Second Half of Bus Org Quiz Questions

Sam has owned stock in Better Boats Inc ("BB") for ten years. One year ago, the 7 member board of directors for BB voted unanimously in favor of a contract calling for BB to pay $100,000 to buy 100 refurbished outboard motors from company owned by the director who serves as chairman of the board. At that time, the market value of the motors appears to have been approximately $50,000. Three months later, Sam died unexpectedly after a short illness. His daughter, as Sam's sole heir, took ownership of the shares on two months later. One month after that, without making demand on the board, Sam's daughter brings a claim against all of the directors stating that the value of her shares has been reduced because the directors' signed the contract for the motors that wasted corporate assets. Based on these facts alone, which of the following statements is most accurate? A. Absent additional facts, Sam's daughter is unlikely to be able to prove that demand would have been futile since there are no specific facts showing why the business judgment rule would not apply to the directors as a group. B. Demand will likely be excused because the challenged conduct involved a conflict of interest. C. Demand will likely be excused because it is not rational to spend $100,000 on products with a fair market value of $50,000. D. Under Arkansas law, demand would be futile (and therefore excused) because the complaint names all of the directors.

A. Absent additional facts, Sam's daughter is unlikely to be able to prove that demand would have been futile since there are no specific facts showing why the business judgment rule would not apply to the directors as a group. The general rule is that the complaint must allege specific facts showing why demand was not made, and here the only documented problem is that the chairman of the board had a conflict. While this is a conflict of interest, it is not clear that all the directors had a conflict.

Xavier and Yolanda are the sole shareholders in an Arkansas corporation. To maximize their influence on the election of directors they agree to vote their shares to see that Xavier, Yolanda, and Zebidiah are all elected to the board of directors, and that all three of them will be retained as corporate officers so long as they serve faithfully and efficiently. The agreement also specifies that each of the three of them will be paid a salary of at least $50,000 per year for their work for the company. Which of the following statements is most accurate? A. Based on these facts, it is unlikely that this arrangement would be found to sterilize the board of directors regardless of whether they create a voting trust or voting agreement. B. On these facts, regardless of whether this is a voting agreement or a voting trust, it would impermissibly sterilize the board because it mandates who will be the directors. C. Based on these facts, this agreement is likely to sterilize the board because it mandates employment for and a minimum salary for someone who is not even a shareholder. D. Based on these facts, because there are only two shareholders in the corporation, it does not matter if this would sterilize the board.

A. Based on these facts, it is unlikely that this arrangement would be found to sterilize the board of directors regardless of whether they create a voting trust or voting agreement. This is the most accurate option. This is unlikely to sterilize the board (which would be a problem for either a voting agreement or voting trust) because directors can still determine if the three individuals are acting faithfully and efficiently. They can also pay higher salaries if they want, meaning that their authority is not completely limited. Note that mandating who the shareholders vote for as director is perfectly permissible, and the fact that one of the three employees is not a shareholder is irrelevant.

Which of the following would not be an appropriate reason for a committee to recommend dismissal of a derivative suit? A. Continuation of the lawsuit would threaten the ability of the directors to retain their position in the corporation. B. There is no reasonable likelihood that the named defendants would be able to pay enough to offset the costs of the litigation. C. Maintaining the derivative action would be too distracting, preventing those associated with the corporation from focusing on the necessary business of the company. D. In the opinion of the committee, the chances of success on the merits do not justify the bad publicity that the litigation would cause. E. All of the other statements are valid reasons to justify a recommendation to dismiss, making this the most accurate response.

A. Continuation of the lawsuit would threaten the ability of the directors to retain their position in the corporation. It is true that a recommendation to dismiss could be based on a determination that the defendants could not pay enough to cover the litigation expense, or the costs to the company's productivity could be too high, or bad publicity could outweigh the benefits of litigation. However, it would NOT be proper for the committee to act simply in order to keep the directors in power. Thus, that was the correct response.

Dave is the only original founder of Dave Co. He owns only 35% of the company stock, but most of the other shareholders are widely dispersed and generally send in proxies or don't bother to vote at all. No other shareholder owns more than 5% of the company stock. Dave has always been able name himself, his wife, and his three adult children to the seven-member board. His family members always do what Dave suggests with regard to the company. Dave agrees to sell his shares to Billy, and as part of the agreement promises to see that Billy has the right to name five of the seven directors immediately, without waiting for the next annual meeting which is more than 8 months away. Which of the following statements is most accurate? A. Dave can probably do this without violating the law, but usually this would require the directors that he controls to resign one at a time, with the remaining directors and any newly appointed directors under Dave's control being expected to vote for Billy's nominees. B. Dave's agreement to sell positions on the board of directors is almost certainly void as against public policy because he is not also selling a majority of the shares. C. Dave can probably do this without violating the law, but Billy has to wait until the next annual shareholder meeting to elect his directors. D. Dave can probably do this without violating the law by having all of his directors resign. As the largest shareholder, Billy would automatically have the ability to name the replacement directors.

A. Dave can probably do this without violating the law, but usually this would require the directors that he controls to resign one at a time, with the remaining directors and any newly appointed directors under Dave's control being expected to vote for Billy's nominees. When there is no other shareholder group that is large enough to contest a major shareholder (such as someone with 35% when no one else owns more than 5%) it is not against public policy to sell directors positions. Normally, directors select their replacements when there is a vacancy in the middle of a term, which means that the best answer is that this would require the directors that Dave controls to resign one at a time, with the remaining directors and any newly appointed directors being required to vote for Billy's nominee. They do not have to wait for the next shareholder meeting, but it is not the shareholders who would be selecting the temporary replacements.

Deb, one of 5 directors, brings a harassment claim against the other directors of Big Co. and the company as her employer. The other directors vote to remove her from the board (which they have the power to do under the corporate bylaws). Deb eventually settles her lawsuit with the directors and the company for a payment of $500,000. She then files a request for indemnification for her attorneys' fees in the amount of $50,000. If the company's articles and bylaws do not mention indemnification and the directors do not want to indemnify Deb, which of the following statements is most accurate? A. Deb will not be entitled to indemnification because she was the plaintiff rather than defending against some other party's complaint. B. Deb will not be entitled to indemnification because she is no longer a director or employee. C. Deb will not be entitled to indemnification because she settled the action rather than being successful on the merits. D. Deb will be entitled to indemnification because she was successful on the merits.

A. Deb will not be entitled to indemnification because she was the plaintiff rather than defending against some other party's complaint. At first it might seem that indemnification should be mandatory, but if you look at the statute, it makes indemnification mandatory only for someone who is successful on the merits or otherwise in defense of an action. That rule does not apply if the person requesting reimbursement was the plaintiff. See ACA 4-27-850(c). However, being a former director is irrelevant and settlement does not prevent indemnification from being appropriate.

Denise is one of seven directors of Carport Co., an Arkansas corporation. She attends a regular monthly meeting and is surprised to see on the agenda a possible contract with Carol, the CEO and largest shareholder and also a member of the board of directors. Carol explains the contract terms, admits to the conflict, and promptly calls for a vote. Denise is the last to vote, and since all of the other directors have voted in favor of the contract, she abstains and says nothing although she believes the contract to be a terrible idea that the board would never have agreed to if Carol had not bulldozed it through. Which of the following statements is most accurate? A. Denise's abstention is unlikely to be protected by the business judgment rule because she did not exercise her business judgment. B. Denise is not likely to be liable under the business judgment rule because she did not vote in favor of the contract. C. Denise is not likely to be liable under the business judgment rule because she was only one of seven votes. D. Denise's abstention is unlikely to be protected by the business judgment rule because Carol had a clear conflict of interest in the transaction.

