IL Bar Business Associations 2 — Questions and Answers
Question 1: A corporate director who approves a transaction in which she has a personal financial interest must demonstrate all of the following to avoid liability EXCEPT:
- Full disclosure of the conflict to the disinterested board members
- That the transaction was substantively fair to the corporation
- That disinterested directors or shareholders approved the transaction after full disclosure
- That the transaction resulted in profits for both the director and the corporation (Correct answer)
Correct answer: That the transaction resulted in profits for both the director and the corporation
An interested director transaction is protected by disclosure plus approval by disinterested directors or shareholders, or by showing the transaction was fair to the corporation — not by proving mutual profits.
Question 2: Under the Illinois Business Corporation Act, a shareholder's right to inspect corporate books and records:
- Is absolute and cannot be restricted by the board of directors under any circumstances
- Requires a proper purpose related to the shareholder's interests as a shareholder (Correct answer)
- Is available only to shareholders holding more than 10% of outstanding shares
- Requires a court order before any inspection may be conducted
Correct answer: Requires a proper purpose related to the shareholder's interests as a shareholder
Illinois law grants shareholders the right to inspect corporate records for a proper purpose, meaning the purpose must be reasonably related to the person's interest as a shareholder.
Question 3: The duty of loyalty requires corporate directors to:
- Maximize short-term stock price above all other corporate interests
- Put the corporation's interests above their own personal interests when the two conflict (Correct answer)
- Consult with every shareholder before making any major corporate decisions
- Avoid making any business decisions that carry financial risk to the corporation
Correct answer: Put the corporation's interests above their own personal interests when the two conflict
The duty of loyalty requires directors to subordinate their personal interests to the interests of the corporation whenever the two come into conflict.
Question 4: In a limited partnership, which of the following most accurately describes the liability of a limited partner?
- A limited partner is personally liable for all debts and obligations of the partnership
- A limited partner's liability is generally limited to the amount of their capital contribution (Correct answer)
- A limited partner loses limited liability protection only if they receive distributions from the partnership
- A limited partner is jointly and severally liable alongside the general partner for all obligations
Correct answer: A limited partner's liability is generally limited to the amount of their capital contribution
A limited partner's liability is generally limited to their capital contribution to the partnership, which is the primary advantage of limited partnership status for passive investors.
Question 5: Which of the following most accurately describes a shareholder derivative lawsuit?
- A suit brought by a creditor directly against a corporation for unpaid debts
- A suit brought by a shareholder on behalf of the corporation to recover for harm done to the corporation (Correct answer)
- A suit by one shareholder against another shareholder for breach of fiduciary duty owed directly to them
- A suit brought by the corporation to collect debts owed by shareholders
Correct answer: A suit brought by a shareholder on behalf of the corporation to recover for harm done to the corporation
A derivative lawsuit is brought by a shareholder in the corporation's name to recover for harm done to the corporation, with any recovery going to the corporation rather than the shareholder personally.
Question 6: Under the Illinois Business Corporation Act, the board of directors may authorize a distribution to shareholders only if, after the distribution:
- The corporation has total assets exceeding its liabilities and can pay its debts as they come due in the ordinary course of business (Correct answer)
- The shareholders have approved the distribution by a majority vote at a duly called meeting
- The distribution amount equals the corporation's net earnings for the current fiscal year
- The distribution has been reviewed and approved by a licensed certified public accountant
Correct answer: The corporation has total assets exceeding its liabilities and can pay its debts as they come due in the ordinary course of business
Under the Illinois Business Corporation Act, distributions are permitted only if the corporation remains solvent — meaning assets exceed liabilities and the corporation can pay its debts as they come due.
Question 7: When a corporation's articles of incorporation are defective, a court may treat the entity as a de facto corporation if:
- The incorporators deliberately chose not to file proper articles to avoid state fees
- A law authorizing incorporation existed, there was a colorable attempt to comply, and the business was conducted in the corporate name in good faith (Correct answer)
- All shareholders formally agreed in writing to be personally liable for corporate debts
- The defect was discovered within 30 days of the purported formation
Correct answer: A law authorizing incorporation existed, there was a colorable attempt to comply, and the business was conducted in the corporate name in good faith
A de facto corporation is recognized when a valid incorporation statute existed, the promoters made a colorable good-faith attempt to comply, and business was conducted as a corporation.
IL Bar Business Associations 2
A corporate director who approves a transaction in which she has a personal financial interest must demonstrate all of the following to avoid liability EXCEPT: