Bar Exam (Next Generation) Quiz: Corporation Formation

18 questions · exam conditions

0:00

Corporation FormationQuestion 1 of 18

Three individuals signed and delivered articles of incorporation for Nova, Inc. to the secretary of state and paid the filing fee. The next day, before hearing anything from the secretary, they signed a one-year lease as 'Nova, Inc.' and began operating. The secretary later rejected the articles because the chosen name was misleadingly similar to an existing corporation; the rejection notice was sent to an email address the three never checked. When the landlord discovered that Nova, Inc. did not exist, she sued the three personally for rent. The following statute applies: 'All persons who purport to act as or on behalf of a corporation, knowing that the corporation has not been incorporated, are jointly and severally liable for all liabilities created while so acting. A person who reasonably believes that the articles of incorporation have been filed is not liable under this section.'

Under the statute, are the three personally liable on the lease?

Yes, because they signed the lease before the articles were accepted, and the lease is therefore their personal contract.

Yes, because they held Nova out as a corporation and the landlord reasonably relied on that holding out.

No, because they reasonably believed the articles had been filed and did not know the corporation had not been incorporated.

No, because a lease signed in the corporate name is void and cannot create liability for anyone.

← Back to quizzes

Bar Exam (Next Generation) Quiz

Bar Exam (Next Generation) Quiz: Corporation Formation

Practice Corporation Formation in Bar Exam (Next Generation) 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 Corporation Formation, giving you a quick way to practice the rules, question types, and explanations that matter most for Bar Exam (Next Generation).

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

Under the statute, are the three personally liable on the lease?

Yes, because they signed the lease before the articles were accepted, and the lease is therefore their personal contract.
Yes, because they held Nova out as a corporation and the landlord reasonably relied on that holding out.
No, because they reasonably believed the articles had been filed and did not know the corporation had not been incorporated. (correct answer)
No, because a lease signed in the corporate name is void and cannot create liability for anyone.

Explanation: Whenever a statute is supplied, your job is to test the facts against its exact elements. Here the statute creates liability only for people who act for a corporation "knowing that the corporation has not been incorporated," and it separately protects anyone who "reasonably believes that the articles of incorporation have been filed." The three individuals signed and delivered the articles, paid the fee, and signed the lease the next day before hearing anything from the secretary. Although the corporation did not yet legally exist—the secretary later rejected the name—the three had no reason to know that at the time: they had done what was required, and the rejection notice was sent to an email address they never checked. That puts them squarely within the reasonable-belief defense, so they are not liable. The "yes, because they signed before the articles were accepted" answer confuses timing with the statutory test: signing before formal acceptance is not automatically a personal contract when the statute focuses on the actor's knowledge. The "yes, because they held Nova out as a corporation" answer invokes common-law holding-out and reliance, but the statute's explicit reasonable-belief defense governs here—they did hold out, yet they lacked the required knowledge that no corporation existed. The "no, because the lease is void" answer misstates the law: a lease signed in a corporate name by a nonexistent corporation is not void for all purposes; it can create personal liability under this statute, but the defense still protects these signers. Study takeaway: whenever a statute is quoted, isolate its elements and look for a safe harbor; a reasonable-belief defense can transform an apparent liability into no liability.

Question 2

Three entrepreneurs, Dana, Priya, and Marcus, signed a five-year lease as "Harbor Health Systems, Inc., a corporation to be formed." They negotiated every term directly with the landlord, who knew the corporation did not yet exist. Harbor was incorporated two weeks later. The corporation occupied the leased space, paid rent for several months, and then stopped paying. The landlord sued both the corporation and Dana, Priya, and Marcus personally. Dana argues that any personal liability ended when Harbor was incorporated and accepted the lease.

Which issue is most significant in determining whether Dana, Priya, and Marcus remain personally liable on the lease?

Whether the landlord knew that the corporation had not been formed when the lease was signed.
Whether Harbor's acceptance of the lease benefits was sufficient to make the corporation liable on the lease.
Whether the landlord agreed to look only to the corporation for performance of the lease. (correct answer)
Whether the lease was signed in the corporate name before the certificate of incorporation was filed.

Explanation: Whenever you see a pre-incorporation contract question, think about promoter liability. A corporation does not exist before filing, so it cannot sign a lease. The promoters who sign are personally liable on that contract unless the other party later agrees to substitute the corporation for the promoters—a novation. Here, the key issue is whether the landlord agreed to look only to the corporation for performance. If the landlord made that agreement, Dana, Priya, and Marcus are released from personal liability. If not, they remain liable even after incorporation, because forming the corporation and having it accept the lease does not automatically erase their obligation. The landlord's knowledge that the corporation did not yet exist is irrelevant; promoters still bear liability despite the other party's awareness. Whether Harbor's acceptance of the lease benefits made the corporation liable is also not decisive—adoption makes the corporation responsible, but it does not release the promoters unless the landlord consents to the substitution. Similarly, signing in the corporate name before the certificate of incorporation was filed does not shield the promoters; signing as "a corporation to be formed" still binds the individual promoters. On exam day, distinguish between the corporation's liability and the promoters' liability. Ask: did the third party agree to release the promoters? That agreement, not mere incorporation or adoption, is what ends personal liability.

