BUS13 Pt. 2

The business judgment rule protects corporate officers and directors when

they set up a committee to establish a decision-making procedure that serves the best interests of the corporation. Directors' and officers' decision-making procedures must be set up in a way that allows careful decisions to be made regarding the best interests of the corporation. Boards will often form committees to carry out their work, and often this committee structure itself is a significant step in establishing a procedure that helps preserve the business judgment rule protection.

An assignment occurs when one party transfers future rights under a contract to a third party.

False An assignment occurs when one party transfers their current rights (not future rights) under a contract to a third party. The party making the assignment is known as the "assignor", and the third party receiving the current rights is the "assignee".

Members of a limited liability company (LLC) can only be taxed as a partnership, even if the corporate tax structure is more favorable.

False An attractive advantage of an LLC is the various tax treatment alternatives. Many LLCs are typically treated as pass-through entities. However, members of an LLC may elect to be taxed as a corporation, if they determine that the corporate tax structure is more favorable.

If a seller has different manufacturing or operational costs that vary from buyer to buyer, that violates antitrust laws.

False Any time a seller has different manufacturing, shipping, or operational costs that vary from buyer to buyer, no violation of antitrust laws occurs. Similarly, if a seller conducts a good faith campaign to meet the lower price of a competitor and this results in price discrimination between several buyers, the seller has not violated antitrust laws.

Unlike an LLP, the managers of a limited liability company (LLC) do not owe fiduciary duties of care and loyalty to the LLC's other members.

False As in many business relationships, the managers of a limited liability company (LLC) owe fiduciary duties of care and loyalty to the LLC's other members. Controlling members (those with veto power or the ownership stake to block decisions by other members) also owe a duty of loyalty to the other members.

In the absence of a manufacturing or design defect, the mere failure to warn cannot render a product unreasonably dangerous.

False Failure to warn may render a product unreasonably dangerous even in the absence of any manufacturing or design defects. One common category of inadequate-warning cases involves prescription drugs, but the theory of unreasonable danger applies to all products that carry some danger in use (such as a lawn mower or snow thrower).

In general, easements are not transferred with the property when the real estate is sold to another party.

False Generally, easements are transferred with the property when the real estate is sold to another party, so long as the new owner has reason to know of the easement (as is the case when the easement is expressly granted in a deed and has been publicly recorded with the appropriate government office).

If a promoter makes a contract on behalf of a not-yet-formed corporation, he is personally liable to perform under the contract even after the corporation is formed and adopts that contract.

False If a promoter makes a contract on behalf of a not-yet-formed corporation, he may have some degree of personal liability to perform under the contract. Generally, the promoter is personally liable when she knows (and the other party has no reason to know) that the corporation is not in existence on the day of the signing. However, a promoter's personal liability ceases at the moment that the corporation is formed and has adopted the contract.

The law protects against third party interference with existing contracts but not with potential contracts or other business relationships.

False In addition to providing protection against third party interference with existing contracts, the law also protects against third parties interfering with potential contract (prospects) or other business relationships. The protections and definition of interference are similar to the existing contractual interference rules.

In a limited liability company (LLC), owners are known as "agents".

False In an LLC, owners are known as "members". An LLC offers its members the same amount of liability protection as principals of a corporate entity. LLC members also receive pass-through tax treatment but without the restrictions on ownership and scope required for other pass-through entities.

Jay is an electronics store owner. He sees Doreen place several store items in her purse and walk toward the exit without paying. Jay detains and questions Doreen for 2 hours then calls the police. Jay was within his rights as a merchant to detain Doreen and cannot be held liable for the tort of false imprisonment.

False Merchants must be careful when detaining an individual suspected of shoplifting. The Restatement provides limited protection for merchants so long as the individual is reasonably suspected and the detention is short in duration. In some cases, courts have interpreted that to mean as few as fifteen minutes.

Josef, a director of TrikeBike, Inc., misrepresents important facts about the financial condition of his company to a creditor. Even if he committed fraud, this could not lead to a piercing of the company's corporate veil.

False Misrepresentations to creditors regarding important facts about the financial condition of the company or lying to investors about potential liabilities of the corporation are examples of fraud that could lead to a piercing of the corporate veil.

Negligence is a result of a person's willful intent to cause harm to another person or property.

False Negligence describes an accidental event that caused harm to another party and is done without willful intent. An intentional tort is one in which the tortfeasor was willful in bringing about a particular event that caused harm to another party.

Personal property must be tangible but need not be movable.

False Personal property must be both tangible and movable. In a business context, goods, vehicles, inventory, and equipment for business operations, such as computers, are all examples of personal property.

A corporate insider has the right to take a lucrative business opportunity for herself, regardless of whether that opportunity relates to the corporation's business or would otherwise benefit the corporation.

False The duty of loyalty requires disclosure and good faith when an insider (i.e., director, officer, or controlling shareholder) learns of a potentially lucrative business opportunity that could enrich her individually but is related to the corporation's business. That is, an insider may not usurp (seize) for herself a business opportunity that rightfully belongs to the corporation or would benefit the corporation in some direct way.

The easiest form of business for an individual to establish and maintain is a corporation.

False The easiest single-person ownership entity to form and maintain is a sole proprietorship. A sole proprietorship requires only a minimal fee, involves a straightforward filing requirement with the appropriate state government authority, and typically requires no annual filings. Its ease of formation and maintenance makes this entity a top choice for start-up businesses with relatively low annual revenues and expenses.

The statute of frauds does not apply to contracts that involve the sale of a land interest.

False The statute of frauds primarily applies to five types of contracts: contracts that involve the sale of interest in land; contracts that cannot be performed in under one year; contracts to pay the debt of another; contracts made in consideration of marriage; contracts for the sale of goods for $500 or more and lease transactions for goods amounting to $1,000 or more.

Vertical price-fixing occurs when a seller attempts to control the resale price of a product at a higher level in the supply chain.

False Vertical price-fixing occurs when a seller attempts to control the resale price of a product at a lower level in the supply chain. Concerted action or agreement between a manufacturer and a retailer to fix the price at the retail level is not considered a per se violation of the Sherman Act.

When a sales contract is missing terms on when a payment is due and the parties do not have an established course of past conduct, the Uniform Commercial Code (UCC) requires that the payment be made at least twenty-four hours prior to delivery.

False When a sales contract is missing terms on when a payment is due and the parties do not have an established course of past conduct, the UCC requires that the payment is due at the time and place where the seller is to make delivery and may be made in any commercially reasonable form (such as a business check).

When one party to a contract fails to fulfill her obligation to perform, she is said to have "discharged" that obligation to the other party.

False When one party to a contract fails to fulfill her obligation to perform, she has breached the contract. The completion of a contract is known as discharge—when both parties have "discharged" their obligation to the other person through performance.

The legal term "property" can only be applied to tangible resources such as land and physical goods.

False When we hear the word "property" we often think of such resources as land and physical goods. In reality, however, property rights can come in many forms, including: private property; common property; public property; and open-access property.

The Hart-Scott-Rodino Act, enacted in 1976, is a preventative statute that requires business entities that are contemplating mergers involving a set dollar amount to give advance notice to the

Federal Trade Commission (FTC) and Department of Justice (DOJ). The Hart-Scott-Rodino Act is a preventive statute that requires business entities that are contemplating mergers involving dollar amounts of a certain size to give advance notice to the Federal Trade Commission (FTC) and the Department of Justice (DOJ) of their intention. This provides the Department of Justice with veto power on a proposed merger if the transaction would violate any of the antitrust laws (including the Sherman Act).

Which of the following statements is true of general partnerships?

General partnerships can operate without written agreements. While some general partnerships have extensive written agreements detailing the internal operations of the business and the rights and responsibilities of the principals, others operate without any written agreement at all. In the absence of an agreement, the Revised Uniform Partnership Act (RUPA) governs a general partnership.

Maya enters into a sales contract with Kevin. Which of the following is most likely to be true if Kevin breaches the contract even before he receives the goods?

If Maya recovers the full value of the contract from Kevin, she cannot resell the goods to a new buyer. In this scenario, since the breach occurs before the goods were actually received by Kevin, if Maya is unable to sell the goods at fair market value, she can recover the full value of the contract from Kevin. If she exercises this remedy, she may no longer resell the goods even if a new buyer is found.

Which of the following is an example of a horizontal restraint?

Market allocations Horizontal restraints involve acting in concert with a competitor that is on the same level of distribution. Price-fixing, market allocation, and boycotts are types of horizontal restraints.

_____ of a corporation have the power to elect and remove directors at their annual meetings.

Shareholders Shareholders are the owners of the corporation. While shareholders do not directly manage the corporation, most states give shareholders certain rights to protect their ownership interests. Most importantly, shareholders, assuming a majority of the ownership consent, have the power to elect and remove directors at the annual shareholders' meetings.

Mirror, Mirror, LLC has a shipment contract with Speedy Ship, Inc. for all their delivery services. Speedy Ship picked up a crate containing five large mirrors from the Mirror, Mirror warehouse but they shattered during transit to the customer. Which party bears the risk of loss?

The customer In this scenario, Mirror, Mirror, LLC bore the risk of loss only until the goods were delivered to Speedy Ship, Inc. In shipment contracts, the seller needs only to deliver the goods to the "hands" of the carrier to achieve complete performance. Normally, the seller bears the risk of loss until the seller delivers the goods to the carrier. At this time, title is deemed to have passed to the buyer.

A court is most likely to pierce the corporate veil when the

liability claim involves a tort committed by the corporation's employees. Courts are more likely to pierce the corporate veil when the claim involves some sort of tort, such as negligence by the corporation's employees or even the principals themselves. This is essentially because the victims of negligence (such as a pedestrian struck by a delivery truck operated by a corporate employee) have become involuntary creditors and have never had the opportunity to mitigate the risk of loss.

A primary purpose of antitrust law is to

prevent, punish, and deter certain unfair business practices. The purposes of antitrust law are to prevent, punish, and deter certain anticompetitive conduct and unfair business practices. Original notions of antitrust law come from the shifting of the U.S. economy from predominantly family agriculture and small merchants into the Industrial Revolution era.

To prove a defamation claim, plaintiff must prove that the defendant's statement was

provably false. In order to qualify as defamatory, the statement made about the plaintiff must be false, not merely unkind. Moreover, if a statement was pure opinion, that statement is not defamatory. That is, a defamatory statement is one that must be provably false.

Which of the following individuals is protected against defamation claims through a qualified privilege?

A non-government official who relies on and cites an official public document while making a public allegation. Qualified privilege is one whereby the defendant must act in good faith and without malice to secure immunity from a defamation claim. Under fair report privilege, if one relies on an official public document or a statement made by a public official and cites the document or public statement when making the alleged defamatory statement, no cause of action for defamation occurs unless the speaker knows the statement is false.

Which of the following sales agreements is most likely to be subject to Article 2 of the Uniform Commercial Code (UCC) because it represents a merchant transaction?

A sales agreement made by Jon, owner of a wholesale plant nursery, who sells to Selene, the owner of a gardening store. The sales agreement that is most likely to be subject to Article 2 of the UCC is one made by Jon, a wholesaler, who sells to Selene, the owner of a retail store. Under the UCC, a "merchant" is someone who is regularly engaged in the sale of a particular good. The UCC imputes a certain level of knowledge and awareness to merchants and allows their transactions to proceed in an expedited manner without certain safeguards intended for average consumers.

Which of the following acts would be considered negligence per se?

Alan drives his car at 60 mph in a 35 mph zone because he does not see the speed limit sign. Violations of safety statutes are referred to as negligence per se. In the above scenario, Alan's act of driving his car faster than the accepted limit violates a safety statute, and it would be considered negligence per se.

Which of the following individuals is most likely to avoid liability for defamation through absolute privilege?

Andreas, a state court judge, who makes insulting statements about the accused during a criminal trial. Absolute privilege, whereby the defendant need not offer any further evidence to assert the defense, is given to judicial officers and proceedings. This includes judges, lawyers, and, in some cases, witnesses. In the above scenario, Andreas, a state court judge, is most likely to avoid liability for defamation through absolute privilege; the others are likely to appeal for qualified privilege.

Which of the following constitutes a partnership at will?

Diane and Ralph's partnership agreement does not address when the partnership will terminate. Ideally, partners should set a specific future date or event for when the partnership will be dissolved (which can be extended by agreement). However, partnerships where the partners have not agreed to remain partners until the expiration of a definite term or event are known as partnerships at will.

A limited partner's personal liability, like a general partner's personal liability, extends to all the limited partnerships' debts and liabilities.

False A general partner in a limited partnership is personally liable for all of the limited partnership's debts and liabilities, as if they were in a general partnership. However, limited partners do not have the same automatic personal liability of a general partner. Rather, the limited partner's liability is limited to whatever the limited partner contributed to the partnership.

A limited partnership may only have limited partners, and not general partners.

False A limited partnership has at least one general partner (managing principal) and at least one limited partner (investing principal).

A failure to act can never be considered a tort, even if it causes a loss to or injury to another party.

False A tort is a civil wrong where one party has acted or, in some cases, failed to act, and that action or inaction causes a loss to be suffered by another party. The law provides a remedy for one who has suffered an injury by compelling the wrongdoer to pay compensation to the injured party.

The term "variance" means a change made to a property lease agreement prior to the expiration of the lease.

False A zoning board or commission is often appointed by the local government to handle appeals from decisions of the zoning officer and to consider applications for parties that wish to have an exception to one of the zoning laws. These exceptions are known as variances.

Allan owns two brown bears that he keeps in a locked cage on his property, which is located in a remote area. He cannot be held liable if the bears harm an individual because he has taken the proper precautions to keep potential visitors safe.

False Allan can be held liable for any injury caused by the bears, even he takes proper precautions to prevent harm. Strict liability torts, in which a tortfeasor may be held liable for an act regardless of intent or willfulness, apply primarily in cases of defective products and abnormally dangerous activities (such as major construction demolition). Owning a wild animal or even some breeds of dogs can result in strict liability should the animal harm an individual, regardless of the precautions taken by the animal's owner.

A sole proprietorship can be passed to the proprietor's heirs through a gift or an estate.

False Although a sole proprietor may sell the assets of her business to another party, the proprietor's ownership interest in a sole proprietorship cannot pass to her heirs through a gift or an estate.

Under the Revised Uniform Limited Partnership Act (RULPA), a limited partnership must have a formal partnership agreement that details the rights, obligations, and relationships between the partners.

False Although the RULPA does not formally require a partnership agreement, the vast majority of limited partnerships have one. That agreement details the rights, obligations, and relationships between partners.

Perfect performance is the only way for the parties to fulfill their affirmative duty of good faith and fair dealing.

False Although the good faith requirement is ordinarily met by the parties simply performing their obligations completely—a situation known as "perfect performance"—the law recognizes that there are some cases in which one party does not perform completely yet has still acted in good faith and is, therefore, entitled to enforce the remaining obligations in the contract against the other party.

In destination contracts, the risk of loss is usually allocated to the seller once the goods are properly tendered.

False Destination contracts require the seller to deliver the goods to a specified location. If the goods are properly tendered, as agreed, the risk of loss is usually allocated to the buyer (not the seller) at the time of tender. In a shipment contract, risk of loss is normally allocated to the seller until such time as the seller has delivered the goods to the carrier.

Oliver is a retailer who sells outdoor equipment and gear. Oliver is unaware that one of the insect repellent brands he sells can cause a dangerous allegoric reaction, particularly in children. Because Oliver did not actually know that the repellent was dangerous, a court could not impose strict liability on Oliver.

False In this situation, Oliver could still be liable for a strict liability tort. Strict liability torts, in which a tortfeasor may be held liable for an act regardless of intent or willfulness, applies primarily in cases of defective products and abnormally dangerous activities. A retailer, who is unaware of the potential danger his products might cause, can still be liable if his products cause actual damage.

