Bar Exam (Uniform) Quiz: Shareholder Actions

20 questions · exam conditions

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Shareholder ActionsQuestion 1 of 20

You are advising a client who is a shareholder in a corporation. The client is aware of two separate issues. First, the board of directors recently made a grossly negligent decision to enter a new market without adequate research, resulting in a $50 million loss to the corporation. Second, the corporation has refused to pay a dividend that was properly declared by the board three months ago. Your client wants to take legal action immediately.

Which of these claims can your client pursue as a direct action without first making a demand on the board? Select one.

The claim regarding the negligent business decision, because the loss was exceptionally large.

Neither claim, because all lawsuits brought by a shareholder against their corporation require a prior demand on the board.

Both claims, because the board's misconduct demonstrates that any demand would be futile.

The claim for payment of the declared dividend, because it is a debt owed by the corporation to the shareholder.

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Bar Exam (Uniform) Quiz

Bar Exam (Uniform) Quiz: Shareholder Actions

Practice Shareholder Actions 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 Shareholder Actions, 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

Which of these claims can your client pursue as a direct action without first making a demand on the board? Select one.

The claim regarding the negligent business decision, because the loss was exceptionally large.
Neither claim, because all lawsuits brought by a shareholder against their corporation require a prior demand on the board.
Both claims, because the board's misconduct demonstrates that any demand would be futile.
The claim for payment of the declared dividend, because it is a debt owed by the corporation to the shareholder. (correct answer)

Explanation: When facing shareholder litigation questions, you need to distinguish between derivative actions (suing on behalf of the corporation) and direct actions (suing for personal harm). The key is determining whether the shareholder suffered individual injury or whether the corporation was harmed. The dividend claim represents a direct action because once a dividend is properly declared, it creates a debt from the corporation directly to each shareholder. This is a personal right - the shareholder can sue immediately without making any demand on the board because they're seeking payment of money owed to them individually, not seeking to remedy harm to the corporation. Choice A is wrong because the negligent business decision, regardless of the dollar amount, harmed the corporation rather than individual shareholders. This requires a derivative suit with demand on the board (unless demand is excused). The size of the loss doesn't change the nature of the claim. Choice B incorrectly states that all shareholder lawsuits require prior board demand. This is only true for derivative actions, not direct actions where shareholders sue for personal injuries. Choice C misapplies the futility exception. While board misconduct can sometimes excuse the demand requirement in derivative suits, that doesn't convert derivative claims into direct ones. The negligent decision claim would still be derivative even if demand were futile, and the dividend claim is direct regardless of board misconduct. Remember this distinction: if you're suing for harm done to you personally as a shareholder (like unpaid dividends or preemptive rights violations), it's direct. If you're suing for harm done to the corporation, it's derivative.

Question 2

You are representing a minority shareholder in a closely held corporation. The corporation's two other shareholders are also its only directors and officers. For the past three years, the directors have voted to pay themselves salaries that are triple the industry average for executives in comparable companies, leaving the corporation with no profits from which to declare dividends. Your client has received no return on her investment. Your client wants to sue the directors to force them to repay the excessive compensation to the corporation.

What is the primary obstacle your client must overcome before this lawsuit can proceed on the merits? Select one.

Proving that the excessive salaries were a direct harm to her, rather than to the corporation.
Satisfying the procedural requirement of making a written demand on the board of directors. (correct answer)
Establishing that the business judgment rule does not protect the directors' decisions regarding compensation.
Demonstrating that she has standing by having owned her shares for at least one full fiscal year.

Explanation: The correct answer is B. The claim that directors paid themselves excessive compensation is a classic derivative claim, as it alleges waste of corporate assets. The recovery would go to the corporation. Under the MBCA, a shareholder must make a written demand on the board to take suitable action before commencing a derivative proceeding. The shareholder must then wait 90 days unless the demand is rejected or irreparable injury would occur. (A) is incorrect because this claim is fundamentally derivative, not direct; attempting to frame it as direct would likely lead to dismissal. (C) is a substantive issue on the merits, but it is not a procedural prerequisite to filing the suit in the way that demand is. (D) is incorrect; standing generally requires the shareholder to have owned shares at the time of the wrong, not for a specific duration like one year.

Question 3

A corporation's bylaws require a supermajority vote (75%) of shareholders to approve any merger. The board of directors approved a merger plan and presented it to the shareholders for a vote. The corporation's management solicited proxies and falsely stated that only a simple majority was required for approval. The merger was subsequently approved with a 60% vote. A shareholder who voted against the merger filed a lawsuit seeking to enjoin the merger, claiming her voting rights were illegally diluted.

Which of the following best characterizes the shareholder's lawsuit? Select one.

A derivative action, because the improper merger harms the corporate entity as a whole.
A direct action, because the shareholder is seeking to vindicate her personal right to a properly conducted vote. (correct answer)
A derivative action, because challenges to board decisions regarding mergers are matters of corporate governance.
A direct action, but it will likely be dismissed if the shareholder cannot prove the merger terms were financially unfair.

Explanation: The correct answer is B. The lawsuit is based on an injury to the shareholder's personal rights as a stockholder—specifically, the right to have her vote counted and given its proper weight according to the corporation's governing documents. When a shareholder's voting rights are denied or diluted, the injury is direct to the shareholder. She is not suing on behalf of the corporation but to protect her own franchise. (A) and (C) are incorrect because the core of the complaint is not the harm from the merger itself (which would be derivative), but the violation of the voting process. (D) is incorrect because the right to a proper vote is separate from the financial fairness of the transaction; the shareholder can bring a direct action to enjoin a merger approved through an illegal process regardless of the terms.

Question 4

A minority shareholder in a closely held corporation claims that the majority shareholders, who also serve as the board of directors, have engaged in a pattern of oppressive conduct. This conduct includes terminating the minority shareholder's employment with the company, refusing to declare dividends despite large cash reserves, and systematically excluding him from all company decisions. The minority shareholder files a lawsuit seeking a court order for the corporation to buy out his shares at fair value.

How is this lawsuit best characterized? Select one.

As a derivative action, because the refusal to pay dividends harms the corporation by creating tax liabilities.
As a derivative action, because terminating an employee and making dividend decisions are matters of corporate management.
As a direct action, because the shareholder alleges personal harm from oppressive conduct distinct from harm to the corporation. (correct answer)
As a direct action, but the remedy of a forced buyout is only available if the corporation is insolvent.

Explanation: The correct answer is C. A lawsuit alleging oppression of a minority shareholder, particularly in a closely held corporation, is generally considered a direct action. The combination of acts (termination of employment, withholding dividends, exclusion from management) creates a harm that is personal to the minority shareholder and not suffered by the shareholders as a whole. Many state statutes provide specific remedies for such oppression, including a forced buyout of the shareholder's shares, which is a form of individual relief. (A) and (B) incorrectly characterize the claim as derivative; while the individual actions might relate to corporate management, their collective use to squeeze out a minority shareholder constitutes a direct harm. (D) is incorrect because the remedy of a buyout for oppression is not contingent on the corporation's insolvency.

Question 5

A publicly traded corporation made a series of false and misleading statements in its public filings about its future business prospects. Relying on these statements, an investor purchased 1,000 shares of the corporation's stock. A month later, the truth was revealed, and the stock price plummeted, causing the investor a significant loss. The investor filed a lawsuit against the corporation and its officers who signed the misleading filings, seeking to recover her personal investment losses.

Is the investor's lawsuit a direct or derivative action? Select one.

Derivative, because the officers' misconduct harmed the corporation's reputation and credibility.
Direct, because the investor is suing based on a fraud committed upon her personally in connection with her purchase of stock. (correct answer)
Derivative, because the loss in stock value reflects an injury to the corporation's overall value.
Direct, but only if the investor can prove the officers intended to harm her specifically.

Explanation: The correct answer is B. This is a securities fraud claim, which is a type of direct action. The basis of the suit is not a harm to the corporation, but a separate and distinct tort committed against the investor: she was fraudulently induced to purchase stock based on misrepresentations. The injury is personal to her (and other similarly situated purchasers) and is not derived from an injury to the corporation. (A) and (C) are incorrect because they mischaracterize the fundamental nature of a securities fraud claim. While the misconduct may also have harmed the corporation, the investor's cause of action is based on the direct harm to her as a purchaser. (D) is incorrect because securities fraud does not require proof of intent to harm a specific individual, but rather a general intent to deceive or a reckless disregard for the truth.

Question 6

What is the primary obstacle your client must overcome before this lawsuit can proceed on the merits? Select one.

Proving that the excessive salaries were a direct harm to her, rather than to the corporation.
Satisfying the procedural requirement of making a written demand on the board of directors. (correct answer)
Establishing that the business judgment rule does not protect the directors' decisions regarding compensation.
Demonstrating that she has standing by having owned her shares for at least one full fiscal year.