Question 3

In June, the secretary of state accepted and filed Cypress Point, Inc.'s articles of incorporation. Because of a processing delay, the secretary did not issue the certificate of incorporation until August. In July, Bertram, Cypress's president, signed a contract in Cypress's name with a supplier. A dispute later arises, and one party argues that Cypress lacked capacity to contract in July because it had not yet received its certificate of incorporation.

Which issue is most important in determining whether Cypress could enter into the contract in July?

Whether the articles of incorporation had been filed with the secretary of state before Bertram signed (correct answer)
Whether the certificate of incorporation had been issued before Bertram signed
Whether Cypress's organizational meeting had been held before Bertram signed
Whether the supplier knew that Cypress had not yet received its certificate of incorporation

Explanation: Whenever you see a question about corporate capacity, start by recalling when corporate existence actually begins. Under the standard rule, a corporation's existence begins when the secretary of state files the articles of incorporation, not when it later issues the certificate. The certificate is merely evidence of incorporation, not the event that creates the corporation. Here, because the secretary accepted and filed Cypress's articles in June, Cypress became a de jure corporation at that moment. Therefore, the key fact is whether the articles had been filed before Bertram signed the July contract. If yes, Cypress had capacity to contract regardless of the August certificate date. The choice about whether the certificate had been issued misses the point: issuance is administrative confirmation, not a precondition to existence. The choice about whether a corporate organizational meeting had been held also confuses internal formalities with legal existence; failure to hold an organizational meeting may have other consequences but does not strip the corporation of capacity. Finally, whether the supplier knew about the certificate delay is irrelevant—capacity depends on the corporation's legal status, not the other party's knowledge or good faith. On exam day, when you see incorporation and contract timing, anchor on the date of filing. Ask: "Had the articles been filed before the action?" If the facts say yes, the corporate act has legal effect.

Question 4

Rosa, a chef, signed a five-year equipment lease as "Rosa, for Savory Kitchens, Inc., a corporation not yet formed." Savory was incorporated soon afterward. At its first board meeting, Savory's board voted to accept the lease, and Savory began using the equipment. Eighteen months later, Savory defaulted on the lease. The lessor has demanded payment from Rosa personally.

Which issue is most important in determining whether Rosa is personally liable to the lessor?

Whether Savory's board vote to accept the lease was unanimous
Whether Rosa intended, when she signed, to bind only Savory and not herself
Whether the lessor and Savory agreed, with Rosa's consent, to substitute Savory for Rosa under the lease (correct answer)
Whether the lessor extended credit primarily to Savory rather than to Rosa when the lease was signed

Explanation: Whenever you see a promoter signing a contract for a corporation not yet formed, promoter liability is the issue. Rosa signed before Savory existed, so at signing there was no principal to bind. Under the strong default rule, a promoter is personally liable on a pre-incorporation contract unless the parties later make a novation. That means the lessor, Savory, and Rosa all agree that Savory will be substituted for Rosa as the party obligated, releasing Rosa. Savory's board later voted to accept the lease and used the equipment, but this is adoption, not a novation; adoption makes Savory liable on the contract, but it does not erase Rosa's liability. Therefore, the key question is whether the lessor and Savory agreed, with Rosa's consent, to substitute Savory for Rosa. The other choices miss that point. Whether the board vote was unanimous is irrelevant—adoption does not require unanimity and, even if unanimous, would not release Rosa. Whether Rosa intended to bind only Savory is also not controlling; a subjective intention cannot bind a nonexistent party, and the lessor is entitled to look to the promoter absent a release. Whether the lessor extended credit primarily to Savory at signing cannot matter because Savory did not exist when the lease was signed, and the lessor's initial expectation does not replace the need for a novation. Study tip: when a promoter seeks to escape liability, look for an actual substitution agreement—not just adoption, intent, or board approval.

Question 5

Ava, knowing that the articles of incorporation for Beacon, Inc. had not yet been filed, signed a one-year commercial lease as "Beacon, Inc., by Ava, President." The lease included this clause: "Landlord acknowledges that Beacon, Inc. has not yet been formed and agrees to look solely to Beacon, Inc. for all amounts due under this lease; no person who signs for Beacon shall have personal liability." Beacon's articles were filed one week later. At its organizational meeting, Beacon's directors voted to adopt the lease, and Beacon occupied the space and paid rent for several months. The landlord now sues Ava and Beacon for unpaid rent after Beacon defaulted. The following statute is in force: § 2.04. Preincorporation Transactions. (a) A person who purports to act as or on behalf of a corporation, knowing that the corporation has not yet been formed, is jointly and severally liable on all obligations arising from the purported act. (b) If the corporation adopts the transaction after formation, it is liable on the obligation. Adoption does not discharge the person's liability under subsection (a). (c) Subsection (a) does not apply to a person if the contract contains a clear and express provision, and the other party knew at the time of contracting that the corporation had not yet been formed, that the other party would look solely to the corporation and not to the person.

Who is liable for the unpaid rent?

Ava and Beacon are jointly and severally liable because Ava knowingly signed before formation and Beacon's later adoption, while making Beacon liable, does not discharge Ava.
Only Beacon is liable because the lease contained a clear and express release, the landlord knew Beacon was unformed, and Beacon adopted the lease after formation. (correct answer)
Only Ava is liable because Beacon did not exist when the lease was signed, and a nonexistent corporation cannot adopt or become a party to the lease.
Neither Ava nor Beacon is liable because the landlord agreed to look solely to Beacon before Beacon existed, so the release never became effective.

Explanation: Whenever you see a preincorporation contract, the key is mapping the facts onto the statute's three layers: promoter liability, corporate liability by adoption, and the carve-out that can eliminate promoter liability. Under § 2.04(a), Ava would be jointly and severally liable because she signed "Beacon, Inc." knowing it had not been formed. But § 2.04(c) removes that liability if the contract has a clear and express provision and the other party knew at contracting that it would look solely to the corporation. Here the lease expressly says exactly that—the landlord knew Beacon was unformed and agreed to look solely to Beacon, with no personal liability for the signer. So Ava falls within the exception and is not personally liable. Beacon, however, is liable: once formed, its directors voted to adopt the lease, and it occupied the space and paid rent, satisfying § 2.04(b)'s adoption rule. Adoption makes the corporation liable without discharging Ava under subsection (a)—but subsection (a) never applied here because of the express release, so no personal liability is left to discharge. The choice saying "Ava and Beacon are jointly and severally liable" misses the statute's exception; it reads "adoption does not discharge" too broadly. The choice that "only Ava is liable" because Beacon did not exist is wrong—a corporation may adopt a preincorporation contract after formation, exactly as § 2.04(b) contemplates. The choice saying "neither is liable" is wrong because Beacon's adoption and occupancy made it liable; the release did not fail simply because Beacon was unformed when the lease was signed—the statute specifically validates such agreements. On this topic, always check the "clear and express provision" exception before applying personal liability; if it applies, you still must separately determine whether the corporation adopted the deal.

Question 6

The articles of incorporation of Omega, Inc. state: 'The shareholders exclusively shall have the power to adopt, amend, or repeal the bylaws' and 'The board of directors shall consist of five members.' At the organizational meeting, the initial directors adopted a bylaw providing that 'the board of directors shall consist of seven members.' No shareholder action was taken. The following statute applies: 'The initial directors may adopt bylaws for the corporation. The shareholders may amend or repeal the bylaws. The directors may also amend or repeal the bylaws unless the articles of incorporation or a bylaw adopted by the shareholders reserves that power exclusively to the shareholders. Bylaws may contain any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with law or the articles of incorporation.'

Is the bylaw adopted by the initial directors valid?

Yes, because the initial directors have authority to adopt initial bylaws at the organizational meeting.
Yes, because the bylaw concerns the board's size and is not inconsistent with any law.
No, because a bylaw affecting the size of the board can be adopted only by the shareholders.
No, because the articles reserved bylaw-making power to the shareholders and the bylaw conflicts with the articles' five-member board. (correct answer)

Explanation: When a question involves corporate bylaws and the articles of incorporation, start by reading the articles as the highest internal authority: bylaws must be consistent with both law and the articles. The statute gives initial directors power to adopt initial bylaws, but it also recognizes that the articles may reserve bylaw-making power exclusively to shareholders. Here the articles do exactly that: they state shareholders exclusively have power to adopt, amend, or repeal bylaws and set the board at five members. So the initial directors' bylaw setting the board at seven is invalid. It was adopted by directors despite an express reservation of that power to shareholders, and it directly conflicts with the articles' fixed five-member board. A bylaw cannot override the articles. The other choices miss these limits. Saying the initial directors had authority to adopt initial bylaws at the organizational meeting is true in general, but that authority does not exist when the articles reserve the power to shareholders. Saying the bylaw is valid because it concerns board size and is not inconsistent with law ignores that it is inconsistent with the articles. And saying a bylaw affecting board size can be adopted only by shareholders is too broad; directors may act unless the power is reserved to shareholders, as it is here. The correct answer is the one that combines the exclusive reservation with the conflict with the articles' five-member board. On exam day, check the articles first: if they fix a matter or reserve bylaw power, any director-adopted bylaw conflicting with either fails.

Question 7

Dana was a promoter of Zeta, Inc. Before Zeta was incorporated, Dana signed a written Supply Agreement with Metro Supply Co. The agreement identified the buyer as 'Zeta, Inc., a corporation to be formed' and was signed 'Zeta, Inc., by Dana, promoter.' It also stated: 'Metro agrees to look only to the corporation for payment, and Dana shall have no personal liability on this agreement.' After Zeta was incorporated, its board adopted a resolution ratifying the Supply Agreement and accepting its benefits. Metro delivered goods; Zeta paid for two shipments but then defaulted on the third. A statute provides: 'A person who enters a contract on behalf of a corporation before its incorporation is liable on the contract unless the contract expressly provides otherwise. A corporation may adopt a preincorporation contract by affirmative action; adoption makes the corporation liable but does not discharge the promoter.'

Who is liable to Metro for the unpaid shipment?

Dana only, because a promoter remains liable until Metro agrees to release Dana.
Zeta only, because the contract expressly disclaimed Dana's liability and Zeta adopted the contract. (correct answer)
Both Dana and Zeta, because adoption binds Zeta and the disclaimer cannot release Dana without a novation.
Neither, because Zeta did not exist when the contract was signed and Metro assumed the risk of nonformation.

