- Is the board's appointment of the new director valid? Select one.
Answer: Yes, because unless the articles provide otherwise, either the shareholders or the board can fill a vacancy on the board.
The correct answer is C. Under the MBCA and most state statutes, a vacancy on the board of directors can be filled by either the shareholders or the board of directors, unless the articles of incorporation provide otherwise. Since the articles are silent, the board's action was permissible. Choice A is incorrect; a simple majority of the remaining directors is typically sufficient. Choice B is incorrect because while shareholders elect directors initially, the power to fill vacancies is usually shared with the board. Choice D is incorrect because when the board fills a vacancy, the new director typically serves only until the next annual shareholder meeting, at which point shareholders elect a director for the remainder of the term.
- Which statement most accurately describes the legal situation? Select one.
Answer: The president exceeded his authority because officers are subject to the direction of the board of directors, which can limit their authority.
This question tests the fundamental hierarchy of authority within corporate governance, specifically the relationship between officers and the board of directors.
The correct answer is D because corporate law establishes a clear chain of command: the board of directors sits above officers in the corporate hierarchy and has the power to direct and limit their authority. Even though the bylaws grant the president broad power over "day-to-day business," this authority is not absolute. The board retains its superior position and can impose reasonable restrictions on how officers exercise their delegated powers. When the board passed a resolution requiring approval for high-salary hires, it was acting within its supervisory role, and the president was legally bound to follow this directive.
Answer A incorrectly assumes that broad bylaw language creates unlimited authority. While hiring is typically part of day-to-day operations, officers' powers are always subject to board oversight and specific limitations the board may impose.
Answer B mischaracterizes what happened. The board didn't amend the bylaws—it issued a specific operational directive, which is well within its management authority and doesn't require shareholder approval.
Answer C focuses on apparent authority, but this is primarily relevant to third-party relationships. The employment contract itself may still be valid because the manager could reasonably believe the president had authority to hire, even if the president acted improperly internally.
Remember: Officer authority flows from and remains subject to board direction. Broad bylaw language doesn't insulate officers from specific board directives that reasonably limit their powers.
- What is the likely outcome of the shareholder's claim that the act was ultra vires? Select one.
Answer: The claim will likely fail, because modern corporate statutes allow corporations to take any action that is legal, and the ultra vires doctrine is largely obsolete.
The correct answer is C. Under modern corporate law, the ultra vires doctrine has been severely limited. Most statutes, including the MBCA, provide that a corporation has the purpose of engaging in any lawful business unless a more limited purpose is stated in the articles. Furthermore, even when a purpose is limited, the power of a corporation to act is generally not challengeable on the ground that it is ultra vires, except in very narrow circumstances (like a shareholder suit to enjoin a proposed act or a suit by the corporation against a director). Given the modern view, courts broadly interpret corporate powers, and the claim is very likely to fail. Choice A reflects the old, strict view of the doctrine. Choice B is incorrect; even if an act were ultra vires, it would not create strict liability. Choice D is incorrect because shareholders do have standing to bring an injunction, though their chances of success are low.
- Can the corporation properly refuse the director's inspection demand? Select one.
Answer: Yes, because a director's inspection right is not absolute and can be denied if the director has an improper purpose that conflicts with the corporation's interests.
The correct answer is C. While directors have broad inspection rights to stay informed and fulfill their fiduciary duties, this right is not absolute. Courts have held that inspection can be denied if the demand is motivated by an improper purpose that is hostile or adverse to the corporation's interests. Here, the director's position with a firm looking to invest in a competitor creates a clear conflict of interest and an improper purpose for accessing sensitive strategic data. Choice A is an overstatement of the law. Choice B is incorrect because the duty of loyalty would actually require the director to avoid using her position to harm the corporation. Choice D is incorrect; both directors and shareholders have inspection rights, though the scope and purpose requirements may differ.
- Is the director's removal valid? Select one.
Answer: Yes, because shareholders have the power to remove directors with or without cause at any time with the vote of a majority of shares.