A. Denise's abstention is unlikely to be protected by the business judgment rule because she did not exercise her business judgment. The correct answer is that business judgment rule is likely to be inapplicable because the decision not to participate was not a business judgment; it was not based on Denise's judgment about the contract at all. Just as in Pritchard v. Baird, where the mother failed to investigate the financials provided to her by her dishonest sons, there was no business judgment here, so liability would be possible. The other answers are all incorrect. The mother in Pritchard v Baird would have been outvoted by her two sons, and it was her failure to act that caused the liability, just as in this fact pattern. Finally, in order to determine the applicability of the business judgment rule, we care about whether Denise had a conflict, not whether some other director did.

States gradually adopted statutes that allowed incorporation through a filing. Which of the following statements about early incorporation statutes is most accurate? A. Even under early incorporation statutes, corporations did not have many of the characteristics of modern corporations such as perpetual duration and limited liability for owners or managers. B. While early incorporation statutes did not always offer perpetual duration for corporations, at least they offered owners and managers protection against personal liability. C. Although early incorporation statutes did not generally allow for perpetual duration or limited liability for managers, they did allow for limited liability for owners. D. Early incorporation statutes completely replaced the possibility of incorporation by special charter.

A. Even under early incorporation statutes, corporations did not have many of the characteristics of modern corporations such as perpetual duration and limited liability for owners or managers. Even under early incorporation statutes, corporations did not have many of the characteristics of modern corporations such as perpetual duration or limited liability for owners or managers. Moreover, adoption of early incorporation statutes did not completely replace special legislative charters, and in fact the dual-incorporation era persisted for decades.

When Kaleisha buys some shares in an Arkansas corporation, she is required to sign a voting agreement that calls for her to elect a specified slate of directors for the next 10 years. She also is required to execute an irrevocable proxy that references the existence of the shareholder agreement and conveys the right to vote on the election of directors to a designated arbitrator. The proxy is sent to the corporation along with a copy of the agreement. Assuming there are no other terms, which of the following statements is most accurate? A. If this is a voting agreement, it is likely to be valid, but if the court characterizes it as a voting trust, it is likely to be unenforceable. B. Regardless of whether this is a voting agreement or voting trust, it is likely to be valid. C. If this is a voting trust, it is likely to be valid, but if the court characterizes it as a voting agreement it could easily be unenforceable. D. Regardless of whether this is a voting agreement or voting trust, it is likely to be unenforceable.

A. If this is a voting agreement, it is likely to be valid, but if the court characterizes it as a voting trust, it is likely to be unenforceable. The problem if this is a voting trust is that ownership of the shares has not been transferred on the books of the corporation to the trustee or person acting in that capacity. that does not apply if this is a voting agreement. There is no other reason to suspect this arrangement would be unenforceable, but because there is a transfer of the right to vote, a court could characterize it as a voting trust, making it unenforceable.

Suppose your client wants to file articles that include this description of the authorized stock: "The corporation shall be authorized to issue the following shares: (1) 10,000 shares of no par common, called Common Shares; (2) 5,000 shares of preferred shares to be called Class A Preferred, non participating with a cumulative preferred dividend of $5 per year; and (3) up to 10,000 shares having one or more designations, in one or more classes, having the rights, power, privileges as determined by the corporation's board of directors." Which of the following statements is most accurate? A. The problem with this provision is that the Class A preferred has no par value listed. B. The problem with this provision is that the third category of shares does not specify the designation, rights, privileges or powers, or par value. C. The problem with this provision is that there is no class of shares that has full voting rights. D. All of the other responses identify actual problems with the proposed provision, making this the most accurate response.

A. The problem with this provision is that the Class A preferred has no par value listed. It is fine to have a class of shares that the directors can describe prior to issuance (which is what the class of blank check shares in the third part of the provision would be). We went over the statute authorizing blank check shares in class, along with an explanation to the effect that allowing such a class to exist is permissible if the number of shares is set out. In addition, I specifically mentioned that common shares do have both voting and participation rights so that is not an issue here. Thus you should have been able to eliminate the final response as being incorrect (not all answers pointed out problems), and you should have known that there was no mention of par value for the common shares.

Sandy, Beach, Waves, and Sunny are shareholders in Vacay Inc. In order to protect their ability to work well together, they agree that upon the attempted sale, transfer, or other conveyance of any shares to anyone other than an existing shareholder, the other shareholders have the right to buy those shares at book value, in proportion to the other shareholders' pre-existing ownership interest in the corporation. This restriction is in the company bylaws, and the shareholders and their spouses are all aware of this arrangement at the time the shares are first issued. In her divorce proceedings, the court orders Sandy to convey one half of her interest in Vacay Inc to her ex-husband. Which of the following statements is most accurate? A. The restriction on transfer is probably enforceable, even though it was not noted on the shares themselves, because Sandy's spouse knew about it, and a share transfer restriction that is reasonable is enforceable. B. It is per-se unreasonable to restrict ownership in a corporation to fewer than five people, so this restriction would not be binding on the court or on Sandy's ex-husband. C. Because this restriction was not noted on the share certificate itself, it is not enforceable against transferees such as Sandy's ex-husband. D. Because this restriction did not specifically mention transfers by operation of law it cannot apply to a transfer ordered by a court.

A. The restriction on transfer is probably enforceable, even though it was not noted on the shares themselves, because Sandy's spouse knew about it, and a share transfer restriction that is reasonable is enforceable. So long as a share transfer restriction is known by a transferee (and this was known by Sandy's ex-husband) it will be binding so long as it is reasonable. There is nothing unreasonable about saying shareholders want to preserve the existing friendly working dynamic. In addition, even though transfers by operation of law are not specifically mentioned, there is no rule requiring that be specifically mentioned in order for an agreement to be enforced, particularly since book value is a non-unreasonable measure of current valuation. There is also nothing wrong with having a small number of shareholders.

Crafting Company is an Arkansas corporation. The shareholders want to provide that directors can be removed at any time by a majority vote of the shareholders, with or without cause, and they propose to the directors that the bylaws be amended to provide this alternative. The bylaws say that they can be amended by the shareholders or the directors. In order to prevent the shareholders from having the right to remove them without cause, the directors quickly amend the bylaws to provide that the bylaws cannot be amended without approval of the directors, thereby hoping to prevent the shareholders from amending the bylaws. Which of the following statements is most accurate? A. This action by the directors in amending the bylaws is unlikely to hold up if challenged in court because it infringes on shareholders' rights to elect and remove directors, which is one of their few statutory powers, with the reason being that the directors want to entrench themselves in their positions. B. The directors have the right to amend the bylaws, so they do not have to listen to the shareholders. C. Shareholders have no ability to remove directors without cause unless that is included in the corporation's articles and the corporation has fifty or fewer shareholders. D. Shareholders cannot be given the right to remove directors without cause.

A. This action by the directors in amending the bylaws is unlikely to hold up if challenged in court because it infringes on shareholders' rights to elect and remove directors, which is one of their few statutory powers, with the reason being that the directors want to entrench themselves in their positions. Directors have a great deal of discretion but they cannot entrench themselves by interfering with shareholders' rights (as limited as those are). Directors DO have to listen to shareholders about election and removal of directors; and shareholders can remove directors without cause if that right is given in the articles OR bylaws. These rights would not change for corporations with more than 50 shareholders.