Explanation: Whenever you see a preincorporation contract question, start with the default rule: a promoter is personally liable unless the contract expressly says otherwise. Here, the Supply Agreement did exactly that—it stated Metro agrees to look only to the corporation for payment and that Dana has no personal liability. So Dana never became personally liable in the first place. That is why the correct answer is Zeta only: the express disclaimer removes Dana from the default rule, and Zeta's board resolution adopting the contract makes Zeta liable. No novation is needed because novation discharges a promoter who was already liable; Dana was never liable here. Dana only is wrong because it ignores the contract's express disclaimer and treats the default rule as absolute. Both Dana and Zeta is wrong because it assumes the disclaimer is ineffective without Metro's later release—but the disclaimer was part of the original written agreement, so Metro knowingly bargained it away. Neither is wrong because Zeta's post-incorporation adoption retroactively binds the corporation, and the statute expressly imposes promoter liability unless disclaimed. On exam day, remember: "promoter liable unless contract says otherwise; corporation liable only if adopted; adoption does not discharge a liable promoter, but a valid disclaimer means there is nothing to discharge."

Question 8

Nova Analytics, Inc. was incorporated on March 1; its articles did not name any initial directors. No organizational meeting had been held when Jordan signed the lease, and no directors had been elected. Jordan, one of Nova's incorporators, signed a lease as "Nova Analytics, Inc., by Jordan, President" with a commercial landlord for office space. After Nova's initial directors were elected, Nova took possession of the office and used it for six months. A dispute arises, and Nova argues that Jordan had no authority to bind it and that Nova is not liable on the lease.

Which issue is most important in determining whether Nova is bound by the lease?

Whether Nova's articles of incorporation were filed before Jordan signed the lease
Whether the landlord knew that no organizational meeting had been held when Jordan signed
Whether Nova ratified the lease by accepting the benefits of the office space with knowledge of the material facts (correct answer)
Whether Jordan was also a shareholder of Nova when he signed the lease

Explanation: Whenever you see a contract signed for a corporation before its governance is fully in place, focus on two things: whether the signer had actual authority, and whether the corporation later ratified the deal. Ratification is usually the most important because it can cure an originally unauthorized contract. Here Jordan signed as "President" before any directors had been elected, so he likely lacked actual authority. That does not end the inquiry. After its initial directors were elected, Nova took possession of the office and used it for six months. By accepting the benefits of the lease with knowledge of the material facts, Nova may have ratified the lease and be bound by it. That is why the issue of whether Nova ratified the lease by accepting the benefits with knowledge is central. The other choices are not decisive. Whether Nova's articles were filed before Jordan signed goes only to whether the corporation existed, not whether Jordan had authority; even pre-filing promoter contracts can be adopted later. Whether the landlord knew no organizational meeting had been held affects apparent authority, but Nova's subsequent acceptance is more important than the landlord's knowledge. Whether Jordan was also a shareholder is irrelevant; share ownership does not by itself make someone an agent or officer with authority to bind the corporation. Study tip: when a corporation takes the benefit of an unauthorized deal after its board is in place, look for ratification—it often binds the corporation despite the original lack of authority.

Question 9

After filing articles of incorporation for Zenith Analytics, Inc., the sole incorporator, Jordan, called a meeting that only Jordan attended. At the meeting, Jordan adopted bylaws, appointed Jordan as president, and issued all of the corporation's authorized shares to Jordan. The articles named no initial directors. Another person who had agreed to invest in Zenith later objected, claiming that Jordan's actions were invalid because the corporation had no board of directors.

Which issue is most significant in determining whether Jordan's actions were valid?

Whether the corporation's bylaws could be adopted by a single incorporator before any directors were elected.
Whether the investor's agreement to invest created an enforceable right to participate in the organizational meeting.
Whether the issuance of shares to Jordan without receiving cash payment violated the consideration requirements for shares.
Whether Jordan, as sole incorporator, was permitted to hold the organizational meeting and take the actions taken. (correct answer)

Explanation: Whenever you see a challenge to corporate organizational actions, ask first: who held the authority to act? That is the key here. Under the Model Business Corporation Act, when articles of incorporation name no initial directors, the incorporators are authorized to hold the organizational meeting and take all necessary actions, including adopting bylaws, appointing officers, and issuing shares. Because Jordan was the sole incorporator, Jordan's lone meeting was proper, and the absence of a board did not invalidate anything — an incorporator steps into that role until directors are elected. The issue about whether bylaws could be adopted by a single incorporator before directors were elected is not the most significant issue because it is really just one piece of the incorporator's general statutory authority; that action is valid for the same reason. The investor's agreement to invest is a distraction — an investor's contract rights do not include a right to participate in an incorporators' organizational meeting, so it has no bearing on the validity of Jordan's actions. And the concern about issuance of shares without cash payment is unsupported by the facts and, more importantly, addresses a different requirement; the court would first resolve Jordan's authority to act at all, which the statute clearly grants. For study, remember the phrase: "no directors named? incorporators act." If the articles are silent on initial directors, look to the incorporators to complete the organization — that pattern appears often in corporations questions.

