California Bar Exam BUSINESS ASSOCIATIONS Answers 2024

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California Bar Exam BUSINESS ASSOCIATIONS Answers

California Bar Exam BUSINESS ASSOCIATIONS Answers – Sample Paper 1

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Q. How is a corporation formed?
Ans: A document, referred to as the “articles of incorporation” or “charter,” must be filed with the state.

Q. Business-judgment rule
Ans: In the absence of fraud, illegality, or self-dealing, courts will not disturb the good-faith judgment of the directors or officers of a corporation.

Q. Promoter liability pre-incorporation
Ans: Promoter is personally liable for knowingly acting on behalf of corp before incorporation, and remains liable after C comes into existence unless (1) subsequent novation, (2) if 3P looks only to C for performance, or (3) promoter had no actual knowledge that corp’s charter has not been issued. Promoter can be liable to C for violating fiduciary duties.

Q. C’s liability pre-incorporation
Ans: Not liable, even those for the benefit of C, unless it expressly or impliedly ADOPTS a K by accepting the benefits of the transaction, or gives express ACCEPTANCE of liability for the debt.

Q. Reqs for Articles of Incorporation
Ans: Must include corporate name, NUMBER OF SHARES IT IS AUTHORIZED TO ISSUE, name and address of its registered agent, and name and address of each incorporator. Must be filed w/ state.

Q. Ultra vires actions
Ans: When a C that has stated a narrow biz purpose in its articles subsequently engages in activities outside that stated purpose. Shareholder, corp, and state can all initiate proceedings to enjoin based on ultra vires action. Modernly, however, most corporations are allowed to engage in any legitimate business purpose and are not able to void contracts Ans: on the mere claim that they are ultra vires.

Q. Ways to create a corp
– De jure corp: when all statutory requirements for incorporation have been satisfied.
– De facto corp: organizers (1) made GOOD-FAITH effort to comply and (2) have no ACTUAL KNOWLEDGE of defect in corporate status.
– Corp by estoppel: a person who deals w/ an entity as if it were a corporation is estopped from denying its existence.

Q. Effect of pre-incorporation subscription
Ans: Prior to incorporation, persons may subscribe to purchase stock from the corporation when it comes into existence. Irrevocable for 6 months from date of subscription (unless all subscribers agree to revocation).

Q. Shareholder’s preemptive rights
Ans: Shareholder has right to purchase newly issued shares in order to maintain proportional ownership share as provided by articles; waiver of preemptive right isn’t revocable. Default in most jdx = shareholders don’t have preemptive rights.

Q. Limitations on distributions
Ans: Corp can’t distribute if insolvent or if distribution would make corp insolvent. Director is personally liable to corporation for amount in excess of lawful amount if unlawful distribution is made.

Q. Restrictions on transfer of securities
Ans: Can’t enforce restriction against person w/o knowledge of restriction unless security is CERTIFIED and restriction is CONSPICUOUSLY on security certificate. If challenged, restriction must be REASONABLE.

Q. Rule 10b-5 action and
Ans: Rule 10b-5 action: ∆ liable if his intentional, fraudulent/deceptive conduct related to sale of security caused justifiable reliance and harmed π.

Q. Rule 16(b) action
Ans: Rule 16(b) action: corporate insider both bought and sold corp’s stock during 6-month period (short-swing profits) at a publicly traded corp.

Q. Amending articles of incorporation
Ans: If no stock has been issued, freely amendable by Board. If a stock has been issued, Board adopts amendments and submits them to shareholders for majority approval.

Q. Which controls when there’s a conflict b/w articles and bylaws?
Ans: Articles.

Q. Types of meetings and reqs (+notice for shareholders)
– Annual: primary purpose is to elect directors.
– Special: may be called by Board of Directors or shareholders who own at least 10% of voting shares.
– Notice for both: must be notified no less than 10 days and no more than 60 days before meeting. Can be waived either by writing or absence.

Q. Types of meetings and reqs (+notice for directors)
Ans: Entitled to two days’ notice of date, time, and place for special meetings (purpose not required); don’t need notice of regular meetings.

Q. Alternative means of making corporate decisions besides holding meeting
Ans: Unanimous written consent

Q. What is required for a proxy vote? For how long is it valid? Who can vote by proxy?
Ans: A shareholder may vote in person or by proxy. Must be in writing and delivered to corp or its agent. Valid for 11 months, unless otherwise specified. Revocable unless it expressly provides that it is irrevocable and the appointment of the proxy is coupled with an interest. Typically, proxy holders who have a prop interest in the shares or a security interest are those who have purchased the shares or otherwise have a business arrangement with the corporation. Any act by the shareholder that is inconsistent w/ a proxy, such as attending shareholder meeting and voting shares, revokes the proxy. If multiple proxies given, the last given revokes all previous proxies. Directors may not vote by proxy.

