CLA/CP Exam CLA/CP Business and Corporate Law 1 — Questions and Answers
Question 1: Under the doctrine of piercing the corporate veil, a court is most likely to hold shareholders personally liable when:
- The corporation fails to pay its federal income taxes on time
- Shareholders comingle personal and corporate assets and the corporation is used to perpetrate a fraud (Correct answer)
- The corporation operates with fewer employees than its competitors
- A shareholder personally guarantees a corporate debt
Correct answer: Shareholders comingle personal and corporate assets and the corporation is used to perpetrate a fraud
Courts pierce the corporate veil when the corporate form is abused—typically shown by a combination of undercapitalization, failure to observe corporate formalities, commingling of funds, and use of the entity as an alter ego to commit fraud or injustice. A personal guarantee (option D) creates direct liability by contract, not veil-piercing.
Question 2: A corporate director who approves a transaction in which she has a personal financial interest will be protected from liability if:
- The transaction is approved by a majority vote of all shareholders regardless of disclosure
- The director's interest is fully disclosed and the transaction is approved by disinterested directors or shareholders, or the transaction is fair to the corporation (Correct answer)
- The director recuses herself from the board meeting but takes no other action
- The articles of incorporation contain a general exculpation clause covering all director decisions
Correct answer: The director's interest is fully disclosed and the transaction is approved by disinterested directors or shareholders, or the transaction is fair to the corporation
Under the duty of loyalty, a director with a conflict of interest must disclose it fully. The transaction is then cleansed if approved by disinterested directors or shareholders after disclosure, or if the director can prove its intrinsic fairness. Mere recusal without disclosure or ratification is insufficient.
Question 3: Which of the following best describes an 'ultra vires' act by a corporation?
- An act that exceeds the authority granted to the board of directors by the shareholders
- An act performed by an officer without board approval that later harms a third party
- An act that falls outside the purposes or powers set forth in the corporation's articles of incorporation (Correct answer)
- An act that violates a state environmental regulation
Correct answer: An act that falls outside the purposes or powers set forth in the corporation's articles of incorporation
'Ultra vires' literally means 'beyond the powers.' It refers to corporate acts that exceed the scope of authority granted by the articles of incorporation. Modern statutes have limited the use of the ultra vires doctrine, but it remains defined as action beyond the corporation's stated purposes or powers—not simply unauthorized officer conduct or regulatory violations.
Question 4: In a member-managed limited liability company (LLC), which of the following statements is generally correct regarding management authority?
- Only the member with the largest ownership interest may bind the LLC in ordinary business transactions
- Each member has apparent authority to bind the LLC in the ordinary course of business (Correct answer)
- A unanimous vote of all members is required before any member may act on behalf of the LLC
- Members may not act as agents of the LLC; only appointed managers may do so
Correct answer: Each member has apparent authority to bind the LLC in the ordinary course of business
In a member-managed LLC, each member is an agent of the LLC for purposes of carrying on its ordinary business, giving each member apparent authority to bind the entity in routine transactions. This mirrors the agency rules applicable to general partnerships, where each partner similarly has authority to bind the partnership.
Question 5: When a corporation is voluntarily dissolved, which of the following correctly states the proper priority order for distributing corporate assets?
- Shareholders receive distributions first, then secured creditors, then unsecured creditors
- Secured creditors are paid first, followed by unsecured creditors and preferred shareholders equally, then common shareholders
- Creditors (secured then unsecured) are paid in full before any distribution is made to shareholders, with preferred shareholders having priority over common shareholders (Correct answer)
- All creditors and shareholders share pro rata in the remaining assets regardless of their class
Correct answer: Creditors (secured then unsecured) are paid in full before any distribution is made to shareholders, with preferred shareholders having priority over common shareholders
Upon dissolution, a corporation must first satisfy all creditor claims—secured creditors have priority, followed by unsecured creditors. Only after all creditor obligations are satisfied may any remaining assets be distributed to shareholders. Among shareholders, preferred shareholders receive their liquidation preference before common shareholders participate.
Question 6: Under the Revised Uniform Partnership Act (RUPA), which of the following events will NOT automatically cause the dissociation of a partner from a general partnership?
- The partner gives express notice of withdrawal
- The partner is adjudicated incompetent by a court
- The partnership's primary business asset is sold to a third party (Correct answer)
- The partner dies
Correct answer: The partnership's primary business asset is sold to a third party
Under RUPA, dissociation occurs upon events such as a partner's notice of withdrawal, death, adjudication of incompetency, or bankruptcy. The sale of a partnership asset—even a major one—does not trigger a partner's dissociation; it is a business decision that may be made in the ordinary course. The partnership entity continues regardless of asset transactions.
CLA/CP Exam CLA/CP Business and Corporate Law 1
Under the doctrine of piercing the corporate veil, a court is most likely to hold shareholders personally liable when: