Overview of Question Types PDF

**Overview of Question Types/First Three Samples** Sample Level 1 Question (questions 1-25) 1. James is a member of a single-member LLC. He owes a significant debt to a creditor. The creditor brings an action to recover against the LLC. The likely outcome is that: 1. The creditor ca...

**Overview of Question Types/First Three Samples** Sample Level 1 Question (questions 1-25) 1. James is a member of a single-member LLC. He owes a significant debt to a creditor. The creditor brings an action to recover against the LLC. The likely outcome is that: 1. The creditor can have full management rights until the debt is satisfied  1. The creditor is entitled to a charging order, which gives access to distributions only  1. The creditor needs to show the elements of piercing the veil to have management rights 1. The creditor needs to show the elements of reverse piercing to have management rights Sample Level 2 Question (questions 26-35) 2. John and Jane are partners in J&J Widgets. They both own 50% of the partnership. Their partnership agreement states that any spending by the partnership that exceeds \$1,000 requires unanimous approval. J&J Widgets sells widget supplies to the general public. John and Jane buy J&J's inventory at the Great Big Widget Store, which only sells to other suppliers. While shopping at the Great Big Widget Store, John spotted an open box Grand Widget Maker 3000 that was 50% off due to a large scratch, which doesn't impact performance. J&J could buy the machine for \$1,700 instead of the usual \$3,400. J&J could probably sell it for at least \$2,500. This was a great deal. Another buyer was also looking at the Grand Widget Maker too, and John couldn't reach Jane for approval, so he just made an executive decision and bought the discounted machine before the other buyer had a chance. Is J&J bound by this decision? 1. Yes, because John had actual authority, since this was a transaction in the ordinary course of the partnership's business 1. Yes, but only if Jane ratifies the purchase afterwards 1. No, because John explicitly lacked actual authority per the partnership agreement 1. Yes, if buying a Grand Widget Maker 3000 was a transaction within the ordinary course of J&J's business  Representative Level 3 Question (questions 36-60) 3. John is a member of Haub Widget Services, a Delaware LLC that builds, restores, and services fine quality widgets throughout Westchester County. John identified a promising business opportunity for the LLC. Haub was growing fast and needed additional space. Based on John's estimates, if Haub expanded its operations by using the space next door, it could hire more staff and significantly increase its production capacity. Since the buildings are right next to each other, key members of management can easily move from one to the other to supervise staff. By increasing production capacity without needing to hire more managers, Haub could significantly increase its revenue. It so happened that John, through a different LLC, owned the building right next door to Haub, which could easily be converted into a second factory. John scheduled a meeting with the other members of Haub, David and Jessica, to discuss the transaction. During the meeting, John disclosed all relevant details about the opportunity, including its potential risks and benefits, but he didn't mention that he owned the neighboring building through a different LLC. After analyzing all the facts, David and Jessica approved buying the building at a price of \$500,000, which was below market value. They believed this transaction was in the best interest of the LLC. Following the transaction, the building on the other side of Haub, which was very similar to John's building, went on the market for \$700,000. After some time went by, David and Jessica found out that John never disclosed that it was his other LLC that owned the building bought by Haub. Feeling slighted, they decided to take legal action for breach of fiduciary duty. What is the most likely outcome? 1. John will not be liable because Haub paid a fair price 2. John bears the burden of proving the obligation of good faith and fair dealing 3. John will be liable because the entire fairness test isn't satisfied  4. John will not be liable because his ownership interest in the building is immaterial if the building is priced below market value 1. (1) 1. (3) 1. \(2) and (3) 1. \(1) and (4) **More Sample Questions** 1. A derivative litigation is brought by a shareholder of a corporation against the directors. The corporation establishes a special litigation committee, which determines that the suit should be dismissed. The court rejects dismissal and allows the suit to move forward. If the shareholder's claims prevail at trial, the recovery goes to: 1. The specific shareholders impacted by the alleged misconduct, but not the other unimpacted shareholders. 1. The corporation itself. 1. The shareholder who brought the claims. 1. The disinterested and independent members of the board of directors. 2. Which of the following statements is true regarding a sole proprietorship? 1. The term sole proprietorship can be used interchangeably with the term single member LLC. 1. A sole proprietorship must file its own tax return and the owner must file a separate tax return. 1. The owner is personally liable for any obligations of the sole proprietorship. 1. The entity provides a liability shield.  3. What fiduciary duties do noncontrolling minority shareholders owe the corporation? 1. None. 1. The duty of loyalty and the duty of care. 1. The same duties as directors, unless the directors are exculpated in the charter. 1. The duty to disclose conflicted interest transactions. 4. A close corporation consists of two shareholders, who are both directors and officers. Jane owns 70% of the corporation and John owns 30% of the corporation. At the outset of the corporate relationship, Jane and John agreed that they would both be employees and directors of the corporation. As time went by, John's work deteriorated. Jane attempted to coach him and provide additional support, but John's performance did not improve. Jane eventually had to hire a third person to do John's job. Relying on her majority controlling position, Jane removed John from his employment duties because of ongoing performance issues. Jane allowed John to remain on the board. She also used her controlling position to issue dividends to both John and herself in proportion to their ownership interests. If John brings an action for breach of fiduciary duty, a court would most likely find that: 1. Jane did not have a proper proxy from John to make an unauthorized decision to end his employment. 