Bar Exam (Uniform) Quiz: Corporate Governance
20 questions · exam conditions
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Corporate GovernanceQuestion 1 of 20

A corporation's board of directors, at a duly called meeting, voted to sell a manufacturing plant that produced 75% of the corporation's revenue and constituted 80% of its assets. The board believed the sale was necessary to avoid impending bankruptcy. The sale was approved by a majority of the directors present. The board did not seek shareholder approval for the transaction.

Is the sale of the manufacturing plant a valid corporate act? Select one.

Yes, because the decision to sell assets is a business decision entrusted to the board of directors.
Yes, because the sale was necessary to avoid bankruptcy, allowing the board to act without shareholder consent.
No, because the sale of substantially all of the corporation's assets is a fundamental change requiring shareholder approval.
No, because any sale of corporate real property, regardless of its value, requires unanimous consent of the shareholders.
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Bar Exam (Uniform) Quiz

Bar Exam (Uniform) Quiz: Corporate Governance

Practice Corporate Governance in Bar Exam (Uniform) with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Corporate Governance, giving you a quick way to practice the rules, question types, and explanations that matter most for Bar Exam (Uniform).

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

A corporation's board of directors, at a duly called meeting, voted to sell a manufacturing plant that produced 75% of the corporation's revenue and constituted 80% of its assets. The board believed the sale was necessary to avoid impending bankruptcy. The sale was approved by a majority of the directors present. The board did not seek shareholder approval for the transaction.

Is the sale of the manufacturing plant a valid corporate act? Select one.

  1. Yes, because the decision to sell assets is a business decision entrusted to the board of directors.
  2. Yes, because the sale was necessary to avoid bankruptcy, allowing the board to act without shareholder consent.
  3. No, because the sale of substantially all of the corporation's assets is a fundamental change requiring shareholder approval. (correct answer)
  4. No, because any sale of corporate real property, regardless of its value, requires unanimous consent of the shareholders.
Explanation: 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.

Question 2

The CEO of a large retail corporation, without express authorization from the board, signed a five-year lease for a new flagship store in a prime location. The corporation's bylaws state that any contract obligating the corporation for more than $1 million requires board approval. This lease involves a total commitment of $5 million. The landlord was unaware of the internal bylaw restriction. When the board of directors discovered the lease, it repudiated the agreement.

Is the corporation likely to be bound by the lease? Select one.

  1. No, because the CEO violated the corporate bylaws, rendering the action void as an ultra vires act.
  2. No, because the CEO lacked actual authority to enter into a lease of this magnitude without board approval.
  3. Yes, because the CEO, as the corporation's chief executive, has inherent authority to enter into transactions in the ordinary course of business.
  4. Yes, because the CEO had apparent authority to bind the corporation, and the landlord was not aware of the internal limitation on that authority. (correct answer)
Explanation: 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.

Question 3

A board of directors, facing a complex financial decision, relied on a detailed report and recommendation prepared by the corporation's Chief Financial Officer (CFO), a respected expert in her field. The board followed the CFO's recommendation, but the decision resulted in a significant financial loss for the corporation because the CFO's report contained a negligent but not obvious error. A shareholder brought a derivative suit against the directors for breaching their duty of care.

What is the directors' best defense to this lawsuit? Select one.

  1. The business judgment rule protects directors from liability for any decision that results in a loss.
  2. The directors are entitled to rely in good faith on information and reports presented by corporate officers whom they reasonably believe to be competent. (correct answer)
  3. The shareholder lacks standing to sue because the decision was approved by a majority of the board.
  4. The CFO is solely liable for the loss as the board's agent, and the directors are automatically indemnified.
Explanation: 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.

Question 4

The board of directors of a corporation decides to issue a new class of preferred stock. The corporation's articles of incorporation authorize the issuance of both common and preferred stock but do not specify the rights and preferences of the preferred shares, instead stating that these shall be 'as determined by the board of directors.' The board passes a resolution setting the dividend rate and liquidation preferences for the new preferred stock and begins offering it to investors.

Was the board's action proper? Select one.

  1. No, because the creation of a new class of stock requires an amendment to the articles of incorporation approved by the existing shareholders.
  2. No, because only common stock can be issued without direct shareholder approval for each issuance.
  3. Yes, but only if the existing shareholders were first offered the right to purchase the new preferred shares through preemptive rights.
  4. Yes, because the articles of incorporation properly authorized the issuance of 'blank-check' preferred stock, allowing the board to set the terms. (correct answer)
Explanation: 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.