Question 10

A and B decided to form Delta Corp. Before formation, A purchased a warehouse in his own name for $200,000. After Delta was incorporated, A proposed that Delta buy the warehouse. The board, composed of A and two directors A had chosen, voted to purchase the warehouse for $350,000. A did not disclose that he owned the warehouse or that his profit would be $150,000. B later learned of the profit. In Landry v. Beacon Industries, the court held: 'A promoter stands in a fiduciary relationship to the corporation and to co-promoters. If a promoter acquires property before incorporation and then causes the corporation to buy it, the promoter must disclose the promoter's interest and the profit to an independent board of directors or to all shareholders. If the promoter fails to disclose, the corporation may rescind the transaction or recover the promoter's secret profit.'

What is Delta's best remedy against A?

Recover the $150,000 secret profit, because A failed to disclose his interest to an independent board or all shareholders. (correct answer)
Rescind the purchase and recover the full $350,000 without returning the warehouse, because A breached his fiduciary duty.
Recover nothing, because A acquired the warehouse before Delta existed and owed Delta no duty at that time.
Recover only the difference between fair market value and the contract price, because the warehouse was worth $350,000.

Explanation: Whenever a question features a promoter selling pre-incorporation property to the newly formed corporation, think fiduciary duty. A promoter may profit from such a deal only if the promoter discloses the interest and profit to an independent board or to all shareholders. Here, A bought the warehouse before Delta existed, then arranged for Delta to buy it at a $150,000 profit. The board was not independent because it consisted of A and directors A chose, and no disclosure was made to B or another neutral body. Under Landry v. Beacon Industries, that breach gives Delta the right to rescind or recover A's secret profit. Therefore Delta's best remedy is to recover the $150,000 secret profit. Rescission is not the best answer because it says "without returning the warehouse" — rescission means restoring the parties to their original positions, so Delta would have to give back the warehouse to get back the full price. Recovering nothing ignores that promoter duties attach when the promoter causes the corporation to purchase the property, even if the asset was acquired before incorporation. Recovering only the fair-market-value/contract-price difference misstates the remedy: the fiduciary wrong is the undisclosed profit from the flip, not merely an overpayment, so Delta may recover the $150,000 gain. On exam day, for promoter transactions, ask: Did an independent board or all shareholders approve with full knowledge? If no, the corporation's go-to remedy is the secret profit — and remember rescission always requires returning what was received.

Question 11

Onyx Materials Corp.'s articles of incorporation provide: "The purpose of the corporation is to manufacture and sell ceramic tile." The board, by a proper vote, contracted to buy a chain of pawnshops. The pawnshops were transferred to Onyx and the purchase price was fully paid. A shareholder later sued to rescind the transaction, arguing that the purchase exceeded Onyx's stated corporate purpose. The contract was at a fair price, and no fraud or waste is alleged. The following statute is in force: § 3.01. Purpose. Every corporation has the purpose of engaging in any lawful business unless a more limited purpose is set forth in its articles of incorporation. § 3.04. Ultra Vires. (a) Except as provided in subsection (b), the validity of corporate action may not be challenged on the ground that the corporation lacks or lacks power to act. (b) A corporation's power to act may be challenged in: (1) a proceeding by a shareholder against the corporation to enjoin the act; (2) a proceeding by the corporation, directly or derivatively, against a director, officer, employee, or agent; or (3) a proceeding by the Attorney General to dissolve the corporation or enjoin unauthorized business. (c) In a shareholder's proceeding under subsection (b)(1), the court may set aside an act only if it has not been fully performed.

How should the court rule on the shareholder's request to rescind the pawnshop purchase?

Grant rescission, because the purchase of pawnshops was outside Onyx's stated purpose and a shareholder may challenge any ultra vires act, whether or not performance is complete.
Deny rescission, but order the directors to reimburse Onyx for the full purchase price because they authorized a transaction outside the corporate purpose.
Deny rescission, because the statute permits a court to set aside an act in a shareholder's ultra vires proceeding only if the act has not been fully performed. (correct answer)
Deny rescission, because the pawnshop acquisition was sufficiently related to Onyx's ceramic-tile business to fall within its stated purpose.

Explanation: This question tests the modern ultra vires doctrine. When you see a challenge to corporate action based on a stated purpose, remember that an ultra vires act is not automatically void; the statute limits remedies. Under §3.04, a shareholder may sue to enjoin or set aside an act, but subsection (c) allows the court to set aside an act only if it has not been fully performed. Here, the board properly voted, the pawnshops were transferred to Onyx, and the purchase price was fully paid. The transaction was completely performed, and no fraud or waste is alleged. Therefore the court must deny rescission. The statute, not the fairness of the price, is what bars the remedy. "Grant rescission because any ultra vires act may be challenged whether or not performance is complete" is wrong because it ignores the full-performance limitation in §3.04(c). "Deny rescission but order directors to reimburse" is also wrong: no fraud, waste, or unfairness is alleged, and directors are not personally liable simply for authorizing a fully performed ultra vires contract. "Deny rescission because the pawnshop acquisition was sufficiently related to the ceramic-tile business" reaches the right result for the wrong reason; a pawnshop chain is not within a purpose limited to manufacturing and selling ceramic tile. Study tip: on ultra vires questions, first ask whether the act has been fully performed. If it has, shareholders cannot unwind it—the statute forecloses rescission.