1. Jane froze out a minority shareholder by taking away John's job. In the context of a close corporation, this constitutes oppression and results in dissolution or a buyout of the plaintiff. 1. Controlling shareholders of public corporations owe a fiduciary duty to minority shareholders.  1. Jane had a legitimate business purpose for ending John's employment, and her legitimate business purpose could not have been achieved through less harmful means. Jane thus did not breach the duty of utmost good faith and loyalty. 5. Which of the following entities can benefit from pass-through taxation? 1. General partnerships, LLPs, LLCs, and LPs. 1. General partnerships, LLCs, LLPs, and C-corps. 1. C-corps and single member LLCs. 1. Sole proprietorships, single member LLCs, and C-corps. 6. A shareholder in a corporation is concerned that the board improperly approved an amendment to the bylaws, and the board's actions may have involved self-dealing. The shareholder contacts the board and requests board minutes, board resolutions, and the directors' emails concerning the decision. The board followed typical corporate formalities when amending the bylaws and making other corporate decisions. It had regular board meetings, maintained accurate and thorough minutes, and also memorialized various decisions in board resolutions. The corporation agreed to provide the requesting shareholder with board minutes and resolutions regarding the bylaw amendment, but refused to provide emails. The shareholder brings a DGCL 220 action demanding the production of emails. A court would likely hold: 1. The board has a right to amend the bylaws as long as the majority of shareholders approve. In this case, a single shareholder cannot object to board action. 1. A requestor must have a proper purpose to request books and records. Questioning why the board chose to amend the bylaws is not a proper purpose, and therefore the requestor is not entitled to any documents. 1. Shareholders are not entitled to emails in a DGCL 220 Books and Records action if other corporate materials are sufficient to accomplish the requestor's purpose. 1. Directors' emails are private and can never be the subject of a DGCL Books and Records request.    7. Assume a plaintiff brings 10(b)/10b-5 action against a company for making a material misstatement in connection with the sale of a security. In this context, what is the fraud-on-the-market approach to showing reliance? 1. The plaintiff must show that the defendant made a public statement in a forum that most reasonable investors read and/or view. Fraud-on-the-market means that a majority of investors likely read and/or viewed the misstatement. 1. Fraud-on-the-market is the idea that security prices reflect all available public information, and investors rely on the integrity of market prices when deciding whether to buy a security. By relying on the integrity of market prices, investors are relying on a misstatement, even if they never heard the misstatement themselves.  1. Fraud-on-the-market is not technically a mechanism to show reliance. Rather, it is a substitute for the six element test to show a 10(b)/10b-5 violation. If a plaintiff can show fraud-on-the-market, then the plaintiff does not need to show reliance or any other element of the 10(b)/10b-5 test. 1. Showing fraud-on-the-market is a way for plaintiffs to avoid having to prove scienter. If a fraud-on-the-market took place, then the scienter element is satisfied. 8. How is a general partnership formed? 1. A general partnership is formed when two people start doing business together without filing any paperwork to organize in another form. 1. A general partnership is formed when the partners file articles of organization with the secretary of state or equivalent office. 1. A general partnership is established when the partners complete a number of corporate documents required by state statute, including the articles of organization and operating agreement. 1. A general partnership is formed the same way as a limited liability partnership -- by filing a statement of qualification with the secretary of state.  9. In a loan agreement between a company and a bank, the company affirms that: its financials are consistent with GAAP and fairly represent the company's financial condition; the company doesn't have undisclosed debt; the company's forward-looking financial projections are reasonable; etc. These are examples of: 1. A promissory note setting forth material events since the last audit 1. Generally Accepted Accounting Principles 1. Affirmative and negative covenants 1. Representations and warranties 10. A bank received a warrant from a borrower as a sweetener in exchange for lowering the interest rate of a loan. The warrant, which has an expiration date of June 5th, is for 1 million shares of common stock at an exercise price of \$10 per share. Under which of the following circumstances would the warrant holder exercise the warrant? 1. The price of common shares goes to \$8 on June 7th. 1. The price of common shares goes to \$12 on June 1st. 1. The price of common stock goes to \$8 on June 1st. 1. The price of commons stock goes to \$12 on June 7th. 11. The bylaws of a corporation state: "The corporation shall ensure that shareholders receive a minimum of 5 days notice and a maximum of 60 days notice for a meeting of the shareholders." Which of the following statements is true? 1. Corporations must provide proper notice before regular meetings of the shareholders but not before special meetings of the shareholders. 1. This reflects the required notice period for a decision by written consent but not for a board meeting. 1. The language at issue is inconsistent with both the DGCL and MBCA, which require a minimum of 10 days notice and a maximum of 60 days notice. 1. Most states allow a minimum of 5 days notice for shareholder meetings that address certain specific topics. We need more information to know the topic of this meeting.