Q. Who can vote in shareholder meetings?
Ans: An owner of voting stock at the close of business on the record date has the right to vote. Directors fix record date.

Q. How many votes are necessary for shareholder approval?
Quorum = majority of votes entitled to be cast on a matter. Can be changed by articles, but can’t be less than 1/3.
Necessary vote = if quorum is present, shareholder vote is effective if votes cast in favor of proposal exceed votes cast against proposal (leaving abstentions aside).

Q. How many votes are necessary for director approval?
Quorum = majority of all directors in office. Can be changed by articles, but can’t be fewer than 2 directors.
Necessary vote = assent of majority of directors present.

Q. Cumulative voting
Ans: Applies only to the election of directors. Shareholders are given # of votes equal to a number of shares they own, multiplied by number of director positions being voted on.

Q. Voting pool
Ans: Shareholders can enter into a binding voting agreement under which they retain legal ownership; doesn’t need to be filed w/ corp. Generally, an agreement between directors as to how to vote is unenforceable. Each director is expected to exercise independent judgment.

Q. Shareholder right to inspect records
Ans: Shareholder with a PROPER PURPOSE has the right to inspect and copy corporate records upon 5 days written notice.

Q. Partnership property ownership
Ans: All property acquired by partnership belongs to the partnership. INTENT of partner controls. Prop is presumed to be partnership prop if it was purchased w/ PARTNERSHIP ASSETS or if partnership CREDIT is used to get financing. If ownership is unclear, consider other factors such as property’s use, tax treatment of prop, and source of funds to maintain or improve prop.

Q. Partnership voting
– Ordinary partnership biz decisions: majority of partners needed.
– Matters outside ordinary course of partnership’s business: consent of all partners needed.
– Amendments to partnership agreement: consent of all partners needed.

Q. Events causing partnership dissociation
-Partner’s notice of withdrawal;
-Partner’s expulsion due to partnership agreement, unanimous vote of other parties, or partner’s bankruptcy;
-Partner’s death;
-Appointment of guardian for partner or judicial determination of partner’s incapacity to perform his duties under partnership agreement; or
-Termination of an entity partner.

Q. Indemnification of a dissociated partner
Ans: Partnership must indemnify dissociated partner against all partnership liabilities, whether incurred before or after dissociation.

Q. Recovery of partnership property from transferee (partnership property was transferred w/o authority)
Ans: Recoverable if partnership interest was INDICATED in the transfer instrument through which the partnership acquired prop or if transferee was AWARE that prop belongs to the partnership and that partner executed transfer w/o authority.


California Bar Exam BUSINESS ASSOCIATIONS Answers – Sample Paper 2

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Q. Shareholder suits (direct)
Ans: DIRECT ACTION: shareholder is suing in the shareholder’s own name for damages. Damages go directly to shareholders. Available if a shareholder has been harmed directly.

Q. Shareholder suits (derivative)
Ans: DERIVATIVE LAWSUITS: shareholder suing on behalf of corp, in corp’s name, and recovery belongs to corp. To bring a derivative suit, the plaintiff must:
(1) have been a SH at the TIME of the wrong and when the action was filed, and continue to be a SH throughout litigation;
(2) be able to FAIRLY AND ADEQUATELY represent the interests of the corporation; and
(3) first make a written DEMAND to the board to take action (unless “demand futility” applies). π can seek reimbursement from corp for reasonable litigation expenses.

Q. Piercing the corporate veil
Ans: Shareholders not personally liable for debts of corp, but only liable for amount invested into corp, EXCEPT court may “pierce the veil” of limited liability to avoid FRAUD or UNFAIRNESS. Totality of circumstances.

Q. Factors considered for piercing the corporate veil:
-Alter ego: disregard of corporate formalities
-Using corp’s assets as shareholder’s own assets
-Self-dealing with corp
-Siphoning of corp’s funds
-Using corporate form to avoid statutory requirements
-Shareholder’s domination over corp
-Fraudulent dealings with a corporate creditor

Q. Controlling shareholder’s fiduciary duty to minority shareholders
Ans: A shareholder owning 50% plus one of a corp’s shares is automatically a controlling shareholder has:
(1) DUTY TO DISCLOSE information that a reasonable person would consider important in deciding how to vote on a transaction; and
(2) DUTY OF FAIR DEALING when purchasing minority shareholder’s interest.

Q. Reqs for directors and officers (hiring)
– Hiring directors: Must have at least one. Hired for an annual shareholder meeting.
– Hiring officers: elected by Board.

Q. Reqs for directors and officers (firing)
– Termination of directors: Can be removed w/ or w/o cause unless articles provide otherwise. D may resign at any time w/ written notice to Board of Directors, its chair, or cop.
– Termination of officers: can be removed w/ or w/o cause at any time.

