NYLE Business Relationships 3 — Questions and Answers
Question 1: A New York corporation's board of directors wants to approve a transaction in which the CEO has a personal financial interest. Under BCL § 713, the transaction may be approved without voidability if:
- The CEO recuses herself and the remaining disinterested directors approve after full disclosure. (Correct answer)
- A majority of all shareholders vote to ratify regardless of whether full disclosure was made.
- The CEO discloses only the material facts and a majority of the full board approves.
- The transaction is approved by the audit committee alone without shareholder notice.
Correct answer: The CEO recuses herself and the remaining disinterested directors approve after full disclosure.
BCL § 713 protects interested director transactions from voidability when the material facts are disclosed and a majority of disinterested directors approve, or disinterested shareholders ratify.
Question 2: Under New York partnership law, a third party extends credit to a partnership in good faith, believing that a person named in old letterhead is still a general partner. That person actually withdrew six months ago but no public notice was filed. Who bears the loss?
- The partnership, because it failed to provide actual notice to the creditor.
- The creditor, because it had a duty to verify current partnership membership.
- The withdrawn partner, personally, under the theory of apparent authority. (Correct answer)
- The remaining partners, because constructive notice is imputed from court records.
Correct answer: The withdrawn partner, personally, under the theory of apparent authority.
A withdrawn partner who fails to file a statement of dissociation or give actual notice remains liable to creditors who in good faith continue to deal with the partnership in reliance on apparent authority.
Question 3: A New York LLC operating agreement specifies that amendments require unanimous written consent. A majority of members attempt to amend the agreement without one member's consent. The attempted amendment is:
- Valid if it reflects sound business judgment under the business judgment rule.
- Valid because majority rule supersedes unanimous-consent provisions in LLCs.
- Invalid because the operating agreement's supermajority requirement controls. (Correct answer)
- Voidable at the option of the dissenting member within 60 days.
Correct answer: Invalid because the operating agreement's supermajority requirement controls.
NY LLC Law permits operating agreements to require unanimous consent for amendments, and such provisions are fully enforceable against attempts to amend by a lesser vote.
Question 4: A shareholder holding 10% of a New York close corporation's shares seeks access to its books and records. Under BCL § 624, the shareholder must:
- Obtain a court order before any inspection rights attach.
- Give five days' written demand stating a proper purpose. (Correct answer)
- Hold at least 25% of outstanding shares to invoke inspection rights.
- Show a specific allegation of fraud before inspection is permitted.
Correct answer: Give five days' written demand stating a proper purpose.
BCL § 624 grants shareholders the right to inspect books and records upon five days' written demand stating a purpose reasonably related to their interest as a shareholder.
Question 5: Under New York law, which of the following acts by a New York general partnership partner does NOT require unanimous consent of all partners?
- Admitting a new partner.
- Amending the partnership agreement.
- Making decisions in the ordinary course of the partnership's business. (Correct answer)
- Disposing of all partnership assets outside the ordinary course.
Correct answer: Making decisions in the ordinary course of the partnership's business.
Ordinary course business decisions require only a majority vote under NY Partnership Law, while extraordinary acts—like admitting partners or disposing of all assets—require unanimity.
Question 6: A New York corporation is administratively dissolved by the Department of State for failure to pay franchise taxes. Its officers continue to transact business on its behalf. The officers are:
- Personally liable for obligations incurred after dissolution because the corporate shield is lost. (Correct answer)
- Protected by the business judgment rule even after dissolution.
- Entitled to reinstatement automatically once back taxes are paid.
- Shielded from personal liability because dissolution only affects future stock issuances.
Correct answer: Personally liable for obligations incurred after dissolution because the corporate shield is lost.
Officers and directors who continue to act for a dissolved corporation are personally liable for obligations they incur because the entity no longer provides a liability shield.
Question 7: Under New York's Revised Limited Partnership Act, a limited partner who participates in control of the business is liable to third parties who:
- Suffer any harm whatsoever from the partnership's activities.
- Reasonably believed, based on the limited partner's conduct, that the limited partner was a general partner. (Correct answer)
- Transacted business with the partnership after a public filing disclosing the control activity.
- Hold more than $10,000 in partnership debt at the time of the claim.
Correct answer: Reasonably believed, based on the limited partner's conduct, that the limited partner was a general partner.
A limited partner who participates in control loses limited liability only as to creditors who actually and reasonably believed the limited partner was a general partner based on that conduct.
NYLE Business Relationships 3
A New York corporation's board of directors wants to approve a transaction in which the CEO has a personal financial interest.
Under BCL § 713, the transaction may be approved without voidability if: