OR Bar Business Associations 3 — Questions and Answers
Question 1: An Oregon LLC member wishes to enforce an agreement that limits distributions to members. Where is this agreement most appropriately set forth?
- The LLC's articles of organization filed with the Secretary of State
- The LLC's operating agreement (Correct answer)
- A resolution adopted by a majority of members at an annual meeting
- A public notice filing with the county recorder
Correct answer: The LLC's operating agreement
An LLC's operating agreement governs the internal affairs of the LLC, including distribution rights and limitations among members.
Question 2: Under Oregon corporate law, which of the following is NOT required for a de facto corporation to exist, shielding promoters from personal liability?
- A valid law under which the corporation could be organized
- A good-faith attempt to incorporate
- Actual use of corporate privileges
- Filing of articles of incorporation with the Secretary of State (Correct answer)
Correct answer: Filing of articles of incorporation with the Secretary of State
De facto corporation status requires a valid enabling statute, a good-faith incorporation attempt, and actual use of corporate powers — not actual filed articles.
Question 3: A corporation's board of directors adopts a resolution authorizing a major asset sale. A shareholder argues the board lacked authority because shareholders did not approve it. Under the Oregon Business Corporation Act, shareholder approval of a major asset sale is generally:
- Not required — the board has sole authority over all asset dispositions
- Required only if the sale involves more than 50% of the corporation's assets
- Required for a sale of substantially all assets outside the ordinary course of business (Correct answer)
- Required only if the corporation is publicly traded
Correct answer: Required for a sale of substantially all assets outside the ordinary course of business
Oregon follows the MBCA rule requiring shareholder approval for a sale of substantially all assets outside the ordinary course of business.
Question 4: Which of the following most accurately describes the business judgment rule?
- It is a presumption that directors acted on an informed basis, in good faith, and in the honest belief they were acting in the corporation's best interests (Correct answer)
- It is a standard requiring courts to substitute their judgment for that of directors on business decisions
- It applies only when directors have a personal financial interest in the transaction
- It shifts the burden to the corporation to prove director decisions were reasonable
Correct answer: It is a presumption that directors acted on an informed basis, in good faith, and in the honest belief they were acting in the corporation's best interests
The business judgment rule is a presumption protecting directors who acted on an informed basis, in good faith, and in the corporation's best interest from judicial second-guessing.
Question 5: A manager-managed Oregon LLC defaults to which governance structure for decisions outside the ordinary course of business?
- Approval by all managers acting unanimously
- Approval by a majority-in-interest of the members (Correct answer)
- Approval by the designated managing member alone
- No special approval needed — managers have plenary authority
Correct answer: Approval by a majority-in-interest of the members
In a manager-managed LLC, extraordinary matters outside ordinary business typically require member approval by a majority interest, not manager action alone.
Question 6: A promoter signs a contract on behalf of a corporation not yet formed. After incorporation, the corporation expressly adopts the contract. What is the promoter's liability?
- The promoter is fully released from liability upon adoption by the corporation
- The promoter remains liable unless the third party agrees to release the promoter (novation) (Correct answer)
- The promoter was never liable because the corporation ratified the contract
- The promoter is liable only for contracts signed after the corporation could have been formed
Correct answer: The promoter remains liable unless the third party agrees to release the promoter (novation)
Corporate adoption of a pre-incorporation contract does not automatically release the promoter; a novation — the third party's agreement to substitute the corporation for the promoter — is required.
Question 7: Under Oregon law, a shareholder in a closely-held corporation who is being 'squeezed out' by majority shareholders may have a claim for:
- Breach of the duty of loyalty owed by majority shareholders acting as fiduciaries (Correct answer)
- Breach of contract only if a shareholder agreement was violated
- Violation of federal securities laws exclusively
- No recognized claim because majority shareholders may act in self-interest
Correct answer: Breach of the duty of loyalty owed by majority shareholders acting as fiduciaries
Courts in closely-held corporations often impose heightened fiduciary duties on majority shareholders, allowing squeeze-out victims to bring claims for breach of the duty of loyalty.
OR Bar Business Associations 3
An Oregon LLC member wishes to enforce an agreement that limits distributions to members.
Where is this agreement most appropriately set forth?