Question 7

A shareholder owned stock in a corporation that operated a chemical plant. She sold all of her shares on June 1. On July 1, it was publicly revealed that for the past five years, the plant's managers had been illegally dumping toxic waste, and the corporation now faces hundreds of millions of dollars in government fines. The former shareholder filed a derivative suit on August 1 against the responsible managers on behalf of the corporation. The corporation moves to dismiss.

What is the most likely basis for the court to grant the motion to dismiss? Select one.

The shareholder lacks standing because she was not a shareholder at the time the suit was filed. (correct answer)
The claim is improper because the harm from environmental fines is a public matter to be handled by regulators, not shareholder litigation.
The shareholder failed to make a demand on the board before filing the suit.
The claim is a direct action because the managers' conduct constituted fraud on the market, injuring all shareholders.

Explanation: The correct answer is A. To have standing to bring and maintain a derivative action, a person must be a shareholder at the time of the alleged wrongdoing (the contemporaneous ownership rule) and must remain a shareholder throughout the litigation. Because the shareholder sold her shares before filing the lawsuit, she no longer has an ownership interest in the corporation and therefore lacks standing to maintain a derivative action on its behalf. (B) is incorrect because illegal conduct that harms the corporation financially is a proper subject for a derivative suit. (C) is a valid procedural requirement, but the lack of standing is a more fundamental, threshold issue that is fatal to the claim. (D) is incorrect; a claim for recovery of corporate losses due to employee misconduct is quintessentially derivative.

Question 8

Which of the following best characterizes the shareholder's lawsuit? Select one.

A derivative action, because the improper merger harms the corporate entity as a whole.
A direct action, because the shareholder is seeking to vindicate her personal right to a properly conducted vote. (correct answer)
A derivative action, because challenges to board decisions regarding mergers are matters of corporate governance.
A direct action, but it will likely be dismissed if the shareholder cannot prove the merger terms were financially unfair.

Question 9

How is this lawsuit best characterized? Select one.

As a derivative action, because the refusal to pay dividends harms the corporation by creating tax liabilities.
As a derivative action, because terminating an employee and making dividend decisions are matters of corporate management.
As a direct action, because the shareholder alleges personal harm from oppressive conduct distinct from harm to the corporation. (correct answer)
As a direct action, but the remedy of a forced buyout is only available if the corporation is insolvent.

Question 10

A director on the board of a manufacturing corporation also owns a controlling interest in a logistics company. The director persuaded the manufacturing corporation's board to award an exclusive, no-bid shipping contract to his logistics company. A shareholder of the manufacturing corporation filed a well-pleaded derivative suit against the director. The board formed a special litigation committee of two independent, disinterested directors to investigate. The committee concluded that pursuing the lawsuit was not in the corporation's best interests. The corporation moved to dismiss the suit based on the committee's recommendation.

What is the most likely outcome of the corporation's motion to dismiss? Select one.

The motion will be denied, because a shareholder has an absolute right to maintain a derivative suit once it has been properly filed.
The motion will be denied, because the underlying transaction involved self-dealing by an interested director.
The motion will be granted, because the decision of an independent special litigation committee is always protected by the business judgment rule.
The motion may be granted if the court finds the committee was independent, acted in good faith, and had a reasonable basis for its conclusion. (correct answer)

Explanation: The correct answer is D. This question tests the special litigation committee (SLC) defense to a derivative suit. When a derivative suit is filed, the board can appoint an SLC of independent directors to investigate and recommend whether to pursue or dismiss the action. Courts give varying degrees of deference to an SLC's recommendation to dismiss. However, the court will not simply rubber-stamp the decision. It will scrutinize the SLC's independence, the thoroughness of its investigation, and the reasonableness of its conclusion. If these factors are met, the court is likely to grant the motion to dismiss. (A) is incorrect; there is no absolute right to maintain a derivative suit. (B) is incorrect because even in cases of self-dealing, a properly constituted and functioning SLC can have the suit dismissed. (C) is an overstatement; courts apply a heightened level of scrutiny to SLC decisions and do not apply the business judgment rule automatically.

Question 11

A corporation's board of directors, relying in good faith on the advice of a reputable outside consulting firm, decided to discontinue a profitable product line to focus on other ventures. The decision turned out to be a catastrophic mistake, leading to massive losses and a steep decline in the corporation's stock price. A shareholder filed a derivative lawsuit against the directors, alleging that the decision constituted a breach of the duty of care.

Although the shareholder's lawsuit is derivative in nature, what legal principle presents the most significant obstacle to the suit's success on the merits? Select one.

The contemporaneous ownership rule, which requires the shareholder to have held stock when the decision was made.
The direct harm rule, which states that a drop in stock price alone is not grounds for a shareholder suit.
The demand requirement, which obligates the shareholder to ask the board to sue itself before filing a lawsuit.
The business judgment rule, which protects directors from liability for honest errors in judgment made in good faith. (correct answer)

Explanation: This question tests your understanding of corporate law defenses available to directors in shareholder litigation. When you see a derivative suit challenging board decisions, immediately consider what protections directors have against liability for business decisions made in good faith. The business judgment rule provides directors with broad protection from personal liability when they make informed decisions in good faith, even if those decisions later prove disastrous. Here, the directors relied on advice from a reputable consulting firm and acted in good faith—classic business judgment rule protection. The rule recognizes that business involves risk and that directors shouldn't face personal liability for honest mistakes, or no one would serve on boards. This protection makes it extremely difficult for the shareholder to succeed on the merits of their breach of duty claim. The other options address procedural requirements or rules that don't bar success on the merits. Choice A, the contemporaneous ownership rule, is a procedural standing requirement that must be met to file suit, but doesn't affect whether the shareholder can win. Choice B incorrectly describes the direct harm rule—stock price drops can support derivative suits, and this rule doesn't exist as stated. Choice C, the demand requirement, is another procedural hurdle about how to properly initiate a derivative suit, not a defense on the merits. Remember: When analyzing derivative suits, distinguish between procedural requirements (standing, demand, etc.) and substantive defenses. The business judgment rule is the most powerful substantive protection for directors and often determines whether shareholders can succeed on claims challenging board decisions.

Question 12

Although the shareholder's lawsuit is derivative in nature, what legal principle presents the most significant obstacle to the suit's success on the merits? Select one.

The contemporaneous ownership rule, which requires the shareholder to have held stock when the decision was made.
The direct harm rule, which states that a drop in stock price alone is not grounds for a shareholder suit.
The demand requirement, which obligates the shareholder to ask the board to sue itself before filing a lawsuit.
The business judgment rule, which protects directors from liability for honest errors in judgment made in good faith. (correct answer)

Question 13

What is the most likely basis for the court to grant the motion to dismiss? Select one.

The shareholder lacks standing because she was not a shareholder at the time the suit was filed. (correct answer)
The claim is improper because the harm from environmental fines is a public matter to be handled by regulators, not shareholder litigation.
The shareholder failed to make a demand on the board before filing the suit.
The claim is a direct action because the managers' conduct constituted fraud on the market, injuring all shareholders.

Question 14

The CEO and controlling shareholder of a corporation orchestrated a transaction in which the corporation purchased a large tract of undeveloped land from the CEO's family trust at a price significantly above its appraised market value. A minority shareholder discovered the self-dealing transaction and wishes to sue. The corporation's five-member board consists of the CEO, his wife, his brother, and two independent directors.

The shareholder's attorney advises filing a derivative suit against the CEO but is concerned about the requirement to first make a demand on the board. In a jurisdiction that excuses demand if it would be futile, what is the shareholder's strongest argument for demand futility? Select one.

That a majority of the board is interested in the challenged transaction, making it unlikely they would authorize a suit. (correct answer)
That the transaction caused a drop in the corporation's stock price, which directly harmed all shareholders.
That the business judgment rule would not protect the directors' decision to approve a self-dealing transaction.
That the lawsuit seeks recovery for the corporation, and therefore the board's involvement is not required.

Explanation: The correct answer is A. This question tests the distinction between direct/derivative actions in the context of the demand futility exception (which exists in some states, though not under the MBCA). A derivative suit alleges harm to the corporation. The demand requirement can be excused as futile if the plaintiff makes a particularized showing that a majority of the board has a financial or familial interest in the challenged transaction or is otherwise dominated by the wrongdoer. Here, three of the five directors (the CEO, his wife, and his brother) are clearly interested, constituting a majority. (B) describes the harm but doesn't address the futility of demand. (C) relates to the merits of the case, not the procedural demand requirement. (D) misstates the law; the board is the proper body to manage the corporation's litigation, which is why demand is required in the first place.