Suzy Shareholder owns all of the outstanding stock in a corporation that owns and operates a public swimming pool. She is the sole director, and as director has caused the corporation to maintain minimum insurance and only hire the cheapest of independent contractors to act as lifeguards. The property itself is heavily mortgaged, with the proceeds of the loan being drained off to pay her salary. She also regularly distributes all income in the form of dividends, so the pool's bank account is always near $0. Last year, the corporation had five serious accidents involving failure to supervise children, but Suzy has not changed any corporate policies. Last month, an unsupervised child was seriously hurt when the lifeguard negligently failed to clear the pool when he went on break. Which of the following statements is most accurate? A. Under the rules announced in Walkovsky v Carlton (Ch.7 p.42), it would probably take more specific factual allegations of dominion and control, and failure to respect the corporation's separate existence, in order to pierce the veil to hold Suzy personally liable. B. Under the rules announced in Walkovsky v Carlton Ch.7 p.42), on these facts Suzy will almost certainly be personally liable under the doctrine of piercing the veil. C. Piercing the veil is not appropriate here because there is no fraud of other illegality. D. Suzy would be liable under the doctrine of piercing the veil because there were prior problems involving children, so she should have known to change the corporation's policies.

A. Under the rules announced in Walkovsky v Carlton (Ch.7 p.42), it would probably take more specific factual allegations of dominion and control, and failure to respect the corporation's separate existence, in order to pierce the veil to hold Suzy personally liable. Under Walkovsky (Ch.7 p.42), it is not enough that the company knows accidents are likely, has minimum insurance, and keeps bank accounts as low as possible. There needs to be evidence (or factual allegations showing) that Suzy failed to respect corporation's existence, either by disregarding formalities, comingling assets, or the like. Note that the second part of the test does not require fraud or illegality and can be satisfied by inequitable conduct (such as failng to change policies after prior accidents).

Which of the following statements is most accurate? A. With regard to the business judgment rule, while the ALI principles of corporate governance provisions, the draft ALI restatement of corporate governance language, and the approach to the business judgment rule adopted by the Delaware courts are all worded differently, for the most part all of these tests look at the same factors. B. With regard to the business judgment rule, the ALI principles of corporate governance provisions, the draft ALI restatement of corporate governance language, and the approach to the business judgment rule adopted by the Delaware courts are all very different, requiring a consideration of different elements. C. With regard to the business judgment rule, the ALI principles of corporate governance provisions, the draft ALI restatement of corporate governance language, and the approach to the business judgment rule adopted by the Delaware courts all focus on different aspects of the rule, so there is no overlap or conflict in the provisions. D. With regard to the business judgment rule, the ALI principles of corporate governance provisions, the draft ALI restatement of corporate governance language, and the approach to the business judgment rule adopted by the Delaware courts are all identical.

A. With regard to the business judgment rule, while the ALI principles of corporate governance provisions, the draft ALI restatement of corporate governance language, and the approach to the business judgment rule adopted by the Delaware courts are all worded differently, for the most part all of these tests look at the same factors. The wording of these three approaches is different but each look to business judgments of directors or officers, and all require the directors to act in good faith, without a conflict of interest, and while being reasonably informed. The provisions are not identical, but they are not radically different. There is significant overlap in what they cover.

Bigg Co was formed 10 years ago with articles that call for two classes of stock: Common shares and Class A preferred. The class A preferred is described limited, non-participating preferred, having $5 per share annual cumulative dividend preference. Eva was a founding shareholder who acquired 1000 shares of Class A preferred 10 years ago. The other founding shareholders bought a total of 1000 shares of common stock (also 10 years ago). There is no other stock outstanding. For the first time ever, the corporation decides to distribute $100,000 as dividends after not paying anything for the first 9 years. Which of the following statements is accurate? A. Eva is entitled only to $5,000. She gets $5 per share for 1000 shares for the Class A shares ($5,000), but because the Class A is non-participating preferred she cannot share in the remaining $95,000. B. Eva will get $50,000. The $5 per share preferred dividend cumulates for the 10 years she has not received any payment. However, because the class A is non-participating preferred, it will not share in the amount left over after payment of the preferred dividend. C. Eva is entitled to $52,500. She gets $5 per share for 1000 shares of Class A that she owns ($5,000), and since she owns 1000 of the total 2000 outstanding shares, she will also get 1/2 of the remaining $95,000 that the directors intend to distribute ($47,500). D. Eva is entitled to $75,000. She gets $5 per share for 1000 shares for the 10 years since she bought her shares ($50,000), and since she owns 1000 of the total 2000 outstanding shares, she will also get 1/2 of the remaining $50,000 that the directors intend to distribute. Non-participating just means she doesn't get to participate in votes.

B. Eva will get $50,000. The $5 per share preferred dividend cumulates for the 10 years she has not received any payment. However, because the class A is non-participating preferred, it will not share in the amount left over after payment of the preferred dividend. She gets cumulative dividends for the entire 10 years, so $5/share times 10 years, for all 1000 shares, meaning she gets $50.000. Because these shares are non-participating (which means economic participation), she does not get anything else.

Strange, Wong, Mordo and Thanos form an Arkansas corporation. Each agree to buy 25 shares, to work full time for the company, and to sit on its five member board of directors, along with Xavier, the corporation's lawyer, who is given 1 share of corporate stock. They do not reduce any such agreement to writing. Thanos passes away unexpectedly, even more unexpectedly leaving his 25 shares to Strange. Strange makes an offer to buy Xavier's share for at a considerable premium so that he will have majority control over the corporation. Which of the following statements is most accurate? A. Because this is a close corporation, Strange cannot offer to buy Xavier's stock at a premium without sharing that premium among all other shareholders. B. Even though this is a close corporation, the share transfer to Strange and the proposed purchase of Xavier's stock would be perfectly permissible. C. Because this is a close corporation, buying shares in order to obtain control would violate his duty as a control shareholder not to thwart the expectations of other shareholders that each would have equal participation in the company. D. Because this is a close corporation, Thanos cannot leave his shares to only one other shareholder and instead must transfer ownership in a manner designed to preserve equal ownership among the others (excluding Xavier).

B. Even though this is a close corporation, the share transfer to Strange and the proposed purchase of Xavier's stock would be perfectly permissible. Not only can shareholders generally sell their shares for what they can get, absent an enforceable agreement to the contrary, this means that other shareholders can legally buy or acquire those shares. If the shareholders want to ensure continued equal ownership, they need to build in share transfer restrictions and preemptive rights, neither of which are present here. Thus, there is nothing wrong with Thanos leaving his shares to Strange, or with Strange offering to buy Xavier's shares (and only his shares) at a premium

Which of the following statements about administrative dissolution is accurate? A. Administrative dissolution can be ordered against an insolvent company. B. If the corporation fixes the problem within 2 years, administrative dissolution can be retroactively remedied as if it never occurred. C. Administrative dissolution can be corrected at any time by paying any back taxes, resolving the problem identified by the Secretary of State, and filing an appropriate document. D. Administrative dissolution virtually never happens in Arkansas.

B. If the corporation fixes the problem within 2 years, administrative dissolution can be retroactively remedied as if it never occurred. See ACA 4-27-1422.

Suppose on September 1, Jabar and Keisha file articles for JB Co. with the Secretary of State. They both sign as incorporators. Which of the following statements is most accurate? A. If the directors are not named in the articles, Jabar and Keisha will have to have an organizational meeting of the organizers and name the initial directors shareholders who will have to elect the initial directors. B. If the directors are not named in the articles, Jabar and Keisha will have to have an organizational meeting of the organizers and name the initial directors. C. If the directors are not named in the articles, the corporation will have to operate without directors until it reaches at least 50 shareholders. D. If the directors are not named in the articles, Jabar and Keisha will have to have amend the document to name the directors.

B. If the directors are not named in the articles, Jabar and Keisha will have to have an organizational meeting of the organizers and name the initial directors. If the directors are not named in the articles, the organizers will have to meet and select them. The corporation cannot have shareholders until the directors authorize issuance of shares. There is no need to amend the articles to accomplish this, and a failure to name directors in the articles does not mean the corporation will not have them.

Keisha, one of 7 directors and a corporate executive, brings a discrimination claim against the other directors of White Co. and the company as her employer. The other directors vote to remove her from the board (which they have the power to do under the corporate bylaws) and to fire her as an employee. Keisha eventually settles her lawsuit with the directors and the company for a payment of $500,000. She then files a request for indemnification for her attorneys' fees in the amount of $50,000. If the company's articles and bylaws both say "This corporation shall indemnify its current and former directors, officers, agents and employees to the maximum extent allowed by law," which of the following statements is most accurate? A. Keisha is not entitled to indemnification on these facts because she was a plaintiff not a defendant. B. Keisha is entitled to indemnification under the articles and bylaws, because she was not acting in bad faith so there is no public policy against allowing her to be indemnified for expenses when she is the plaintiff in an action that arose because she was a director and employee. C. There was no need to have a provision in the corporation's articles or bylaws for this case, since she would already have been entitled to mandatory indemnification because she was successful (although not on the merits). D. Keisha is not entitled to indemnification unless the court orders it.

B. Keisha is entitled to indemnification under the articles and bylaws, because she was not acting in bad faith so there is no public policy against allowing her to be indemnified for expenses when she is the plaintiff in an action that arose because she was a director and employee. Statutory indemnification is not exclusive, and the only public policy limitation on indemnification is that someone found liable to the company or anyone acting in bad faith can only be indemnified if the court orders it. See Waltuch v Conticommodity and ACA 4-27-850(f). However, because she was a plaintiff, the articles or bylaws do have to provide for indemnification. There is nothing that would require a court order on these facts.

Which of the following is NOT a requirement for the business judgement rule to apply so that a director is insulated from liability? A. The director must not have had a conflict of interest in making the decision or taking the action that led to the losses for which liability might be imposed. B. The director must have had a reasonable belief that he was acting in or not opposed to the interests of the corporation in making the decision or taking the action that led to the losses for which liability might be imposed. C. The director must have been reasonably informed prior to taking the action or making the decision that led to the losses for which liability might be imposed. D. Any loss must have been the result of a business judgment made by or agreed to by the director to be protected by the business judgment rule. E. All of the preceding statements are correct, making this the most accurate response.

B. The director must have had a reasonable belief that he was acting in or not opposed to the interests of the corporation in making the decision or taking the action that led to the losses for which liability might be imposed. The business judgement rule does NOT require that the director had a "reasonable belief" that any action or decision was in or not opposed to the corporation's best interests. All the other answers ARE requirements in order to apply the business judgment rule to protect a director from liability (i.e., the requirement of a business judgment, being reasonably informed, and absence of a conflict of interest).

A client asks if it would be a good policy to always make demand on the board of Delaware corporations because it seems so difficult to know when it will be excused. What is the best response to this suggestion? A. No, you should not always make demand because that means the directors can recommend any action be dismissed. B. Unfortunately, there are potential negative consequences for making demand when you don't have to. If the directors decline to pursue the action, you will have been deemed to waive any argument that the directors are incapable of exercising good faith, independent informed business judgment in the matter. C. Yes, unless there is a risk that the statute of limitations will run or evidence that the directors will destroy the relevant evidence, demand should always be made. D. Yes, you should always make demand because of the universal demand rule.

B. Unfortunately, there are potential negative consequences for making demand when you don't have to. If the directors decline to pursue the action, you will have been deemed to waive any argument that the directors are incapable of exercising good faith, independent informed business judgment in the matter. This is the correct response under Delaware law. As we read in Grimes v Donald, there are potential negative consequences for making demand when you don't have to. If the directors decline to pursue the action, you will have been deemed to waive any argument that the directors are incapable of exercising good faith, independent informed business judgment in the matter. Delaware does not have universal demand, and it is not a good policy to make it unless you believe it is genuinely futile under the applicable test.

Prescot is desperate to sign a lease for the Arkansas corporation he is getting ready to form. He signs a lease with a Fayetteville, Arkansas landlord signing it "Prescot, on behalf of P corp, a Corporation in the process of being formed." Which of the following statements is most accurate? A. This language is not enough, but it would be sufficient to release him from liability if he signed as "Prescott, President of a corporation to be formed." B. We do not know if signing the lease in this way is sufficient to protect Prescot from personal liability since there appears to be a split in authority, and Arkansas has not adopted either position. C. Notwithstanding the information in the signature, Prescot will definitely be liable under Arkansas law since the landlord did not specifically release him from liability. D. Because of the information in the signature, Prescot will definitely not be liable under Arkansas law since the landlord will have specifically acknowledged that he is accepting the corporation as a party even though it is not yet formed.

B. We do not know if signing the lease in this way is sufficient to protect Prescot from personal liability since there appears to be a split in authority, and Arkansas has not adopted either position. There really is not much difference between "a corporation in formation" and "a corporation to be formed." The problem is that we do not know if the Arkansas courts will accept this language as being sufficient, in and of itself, to release Prescott from personal liability as a corporate promoter.

Which of the following statements about amended restated and amended and restated articles is most accurate? A. "Amended," "restated," and "amended and restated articles" are exactly the same thing B. There is no difference between "amended" and "restated" articles, but "amended and restated" articles is a term of art that means something else. C. Amended, "Restated," and "Amended and Restated" Articles all mean something different. D. None of the preceding statements is correct making this the most accurate.

C. Amended, "Restated," and "Amended and Restated" Articles all mean something different. Amended articles just include the provision that is amended. Restated articles include all the current articles as previously amended but without any new amendment. "Amended and Restated," articles have a new amendment but also restate all the other provisions so there is asingle document that shows the current, complete articles as amended. The three things are all somewhat different.

Apple, Berry, and Olive are equal shareholders in Fresh Fruit Co.They each agreed orally to contribute $1000 for a 1/3 ownership interest in the business. They futher agreed to vote for each other as directors, and that each of them will work full time for the company and will earn equal salaries so long as each stays on as a full-time employee. In August, Olive proposes that the company also sell preserved fruits, and she winds up in a heated argument with Apple and Berry. Apple and Berry get so annoyed they call a special directors' meeting, and on August 5 they vote to fire Olive. At the annual shareholder meeting on August 15, they refuse to re-elect her as a director. Since then, Olive has been excluded from all decisions, has not been able to work for the company, and has received no salary. Which of the following statements is most accurate? A. Unless they reduced their shareholder agreement to writing, it is not enforceable and so Apple and Berry would not be liable for violating any duties. B. Unless Apple and Berry also tried to pressure Olive into selling out for an unfairly low price, there would be no freeze out and therefore no breach of their duty as control shareholders. C. Because Apple and Berry have thwarted Olive's reasonable expectations of continued employment, a salary, and a place on the board, in most states they would likely have violated their duties as control shareholders in a close corporation. D. Apple and Berry are entitled to fire Olive and refuse to elect her as director because they disagree with her, and therefore they have a business purpose for their actions.

C. Because Apple and Berry have thwarted Olive's reasonable expectations of continued employment, a salary, and a place on the board, in most states they would likely have violated their duties as control shareholders in a close corporation. This is the most accurate answer. Merely disagreeing with someone is not a reason to thwart their reasonable expectations. In addition, there is no requirement that the majority must also be attempting a freeze out of the minority in most states. This is not a claim based on the agreement, but based on control shareholders' fiduciary obligations, which do appear to be implicated here.

Daniel is a former director of Data Inc. He asks the corporation to indemnify him for legal expenses incurred when he was sued for voting in favor of acquiring a small social media company that subsequently turned out to have engaged in illegal cyber attacks on various American corporations. That action was settled for a payment of $5 million, the full amount of Data Inc.'s director and officer insurance, with no additional payment from Daniel. Data Inc's new directors do not want to indemnify any of the former directors, and there is nothing in the company's articles or bylaws that mention indemnification. Which of the following statements is most accurate? A. Because the action likely to have been derivative, Daniel cannot be indemnified unless there is a court order requiring such payment. B. Daniel does not have to be indemnified because the company's articles and bylaws do not require indemnification and the current directors do not want to vote for it. C. Because Daniel was not required to contribute to the settlement, he will be deemed to have been successful (albeit not on the merits), and thus indemnification is mandatory under the statute even if the articles and bylaws are silent. D. Daniel does not have to be indemnified because he is no longer a director of the company.

C. Because Daniel was not required to contribute to the settlement, he will be deemed to have been successful (albeit not on the merits), and thus indemnification is mandatory under the statute even if the articles and bylaws are silent. a settlement that does not include any finding of guilt or payment is deemed success in the action, and under the statutes (including ACA 4-27-850(c)) indemnification under such circumstances is mandatory. The articles and bylaws can be silent and indemnification is still required, and former directors are included. Note also that mandatory indemnification applies to both direct and derivative actions.

Calvin is a majority shareholder in Prized Possessions Inc.(PP), an Arkansas corporation which conducts high-end estate sales on consignment. PP has sold items ranging from antique jewelry to designer clothes and furnishings to luxury automobiles. Calvin owns 51% of the outstanding shares of PP. The company is valued at $2,000,000 including the property out of which it operates and goodwill associated with the business. Slim offers Calvin $2,000,000 for his shares, with $100,000 cash down and the rest in a promissory note bearing 8% interest secured by the accounts receivable of the company. Calvin agrees without doing any additional investigation. Slim robs the company of about $1.5 million in portable inventory less than a month after assuming control of the business, and then disappears. Which of the following statements is most accurate? A. Calvin is unlikely to be liable for selling his shares to Slim because Calvin did not know that Slim was going to loot the company. B. Calvin is unlikely to be liable for selling to Slim because Calvin was also duped by the buyer, who has now disappeared without paying on the note. C. Calvin should have been suspicious of such a high price, and given the nature of the business, he could easily be liable for selling control to someone he should have investigated more carefully. D. Calvin is unlikely to be liable because control shareholders can sell to anyone at anytime for anything they can get, absent agreement to the contrary.

C. Calvin should have been suspicious of such a high price, and given the nature of the business, he could easily be liable for selling control to someone he should have investigated more carefully. While it is not certain that Calvin will be liable, there are enough red flags (the high price paid, and the nature of the business) that he should have investigated more carefully. Just because he was duped too does not mean he will not be liable, and the standard is whether the control shareholder knew or should have known that the buyer was likely to loot the company. Not all sales of shares are permissible.

Aronson v Lewis has a very specific standard for when demand is to be waived under Delaware law. Which of the following statements of the standard is most accurate if you assume there has been no change on the board since the time of the alleged wrongdoing? A. Demand can only be excused where facts are alleged with particularity which show beyond a reasonable doubt that the directors' action was entitled to the protections of the business judgment rule. B. Delaware has adopted universal demand, but courts still allow it to be excused if there is a showing of extraordinary circumstances making it impractical to make demand without jeopardizing the ability of the plaintiffs to proceed with the lawsuit. C. Demand can only be excused where facts are alleged with particularity which create a reasonable doubt that the directors' action was entitled to the protections of the business judgment rule. D. Demand can only be excused where facts are alleged with particularity indicating a reasonable probability that the directors' action was not entitled to the protections of the business judgment rule.

C. Demand can only be excused where facts are alleged with particularity which create a reasonable doubt that the directors' action was entitled to the protections of the business judgment rule. The Delaware rule is that demand can only be excused where facts are alleged with particularity which create a reasonable doubt that the directors' action was entitled to the protections of the business judgment rule. The alleged facts don't have to show that beyond a reasonable doubt, and they don't have to show to a reasonable probability that the directors would not be protected by the business judgment rule. Raising a reasonable doubt is enough. Delaware has certainly not adopted universal demand.

Under the rules in most states, which of the following statements about demand futility is the most accurate? A. Demand would be excused if the complaint alleges that the directors are all elected by and could be replaced by the primary defendant responsible for the conduct that is being complained about. B. Demand is generally excused if there is a conflict of interest transaction. C. Demand is only excused if the plaintiff can show particularized facts that indicate why the directors might not be capable of making a decision that satisfies the business judgment rule. D. Demand is generally excused if all of the directors are named in the complaint.

C. Demand is only excused if the plaintiff can show particularized facts that indicate why the directors might not be capable of making a decision that satisfies the business judgment rule. Most states look for a pleading with particularized facts showing that the board as a whole, or at least a controlling majority of the board, would be unable to evaluate the demand for action in accordance with the requirements of the business judgment rule. States differ on how strong the proof must be, with Delaware requiring particularized facts that go so far as to create a "reasonable doubt" that the decision would be protected. New York merely requires a showing of facts indicating that the directors might not qualify under the business judgment rule. But in most cases, the underlying question is still whether the directors as a whole cannot satisfy the business judgment rule. It is not enough to name the directors, to allege a conflict or even to show that they were elected by and could be replaced by a primary wrong-doer.

Carla, the CEO of Acme Assets Corp ("AA"), an Arkansas corporation, asks the AA board of directors to approve a contract with Better Batteries, Inc. Carla's assets include a $10,000,000 investment in a mutual fund that includes a 5% ownership in Better Batteries as one of its 50 investments. Carla's share of the Better Batteries investment would probably have a value of about $250,000. Carla does not disclose that she owns this indirect interest in Better Batteries although she knows that she does. Which of the following statements is most accurate? A. This is extremely unlikely to involve a conflict of interest transaction because she is not a shareholder in the other party, and instead only owns an interest in a mutual fund. B. This is will be a conflict of interest transactions if the court determines that an average, ordinarily prudent person would consider a quarter of a million investment in Better Batteries to be important in making decisions involving Better Batteries. Her extraordinary wealth is not relevant. C. Even though the interest is indirect, if a court determines that a $250,000 investment is large enough that it would likely influence her decision-making with regard to the contract, this could be a conflict of interest transaction. Merely being important to an ordinary person is not the test. D. Merely owning stock in the other party to a contract (directly or indirectly) cannot constitute a conflict of interest unless the owner also owes fiduciary duties to the other party, such as by being a director or partner.

