correct Answer: B. Keisha and Jane, because Marcel's rights as assignee are limited to the receipt of distributions. Although a member may assign her interest in the LLC, the assignment will only transfer her right to receive distributions. An assignee can only become a member, and exercise governance rights, after compliance with the requirements of the operating agreement, which is likely to require the consent of all members.

Question 101

Corporation sets its annual shareholder meeting for March 1, with a record date of February 1. It sends out notice to all shareholders of the meeting. Mort is a longtime shareholder, but sells all of his shares to Stella on February 15. Nevertheless, Mort sends in his proxy to have his shares voted in favor of a controversial resolution to be considered at the meeting. Stella attends the meeting in person, and votes against the controversial resolution. What is the outcome?

Answer 101

Correct Answer: B. Mort's votes are counted, Stella's votes are not counted. Explanation: All shareholders on the record date (according to the corporation or its custodian's records) are entitled to receive notice of the shareholder meeting and to vote their shares. In addition, shares may be voted either in person or by proxy.

Question 102

A, B and C would like to form a limited partnership. They file paperwork with the state identifying A as the general partner, and A, B and C as limited partners. A manages the business solely. All three share in the profits. Eventually, the partnership becomes insolvent. In the face of multiple creditors, whose claims far exceed the assets of the business, A, B and C all disclaim any liability for the outstanding debts, citing their status as limited partners. Is this correct?

Answer 102

Correct Answer: B. No, A alone is liable for the excess amounts due because A is the general partner. Explanation: A is the general partner in the limited partnership. That means that, in addition to whatever A is entitled to/responsible for as a limited partner, A also functions as a general partner. General partnership brings with it control, but also personal liability for the debts of the partnership in excess of partnership assets.

Question 103

Shen and Jack would like to purchase shares in Corporation. Shen has cash available to purchase the shares, but Jack does not. However, Jack does own a patent that will contribute to Corporation's business. Jack offers the patent right in exchange for shares. Shen objects, claiming that the patent is not permissible consideration for the shares, only cash (like he is offering) is permissible. Who is correct?

Answer 103

Correct Answer: D. Jack, because tangible or intangible property may be valid consideration for the shares. Explanation: It explains that either tangible or intangible (e.g., patent) property may serve as consideration for shares, in addition to cash or labor or services actually performed for the corporation.

Question 104

Shareholder X challenges a transaction between Corporation and one of the directors, and shows that the director has a conflict of interest. The director responds by showing that the transaction was inherently fair. Who prevails?

Answer 104

Correct Answer: C. The director, because a showing of inherent fairness will cleanse the conflicted transaction. Explanation: Court-determined fairness is a traditional way to overcome the potential duty of loyalty violation of a director self-dealing transaction.

Question 105

Car Dealership is corporation 100% owned by C, who also serves as president and director of Car Dealership. H works at the dealership as a salesman and K works at the dealership as a manager. Salesman H sells a car to Customer, and then, unknown to Customer, Salesman H forges Customer's signature on a rebate application to the car manufacturer. Manager K signs the rebate application as the sales manager of Car Dealership. The car manufacturer sends the rebate to Car Dealership, and Car Dealership deposits the funds into its own account and keeps them. Customer finds out and complains to the police. Car Dealership is charged with theft and forgery. Is Car Dealership likely to be found guilty of the charges?

Answer 105

Correct Answer: C. Yes, because Manager K ratified Salesman H's criminal acts. Explanation: It correctly states a part of the rule for corporate criminal liability. The rule requires that, in order for a corporation to be guilty of a specific intent crime, it must be proven, inter alia, that the criminal acts were authorized, tolerated, or ratified by corporate management.