CLA/CP Business and Corporate Law 1 Flashcards

Under the doctrine of piercing the corporate veil, a court is most likely to hold shareholders personally liable when:

Answer: Shareholders comingle personal and corporate assets and the corporation is used to perpetrate a fraud

Courts pierce the corporate veil when the corporate form is abused—typically shown by a combination of undercapitalization, failure to observe corporate formalities, commingling of funds, and use of the entity as an alter ego to commit fraud or injustice. A personal guarantee (option D) creates direct liability by contract, not veil-piercing.

A corporate director who approves a transaction in which she has a personal financial interest will be protected from liability if:

Answer: The director's interest is fully disclosed and the transaction is approved by disinterested directors or shareholders, or the transaction is fair to the corporation

Under the duty of loyalty, a director with a conflict of interest must disclose it fully. The transaction is then cleansed if approved by disinterested directors or shareholders after disclosure, or if the director can prove its intrinsic fairness. Mere recusal without disclosure or ratification is insufficient.

Which of the following best describes an 'ultra vires' act by a corporation?

Answer: An act that falls outside the purposes or powers set forth in the corporation's articles of incorporation

'Ultra vires' literally means 'beyond the powers.' It refers to corporate acts that exceed the scope of authority granted by the articles of incorporation. Modern statutes have limited the use of the ultra vires doctrine, but it remains defined as action beyond the corporation's stated purposes or powers—not simply unauthorized officer conduct or regulatory violations.

In a member-managed limited liability company (LLC), which of the following statements is generally correct regarding management authority?

Answer: Each member has apparent authority to bind the LLC in the ordinary course of business

In a member-managed LLC, each member is an agent of the LLC for purposes of carrying on its ordinary business, giving each member apparent authority to bind the entity in routine transactions. This mirrors the agency rules applicable to general partnerships, where each partner similarly has authority to bind the partnership.

When a corporation is voluntarily dissolved, which of the following correctly states the proper priority order for distributing corporate assets?

Answer: Creditors (secured then unsecured) are paid in full before any distribution is made to shareholders, with preferred shareholders having priority over common shareholders

Upon dissolution, a corporation must first satisfy all creditor claims—secured creditors have priority, followed by unsecured creditors. Only after all creditor obligations are satisfied may any remaining assets be distributed to shareholders. Among shareholders, preferred shareholders receive their liquidation preference before common shareholders participate.

Under the Revised Uniform Partnership Act (RUPA), which of the following events will NOT automatically cause the dissociation of a partner from a general partnership?

Answer: The partnership's primary business asset is sold to a third party

Under RUPA, dissociation occurs upon events such as a partner's notice of withdrawal, death, adjudication of incompetency, or bankruptcy. The sale of a partnership asset—even a major one—does not trigger a partner's dissociation; it is a business decision that may be made in the ordinary course. The partnership entity continues regardless of asset transactions.