HI Bar - Hawaii Bar Business Associations 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?

Accepted Answer

Piercing the corporate veil

Answer

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?

Accepted Answer

The partnership is automatically dissolved.

Answer

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?

Accepted Answer

The business judgment rule

Answer

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?

Accepted Answer

Make a written demand on the board of directors to take suitable action.

Answer

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?

Accepted Answer

A member is generally not personally liable for the debts and obligations of the LLC.

Answer

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.

HI Bar - Hawaii Bar Exam Practice Test

HI Bar - Hawaii Bar Exam Practice Test

HI Bar - Hawaii Bar Business Associations Questions and Answers