C. Even though the interest is indirect, if a court determines that a $250,000 investment is large enough that it would likely influence her decision-making with regard to the contract, this could be a conflict of interest transaction. Merely being important to an ordinary person is not the test. If, given her financial situation, this indirect ownership interest would likely influence her decision making, this could be a conflict that she would have been required to disclose. The test is not what an average person would consider important, but what this director would have been influenced by. An indirect interest such as owning stock or owning stock indirectly can certainly constitute a conflict.

Which of the following statements about notices to creditors is most accurate? A. In order to trigger a shorter notice period for known creditors, a corporation that intends to dissolve need only send out a notice to the known creditors that warns them of when, where and how to make a claim against the corporation. B. A corporation that is in dissolution has to wait five years to pay out proceeds to shareholders in order to give unknown creditors the ability to bring actions and recover against the corporation. C. The five year statute of limitations for unknown creditors cannot be shortened, but by filing a notice to known creditors, the corporation can give known creditors a much shorter time period in which to file claims. D. In order to apply the statutory period of limitations for creditors of a dissolved corporation, the creditor must be mailed a notice whenever that person's claim becomes known, no matter how late it is in the process.

C. The five year statute of limitations for unknown creditors cannot be shortened, but by filing a notice to known creditors, the corporation can give known creditors a much shorter time period in which to file claims. The first step in the process must be filing of articles of dissolution. Then known creditors should be dealt with (and have to be given notice to trigger a shorter period of limitations). Then the corporation can pay out any excess amounts, but shareholders might have to repay those amounts if a later claimant comes forward within 5 years (assuming all the steps for dissolution and publication notice are followed). There is no requirement that an unknown creditor be mailed notice if they later become known during the five year post-dissolution period.

Ophelia Organizer signs articles of incorporation for O Inc. and mails the documents to the Arkansas Secretary of State. Two days later, she calls the secretary of state and asks if they have the articles. The person who answers the phone says yes, and Ophelia says "Great!" She hangs up the phone before hearing that they have the articles, but have not filed them because they have been deemed confusingly similar to the registered trademark of O, Oprah's magazine. Ophelia immediately signs a lease with Larry Landlord as "Ophelia Organizer, agent for O Inc., an Arkansas Corporation." Which of the following statements is most accurate? A. Under the terms of the ACA 4-27-204, statutory promoter liability, Ophelia is not liable because Larry Landlord did not know there was no corporation. B. Under the terms of the ACA 4-27-204, statutory promoter liability, Ophelia would be liable as a promoter unless the court determines there is a corporation de facto or by estoppel. C. Under the terms of the ACA 4-27-204, statutory promoter liability, Ophelia is not liable because she did not know there was no corporation. D. Under the terms of the ACA 4-27-204, statutory promoter liability, Ophelia is liable because she acted before there was a valid corporation de jure.

C. Under the terms of the ACA 4-27-204, statutory promoter liability, Ophelia is not liable because she did not know there was no corporation. Statutory corporate promoter liability turns on whether the promoter knew there was no corporation and acts anyway. Here, there should be no liability on that theory for Ophelia since she did not know there was no corporation.

In Co has 7 directors. Allegations of sexual harassment and a hostile work environment were made against the board of directors. The company settled with the three women who filed the complaint, and no litigation was initiated. The terms of the settlement are confidential. Six months later, a shareholder tried unsuccessfully to obtain information about the allegations and instead uncovered complaints by several women who still work with the board. A derivative suit seeking removal of all directors and officers engaged in inappropriate behavior and in allowing or fostering a hostile work environment is initiated. Shortly after the suit is initiated, the board votes to add two new members. The two new members are then appointed to a committee to investigate the merits of the lawsuit. Which of the following statements is most accurate? A. Even if the committee recommends dismissal, if there is proof that the committee did not act in good faith, the court should dismiss any motion to dismiss based on that recommendation. B. Even if the committee recommends dismissal, unless the committee is fully informed about the situation the court should dismiss any motion to dismiss based on that recommendation. C. Even if the committee recommends dismissal, if there is proof the committee exercised no independent judgment and just did what the other directors told it, the court should dismiss any motion to dismiss based on that recommendation. D. All of the other responses to this question are true, making this the most accurate response.

D. All of the other responses to this question are true, making this the most accurate response.

Which of the following statements about application of securities laws to sales of corporate shares in a for-profit corporation is most accurate? A. So long as there is only a single purchaser of all of a (for-profit) corporation's stock, that is like buying the entire company, which would not involve the sale of securities. B. If the sale of stock is to existing shareholders in a closely held (for-profit) corporation, that is not the sale of securities. C. So long as the sales involve only stock in a closely held (for-profit) corporation, the federal securities laws do not apply. D. All sales of stock in a (for-profit) corporation involve the sale of securities, even if the corporation is closely held.

D. All sales of stock in a (for-profit) corporation involve the sale of securities, even if the corporation is closely held. All sales of stock in a for-profit corporation involve the sale of securities. It does not matter if the corporation is closely held, if the sale is only to existing shareholders, or if the purchaser is buying the entire corporation through acquiring all of the shares. All of these are sales of securities.

Which of the following statements about the earliest corporations (those formed prior to 1800) is most accurate? A. Most early corporations were not organized as profit-making businesses B. Early corporations had to be approved by obtaining a special charter from the state, meaning that only wealthy and politically connected individuals had access to the corporate form. C. Most early corporations could only be formed for a limited period of time. D. All of the preceding choices are true, making this the MOST accurate response. E. None of the preceding choices are true, making this the most accurate response.

D. All the preceding choices are true, making this the MOST accurate response Early corporations were not at all like the modern business corporation. All of the first three statements are accurate, making this the most accurate response. Most early corporations were charitable in nature (typically for religious organizations). These corporations could only be obtained with a special legislative charter, and most existed only for a limited number of years.

Carol Corp., an Arkansas corporation, is supposed to have 3 directors. Carol owns 100 shares. Abby owns 10 shares, and Bertha owns 5 shares. Which of the following statements is most accurate? A. Cumulative voting will guarantee Abby and Bertha the right to elect one of the three directors because the purpose of cumulative voting is to give minority shareholders the right to elect at least one director. B. Cumulative voting is not allowed in Arkansas. C. Cumulative voting will allow Abby and Bertha that ability to elect a director if they pool their votes and carefully coordinate for whom they will vote. Because Abby and Bertha own so few shares, they would have to vote together using all of their cumulative votes (3 votes per share for the combine 15 shares) in order to be able to elect a director against Carol's wishes. D. Cumulative voting is unlikely to have a significant impact on who is elected to the board in this company because Carol owns so many more shares than the other two shareholders.

D. Cumulative voting is unlikely to have a significant impact on who is elected to the board in this company because Carol owns so many more shares than the other two shareholders. Even if Abby and Bertha combine their votes, their share ownership is so small that they cannot outvote Carol for any of the three positions. Thus, although cumulative voting is perfectly permissible in Arkansas, it would not have a significant impact for these shareholders.