The correct answer is C. Under the Model Business Corporation Act (MBCA) and the law of most jurisdictions, shareholders may remove directors with or without cause by a vote of a majority of the shares entitled to vote, unless the articles of incorporation provide otherwise. Since the articles here are silent, the default rule applies. Choice A states the opposite of the modern rule. Choice B is incorrect; a simple majority of shares is typically sufficient, not a supermajority, unless required by the articles. Choice D is incorrect as the board's approval is not required for shareholders to exercise their power to remove a director.
- Was the board's action proper? Select one.
Answer: Yes, because the articles of incorporation properly authorized the issuance of 'blank-check' preferred stock, allowing the board to set the terms.
When you encounter questions about stock issuance and board authority, focus on what powers the articles of incorporation delegate to the board versus what requires shareholder approval.
The board's action was proper because the articles of incorporation specifically authorized both common and preferred stock issuance, with the preferred stock terms "to be determined by the board of directors." This creates what's known as "blank-check" preferred stock, giving the board discretionary authority to set dividend rates, liquidation preferences, and other terms without returning to shareholders for each series. This arrangement is legally permissible and commonly used to provide corporate flexibility.
Option A is incorrect because no amendment to the articles is needed here—the board is operating within the authority already granted by the existing articles. An amendment would only be required if the articles didn't authorize preferred stock or board discretion over terms.
Option B misunderstands corporate law. Both common and preferred stock can be issued under proper authorization without individual shareholder approval for each issuance, provided the articles of incorporation grant such authority.
Option C incorrectly assumes preemptive rights are required. Preemptive rights (allowing existing shareholders to purchase new shares proportionally) are not automatically required for new stock issuances and depend on state law and corporate charter provisions. They're not mentioned as a requirement here.
Remember: When analyzing board authority over stock issuance, always check what the articles of incorporation specifically authorize. "Blank-check" preferred provisions are valid corporate planning tools that avoid repeated shareholder votes for routine financing decisions.
- What is the corporation's best defense against the enforcement of the contract? Select one.
Answer: The contract is voidable because the treasurer lacked actual or apparent authority to bind the corporation in a real estate purchase.
The correct answer is B. An officer can bind the corporation if they have actual or apparent authority. The treasurer's actual authority was limited by the bylaws. Critically, a treasurer does not typically have apparent authority to engage in extraordinary transactions like purchasing an office building. A third party would not be reasonable in assuming a treasurer has this power, unlike a CEO or president. Therefore, the corporation can argue the treasurer had neither actual nor apparent authority. Choice A is incorrect; while a major transaction, it's not necessarily a fundamental change requiring shareholder vote unless it's a sale of substantially all assets. Choice C is incorrect because a breach of duty affects the relationship between the officer and corporation but doesn't automatically void a contract with a third party. Choice D is incorrect; other officers can be granted authority, and the key issue here is the scope of the treasurer's authority, not the president's.
- Is the corporation likely to be bound by the lease? Select one.
Answer: Yes, because the CEO had apparent authority to bind the corporation, and the landlord was not aware of the internal limitation on that authority.
The correct answer is D. While the CEO lacked actual authority due to the bylaw restriction (B), the corporation is likely bound under the doctrine of apparent authority. A CEO typically has the apparent authority to enter into contracts in the ordinary course of business. A third party like the landlord can reasonably rely on this authority unless they know or should have known of the internal limitation. Since the landlord was unaware of the bylaw, the CEO's apparent authority will likely bind the corporation. Choice A is incorrect; this is an issue of authority, not ultra vires, which relates to acts beyond the corporation's stated purpose. Choice C is plausible, but apparent authority is the more precise legal concept, as a $5 million lease might be argued to be outside the 'ordinary course' for some businesses; however, the key is the third party's reasonable perception of the officer's power.
- What is the primary legal basis for the shareholder's challenge? Select one.
Answer: The action is a voidable interested director transaction because the CEO's vote was required for approval.
The correct answer is C. This is a classic interested director transaction, as the CEO has a direct financial interest in the decision. Under the MBCA, such a transaction is voidable unless it is approved by a majority of disinterested directors, approved by shareholders, or is proven to be fair to the corporation. Here, there were only two disinterested directors (the two who voted with the CEO and the one who voted against). The vote was 3-1, so the CEO's vote was necessary for the majority. Therefore, the transaction was not properly approved by disinterested directors and is subject to challenge. Choice A is incorrect; under modern statutes, an interested director can be counted for quorum purposes. Choice B is incorrect; it is common for officers to also serve as directors. Choice D is incorrect; setting officer compensation is a core function of the board of directors.