Parties to a contract must make a reasonable effort to avoid damages and losses. This rule is often called the "duty to substantially perform".

False Parties to a contract must make a reasonable effort to avoid damages and losses. This rule is often called the "duty to mitigate". If a party can avoid damages through reasonable effort and without undue risk or expense, she may be barred from recovery in a lawsuit.

The aggrieved party suing for breach of contract is not required to demonstrate tender of performance to satisfy their burden of proceeding with "clean hands".

False The "clean hands" equitable maxim requires that the aggrieved party show that that they had no fault in causing the breach and were ready, willing, and able to perform its required obligations under the contract. This readiness to perform is called "tender of performance".

Keep Cool, Inc. installed an air-conditioning system in Herman's home. The air-conditioning system is not considered a fixture that becomes part of Herman's real property.

False The air-conditioning system is considered a fixture. The ownership rights to a parcel (piece) of real property, also called real estate, include the land and any structures built upon it, as well as plant life and vegetation. The structures are known as the property's improvements. The ownership rights also extend to anything that is affixed, known as fixtures, to the structure, such as plumbing, heating and cooling systems, and the like.

The finder of lost personal property can keep it; the original owner of the property has no right to recover that personal property from the finder.

False Under the common law, the finder's rights depend on the category of the found property. Found property is categorized in one of four ways: mislaid, lost, abandoned, or treasure trove. The finder of lost or abandoned property and treasure trove acquires the right to possess the property against the entire world except against the actual owner, regardless of the place of the finding. The finder of the mislaid property, however, must turn the property over to the premises owner to safeguard the property for the true owner. The key to determining whether the property is lost (or abandoned or considered a treasure trove) versus mislaid is the element of involuntariness. That is, in order to abandon personal property, one must voluntarily and intentionally give up a known right.

When a buyer agrees to purchase all of the goods needed to complete a project from a particular seller, the contract is called an output contract.

False When a buyer agrees to purchase all of or up to an agreed amount of what the buyer needs for a given period, the contract is known as a requirements contract. A court will generally enforce a requirements contract for the sale of goods, despite the missing quantity.

The Revised Uniform Partnership Act (RUPA) uses the term "withdrawal" to describe the act of separation whereby a partner no longer wishes to be a principal in a partnership.

False When a partner no longer wishes to be a principal in a partnership, she may choose to leave the partnership. The RUPA uses the term "dissociation" to describe this act of separation.

Which of the following is a drawback of a sole proprietorship?

It does not protect the principal's personal assets against the business' unpaid debts and liabilities. The chief drawback to a sole proprietorship is a complete lack of protection of the principal's personal assets for unpaid debts and liabilities of the business. All debts and liabilities of the business are also treated as personal debts and liabilities of the principal.

_____ ownership interests afford the least amount of general rights associated with real estate.

Leasehold estate A leasehold estate ownership interest affords the least amount of rights because it grants only a qualified right to use the real estate in an exclusive manner for a limited period of time. The most common form of leasehold estate is the landlord-tenant agreement, whereby the landlord gives the tenant a qualified right to possess and use the real estate for a specified period of years that is often spelled out in a written lease.

Max purchased an antique watch from a local store for $500. As soon as Max stepped outside the shop with the watch, a man approached him claiming that the watch was actually his and had been stolen over a week ago. He claimed that the watch was personalized with his initials and showed Max his driver's license. Max checked the watch and realized that the man was, in fact, the owner of the watch. In the context of rights of ownership, which of the following is true in this scenario?

Max should return the watch to the man who approached him, as this man is the actual owner. In this scenario, Max should return the watch to the man who approached him, as this man is the actual owner. Under these circumstances, even if the buyer had no reason to know the good was stolen, the buyer does not acquire valid title. This situation is governed by the property law maxim that a seller cannot convey valid title unless she has valid title in the first place. Therefore, if the good was stolen, the actual owner may recover the property even from a good faith buyer.

Cora agreed to sell Rafael a rare, vintage car in 90 days. When the parties met to sign the paperwork and hand over the keys, Cora breached their agreement by refusing to sell. If the court orders Cora to sell Rafael the car, as promised, which type of remedy is being granted?

Specific performance Specific performance is an equitable remedy whereby a court orders the breaching party to render the promised performance and to take a specific action. This remedy is available only when the subject matter of the contract is sufficiently unique and money damages would be an inadequate remedy. Specific performance is rarely available in a sale of goods case unless the goods are rare or distinctive such that the buyer could not reasonably be expected to find those goods elsewhere.

Parties to a contract can ordinarily substitute another party to perform their contract duties. Which of the following statements is true when a delegation of duties occurs?

The delegator can be held liable for the delegatee's failure to perform. Delegation occurs when one party transfers their contract duties to a third party. The party making the delegation is known as the "delegator", and the third party receiving the duty to perform is the "delegatee". When one party delegates their duty, the delegator remains liable for the obligation. If the delegatee fails to perform, the delegator must either perform or suffer liability for the breach of contract.

Which of the following is true of a contract that involves a partial breach by one of the parties?

The nonbreaching party under the contract may not be relieved from performing his duties. There are cases where the breach is not material, which is sometimes referred to as a "partial breach". In partial breach cases, the nonbreaching party may not be relieved from performing. However, the nonbreaching party may still recover damages related to the breach from the breaching party.

Which of the following is NOT typically included in a real property owner's "bundle of rights"?

The unlimited right to use and control the airspace over the property. A real property owner's bundle of rights typically includes the right to sell, gift, lease, and control the property and its improvements and fixtures. Traditional property ownership rights are said to extend from "the soil upward into Heaven" and also include the right to use and enjoyment of the property; subsurface rights; water rights; and airspace rights. However, landowners may not use their airspace rights to prevent airplane flights over their property or in such a way that somehow interferes with the air rights of another.

In general, there is no duty to act or rescue another. However, if a party chooses to renders assistance, they assume a duty to proceed with reasonable care and must not leave the injured party in a worse position.

True "Assumption of duty" is an exception to the general rule that there no general duty to act/rescue another. When one party voluntarily begins to render assistance, they assume a duty to proceed with reasonable care, continue rendering aid, and not leave the injured party in a worse position.

Common law dictates that several specific terms of a contract must be in writing, while the Uniform Commercial Code (UCC) has a much more liberal rule concerning what must be in writing.

True Common law dictates that several specific terms of a contract must be in writing, while the Uniform Commercial Code (UCC) has a much more liberal rule concerning what must be in writing. The UCC's statute of frauds provisions are satisfied so long as the writing contains the quantity, the signature of the party against whom enforcement is sought, and language that would allow a reasonable person to conclude that the parties intended to form a contract.

Parties who are adversely affected by a zoning ordinance are generally entitled to some form of procedural due process to protect their property rights.

True Courts have ruled that the law sets limits on a local government's right to regulate private property usage through a variety of constitutional protections of property owners. First, if the zoning is so overreaching that it deprives the owner of all economic value of her property, the zoning will be categorized as a taking and the government is required to pay the owner the market value of the property as required in the Constitution's Takings Clause. Second, those parties who are adversely affected by a zoning ordinance are generally entitled to some form of procedural due process, such as a hearing by the local government.

Dan owns a parcel of land that has a river running through it. According to the legal rights granted to him as a landowner, he will not be allowed to build a dam across the length of the river to access all of the water for his crops, even if the dam is on his property.

True Dan will not be allowed to build a dam across the entire river to access all of the water for his crops because the adjacent landowners also have water rights. Also known as riparian rights, landowners have the right to reasonable use of any streams, lakes, and groundwater (water contained in soil) that are fully or partially part of their real property. Reasonable use means that the landowner is entitled to only as much of the water as she can put to beneficial use upon her land while balancing the rights of others who have riparian rights in the same stream or lake (such as an adjacent landowner).

Employees of print media organizations are afforded a qualified protection from defamation liability so long as they have acted in good faith and without malice.

True Employees of media organizations (e.g., television, radio, periodicals) are afforded a qualified protection from defamation liability. So long as the media have acted in good faith, without malice, and without a reckless disregard for the truth, the media is protected from liability through privilege as a defense for unintentional mistakes of fact in their reporting.