In early January, Manufacturing Co buys 100,000 switches from a company owned by the chairman of the board for a total price of $5 million. The other directors never even looked at what the switches were worth or asked who owned the switch company. At that time, the market value of the switches was less than $1 million. On February 15, Nandi (a long time employee of Manufacturing Co) buys 1000 shares of stock in Manufacturing Co. On March 15, Nandi is electrocuted when she is installing one of Manufacturing Co's switches and it turns out to be defective. On May 1, Nandi's heirs bring a wrongful death claim naming Manufacturing Co, without making demand on the directors. Which of the following statements is most accurate? A. Demand would be excused here because this involved a conflict of interest transaction. B. Demand would be required unless there are more specific facts that can be alleged. C. Demand would be excused here because the directors made no effort to become reasonably informed. D. Demand is not required here, so there is no need to "excuse" it.

D. Demand is not required here, so there is no need to "excuse" it. This is not a derivative suit, so you would not even get to the question of demand. Demand ONLY applies if the action is derivative.

Bigg Co was formed 10 years ago with articles that call for two classes of stock: Common shares and Class A preferred. The class A preferred is described participating preferred, also having $5 per share annual dividend preference. Eva was a founding shareholder who acquired 1000 shares of Class A preferred 10 years ago. The other founding shareholders bought a total of 1000 shares of common stock (also 10 years ago). There is no other stock outstanding. For the first time ever, the corporation decides to distribute $100,000 as dividends. Which of the following statements is accurate? A. Eva is entitled only to $5,000. She gets $5 per share for 1000 shares for the Class A shares ($5,000), but because the Class A is preferred she cannot share in the remaining $95,000. B. Eva is entitled to $75,000. She gets $5 per share for 1000 shares for the 10 years since she bought her shares ($50,000), and since she owns 1000 of the total 2000 outstanding shares, she will also get 1/2 of the remaining $50,000 that the directors intend to distribute. C. Eva will get $50,000. The $5 per share preferred dividend cumulates for the 10 years she has not received any payment. However, because the class A is preferred, it will not share in the amount left over after payment of the preferred dividend. D. Eva is entitled to $52,500. She gets $5 per share for 1000 shares of Class A that she owns ($5,000), and since she owns 1000 of the total 2000 outstanding shares, she will also get 1/2 of the remaining $95,000 that the directors intend to distribute ($47,500).

D. Eva is entitled to $52,500. She gets $5 per share for 1000 shares of Class A that she owns ($5,000), and since she owns 1000 of the total 2000 outstanding shares, she will also get 1/2 of the remaining $95,000 that the directors intend to distribute ($47,500). The preferred stock in this case gets the divdend preference ($5 times 1000 shares) for this year only, but it does not get to add anything for prior years because the shares do not say the preference is cumulative. Then, because the preferred is designated as "participating," it will share equally with common shares in amounts that are left. That is what it means to be "participating." Since Eva owns 1/2 of all the outstanding shares, she would therefore get $47,500 or half of $95,000, which totals $52,500 when you add that to the preference amount. It was not the math that was intended to be challenging (since that is done for term-10you), but rather a check to make certain you understand that dividends are presumed NOT to be cumulative (and what that means), and participating shares get to "participate" in distributions along with common shares.

C is a minority shareholder in Profitable Co., a profitable Arkansas corporation. The majority shareholders sit on the board, and they have consistently excluded C from sharing in corporate income by paying themselves generous salaries and bonuses, and by refusing to give C access to corporate records. C brings an action for judicial dissolution. Which of the following statements is the most accurate? A. Because the corporation is profitable, the court cannot order dissolution. B. If C can prove that the conduct by the control shareholders/directors amounted to oppression or waste of assets, the court will order judicial dissolution. C. The courts cannot order dissolution here because there is no proof that the directors are deadlocked or that irreparable harm is being threatened. D. Even if C can prove that the control shareholders and directors have been trying to thwart his reasonable expectations, or to freeze him out, courts are unlikely to order judicial dissolution.

D. Even if C can prove that the control shareholders and directors have been trying to thwart his reasonable expectations, or to freeze him out, courts are unlikely to order judicial dissolution. courts are very reluctant to order to dissolution of a profitable corporation although they will order some kind of equitable relief. The shareholder is unlikely to get an order of dissolution, but it is possible, and C need not also prove deadlock if there is oppression of the minority.

Candy Corp is an Arkansas corporation. April owns 7 shares, May owns 2 shares, and June owns 2 shares. The corporate bylaws call for the election of three directors. The articles say that election of directors will be by cumulative voting. Which of the following statements is most likely to be true? A. With cumulative voting, May and June are guaranteed the ability to elect at least one director. This is because May and June each have more than one share, giving each of them 6 votes in the directors' election so regardless of whether they vote together, they cannot be outvoted. B. Cumulative voting is unlikely to have an impact on the election of directors in this corporation. This is because April owns so many more shares than either May or June. C. Cumulative voting is only allowed in corporations that have at least 9 or more directors, so this arrangement would not be legal in Arkansas. D. If May and June carefully coordinate their voting, they can choose one of the three directors no matter how April votes, but April can always elect two no matter how May and June vote. This is because April has only 21 votes to spread around, while together May and June have 12. No matter how you split up 21 votes, you cannot give three directors more than 12 votes each.

D. If May and June carefully coordinate their voting, they can choose one of the three directors no matter how April votes, but April can always elect two no matter how May and June vote. This is because April has only 21 votes to spread around, while together May and June have 12. No matter how you split up 21 votes, you cannot give three directors more than 12 votes each. April owns a majority of the shares, so if she is careful she can elect majority of the directors. However, if May and June cumulate their votes, they do have enough voting power to guarantee they can elect one director of their choosing. Thus is it is not accurate to say that cumulative voting would not matter here, although if they do not coordinate their votes, their ability to elect a director is not guaranteed. And there is no requirement that limits cumulative voting to corporations with 9 or more directors.

Amir and Bibi are both shareholders in an Arkansas corporation. The sign a document that says they agree to vote their shares so as to elect Caidan as a director of the corporation. According to its terms, the agreement is to last for 10 years, and a copy has been filed with the corporation. Which of the following statements is most accurate? A. On these facts, this looks like an enforceable voting trust. B. On these facts, this looks like an unenforceable voting agreement. C. On these facts, this looks like an unenforceable voting trust. D. On these facts, this looks like an enforceable voting agreement.

D. On these facts, this looks like an enforceable voting agreement. This agreement between shareholders about voting makes no attempt to transfer the right to vote to anyone else, meaning this is a typical voting agreement. It is in writing, it is signed, it does not sterilize the directors, was not issued for a private benefit, and is not subject to any other contract defense. Thus, on these facts, this would be an enforceable voting agreement.

C Corp is a corporation with 9 directors. The company auditors discover the payment of some illegal bribes. The 2 directors who were involved in the bribes were asked to resign, as were the employees who paid the bribes. No other action was taken by C Corp even after the corporation was assessed a $2 million fine as a result of the bribes. S, a shareholder, finds out the the company let the directors go without asking them to make restitution, and makes demand on the board asking them to institute legal proceedings to recover the $2 million in corporate fines from the directors who resigned. The directors unanimously vote to do nothing, and S initiates a derivative lawsuit naming the seven remaining directors and the company for failing to go after the directors who allowed the bribes, seeking damages from them. The company creates a subcommittee consisting of 5 directors, all of whom were on the board when the bribes were paid, and all of them voted not to initiate an action against the two dismissed directors. The committee unanimously recommends dismissal of the derivative suit. Which of the following statements is the most accurate? A. If Zapata applies, then the court should grant the motion to dismiss although it is not clear what the court might do under Auerbach. B. There are not enough facts here to tell if the court should follow a committee recommendation to dismiss under either Auerbach or Zapata. C. If Auerbach applies, then the court should grant the motion to dismiss although it is not clear what the court might do under Zapata. D. Regardless of whether Auerbach or Zapata applies, the court should not grant any motion to dismiss based on a recommendation of this committee.

