Officer & Director Liability (MBCA 2016) - Next Generation Bar Exam

1. Under MBCA 6.40, when is a distribution to shareholders prohibited?

   When afterward it could not pay debts as they come due, or its assets would be less than liabilities plus preferences. These are the equity insolvency and balance sheet tests.

2. Under MBCA 2.02(b)(4), what director liabilities may not be eliminated by a provision in the articles?

   Improper financial benefits, intentional harm to the corporation or shareholders, unlawful distributions, and intentional crimes. Other claims for money damages, such as duty-of-care claims, may be exculpated.

3. Under the MBCA, when may a court order indemnification of a director?

   When it is fair and reasonable in view of all the relevant circumstances. Court-ordered indemnification may apply even if the director did not meet the statutory standard, subject to limits.

4. Under the MBCA, what standard must a director meet for permissive indemnification?

   Good faith and a reasonable belief that the conduct was in, or not opposed to, the corporation's best interests. In a criminal proceeding, the director also must have had no reasonable cause to believe the conduct was unlawful.

5. Under MBCA 8.33, what liability does a director who votes for an unlawful distribution have?

   Personal liability to the corporation for the amount exceeding what could lawfully be distributed. Liability requires that the director failed to comply with the standards of conduct, and the director may seek contribution.

6. A director carelessly votes for a dividend that leaves the corporation unable to pay its debts as they come due. What is the director's liability?

   Personal liability to the corporation for the amount of the unlawful distribution. The articles cannot exculpate liability for unlawful distributions.

7. Under the MBCA, how may a director present at a board meeting avoid being deemed to assent to the board's action?

   By objecting to holding the meeting, or by having a dissent or abstention recorded in the minutes or promptly delivered in writing. A director who votes in favor of the action cannot later record a dissent.

8. Under the MBCA, on what conditions may a corporation advance a director's litigation expenses?

   A written affirmation of good-faith belief in meeting the standard and an undertaking to repay if not entitled. The undertaking need not be secured and may be accepted without regard to ability to repay.

9. Under the MBCA, what may a corporation buy to protect directors and officers against liabilities it could not lawfully indemnify?

   Directors' and officers' liability insurance. The power to insure is broader than the power to indemnify.

10. Under the MBCA, what must a plaintiff show beyond a breach of the standards of conduct to hold a director liable for damages?

    Harm to the corporation proximately caused by the director's conduct. Liability also requires that the conduct fall within a ground in section 8.31, such as bad faith or a lack of objectivity.

11. Under the MBCA, for which liabilities may a corporation not indemnify a director absent court order?

    Liability to the corporation in a proceeding by or in its right, and liability for receiving an improper financial benefit. Reasonable expenses in a derivative suit may be indemnified if the standard of conduct was met.

12. Under the MBCA, when is a corporation required to indemnify a director?

    When the director was wholly successful, on the merits or otherwise, in defending the proceeding. Mandatory indemnification covers reasonable expenses incurred in the defense.

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