Question 12

Pelican Packaging Corp.'s articles of incorporation state that the corporation's sole purpose is "manufacturing and selling paperboard packaging." With board approval, Pelican agreed to donate $500,000 to a local art museum as part of a sponsorship campaign. In exchange, the museum agreed to display Pelican's name on a gallery wall. A shareholder has sued to block the donation before payment is made, arguing that the donation exceeds Pelican's corporate purposes.

Which question is most important in resolving whether Pelican may make the donation?

Whether the donation is within Pelican's stated corporate purpose or reasonably incidental to it (correct answer)
Whether Pelican's board complied with quorum and voting requirements when authorizing the donation
Whether the museum knew that Pelican's articles limited its corporate purposes when it accepted the pledge
Whether Pelican's shareholders would have approved the donation if they had been asked

Explanation: Whenever you see a shareholder challenging a corporate action as exceeding the company's stated purposes, you are in the doctrine of ultra vires. The central question is always whether the action falls within the corporation's purposes or is reasonably incidental to them. Here, Pelican's articles limit its purpose to "manufacturing and selling paperboard packaging." The donation is part of a sponsorship campaign that displays Pelican's name on a museum wall—that is advertising, which is reasonably incidental to selling packaging. The museum's pledge is a business promotion, not a charitable gift unrelated to operations. Therefore, the donation likely passes the ultra vires test. Why not the other choices? Whether the board complied with quorum and voting requirements goes to procedural validity, not authority to act under the articles; even perfect compliance cannot save an action outside the corporate purpose. Whether the museum knew of the limitation is irrelevant because ultra vires concerns the corporation's capacity, not the other party's state of mind. Whether shareholders would have approved misses the point—directors have discretion to run the business without shareholder votes, and shareholder approval cannot expand a purpose-limited charter. Your study tip: when a question involves a corporate act challenged for exceeding stated purposes, focus only on the fit between the act and the company's purpose clause. Don't get distracted by voting, knowledge, or approval issues unless the question explicitly raises them as separate defects.

Question 13

A group of investors planned to form Northgate Development Corp. They signed a contract to buy a tract of land, naming the buyer as "Northgate Development Corp." The organizers believed the articles of incorporation had been filed, but the filing was not completed until two days after the sellers accepted the contract and signed the deed. The deed was recorded in the name of Northgate Development Corp. The sellers later learned of the timing and refused to honor the deed, claiming the corporation did not exist when the deed was delivered.

Which issue is most significant in determining whether the deed is valid?

Whether the organizers reasonably believed the articles had been filed before the deed was delivered.
Whether Northgate Development Corp. accepted or ratified the contract and deed after its incorporation was completed. (correct answer)
Whether the sellers knew that the articles had not been filed when the deed was delivered.
Whether the deed was recorded after Northgate Development Corp. came into existence.

Explanation: Whenever a question involves a contract or deed signed before a corporation is formed, the key concept is that a corporation does not exist until the articles are filed. Here, the deed was delivered two days before filing, so Northgate Development Corp. was not yet a legal entity capable of holding title. The most significant issue is therefore whether Northgate, after its incorporation was completed, accepted or ratified the contract and deed. If the corporation adopted the promoters' pre-incorporation contract, the defect can be cured and the deed can become valid. If it did not, the deed fails because there was no grantee in existence at delivery. The organizers' reasonable belief is not controlling; subjective belief cannot create corporate existence. The sellers' knowledge is also not decisive—even if the sellers were unaware of the timing, delivery to a non-existent entity was still defective, though later ratification could fix it. And the fact that the deed was recorded after incorporation does not validate it; recording merely provides notice and cannot cure an invalid delivery or transfer title that never legally passed. On the bar, remember the sequence: formation date controls. Before filing, promoters act on their own behalf. Ask whether the newly formed corporation expressly or impliedly adopted the pre-incorporation contract—that is the issue that determines validity.

Question 14

Before Beta Logistics, Inc. was formed, Keisha signed a subscription agreement promising to buy 1,000 shares of the corporation for $50,000. The agreement stated that Keisha would pay for the shares when the corporation demanded payment. Five months after she signed the agreement, the corporation was formed. One month later, the corporation demanded the $50,000. Keisha refused, arguing that she had revoked the subscription before the demand.

Which issue is most significant in determining whether Keisha must pay?

Whether the corporation's board of directors formally approved the subscription after incorporation.
Whether the subscription agreement gave Keisha a right to revoke before the corporation accepted the subscription. (correct answer)
Whether the corporation was formed within six months after Keisha signed the subscription agreement.
Whether Keisha signed the agreement before any shares were offered to the public.