Question 5

A corporation's board of directors consists of seven members. The corporation's president, who is not a director, wishes to enter into a major strategic partnership that involves acquiring a smaller company. The president calls each of the seven directors individually by phone, and five of them separately tell the president they approve of the acquisition. The president, believing he has secured board approval, executes the acquisition agreement. A major shareholder learns of the acquisition and files a lawsuit to have the agreement voided.

What is the likely outcome of the shareholder's lawsuit? Select one.

  1. The suit will fail, because a majority of the board of directors approved the acquisition, vesting the president with the necessary authority.
  2. The suit will fail, because the president has inherent authority to enter into transactions that are in the corporation's best interest.
  3. The suit will succeed, because a fundamental corporate change like an acquisition requires shareholder approval, not just board approval.
  4. 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. (correct answer)
Explanation: 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.

Question 6

You are representing a client who is a minority shareholder in a highly profitable, privately held corporation. For the past three years, the board of directors has refused to declare any dividends, instead reinvesting all profits into expanding the business. The client believes the directors, who are also the majority shareholders, are doing this to 'freeze out' the minority by denying them any return on investment. The client wants to file a suit to compel the payment of a dividend.

What is the strongest argument against your client's position? Select one.

  1. Shareholders only have a right to receive dividends when the corporation is being dissolved.
  2. The decision to declare dividends is a matter of business policy that falls within the board's discretion, protected by the business judgment rule. (correct answer)
  3. Only the president of the corporation has the authority to recommend a dividend, which the board can then approve or reject.
  4. A suit to compel dividends can only be brought as a derivative action on behalf of the corporation, not as a direct action by a shareholder.
Explanation: 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.

Question 7

You represent the majority shareholder of a close corporation. Your client and the only other shareholder have had a falling out. Your client, who controls the board of directors, has had the board pass a resolution to dissolve the corporation. The articles of incorporation and bylaws are silent on the procedure for voluntary dissolution. The minority shareholder objects, claiming that the majority shareholder cannot force a dissolution.

What must have occurred for the dissolution to be validly initiated? Select one.

  1. The board of directors must have adopted a proposal to dissolve and submitted it to the shareholders for their approval. (correct answer)
  2. The majority shareholder must have petitioned a court for judicial dissolution due to deadlock or oppression.
  3. The president of the corporation must have certified that the corporation is no longer profitable.
  4. All shareholders, including the minority shareholder, must have provided their unanimous written consent to dissolve.
Explanation: 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.

Question 8

A corporation's articles of incorporation state that its purpose is 'to engage in the business of software development.' The board of directors, seeing a market opportunity, votes to acquire a small chain of coffee shops. A shareholder files a derivative suit against the directors, alleging that the acquisition was an ultra vires act and a breach of their duty of care.

What is the likely outcome of the shareholder's claim that the act was ultra vires? Select one.

  1. The claim will likely succeed, because the act of acquiring coffee shops is clearly outside the corporation's stated purpose.
  2. The claim will likely succeed, because ultra vires acts are per se breaches of the duty of care for which directors are strictly liable.
  3. 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. (correct answer)
  4. The claim will likely fail, because only the state attorney general, not a shareholder, has standing to challenge a corporate act as ultra vires.
Explanation: 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.

Question 9

The board of directors of a corporation decides to issue a new class of preferred stock. The corporation's articles of incorporation authorize the issuance of both common and preferred stock but do not specify the rights and preferences of the preferred shares, instead stating that these shall be 'as determined by the board of directors.' The board passes a resolution setting the dividend rate and liquidation preferences for the new preferred stock and begins offering it to investors.

Was the board's action proper? Select one.

  1. No, because the creation of a new class of stock requires an amendment to the articles of incorporation approved by the existing shareholders.
  2. No, because only common stock can be issued without direct shareholder approval for each issuance.
  3. Yes, but only if the existing shareholders were first offered the right to purchase the new preferred shares through preemptive rights.
  4. Yes, because the articles of incorporation properly authorized the issuance of 'blank-check' preferred stock, allowing the board to set the terms. (correct answer)
Explanation: 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.