Under the Uniform Commercial Code (UCC), if a seller fails to achieve perfect tender in a sales contract, the buyer has the option of rejecting the entire shipment of goods within a reasonable time.

True If a seller fails to achieve perfect tender, the buyer has three options: (1) Reject the entire shipment of goods within a reasonable time, (2) accept the shipment of goods as is, or (3) accept any number of commercial units and reject the rest of the goods in a reasonable time.

In choosing a business entity, principals should consider the extent to which they are personally liable for the debt and other contract or tort liabilities of the business entity itself.

True In choosing a business entity, principals should consider the extent to which they are personally liable for debt and other contract or tort liabilities of the business entity itself. Each form of entity has its attendant advantages and drawbacks and a variety of legal consequences for the owners, known as "principals", of the business.

Products liability laws that cover individuals who are injured by a product may take the form of state common law or state statutes.

True Laws that cover individuals who are injured by a product, known as products liability laws, may take the form of state common law or state statutes that expressly impose liability for injuries that result from products. These statutes are based primarily on the Restatements and are relatively uniform from state to state.

Liquidated damages are damages that the parties in a contract agree to ahead of time.

True Liquidated damages are damages that the parties agree to ahead of time. In some cases, it may be very difficult to determine actual damages, so parties may agree at the time of the contract that a breach would result in a fixed damage amount. In order for such provisions to be enforceable, courts have held that liquidated damage clauses must be directly related to the breach and a reasonable estimate of the actual damages incurred (i.e., damages cannot be excessive so as to penalize the breaching party).

Lowery & Humphrey is a small architecture firm that is looking to sell their current office space, which is in a renovated bungalow. The business' drafting tables and desk lamps would be considered tangible personal property of that business and not part of the real property.

True Personal property is both tangible and movable. In a business context, goods, vehicles, inventory, and equipment for business operations, such as computers, desks, and lamps, are all examples of personal property.

The two types of regulations relating to real property that are most crucial in business planning and operations are zoning ordinances and environmental regulations.

True State and local governments frequently pass statutes and ordinances that impose regulation on how a landowner may use a particular parcel of real estate. These regulations come in several forms. The two types of regulations that are most crucial in business planning and operations are zoning ordinances and environmental regulations.

The Uniform Commercial Code (UCC) does not apply to real estate sales contracts.

True The UCC applies only to contracts for the sale of goods. The UCC defines "goods" as property that is tangible (has a physical existence) and movable from place to place. Real estate transactions are subject to common law rules.

The good faith provision of the Uniform Commercial Code (UCC) imposes a duty of honesty and commercial reasonableness which is the bedrock of any sales contract.

True The UCC has a good faith provision (similar to the duty of good faith in a common law contract) that imposes a duty of good faith and commercial reasonableness as the bedrock of any sales contract. Good faith is defined in the UCC as "honesty in fact in the conduct or transaction concerned." In addition, merchants have the duty to act in a commercially reasonable manner. Generally, this means that merchants (merchants only) must observe industry standards and practices that may be unique to a particular industry or field.

The Uniform Commercial Code (UCC) considers electronic records and signatures in a sales transaction to be valid.

True The UCC recognizes electronic records and signatures in a sales transaction as valid. This means that the hard copies of documents with original signatures are not always necessary. Although the UCC does not require electronic transactions, it makes clear that a sales contract is not unenforceable simply because it is in electronic form.

Deviation from the required performance under a contract is known as "material" when the deviation results in a substantial change in value of the contract or changes the fundamental basis of the agreement.

True The law recognizes a party's good faith effort to substantially perform her obligations by allowing the substantial performance to satisfy the requirements of the agreement and trigger the other party's obligation to perform. In order to prevail in a substantial performance case, the party trying to enforce the contract must show that any deviation from the required performance is not material. In this context, "material" means some deviation from the contract that results in a substantial change in value of the contract or changes a fundamental basis of the agreement.

The underlying policy of the Uniform Commercial Code (UCC) is to promote commercial efficiency by providing standardized procedures that merchants and consumers may rely upon.

True The underlying policy of the UCC is to promote commercial efficiency by providing standardized procedures that merchants and consumers may rely upon. The provisions of the UCC were drafted with the goal of promoting the completion of a business transaction.

Kathleen has been hired as an accountant at a large accounting firm. However, her employment contract remains valid only if she passes the CPA exam within a year of joining the firm. The accounting firm is not obligated to retain Kathleen as an employee if she does not pass the CPA exam in time. This is an example of a "condition subsequent".

True This is an example of a "condition subsequent". A contract condition is categorized as either a "condition precedent", where the event must occur before contract performance is due, or a "condition subsequent", where the event occurs after the contract performance and discharges the parties' obligations.

Under the doctrine of accord and satisfaction, rendering an agreed substitute performance guarantees discharge of the existing performance obligation.

True Under the doctrine of accord and satisfaction, one party agrees to render a substitute performance in the future (known as accord), and the other party promises to accept that substitute performance in discharge of the existing performance obligation. Once the substitute performance has been rendered, this acts as a satisfaction of the obligation.

General partnerships are created by when two or more principals demonstrate their intent to carry on as co-owners of a business for profit, even when they have not filed a form with a government agency.

True Unlike most business entities, general partnerships are not created by filing a form with a government agency. Instead, the law recognizes two or more principals as being a general partnership if they have demonstrated an intent to carry on as co-owners of a business for profit.

When a partner dissociates herself (rightfully or wrongfully) from a general partnership, the partnership does not automatically dissolve and may continue with the remaining partners.

True When a partner dissociates herself (rightfully or wrongfully) from a general partnership, the partnership does not automatically dissolve. In fact, the Revised Uniform Partnership Act (RUPA) leans toward the notion that the partnership can continue.

Article 2 of the Uniform Commercial Code (UCC) contains special provisions that apply only in transactions between merchants.

True While many sales contracts involve the sale of goods to a consumer, Article 2 also contains special provisions that apply only in transactions between merchants. A merchant is one that is regularly engaged in the sale of a particular good. The UCC imputes a certain level of knowledge and awareness to merchants and allows their transactions to proceed in an expedited manner without the necessity for safeguards intended for average consumers.

Marcela does all of the advertising, marketing, and sales for Finn's cookie delivery service in exchange for twenty percent of the profits. Even though they have not entered into a formal partnership agreement, Marcela and Finn may be considered general partners under the theory of implied partnership.

True While, the parties may not actually intend to be partners, the law can still recognize their relationship as an implied partnership. The law recognizes two or more principals as being a general partnership if they have demonstrated an intent to carry on as co-owners of a business for profit. While some general partnerships have extensive written agreements detailing the internal operations of the business and the rights and responsibilities of the principals, others operate without any written agreement at all. In the absence of an agreement, the Revised Uniform Partnership Act (RUPA) governs a general partnership.

Which of the following is true of product liability?

Warranty laws impose liability even in the absence of negligence. Warranty laws are important protection for purchasers because they impose liability even in the absence of negligence. When the seller makes a representation of fact about a product, this is known as an express warranty. If the seller has not made a specific representation about the product, the buyer may still be protected by a Uniform Commercial Code-imposed implied warranty.

André is starting a small office supply business in his hometown. He enters into an agreement with Georgios, the owner of a retail space, to lease his new shop on a month-to-month basis. The lease renews automatically until one party gives advance notice to terminate the lease. André hopes to grow his business in that location for five years, then move to a larger space. The leasehold estate created by the landlord-tenant agreement between André and Georgios is

a periodic tenancy. A landlord and tenant may not wish to fix a specific time period but rather to have a month-to-month agreement that continues to renew automatically for that time period (in this case, one month) until one party or the other gives advance notice that he wishes to terminate the lease. This leasehold estate is known as a periodic tenancy.