- What must have occurred for the dissolution to be validly initiated? Select one.
Answer: The board of directors must have adopted a proposal to dissolve and submitted it to the shareholders for their approval.
The correct answer is A. Voluntary dissolution is a fundamental corporate change. Like a merger or a sale of all assets, it requires a two-step process: (1) the board of directors must first adopt a resolution recommending dissolution, and (2) the resolution must then be submitted to and approved by the shareholders. Here, the board passing a resolution is the correct first step, but it must be followed by a shareholder vote. Choice B describes judicial dissolution, which is a different process. Choice C is incorrect as there is no such requirement. Choice D describes dissolution by written consent, which is an alternative but requires unanimity, whereas the standard voting procedure does not.
- Is the shareholder likely to succeed in enjoining the merger? Select one.
Answer: Yes, because a merger is a fundamental corporate change that requires both board approval and shareholder approval.
The correct answer is C. A merger is a fundamental corporate change. The standard procedure requires a two-step process: (1) adoption of the merger plan by the board of directors, and (2) approval of the plan by the shareholders. The board's unanimous approval is a necessary first step, but it is not sufficient on its own. The failure to seek shareholder approval is a fatal procedural flaw. Choice A is incorrect because board unanimity does not eliminate the shareholder voting requirement. Choice B is incorrect as an officer cannot ratify a decision that requires shareholder approval. Choice D is incorrect because the board must initiate the merger plan before it goes to the shareholders.
- What is the likely outcome of the shareholder's lawsuit? Select one.
Answer: The suit will succeed, because the board of directors did not act as a collective body at a formal meeting or by unanimous written consent.
The correct answer is D. Directors must act as a collective body. Their power is exercised at a meeting where they can deliberate, or by unanimous written consent. Individual assent from directors, even a majority, outside of a formal meeting is generally not a valid corporate act. Therefore, the board did not validly approve the acquisition. Choice A is incorrect because individual approval is not the same as a formal board vote. Choice B is incorrect because a president's authority does not extend to fundamental transactions like acquisitions without specific board authorization. Choice C is incorrect because while many acquisitions require shareholder approval, not all do, and the primary defect here is the lack of proper board action, which must precede any shareholder vote.
- Must the corporation comply with the shareholder's demand? Select one.
Answer: No, because the management of the corporation's day-to-day business, including marketing, is vested in its officers and overseen by the board.
The correct answer is C. Shareholders do not participate in the day-to-day management of the corporation. That role is delegated to the officers, who are supervised by the board of directors. A marketing campaign falls squarely within the ordinary course of business. Therefore, even a large shareholder cannot unilaterally demand its termination. Choice A is incorrect; ownership does not equal management power. Choice B is incorrect because a VP of Marketing would likely have actual or apparent authority to launch such a campaign as part of their duties. Choice D is incorrect because even a majority of shareholders cannot directly manage the business; their power is exercised through electing directors and voting on fundamental changes.
- Which of the following is the strongest argument that the board's action was valid? Select one.
Answer: The board has the exclusive power to set qualifications for and appoint corporate officers.
The correct answer is A. The board of directors is responsible for the management of the corporation, which includes appointing, overseeing, and setting the terms for corporate officers. Amending the bylaws to set qualifications like a retirement age is a valid exercise of this management power, especially when the articles explicitly grant the board the power to amend bylaws. Choice B is incorrect because shareholder ratification is not typically required for board-initiated bylaw amendments, unless the articles or a shareholder-adopted bylaw require it. Choice C is incorrect; while shareholders have an inherent power to amend bylaws, the MBCA allows this power to be shared with the board. Choice D is incorrect as an officer's consent is not required for the board to set general corporate policy through a validly enacted bylaw.
- Which of the following actions may the board of directors properly take in response? Select one.
Answer: The board can ratify the president's action, which would bind the corporation to the new loan.