Question 10

The CEO of a large retail corporation, without express authorization from the board, signed a five-year lease for a new flagship store in a prime location. The corporation's bylaws state that any contract obligating the corporation for more than $1 million requires board approval. This lease involves a total commitment of $5 million. The landlord was unaware of the internal bylaw restriction. When the board of directors discovered the lease, it repudiated the agreement.

Is the corporation likely to be bound by the lease? Select one.

  1. No, because the CEO violated the corporate bylaws, rendering the action void as an ultra vires act.
  2. No, because the CEO lacked actual authority to enter into a lease of this magnitude without board approval.
  3. Yes, because the CEO, as the corporation's chief executive, has inherent authority to enter into transactions in the ordinary course of business.
  4. Yes, because the CEO had apparent authority to bind the corporation, and the landlord was not aware of the internal limitation on that authority. (correct answer)
Explanation: 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.

Question 11

A corporation's Vice President of Marketing, acting on her own initiative, launched a new, expensive advertising campaign. The corporation's largest shareholder, who owns 40% of the stock, strongly disagrees with the campaign's message and theme. The shareholder sends a formal letter to the corporation's board demanding that the campaign be immediately terminated.

Must the corporation comply with the shareholder's demand? Select one.

  1. Yes, because a shareholder with a substantial ownership stake has the right to direct corporate policy.
  2. Yes, because the Vice President exceeded her authority by launching the campaign without board or shareholder approval.
  3. No, because the management of the corporation's day-to-day business, including marketing, is vested in its officers and overseen by the board. (correct answer)
  4. No, unless the shareholder can obtain the support of shareholders owning more than 50% of the stock.
Explanation: 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.

Question 12

A corporation has a five-member board. One of the directors, who is also the corporation's CEO, is present at a board meeting where the board is setting the CEO's annual bonus. Four directors are present in total. The CEO participates in the discussion and then votes with two other directors in favor of a large bonus. The fourth director votes against it. A shareholder challenges the board's action.

What is the primary legal basis for the shareholder's challenge? Select one.

  1. The board lacked a quorum because an interested director cannot be counted for quorum purposes.
  2. The CEO, as an officer, is not permitted to be a member of the board of directors.
  3. The action is a voidable interested director transaction because the CEO's vote was required for approval. (correct answer)
  4. The decision to set officer compensation is reserved to the shareholders, not the board.
Explanation: 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.

Question 13

A corporation's board of directors voted unanimously to approve a merger with another company. Following the vote, the corporation's CEO began taking steps to implement the merger. However, the board did not submit the merger plan to the shareholders for a vote, believing that their unanimous approval was sufficient. A shareholder filed an action to enjoin the merger.

Is the shareholder likely to succeed in enjoining the merger? Select one.

  1. No, because the board of directors has the authority to approve mergers without shareholder consent when the vote is unanimous.
  2. No, because the CEO's actions to implement the merger effectively ratified the board's decision, making it final.
  3. Yes, because a merger is a fundamental corporate change that requires both board approval and shareholder approval. (correct answer)
  4. Yes, because only the shareholders, not the board of directors, have the power to initiate and approve a merger plan.
Explanation: 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.

Question 14

A director on a five-person board resigns with two years left in her term. The corporation's articles of incorporation and bylaws are silent on filling vacancies. At the next board meeting, the three remaining directors vote 2-to-1 to appoint a new director to fill the vacancy until the next annual shareholder meeting. A shareholder contends that only shareholders can fill a board vacancy.

Is the board's appointment of the new director valid? Select one.

  1. No, because a board vacancy can only be filled by a unanimous vote of the remaining directors.
  2. No, because the power to elect directors is reserved exclusively to the shareholders.
  3. Yes, because unless the articles provide otherwise, either the shareholders or the board can fill a vacancy on the board. (correct answer)
  4. Yes, but the new director serves for the full remainder of the predecessor's two-year term, not just until the next meeting.
Explanation: 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.

Question 15

The board of directors of a corporation passed a resolution authorizing the corporation to borrow $2 million from a specific bank. The resolution directed the corporation's president to execute the necessary loan documents. The president, believing he could get a better interest rate from a different bank, ignored the board's resolution and instead executed loan documents for a $2 million loan with the different bank. The board is now considering its options.

