KY Bar Business Organizations 1 — Questions and Answers
Question 1: Under the Model Business Corporation Act (MBCA), which of the following best describes the business judgment rule?
- Directors are personally liable for any business decision that results in a loss to the corporation
- Directors are protected from liability for business decisions made in good faith, on an informed basis, and in the honest belief the action is in the corporation's best interest (Correct answer)
- Directors must obtain shareholder approval for all major business decisions
- Directors are immune from any liability regardless of how decisions are made
Correct answer: Directors are protected from liability for business decisions made in good faith, on an informed basis, and in the honest belief the action is in the corporation's best interest
The business judgment rule shields directors from liability when they act in good faith, on an informed basis, and in the honest belief that the action serves the corporation's best interest.
Question 2: A corporation's articles of incorporation must include which of the following under the MBCA?
- The names and addresses of all shareholders
- The corporation's name, number of authorized shares, and registered agent information (Correct answer)
- The corporation's annual financial projections
- The salary structure for all corporate officers
Correct answer: The corporation's name, number of authorized shares, and registered agent information
The MBCA requires articles of incorporation to include the corporate name, number of authorized shares, and the name and address of the registered agent.
Question 3: Which of the following correctly describes 'piercing the corporate veil'?
- A creditor can always hold shareholders personally liable for corporate debts
- Shareholders may be held personally liable when the corporate form is used as an alter ego to perpetuate fraud or injustice (Correct answer)
- Officers are personally liable for all torts committed during the scope of their employment
- Directors are liable for corporate debts whenever the corporation becomes insolvent
Correct answer: Shareholders may be held personally liable when the corporate form is used as an alter ego to perpetuate fraud or injustice
Courts pierce the corporate veil to impose personal liability on shareholders when they use the corporation as an alter ego to perpetuate fraud or injustice, disregarding corporate formalities.
Question 4: Under the MBCA, a shareholder derivative suit may be brought when:
- A shareholder directly suffers personal harm from a corporate officer's actions
- The corporation has a valid claim but the board wrongfully refuses or fails to sue on the corporation's behalf (Correct answer)
- A shareholder simply disagrees with a business decision made by the board
- A majority shareholder wishes to force a minority shareholder to sell their shares
Correct answer: The corporation has a valid claim but the board wrongfully refuses or fails to sue on the corporation's behalf
A derivative suit is brought by a shareholder on behalf of the corporation to enforce a corporate right when the board has wrongfully refused to pursue the claim.
Question 5: Which of the following is NOT a recognized fiduciary duty owed by corporate directors under the MBCA?
- Duty of care
- Duty of loyalty
- Duty to maximize shareholder profit in every fiscal quarter (Correct answer)
- Duty to act in good faith
Correct answer: Duty to maximize shareholder profit in every fiscal quarter
Directors owe duties of care, loyalty, and good faith, but there is no legal duty to maximize quarterly profits; directors retain broad discretion in business decisions under the business judgment rule.
Question 6: After a corporation is formed, it wishes to adopt a contract made by its promoter before incorporation. Which doctrine makes this possible?
- Ratification, whereby the corporation expressly or impliedly adopts the pre-incorporation contract (Correct answer)
- Promissory estoppel, preventing the promoter from denying the corporation's rights
- Ultra vires, expanding the corporation's authority beyond its articles
- Respondeat superior, making the corporation liable for its agent's prior acts
Correct answer: Ratification, whereby the corporation expressly or impliedly adopts the pre-incorporation contract
A corporation may ratify a promoter's pre-incorporation contract after formation, thereby becoming bound by it as if it had been a party from the start.
Question 7: Which of the following best describes a close corporation?
- A corporation with shares publicly traded on a national stock exchange
- A corporation with a small number of shareholders, shares not publicly traded, and often restrictions on share transfers (Correct answer)
- A nonprofit corporation subject to close regulatory oversight by the state
- A foreign corporation granted authority to do business in Kentucky
Correct answer: A corporation with a small number of shareholders, shares not publicly traded, and often restrictions on share transfers
A close corporation has a small number of shareholders, its shares are not publicly traded, and share transfer restrictions are commonly imposed by the articles or a shareholders' agreement.
KY Bar Business Organizations 1
Under the Model Business Corporation Act (MBCA), which of the following best describes the business judgment rule?