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NCA Business Organizations study materials
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NCA Business Organizations practice questions

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Question 1Business Organizations

Which document, filed with the state, formally creates a corporation and sets out its basic structure?

  1. The board resolution
  2. The shareholder agreement
  3. The articles of incorporation Correct answer.
  4. The bylaws

Explanation

The articles of incorporation are the charter document filed with the state that brings the corporation into legal existence and states its name, purpose, and authorized shares. Bylaws are internal rules adopted later and do not create the entity.

Question 2Business Organizations

A general partnership is created when two or more persons agree to do which of the following?

  1. Execute a written partnership agreement
  2. File a certificate with the secretary of state
  3. Obtain a business license
  4. Carry on a business as co-owners for profit Correct answer.

Explanation

A general partnership arises by operation of law whenever two or more persons carry on a business as co-owners for profit, regardless of whether they file anything or sign a writing. No formal filing or license is required to create it.

Question 3Business Organizations

Which characteristic distinguishes a limited liability company from a general partnership?

  1. It is taxed as a corporation in all cases
  2. It must issue shares of stock
  3. Its members are shielded from personal liability for business debts Correct answer.
  4. It cannot have more than one owner

Explanation

The defining benefit of an LLC is limited liability: members generally are not personally liable for the entity's obligations, whereas general partners bear personal liability for partnership debts. An LLC may have one or many members and is not automatically taxed as a corporation.

Question 4Business Organizations

In a corporation, which group typically has the authority to elect the board of directors?

  1. The shareholders Correct answer.
  2. The employees
  3. The creditors
  4. The officers

Explanation

Shareholders own the corporation and elect the board of directors, who then oversee management. Officers are appointed by the board and do not elect directors.

Question 5Business Organizations

Which of the following is a defining feature of a sole proprietorship?

  1. The business must file articles with the state
  2. The owner reports business income on a personal tax return Correct answer.
  3. The owner has limited liability
  4. The business is a separate legal entity

Explanation

A sole proprietorship is not a separate legal entity, so the owner reports business income and losses on their personal tax return. The owner also bears unlimited personal liability, and no state formation filing is required.

Question 6Business Organizations

Which entity type requires at least one general partner and at least one limited partner?

  1. Limited liability company
  2. Limited partnership Correct answer.
  3. Limited liability partnership
  4. Close corporation

Explanation

A limited partnership must have at least one general partner, who manages and bears liability, and at least one limited partner, who contributes capital but does not manage. This dual structure is its defining statutory requirement.

Question 7Business Organizations

Which term describes the fiduciary duty of a director to act in the best interests of the corporation rather than for personal gain?

  1. Duty of loyalty Correct answer.
  2. Duty of candor
  3. Duty of care
  4. Duty of oversight

Explanation

The duty of loyalty requires directors and officers to subordinate personal interests to those of the corporation and to avoid conflicts of interest. The duty of care concerns diligence and informed decision-making, not loyalty.

Question 8Business Organizations

What is the primary effect of piercing the corporate veil?

  1. The corporation must reincorporate in another state
  2. The corporation loses its tax exemption
  3. The board is dissolved
  4. Shareholders become personally liable for corporate obligations Correct answer.

Explanation

Piercing the corporate veil is an equitable remedy that disregards limited liability, making shareholders personally liable for corporate debts. Courts typically do so for abuse such as commingling funds or using the entity as a sham.

Question 9Business Organizations

A corporation's bylaws conflict with a provision in its articles of incorporation. Which document controls?

  1. The articles of incorporation, because they are superior Correct answer.
  2. Neither, because the conflict voids both
  3. The bylaws, because they are more recent
  4. The shareholder agreement, because shareholders are owners

Explanation

The articles of incorporation are the charter and take precedence over bylaws when the two conflict. Bylaws govern internal operations but must be consistent with the charter and applicable law.

Question 10Business Organizations

Two partners share profits equally but have no written agreement on management. One partner signs a contract with a supplier for inventory. The other partner objects. Is the partnership bound?

  1. Yes, because each partner is an agent of the partnership for ordinary business Correct answer.
  2. No, because the contract exceeds the partner's authority
  3. Yes, but only if the supplier knew of the partnership
  4. No, because both partners did not consent

Explanation

Under partnership law, each partner is an agent of the partnership for acts in the ordinary course of business, so a single partner's purchase of inventory binds the firm. Unanimity is not required for ordinary-course transactions.

Question 11Business Organizations

A member of a manager-managed LLC signs a contract purporting to bind the LLC, but the operating agreement reserves all management to designated managers. The counterparty did not know of the restriction. What is the likely result?

  1. The LLC is bound only if the member had actual authority
  2. The contract is void regardless of appearances
  3. The LLC may be bound if the member appeared to have authority under the circumstances Correct answer.
  4. The LLC is bound because members always have apparent authority

Explanation

In a manager-managed LLC, a member is not an agent of the LLC merely by being a member, but apparent authority can still bind the entity if the LLC clothed the member with indicia of authority. The analysis turns on the counterparty's reasonable belief, not merely status.

Question 12Business Organizations

A director learns of a business opportunity that the corporation is financially unable to pursue. The director personally takes the opportunity. Which defense is most relevant to whether the director breached the duty of loyalty?

  1. The business judgment rule
  2. The ultra vires doctrine
  3. The corporate opportunity doctrine Correct answer.
  4. The doctrine of ratification

Explanation

The corporate opportunity doctrine asks whether an opportunity belongs to the corporation; if the corporation lacks the financial ability to take it, the director may generally pursue it. This doctrine directly governs usurpation of business opportunities under the duty of loyalty.

Question 13Business Organizations

A shareholder wants to inspect the corporation's books and records. Which standard generally applies to the request?

  1. The shareholder must obtain board approval
  2. The shareholder must show a proper purpose Correct answer.
  3. The shareholder must have held shares for one year
  4. The shareholder must own at least ten percent

Explanation

Shareholders have a statutory right to inspect books and records for a proper purpose reasonably related to their interest as shareholders. Ownership thresholds and waiting periods are not the general rule.

Question 14Business Organizations

A promoter signs a lease on behalf of a corporation that has not yet been formed. The corporation later forms but never adopts the lease. Who is liable on the lease?

  1. The landlord only, because it assumed the risk
  2. Neither party, because the corporation now exists
  3. The corporation, because it benefited
  4. The promoter, because the corporation did not adopt the contract Correct answer.

Explanation

A promoter who contracts on behalf of a nonexistent corporation is personally liable unless the contract clearly provides otherwise, and the corporation is not bound unless it adopts the contract. Because the corporation never adopted the lease, the promoter remains liable.

Question 15Business Organizations

Which action most likely constitutes a breach of the duty of care by a corporate director?

  1. Relying on a committee report prepared by experts
  2. Dissenting from a board decision and recording the dissent
  3. Approving a risky acquisition after extensive due diligence
  4. Failing to attend meetings or review materials before a major decision Correct answer.

Explanation

The duty of care requires directors to stay informed and act with reasonable diligence; chronic absenteeism or refusing to review materials breaches that duty. Informed risk-taking and reasonable reliance on experts are protected.

Question 16Business Organizations

A limited partner begins regularly managing the partnership's daily operations. What is the likely consequence?

  1. The limited partner automatically becomes a general partner in all respects
  2. The limited partner may lose limited liability protection for those activities Correct answer.
  3. The limited partner gains a veto over all decisions
  4. The partnership dissolves immediately

Explanation

A limited partner who takes part in control of the business may become liable to third parties who reasonably believe the partner is a general partner. The protection is lost only to the extent of that participation, not automatically in all respects.

Question 17Business Organizations

A shareholder sues derivatively on behalf of the corporation. Before filing, the shareholder must typically do which of the following?

  1. Notify the secretary of state
  2. Obtain a majority shareholder vote
  3. Make a demand on the board or show that demand would be futile Correct answer.
  4. Sell all other investments in the company

Explanation

A derivative plaintiff must either make a demand on the board to pursue the claim or demonstrate that demand would be futile because the board is conflicted. This requirement gives the board the first opportunity to act.

Question 18Business Organizations

A corporation's board adopts a policy that the corporation will not pay dividends to any shareholder who votes against management. This policy is most likely:

  1. Valid because directors control dividend policy
  2. Invalid because it improperly penalizes voting rights Correct answer.
  3. Valid if approved by a majority of shareholders
  4. Invalid because dividends must be paid annually

Explanation

Although directors have discretion over dividend declarations, they may not use that power to punish shareholders for exercising voting rights. Such retaliation undermines the shareholder franchise and is impermissible.

Question 19Business Organizations

Which doctrine protects a board's informed decision to reject a merger proposal, even if a court might have decided differently?

  1. The rule against perpetuities
  2. The business judgment rule Correct answer.
  3. The parol evidence rule
  4. The doctrine of promissory estoppel

Explanation

The business judgment rule presumes that directors acted in good faith and on an informed basis, so courts defer to their decisions absent a breach of duty. It protects substantive business choices from judicial second-guessing.

Question 20Business Organizations

An LLC operating agreement is silent on whether a member may transfer her interest. Under common default rules, what may the member transfer without the consent of other members?

  1. Her management rights
  2. Her entire membership interest including voting
  3. Nothing, because transfers are always barred
  4. Her economic interest only Correct answer.

Explanation

Absent contrary provisions, a member may transfer the economic right to receive distributions but cannot transfer management or voting rights without consent. The transferee thus becomes an assignee rather than a full member.

Question 21Business Organizations

A close corporation has three shareholders who all participate in management. One shareholder dies, and the estate seeks to sell to an outsider. Which mechanism most commonly addresses this situation?

  1. A buy-sell agreement Correct answer.
  2. A poison pill
  3. A proxy contest
  4. A stock dividend

Explanation

A buy-sell agreement typically requires the corporation or remaining shareholders to purchase a departing shareholder's interest at a set price, preserving the close corporation's ownership structure. Poison pills, proxies, and stock dividends address different concerns.

Question 22Business Organizations

A director sits on the board of two companies negotiating a contract with each other. She discloses the conflict and abstains, and the disinterested directors approve the deal after review. What is the likely effect of that approval?

  1. It generally protects the transaction under the business judgment rule Correct answer.
  2. It eliminates all judicial review of the transaction
  3. It automatically voids the transaction
  4. It shifts liability to the shareholders

Explanation

When a conflicted director discloses and abstains, and disinterested directors approve the transaction after informed review, the transaction generally receives business judgment protection. The approval does not eliminate review entirely, but it restores deference.

Question 23Business Organizations

A parent corporation dominates a subsidiary, commingles funds, and uses the subsidiary to shield its own obligations. A creditor of the subsidiary seeks recovery from the parent. Which theory best supports the claim?

  1. Doctrine of corporate opportunity
  2. Piercing the corporate veil based on alter ego Correct answer.
  3. Ultra vires act
  4. Breach of the duty of candor

Explanation

Alter ego is a form of veil piercing used when a parent so dominates a subsidiary that the two lack separate identities and honoring the separation would work injustice. Commingling and use of the entity as a shield are classic indicia.

Question 24Business Organizations

A shareholder proposes a resolution at an annual meeting that would require the board to submit any future merger to a shareholder vote. Management excludes it under a rule allowing exclusion of proposals that interfere with ordinary business operations. Which analysis is most accurate?

  1. The proposal is excludable because only directors may propose resolutions
  2. Exclusion is improper if the proposal concerns a significant policy matter rather than ordinary business Correct answer.
  3. Exclusion is proper because shareholders lack any proposal rights
  4. The proposal is always excludable because it concerns business operations

Explanation

Shareholder proposal rules distinguish ordinary business matters from significant policy issues; proposals addressing major corporate governance or structural decisions may not be excluded merely because they touch on business. Shareholders retain a right to submit proposals.

Question 25Business Organizations

Which characteristic distinguishes a corporation from a general partnership with respect to liability of owners?

