RI Bar Business Associations 2 — Questions and Answers
Question 1: Which of the following most accurately describes a corporation's duty of loyalty as applied to corporate officers?
- Officers must maximize short-term shareholder profit in every transaction
- Officers must act in the corporation's best interest and refrain from self-dealing without disclosure and approval (Correct answer)
- Officers owe loyalty only to the board of directors, not to shareholders
- Officers must place the interests of creditors above those of shareholders during normal operations
Correct answer: Officers must act in the corporation's best interest and refrain from self-dealing without disclosure and approval
The duty of loyalty requires officers to prioritize the corporation's interests over personal interests and to avoid or properly disclose self-dealing transactions.
Question 2: An 'interested director transaction' can be validated under most state corporate laws if:
- The transaction is approved by disinterested directors after full disclosure of the material facts (Correct answer)
- The interested director recuses themselves from all board discussions
- The transaction produces a profit for the corporation greater than market rate
- The transaction is reported to the SEC within 30 days
Correct answer: The transaction is approved by disinterested directors after full disclosure of the material facts
Interested director transactions are cleansed if the material facts are disclosed and the transaction is approved by a majority of disinterested directors.
Question 3: Under the Revised Uniform Limited Partnership Act (RULPA), which partner bears management responsibility and unlimited liability?
- Limited partners with more than a 50% capital interest
- General partners (Correct answer)
- All partners equally
- The managing limited partner elected by the other partners
Correct answer: General partners
In a limited partnership, general partners manage the business and bear unlimited personal liability, while limited partners have liability capped at their contributions.
Question 4: A limited partner who participates substantially in the control of a limited partnership's business risks:
- Forfeiting their right to receive future distributions
- Being held liable to third parties who reasonably believed they were a general partner (Correct answer)
- Having their capital interest diluted by the general partner
- Automatic conversion to general partner status by statute
Correct answer: Being held liable to third parties who reasonably believed they were a general partner
Under traditional limited partnership law, a limited partner who participates in control may lose liability protection and become liable to third parties who reasonably believed they were a general partner.
Question 5: A shareholder derivative suit may be brought when:
- A shareholder personally suffers a direct economic injury from the corporation's actions
- The corporation suffers a wrong that the board refuses to address, and the shareholder sues on the corporation's behalf (Correct answer)
- A majority of shareholders vote to authorize litigation against a director
- The SEC brings an enforcement action and private shareholders intervene
Correct answer: The corporation suffers a wrong that the board refuses to address, and the shareholder sues on the corporation's behalf
A derivative suit allows shareholders to sue on behalf of the corporation for wrongs done to the corporation when the board improperly refuses to act.
Question 6: Under corporate law, the pre-emptive right gives existing shareholders the right to:
- Vote against any new issuance of shares at a shareholder meeting
- Purchase a proportional share of newly issued stock before it is offered to the public (Correct answer)
- Demand that the corporation repurchase their shares at book value
- Block the board from issuing stock options to executives
Correct answer: Purchase a proportional share of newly issued stock before it is offered to the public
Pre-emptive rights allow existing shareholders to maintain their proportional ownership by purchasing newly issued shares before outsiders can acquire them.
Question 7: Which of the following is an accurate statement about an LLC's operating agreement?
- It must be filed with the state to be effective
- It can override most default statutory provisions governing the LLC's internal affairs (Correct answer)
- It cannot alter the default rule requiring equal profit distributions among members
- It must be approved by a two-thirds supermajority of members to amend
Correct answer: It can override most default statutory provisions governing the LLC's internal affairs
An LLC's operating agreement is highly flexible and can override most default statutory rules governing internal affairs, subject to a few mandatory protections.
RI Bar Business Associations 2
Which of the following most accurately describes a corporation's duty of loyalty as applied to corporate officers?