CLA/CP Exam Business and Corporate Law 4 — Questions and Answers
Question 1: Under the Statute of Frauds, which of the following contracts MUST be in writing to be enforceable?
- A contract to perform services within six months
- A contract for the sale of goods worth $600 (Correct answer)
- A lease for office space for eight months
- A one-time consulting agreement
Correct answer: A contract for the sale of goods worth $600
The UCC requires contracts for the sale of goods of $500 or more to be evidenced by a signed writing.
Question 2: The business judgment rule protects corporate directors from liability for their decisions when the director:
- Acts in bad faith and with a conflict of interest
- Makes an uninformed decision without reviewing available information
- Acts on an informed basis, in good faith, and in the honest belief the action is in corporate interests (Correct answer)
- Approves a transaction in which the director has a financial stake
Correct answer: Acts on an informed basis, in good faith, and in the honest belief the action is in corporate interests
The business judgment rule shields directors who act in good faith, on an informed basis, in the honest belief it serves the corporation's best interests.
Question 3: When one corporation acquires another through a 'merger,' what happens to the acquired company?
- It continues to operate as an independent subsidiary
- It ceases to exist as its assets and liabilities are absorbed by the surviving entity (Correct answer)
- It converts to a partnership
- It remains a separate corporation with a new name
Correct answer: It ceases to exist as its assets and liabilities are absorbed by the surviving entity
In a statutory merger, the acquired corporation is extinguished and the surviving corporation assumes all its assets and liabilities.
Question 4: A principal who approves an unauthorized act that an agent already performed is said to have:
- Created apparent authority
- Established implied authority
- Ratified the agent's act (Correct answer)
- Delegated fiduciary duty
Correct answer: Ratified the agent's act
Ratification occurs when a principal expressly or impliedly confirms an agent's previously unauthorized act, making it binding.
Question 5: A 'buy-sell agreement' between shareholders of a closely held corporation is typically used to:
- Authorize additional stock issuances
- Control the transfer of shares and provide exit mechanisms for owners (Correct answer)
- Report insider trading to the SEC
- Establish preferred dividend rights
Correct answer: Control the transfer of shares and provide exit mechanisms for owners
Buy-sell agreements govern what happens when a shareholder wants to leave, dies, or becomes disabled, preventing unwanted outside parties from acquiring shares.
Question 6: An employee who causes harm to a customer while performing job duties within the scope of employment creates liability for the employer under which doctrine?
- Ultra vires
- Respondeat superior (Correct answer)
- Promissory estoppel
- Piercing the veil
Correct answer: Respondeat superior
Respondeat superior holds employers vicariously liable for employees' tortious acts committed within the scope of employment.
Question 7: Which of the following is a distinguishing feature of a 'C corporation' compared to an 'S corporation'?
- C corporations have no more than 100 shareholders
- C corporations are subject to double taxation on income (Correct answer)
- C corporations cannot issue preferred stock
- C corporations file taxes on a pass-through basis
Correct answer: C corporations are subject to double taxation on income
C corporations are taxed at the entity level, and shareholders are taxed again on dividends received, resulting in double taxation.
CLA/CP Exam Business and Corporate Law 4
Under the Statute of Frauds, which of the following contracts MUST be in writing to be enforceable?