ACP Entity Formation & Corporate Governance 2 — Questions and Answers
Question 1: Which document governs the internal operations of a limited liability company in most U.S. states?
- Certificate of Organization
- Operating Agreement (Correct answer)
- Articles of Incorporation
- Shareholder Agreement
Correct answer: Operating Agreement
The Operating Agreement governs the internal management, member rights, and operational rules of an LLC.
Question 2: A corporation's board of directors owes which primary fiduciary duties to the corporation?
- Loyalty and disclosure only
- Care and diligence only
- Duty of care and duty of loyalty (Correct answer)
- Duty of obedience and duty of prudence
Correct answer: Duty of care and duty of loyalty
Directors owe the duty of care (acting as a reasonably prudent person) and duty of loyalty (putting the corporation's interests first).
Question 3: What is a 'registered agent' in the context of corporate formation?
- The attorney who drafts the articles of incorporation
- A person or entity designated to receive official legal and government correspondence on behalf of the entity (Correct answer)
- The incorporator who signs formation documents
- The state official who approves the corporate charter
Correct answer: A person or entity designated to receive official legal and government correspondence on behalf of the entity
A registered agent has a physical address in the state of formation and accepts service of process and official notices on behalf of the entity.
Question 4: Under the business judgment rule, courts will generally defer to a board decision if the directors acted with all of the following EXCEPT:
- On an informed basis
- In good faith
- In their own personal financial interest (Correct answer)
- In a manner they reasonably believed to be in the best interest of the corporation
Correct answer: In their own personal financial interest
The business judgment rule protects disinterested directors; a director acting in their own personal financial interest is conflicted and loses the rule's protection.
Question 5: Which type of corporate merger results in both original entities dissolving and forming a completely new entity?
- Forward triangular merger
- Reverse merger
- Consolidation (Correct answer)
- Short-form merger
Correct answer: Consolidation
In a consolidation, two or more corporations combine to form an entirely new entity, and all predecessor corporations cease to exist.
Question 6: A shareholder derivative suit is brought by a shareholder:
- To enforce personal rights against the corporation
- On behalf of the corporation to remedy a wrong done to the corporation (Correct answer)
- To challenge a dividend payment directly
- To dissolve the corporation involuntarily
Correct answer: On behalf of the corporation to remedy a wrong done to the corporation
In a derivative suit, a shareholder sues on behalf of the corporation when the board fails to pursue a valid corporate claim.
Question 7: What is the primary purpose of a stockholders' buy-sell agreement?
- To set the market price of publicly traded shares
- To control the transfer of ownership interests and provide liquidity mechanisms among owners (Correct answer)
- To authorize the issuance of new shares
- To establish voting rights for preferred shareholders
Correct answer: To control the transfer of ownership interests and provide liquidity mechanisms among owners
A buy-sell agreement restricts share transfers and establishes how ownership interests are bought and sold when triggering events occur (death, disability, departure).
ACP Entity Formation & Corporate Governance 2
Which document governs the internal operations of a limited liability company in most U.S. states?