Question 15

A minority shareholder in a large, publicly-traded tech corporation learned that the corporation's CEO has been using the corporate jet for lavish personal vacations, costing the corporation over $2 million in the past year. This expense, combined with other executive perquisites, was disclosed in the company's annual report, after which the corporation's stock price fell by 10%. The shareholder, who owned stock throughout this period, filed a lawsuit against the CEO seeking to recover the $2 million for the corporation and damages for the decline in her stock's value.

How should a court characterize the shareholder's lawsuit? Select one.

As a direct action, because the shareholder suffered a personal financial loss from the decline in her stock's value.
As a derivative action, because the alleged harm of misusing corporate assets was primarily an injury to the corporation. (correct answer)
As a direct action, because the CEO's breach of the duty of loyalty is a wrong committed against each shareholder individually.
As a derivative action, but only if the shareholder owns at least 1% of the corporation's outstanding shares.

Explanation: The correct answer is B. The core of the claim is the misuse of corporate assets (the jet), which constitutes a direct harm to the corporation itself. A lawsuit to recover for such harm must be brought on the corporation's behalf, making it a derivative action. The shareholder's loss in stock value is a consequence of the harm to the corporation and is not a separate and distinct injury that would support a direct action. (A) is incorrect because a drop in stock value resulting from corporate mismanagement is the classic example of a harm that is not unique to a shareholder and must be pursued derivatively. (C) is incorrect because the fiduciary duties of directors and officers are owed to the corporation, and a breach that harms the corporation is the basis for a derivative suit, not a direct one. (D) is incorrect as there is no general rule under the MBCA requiring a minimum share ownership percentage to bring a derivative suit, although some states may have such statutes.

Question 16

A shareholder owns stock in two corporations, Parent Co. and Sub Co. Parent Co. owns 80% of Sub Co. The board of Parent Co., which has several overlapping directors with Sub Co., caused Sub Co. to enter into a long-term supply agreement with Parent Co. on terms that are highly unfavorable to Sub Co. but very profitable for Parent Co. A minority shareholder of Sub Co. filed a lawsuit against the overlapping directors, alleging they breached their fiduciary duties to Sub Co.

Which of the following must the shareholder allege for her lawsuit to be properly constituted? Select one.

That the transaction constituted a direct injury to her as a minority shareholder of Sub Co.
That she has made a demand on the board of Parent Co. to correct the unfair transaction.
That Parent Co. owed a fiduciary duty directly to her as a minority shareholder of Sub Co.
That she is bringing the action on behalf of Sub Co. to recover the losses it sustained. (correct answer)

Explanation: When you encounter a scenario involving corporate wrongdoing that harms the corporation itself, you need to distinguish between direct and derivative claims. Here, the unfavorable supply agreement between Parent Co. and Sub Co. harmed Sub Co. as an entity, not individual shareholders personally. Answer D is correct because this situation requires a derivative lawsuit. Since the overlapping directors allegedly breached their duties to Sub Co. and caused losses to the corporation, any recovery must flow back to Sub Co. itself. The minority shareholder must explicitly allege she's suing on behalf of Sub Co. to recover corporate losses—this is the defining characteristic of a derivative action. Answer A is wrong because this isn't a direct injury to the shareholder personally. The harm flows to Sub Co. first, and shareholders are only affected indirectly through their ownership interest. Answer B incorrectly suggests making a demand on Parent Co.'s board, but the demand requirement (when applicable) involves the board of the corporation that was harmed—here, Sub Co.'s board. Answer C is incorrect because Parent Co. doesn't owe direct fiduciary duties to Sub Co.'s minority shareholders; the overlapping directors owe duties to Sub Co. as the subsidiary corporation. Remember this key distinction: if the corporation is harmed and any recovery would go to the corporate treasury, it's derivative. If individual shareholders suffer distinct personal harm, it's direct. Corporate law heavily favors derivative treatment when the injury primarily affects the entity itself.

Question 17

A director of a pharmaceutical corporation learned through a confidential board presentation that the company was about to receive FDA approval for a new breakthrough drug. Before the news became public, the director personally invested in a small, private supplier company that she knew would receive a massive, lucrative contract from the pharmaceutical corporation once the drug was approved. When the scheme was revealed, a shareholder of the pharmaceutical corporation filed a lawsuit against the director.

Which of the following best describes the nature of the shareholder's lawsuit? Select one.