  1. Shareholders are generally shielded from personal liability for corporate obligations. Correct answer.
  2. Both entity owners face unlimited personal liability for entity debts.
  3. Shareholders are personally liable for corporate debts to the extent of their investment.
  4. Partners are shielded from personal liability for partnership obligations.

Explanation

A corporation is a separate legal person, so its shareholders ordinarily risk only their invested capital and are not personally liable for corporate debts. General partners, by contrast, remain personally liable for partnership obligations. This limited-liability feature is a central reason entrepreneurs choose the corporate form.

Question 26Business Organizations

A corporation's articles of incorporation state that the corporation's purpose is 'to operate a retail bakery.' The board later votes to open a chain of auto repair shops. What is the most accurate description of this action?

  1. The action is void automatically and no contract made under it can be enforced.
  2. The action is valid only if a majority of shareholders abstain.
  3. The action is valid because boards may change corporate purpose at will.
  4. The action is ultra vires and may be challenged as beyond the corporation's stated powers. Correct answer.

Explanation

Acts beyond the purpose or powers stated in the articles are ultra vires. Modern statutes limit the consequences, but such acts may still be enjoined or challenged by shareholders or the state. The board cannot unilaterally rewrite the stated corporate purpose.

Question 27Business Organizations

Which document typically sets forth the internal operating rules of a corporation, such as the timing of shareholder meetings and officer duties?

  1. The proxy statement
  2. The articles of incorporation
  3. The bylaws Correct answer.
  4. The subscription agreement

Explanation

The bylaws govern the corporation's internal affairs, including meeting procedures, officer roles, and committee structure. The articles are the public charter filed with the state and generally address purpose, capital structure, and other foundational matters. Bylaws must be consistent with the articles and applicable law.

Question 28Business Organizations

A promoter enters a contract with a supplier on behalf of a corporation that has not yet been incorporated. The corporation is later formed and adopts the contract. Who is liable to the supplier?

  1. The corporation, because adoption makes it a party, and the promoter may also remain liable unless released. Correct answer.
  2. Only the corporation, because adoption extinguishes any promoter liability.
  3. Only the promoter, because the corporation did not exist when the contract was signed.
  4. Neither party, because a pre-incorporation contract is void.

Explanation

A promoter who contracts on behalf of a nonexistent corporation is generally personally liable unless the other party agrees otherwise. When the corporation is formed and adopts the contract, it becomes bound, but the promoter is not automatically released. The supplier may therefore look to both the corporation and the promoter unless a novation occurs.

Question 29Business Organizations

Which of the following best describes the duty of loyalty owed by corporate officers and directors?

  1. A duty to avoid conflicts of interest and refrain from self-dealing at the corporation's expense. Correct answer.
  2. A duty to maximize short-term profits for shareholders.
  3. A duty to disclose all corporate information to the public.
  4. A duty to attend every board meeting in person.

Explanation

The duty of loyalty requires fiduciaries to place the corporation's interests ahead of their own and to avoid self-dealing, usurpation of opportunities, and undisclosed conflicts. It is distinct from the duty of care, which concerns diligence and informed decision-making. Loyalty focuses on faithfulness rather than profit maximization.

Question 30Business Organizations

A board of directors approves a merger after receiving a detailed fairness opinion, holding several lengthy meetings, and reviewing alternatives. A shareholder later sues, claiming the price was too low. Which standard will a court most likely apply to the board's decision?

  1. Strict scrutiny, because a merger affects shareholder ownership.
  2. A per se rule of invalidity, because shareholders did not vote.
  3. The business judgment rule, because the board was informed and disinterested. Correct answer.
  4. Intermediate scrutiny, because mergers are quasi-public transactions.

Explanation

The business judgment rule presumes that informed, disinterested directors acted in good faith and in the corporation's best interests. Courts generally defer to such decisions rather than substituting their own judgment about price. Because the board reviewed information and alternatives, the presumption is likely to apply.

Question 31Business Organizations

A shareholder who disagrees with a merger wants to exit the corporation and receive the fair value of her shares. Which right is she most likely exercising?