Explanation: Whenever you see a preincorporation subscription, think of it as a special contract rule, not an ordinary revocable offer. Under modern corporate law, a subscription entered into before the corporation exists is irrevocable for six months from signing unless the subscription agreement gives the subscriber a right to revoke, or all subscribers agree otherwise. The decisive question here is whether Keisha's agreement contained such a revocation right. If it did, she could revoke before the corporation acted on the subscription. If it did not, her purported revocation was ineffective, and Beta's demand—made six months after she signed—came within the enforceable window, so she must pay. The other choices are distractions. Formal board approval after incorporation is not the central issue; a preincorporation subscription can bind the subscriber without a separate board vote, and the corporation's demand may itself show it is treating the subscription as effective. Whether the corporation formed within six months after Keisha signed is a trap: the six-month irrevocability period runs from the signing of the subscription, not from formation. And whether Keisha signed before any shares were offered to the public is irrelevant to enforceability; preincorporation subscriptions do not depend on the timing of a public offering. Study tip: when you see "subscription agreement" and "before incorporation," immediately look for a revocation term. If the agreement is silent, the subscriber is locked in for six months.

Question 15

Maple Corp's articles of incorporation state: 'The purpose of the corporation is to operate a bakery.' Maple contracts with Harbor Boats to buy a commercial fishing vessel for its fair-market value, intending to lease it to a seafood processor. A Maple shareholder learns of the contract and sues to enjoin the closing, arguing the purchase is outside Maple's stated purpose. The following statute applies: 'Section 3.01: A corporation may be formed to engage in any lawful business, and a corporation has the same powers as an individual to do all things necessary or convenient to carry out its business and affairs. Section 3.04(a): No act of a corporation and no transfer of property by a corporation is invalid solely because the act or transfer was beyond the corporation's purposes or powers. Section 3.04(b): A shareholder may sue the corporation to enjoin an act that is beyond the corporation's powers, except that a court may not enjoin the performance of a contract if the other party to the contract is not a party to the proceeding and the contract is fair and reasonable to the corporation.'

Under these provisions, should the court enjoin the closing?

Yes, because the purchase is outside Maple's stated purpose and the shareholder has standing to enjoin ultra vires acts.
Yes, because the fishing vessel is not necessary or convenient to operating a bakery.
No, because Section 3.04(a) makes all corporate acts and transfers valid regardless of purpose.
No, because the contract is fair and reasonable to Maple and Harbor Boats is not a party to the shareholder's proceeding. (correct answer)

Explanation: When you see a statute about "purposes or powers," you're in ultra vires territory. Remember the modern rule: an act is not automatically invalid just because it exceeds the corporation's stated purpose, but shareholders may still seek an injunction subject to statutory limits. Here, Section 3.04(b) allows a shareholder to enjoin an ultra vires act, but it has a critical shield: if the contract's other party is not in the lawsuit and the contract is fair and reasonable to the corporation, the court cannot enjoin performance. Maple agreed to pay fair-market value for the vessel, so the contract is fair and reasonable on its face, and Harbor Boats is not a party to the shareholder's proceeding. Therefore, the court should not enjoin the closing. The first wrong answer, "Yes, because the purchase is outside Maple's stated purpose and the shareholder has standing," ignores that standing alone does not overcome the statutory protection for fair contracts with absent third parties. Similarly, "Yes, because the fishing vessel is not necessary or convenient to operating a bakery" confuses the purpose language with the shareholder injunction test; the statute specifically prevents invalidation on that ground. The third wrong answer, "No, because Section 3.04(a) makes all corporate acts and transfers valid regardless of purpose," overreads the statute—Section 3.04(a) removes automatic invalidity, but it does not eliminate the shareholder's injunction remedy altogether. Only the fair-contract, nonparty rule resolves the case. Study tip: when asked about ultra vires, look first for whether a shareholder is seeking to enjoin a contract and whether the outside party is before the court. That trigger tells you whether the "fair and reasonable" exception applies.

Question 16

An attorney prepared and filed articles of incorporation for Bright Services, Inc. The articles stated the corporate name, the number of authorized shares, and the name and address of the incorporator, but they did not state the address of the corporation's initial registered office or name its initial registered agent. The secretary of state accepted and filed the articles. Bright then contracted with Office Mart for furniture. When Bright later refused to pay, Office Mart argued that the contract was void because Bright never had a registered agent and thus never came into existence. The following statute applies: 'The articles of incorporation must set forth (1) a corporate name; (2) the number of authorized shares; (3) the street and mailing addresses of the initial registered office and the name of the initial registered agent; and (4) the name and address of each incorporator. Corporate existence begins when the articles of incorporation are filed. The filing of the articles is conclusive proof that all conditions precedent to incorporation have been satisfied, except in a proceeding by the state to cancel or revoke the incorporation.'

Under the statute, is Office Mart correct that the contract is void?

Yes, because the articles failed to include a mandatory provision and no corporation came into existence.
Yes, because the secretary of state's acceptance cannot cure a material omission from the articles.
No, because Bright's existence began upon filing; only the state may later seek revocation for the omission. (correct answer)
No, because the registered-agent requirement is directory only and failure to comply has no legal consequence.

Explanation: Whenever you see a corporate formation question, focus on the statute's exact wording about the effect of filing. Here, the statute creates a conclusive presumption of valid existence upon filing, with a specific exception for state action. The correct answer is that Bright's existence began upon filing; only the state may later seek revocation for the omission. The statute says existence begins upon filing, and that filing is conclusive proof that all conditions precedent are satisfied, except in a state proceeding to revoke. Since Office Mart is a private party, it cannot attack the corporation's existence based on the omitted registered agent. The contract is not void; Bright exists and can be bound. Why are the others wrong? The choice saying 'the articles failed to include a mandatory provision and no corporation came into existence' ignores the conclusive proof provision. The choice saying 'the secretary of state's acceptance cannot cure a material omission' misapplies the rule; the filing itself is conclusive proof, curing the defect as to third parties. The choice saying 'the registered-agent requirement is directory only' is a trap. The statute says 'must set forth,' making it mandatory, not directory. However, the consequence of a mandatory omission is not automatic voidness; it is potential revocation by the state. So the conclusion is 'no,' but the reasoning is wrong. Study tip: remember that 'conclusive proof' statutes shift the risk of defective formation to the state. A private party cannot use a formation defect to escape a contract once the articles are filed. Watch for the 'except in a proceeding by the state' clause – it signals that only the state can act on the defect.

Question 17

Atlas Analytics, Inc.'s articles of incorporation state: "The board of directors shall consist of five directors. The power to adopt, amend, or repeal bylaws is reserved exclusively to the shareholders." The articles named five initial directors. At the organizational meeting, three of the five initial directors, constituting a quorum, adopted a bylaw providing: "The board of directors shall consist of three directors." Later, at the first shareholders' meeting, the shareholders ratified the three-director bylaw by the vote required to amend the bylaws, but they did not amend the articles. The following statute is in force: § 2.06. Bylaws. (a) The incorporators or board of directors shall adopt initial bylaws. (b) The bylaws may contain any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with law or the articles of incorporation. (c) The shareholders may amend or repeal the bylaws. The board of directors may amend or repeal the bylaws unless the articles of incorporation or this Act reserve that power exclusively to the shareholders in whole or part.

Is the three-director bylaw valid?

Yes, because the initial directors had statutory authority to adopt initial bylaws and the shareholders later ratified the bylaw by the required vote.
Yes, because the number of directors may be fixed by bylaw, and the articles' statement of five directors is merely a default provision.
No, because the bylaw conflicts with the articles, and a bylaw may not be inconsistent with the articles even if shareholders ratify it. (correct answer)
No, because the articles' exclusive reservation of bylaw power to the shareholders prevented the initial directors from adopting any initial bylaws.

Explanation: This question tests the hierarchy of corporate governance documents: the articles of incorporation are supreme over bylaws. The statute says a bylaw may not be inconsistent with law or the articles. Here, the articles expressly require a five-director board, while the bylaw sets the board at three. That is a direct conflict, and a shareholder ratification cannot cure it. Ratification is not an amendment of the articles; the shareholders only approved the bylaw itself, and the bylaw remains substantively invalid under the statute. The first wrong answer correctly notes that the initial directors had statutory authority to adopt initial bylaws, but it wrongly assumes ratification can override the articles. The second wrong answer treats the articles' five-director requirement as a default rule; it is not. A bylaw may fix the number of directors, but it may not contradict an explicit article. The last wrong answer overstates the exclusive-reservation clause: the Act specifically directs the incorporators or initial directors to adopt initial bylaws, so the reservation did not strip them of all power to adopt initial bylaws. In any event, the fatal defect here is the conflict with the articles, not who adopted the bylaw. Strategy: whenever a bylaw seems to conflict with the articles, stop—the articles control. Only an amendment to the articles can remove the conflict.

Question 18

Greenway Manufacturing, Inc.'s articles of incorporation state that the corporation's purpose is "to manufacture and sell agricultural equipment." The board of directors, without seeking shareholder approval, used corporate funds to purchase a shopping mall and then leased space in the mall to retail tenants. A long-time shareholder learns of the purchase and wants to challenge it, claiming the corporation has no power to invest in real estate.

Which legal issue is raised by the shareholder's claim?

Whether the transaction exceeds the corporation's stated purposes and is therefore an ultra vires act. (correct answer)
Whether the board of directors breached its fiduciary duty by failing to seek shareholder approval.
Whether the board of directors lacked actual authority to enter the transaction under the corporate bylaws.
Whether the shareholders have standing to challenge acts approved by a majority of the board of directors.

Explanation: Whenever you see a shareholder challenging a corporation's action based on the corporation's stated purpose, think ultra vires—the question is whether the corporation has the legal capacity to act beyond its charter. Here, the articles limit Greenway to manufacturing and selling agricultural equipment, yet the board bought a shopping mall and leased retail space. That is not agricultural equipment, so the shareholder's claim raises exactly whether the transaction exceeds the corporation's stated purposes and is therefore an ultra vires act. The fiduciary-duty choice misses the mark: directors generally need not seek shareholder approval for ordinary business decisions, and the claim here is about the corporation's power, not the board's loyalty or care. The actual-authority choice is a trap—authority under the bylaws concerns whether the board had permission to act internally, whereas ultra vires concerns whether the corporation has legal capacity to act at all. Finally, the standing choice is backwards: shareholders do have standing to challenge an ultra vires act, so the dispute is not about whether they can sue, but about whether the act is ultra vires in the first place. Study tip: on the bar exam, separate capacity (ultra vires, charter limits) from authority (bylaws and agency) and from fiduciary duty (loyalty and care). When a charter's purpose clause is the basis of the challenge, the raised issue is almost always ultra vires.