Which of the following actions may the board of directors properly take in response? Select one.

  1. The board can ratify the president's action, which would bind the corporation to the new loan. (correct answer)
  2. The board has no recourse, as the president's duty is to seek the best financial terms for the corporation.
  3. The board can sue the new bank for interfering with the corporation's internal governance.
  4. The board must seek shareholder approval to either ratify or reject the president's unauthorized action.
Explanation: 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.

Question 16

A corporation's treasurer, whose duties are defined in the bylaws as managing internal accounts and payroll, signed a contract to purchase a new office building for the corporation. This was a major transaction for the company. The board of directors had not authorized the purchase. The real estate seller now seeks to enforce the contract against the corporation.

What is the corporation's best defense against the enforcement of the contract? Select one.

  1. The contract is void because the purchase of real property is a fundamental change requiring shareholder approval.
  2. The contract is voidable because the treasurer lacked actual or apparent authority to bind the corporation in a real estate purchase. (correct answer)
  3. The contract is voidable because the treasurer breached his fiduciary duty of loyalty to the corporation.
  4. The contract is void because only the corporation's president has the inherent authority to execute contracts on behalf of the corporation.
Explanation: 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.

Question 17

A corporation's articles of incorporation state that its purpose is 'to engage in the business of software development.' The board of directors, seeing a market opportunity, votes to acquire a small chain of coffee shops. A shareholder files a derivative suit against the directors, alleging that the acquisition was an ultra vires act and a breach of their duty of care.

What is the likely outcome of the shareholder's claim that the act was ultra vires? Select one.

  1. The claim will likely succeed, because the act of acquiring coffee shops is clearly outside the corporation's stated purpose.
  2. The claim will likely succeed, because ultra vires acts are per se breaches of the duty of care for which directors are strictly liable.
  3. 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. (correct answer)
  4. The claim will likely fail, because only the state attorney general, not a shareholder, has standing to challenge a corporate act as ultra vires.
Explanation: 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.

Question 18

A board of directors, facing a complex financial decision, relied on a detailed report and recommendation prepared by the corporation's Chief Financial Officer (CFO), a respected expert in her field. The board followed the CFO's recommendation, but the decision resulted in a significant financial loss for the corporation because the CFO's report contained a negligent but not obvious error. A shareholder brought a derivative suit against the directors for breaching their duty of care.

What is the directors' best defense to this lawsuit? Select one.

  1. The business judgment rule protects directors from liability for any decision that results in a loss.
  2. The directors are entitled to rely in good faith on information and reports presented by corporate officers whom they reasonably believe to be competent. (correct answer)
  3. The shareholder lacks standing to sue because the decision was approved by a majority of the board.
  4. The CFO is solely liable for the loss as the board's agent, and the directors are automatically indemnified.
Explanation: 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.

Question 19

A corporation's bylaws grant the president the authority to 'manage the day-to-day business and affairs of the company.' The bylaws also grant the board of directors the power to appoint and remove all officers. The board, concerned about the president's performance, passed a resolution instructing the president to obtain board approval before hiring any employee with a salary over $100,000. The president ignored the resolution and hired a new manager for $120,000.

Which statement most accurately describes the legal situation? Select one.

  1. The president acted within his authority because the bylaws grant him power over 'day-to-day business,' which includes hiring.
  2. The board's resolution is an invalid attempt to amend the bylaws without a shareholder vote.
  3. The employment contract is void because the president lacked apparent authority to hire the manager.
  4. The president exceeded his authority because officers are subject to the direction of the board of directors, which can limit their authority. (correct answer)
Explanation: 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.

Question 20

A corporation has a five-member board. One of the directors, who is also the corporation's CEO, is present at a board meeting where the board is setting the CEO's annual bonus. Four directors are present in total. The CEO participates in the discussion and then votes with two other directors in favor of a large bonus. The fourth director votes against it. A shareholder challenges the board's action.

What is the primary legal basis for the shareholder's challenge? Select one.

  1. The board lacked a quorum because an interested director cannot be counted for quorum purposes.
  2. The CEO, as an officer, is not permitted to be a member of the board of directors.
  3. The action is a voidable interested director transaction because the CEO's vote was required for approval. (correct answer)
  4. The decision to set officer compensation is reserved to the shareholders, not the board.
Explanation: 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.