Business Organizations

To form an LLC, one must file ____________ with the Secretary of State. a- articles of incorporation b- an operating agreement c- articles of organization d- none of the above

C.

Which one of the following is illegal? a- greenmail b- poison pills c- golden parachutes d- none of the above

D.

Which of the following is not a method for a minority stockholder to force a closed corporation to buy his or her shares of stock? a- A provision in the articles of incorporation or bylaws, which provides a "triggering event" and upon occurrence, the stockholder may demand a buy out b- Shareholder may petition the court for involuntary dissolution of the corporation c- A significant change in the corporate structure, such as a merger, for grounds for a statutory right of appraisal d- Stockholder may make a demand for fair value, to be determined by an appropriate method, for his or her shares of stocks

D. Shareholder may not make a demand at any time for a closed corporation to buy his or her outstanding shares.

T/F - Apparent authority must be traced back to an act of the agent.

False. Apparent authority must be traced to the principal.

Chelsea may ratify the portion of the K for the lease and sale and disaffirm the option to purchase.

False. Can only ratify something 100%.

T/F - A principal is not bound by the acts of an agent if there is no actual or apparent authority.

False. Can still be bound under ratification, estoppel, inherent agency, adoption.

Only majority shareholders may request corporate records.

False. The KRS gives no minimum required percentage of ownership to request corporate records.

Define misappropriation theory.

Imposes Cady-Roberts theory if Defendant used inside information in violation of a duty to the source of the information. Tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing information to the tippee and the tippee knows or should have known that there has been a breach.

What are some of the factors used to evaluate the Unity of Interest when piercing the corporate veil?

Maintaining corporate formalities, commingling of funds, undercapitalization, treating corporate assets as personal

What is a voting trust?

Shareholders who wish to act in concert turn their shares over to a trustee and the trustee votes all the shares, in accordance with instructions in the document establishing the trust.

The business judgment rule does not apply to defensive tactics used by a target company faced with a takeover.

True. "Enhanced scrutiny" is used, i.e., is the objective fair and reasonable.

The demand requirement imposed on stockholders who want to file a derivative action against directors may be excused if the majority of the board has a material financial or familial interest.

True. Other reasons include the inability of the board to act independently or failure to exercise good business judgement.

A member of an LLC who enters into a contract with a third-party but does not fully disclose the identity of the LLC to the third-party, is personally liable under the contract.

True. Under common law of agency, an agent is liable on a contract entered on behalf of a principal if the principal is not fully disclosed.

T/F - Agency requires an agreement between the parties.

True. While a contract is not necessary, there must be agreement b/c agency requires a manifestation of consent by both parties.

Define mandatory indemnification.

Unless limited by its articles of incorporation, a corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he was a party because he is or was a director of the corporation against reasonable expenses incurred by him in connection with the proceeding.

2 kinds of LLC's are...

member-managed and manager-managed

The rules concerning lawyers who go into business with a client require what?

(1) Fair and reasonable terms, (2) Fully disclosed, (3) opportunity to seek outside advice, (4) client consents in written form.

Name 5 common ways to pierce the corporate veil.

(1) Fraud, wrong-doing, injustice to 3rd parties; (2) alter-ego theory; (3) Failure to maintain separate identities between the company and the owners and/or shareholders; (4) Failure to adequately capitalize the company; (5) Failure to follow corporate formalities.

If the claim does not involve wrongdoing by the directors, then the directors need to act...

(1) In good faith, (2) on an informed basis, (3) in a manner they honestly believe is in the best interest of the corporation. This is the 8-300 general standard that directors must meet for everything they do (also called the business judgement rule). If they meet this test, the Plaintiff has a high burden of clear and convincing evidence that the director's decision should not be upheld.

If a claim involves wrongdoing on the part of directors, then the directors need to appoint an independent committee, i.e., a special litigation committee (SLC) to review the allegations and make a decision. Under the Delaware state test, followed in Kentucky, the court will uphold the SLC decision if:

(1) The SLC was independant, (2) the SLC followed appropriate procedures to inform themselves about the issues in the same way a reasonably prudent person would inform themselves before making such a decision, and (3) the Court, using its own business judgement believes the decision of the SLC was reasonable.

What two things must occur for a principle to be bound to a contract by the act of an agent?

1. A principal-agent relationship must exist, and 2. The agent must have "authority," or a "substitute for authority."

What are the seven sources from which agency may arise?

1. Express 2. Implied 3. Apparent 4. Estopple 5. Ratification 6. Adoption 7. Inherent Agency Power

An outsider's shaking down a target company by taking a controlling interest in it, then demanding a premium stock price for return of control is called: a- greenmail b- a white knight c- a poison pill d- a revlon duty

A.

Austin asks permission to buy stock in NObamaCorp, a new company which Jennifer, a member of the Board of Meatbeat, Inc., does not recognize at all and which she admits she knows nothing about. Jennifer just loves the name. Without a second thought, Jennifer sends Austin e-mail permission to make a $50,000,000 purchase of a controlling interest in NObamaCorp with a mouse-click. What has she done wrong? a- Violated her duty of care to Meatbeat, Inc. b- Violated her duty of loyalty to Meatbeat, Inc. c- Violated her due diligence obligations d- Nothing. She's protected under the business judgement rule.

A.

During a takeover, an option granted by a seller to a favored buyer to purchase a valuable company asset at a bargain price: a- a lock-up option b- a golden egg option c- a golden parachute option d- a pacman option

A.

What percentage of stock must a shareholder (or group) hold to trigger the William's Act? a- 5% b- 10% c- 20% d- 50%

A.

Which of the following is not an exception to the independent contractor doctrine and would not subject the principal to possible liability? a- where contractor is not insured b- where principal retains control of manner and means of the work c- where principal engages an incompetent contractor d- where activity contracted is a nuisance pro se or inherently dangerous

A.

Former employees have a fiduciary duty to former employers to: a- not operate a business offering the same services as the former b- not use customer information gained due to working for the former employer in soliciting business c- not solicit customers of the former employer d- none of above

B.

When a shareholder challenges the decision of the Board of Directors, he must prove his case by: a- great weight b- clear and convincing d- preponderance e- substantial

B.

When determining whether an offer for securities is exempt from registration as a "private offering" under Section 4(2) of the Securities Act of 1933, which of the following factors is NOT usually considered? a- Number of offerees b- "Insider" status of the offerees c- Number of units offered d- Size of the financial stakes

B.

When one firm wants to attempt a takeover of another, they may offer to buy stock at a set price, but only actually purchase the stock if they would be able to obtain a certain set amount, say 90%, of the outstanding stock. This is called ________. a- a golden parachute b- a tender offer c- an acquisition offer d- a poison pill

B.

Which of the following must be proved to overcome the defense that a board relied on an expert? a- the expert must commit malpractice b- the expert was not selected with reasonable care c- the advice was based on false information d- all of the above

B.

10(b)-5 mandates: it shall be unlawful for any person, in the connection with the purchase/sale of any security ... (which of the following does not apply): a- to employ an artifice, scheme, or device to defraud b- to make any untrue statement of material fact c- to seize for personal gain any corporate opportunity for profit d- to engage in any act which operates or would operate as a fraud or deceit on any person

C.

Evaluating a stock's fair value is based on asset costs and accounting principles is: a- appraisal b- director's agreement c- book value d- "You name it"

C.

If an acquirer makes a first tender offer for the stock of a target corporation, the Williams Act of 1968 requires that acquirer must.... a- pay the highest price to the stockholders who respond to the initial tender offer first b- pay the offered price to all stockholders choosing to accept the initial tender offer c- pay the same price for all purchases made under the initial tender offer d- pay the price offered under the initial tender offer of no more than 51% of the total shares

C.

Which of the following is not a form of "authority" or a "substitute for authority" under the contract theory of agency law? a- express b- ratification c- primary d- apparent

C.

Once a purchaser has bought a controlling majority share in a corporation, it may: a- require current directors to resign before the end of their term by contract agreement b- appoint new directors c- increase or decrease the number of directors d- all of the above

D.

To disregard a corporate entity and pierce the corporate veil, the Van Dorn test is used. It includes: a- Unity of interest between the parties b- Unity of ownership c- Effect of not piercing the veil d- All of the above.

D.

Which of the following people are not banned from insider trading through the judicial interpretation of Section 10(b) of the SEC? a- officers b- directors c- 10% shareholders d- none of the above

D.

Apparent authority v. apparent agency

Distinct concepts. Apparent agency creates an agency relationship that does not otherwise exist, while apparent authority expands the authority of an actual agent. Think of McDonalds case - the issue was whether 3k was D's apparent agent, not whether D had apparent authority.