Under the doctrine of ______, a party may gain title to real estate through actual possession that is continuous, visible, and exclusive.

adverse possession In some cases, a party may gain title to real estate through the doctrine of adverse possession. In order to acquire title to land through adverse possession, the acquiring party must demonstrate that she has possessed it in a certain way for a certain period of time. These requirements are often spelled out in a particular state's statutory or common law. In general, the requirements are that the party must have met a three-prong test. Obtaining title requires that the adverse possession must have been (1) open, notorious, and visible; (2) exclusive and actual; and (3) continuous.

Elise was injured when her Proper Pour coffee pot spontaneously shattered. Elise may pursue a products liability claim against Proper Pour under all of the theories of liability listed below, except

assumption of risk. In a products liability case, the injured party may pursue a legal remedy against the seller under one of three theories of liability: (1) negligence, (2) warranty, or (3) strict liability. In the above scenario, Elise can pursue her products liability claim under any of these three theories. Assumption of risk is a defense the seller might be able to use in response to a products liability claim and is not a theory of liability.

The intentional touching of another person, without that person's consent, in a harmful or offensive manner is called _____.

battery The intentional touching of another person, without that person's consent, in a harmful or offensive manner is called battery.

Terms of a contract that predetermine which nation's laws and court system will be used in a potential lawsuit over that contract are called _____.

choice of law and forum clauses Terms of a contract that predetermine which nation's laws and court system will be used in a potential lawsuit over that contract are called choice of law and forum clauses. It is particularly important for managers to understand choice of law and forum principles in international contracts because risk and expense of enforcement become increasingly important factors that should be considered in arriving at appropriate pricing, delivery proposals, and insurance needs.

Eminent domain is traditionally invoked using a(n) _____.

condemnation proceeding Eminent domain is traditionally invoked using a condemnation proceeding. Once a government has decided that certain real estate is necessary for public use, the government typically begins to negotiate sales agreements with the private property owners of the area(s) to be taken.

When a seller breaches a sales contract, the Uniform Commercial Code (UCC) permits the buyer to prevent further losses by canceling the contract and purchasing substitute goods from another vendor in order to continue business operations. This right is known as _____.

cover When a seller breaches a sales contract, the UCC provides the nonbreaching buyer with an option to take immediate steps by canceling the contract and purchasing substitute goods from another vendor, a right known as "cover", in order to continue business operations. The UCC requires the covering party to purchase the goods in good faith and without unreasonable delay.

When the parties to a contract perform their agreed contractual obligations in good faith to complete the contract, this is known as _____.

discharge Most commonly, the parties agree on terms and the parties perform the contractual obligations in good faith in order to complete the contract. This completion is known as discharge, because both parties have now "discharged" their obligation to the other by performing the agreed-upon duties.

If one party to a contract uses any form of unfair coercion to induce another party to enter into or modify a contract, the coerced party may avoid the contract on the basis of _____.

duress If one party to a contract uses any form of unfair coercion to induce another party to enter into or modify a contract, the coerced party may avoid the contract on the basis of duress. Violence, economic threat, and threat of extortion are three categories of duress recognized by law.

Andrew owns a piece of land covering 24 acres. He has unrestricted rights over the land, except for those restrictions imposed by law. His rights are valid for an unlimited period of time and the land can be inherited by his son or daughter. In other words, Andrew's rights over his land are best characterized as _____.

fee simple absolute Andrew's rights over his land are best characterized as fee simple absolute. Fee simple absolute means that the rights are unrestricted (of course, always subject to the restrictions imposed by law, such as zoning), infinite in duration, and inheritable by the owner's heirs.

Josh tells Rick that the mountain bike he's selling is less than a year old, has recently been serviced, and is in great condition. Rick agrees to buy the bike and signs Josh's contract. However, Josh knows that his bike is six years old and needs repairs. Rick is seriously injured when the bike malfunctions on his first mountain ride. In this scenario, Rick might be able to avoid the contract and recover damages because Josh's conduct meets the standard for _____.

fraudulent misrepresentation In this scenario, Josh's conduct would satisfy the requirements for fraudulent misrepresentation. When one party has engaged in conduct that meets the standards for misrepresentation and that party has actual knowledge that the representation is not true, this is known as fraudulent misrepresentation (sometimes referred to, simply, as fraud). That is, misrepresentation plus knowledge (also known as guilty knowledge) equals fraudulent misrepresentation.

When the subject matter of the contract has been destroyed subsequent to the agreement but prior to performance, the remaining contract obligations will likely be discharged on the basis of _____.

impossibility When the subject matter of the contract has been destroyed subsequent to the agreement but prior to performance, the remaining contract obligations will likely be discharged on the basis of impossibility.

Stephanie agrees to sell her sailboat to Walter and to deliver in two weeks. Walter then learns that Stephanie is looking for another buyer who will pay a higher price. Walter turns to the court to stop Stephanie from selling her sailboat to any other party. In this case, Walter is seeking _____.

injunctive relief In this scenario, Walter is requesting that the court grant injunctive relief. A court order to refrain from performing a particular act is known as injunctive relief.

According to the Revised Uniform Partnership Act (RUPA), when a partner exercises a rightful dissociation, the partner

is no longer liable for debts incurred by the partnership. According to the RUPA, when a partner exercises a rightful dissociation, she is no longer liable for the debts and liabilities incurred by the partnership. Although the partner is still liable for predissociation liability, she no longer owes any fiduciary duty to the partnership or the remaining principals.

A sole proprietorship ____.

is not subject to corporate income taxation. A sole proprietorship is not subject to corporate income taxation, and the principal does not file a separate tax return on behalf of the business. Rather, the principal reports business income and expenses on her own individual tax return and pays taxes on business income (or deducts business losses) based on her own individual tax rate.

Carmen, Esther, and Dan have a general partnership to operate a construction company. Carmen owns 60% of the company and Esther and Dan each own 20%. A passerby was recently injured at one of their sites and obtained a judgment against the company for her extensive medical bills and other damages. If the business' assets are insufficient to cover the damages, the general partners' personal assets are at risk

jointly and severally, regardless of their percentage of ownership interest in the partnership. General partners' personal assets are at risk for the full amount of the debts and liabilities of the partnership jointly (all partners together) and severally (each and every partner separately) regardless of their percentage of ownership interest in the partnership.

When one merchant proposes a term in the purchase order but the other merchant's acknowledgment form includes a term that is different from the offer, the majority of states apply the rule that the conflicting terms cancel each other out and neither term becomes part of the contract. This is known as the _____.

knockout rule In some cases, one merchant proposes a certain term in the offering document (e.g., the purchase order), but the other merchant's acceptance (e.g., the acknowledgment form) states a term that is different from the offer. In such a case, the majority of states use the knockout rule. Under this rule, the conflicting clauses knock each other out and neither clause becomes part of the contract. Instead, the parties look to the UCC's gap-filler provisions to supply the term.

In cases of fraudulent misrepresentation, the law is most likely to allow the innocent party to recover when the tortfeasor

knows that the misrepresented fact is false. In cases of fraudulent misrepresentation, the law allows the innocent party to recover if (1) the misrepresentation was a material fact known to be false by the tortfeasor (or was a reckless disregard for the truth); (2) the tortfeasor intended to persuade the innocent party to rely on the statement, and the innocent party did, in fact, rely on it; and (3) the innocent party suffered damages.

Koralia left her designer jacket with the coat check attendant at a fine dining restaurant. The coat check attendant went on break, without locking the coat check room, and the jacket was stolen. In the context of bailment relationships, the restaurant is most likely

liable as a bailee because the coat check attendant failed to act with reasonable care to protect the jacket. Bailments are created when the bailor (owner of the property) entrusts a bailee to temporarily hold the property. If parties intend to create a bailment relationship, the bailee owes a duty of care and a duty to act reasonably in protecting the property. In this scenario, the restaurant is likely liable as a because the coat check attendant failed to act with reasonable care to protect the jacket.

One of the primary differences between a general partnership and a limited partnership is that

partners in a general partnership are permitted to bind the partnership; limited partners do not have the authority to bind the partnership. One of the primary differences between general partners and limited partners is the extent to which they are permitted to be involved in day-to-day operations of the business. General partners manage the business and are permitted to bind the partnership. Limited partners may engage in consulting and contribute expertise but may not engage in management activities such as supervision of employees.

Under the Uniform Commercial Code (UCC), a seller's obligation actually goes beyond just delivering conforming goods. The seller must deliver the goods in a manner that matches the contract terms in every respect. This is known as the _____.

perfect tender rule Under the UCC, a seller's obligation actually goes beyond just delivering conforming goods. The seller must tender the goods in a manner that matches the contract terms in every respect. This is known as the perfect tender rule.

Under a typical franchise agreement, the franchisor sells the franchisee the right to do all of the following, except

sell the business' retail space to a third party. An existing entity that wishes to distribute its products to a broader market without the overhead costs of retail space, equipment, and employees can do so through the use of a franchise. A franchise should be thought of as a method of conducting business that centers on a contractual relationship rather than as a business entity. Federal statutes define a franchise as an arrangement of a continuing commercial relationship for the right to operate a business pursuant to the franchisor's trade name or to sell the seller's branded goods. A franchise involves the franchisor, a business entity that has a proven track record of success, selling to a franchisee the right to operate the business and use the business's trade secrets, trademarks, products, and so on.

General partnerships can be funded in a number of ways, except

selling ownership rights through public markets. General partnerships are generally funded either through debt or through a sale of equity. Partnerships may not, however, sell ownership rights through the public markets, such as the New York Stock Exchange. Sometimes general partners hedge their financial investment through a combination of debt and equity.

The U.N. Convention on Contracts for the International Sale of Goods (CISG) is different from the Uniform Commercial Code (UCC) in that

the CISG allows sellers the right to cure even after the performance period is over. The CISG gives sellers an absolute right and obligation to cure, and buyers must allow the seller an adequate opportunity to cure even if the time for performance is past due. The buyer must give notice of the nonconformance in a timely manner in order to trigger the seller's cure obligations.

An aggrieved party is entitled to recover consequential damages when

the damages are an indirect result of the contract breach. An aggrieved party is entitled to recover consequential damages if the damages are caused by unique and foreseeable circumstances beyond the contract itself. However, in order to recover consequential damages, those damages must still "flow from" the breach (i.e., the damages were a consequence of the breach).

The authority of state and federal governments to take an individual's private property is called _____.

the power of eminent domain The authority of state and federal governments to take a person's private property is called the power of eminent domain. This power is derived from the Takings Clause of the Fifth Amendment, which states: "[N]or shall private property be taken for public use without just compensation."

Generally, the Uniform Commercial Code (UCC) provides that a merchant's firm offer can only be irrevocable for a maximum period of _____.

three months A firm offer is created when a merchant offers to buy or sell goods with an explicit promise, in writing, that the offer will be held open for a certain time period. In general, the UCC provides that the offer can only be irrevocable for a maximum period of three months.

The party that commits a civil wrong and causes the other party to suffer a loss is called a(n)

tortfeasor. One who commits a tort is known as the tortfeasor. The tortfeasor's wrongful conduct is described as tortious conduct.

Amounts spent in defining, monitoring, and enforcing property rights are often called

transaction costs. Property rights to a good must be defined, their use must be monitored, and possession of rights must be enforced. The costs of defining, monitoring, and enforcing property rights are often called transaction costs. Depending on the level of transaction costs, various forms of property and legal institutions will develop.

Under the doctrine of res ipsa loquitur, the injured party can prove a negligence claim by

using the facts of the case to create a presumption of negligence. The doctrine of res ipsa loquitur (a Latin phrase meaning "the thing or matter speaks for itself") is deep-seated in American tort law. This doctrine allows an injured party to create a presumption that the tortfeasor was negligent by pointing to certain facts that infer negligent conduct. Through res ipsa loquitur, the injured party can make a successful negligence claim without showing exactly how the tortfeasor behaved.

Which of the following is NOT included in the revised limited liability company (LLC) statute, the RULLCA?

A mandatory structure for the LLC's management. The revised LLC statute (RULLCA) addresses several issues related to the operating agreement. First, it establishes the primacy of the operating agreement in evidencing the relationship among the limited liability company and its members, the rights and duties of any managers, and the activities and affairs of the company. Second, it lists those matters that are not subject to change by the operating agreement by setting forth 17 nonwaivable statutory provisions related to liability of the entity and its members. Third, it confirms that an operating agreement may include specific penalties or other consequences if a member fails to comply with its terms or upon certain events specified in the operating agreement.

Which of the following statements is true of the taxation of limited liability partnerships (LLPs)?

All income or losses from an LLP are reported on the partners' individual tax returns. LLPs are treated as pass-through entities. They are not subject to tax; any income is taxed only when it is distributed to its partners. Because it is not a taxable entity, an LLP files an information return that informs federal and state tax authorities of the profits and losses of the LLP. All income or losses are reported on the partners' individual tax returns. Any losses are deductible and may sometimes help to reduce taxes on other sources of revenue in the individual's tax return.

Which of the following statements accurately differentiates between the management of a limited liability company (LLC) and a limited liability partnership (LLP)?

An LLC may be member-managed or manager-managed; an LLP is managed by managing partners or an executive committee. Most states distinguish between a member-managed LLC and a manager-managed LLC. Managing members manage LLCs, whereas an executive committee or managing partners manage an LLP.

Which of the following is most likely to be considered a violation of the Sherman Act?

Blue Orchid, Inc. attempts to acquire enough power so they can fix prices and exclude competitors and gains control over 75% of the flower delivery market. In the above scenario, Blue Orchid's actions most likely violate the Sherman Act because the statute outlaws affirmative action toward monopolizing or attempting to monopolize a part of trade or commerce. The Sherman Act does not prohibit a business entity from becoming a monopoly. Instead, the statute prohibits the use of monopoly power to create an anticompetitive market in a particular industry. For a business entity to violate the Sherman Act, it must possess monopoly power and must have an overt intent to monopolize.

The _____ is a federal antitrust law enacted in 1914 to prevent specific types of trade restraints, including exclusive dealing arrangements, tie-in sales, price discrimination, mergers and acquisitions, and interlocking directorates.

Clayton Act The Clayton Act was enacted to prevent specific types of restraints, including exclusive dealing arrangements, tie-in sales, price discrimination, mergers and acquisitions, and interlocking directorates.

Dan is the managing member of a limited liability company (LLC) called Zenith LLC. Dan signs a five-year lease on behalf of the LLC for a retail space. Three years later, Zenith suffers huge losses and defaults on its lease payments. The company is forced to breach the lease and move out of the retail space. In the context of liability payments, which of the following statements is most likely to be true?

Dan is only obligated to use his personal assets to complete the payment obligations of the business if he signed a personal guarantee. Dan must use his personal assets to guarantee payment obligations of the business venture if he signed a personal guarantee. Although LLC members are insulated from personal liability for any business debt or liability, creditors often require that LLC members sign personal guarantees, pledging their personal assets to assure payment. In cases of fundamental unfairness, a court may disregard the LLC protections for the members.

_____ occurs when an individual member of a limited liability company (LLC) exercises their right to withdraw from the partnership.

Dissociation Dissociation occurs when an individual member exercises their right to withdraw from the partnership. Generally, upon a dissociation, the remaining members may either continue or trigger dissolution of the LLC.

In a direct action suit, the individual shareholder or group of shareholders sues an insider on behalf of the corporation.

False A shareholder's derivative action suit is not the same as a shareholder's direct action suit. In a derivative action suit, an individual shareholder (or a group of shareholders) brings a lawsuit against an insider in the name of the corporation itself. In a direct action suit, the shareholder brings suit on her own behalf.

All states recognize and provide the same procedural and internal default rules for a limited liability company (LLC) by statute.

False All states recognize and provide both procedural (formation) and internal default rules (in the event the parties do not agree otherwise) for an LLC. However, LLC statutes can vary considerably from state to state.

Privately held corporations may issue bonds to raise capital, but publicly held corporations may not.

False Both privately held and publicly held corporations may issue bonds. Even relatively small corporations use bonds to finance expansion or the building of a new facility, and bonds can range in amount from several hundred million dollars to as little as $500,000. Bonds for such small amounts are sometimes called "micro bonds".