Direct, because the director's self-dealing diluted the value of the shareholder's individual investment.
Direct, because the director violated a fiduciary duty owed directly to each shareholder to act in good faith.
Derivative, because the director usurped a business opportunity that rightfully belonged to the corporation. (correct answer)
Derivative, but the claim will fail because the director invested in a separate company, not the corporation itself.

Explanation: The correct answer is C. This is a classic example of usurpation of a corporate opportunity. The director used information obtained through her corporate position to take a business opportunity (investing in the key supplier) that the corporation itself could have pursued. The duty to not usurp corporate opportunities is a fiduciary duty owed to the corporation. Therefore, the harm is to the corporation, and a lawsuit to recover for that harm must be brought derivatively. (A) and (B) are incorrect because the primary duty breached was to the corporation, and the shareholder's financial loss is a byproduct of the corporate harm. (D) is incorrect because the claim is meritorious; usurping an opportunity does not require investing in the corporation itself but rather taking an opportunity that is in the corporation's line of business or of interest to it.

Question 18

A corporation's board of directors voted to acquire another company. To finance the acquisition, the board approved a plan to issue a large number of new shares. This action significantly diluted the voting power of all existing shareholders. An unhappy shareholder filed suit against the directors, alleging that the acquisition was a poor business decision and that the share issuance unfairly diluted her ownership interest. The lawsuit seeks to rescind the share issuance.

How should the shareholder's claim regarding the dilution of her ownership interest be characterized? Select one.

As a direct claim, because the dilution of voting power is a personal injury to the shareholder.
As a derivative claim, because the harm resulted from a board decision affecting all shareholders proportionally. (correct answer)
As a direct claim, because any action affecting a shareholder's ownership percentage is a direct harm by definition.
As a derivative claim, because the underlying business decision to make the acquisition is a matter of corporate concern.

Explanation: The correct answer is B. When a corporate action, such as a new share issuance, affects all shareholders in the same way (i.e., proportionally diluting their ownership), the harm is considered to be to the corporation as a whole. The claim is that the directors harmed the corporation by issuing stock for an improper purpose or inadequate consideration. Therefore, the action must be brought derivatively. (A) is incorrect because, unlike the denial of a specific voting right in a single election, a general dilution affecting all shareholders equally is not considered a personal injury for purposes of a direct suit. (C) is an overstatement and incorrect. (D) is close, but the key is not just that it was a corporate decision, but that the alleged harm was not unique to the plaintiff shareholder and was shared proportionally by all.

Question 19

How should a court characterize the shareholder's lawsuit? Select one.

As a direct action, because the shareholder suffered a personal financial loss from the decline in her stock's value.
As a derivative action, because the alleged harm of misusing corporate assets was primarily an injury to the corporation. (correct answer)
As a direct action, because the CEO's breach of the duty of loyalty is a wrong committed against each shareholder individually.
As a derivative action, but only if the shareholder owns at least 1% of the corporation's outstanding shares.

Question 20

A corporation entered into a major construction contract with a third-party builder. The builder subsequently breached the contract, causing the corporation significant financial losses. The corporation's board of directors, after conducting a reasonable investigation, concluded that the costs and risks of litigation against the builder outweighed the potential recovery and voted not to file a lawsuit. A shareholder, disagreeing with this decision, filed a suit against the builder on the corporation's behalf.

The builder moves to dismiss the shareholder's lawsuit. What is the builder's strongest argument for dismissal? Select one.

The shareholder lacks standing because the injury was to the corporation, not the shareholder personally.
The shareholder's claim is a direct action that can only be brought against the corporation's directors, not a third party.
The decision not to sue, made by a disinterested board after a reasonable investigation, is protected by the business judgment rule. (correct answer)
The shareholder failed to join the corporation as a necessary party to the derivative action.

Explanation: The correct answer is C. This scenario describes a derivative action where a shareholder seeks to enforce a corporate claim that the board has refused to pursue. A board's decision not to pursue litigation is a business decision. If a majority of disinterested directors determines in good faith after a reasonable investigation that the action is not in the corporation's best interests, that decision is protected by the business judgment rule, and a court will dismiss the derivative suit. (A) is incorrect because while the injury is to the corporation, that is precisely the basis for a derivative action, not a reason for dismissal on standing grounds if procedural requirements are met. (B) is incorrect because the claim is derivative, not direct. (D) is a procedural point, but the dispositive substantive issue is the board's valid exercise of business judgment.