  1. The appraisal right Correct answer.
  2. The preemptive right
  3. The right of first refusal
  4. The inspection right

Explanation

Appraisal rights allow a dissenting shareholder to require the corporation to purchase her shares at fair value following certain fundamental transactions such as mergers. The remedy protects shareholders who object to the transaction. It is distinct from rights to buy new shares or inspect records.

Question 32Business Organizations

A shareholder owns 5 percent of a public corporation and wishes to submit a proposal for a vote at the annual meeting. Which federal rule generally governs the process for including shareholder proposals in the company's proxy materials?

  1. Rule 14a-8 Correct answer.
  2. Rule 10b-5
  3. Section 16(b)
  4. Regulation S-K Item 402

Explanation

Rule 14a-8 under the Securities Exchange Act permits qualifying shareholders to include proposals in the company's proxy statement, subject to eligibility thresholds and substantive exclusions. It is the principal federal mechanism for shareholder access to the proxy. The other provisions address fraud, executive compensation disclosure, and short-swing profits.

Question 33Business Organizations

A corporation's board declares a dividend payable to shareholders of record on June 1. A person who buys shares on June 5 will not receive the dividend. Which concept explains this result?

  1. Dividends vest only after shareholder ratification.
  2. Dividends are paid only to directors.
  3. Dividends are payable only to preferred shareholders.
  4. The record date fixes who is entitled to the declared dividend. Correct answer.

Explanation

When a board declares a dividend, it sets a record date that determines which shareholders are entitled to payment. Purchasers after the record date acquire shares without the right to that declared distribution. This rule facilitates orderly administration of distributions.

Question 34Business Organizations

A member of a member-managed LLC wants to bind the LLC to a contract with a new vendor. Under common default rules, who generally has authority to bind the LLC in ordinary course business?

  1. Only a member designated as manager in the articles of organization.
  2. Only members holding at least a majority in number.
  3. Only the member with the largest capital contribution.
  4. Each member, acting as an agent of the LLC for apparently carrying on its ordinary business. Correct answer.

Explanation

In a member-managed LLC, each member is generally an agent of the LLC with authority to bind it in the ordinary course of business. This default mirrors partnership agency rules. The operating agreement may alter this allocation of authority.

Question 35Business Organizations

Which of the following is a key difference between a limited liability partnership and a general partnership?

  1. In an LLP, partners are generally shielded from personal liability for the partnership's obligations. Correct answer.
  2. An LLP cannot own property in its own name.
  3. An LLP is taxed as a corporation by default.
  4. An LLP must have at least one general partner and one limited partner.

Explanation

The defining feature of an LLP is limited liability for its partners, who are generally protected from personal exposure to partnership debts and claims. A general partnership exposes its partners to joint and several liability. LLPs typically remain pass-through entities for tax purposes.

Question 36Business Organizations

A limited partnership agreement is silent on how profits are divided. Under the default rule of the Uniform Limited Partnership Act, how are profits shared among the partners?

  1. In proportion to each partner's capital contribution. Correct answer.
  2. According to the number of years each partner has been in the partnership.
  3. Entirely to the general partners as compensation for management.
  4. Equally among all partners, general and limited.

Explanation

Absent an agreement, the default rule allocates profits and losses in proportion to the value of each partner's contributions. This mirrors the partnership default and reflects each partner's economic stake. Partners may override the default in the partnership agreement.

Question 37Business Organizations

A shareholder owns 10 percent of a corporation and believes the board approved an improper transaction. She sues on the corporation's behalf after making a written demand that the board rejected. What is this lawsuit called?

  1. An appraisal proceeding
  2. A class action
  3. A derivative action Correct answer.
  4. A direct action

Explanation

A derivative action is brought by a shareholder on behalf of the corporation to enforce a right the corporation itself has failed to assert. Demand on the board, or excusal for futility, is generally required before filing. Any recovery typically belongs to the corporation rather than the individual shareholder.

Question 38Business Organizations

A controlling shareholder proposes to buy the remaining minority shares of a subsidiary at a price she sets. Which standard of review will a court most likely apply?