What requirement, if not met, is fatal to the private placement exemption to the registration of securities before there is an offering?

Failure to determine number of offers given.

Unless otherwise contracted for, to raise additional capital among partners, a majority of affirmative votes for putting in a determined amount may bind the minority voting partners.

False - default is a unanimous agreement

The labels parties assign to their intended legal relationships are dispositive as to existence of a partnership relationship as a matter of law.

False, the labels a party assigns to their intended legal relationship are probative but not dispositive.

Stockholders in a closely-held corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another.

False, though true in some jurisdictions. Stockholders in close corporations must discharge their management and stockholder responsibility in conformity with this strict good faith standard. Stockholders may not act out of avarice, expediency or self-interest in derogation of their duty of loyalty to the other stockholders and to the corporation.

Courts usually treat the piercing of the LLC veil differently than that of a standard corporation.

False.

To prove an act was ratified by the principal, a 3rd party only has to show that the principal received benefits from the agent's act and failed to repudiate.

False. A 3rd party must first show that the act was "purported to have been done on account of the principal."

Interested shareholders can ratify their own transactions with their corporation.

False. A majority of disinterested shareholders must ratify corporate transactions with an invested director.

A partner may not be reimbursed for payments made to or for liabilities the partner incurred in the ordinary course of business.

False. A partner shall reimburse and indemnify a partner for payments and liabilities incurred by the partner in the ordinary course of business or for preservation of business property.

T/F - A partner who has wrongfully dissolved a partnership may participate in the winding up of the partnership business.

False. A partner who wrongfully dissolved the partnership is precluded from participating in the winding up.

A partner has an individual interest in the assets of a partnership, which is conceived of as a separate entity.

False. A partnership can be conceived as a separate legal entity, similiar to a legal corporation. All partners own in this case is a partner's share of profits and losses. No individual interests.

A partnership is an association of two or more persons to carry on as co-owners, a business, or endeavor with a common purpose.

False. A partnership is an association of two or more persons to carry on as co-owners of a business for profit.

T/F - A principal is never bound to contract liability if the act of the agent was "authorized" and is bound if "not authorized".

False. A principal is always bound to contract liability if the agent was "authorized".

A purchase of securities that results in the purchaser holding more than 10% of a corporation makes the purchaser a "beneficial owner" so that any profits from a sale of those securities within a six-month period are short-swing profits that must be paid to the corporation.

False. A purchaser of securities must account for profits from the sale of the securities within six months only if he was a beneficial owner (i.e., owned 10% or more of the corporation) before the purchase.

Majority stockholders have a fiduciary duty to minority stockholders and cannot sell majority shares at a premium to the detriment of minority interests.

False. Absent any looting of corporate assets, fraud, conversion of corporate property, or other bad faith, a controlling stockholder (or group) is free to sell and a purchaser is free to buy that controlling interest at a premium. A controlling stockholder has no obligation to share that premium with minority shareholders.

Fiduciary duty forbids an agent who has stopped being an agent from utilizing any business knowledge they acquired as an agent to compete with principle.

False. Agent has fiduciary duty not to use proprietary info that only available due to agency relationship, but duty does not apply to all business knowledge and training they acquired while an agent for the principle.

Principal is never liable for the torts of independent contractor.

False. Although a principal is generally not liable for torts of independent contractor, a principal is liable if the work done is a nuisance per se or if the work is inherently dangerous.

An agent can create his own authority.

False. Apparent authority is authority the agent is held out by the principle as possessing. An agent can't create their own authority. Principle must do something to create the reasonable belief in the eyes of a third party that the agent had authority.

In Kentucky, if a Director of a corporation has a conflict of interest regarding a transaction entered into by the corporation, the transaction will be voidable.

False. At common-law, a director could not have any conflict of interest and such transactions would be voidable. However, the common-law rule has been changed by statute in Kentucky. The conflict alone will not make the transaction voidable if the director has disclosed the conflict to the Board or to shareholders, or if neither preceding option is workable, the transaction is fair to the corporation.

A finding of apparent authority will make a principal liable for the acts of its agents under the tort theory of agency law.

False. Authority is not at issue under the tort theory of agency law but apparent agency can make a principal liable for the acts of its agents.

A promoter signs a contract for yet to be formed corporation. The corporation may ratify the promoter's activities.

False. Corporation could not have authorized promoter's acts at the time of the action because the corporation did not exist then. A principal can only ratify if principal could have authorized at the time of the act.

