- Which of the following facts, if true, would most strongly support Henry's ability to sue Grace for his unpaid share of the profits?
Answer: The LLC's operating agreement gives Henry a contractual right to receive 60% of the LLC's annual net profits after expenses.
Whenever you see an LLC member suing for unpaid profits, separate two questions: what right does the member have to receive profits, and did the manager breach a duty. Distributions in an LLC are governed primarily by the operating agreement, not by a general default rule that all members automatically get paid annually.
Here, the fact that the operating agreement gives Henry a contractual right to receive 60% of annual net profits after expenses is the strongest support. That language creates an enforceable entitlement: if profits existed and were not distributed, Henry has a direct breach-of-contract claim against Grace for withholding his agreed share.
Now the distractors. Henry's share being approximately $120,000 only proves damages; it does not prove he had a legal right to that money. Grace's personal vacation shows she misused LLC funds, but that supports a fiduciary-duty claim for the LLC, not Henry's personal claim for his share of profits. The fact that Grace also used profits to renovate a building she personally owns is similarly a self-dealing problem, but again, the question asks about Henry's unpaid share, not general mismanagement. Finally, Grace having exclusive authority to decide distributions actually cuts against Henry: if distributions are discretionary and she has sole discretion, Henry has no automatic right to demand profits.
Remember: in LLC law, contract terms beat default rules. Look first to the operating agreement for a clear distribution right before analyzing fiduciary duties or damages.
- Which issue is most likely to determine the outcome of the motion?
Answer: Whether Priya has standing to bring a derivative suit despite buying her shares after the challenged issuance.
Whenever you see a derivative suit, separate the threshold issues—standing and demand—from the merits of the underlying claim. Here, the pivotal issue is the contemporaneous-ownership rule: a shareholder may bring a derivative suit only if she owned stock at the time of the challenged transaction. Priya bought her shares on June 1, but the directors' stock issuance occurred on April 1. Because she was not a shareholder when the alleged wrongdoing happened, she likely lacks standing to sue on the corporation's behalf.
The choice about whether the directors' self-dealing was a breach of fiduciary duty goes to the merits, not to whether Priya may maintain the suit—even a meritorious claim fails if the plaintiff lacks standing. Similarly, whether the issuance diluted Priya's voting power addresses her personal injury, but a derivative claim must enforce corporate rights, not individual shareholder harm. And whether Priya made her demand in good faith is not the correct focus: the demand requirement asks whether she fairly demanded action or showed demand was excused, not whether her subjective motive was proper.
For the bar exam, remember the timing trap: a later purchaser generally cannot bring a derivative suit for earlier misconduct. Check share ownership dates before analyzing fiduciary duties or demand.
- Which of the following is the most significant legal issue raised by Rosa's proposed suit?
Answer: Whether Rosa's claim should be treated as derivative on behalf of Blanca or direct against Victor.
Whenever a shareholder complaint alleges harm to the corporation plus harm to the shareholder, ask first: who owns the right to sue? A claim that corporate assets were sold below market is a corporate injury, even in a close corporation. The controlling shareholder's self-dealing may be a breach of fiduciary duty, but the loss is to Blanca; any recovery for the factory's value generally belongs to Blanca and must be pursued derivatively, unless state close-corporation law permits a direct action under special circumstances. The dividend-stoppage claim, by contrast, may be direct because it harms Rosa as a shareholder. Thus the threshold question is whether Rosa's suit is derivative, direct, or a mix; that classification controls standing, procedural requirements, and who recovers.
The claim that Victor, as majority shareholder, owes fiduciary duties states a true rule but skips the threshold issue: the existence of the duty is not the contested question, and proving a breach would still require deciding who may enforce it. The board-joinder option confuses the corporation with its board; a derivative suit must join the corporation as a party, but individual directors generally need not be joined. The sale-to-Victor's-brother option describes the underlying wrong, not the most significant legal issue, because proving the sale breached Victor's duty of loyalty does not resolve whether Rosa can sue directly.
Study tip: when a shareholder alleges majority misconduct, first classify the injury—corporate or direct—before discussing fiduciary duty.
- How should the court rule on OmniBank's motion?
Answer: Decide whether the SLC was independent, acted in good faith, and made a reasonable inquiry; if so, give weight to its recommendation but exercise the court's own independent business judgment.
When you see a derivative action and a special litigation committee, the statute controls the standard. Section 7.44(a) lets the corporation move to dismiss, but the court is not a rubber stamp. The key is that the SLC's recommendation is persuasive evidence, not a binding verdict.
The correct approach is to first verify the SLC's independence, good faith, and reasonable inquiry. Under Section 7.44(c), if the corporation proves those elements, the court must then exercise its own independent business judgment on whether dismissal is in the corporation's best interests, giving appropriate weight to the SLC's work. That is exactly what the correct answer says. So you should reject any answer that makes the court's role passive or automatic.
The "dismiss automatically" choice fails because Section 7.44(c) explicitly requires an independent judicial business judgment, not automatic deference. The "deny automatically because the SLC failed to interview the complaining employee" choice is too rigid: reasonableness is assessed on the whole record—4,000 documents and ten interviews—not by any single missing witness. The "deny automatically because one SLC member served on the audit committee" choice is likewise wrong because Section 7.44(b) states that service on another board committee is not by itself a lack of independence, and that member had no role in the bonus decision and only a small shareholding.
