RI Bar Business Associations 1 — Questions and Answers
Question 1: Under agency law, which of the following best describes an agent acting with 'apparent authority'?
- The principal expressly authorized the agent to act on their behalf
- The agent acts based on reasonable belief of authority granted by the principal
- A third party reasonably believes the agent has authority based on the principal's conduct (Correct answer)
- The agent acts without any authorization but the principal later ratifies the act
Correct answer: A third party reasonably believes the agent has authority based on the principal's conduct
Apparent authority arises when the principal's conduct causes a third party to reasonably believe the agent has authority to act.
Question 2: A general partnership is formed when:
- Two or more persons file articles of partnership with the state
- Two or more persons associate to carry on a business for profit, with or without a formal agreement (Correct answer)
- Partners execute a written partnership agreement signed before a notary
- At least one partner contributes capital and another contributes services
Correct answer: Two or more persons associate to carry on a business for profit, with or without a formal agreement
Under the Uniform Partnership Act, a partnership is formed by the association of two or more persons to carry on a business for profit, and no formal filing is required.
Question 3: In a general partnership, a partner's liability for partnership obligations is:
- Limited to the amount of capital the partner contributed
- Joint and several for all partnership debts and obligations (Correct answer)
- Proportional to the partner's ownership percentage
- Limited to partnership assets unless the partner personally guaranteed the debt
Correct answer: Joint and several for all partnership debts and obligations
General partners are jointly and severally liable for all partnership obligations, meaning each partner can be held fully responsible.
Question 4: Under the Model Business Corporation Act, which of the following is required to pierce the corporate veil?
- The corporation was undercapitalized at the time of formation
- The controlling shareholders failed to hold annual meetings
- Fraud, injustice, or fundamentally unfair conduct, plus the corporate form was used as a mere instrumentality (Correct answer)
- The corporation failed to pay dividends to shareholders
Correct answer: Fraud, injustice, or fundamentally unfair conduct, plus the corporate form was used as a mere instrumentality
To pierce the corporate veil, courts generally require a showing that the corporate form was abused (alter ego or instrumentality theory) combined with fraud or fundamental unfairness.
Question 5: A limited liability company (LLC) member's interest in the LLC is best described as:
- Direct ownership of the LLC's assets
- A personal property interest consisting of a share of profits and losses and a right to receive distributions (Correct answer)
- An equity security regulated under federal securities law
- A partnership interest subject to all Uniform Partnership Act provisions
Correct answer: A personal property interest consisting of a share of profits and losses and a right to receive distributions
An LLC member's interest is a personal property interest that includes the right to share in profits/losses and receive distributions, not direct ownership of LLC assets.
Question 6: Under the business judgment rule, a corporate director's decision is protected from judicial second-guessing if the director:
- Acts in good faith, on an informed basis, and honestly believes the action is in the corporation's best interest (Correct answer)
- Obtains approval from a majority of shareholders before acting
- Consults with outside legal counsel prior to making the decision
- Acts unanimously with all other board members on the decision
Correct answer: Acts in good faith, on an informed basis, and honestly believes the action is in the corporation's best interest
The business judgment rule protects directors who act in good faith, with due care (on an informed basis), and in the honest belief that the action serves the corporation's best interest.
Question 7: When a corporation's board of directors approves a merger, which of the following shareholder rights is typically triggered?
- The right to inspect all corporate books and records
- The right to demand dissolution of the corporation
- Appraisal rights, allowing dissenting shareholders to receive fair value for their shares (Correct answer)
- The right to elect new directors before the merger is completed
Correct answer: Appraisal rights, allowing dissenting shareholders to receive fair value for their shares
Dissenting shareholders in a merger typically have appraisal rights (also called dissenters' rights) to receive judicially determined fair value for their shares.
RI Bar Business Associations 1
Under agency law, which of the following best describes an agent acting with 'apparent authority'?