MA Bar Business Associations 1 — Questions and Answers
Question 1: Under Massachusetts law, which of the following best describes the business judgment rule as it applies to corporate directors?
- Directors are strictly liable for any business decision that results in a corporate loss
- Courts will not second-guess a director's business decision if the director acted on an informed basis, in good faith, and in the honest belief the decision served the company's best interest (Correct answer)
- Directors are protected only if they obtain prior shareholder approval before making significant business decisions
- The rule applies only to directors who own at least 10% of the corporation's outstanding stock
Correct answer: Courts will not second-guess a director's business decision if the director acted on an informed basis, in good faith, and in the honest belief the decision served the company's best interest
The business judgment rule shields directors from liability when they act on an informed basis, in good faith, and with the honest belief that their decision serves the corporation's best interests.
Question 2: Under the Massachusetts Uniform Partnership Act, which statement is TRUE regarding liability of partners in a general partnership?
- Each partner is liable only for debts that partner personally incurred on the partnership's behalf
- Partners are jointly and severally liable for all partnership debts and obligations (Correct answer)
- Partners are liable only up to the amount of their capital contribution
- Partner liability is limited unless the creditor has first exhausted all available partnership assets
Correct answer: Partners are jointly and severally liable for all partnership debts and obligations
Under the Massachusetts Uniform Partnership Act, all general partners are jointly and severally liable for all partnership obligations without any cap.
Question 3: In Massachusetts, which of the following best describes the personal liability of members of a member-managed LLC?
- Members are personally liable for all LLC debts because they participate in management
- Members have unlimited personal liability similar to general partners in a partnership
- Members are generally not personally liable for the debts and obligations of the LLC (Correct answer)
- Member liability is unlimited unless the LLC maintains at least $1 million in capitalization
Correct answer: Members are generally not personally liable for the debts and obligations of the LLC
Massachusetts LLC members enjoy limited liability protection and are generally not personally responsible for the LLC's debts, regardless of their participation in management.
Question 4: Under Massachusetts law, which document must be filed with the Secretary of State to form a for-profit corporation?
- Corporate Bylaws
- Articles of Organization (Correct answer)
- Operating Agreement
- Certificate of Limited Partnership
Correct answer: Articles of Organization
In Massachusetts, a corporation is formed by filing Articles of Organization with the Secretary of State, which serves as the foundational public formation document.
Question 5: A corporate director approves a contract without disclosing that he has a personal financial interest in the contracting party. Under Massachusetts law, this transaction is best characterized as:
- Void and unenforceable as a matter of law regardless of its terms
- Automatically ratified if the transaction ultimately benefits the corporation
- Voidable unless subsequently approved by disinterested directors or shareholders after full disclosure (Correct answer)
- Valid because directors are always presumed to act in good faith absent proven fraud
Correct answer: Voidable unless subsequently approved by disinterested directors or shareholders after full disclosure
Under Massachusetts law, a self-interested transaction is voidable unless approved by disinterested directors or shareholders after full and fair disclosure of the director's conflict of interest.
Question 6: Under Massachusetts law, a shareholder derivative suit is brought by a shareholder primarily to:
- Seek personal damages for a reduction in the shareholder's individual stock value
- Enforce a right belonging to the corporation that management has wrongfully failed to pursue (Correct answer)
- Dissolve the corporation when the board of directors is deadlocked
- Compel the corporation to declare a dividend at a specified rate
Correct answer: Enforce a right belonging to the corporation that management has wrongfully failed to pursue
A derivative suit permits a shareholder to sue on the corporation's behalf to enforce corporate rights when management has wrongfully declined to act.
Question 7: Massachusetts courts are most likely to pierce the corporate veil and hold shareholders personally liable when:
- The corporation fails to earn a profit for three or more consecutive fiscal years
- A shareholder personally guarantees a specific corporate debt to a third-party creditor
- The corporation is used as an alter ego to perpetrate fraud or injustice, with commingling of assets (Correct answer)
- The corporation has fewer than five shareholders of record
Correct answer: The corporation is used as an alter ego to perpetrate fraud or injustice, with commingling of assets
Massachusetts courts pierce the corporate veil when shareholders exploit the corporate form as an alter ego to commit fraud or injustice, treating corporate and personal affairs as indistinguishable.
MA Bar Business Associations 1
Under Massachusetts law, which of the following best describes the business judgment rule as it applies to corporate directors?