NYLE - New York Law NY Business Relationships Questions and Answers — Questions and Answers
Question 1: A shareholder of a New York corporation wishes to bring a derivative suit against the board of directors for mismanaging corporate assets. According to New York's Business Corporation Law, which of the following is a mandatory prerequisite for commencing this action, unless it is excused?
- Posting a bond for the corporation's legal expenses.
- Obtaining the approval of a majority of the minority shareholders.
- Making a demand on the board of directors to initiate the action themselves. (Correct answer)
- Filing a notice of claim with the New York Attorney General.
Correct answer: Making a demand on the board of directors to initiate the action themselves.
Under New York Business Corporation Law § 626(c), a complaint in a shareholder derivative action must set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort (i.e., that a demand would be futile).
Question 2: An employee at a Manhattan art gallery, who has previously been authorized to sell paintings up to $50,000, finalizes a sale of a painting for $75,000 to a repeat customer. The gallery owner had privately told the employee last week not to sell any piece for more than $60,000. The customer was unaware of this new limitation. Is the gallery bound by the contract?
- No, because the employee lacked actual authority to make the sale.
- No, because the employee intentionally disobeyed the owner's instructions.
- Yes, because the employee had apparent authority to complete the sale. (Correct answer)
- Yes, because all sales made by an employee are automatically binding on the employer.
Correct answer: Yes, because the employee had apparent authority to complete the sale.
In New York, a principal is bound by the acts of an agent who acts with apparent authority. Apparent authority arises when the words or conduct of the principal, communicated to a third party, give rise to the reasonable belief that the agent possesses authority. Here, the gallery's prior conduct of allowing the employee to make significant sales created a reasonable belief for the repeat customer that the employee had authority for this sale.
Question 3: Under New York Partnership Law, what is the default liability of a general partner in a limited partnership for the debts and obligations of the partnership?
- Liable only up to the amount of their capital contribution.
- Not liable for any partnership debts, as that is the role of limited partners.
- Liable jointly and severally for all debts and obligations, the same as a partner in a general partnership. (Correct answer)
- Liable only for tortious acts, but not for contractual obligations.
Correct answer: Liable jointly and severally for all debts and obligations, the same as a partner in a general partnership.
According to New York Partnership Law § 121-403, a general partner of a limited partnership has the liabilities of a partner in a partnership without limited partners. This means they are subject to joint and several liability for the partnership's obligations.
Question 4: A plaintiff in a lawsuit is attempting to hold the sole member of a New York LLC personally liable for the company's debts, a concept known as 'piercing the corporate veil.' Which of the following is a key element the plaintiff must prove to be successful?
- That the LLC was unprofitable for three consecutive years.
- That the member exercised complete domination over the LLC and used that domination to commit a fraud or wrong against the plaintiff. (Correct answer)
- That the LLC failed to hold an annual meeting of its members.
- That the member was also the chief executive officer of the LLC.
Correct answer: That the member exercised complete domination over the LLC and used that domination to commit a fraud or wrong against the plaintiff.
New York courts will pierce the corporate veil (a doctrine applied to LLCs as well) when a plaintiff demonstrates two key elements: (1) the owner exercised complete domination over the entity with respect to the transaction in question, and (2) this domination was used to commit a fraud or a wrong that resulted in injury to the plaintiff.
Question 5: Three individuals attempt to form a corporation in New York. They properly draft the certificate of incorporation but, due to a clerical error at their law firm, the certificate is never filed with the Department of State. They proceed to conduct business as 'ABC Corp.' Under New York law, what is the likely status of their business?
- A de jure corporation, because they had the intent to incorporate.
- A corporation by estoppel, because they held themselves out as a corporation.
- A general partnership, because a de jure corporation was never formed. (Correct answer)
- A de facto corporation, because they made a good faith attempt to comply with incorporation statutes.
Correct answer: A general partnership, because a de jure corporation was never formed.
In New York, corporate existence begins upon the filing of the certificate of incorporation with the department of state. Without filing, no corporation—neither de jure nor de facto—is formed. When individuals hold themselves out as a corporation without having actually formed one, they are typically treated as partners and are subject to personal liability for the business's obligations.
Question 6: The board of directors of a New York corporation decided to invest in a new, unproven technology that ultimately failed, causing a significant financial loss. A shareholder sued the directors for breaching their duty of care. The directors' decision was made in good faith and with adequate information. Which legal principle will most likely protect the directors from liability?
- The doctrine of ultra vires.
- The principle of limited liability.
- The business judgment rule. (Correct answer)
- The concept of par value.
Correct answer: The business judgment rule.
The business judgment rule shields corporate directors from liability for decisions made in good faith, with due care, and in the best interests of the corporation. Courts in New York will not second-guess a board's business decisions, even if they turn out poorly in hindsight, as long as the decision-making process was sound and there was no self-dealing or bad faith.
NYLE - New York Law NY Business Relationships Questions and Answers
A shareholder of a New York corporation wishes to bring a derivative suit against the board of directors for mismanaging corporate assets.
According to New York's Business Corporation Law, which of the following is a mandatory prerequisite for commencing this action, unless it is excused?