  1. The parol evidence rule, because the price was negotiated.
  2. The rule of reason, because the transaction affects competition.
  3. The business judgment rule, because the transaction is a merger.
  4. Entire fairness, because a controlling shareholder stands on both sides of the transaction. Correct answer.

Explanation

Transactions between a controlling shareholder and the corporation involving minority shares trigger entire fairness review, which examines both fair dealing and fair price. The burden falls on the controlling party to demonstrate fairness. This heightened standard responds to the risk of self-dealing.

Question 39Business Organizations

An officer of a corporation buys shares of the corporation based on confidential information that the company is about to announce a lucrative acquisition. The officer later sells at a profit. Which legal theory most directly applies?

  1. Ultra vires action.
  2. Antitrust tying arrangement.
  3. Unfair labor practice.
  4. Insider trading under the misappropriation and classical theories. Correct answer.

Explanation

Trading on material nonpublic information in breach of a duty owed to the corporation or the information's source constitutes insider trading under federal securities law. The classical theory covers corporate insiders, while the misappropriation theory covers those who owe a duty to the source of the information. Both theories support liability here.

Question 40Business Organizations

A corporation's board wants to adopt a defensive measure to fend off a hostile takeover. Which standard will a court apply in evaluating the measure?

  1. The measure is valid if it is reasonable in relation to the threat posed and the board acted in good faith. Correct answer.
  2. The measure is invalid whenever it reduces shareholder value in the short term.
  3. The measure is valid only if it permanently prevents any takeover.
  4. The measure is automatically valid if a majority of shareholders approve.

Explanation

Under the Unocal standard, defensive measures are reviewed for reasonableness in relation to the threat posed, coupled with good faith and reasonable investigation. Courts do not require shareholders to approve defensive measures, nor do they demand that the measure be ineffective. The test balances board discretion against entrenchment concerns.

Question 41Business Organizations

A director serves on the boards of two corporations that are negotiating a supply agreement. The director discloses the conflict, abstains from the vote, and does not participate in deliberations. What is the most likely effect on the transaction's validity?

  1. The transaction is valid only if the director resigns from one board.
  2. The transaction may be upheld because the conflict was disclosed and the director abstained. Correct answer.
  3. The transaction is void because a conflicted director was present.
  4. The transaction requires court approval regardless of disclosure.

Explanation

A conflicted director's transaction is generally protected if the conflict is disclosed to and approved by disinterested directors or shareholders, or if the transaction is fair. Disclosure and abstention support the disinterested approval process. Courts do not require resignation or automatic court approval.

Question 42Business Organizations

A member of an LLC wants to sell her interest to an outside buyer. The operating agreement is silent on transfer. Under common default rules, which statement is most accurate?

  1. The member may transfer her interest only to a family member.
  2. The member may freely transfer her entire interest and the buyer automatically becomes a member.
  3. The member may transfer her economic interest, but the buyer becomes a member only with consent of the other members. Correct answer.
  4. The member may not transfer her interest under any circumstances.

Explanation

Default LLC rules generally permit assignment of the economic interest, entitling the assignee to distributions. Admission as a member, however, typically requires the consent of the existing members. This distinction protects the personal relationships central to many LLCs.

Question 43Business Organizations

A member of a member-managed LLC commits a tort against a third party while carrying out ordinary LLC business. Which statement best reflects the typical liability outcome?

  1. Only the member is liable; the LLC bears no responsibility.
  2. The member is personally liable, and the LLC is also liable for the tort. Correct answer.
  3. Neither the member nor the LLC is liable because LLCs cannot be sued in tort.
  4. Only the LLC is liable; the member is always shielded.

Explanation

Limited liability shields members from contractual debts of the LLC, but a member who personally commits a tort remains personally liable to the injured party. The LLC may also be vicariously liable for torts committed by its agents within the scope of business. Limited liability is not a license to commit wrongs.

Question 44Business Organizations

A close corporation's shareholders want to eliminate the board of directors and manage the corporation directly. Which mechanism generally permits this?

