VT Bar Business Organizations 1 — Questions and Answers
Question 1: Under the Model Business Corporation Act (MBCA), what is the minimum number of incorporators required to form a corporation?
- One (Correct answer)
- Two
- Three
- Five
Correct answer: One
The MBCA allows a corporation to be formed by a single incorporator who delivers articles of incorporation to the state filing office.
Question 2: The business judgment rule protects directors who make decisions that:
- Result in profit for the corporation
- Were made in good faith, with due care, and in the honest belief the action was in the corporation's best interest (Correct answer)
- Were approved by a majority of shareholders
- Were made only after consulting independent legal counsel
Correct answer: Were made in good faith, with due care, and in the honest belief the action was in the corporation's best interest
The business judgment rule protects directors who acted in good faith, with reasonable care, and in the corporation's best interest, even if the decision later proves unwise.
Question 3: When will a court most likely pierce the corporate veil and hold shareholders personally liable?
- Whenever the corporation is insolvent
- When the corporation fails to hold annual shareholder meetings
- When the corporate form is used as a sham or to perpetrate fraud, and there is such unity of interest that the corporation and shareholder are indistinguishable (Correct answer)
- Whenever the corporation has fewer than three shareholders
Correct answer: When the corporate form is used as a sham or to perpetrate fraud, and there is such unity of interest that the corporation and shareholder are indistinguishable
Courts pierce the corporate veil when the corporate form is abused as a sham or to perpetrate fraud, and maintaining the fiction would sanction injustice.
Question 4: A shareholder's preemptive right allows the shareholder to:
- Vote on all corporate transactions above a certain value
- Receive dividends before other shareholders
- Purchase newly issued shares in proportion to their current ownership before they are offered to outsiders (Correct answer)
- Inspect all corporate books and records at any time
Correct answer: Purchase newly issued shares in proportion to their current ownership before they are offered to outsiders
Preemptive rights give existing shareholders the opportunity to maintain their proportional ownership by purchasing new shares before they are sold to outside parties.
Question 5: An act performed by a corporation outside the scope of its stated purposes in the articles of incorporation is known as:
- Ultra vires (Correct answer)
- Intra vires
- A breach of the duty of care
- A violation of the business judgment rule
Correct answer: Ultra vires
Ultra vires refers to acts that exceed the authority granted to a corporation in its charter; under the MBCA, ultra vires acts are generally enforceable but may give rise to shareholder suits.
Question 6: In a short-form merger under the MBCA, which approval is required when a parent corporation owns at least 90% of a subsidiary?
- Both boards of directors and shareholders of both corporations must approve
- Only the parent board's approval is required; no shareholder vote of either corporation is needed (Correct answer)
- A majority of all outstanding shares of both corporations must vote in favor
- The subsidiary's shareholders must approve by a two-thirds supermajority
Correct answer: Only the parent board's approval is required; no shareholder vote of either corporation is needed
In a short-form merger where the parent owns at least 90% of the subsidiary, only the parent board needs to approve; no shareholder vote of either entity is required.
Question 7: Directors of a corporation owe fiduciary duties of:
- Care and loyalty only
- Care, loyalty, and good faith (Correct answer)
- Care, loyalty, good faith, and full candor to shareholders
- Loyalty and obedience only
Correct answer: Care, loyalty, and good faith
Directors owe the duties of care (act with reasonable care), loyalty (act in the corporation's best interest), and good faith (act honestly and in good conscience).
VT Bar Business Organizations 1
Under the Model Business Corporation Act (MBCA), what is the minimum number of incorporators required to form a corporation?