Business Associations Flashcards

Under the common law and Revised Model Business Corporation Act, what is the liability of a shareholder for corporate debts in a closely held corporation?

Answer: Shareholders generally have no personal liability for corporate debts — limited liability shields them — subject to exceptions such as piercing the corporate veil

The most fundamental principle of corporate law is that shareholders enjoy limited liability — they are not personally liable for corporate debts and obligations beyond their investment. However, courts may pierce the corporate veil and hold shareholders personally liable if the corporation is used as an alter ego, was inadequately capitalized, or if recognizing the corporate form would sanction fraud.

Under Delaware law and MBCA, which of the following characterizes a shareholder's derivative suit?

Answer: A suit brought by a shareholder on behalf of the corporation to enforce the corporation's right to recover for wrongs done to it, with any recovery going to the corporation

A derivative suit is brought by a shareholder in the name of the corporation to enforce a right belonging to the corporation — the injury is to the corporation, not directly to the shareholder. Recovery goes to the corporation, not the individual plaintiff. The plaintiff must first make a demand on the board of directors (or show demand is excused) before filing.

Which of the following is NOT a requirement for a valid securities fraud claim under SEC Rule 10b-5?

Answer: The plaintiff must have suffered a loss on the specific securities purchased from the defendant

Rule 10b-5 under § 10(b) of the Securities Exchange Act of 1934 does not require privity — the plaintiff need not have purchased the securities directly from the defendant. The elements are: (1) material misrepresentation or omission; (2) in connection with purchase or sale of a security; (3) scienter; (4) reliance; (5) loss causation; and (6) damages.

Under the law of agency, when is a principal liable for the unauthorized torts of an independent contractor?

Answer: A principal may be liable for an independent contractor's torts if the activity is inherently dangerous, the principal negligently selected the contractor, or the duty is non-delegable

While the general rule exempts principals from vicarious liability for independent contractor torts, exceptions include: (1) Inherently dangerous activities — when the activity creates a peculiar risk of harm unless special precautions are taken; (2) Negligent selection — when the principal negligently hired an incompetent contractor; (3) Non-delegable duties — statutory or common law duties the principal cannot avoid by delegating to an independent contractor.

When two partners form a general partnership for a five-year term, and one partner wrongfully dissolves the partnership after one year, what rights does the non-breaching partner have?

Answer: The non-breaching partner may continue the partnership business, paying the breaching partner only the value of the interest minus damages caused by the wrongful dissolution

Under RUPA § 602, a partner who wrongfully dissociates is liable to the partnership and co-partners for damages caused by the breach. The remaining partners may continue the business and buy out the wrongfully dissociating partner at a price calculated as the value of their interest minus the damages the breach caused to the partnership.

Under the Uniform Securities Act and federal securities law, which of the following transactions is exempt from the securities registration requirements?

Answer: A private placement offered only to sophisticated accredited investors without general advertising under SEC Regulation D Rule 506

SEC Regulation D, Rule 506 provides a safe harbor exemption from the Securities Act § 5 registration requirements for private placements. Under Rule 506(b), issuers may sell to an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors without general solicitation, without registration. Rule 506(c) allows general solicitation if all purchasers are accredited investors.