  1. A unanimous vote of the board alone.
  2. Filing a certificate of dissolution.
  3. Issuing preferred stock to a single investor.
  4. A shareholder agreement authorized by statute in many jurisdictions. Correct answer.

Explanation

Many jurisdictions permit close corporations to dispense with a board through a shareholder agreement, provided the arrangement is authorized by statute and properly documented. This flexibility reflects the identity of ownership and management in close corporations. Board action alone cannot eliminate the board.

Question 45Business Organizations

A corporation's charter authorizes 1,000 shares. The board wants to issue 400 new shares to a friendly investor. An existing shareholder claims a right to buy a proportionate share first. Which right is she asserting?

  1. The appraisal right
  2. The preemptive right Correct answer.
  3. The inspection right
  4. The right of first refusal

Explanation

Preemptive rights allow existing shareholders to purchase new issuances of stock in proportion to their holdings before the shares are offered to outsiders. This protects against dilution. Such rights must generally be provided in the articles or by statute.

Question 46Business Organizations

A corporation's board approves a transaction that benefits the CEO's family business. The CEO did not disclose the relationship, and the disinterested directors were unaware of it. Which claim is most likely available to shareholders?

  1. A claim for securities registration violation.
  2. A claim for ultra vires action.
  3. A claim for breach of the duty of loyalty based on undisclosed self-dealing. Correct answer.
  4. A claim for antitrust violation.

Explanation

Undisclosed self-dealing by a fiduciary implicates the duty of loyalty, and the transaction may be subject to entire fairness review. Disclosure to disinterested decision-makers is essential to obtain business judgment protection. The failure to disclose undermines any claim that the transaction was approved by an informed, independent body.

Question 47Business Organizations

A shareholder wants to examine the corporation's minute books and financial records to investigate suspected mismanagement. Which standard generally governs the request?

  1. The shareholder must obtain board approval before inspecting any record.
  2. The shareholder must file a lawsuit before inspecting records.
  3. The shareholder must own at least 25 percent of the shares.
  4. The shareholder must show a proper purpose reasonably related to her interest as a shareholder. Correct answer.

Explanation

Inspection rights are generally available to shareholders who articulate a proper purpose connected to their investment, such as investigating mismanagement or communicating with other shareholders. Ownership thresholds and board pre-approval are not typical requirements. Courts balance the shareholder's purpose against the corporation's interest in confidentiality.

Question 48Business Organizations

A corporation's board rejects a favorable merger offer without any investigation, relying solely on the CEO's assurance that the offer is too low. Shareholders challenge the decision. Which outcome is most likely?

  1. The decision is automatically valid because mergers are board prerogatives.
  2. The business judgment rule protects the decision because the board acted in good faith.
  3. The decision is void because shareholders did not vote first.
  4. The board may face liability because it failed to inform itself before deciding. Correct answer.

Explanation

The duty of care requires directors to inform themselves of all material information reasonably available before making a decision. A board that relies solely on a CEO's conclusory assurance without investigation may lose business judgment protection. Gross negligence in the decision process can support liability.

Question 49Business Organizations

A corporation is formed in Delaware but conducts all of its business in California. A dispute arises over the corporation's internal affairs, such as the election of directors. Which law generally governs?

  1. Federal corporate law.
  2. The law of the state of incorporation, Delaware. Correct answer.
  3. The law of the state where the largest shareholder resides.
  4. The law of the state where the business operates, California.

Explanation

The internal affairs doctrine provides that the law of the state of incorporation governs a corporation's internal relationships, including director elections and shareholder rights. This rule promotes predictability and uniformity. It applies even when the corporation operates entirely in another state.

Question 50Business Organizations

Which characteristic distinguishes a corporation from a sole proprietorship?

  1. The corporation's owners face unlimited personal liability for business debts
  2. The corporation's owners must all actively manage daily operations
  3. The corporation cannot outlive the death of its founder
  4. The corporation is treated as a separate legal entity from its owners Correct answer.

Explanation

A corporation is a legal person distinct from its shareholders, so it can own property, contract, sue, and be sued in its own name. This separate entity status supports limited liability and perpetual existence, which a sole proprietorship lacks.