NYLE Business Relationships 5 — Questions and Answers
Question 1: A New York LLC member transferred her membership interest to a third party without obtaining the consent required by the operating agreement. What rights does the transferee obtain?
- Full membership rights including voting and management participation.
- Only the economic rights (distributions and allocation of profits/losses) but not membership rights. (Correct answer)
- No rights at all because an unauthorized transfer is void under NY LLC Law.
- Full membership rights but only after a 30-day cure period expires.
Correct answer: Only the economic rights (distributions and allocation of profits/losses) but not membership rights.
Under NY LLC Law § 603, an unauthorized transfer conveys only the transferor's economic interest; the transferee does not become a member and has no voting or management rights.
Question 2: Under the New York Business Corporation Law, which statement correctly describes the appraisal right (right of dissent) available to shareholders?
- It is available whenever a shareholder disagrees with any board decision.
- It allows dissenting shareholders to compel the corporation to buy their shares at fair value in specified transactions such as mergers. (Correct answer)
- It requires the shareholder to file suit within 30 days of any board vote.
- It applies only to publicly traded corporations listed on a national exchange.
Correct answer: It allows dissenting shareholders to compel the corporation to buy their shares at fair value in specified transactions such as mergers.
BCL §§ 623–624 grant shareholders who dissent from certain extraordinary transactions (e.g., mergers) the right to have their shares appraised and purchased at fair value.
Question 3: Two members of a New York two-member LLC have a complete deadlock on every management decision. Which remedy is most likely available under New York law?
- Automatic dissolution by operation of law after 90 days of deadlock.
- Judicial dissolution under NY LLC Law § 702 because it is not reasonably practicable to carry on business. (Correct answer)
- Appointment of a receiver only if the LLC is insolvent.
- Mandatory arbitration ordered by the Department of State.
Correct answer: Judicial dissolution under NY LLC Law § 702 because it is not reasonably practicable to carry on business.
A complete and irresolvable deadlock between equal members renders it not reasonably practicable to carry on the LLC's business, satisfying the standard for judicial dissolution under NY LLC Law § 702.
Question 4: A New York limited liability company's articles of organization state that the LLC's purpose is 'to operate retail clothing stores.' The LLC's manager instead invests all funds in real estate. Under the ultra vires doctrine as applied to LLCs in New York, the investment is:
- Automatically void because it exceeds the stated purpose in the articles.
- Voidable by members in equity, and the manager may face personal liability for breach of fiduciary duty. (Correct answer)
- Fully valid because New York abolished the ultra vires doctrine entirely for all business entities.
- Subject to approval by the Department of State before it can take effect.
Correct answer: Voidable by members in equity, and the manager may face personal liability for breach of fiduciary duty.
While NY has greatly limited the ultra vires doctrine, members may seek equitable relief against acts outside the LLC's stated purpose, and the manager may be liable for breach of the duty of loyalty.
Question 5: A New York corporation's board adopts a poison pill (shareholder rights plan) without shareholder approval to defend against a hostile takeover. Under New York law, the pill is:
- Per se invalid because shareholder approval is required for any anti-takeover measure.
- Presumptively valid as a board-authorized measure reviewed under the business judgment rule. (Correct answer)
- Valid only if the target corporation is incorporated in Delaware.
- Automatically invalidated by BCL § 505 which prohibits discriminatory share issuances.
Correct answer: Presumptively valid as a board-authorized measure reviewed under the business judgment rule.
New York courts apply the business judgment rule to board-adopted rights plans, presuming validity when directors acted in good faith to protect the corporation from a perceived threat.
Question 6: Under New York law, an agent acting within the scope of apparent authority binds the principal when the third party:
- Believes the agent has authority based solely on the agent's own representations.
- Reasonably relies on manifestations of authority made by the principal to the third party. (Correct answer)
- Conducts any transaction with the agent regardless of what the principal communicated.
- Obtains a written warranty of authority signed by the agent.
Correct answer: Reasonably relies on manifestations of authority made by the principal to the third party.
Apparent authority arises only from the principal's own words or conduct that reasonably lead the third party to believe the agent is authorized; the agent alone cannot create apparent authority.
Question 7: A New York general partnership agreement states it will last for five years. After three years, the partners unanimously agree to dissolve. Under NY Partnership Law, which statement is correct?
- Dissolution is wrongful because the partnership term has not expired, and all partners are liable for breach.
- Dissolution is rightful because unanimous partner consent always authorizes dissolution regardless of the term. (Correct answer)
- Dissolution requires court approval because early termination violates the express agreement.
- Dissolution is only valid if 60 days' written notice is given to all creditors before winding up.
Correct answer: Dissolution is rightful because unanimous partner consent always authorizes dissolution regardless of the term.
Under NY Partnership Law, unanimous consent of all partners is an independent ground for dissolution and may occur before a term expires without constituting wrongful dissolution.
NYLE Business Relationships 5
A New York LLC member transferred her membership interest to a third party without obtaining the consent required by the operating agreement.
What rights does the transferee obtain?