CAS Bar Business Associations 4 — Questions and Answers
Question 1: Under the Revised Uniform Limited Partnership Act adopted in California, a limited partner who participates in control of the business:
- Is personally liable to all creditors as if a general partner
- Loses limited liability only to persons who reasonably believed the limited partner was a general partner
- Has no liability beyond their capital contribution regardless of control participation (Correct answer)
- Automatically becomes a general partner upon exercising control
Correct answer: Has no liability beyond their capital contribution regardless of control participation
Under RULPA and modern LP acts, limited partners are not personally liable for LP obligations solely by reason of participating in control of the business.
Question 2: A shareholder in a close corporation brings a derivative suit. Before filing, the shareholder must:
- Own at least 5% of outstanding shares
- Make a written demand on the board and wait 90 days unless demand is futile (Correct answer)
- Obtain approval from a majority of disinterested shareholders
- Post a bond equal to the corporation's litigation costs
Correct answer: Make a written demand on the board and wait 90 days unless demand is futile
California Corporations Code requires a plaintiff in a derivative suit to make demand on the board unless demand would be futile, and generally wait 90 days for a response.
Question 3: Which doctrine allows courts to disregard the corporate form and hold shareholders personally liable for corporate debts?
- Business judgment rule
- Piercing the corporate veil (Correct answer)
- Ultra vires doctrine
- Alter ego theory only in tort cases
Correct answer: Piercing the corporate veil
Piercing the corporate veil (also called alter ego liability) allows courts to hold shareholders personally liable when the corporate form is used to perpetrate fraud or injustice.
Question 4: In an LLC, which document primarily governs the internal affairs of the company and the rights of its members?
- Articles of organization
- Operating agreement (Correct answer)
- Certificate of good standing
- Statement of information
Correct answer: Operating agreement
The operating agreement governs the internal affairs of an LLC including member rights, management structure, and profit distributions.
Question 5: Under California law, when a general partner of an LP withdraws in violation of the partnership agreement, the remaining partners may:
- Continue the business and recover damages from the withdrawing partner (Correct answer)
- Only dissolve the partnership and wind up affairs
- Require the withdrawing partner to return all past distributions
- Elect a new managing partner within 30 days to avoid dissolution
Correct answer: Continue the business and recover damages from the withdrawing partner
Under the California Revised Uniform Limited Partnership Act, wrongful withdrawal allows the remaining partners to continue the business and sue for damages caused by the breach.
Question 6: A corporation's articles of incorporation contain an exculpation clause eliminating director liability. Under California law, such a clause CANNOT eliminate liability for:
- Uninformed business decisions that result in financial loss
- Intentional misconduct or knowing violation of law (Correct answer)
- Decisions made without consulting experts
- Failure to attend board meetings
Correct answer: Intentional misconduct or knowing violation of law
California law permits exculpation clauses for duty of care violations but not for intentional misconduct, knowing violations of law, or self-dealing transactions.
Question 7: Two attorneys form a law firm as a general partnership. One partner commits malpractice. The other partner's personal liability for this tort is:
- None, because professional services are excluded from partnership liability
- Full joint and several liability if they had notice of the partner's incompetence
- Limited to their capital contribution to the firm
- Full joint and several liability under California partnership law (Correct answer)
Correct answer: Full joint and several liability under California partnership law
Under California's UPA, all partners are jointly and severally liable for torts committed by a partner acting in the ordinary course of partnership business.
CAS Bar Business Associations 4
Under the Revised Uniform Limited Partnership Act adopted in California, a limited partner who participates in control of the business: