HI Bar - Hawaii Bar Business Associations Questions and Answers — Questions and Answers
Question 1: A solo entrepreneur forms a corporation, 'Island Ventures, Inc.', in Hawaii for a high-risk business. The entrepreneur is the sole shareholder, director, and officer. They frequently use the corporate bank account to pay for personal expenses, fail to hold any director or shareholder meetings, and contribute only $100 in initial capital despite the business needing significantly more. When Island Ventures, Inc. is unable to pay a $50,000 debt to a supplier, what legal doctrine might the supplier successfully use to hold the entrepreneur personally liable for the corporate debt?
- The business judgment rule
- The doctrine of ultra vires
- Piercing the corporate veil (Correct answer)
- The doctrine of respondeat superior
Correct answer: Piercing the corporate veil
Piercing the corporate veil is an equitable doctrine used by courts to impose personal liability on shareholders for a corporation's debts. Hawaii courts will disregard the corporate entity when it is used to justify wrong, protect fraud, or defend crime. Factors considered include undercapitalization, failure to observe corporate formalities (like holding meetings), and the co-mingling of corporate and personal funds, all of which are present in this scenario.
Question 2: Two friends, Leilani and Pono, form a general partnership-at-will to operate a surf shop in Haleiwa. They do not have a written partnership agreement. After a successful year, Leilani decides she wants to move to the mainland and informs Pono that she is leaving the partnership effective immediately. Under the Hawaii Uniform Partnership Act (HRS Chapter 425), what is the immediate legal consequence of Leilani's notification to Pono?
- Leilani has breached the partnership agreement and is liable for damages.
- The partnership is automatically dissolved. (Correct answer)
- Pono has the right to buy out Leilani's interest at a 25% discount.
- The partnership continues, but Leilani is now considered a dissociated partner with no management rights.
Correct answer: The partnership is automatically dissolved.
Under Hawaii law, for a partnership-at-will (one not for a specific term or undertaking), the express will of any partner to withdraw is an event that causes dissolution of the partnership. Leilani's notification to Pono triggers the dissolution and the subsequent 'winding up' process. Since there was no agreement specifying a term, her withdrawal is not a breach.
Question 3: The board of directors of a publicly-traded Hawaii corporation approved a major acquisition of another company after commissioning and reviewing financial reports, market analyses from outside experts, and holding several lengthy meetings. Six months later, due to an unforeseen global market collapse, the acquired company's value plummets, causing a significant loss to the corporation. A shareholder files a derivative suit against the directors, alleging a breach of the duty of care. What is the directors' most potent defense?
- The doctrine of limited liability
- The business judgment rule (Correct answer)
- Shareholder ratification
- The corporate opportunity doctrine
Correct answer: The business judgment rule
The business judgment rule protects directors from personal liability for business decisions that result in losses, provided the directors acted on an informed basis, in good faith, and in the honest belief that the action was in the best interests of the corporation. Here, the directors engaged in a diligent process, which shields their decision from judicial second-guessing, even if it turned out poorly in hindsight.
Question 4: A shareholder of a large Hawaii-based agricultural corporation believes the CEO and other top executives are paying themselves excessive, unwarranted bonuses, thereby wasting corporate assets and harming the company. The shareholder wishes to file a lawsuit on behalf of the corporation to recover these funds. Which of the following is a mandatory prerequisite for the shareholder before commencing this shareholder derivative action under Hawaii law?
- Obtain the support of at least 10% of the other shareholders.
- Post a bond sufficient to cover the corporation's potential legal expenses.
- File a complaint with the Hawaii Department of Commerce and Consumer Affairs.
- Make a written demand on the board of directors to take suitable action. (Correct answer)
Correct answer: Make a written demand on the board of directors to take suitable action.
Under Hawaii law (specifically HRS §414-173 and Hawaii Rules of Civil Procedure 23.1), before a shareholder can bring a derivative suit, they must first make a written demand on the corporation's board of directors, requesting that the board pursue the action itself. The shareholder can only proceed with the suit if the board rejects the demand or a certain period of time passes without a response, unless it can be shown that making such a demand would be futile.
Question 5: Which of the following statements most accurately describes the personal liability of a member of a properly formed Hawaii Limited Liability Company (LLC) for a business debt owed by the LLC?
- A member's liability is unlimited, similar to a sole proprietor.
- A member is personally liable for the LLC's debts, but only up to the amount of their capital contribution.
- A member is generally not personally liable for the debts and obligations of the LLC. (Correct answer)
- A member is only personally liable for the LLC's debts if they actively participate in the management of the company.
Correct answer: A member is generally not personally liable for the debts and obligations of the LLC.
Hawaii's LLC Act, specifically HRS §428-303, provides that a member or manager of an LLC is not personally liable for the company's debts, obligations, or liabilities solely by reason of being a member or manager. This limited liability shield is a primary advantage of the LLC structure, protecting the personal assets of its members from business creditors, absent circumstances that would justify piercing the veil.
Question 6: Kalani and David are partners in a general partnership that buys and sells rare art. Kalani learns that a rare painting by a famous local artist is for sale, an opportunity that falls squarely within the partnership's business. Without informing David, Kalani purchases the painting with his own money and then resells it for a substantial personal profit. Kalani's actions are a breach of which fiduciary duty?
- The duty of care
- The duty of loyalty (Correct answer)
- The duty to inform
- The duty of good faith and fair dealing
Correct answer: The duty of loyalty
The duty of loyalty requires a partner to account to the partnership for any profit or benefit derived from a transaction connected with the partnership's business, including the appropriation of a partnership opportunity. By taking the art deal for himself without disclosing it to his partner, Kalani usurped a corporate opportunity and engaged in self-dealing, which is a classic breach of the duty of loyalty as defined in HRS §425-124.
HI Bar - Hawaii Bar Business Associations Questions and Answers
A solo entrepreneur forms a corporation, 'Island Ventures, Inc.', in Hawaii for a high-risk business.
The entrepreneur is the sole shareholder, director, and officer.
They frequently use the corporate bank account to pay for personal expenses, fail to hold any director or shareholder meetings, and contribute only $100 in initial capital despite the business needing significantly more.
When Island Ventures, Inc. is unable to pay a $50,000 debt to a supplier, what legal doctrine might the supplier successfully use to hold the entrepreneur personally liable for the corporate debt?
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