Business Associations - Fall 2025

Business Associations - Practice Exam Notes

Question 1 (14 Points)

1a. Definition of Corporate Waste (2 Points)

  • Term: Corporate Waste

  • Definition: Corporate waste applies when no reasonable business person would consider an exchange adequate.

  • Sources:

    • Saxe v. Brady, 184 A.2d 602 (Del. Ch. 1962)

    • Brehm v. Eisner, 746 A.2d 244 (Del. 2000)

1b. Property Held by Partnerships (2 Points)

  • Term: Tenancy in Partnership

  • Acts & Provisions:

    • Under UPA § 25: Property is held as tenancy in partnership.

    • Under RUPA § 203: Partnership property is owned by the entity itself.

  • Sources:

    • Uniform Partnership Act (1914) §§ 24–25

    • Revised UPA (1997) §§ 201–203

1c. Partner’s Power to Terminate and Fiduciary Duty (10 Points)

  • Term: Duty of Loyalty and Good Faith

  • Interaction: Partners can dissolve a partnership at will provided they exercise this power in good faith.

  • Key Points:

    • A partner cannot dissolve the partnership to appropriate business opportunities, exclude co-partners from profits, or act with personal animus.

  • Case Reference: Page v. Page, 359 P.2d 41 (Cal. 1961)

    • Findings:

    • Dissolution at will is permitted.

    • However, a partner violates their fiduciary duties if they dissolve to appropriate the business for personal gain or to squeeze out another partner.

    • Dissolution motivated by bad faith or opportunism constitutes wrongful dissolution, leading to possible damages.

  • Sources:

    • Page v. Page, 359 P.2d 41 (Cal. 1961)

    • RUPA § 404 (Duty of Loyalty and Good Faith)

Question 2 (28 Points)

2a. Fiduciary Duty in Meinhard v. Salmon (8 Points)

  • Case: Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928)

  • Description of Fiduciary Behavior: Judge Cardozo articulated that fiduciaries owe “the duty of the finest loyalty.”

  • Key Quotes:

    • “A trustee is held to something stricter than the morals of the marketplace.”

    • “Not honesty alone, but the punctilio of an honor the most sensitive.”

2b. Differences between Business Forms (16 Points Total)
i. LLP vs LLC (8 Points)

  • Limited Liability Partnership (LLP):

    • Limited liability for partners from vicarious liability, but not for personal misconduct.

    • Governed by partnership statutes; usually partner-managed.

    • Pass-through taxation.

  • Limited Liability Company (LLC):

    • Full limited liability for all members.

    • Flexible management structure: member-managed or manager-managed.

    • Pass-through or corporate election taxation.

ii. LP vs LLP (8 Points)

  • Limited Partnership (LP):

    • Must have one general partner with unlimited liability.

    • Limited partners cannot participate in management without losing protection.

  • Limited Liability Partnership (LLP):

    • All partners enjoy limited liability.

    • Partners may participate in management without losing liability protections.

  • Sources:

    • ULPA (2001)

    • RUPA (1997)

2c. Corporate Governance as a Republic (12 Points)

  • Statement: The corporation is a “republic, not a direct democracy.”

  • Explanation:

    • This reflects the board-centric model of corporate governance where stockholders do NOT directly manage the corporation.

    • The board of directors exercises managerial authority.

  • Delaware Jurisprudence Feature:

    • Delaware’s Business Judgment Rule: Courts defer to the board’s decisions unless there is fraud, illegality, or conflict of interest.

  • Key Cases:

    • Aronson v. Lewis, 473 A.2d 805 (Del. 1984)

    • Unocal Corp. v. Mesa Petroleum, 493 A.2d 946 (Del. 1985)

Question 3 (24 Points)

3a. Avoiding Corporate Veil Piercing (9 Points)

  • Strategies for Owners of Multiple Corporations:

    • Maintain adequate capitalization.

    • Keep separate bank accounts for each entity.

    • Observe corporate formalities (minutes, bylaws, records).

    • Avoid commingling funds or using corporate assets for personal use.

    • Sign contracts in proper corporate capacity, avoiding personal signatures.

    • Avoid using corporations for fraudulent purposes.

  • Sources:

    • Walkovszky v. Carlton, 223 N.E.2d 6 (N.Y. 1966)

    • Geyer v. Ingersoll Publications (Del. Ch. 1992)

3b. Types of Debt and Equity in Capital Structure (10 Points)

  • Equity:

    • Common Stock: Residual ownership, voting rights, last in liquidation.

    • Preferred Stock: Dividend or liquidation preference, often no voting rights.

    • Convertible Preferred Stock: Preferred stock that can convert into common stock.

    • Warrants/Options: Contractual rights to buy stock at a set price.

  • Debt:

    • Secured Debt: Backed by collateral; lenders can repossess assets.

    • Unsecured Debt: General obligations without collateral backing.

    • Subordinated/Mezzanine Debt: Ranks below senior debt; typically carries higher interest.

    • Bonds/Debentures: Publicly traded or private notes issued by corporations.

  • Sources:

    • Standard corporate finance doctrine.

    • Principles of Corporate Finance (Brealey & Myers).

3c. Efficient Capital Market Hypothesis (4 Points)

  • Definition: The Efficient Capital Market Hypothesis (ECMH) posits that market prices reflect all available information, making it impossible to consistently outperform the market.

  • Forms of ECMH:

    • Weak Form: Prices reflect past price information.

    • Semi-Strong Form: Prices reflect all public information.

    • Strong Form: Prices reflect both public and private information.

  • Sources:

    • Eugene Fama, Efficient Capital Markets (1970).

3d. SEC Rule on Voting in Public Companies (1 Point)

  • Rule: SEC Rule 14a-8

  • Focus: Governs shareholder proposals and proxy voting mechanisms.

  • Sources:

    • 17 C.F.R. § 240.14a-8

Question 4 (18 Points)

4a. Challenging Bylaw Amendments (12 Points)

  • Context: TechCo faces a proxy contest from insurgent shareholders that leads to bylaw amendments by the board.

  • Bylaw Amendments:

    1. Move the annual meeting from March to January.

    2. Require director nominations to be submitted 90 days in advance (previously 30).

    3. Require nominating shareholders to hold 10% of shares for at least two years.

  • Challenge Viability: Yes, they can likely succeed based on several doctrines:

    1. Schnell v. Chris-Craft (Del. 1971): Directors may not use corporate machinery for inequitable purposes, even if legally permissible.

    2. Blasius Industries v. Atlas (Del. Ch. 1988): If board actions primarily interfere with shareholder voting, strict scrutiny applies.

    3. Unocal: Defensive measures must be proportional and in good faith.

  • Analysis:

    • Actions taken (moving meetings, changing nomination deadlines, and imposing ownership requirements) specifically target dissident shareholders and harm their interests.

    • The explanation for moving the date (to obtain cheaper rates) can be seen as pretextual.

    • Under Blasius, the board has not shown compelling justification for their actions, which makes these amendments likely invalid.

  • Sources:

    • Schnell v. Chris-Craft, 285 A.2d 437

    • Blasius Industries v. Atlas, 564 A.2d 651

    • Unocal Corp. v. Mesa Petroleum, 493 A.2d 946

4b. Current Three-Prong Formulation of Duty of Care (6 Points)

  • Prong 1: Act on an informed basis (adequate information).

  • Prong 2: Act in good faith.

  • Prong 3: Act with the care that an ordinarily prudent person would use in similar circumstances.

  • Sources:

    • Aronson v. Lewis, 473 A.2d 805 (Del. 1984)

    • DGCL § 141(a) (Director Duties)

Question 5 (16 Points)

5a. Writing Requirement for Agency Arrangement (2 Points)

  • Requirement: An agency arrangement does not need to be in writing unless the Statute of Frauds necessitates a written form (for example, for the transfer of land).

  • Types of Agency: Can be express, implied, or by conduct.

  • Source:

    • Restatement (Third) of Agency § 1.03

5b. Fiduciary Duties of Agent to Principal (2 Points)

  • Duties:

    1. Duty of loyalty (prohibiting self-dealing and secret profits).

    2. Duty of care/competence.

    3. Duty of obedience to lawful instructions.

  • Sources:

    • Restatement (Third) of Agency §§ 8.01–8.12.

5c. Definitions of Corporate Types (6 Points)

  • Public Corporation: Shares are traded on public markets, SEC-registered, and have dispersed shareholders.

  • Private Corporation: Not publicly traded; fewer disclosure requirements.

  • Closely-Held Corporation: Few shareholders, often involved in management; shares not freely transferable; resembles partnerships.

  • Sources:

    • DGCL § 202

    • Typical distinctions in corporate law doctrine.

5d. Three-Prong Business Judgment Rule (6 Points)

  • BJR Definition: Presumes directors have:

    1. Acted on an informed basis.

    2. Acted in good faith.

    3. Acted with honest belief that decisions are in the best interests of the corporation.

  • Sources:

    • Aronson v. Lewis, 473 A.2d 805 (Del. 1984)

    • Cede & Co. v. Technicolor, 634 A.2d 345 (Del. 1993)