Courts looks primarily at corporate statutes to determine controlling authority for LLC's.

False. Courts look at both partnership and corporate statutes, making it difficult to predict what a court will do.

A partner may in some cases "freeze out" a co-partner by adverse pressure to use the business for his or her own wishes.

False. Even though a partner does not have to stay in a partnership that is unprofitable, he cannot freeze out another partner by adverse pressure and appropriate a business for his own use. Likewise, he may not dissolve a partnership to gain the benefits of the business for himself unless he fully compensates his co-partner for his share of the prospective business opportunity.

Generally, one partner can deny another partner's agency status and deny the partner's authority to act for the purpose of conducting partnership business.

False. Every partner is an agent of the partnership for the purpose of its business and the act of every partner done in furtherance of partnership business binds the partnership unless the partner acting has no authority to act for the partnership in the particular matter and the person with whom he is dealing has knowledge of the fact that he has no authority.

The only fiduciary duty a partner owes to a partnership and the other partners is the duty of loyalty.

False. Fiduciary duties also includes a limited duty of loyalty and a duty of care to the partnership and partners to refrain from gross negligence, intentional misconduct, or violating the law knowingly.

A showing of fraud perpetrated by the parent company is required to prove that the subsidiary is a "mere instrumentality."

False. Fraud is not necessary, but it is sufficient for proving "mere instrumentality." A totality of the circumstances standard is used to establish "mere instrumentality" or the alter ego relationship, between parent and subsidiary before a court will set aside the corporate form and expose the parent to direct liability.

A corporation must be registered as such and will never be treated as one without proper filing.

False. If an entity detrimentally relies on the organizations status as a corporation, a defendant-organization may be estopped from denying its status as a a corporation.

Incumbent directors may not use corporate assets when contesting a policy matter in proxy fights, even if the expenses are reasonable.

False. Incumbent directors may use corporate assets to pay for a proxy fight about policy as long as the expenses are reasonable and proper.

In a partnership contract, the partners can contractually agree that their partnership cannot be dissolved.

False. It's true that the relationship among partners is contractual but the partners cannot agree to an indissoluble relationship.

Under the alter-ego theory, a parent company that controls several subsidiaries creates liability between the sister subsidiaries.

False. No vicarious liability among sister corporations.

Under the alter ego theory, where a parent company controls several subsidiaries, each subsidiary then becomes liable for the actions of all other subsidiaries.

False. No vicarious liability between the subagents.

Joint tenancies, tenancies in common, tenancy by entireties, joint property, common property, or part ownership may be enough to establish a partnership.

False. None of that is ever enough - also needs to do so for profit.

In tort cases, D has burden of proving an agency relationship does not exist. In K cases, P has burden.

False. P always has burden of proving agency relationship.

A creditor's inability to collect payment from a corporate defendant is sufficient to pierce the corporate veil.

False. P must show the elements of piercing the corporate veil, i.e., fraud.

In a law office partnership, it is a violation of a partner-lawyer's fiduciary duty to plan to compete with the firm to which the partner lawyer owes allegiance.

False. Partners may plan to compete with an entity to which they owe allegiance, provided they do not otherwise breach fiduciary duties. Logistical arrangements are permitted.

The Board of Directors of a corporation may not decide to give a donation for public welfare, charitable, scientific, or educational purposes.

False. Permissible by statute in Kentucky.

A security may be offered for sale prior to the registration statement becoming effective so long as the registration statement has been filed properly with the SEC.

False. Section 5 of the Securities Act imposes three basic rules: (1) a security may not be offered for sale through the mail or by use of other means of interstate commerce unless a registration statement has been filed with the SEC; (2) securities may not be sold until the registration statement is effective; and (3) the prospectus must be delivered to the purchaser for sale.

A person bringing an action for monetary damages against a board of directors must prove their case by a preponderance of evidence.

False. Standard is clear and convincing evidence.

Strike suits are shareholder derivative suits brought by majority shareholders for the purpose of demanding the payment of dividends.

False. Strike suits are nuisance suits brought by shareholders who own very few shares for the purpose of being settled.

The Securities Exchange Act of 1934 applies to the primary market.

False. The Security Act of 1933 applies to initial offerings, i.e., the primary market. The Security Exchange Act of 1934 applies to all sales and offers after the initial offering.

In the realm of insider trading, the basic test of materiality of the information is whether there is any person who would attach importance to the information in determining his or her course of action to buy or sell.

False. The basic test is whether a reasonable person would attach importance to the information.

If any director is entitled to the benefit and support of the business judgment rule, then all directors are also entitled to the protection of the business judgement rule.

False. The fact that one (or more) directors acted in good faith, honestly and in a manner they believed was in the best interest of the corporation does not mean that all other directors also acted in the same way. Directors can only act in a group but they are individually liable or severally liable depending on whether they acted in bad faith.

The rights of corporate bondholders are largely governed by the Board of Directors' fiduciary duty to.

False. The rights of bondholders are governed largely by private contract. Board of Directors only owe fiduciary duties to shareholders.

In a reverse triangular merger, the target company is merged into a subsidiary of the acquirer and ceases to exit.

False. This is a forward triangular merger. In a reverse triangular merger, the target company becomes a wholly-owned subsidiary by merging with a subsidiary that then ceases to exist.

Shareholders have all the power to manage, while the board of directors has no power to manage but has the right to vote and the right to receive distributions.

False. Vice-versa.

A Board of Directors may use their discretion under the business judgment rule to change the purpose of a corporation, such as serving the public rather than making a profit.

False. While the business judgment rule is used to cover most managerial decisions, amending the right of stockholders to dividends is not covered under this rule.

_______________ is a termination agreement that provides substantial bonuses and other bonuses for managers and certain directors upon a change in control of a company.

Golden parachute

Describe the fraud-on-the-market theory.

In an open market, it is assumed that the price of a security is based on all available material information. Thus, when materially misleading information regarding certain stock has made it into the market, anyone who buys or sells that stock is presumed to have relied on the misleading information and need not prove individual reliance to bring a 10b-5 claim.

Is it enough for a finding of estoppel that a defendant held himself out to the world as a partner?

No. Partnership by estoppel requires both an action by a defendant holding himself as such AND a showing of detrimental reliance on the representation.

If Bill and Stephanie are discussing inside information and a taxi-driver overhears and purchases shares in the corporation, is the cabbie liable for a Rule 10b-5 violation?

No. People who pick up information when other people do not intend them to hear generally don't have a Cady Roberts duty.

If Ivanna enjoys the benefits of the sale of a property Trump made without her permission, is she automatically bound under ratification?

No. The principal must intentionally and knowingly ratify the agent's actions.

What is required to form a partnership?

Partnership is an association of two or more persons or entities who carry on as co-owners of a business for profit.

___________ are usually put in place by the board to avoid takeover. They can take the form of rights that only come into effect when an acquisition is announced or takes place

Poison pills

Bob driving to a business meeting in Nashville stops to pick up his daughter from day care. While pulling away from dropping daughter off with wife, Bob runs over Carrie. Can Carrie hold Bob's employer liable for the accident?

Probably not within Bob's scope of employment.

To fulfill the ___________, the person making a false statement under Rule 10B-5 must have made it with the intent to deceive, manipulate, or defraud.

Scienter Requirement

Define a Reverse Triangular Merger.

The buyer's subsidiary merges into the target, leaving the target company as the buyer's subsidiary.

Define a Forward Merger.

The target company merges with the buyer, eliminating the target's existence. The buyer consequently assumes the target's rights and liabilities.

Define a Forward Triangular Merger.

The target merges into the buyer's subsidiary with the subsidiary assuming the target's rights and liabilities.

T/F - A creditor becomes a principal to a debtor when the creditor assumes de facto control over the conduct of the debtor.

True

Unless the partners agree otherwise, an act outside the ordinary course of business may be undertaken only with the consent of all partners.

True (in most states - Idaho requires a majority approval)

T/F - Even if the parties did not intend for the legal consequences of agency to exist, an agency relationship may still be formed

True - As long as the two parties agree that the agent will act for the benefit and subject to the control of the principal, it does not matter if they don't intend the legal consequences of agency to exist. They have an agency relationship based the actual arrangement not the intended consequences.

Any partner who negligently causes injury to another while acting within the scope of partnership business has the right to be indemnified against loss by the partnership.

True - if the tort was not intentional or grossly negligent, the partner is entitled to be indemnified. However, a partnership has no right of indemnity against a partner.

Shareholders have the right to add issues to the agenda of a corporate meeting, subject to certain limitations.

True, as long as the issues are not political in nature or binding on the corporation.

Even though one may not actually be a partner, he or she can be estopped from denying the partnership and may be held liable for partnership liabilities.