D. Regardless of whether Auerbach or Zapata applies, the court should not grant any motion to dismiss based on a recommendation of this committee. The members of this committee are not disinterested since they are being sued for failure to initiate an action to recover $2 million in fines. This is not a case involving failure to make demand; this test looks at whether the directors making the recommendation to dismiss would be protected by the business judgment rule when looking at THAT decision. These are defendants in the ongoing suit and they were defendants at the time of the bribe AND at the vote not to go after the directors who paid the bribe. That gives them a conflict of interest in deciding whether to dismiss the action against them.

A, B, and C are the directors of D Corp., an Arkansas corporation. A recommends to the board that the corporation enter into a contract with A's only child, who has finally moved into his own apartment after graduating from college last year. A fully discloses the situation including the fact that A has continued to subsidize her son's living expenses. A and B vote in favor of the contract, while C abstains. S, a shareholder in the corporation, brings an action alleging that the contract is unfair and wastes corporate assets. Which of the following statements about the lawsuit is the most accurate? A. The directors will have the burden of proving unfairness, but only because A improperly voted on the transaction. B. On these facts, there can be no conflict of interest since A is not the party on the other side of the transaction, and her son no longer lives at home. C. The shareholder will have to prove unfairness because the director's vote in favor of the contract was 2 in favor, none opposed, and one abstention. D. The directors will have the burden of proving the contract is fair in order to prevail even though the vote in favor of the transaction was 2 in favor with 1 abstention.

D. The directors will have the burden of proving the contract is fair in order to prevail even though the vote in favor of the transaction was 2 in favor with 1 abstention. This is likely to be a conflict since it involves A's only son whom A continues to support. Although 2 directors voted in favor of the transaction, one of them was A, so her vote was not disinterested. While A's vote was not improper, it does not count. It would have taken at least 2 disinterested directors voting in favor of the transaction to place the burden of proof as to unfairness on the shareholder.

Suppose your client wants to file articles that include this description of the authorized stock: "The corporation shall be authorized to issue the following shares: (1) 1,000 shares of Class A Common stock having 10 votes per share, with a par value of $1.00 per share; (2) 100,000 shares of Class B Common stock, having 1 vote per share, with a par value of $.01 per share; (3) 100,000 shares of no-par preferred shares to be called Class C Preferred, non-participating with a cumulative preferred dividend of $5 per year; and (4) up to a total of 10,000 shares having unique designations, in up to two classes or series, having the rights, power, privileges, and par value as determined by the corporation's board of directors." Which of the following statements is most accurate? A. The only problem here is that Class A Common has to have one vote per share because it is called common stock. B. The only problem here is that you cannot have two classes of Common stock with different rights. C. The only problem here is that you cannot have the shares discussed in item 4 because they don't have a designation, or par value, or the number of shares in each of the two classes or series. D. There is nothing impermissible about this language making this the best answer.

D. There is nothing impermissible about this language making this the best answer. There is nothing impermissible about this language. You can modify the usual understanding about what common stock means with explicitly language. You can have multiple classes of common. You can have common with multiple votes per share. It does not have to be called preferred. In addition, item 4 is perfectly fine as a blank check share provision.

There must be a statute specifically allowing for the existence of de facto businesses, good faith efforts to form the corporation, both parties must agree to accept the corporation as if it was in existence knowing that it was not, and the equities must be in favor of de facto status. A. There must be a statute allowing for the formation of a corporation, good faith efforts to form the corporation, both parties must agree to accept the corporation as if it was in existence knowing that it was not, and the equities must be in favor of de facto status. B. There must be a statute specifically allowing for the existence of de facto businesses, good faith efforts to form the corporation, the parties must act as if the corporation existed, and the equities must be in favor of de facto status. C. There must be a statute specifically allowing for the existence of de facto businesses, good faith efforts to form the corporation, both parties must agree to accept the corporation as if it was in existence knowing that it was not, and the equities must be in favor of de facto status. D. There must be a statute allowing for the formation of a corporation, good faith efforts to form the corporation, the parties must act as if the corporation existed, and the equities must be in favor of de facto status.

D. There must be a statute allowing for the formation of a corporation, good faith efforts to form the corporation, the parties must act as if the corporation existed, and the equities must be in favor of de facto status. While there needs to be a statute authorizing the corporate form, it does NOT need to specifically authorize de facto corporations. In addition, while the parties have to act as if there is a corporation, they do not need to do so knowing there is no valid incorporation.

X, Y and Z are the sole directors of an Arkansas corporation. Y proposes a contract with ABC corp, without knowing that X 's husband is on the board of directors for ABC. X explains the conflict and abstains from voting on the contract. Following disclosure, both Y and Z vote to approve the deal. Which of the following statements is most accurate? A. This situation likely involves a conflict of interest, and X would have the burden of proving fairness if there is a challenge to the contract. B. This is unlikely to involve a conflict because Y did not even know that X's husband was a director of the other corporation when Y proposed the contract. C. This is unlikely to involve a conflict of interest, because X completely abstained from voting and was not responsible for suggesting the contract to other directors. D. This situation likely involves a conflict of interest, but because the 2 disinterested directors approved the contract, the complaining party would have the burden of proving unfairness if there is a challenge to the contract.

D. This situation likely involves a conflict of interest, but because the 2 disinterested directors approved the contract, the complaining party would have the burden of proving unfairness if there is a challenge to the contract. Once a contract that amounts to a conflict of interest transaction is approved by a majority of disinterested directors (provided there are at least 2 of them voting in favor), the burden of proving the transaction was unfair shifts to the plaintiff. Abstention from voting by the director with the conflict does not change this, and knowledge at the time a deal is proposed is not what controls the outcome of a conflict of interest case.

Which of the following constitutional rights are possessed by corporations? A. Corporations have the right to be free from unreasonable searches and seizures. B. Corporations have free exercise rights under the first amendment. C. Corporations have free speech rights under the first amendment. D. Corporations have due process rights. E. Corporations possess all the preceding constitutional rights, making this the most accurate statement.

E. Corporations possess all the preceding constitutional rights, making this the most accurate statement. Corporations have the right to be free from unreasonable searches and seizures, they have free exercise rights, free speech rights and due process rights. Thus it is most accurate to say that they have all of these rights.

Which of the following statements about standing to bring a derivative action is most accurate? A. To have standing to bring a derivative suit, a shareholder must always have owned shares at the time the harm occurred. B. To have standing to bring a derivative suit, a shareholder must always own shares in the corporation that was harmed. C. To have standing to bring a derivative suit, a shareholder must adequately represent the views of a shareholder group, although that group does not need to own a majority of the shares. D. To have standing a shareholder must legally owns his, her or its shares on the records of the appropriate corporation. E. None of the preceding options are true, making this the most accurate response.

E. None of the preceding options are true, making this the most accurate response. Shareholders must normally own shares at the time the harm occurred, but there are exceptions (such as acquiring the shares by operation of law). Similarly, in some occasions a shareholder can own shares in a parent corporation rather than the corporation that was actually harmed. A shareholder must be representative, but that does not require that there be a group that agrees with the plaintiff in a derivative suit. And finally, beneficial ownerships of the shares is enough in every American jurisdiction so legal title is not required.