Your study tip: for SLC questions, remember the three-part test—independence, good faith, reasonable inquiry—plus the court's independent business judgment. Watch for "automatic" answer choices that try to convert a nuanced standard into a bright-line rule.
- Should the court dismiss Priya's derivative action?
Answer: Yes, because Priya is not a member, and an assignee who has not been admitted as a member cannot maintain a derivative action regardless of demand.
This question tests the line between economic rights and membership rights in an LLC, especially for derivative standing. When you see a derivative action, your first question is always: does this plaintiff have statutory standing to sue on behalf of the company?
Here, the LLC act is explicit: only a person who is a member at the time of the transaction and at commencement may bring a derivative action, and a transferee who has not become a member may not. Priya received only Jasper's economic rights—distributions and allocations—as security. She was never admitted as a member, and the operating agreement required all members' consent, which was never given. So she lacks derivative standing. Demand is irrelevant because standing is a threshold requirement; Chen's interest as sole manager cannot cure Priya's inability to sue.
The wrong choices each blur that line. The choice saying the assignment gave Priya all economic rights so she "stands in Jasper's shoes" is wrong because derivative standing is not an economic right—it belongs only to members. Similarly, the statement that Jasper's membership interest includes derivative rights and that the assignment transferred all economic rights confuses economic benefits with governance and litigation rights. The claim that Priya, as a secured party, can enforce the LLC's claims once the debt is in default is also unsupported; a secured party has rights against collateral, not automatic derivative standing.
Study tip: in LLC derivative actions, check standing before demand or merits. A nonmember assignee can never maintain a derivative action, no matter how strong the underlying claim.
- How should the court rule on Delia's fee motion?
Answer: Award fees from the $200,000 common fund and, if that is insufficient, against Beacon for the reforms only if Delia proves the suit was a substantial factor and the fees are reasonable.
In a derivative suit, attorney's fees are an exception to the usual "each side pays its own fees" rule. The statute allows fees only if the suit produced a common fund or a substantial nonpecuniary benefit, and the plaintiff must show the suit actually caused that benefit—not just that it possibly prompted corporate action.
Here, the $200,000 repayment is a concrete common fund, even though it merely restored money the corporation should not have lost. The governance reforms can also support a fee award, but only if Delia proves they were a substantial nonpecuniary benefit caused by the suit as a substantial factor, and that the requested fees are reasonable. The court should first look to the $200,000 fund, then may award additional fees against Beacon for the reforms if the fund is insufficient.
"Deny fees entirely" is wrong because the repayment is a common fund, and the reforms are not automatically speculative—they must be proven. "Award fees from the $200,000 repayment only" is wrong because the statute expressly authorizes the corporation to pay fees for a substantial nonpecuniary benefit. "Award the full $400,000 against Beacon" is wrong because but-for causation alone is not enough; the statute requires substantial-factor causation and reasonableness, and fees are limited to the extent of the benefit.
On exam questions like this, look for the statutory trigger words: common fund, substantial nonpecuniary benefit, substantial factor, and reasonableness.
- Which issue is most likely to determine whether the settlement can take effect?
Answer: Whether the court approves the settlement as fair to Northstar and adequate for its shareholders.
In a derivative suit, the shareholder is asserting the corporation's claim, so the corporation—not the individual shareholder—controls the litigation. Whenever you see a proposed settlement of a derivative action, the central issue is whether the court will approve it as fair and adequate. That is exactly what determines whether this settlement can take effect: the court must find that the $1 million payment, surrender of stock options, and new internal controls are a reasonable resolution for Northstar and its shareholders. The court's role is protective because the real party in interest is the corporation.
The demand on Northstar's board is not the determinative issue because the passage tells you a proper demand was already made; that requirement is satisfied. A vote by Northstar's disinterested shareholders is also not the deciding factor—derivative settlements cannot be ratified by shareholder vote to override judicial review; the court must independently assess fairness. Finally, whether the directors' insurer is obligated to pay may affect funding, but it does not control whether the settlement can take effect; even a funded settlement needs court approval. The objecting shareholders may argue inadequacy, but their remedy is to persuade the court, not to demand a shareholder referendum.
Remember: in derivative suits, watch for court approval of settlements and fee awards—it is the procedural checkpoint that protects absent shareholders.
- Which statement best describes how the court should treat Abby's two claims?
Answer: The breach-of-agreement claim is direct and may proceed; the corporate-waste claim is derivative and may not proceed unless Abby makes demand or shows demand is excused.
Whenever you see a shareholder claim, first ask: who suffered the primary injury, and is the asserted right owed directly to this shareholder? That distinction controls direct versus derivative treatment.
Here, Abby's first claim is for breach of the shareholders' agreement. That agreement gave Abby a personal contractual right to purchase shares in a new issuance to maintain her 20% stake. Because the board failed to offer her the shares, the injury is to Abby's contractual entitlement, independent of any corporate loss. Under the rule in In re Monarch, that claim is direct and may proceed without demand.