True, if the Plaintiff can prove (1) action by the defendant and (2) detrimental reliance.

Although different states have adopted different rules, most states hold that shareholders do not owe fiduciary duties to one another and are generally free to vote their own selfish interests without regard to the interest of all shareholders as a group.

True, though some states hold that shareholders in a closely-held corporation owe fiduciary duties to other shareholders.

An employer is subject to liability for torts committed by employees while acting within the scope of their employment.

True.

If an LLC liquidates and transfers its assets to the members, each member is a transferee for less than full consideration. This applies when creditors are left unpaid. The transferee is liable only to the extent of the value of the assets they received.

True.

Policies of business management by a board of directors are supported by the business judgment rule if the board acts in good faith, on an informed basis and in a manner they honestly believe is in the best interest of the company.

True.

Prior to Derivative Suit, Shareholder Demand Must Clearly Identify Wrong and Demand Action. A shareholder acting on behalf of a corporation may bring a "derivative suit" against corporate directors and management for fraud, mismanagement, self-dealing or dishonesty.

True.

The theory of alter-ego make a parent company liable for the actions of a subsidiary company.

True.

Unless otherwise provided or contracted, all partners have equal rights in the management and conduct of the partnership business and any difference arising as to ordinary matters may be decided by a majority of partners.

True.

A deadlock between equal 50/50 owners of a closed corporation can be grounds for an involuntary dissolution by the courts.

True. A court can dissolve a closed corporation whenever it is not reasonably practicable to carry on the business in conformity with the articles of incorporation or bylaws, e.g., if two equal factions cannot decide whether to continue the business.

A principal may still be bound in tort or contract by the actions of an agent even though the agent disregarded the principal's directions, secret or otherwise, so long as the agent acted within the scope of the business entrusted to the agent's care and the third-party is not aware that the agent has disregarded express directions of the principal.

True. A principal is bound in tort by actions within the scope of the agency. In contract, the principal would not be bound under theories of express or implied authority but could be bound under the doctrine of apparent authority, estoppel, ratification, adoption, or inherent agency power. By selecting the agent, the principal has, to some extent, vouched for his/her reliability.

If the injury to a shareholder is direct, that person need not comply with procedures in a derivative suit.

True. A shareholder may bring a shareholder derivative action if the injury goes to the plaintiff individually as a shareholder. However, direct actions must allege more than injury; the injury must also be separate from other shareholders.

An investor must prove reliance on material, public misrepresentations if he wants to sue under the fraud-on-the-market theory of Rule 10-b5.

True. An investor's reliance on material, public misrepresentations may be presumed under a fraud-on-the-market theory.

When a Board of Directors decides to split a corporation into several subsidiaries for the purposes of impeding a hostile takeover, it is permissible for those directors to appoint themselves to the Board of Directors of one of those subsidiaries without holding a shareholder meeting.

True. Appointing themselves to the subsidiary's Board of Directors is not a violation of Revlon duties so long as the Board is actively resisting a hostile takeover.

Under the Blasius standard for the duty of loyalty, the Board must show that they had a compelling justification for interfering with a shareholder vote.

True. Blasius is a higher standard than the business judgment rule and requires the Board have the burden of showing compelling justification for interruption of a shareholder vote.

A director or officer who violates his duty of care and thereby injures the corporation may be held personally liable for the corporation's damages.

True. But a Plaintiff suing for monetary damages has the burden of proving the director wantonly violated his duty of care and that the breach was the legal cause of damages.

Agreements among shareholders by which the shareholders bind themselves to electing themselves, or their representatives, as directors are enforceable in most jurisdictions.

True. Contracts among shareholders regarding the voting of their shares are generally enforceable according to their terms. They do not interfere with the obligations of the directors to exercise their sound judgment in managing the affairs of the corporation.

Mark is a Director of Banking, Inc., a corporation in the banking business. Mark was a person who did not have general knowledge about the business of Banking, Inc., but agreed to serve on the board of directors after his son, Austin, a worthless s.o.b, asked him to. Banking, Inc., was sued by Creditor for an unpaid invoice that Banking, Inc., owed. Thereafter, Banking, Inc., became insolvent, but the Board of Directors voted unanimously to enter into a transaction with Lender. The Board had no intention of repaying the loan. Mark may be liable to Creditor for breach of his fiduciary duties since he is a director of Banking, Inc.