The correct answer is A. Officers are agents of the corporation and are subject to the control of the board of directors. The president exceeded his actual authority by disobeying a specific directive from the board. However, the board has the power to ratify an unauthorized act of an officer, which would make the contract binding on the corporation as if it had been originally authorized. The board could also choose to repudiate the contract and remove the president for cause. Choice B is incorrect because the president's duty of obedience to the board's lawful directives overrides his discretion. Choice C is unlikely to succeed as the bank was likely unaware of the president's lack of authority. Choice D is incorrect because this is a management decision within the board's power, not a fundamental change requiring shareholder action.
- Is this agreement likely to be enforceable? Select one.
Answer: No, because the provision about voting as directors is void as it improperly restricts the directors' fiduciary duties to the corporation.
The correct answer is B. While the part of the agreement where shareholders agree on how to vote their shares (a shareholder voting agreement) is generally valid (making C partially correct but incomplete), the part where they commit to how they will vote as directors is problematic. This is often seen as an invalid restriction on a director's fiduciary duty to use their independent judgment to act in the best interests of the corporation. Directors cannot agree in advance to be 'sterilized' of their discretion. While modern statutes for close corporations may permit such agreements if certain formalities are met (e.g., all shareholders agree), a standard agreement like this is traditionally void on public policy grounds. Choice A is incorrect; shareholder voting agreements are generally valid. Choice D is irrelevant to the enforceability of this specific agreement.
- What is the strongest argument against your client's position? Select one.
Answer: The decision to declare dividends is a matter of business policy that falls within the board's discretion, protected by the business judgment rule.
The correct answer is B. The power to declare dividends lies exclusively with the board of directors. This decision is a matter of business policy and is protected by the business judgment rule. Courts are extremely reluctant to interfere with the board's discretion unless there is a showing of bad faith or fraud, which is a high bar. Choice A is incorrect; shareholders have a right to dividends when declared by the board during the corporation's operation. Choice C is incorrect because the power to declare dividends rests with the board, not officers. Choice D is incorrect because an action to compel a dividend is a direct action, not derivative, as it enforces the shareholder's right to a return.
- What must the corporation do next to validly amend its articles of incorporation? Select one.
Answer: The board must submit the amendment to the shareholders for approval at a properly noticed meeting.
The correct answer is C. Amending the articles of incorporation is a fundamental corporate change. The procedure requires that the board of directors first adopt a resolution with the proposed amendment and then submit it to the shareholders for their approval. Even a seemingly minor change like altering the corporate name requires this two-step process. Choice A is incorrect because shareholder approval must be obtained before filing. Choice B describes a notice requirement not typically found in modern corporate statutes. Choice D is incorrect because the board does not have sole authority to amend the articles; shareholder approval is essential.
- Is the sale of the manufacturing plant a valid corporate act? Select one.
Answer: No, because the sale of substantially all of the corporation's assets is a fundamental change requiring shareholder approval.
The correct answer is C. The sale of all or substantially all of a corporation's assets outside the ordinary course of business is a fundamental corporate change. Because the plant represented the vast majority of the corporation's assets and revenue, its sale qualifies. Such a transaction requires both board approval and subsequent approval by a majority of shareholders. Choice A is incorrect because this goes beyond a normal business decision. Choice B is incorrect; while financial distress is relevant to the board's business judgment, it does not eliminate the statutory requirement for shareholder approval of such a sale. Choice D is incorrect as it states an inaccurate rule.
- What is the directors' best defense to this lawsuit? Select one.
Answer: The directors are entitled to rely in good faith on information and reports presented by corporate officers whom they reasonably believe to be competent.
The correct answer is B. Corporate law statutes, including the MBCA, explicitly provide that in discharging their duties, directors are entitled to rely on information, opinions, reports, or statements prepared or presented by corporate officers whom the director reasonably believes to be reliable and competent in the matters presented. This statutory protection is the most direct defense. Choice A is too broad; the business judgment rule has limits and does not protect against grossly negligent processes, although it is related. The specific right of reliance is the stronger defense here. Choice C is incorrect; shareholder standing for a derivative suit is based on stock ownership, not the nature of the board's vote. Choice D is incorrect; directors are not automatically indemnified, and their own duty of care is the issue, though they may have a claim against the CFO.
