- Is Greenfield bound to sell the chemical division to Nubo?
Answer: Not binding, because the sale of a principal division was outside the ordinary course and the board had not acquiesced in substantially similar prior transactions.
Whenever you see a corporate officer purporting to bind the corporation, separate ordinary-course contracts from extraordinary transactions. Under Reyes, a president has actual authority only for contracts in the usual and ordinary course; extraordinary transactions—like selling a principal division—require specific board authorization unless the board knowingly acquiesced in a course of substantially similar prior transactions and the other party reasonably relied.
Selling the chemical division is extraordinary: it is 35% of Greenfield's assets and 30% of its revenue, and it was described as a principal division. The board had permitted only ordinary supply contracts and equipment leases, never a division sale, so there was no substantially similar course for Nubo to rely on. Thus Greenfield is not bound.
The apparent-authority argument fails because Reyes is explicit that the president's title alone cannot create apparent authority for extraordinary transactions, and the past ordinary contracts are not substantially similar. The "only 35% of assets" argument misses the point: the rule focuses on selling a principal division, not on a statutory "all or substantially all" threshold. Finally, the claim that a president has no authority without express board approval is overbroad—presidents do have actual authority for ordinary-course contracts; the problem is that this sale is not one of them.
Study tip: when an executive makes an unusual deal, ask: Is it ordinary? If not, was there a prior substantially similar course of board acquiescence and reasonable reliance? The course must match the kind of transaction.
- Which issue is most important in determining whether the board's approval of the sale was valid?
Answer: Whether a bylaw adopted by shareholders may require a supermajority vote of directors for specified board actions.
Start with the default rule: the board manages the corporation by majority vote of a quorum. Shareholder-adopted bylaws, however, may impose additional voting requirements for board action, as long as those requirements are consistent with state law and the corporation's articles of incorporation. Here, the decisive issue is whether that bylaw—requiring at least four of five directors for a large asset disposition—was valid. If it was, the 3–2 vote was insufficient and the sale should be set aside. If it was invalid, the ordinary majority vote was enough to approve it.
The answer choice about the sale being outside the ordinary course of business is not the key issue, because the question is whether the board validly approved the sale, not whether shareholder approval was also required for a fundamental change. And there is no indication that the three approving directors had a conflict of interest, so that choice is unsupported by the facts. The business judgment rule is also a distraction: it might protect directors from liability for a reasonable decision, but it cannot cure a failure to satisfy the specific voting requirement that the shareholders challenged.
So when you see a supermajority voting provision, first ask whether the provision was validly adopted and whether it was actually followed. That will usually tell you whether the board action was valid at all.
- Will Adams and Brooks succeed in invalidating the hiring?
Answer: No, because the agreement was not signed by every shareholder and was not noted on the share certificates, so it does not limit the board's authority.
When you see a statutory close corporation paired with a shareholder management agreement, your first instinct should be to check the statute's exact formalities. These agreements are valid only if they strictly comply with the statutory requirements—typically unanimous shareholder signatures and proper notation on share certificates. The statute here is explicit: the agreement must be signed by every shareholder and noted on the certificates before or at the time shares are issued or transferred.
Applying that rule, Adams and Brooks will not succeed. Chen, a 10% shareholder, did not sign the agreement, and the certificates carry no notation of it. The statute states that unless both conditions are met, the agreement does not limit the board's authority to act. Since the board hired the CFO without approval, the hiring stands.
Now consider the incorrect choices. The choice claiming that "Adams and Brooks together hold 90% of the shares" and that the agreement required 90% approval is a trap—it conflates the agreement's internal voting threshold with the statutory requirement for validity. The statute demands unanimous signature, not a supermajority. The choice stating that a shareholder management agreement is valid "even if one shareholder does not sign, so long as it is in writing" is also wrong because the statute explicitly overrides that—a writing alone is insufficient; every shareholder must sign. Finally, the choice asserting that shareholders "may not restrict the board's authority over officers even by unanimous agreement" misreads the statute—it expressly permits such restrictions, provided the formalities are satisfied.
Your takeaway: on the bar exam, whenever a close corporation agreement appears, immediately check for the two magic requirements—unanimous signature and certificate notation. If either is missing, the agreement cannot bind the board.
- Which claim is most likely at the center of the shareholders' suit?
Answer: Breach of the duty of loyalty by diverting a corporate opportunity to herself.
Whenever you see a director profiting from an opportunity learned through board service, the central concept is the corporate opportunity doctrine under the duty of loyalty. Directors must not divert for personal gain a business opportunity that the corporation could pursue and has an interest or expectancy in.
Here, Lena learned about the navigation-module contract at a board meeting while serving as a director. Even though the board only authorized study and never voted to bid, Meridian had a concrete interest in the opportunity. Lena then resigned and used nonpublic details to submit a competing bid. That is the classic pattern: usurping a corporate opportunity for herself, in violation of her fiduciary duty of loyalty. Her resignation does not erase liability for an opportunity she learned in her official capacity.
The duty of care choice misses the mark because no facts show missed deadlines, negligent management, or careless decision-making. The sale of control choice is wrong because there was no sale of corporate control; resigning and competing is not "selling" anything. The tortious interference choice mislabels the claim: while Lena competed with Meridian, the shareholders' suit is fundamentally a fiduciary duty claim against a director, not a tort claim by a third party.
Study tip: when a director resigns and takes a deal learned pre-resignation, think loyalty/corporate opportunity first — resignation is a shield, not a clean slate.
- Was the amendment approved?
Answer: Not approved, because Alvarez's revocation was timely, and Blake's and Chen's delivered consents totaled only 300 shares, below the 501 needed.
Whenever you see a written-consent question, track the vote count on a timeline. The amendment needs a majority of the 1,000 outstanding shares, so 501 votes are required. Alvarez delivered 300 shares on May 2, but revoked in writing on May 3 before any other consent had arrived. Under the statute, a consent is revocable until the corporation has received consents from holders of the minimum number of votes required. Because only Alvarez's 300 shares were in when he revoked, his revocation was timely and his 300 shares no longer count. Blake's 200 shares on May 5 and Chen's 100 shares on May 7 total only 300, below the 501 required. So the amendment was not approved.
The "Alvarez's signed and delivered consent was irrevocable" choice misses the statute's clear rule: delivery alone does not make a consent irrevocable; the minimum-vote threshold does. The "action became effective on May 7 when Blake's and Chen's consents were delivered" choice wrongly includes Alvarez's revoked shares and confuses effectiveness with the required vote; notice timing is irrelevant to validity. The "only when every shareholder signs" choice confuses written consent with unanimous consent—the statute expressly allows action by holders of the minimum number of votes, not all shareholders.
Study tip: for consent questions, always ask "what votes were irrevocably delivered before the minimum was reached?" and ignore later notices unless they affect procedural rights.
- Which legal issue is most likely to determine Victor's right to relief?
Answer: Whether the shareholders' voting agreement is valid and specifically enforceable according to its terms.
Whenever you see a shareholder voting arrangement, classify it: a proxy is a revocable delegation of voting authority, while a shareholders' voting agreement is a contract among shareholders to vote their shares a certain way. Inez and Victor signed a ten-year agreement to vote for each other's continued board service, so Victor is suing to enforce that contract. The decisive issue is whether the shareholders' voting agreement is valid and specifically enforceable according to its terms. Shareholder voting agreements are generally enforceable if their purpose is lawful; courts will order specific performance rather than leaving the promise to damages.
The answer suggesting Inez's promise was a revocable proxy misses that distinction: a proxy transfers voting power to another person, whereas Inez retained her shares and made a contractual commitment about her own vote. The answer about Victor's conduct breaching a fiduciary duty raises a separate claim; even if Victor made wasteful decisions, the contract question would still be whether Inez is bound, and a mere disagreement would not automatically excuse her promise. The answer about filing the agreement with Beacon Advisors is also wrong: no filing is required for a shareholder voting agreement to be effective. Therefore, validity and specific enforceability control the outcome.
