CAS Bar Business Associations 2 — Questions and Answers
Question 1: Under the California Corporations Code, a corporation legally comes into existence upon:
- Execution of the articles of incorporation by the incorporators
- Filing of the articles of incorporation with the California Secretary of State (Correct answer)
- Adoption of bylaws by the initial board of directors
- Issuance of shares to the first shareholders
Correct answer: Filing of the articles of incorporation with the California Secretary of State
A California corporation is legally formed upon the Secretary of State's filing of the articles of incorporation, not upon execution or later corporate actions.
Question 2: The business judgment rule in California corporate law protects directors from liability when they:
- Have a personal financial interest in the transaction being approved
- Make informed, good faith business decisions in the best interest of the corporation (Correct answer)
- Rely solely on management recommendations without independent investigation
- Approve transactions that later result in significant financial loss to the corporation
Correct answer: Make informed, good faith business decisions in the best interest of the corporation
The business judgment rule shields directors who act in good faith, on an informed basis, and in the honest belief that the action is in the corporation's best interest.
Question 3: In California, the 'piercing the corporate veil' doctrine permits courts to hold shareholders personally liable when:
- The corporation fails to generate sufficient profits for two consecutive years
- The corporate form is used to perpetrate fraud or there is such unity of interest that separateness would sanction injustice (Correct answer)
- The corporation fails to pay state franchise taxes on time
- Shareholders vote against a proposed merger
Correct answer: The corporate form is used to perpetrate fraud or there is such unity of interest that separateness would sanction injustice
California courts pierce the corporate veil when the corporation is used to perpetrate fraud or when such unity of interest exists that enforcing separateness would sanction injustice.
Question 4: A director's duty of loyalty under California corporate law primarily requires the director to:
- Maximize shareholder value in every decision regardless of other considerations
- Disclose conflicts of interest and obtain approval for self-interested transactions (Correct answer)
- Attend all board meetings and vote on every matter presented
- Invest personal funds in the corporation to align interests with shareholders
Correct answer: Disclose conflicts of interest and obtain approval for self-interested transactions
The duty of loyalty requires directors to disclose any personal conflicts and obtain approval from disinterested directors or shareholders for self-interested transactions.
Question 5: Which procedural requirement must generally be satisfied before a shareholder can file a derivative suit in California?
- The plaintiff must own at least 10% of the corporation's outstanding shares
- The plaintiff must make a demand on the board or demonstrate that demand would be futile (Correct answer)
- The lawsuit must be approved by a majority vote of all shareholders at a meeting
- The plaintiff must also hold a position as a director of the corporation
Correct answer: The plaintiff must make a demand on the board or demonstrate that demand would be futile
California requires a shareholder to make a written demand on the board to take corrective action, or to plead with particularity why such demand would be futile, before filing a derivative suit.
Question 6: Under California cumulative voting rules for director elections, a shareholder with 100 shares voting to fill 3 director seats may:
- Cast 100 votes per director seat for a maximum of 300 total votes
- Cast 300 votes allocated in any combination among the candidates (Correct answer)
- Cast only 1 vote per director seat for a total of 3 votes
- Cast votes only equal to the percentage of shares owned
Correct answer: Cast 300 votes allocated in any combination among the candidates
Cumulative voting multiplies a shareholder's shares by the number of director seats available, allowing all resulting votes to be concentrated on one or more candidates as the shareholder chooses.
Question 7: When a California corporation pays an unlawful dividend that exceeds retained earnings, who may be held liable?
- Only the CEO who authorized the payment to shareholders
- Directors who approved the dividend and shareholders who received it with knowledge of its unlawfulness (Correct answer)
- Only the CFO who signed the distribution checks
- The corporation's outside auditors who failed to detect the improper accounting
Correct answer: Directors who approved the dividend and shareholders who received it with knowledge of its unlawfulness
Directors who vote for or assent to an unlawful dividend are jointly and severally liable for the amount, and shareholders who received distributions knowing they were unlawful must return them.
CAS Bar Business Associations 2
Under the California Corporations Code, a corporation legally comes into existence upon: