Business Associations Flashcards

A corporation's board approves a transaction in which the CEO, who is also a director, has a material financial interest. Under California law, this transaction is voidable UNLESS:

Answer: The CEO disclosed the interest and disinterested directors approved it after full disclosure

Under California Corporations Code § 310, an interested director transaction is not voidable if the material facts were disclosed and disinterested directors approved it in good faith.

In a California general partnership, a partner's transferable interest includes:

Answer: Only the right to receive distributions of profits and surplus upon dissolution

Under the California Revised Uniform Partnership Act, a partner's transferable interest is limited to the right to receive distributions; governance rights cannot be transferred to a non-partner.

What is the primary legal effect of a corporation's S-election under federal tax law, relevant to the California Bar?

Answer: Corporate income and losses pass through directly to shareholders, avoiding double taxation

An S-corporation election causes corporate income, losses, deductions, and credits to pass through to shareholders' personal tax returns, avoiding entity-level federal income tax.

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

Answer: The work involves inherently dangerous activities or non-delegable duties

Principals are generally not liable for independent contractors' torts, but exceptions apply for inherently dangerous activities and non-delegable duties imposed by law.

ABC Corp. enters into a contract before its incorporation is complete. After incorporation, the board ratifies the contract. The legal effect of ratification is:

Answer: The corporation becomes bound, but the promoter remains liable unless there is a novation

Corporate ratification of a pre-incorporation contract binds the corporation, but the promoter remains personally liable until the parties enter a novation substituting the corporation for the promoter.

A minority shareholder in a California close corporation claims the majority is freezing her out by eliminating dividends and her employment. Her BEST remedy under California law is:

Answer: Bring a dissolution action for breach of fiduciary duty owed to minority shareholders

California courts recognize a fiduciary duty among close corporation shareholders; minority shareholders may seek judicial dissolution or buyout when the majority engages in oppressive freeze-out conduct.

Under the doctrine of apparent authority, a third party may hold a principal liable for an agent's unauthorized act when:

Answer: The principal's conduct caused the third party to reasonably believe the agent had authority

Apparent authority arises from the principal's manifestations — not the agent's — that lead a third party to reasonably believe the agent is authorized to act.