Price-fixing between competitors is not a per se violation of the Sherman Act.

False Collusion among competitors to set artificially high prices—a practice known as price-fixing—is a clear example of a per se violation of the Sherman Act. The per se standard has been developed into a comparatively complicated body of law and tests for federal courts to apply.

Corporate officers have only express authority, as outlined by the company bylaws, and do not have any implied or inherent authority to act on behalf of the corporation.

False Corporate officers have both express and implied authority. Express authority comes from the bylaws or through a board of directors' resolution that gives specific authority to a particular officer. Certain corporate officers also have implied or inherent authority to act as agents of the corporation.

Corporations are created through a federal law filing, and their formation is governed by federal statutes.

False Corporations are created through a state law filing, and their formation is governed through state statutes. State statutes vary in their corporate formation and governance rules, but each state has a specific law, often called the business corporation law.

A limited liability company (LLC) is formed when a general partnership files a statement of qualification with the appropriate public official.

False Limited liability partnerships (LLPs) are formed when a general partnership files a statement of qualification with the appropriate public official. The conversion of the partnership must be approved by a majority of the ownership. The statement of qualification includes the name and street address, an affirmative statement electing to become an LLP, an effective date, and the signatures of at least two of the partners. Some states also require a filing to inform tax authorities of the existence of the entity. Once approved, the filing becomes part of the public record.

One of the primary weaknesses of a limited liability company (LLC) is that members do not have flexibility to determine the rights and responsibilities of each member.

False One of the primary benefits of an LLC is that it affords its members a great deal of flexibility in determining the rights and responsibilities of each member. LLC operating agreements cover many of the internal rules for the actual operation of the entity and will typically set forth a structure for managing the entity through a single member or a board of "managing members" (akin to a board of directors). The operating agreement also defines the members' responsibilities for the day-to-day operations.

ZincX Inc. shareholders sue Ralph, a director, for making a poor financial decision that cost the company millions of dollars. Ralph can claim protection under the business judgment rule as long as he had a vested financial self-interest in the disputed financial decision.

False Ralph may not claim protection under the business judgment rule if he had any financial self-interest in the disputed transaction or decision. Being a shareholder of a merging company or a supplier to a corporation may be dangerous territory for a director because a transaction with the merger partner or supplier may have some degree of self-dealing contamination that will deprive the director of any business judgment rule protection.

Under the Sherman Act, all monopolies are illegal.

False The Sherman Act does not make all monopolies illegal. Only a monopoly that has been acquired or maintained through prohibited conduct is illegal.

Violators of antitrust laws are only subject to civil penalties, not criminal penalties.

False Violators of antitrust laws are subject to both civil penalties and criminal sanctions, including incarceration. Antitrust laws are exclusively federal statutes, and the agencies charged with enforcement of these laws are the Department of Justice (U.S. Attorney's Office) and the Federal Trade Commission.

Which of the following is true of the taxation of a C corporation?

In a C corporation, both the entity and the shareholders pay tax through a system of double taxation. In a double taxation system, C corporations pay tax on their earnings, then shareholders pay tax on any corporate earnings distributed to them in the form of dividends. The taxation occurs at both (1) the corporate level, when income is earned by the corporation, and (2) the individual level, when it is distributed as a dividend (profit) to the shareholder.

Which of the following statements is true of a limited liability company (LLC)?

In a member-managed LLC, the management structure of the entity is similar to a general partnership. In a member-managed LLC, the management structure of the entity is similar to a general partnership with all the members having the authority to bind the business.

Lindsay is one of the directors of Sky Create, Inc, a graphic design company. In which of the following situations will a court most likely find that Lindsay breached her duty of care?

Lindsay believes that a reporting officer has been acting suspiciously but still allows him to make decisions. A court will most likely find that Lindsay breached her duty of care if she believes that a reporting officer has been acting suspiciously but still allows him to make decisions. Under the Revised Model Business Corporation Act (RMBCA), directors still fulfill their duty of care even though they did not personally verify the records or other information provided to them by officers or outside experts whom they reasonably believe to be reliable and competent. However, directors have the obligation to question any suspicious activity by the corporation or its officers. If the issue is outside their field, they must investigate it by consulting outside experts (such as a CPA or an attorney).

Mira, Alex, and Petra are partners in the Lexington Bookkeeping Services company, a limited liability partnership (LLP). Alex engaged in tortious conduct by converting (taking) their clients' funds for his own personal use. If the plaintiff clients sue Lexington Bookkeeping Services, but the business' assets cannot cover the damages, which is the following is likely to be true?

Mira's and Petra's personal assets will be protected, but not Alex's personal assets. In cases where a partner has engaged in some misconduct or tortious conduct (such as conversion or negligence), the LLP acts to shield only the personal assets of the innocent partners—never the partner who committed the misconduct. In this scenario, Mira's and Petra's personal assets will be insulated from liability, but not Alex's personal assets because he committed the tortious conduct.

The Federal Trade Commission regulations relating to franchises are designed primarily to do which of the following?

Provide full disclosure of relevant information about the franchise, prior to the franchisee's investment. The FTC is the federal regulatory authority that oversees the regulation of franchisors. The FTC regulations are primarily designed to ensure full disclosure of all information relating to a franchise company prior to a franchisee's investment.

Wind-Block Inc. manufactures equipment required for building wind turbines. It is the monopoly holder in the industry, which gives it the inherent power to set prices without any chance of losing market share to competition. Which of the following antitrust laws is designed to combat this problem?

Structural-offense laws In the above scenario, structural-offense laws can be used to combat the problem of a monopoly holder having the inherent power to set prices without losing market share due to competition. Structural-offense laws are for offenses that do not involve a behavioral aspect (such as price-fixing).

Which of the following statements is true of the famous U.S. v. Microsoft case?

The government alleged that Microsoft used its monopoly in the computer operating system market to eliminate competition from a more popular Internet browser. The government alleged that Microsoft used its monopoly in the computer operating system market to eliminate competition from a more popular Internet browser, called Navigator, sold by Netscape. The trial court ruled against Microsoft and ordered the radical remedy of requiring Microsoft to reorganize its operating system entity separate and apart from its entity responsible for Explorer. On appeal, the D.C. Circuit Court of Appeals affirmed the finding by the trial court that Microsoft fundamentally employed illegal anticompetitive means to maintain and further its monopoly of the operating system market; the court reversed and remanded for reconsideration the finding that Microsoft illegally attempted to monopolize the browser market, ruling that the appropriate standard was the rule of reason analysis. It also vacated the order requiring the company to break apart.

Which of the following is true of privately held corporations?

They often use unanimous consent resolutions to handle tasks like electing directors or issuing stock. In lieu of an actual meeting, privately held corporations often use a single document signed by each principal to dispose of necessary tasks such as electing directors or issuing stock. This document is known as a unanimous consent resolution.

A partnership agreement typically establishes a limited liability partnership's (LLP's) management and operational structure.

True Although not required by statute, limited liability partnerships will frequently have a partnership agreement that sets out the management and operational structure. LLPs are sometimes governed by one or more managing partners and/or some type of executive committee elected by the other partners. Day-to-day operations, partners' powers, election procedures, qualifications, compensation, meeting times, and other organizational matters are typically addressed in the partnership agreement.

An agreement between the government and a party that spells out detailed conditions and compliance measures that the party agrees to take in exchange for the government's not pursuing a court action is known as a consent order.

True An agreement between the government and a party that spells out detailed conditions and compliance measures that the party agrees to take in exchange for the government's not pursuing a court action is known as a consent order. After sparring with federal and state regulators (not to mention competitors) in the courts over several years, Microsoft settled United States v. Microsoft case in 2002 by entering into a consent order.

A promoter that acts on behalf of a corporation, knowing incorporation has not yet occurred, may be jointly and severally liable for all liabilities created by those acts.

