Business Associations Flashcards

Under the business judgment rule, which standard applies when a court reviews a corporate director's business decision?

Answer: Courts will not second-guess a director's business decision if the director acted on an informed basis, in good faith, and in the honest belief that the action was in the corporation's best interests

The business judgment rule is a presumption that directors acted on an informed basis, in good faith, and in the honest belief that the action was in the best interests of the corporation. Courts will not substitute their business judgment for that of the directors, and the plaintiff bears the burden of overcoming the presumption.

Under partnership law, when does a general partner have apparent authority to bind the partnership?

Answer: When carrying on business of the kind usually carried on by the partnership in the ordinary course, unless the third party knows the partner lacked authority

Under UPA § 301 and RUPA § 301, a partner is an agent of the partnership for the purpose of carrying on the business in the ordinary course. Acts within the ordinary course bind the partnership unless the acting partner had no authority and the third party knew or had received notification of the lack of authority.

Under Delaware corporate law and the MBCA, what is the standard of review for a controlling shareholder's transaction with the corporation?

Answer: Entire fairness review — the controlling shareholder must show the transaction was entirely fair in terms of both process (fair dealing) and price (fair price)

When a controlling shareholder engages in a transaction with the corporation, it constitutes a conflict of interest that removes the business judgment rule's protection. Delaware courts apply the 'entire fairness' standard, requiring the controlling party to prove both fair dealing (the process by which the transaction was structured and approved) and fair price (the economic terms).

Under RUPA, which of the following events causes a dissolution of a partnership?

Answer: A partner's wrongful dissociation or dissociation by a partner who causes winding up of the partnership under the partnership agreement or by judicial decree

Under RUPA, dissolution and winding up are triggered by specific events: a partner's dissociation in circumstances that require winding up (such as rightful dissociation in an at-will partnership or dissolution by court order for improper conduct). Not every dissociation causes dissolution — RUPA allows the remaining partners to continue the business in a buyout situation.

Under LLC law, which of the following best describes the 'charging order' remedy available to a creditor of an LLC member?

Answer: The creditor receives the right to receive distributions that would otherwise be paid to the debtor-member, but cannot become a member or exercise membership rights

A charging order is the exclusive remedy available to a judgment creditor of an LLC member in most states. It gives the creditor the right to receive distributions paid to the debtor-member — like a lien on the economic rights — but it does not give the creditor membership rights (voting, management participation).

Under corporate law, the duty of loyalty requires a director to avoid self-dealing. Under the MBCA § 8.61, an interested director transaction is NOT voidable if:

Answer: The material facts of the transaction were disclosed to the board and it was approved by a majority of disinterested directors, OR approved by a majority of shares held by disinterested shareholders, OR the transaction was fair to the corporation at the time authorized

MBCA § 8.61 provides three safe harbors for interested director transactions: (1) approval by a majority of qualified (disinterested) directors after full disclosure; (2) approval by a majority of disinterested shareholders after disclosure; or (3) the transaction was fair to the corporation at the time it was authorized. Any one of the three safe harbors validates the transaction.