Her second claim, for breach of fiduciary duty and corporate waste, is different. Issuing shares below fair value primarily injures the corporation by diluting its value and transferring wealth at the corporation's expense. Abby's resulting drop in ownership percentage and share value is indirect. That claim is derivative, so she must make demand on the board or plead with particularity why demand is excused before proceeding.
The choice saying the entire action is derivative ignores Abby's separate contractual right. The choice saying the contract claim is direct but still requires demand confuses derivative procedure with direct claims. And the choice treating the contractual right as held for all shareholders misreads the agreement—the right was personal to Abby, not a general preemptive right.
On exam day, separate the claims: personal contract breach = direct; corporate value loss = derivative, requiring demand.
- Which of the following facts, if true, would most strongly support Delta's motion to dismiss?
Answer: The two appointed directors were independent, had no role in the supplier transactions, and based their recommendation on a thorough report from independent counsel.
This is a shareholder-derivative demand question. Once a shareholder makes a demand on the board and the board rejects the suit, courts generally review that rejection under the business judgment rule. So the decisive issue is whether the rejection decision was made by independent, disinterested directors acting in good faith and on a reasonable basis.
The best supporting fact is that the two appointed directors were independent, had no role in the supplier transactions, and based their recommendation on a thorough report from independent counsel. That fact directly establishes the committee was disinterested and its process was reasonable, so Delta's motion to dismiss should prevail. It shows the board's rejection of Chen's demand was a legitimate business judgment, not a defense of the CEO.
The wrong choices reveal common traps. The fact that the audit committee reviewed and approved the supplier transactions, with the CEO as a member, actually hurts Delta: approval by an interested director does not show the independence needed for business-judgment protection. The fact that Chen made his demand more than 90 days before the investigation was completed also does not support dismissal—statutes often let a shareholder proceed if a board takes too long, so delay would cut against Delta. Chen's continuous stock ownership from before the transactions through filing supports his standing as a shareholder, but standing is not a reason to dismiss on the merits; it helps Chen, not Delta.
On exam, focus on whether the board's demand-rejection decision was made disinterestedly and on an informed basis—that is what makes a derivative suit dismissed.
- Should the court grant Northwind's motion to dismiss?
Answer: Yes, because the directors who would consider the demand are the two independent Audit Committee members, and Evan neither made demand nor showed that demand would be futile or that irreparable injury would result from waiting.
When you see a shareholder derivative suit, the first question is always: to whom must demand be made, and was it made? Under Section 7.42(a), a shareholder must make demand and then wait 90 days, unless demand is rejected or waiting would cause irreparable injury. Section 7.42(b) excuses demand only with particularized facts showing that a majority of the directors who would consider the demand are interested or dependent and that the transaction was not a valid business judgment. Here, Northwind's bylaws route every derivative demand to the two-member Audit Committee, and both members are independent and disinterested. Because Evan made no demand and alleged no irreparable injury, the court should dismiss.
The "majority of the full five-member board was interested" argument misfires: demand is not measured against the whole board when bylaws designate a committee to consider it. The "40% below market" argument also fails—a low sale price alone is not enough to prove the absence of business judgment, and Evan did not allege particularized facts about the Audit Committee's disqualification. Finally, the claim that the Audit Committee "is not authorized to bind the full board" is beside the point; the committee is authorized to decide whether Northwind should pursue the claim, so demand was required there.
Study tip: in derivative suits, identify the demand panel first. Statutes and bylaws may create a committee, and futility is measured against that panel—not the full board. Then check demand, futility, and irreparable injury before examining the merits.
- Should the court dismiss Petra's action because she did not demand that Sevilla's board sue?
Answer: No, because demand on Sevilla's board was excused: a majority of that board is composed of Andalusian directors or an officer, and Petra made the required demand on Andalusian's board.
Whenever you see a double derivative suit, check the statutory elements: (1) parent owns a majority of the subsidiary's voting shares, (2) demand on the parent's board was made or excused, and (3) demand on the subsidiary's board was made or excused. Here Andalusian owns 80% of Sevilla, and Petra demanded on Andalusian's board, which then rejected the demand. The only issue is whether she also had to demand on Sevilla's board. Under the statute, that demand is excused if a majority of Sevilla's board is composed of parent directors/officers or is controlled by the parent. Sevilla has five directors: two Andalusian directors and one Andalusian vice president—three of five are parent directors/officers. So a majority triggers the excuse, and no demand on Sevilla is required. The court should not dismiss.
The first wrong answer claims both demands are always required, but the statute expressly excuses the subsidiary demand in just this situation. The second wrong answer says only a subsidiary shareholder can sue, but the statute authorizes a parent's shareholder to bring a double derivative action on behalf of the subsidiary. The last wrong answer overstates, saying no demand is ever required; actually, demand on the parent's board is required and was made here, and the parent's rejection does not automatically bind the subsidiary.
Study tip: for derivative suits involving parent-subsidiary structures, always count the subsidiary board's composition carefully—a majority of parent directors/officers is your trigger for excusing subsidiary demand.