Study tip: on bar questions, distinguish proxy, voting trust, and voting agreement—only the proxy is generally revocable.
- Is the committee's dividend authorization valid?
Answer: Yes, because the board resolution prescribed a formula or method for authorizing the distribution and the committee authorized the dividend in accordance with it.
Whenever you see a corporate board committee question, start with the statutory default rule. Under § 8.25(c), a board committee generally may not authorize shareholder distributions—but the statute creates an exception: the board may prescribe a formula or method for authorizing distributions, and the committee may then authorize distributions according to that formula or method.
Here, the board's resolution did exactly that. It set a definite ceiling—"not more than $2.00 per share"—and supplied a method: the committee must determine that funds are legally available. The committee made that determination and declared a dividend within the stated cap. That fits the statutory exception, so the dividend authorization is valid.
The choice claiming a committee can never authorize distributions is wrong because it ignores the explicit formula-or-method exception. The choice arguing the resolution failed because it didn't fix a definite dollar amount is also wrong: a formula or method can include a range plus a condition, and it need not leave the committee with no discretion, only with a predetermined standard. Finally, the choice asserting that an executive committee can exercise all board power despite the statutory exceptions is wrong because § 8.25(c)'s restrictions apply even after a committee is created; the board may not simply waive them except through the distribution formula mechanism.
For the exam: when a question involves delegated board power, check for the statutory carve-out and ask whether the board supplied a genuine formula or method—caps, conditions, and legal-availability requirements all count.
- Which issue is central to resolving Marta's inspection claim?
Answer: Whether Marta's request relates to a purpose that is proper for a shareholder investigating corporate mismanagement.
Shareholder inspection claims turn on the shareholder's purpose. Under corporate law, a shareholder has a right to inspect books and records if the request is made in good faith and for a proper purpose—one reasonably related to the shareholder's interest as an owner. Investigating suspected mismanagement or self-dealing qualifies. Marta wants to examine customer lists, pricing models, and emails to determine whether the CEO's family received secret discounts. That is a classic proper purpose, so it is the central issue in her claim.
The other choices miss the mark. There is no requirement that Marta first make a demand on Juniper's board to correct the alleged misconduct; inspection is a distinct statutory remedy, and the demand is made on the corporation, not a precondition to suing for inspection. Whether Juniper's customer lists and pricing emails are protected as trade secrets may affect the scope of inspection or the need for a protective order, but it is not the central issue because even sensitive materials can be inspected when the purpose is proper. Finally, the discounts, if proved, would likely be waste or breach of fiduciary duty, not an ultra vires act, which means action beyond the corporation's legal powers.
On exam, whenever a shareholder seeks corporate records, immediately ask: what is the stated purpose? If it is investigating mismanagement or wrongdoing affecting shareholder value, the purpose is proper—even if the company claims confidentiality.
- Which legal issue is most likely to determine whether the sale is invalid without shareholder approval?
Answer: Whether the sale leaves Horizon without a significant continuing business activity, thus requiring shareholder approval.
Whenever you see a sale of a company's assets, ask whether the transaction is in the ordinary course of business. If it is not, and the sale disposes of substantially all assets, the directors must obtain shareholder approval. Here, Horizon is selling its only plant, all inventory, and its trade name—essentially its entire operating business. That triggers the "significant continuing business activity" test: if the corporation is left with no meaningful ongoing business, the sale is a fundamental change requiring shareholder approval. The board's failure to submit it makes the sale invalid.
The fairness of the sale price and the board's good faith go to fiduciary duty, but even a fair, good-faith sale cannot replace the statutory shareholder vote. Likewise, the business judgment rule protects disinterested board decisions from judicial second-guessing, but it does not excuse compliance with an explicit voting statute. And a certificate of incorporation cannot override that statutory mandate; it may impose additional requirements, but it cannot authorize the board to bypass the shareholder vote required for a sale of substantially all assets.
Study tip: On bar-exam corporate questions, distinguish "ordinary course" sales from "fundamental change" sales. If the company will lack a significant continuing business activity, shareholder approval is required.
- Has Director Dana been removed?
Answer: No, because the 45 shares voted against removal would be sufficient to elect Dana if those votes were cast cumulatively in an election.
This question tests the interaction between cumulative voting and director removal. Whenever a statute protects cumulative voting, a removal without cause is not a simple majority question — you must ask whether the opposing votes could have elected the director in a cumulative election.
Here, Dana is only one director being removed from a nine-member board, so §3.04(b) applies. The 45 shares voted against her removal would receive 45 × 9 = 405 votes if cast cumulatively at an election. To guarantee election of one director on a nine-member board, a shareholder group needs just over 100 × 9 ÷ (9 + 1) = 90 votes, or 91 votes. Because 405 is far more than that, the 45-share minority could have elected Dana, so she cannot be removed without cause.
The choice saying "55 of 100 shares voted in favor, so the shareholders' choice governs" is wrong because ordinary majority voting is overridden by the cumulative-voting removal statute. The choice claiming cumulative voting protects shareholders only at election, not removal, is also wrong — the statute expressly extends that protection to removal without cause. And the "two-thirds vote" choice invents a supermajority requirement that the statute does not impose.
So Dana remains a director. Remember: in a cumulative-voting corporation, minority shareholders have "electability" rights that survive removal attempts — always calculate whether the no-votes could have seated the director.
- Is the appointment of X to the board valid?
Answer: Invalid, because Alvarez provided only one of the two votes, not the affirmative vote of a majority of all remaining directors.
Whenever you see a board vacancy question, look first to the statute or articles, then to the voting rule. Here, the statute allows the remaining directors to fill a vacancy when they constitute fewer than a quorum, but it imposes a specific voting requirement: "the affirmative vote of a majority of all the directors remaining in office." With only Alvarez and Byrne left, two directors remain, so a majority of all remaining directors means both must vote yes. Alvarez's single vote is only one of two, not a majority, so the appointment is invalid.
The first two wrong choices both turn the board's power into an individual director's power. It is not enough that the two remaining directors are fewer than a quorum, and the law does not authorize each director to act unilaterally to keep the corporation operating. The board as a body must vote, and the statute requires a majority of all remaining directors. The fourth choice is also wrong: the statute explicitly says vacancies may be filled by the shareholders or by the board, even when fewer than a quorum remains, so shareholders are not the only option.
Study tip: do not confuse "a quorum of the whole board" with "the vote needed among remaining directors." A reduced board can act, but only by the required majority of those who remain.
- Which issue must the court resolve before considering whether Gloria satisfied the demand and standing requirements for a shareholder suit?
Answer: Whether the claim Gloria seeks to assert belongs to Preston rather than to Gloria individually.
Whenever you see a shareholder lawsuit against officers or directors, your first instinct should be to classify the claim: is it the shareholder's own injury, or an injury to the corporation? That threshold determines whether the derivative-suit rules even apply. Here, Gloria is purporting to assert Preston's claim against the CEO, so the court must first decide whether the claim actually belongs to Preston. If it does, derivative requirements like demand and standing control; if it belongs to Gloria individually, she may sue directly and those requirements are irrelevant.
The choice about whether Gloria's shares were held of record when the board approved the leases is a standing requirement—specifically contemporaneous ownership—but it is considered only after the court knows this is a derivative claim. Similarly, whether the board's rejection of the demand was made in the corporation's best interests concerns the demand requirement and the business judgment rule; again, that question assumes a derivative suit is proper. Finally, whether the CEO's company received a substantial benefit and whether it was disclosed goes to the merits of the alleged self-dealing, not to the preliminary procedural gateway.
Remember the order: characterize the claim first, then apply derivative-suit hurdles. On exam day, whenever you see "shareholder suing on behalf of the corporation," ask "whose right is being enforced?" That single question unlocks the entire analysis.