True Generally, a promoter is personally liable when she knows (and the other party has no reason to know) that the corporation is not in existence on the day of the signing. The Revised Model Business Corporation Act (RMBCA) provides that anyone purporting to act on behalf of a corporation (i.e., a promoter), knowing incorporation has not yet occurred, is jointly and severally liable for all liabilities created by those acts.

Antitrust laws provide for government enforcement of antitrust statutes and permit an aggrieved party to file a private enforcement action against an alleged antitrust violator.

True In addition to providing for government enforcement of antitrust statutes, antitrust laws also permit an aggrieved party to file a private enforcement action against an alleged antitrust violator. Some antitrust statutes allow a party that suffered damages by virtue of any antitrust violation the right to a private suit in the federal courts for triple the damages sustained plus reasonable attorney fees and a court order restraining future violations.

In certain situations, a limited liability partnership (LLP) has the right to "call" for more money contributions from each partner to keep the partnership afloat.

True In certain situations, an LLP has the right to "call" for more money contributions from each partner to keep the partnership afloat. Although terms vary, partners that are not in a position to make a call contribution may be forced to sell their interest in the partnership.

Parties generally agree to the specifics of managing their limited liability company (LLC) through a management (or operating) agreement.

True LLC statutes typically assume that the members will agree on the specifics of managing the venture through a management agreement or an operating agreement.

Modern-day antitrust enforcement is primarily concerned with protecting the competitive process to, ultimately, benefit consumers.

True Modern-day antitrust enforcement is concerned primarily with protecting the competitive process rather than individual competitor companies. The underlying theory is that protection of this process will ultimately benefit consumers.

Before shareholders of a corporation can file a derivative action lawsuit, they must first make a formal demand on the board of directors to take corrective action and must allow sufficient time for correction.

True There are several special procedural requirements for a derivative action. The most important requirement is that the shareholders must first make a formal demand on the board of directors to take corrective action and must allow sufficient time for correction.

Which of the following is an example of a vertical restraint?

Tying agreement Vertical restraints refer to acting in concert with another party on a different distributional level. Tying agreements or tie-ins are vertical restraints. Sellers that tie a second product to the first product are acting illegally per se if the seller possesses sufficient market power to render the tie-in coercive.

Which of the following is true of dissociation in a limited liability company (LLC)?

Upon dissociation, the remaining members have the choice to either continue the LLC or to trigger dissolution. Dissociation occurs when an individual member decides to exercise the right to withdraw from the partnership. Upon a dissociation, the remaining members may either continue the LLC or decide to trigger dissolution.

A limited liability company (LLC) is formed by filing _____ with the state public filing official in the secretary of state's corporation bureau.

articles of organization An LLC is formed by filing articles of organization (also called a certificate of organization) with the state public filing official in the secretary of state's corporation bureau.

A limited liability company's (LLC's) operating agreement will typically contain provisions for all of the following, except

assigning personal liability to the members for business debts. LLCs are frequently governed by agreement of the parties in the form of an operating (or management) agreement. Operating agreements, similar to partnership agreements, cover many of the internal rules for the actual operation of the entity. The operating agreement of the LLC often controls the amount and methods of capitalizing the business; the procedure for handling a member's death or incapacity; the structure of governance; and the members' responsibilities. If the parties do not execute an operating agreement, the state LLC statute sets out default rules.

A _____ occurs when competing firms agree not to deal with a third party (whether it be buying from or selling to that party).

boycott A boycott occurs when competing firms agree to a concerted refusal to deal with a third party (whether it be buying from or selling to that party) and may be considered a per se Sherman Act violation.

When principals wish to convert a privately held corporation to a publicly held corporation, they will typically

engage in an initial public offering (IPO). When privately held corporations require more capital to expand, they may go through the very complex and time-consuming process of converting the corporation from privately held to publicly held by engaging in an initial public offering (IPO). At that point, the corporation may raise equity by selling its shares to the general public and financial institutions.

Many state limited liability company (LLC) statutes provide for the judicial expulsion of a member for any of the following reasons, except

engaging in conduct that goes against the majority opinion of LLC members. Many state LLC statutes provide for judicial expulsion if one or more members of the LLC demonstrate to a court that a member has (1) engaged in wrongful conduct that has adversely and materially affected the LLC, (2) willfully committed a material breach of the operating agreement, or (3) engaged in conduct relating to the company's activities that make it not reasonably practicable to carry on the activities with the member.

An S corporation

has the ability to distribute earnings without incurring double level taxation. Subject to certain exceptions under the tax laws, Subchapter S corporations are not subject to tax at the entity level. They have the ability to distribute earnings without incurring double level taxation (i.e., without having a tax imposed on both the entity and the equity holder).

Sandra is a member of the board of directors at SwimGym, Inc. Sandra failed to attend most of last year's board meetings, claiming that she was unaware of their occurrence. During the meetings she did attend, it was clear that she had not read the reports or financial records provided by the company and was not up to date with the latest developments. In this scenario, Sandra breached her duty of care primarily through _____.

negligence In this scenario, Sanra breached her duty of care primarily through negligence. Courts have held that a director breaches her duty of care when she has failed to fulfill her role in oversight. When a director does not read reports, financial records, or other information provided by the corporation or fails to attend meetings, this weighs heavily in favor of a finding of a breach of duty through negligence.

Ancient Grove specializes in selling premium olive oil. If Ancient Grove enters into an agreement with an olive oil producer in Greece to purchase all the oil they produce, this would be a(n) _____.

output contract In this scenario, the contract entered by Ancient Grove is an output contract. In output contracts, the quantity may be an open term if a buyer agrees to purchase all of the goods that a seller produces. After entering into an output contract, the seller gives up the right to sell the goods elsewhere.

There are two lemonade stands on the same street. Each time one vendor lowers the price of a glass of lemonade, the other vendor does the same. If one of the vendors increases the price of a glass of lemonade, the other vendor does the same. This is an example of _____.

price leading The above scenario is an example of price leading, which is cutting or increasing prices based on the actions of a competitor. Although this may appear to be price-fixing, the element of agreement is usually not satisfied in these circumstances because the competitors are not taking these actions in concert (i.e., jointly or in unison) with the intent to restrain competition.

Courts have traditionally treated the sport of _____ as exempt from the Sherman Act.

professional baseball A recurring debate in antitrust law centers on whether collegiate and professional sports leagues are unfairly restraining trade through league rules and policies. The history of Major League Baseball's exemption from the Sherman Act dates back to a 1922 U.S. Supreme Court case in which the Court ruled that the business of putting on an "exhibition" of baseball did not involve interstate commerce and was therefore not subject to the provisions of the Sherman Act. The Court reaffirmed the exemption in the 1952 case Toolson v. New York Yankees.

Corporate bylaws typically set the procedures and requirements for electing a board of directors. When the bylaws specify the number of shareholders who must be present to hold a vote, this is known as the _______ requirement.

quorum Shareholders elect directors. In most corporations directors hold office for one year, but the bylaws can set any term. The bylaws also set the procedures and requirements for an election in terms of time and date, notification to shareholders, and the number of shareholders who must be present to hold a vote—known as the quorum requirement.

When the parties have imperfectly expressed their agreement and this imperfection results in a dispute, a court may rewrite the contract so it conforms to the parties' actual intentions. This contract modification is called _____.

reformation When the parties have imperfectly expressed their agreement and this imperfection results in a dispute, a court may rewrite the contract so it conforms to the parties' actual intentions. This contract modification is called "reformation".

Using the _______ standard, a business alleged to have committed a Sherman Act violation may offer evidence that its actions were justified and necessary under the economic conditions.

rule of reason If the anticompetitive activities do not rise to the level of a per se violation Sherman Act, courts will apply the rule of reason standard to determine whether a violation has occurred. The rule of reason requires that a fact finder (judge or jury) embark on an examination into market complexities and industry practices in order to determine whether or not the parties' actions violate the Sherman Act. Under this standard, a business alleged to have committed a violation may offer evidence that its actions were reasonable because they were justified and necessitated by economic conditions. In essence, the rule of reason contemplates a scale in which the court weighs any anticompetitive harm suffered against the marketwide benefits of the actions.