True. Generally, directors owe fiduciary duties to the corporation but not to creditors. However, there are exceptions, such as where a creditor has a judgment against the corporation, in cases of deepening insolvency, or when the corporation is a financial institution. This is an example of deepening insolvency, making the interests of creditors paramount.

An LLC Operating Agreement may limit the members' fiduciary duties.

True. LLC members may alter their fiduciary duties by contract.

The business judgment rule will protect directors as long as they act in good faith, on an informed basis and in a manner they believe is in the best interest of the corporation and with the objective of maximizing shareholder wealth.

True. Provided the end is to grow wealth, directors have discretion over the means. The business judgment rule applies to decisions that maximize good will, in addition to wealth.

A proxy relationship coupled with an interest which benefits the agent is not revocable.

True. The interest must be in the subject matter of the power and not in the proceeds that will arise out of exercise of the power.

Unity of interest and ownership between the corporation and the individual AND failure to treat them as separate corporate entities would promote fraud.

True. The key to piercing the corporate veil claims is understanding that the corporation and the individual function so closely that they should be considered a single entity, sharing one another's liabilities.

A primary factor courts will consider in determining whether a partnership exists is the objective intent of the parties.

True. The test is whether it appears objectively that the parties intended to contract. Two most relevant factors are whether the parties share net profits and losses.

In the course of ordinary business decisions, a Board of Directors may elect to donate modest amounts of corporate dividends to charitable organizations.

True. This is covered by a corporation's implied and incidental powers under the common law and the business-judgment rule.

A principal is always bound by the authorized act of an agent.

True. Under contract theory, a principal is always bound by authorized acts of agent.

If, in a transaction between a parent company and its subsidiary, the parent company controls the transaction and fixes the terms, the transaction must meet the intrinsic fairness test.

True. Under the business judgment rule, the directors of a corporation get the benefit of a rebuttable presumption of good faith. Under the intrinsic fairness test, the burden of proof is on the directors to show, subject to close scrutiny, that the transactions were objectively fair to the corporation.

When are corporations not personally liable to creditors under the theory of transferee liability?

When the assets taken deprive unknown creditors.

Mark, Austin, and Jennifer are the sole shareholders and managers of the corporation Link, Inc. Link produces video games and distributes them worldwide. Charter, Inc., a transport company, ships the video games internationally for Link. Link is unexpectedly dissolved and Charter wants to bring an action to reclaim payment owed to them for their last shipment of video games to Anchorage, Alaska. Upon further investigation, it is revealed that Mark, Austin, and Jennifer put their assets into a separate subsidiary entity (Mario, Inc.) to limit liability only to that subsidiary corporation and protect the parent company. Under what theory may Charter bring an action against Link?

alter-ego

Generally, if the Board of Directors makes a decision not to take action demanded by a shareholder, it is entitled to protection under the Business Judgement Rule unless there is a _____________________________ or _____________.

conflict of interest; fraud

In a limited partnership, a limited partner may lose protection if they were to participate in the _____________ of the business.

control

One device is when you deprive minority stockholders of corporate offices and of employment with the corporation. This device accomplishes a _______.

freeze-out

A ______________ is any arrangement; under which one person turns over money to another person, largely to make a profit through the efforts of another person.

security

Define debenture.

An unsecured loan certificate backed by general credit instead of specific credit.

When is an employee's conduct not within the scope of employment? a - if it exposes the employer to tort liability b- if it does not serve the employer c- if it exposes the employer to criminal liability d- if it causes the employer to lose money

B

Congress passed the Williams Act in 1968 as a response to... a- increasing shareholder unrest b- increasing number of hostile tender offers c- unnecessarily heavy fiduciary duties on corporate directors d- a general public policy against mergers of any kind

B.

These state laws of the same name come from the claim that these statutes protect investors from "speculative schemes which have no more basis than so many feet of _______."

Blue Sky

A partnership exists if there is a right to share in profits.

False. This factor is not conclusive.

In a partnership for term can any partner terminate at will without penalty?

No.

What is the Revlon Rule?

The legal requirement that a company's board of directors make a reasonable effort to obtain the highest value for a company when a hostile takeover is imminent. The Revlon rule involves a narrower interpretation of a board's fiduciary duty, which typically is limited to protecting a company from external threats: under normal conditions a director is not required to negotiate with any hostile bidder.

The main purpose and role of a corporation is to ____________________.

maximize shareholder wealth