Q. Duty of care
– Officer or director must act how a PRUDENT PERSON would reasonably believe appropriate under similar circumstances.
– RELIANCE PROTECTION: can rely on information and opinions of officers, employees, outside experts, or committees.
– BUSINESS-JUDGMENT RULE: in the absence of fraud, illegality, or self-dealing, courts will not disturb the good-faith judgment of directors or officers.

Q. Duty of loyalty
– Officer or director must act in a manner that director reasonably believes is in BEST INTEREST of corp.
– SELF-DEALING transactions violate duty unless safe harbor protection applies.
– USURPATION OF CORP OPPORTUNITY doctrine: usurping or stealing corp opportunity.

Q. Self-dealing
Ans: A director has engaged in self-dealing when he engages in a conflict-of-interest transaction with his own corporation.

Q. Conflict-of-interest transaction
Ans: Any transaction between a director and his C that would NORMALLY REQUIRE APPROVAL of the board and that is of such FINANCIAL SIGNIFICANCE to the director that it would reasonably be expected to INFLUENCE the director’s vote on the transaction.

Q. Safe-harbor rule
Ans: A transaction will be upheld if the director or officer disclosed all material facts and obtained majority approval by the Board or shareholders w/o conflicting interest OR if the transaction was fair to the corp at the time of commencement.

Q. Indemnity
– Corp is required to indemnify director/officer for any reasonable expense incurred in SUCCESSFUL defense of a proceeding against the director.
– Corp is prohibited from indemnifying director/officer against liability due to the receipt of an IMPROPER PERSONAL BENEFIT.
– Corp may indemnify in an unsuccessful defense if director/officer acted in GOOD FAITH w/ reasonable belief that conduct was in corp’s best interest and director/officer didn’t have reasonable cause to believe the conduct was lawful.

Q. When is an officer personally liable to 3P?
Ans: When an officer has acted in a PERSONAL capacity or has engaged in PURPOSEFUL TORTIOUS behavior.

Q. What is required for corps to merge?
Ans: Merger – Board and shareholders must approve by majority vote at a meeting w/ a quorum in both corps. Required docs must be filed w/ state.

Q. What is required for corps to acquire?
Ans: Acquisition – same as merger except only transferor corp’s Board and shareholders are entitled to vote. Transferor corp remains liable for its debts.

Q. How can a corp’s status be terminated voluntarily?
– Procedure after issuance of stock: (1) Board adopts RESOLUTION proposing change; (2) written NOTICE sent to shareholders of special meeting; and (3) majority of SHAREHOLDERS VOTE in favor of the fundamental change.
– WINDING UP: dissolved corp may continue to exist to collect assets, dispose of prop not distributed to shareholders, discharge liabilities, etc.

Q. Limited partnership
Ans: Must be formed by at least one general partner and one limited partner. Formed when a certificate of limited partnership is filed. Limited partner’s liability for partnership debts is limited to capital contribution to partnership.

Q. How can a corp’s status be terminated involuntarily?
– Can be pursued by creditors if C is insolent
– Can be pursued by shareholders for (1) MISAPPLICATION of corp’s assets; (2) directors acting ILLEGALLY, oppressively, or fraudulently; (3) directors DEADLOCKED and irreparable injury threatened or suffered; or (4) shareholders DEADLOCKED and can’t elect successor directors.

Q. Oppression doctrine
Ans: Protects minority from oppressive majority control for involuntary dissolution. Statutory provisions interpreted to protect reasonable expectations of shareholders.

Q. Closely held corporations
Ans: Only a few shareholders. Stock not publicly traded. More relaxed style of governance.

Q. S corporation
Ans: Avoids double taxation by passing income and expenses through to its shareholders, who are then taxed directly.

Q. Limited liability corp
Ans: Combines limited liability of a corp w/ tax treatment of a partnership. Avoids double taxation by passing income and expenses through to its shareholders, who are then taxed directly. Members instead of shareholders. More flexible than S corporation. Presumed to be managed by all of its members. Members are not liable for LLC’s obligations; managers are not personally liable for obligations incurred on behalf of LLC.

Q. Creation of an agency relationship (what is and isn’t necessary)
Ans: Necessary: Assent (both parties), Benefit, Control. Not necessary: consideration and writing.

Q. Types of principals
Ans: Yypes of principals includes:
– Individual: ABC
– Employer: P employs an employee to perform services and has a right to control physical conduct of employee’s performance.

Q. Reqs for agent
Ans: Must have MINIMAL capacity (capacity to do whatever he has been appointed to do) and must manifest ASSENT and CONSENT to act on principal’s behalf and to be subject to principal’s CONTROL. Unincorporated associations can’t be agents.


California Bar Exam BUSINESS ASSOCIATIONS Answers – Sample Paper 3

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Q. Independent contractor (most important factors)
Ans: Most important factors:
– independent contractor is not subject to the principal’s CONTROL regarding the PHYSICAL CONDUCT of the agent’s performance.
– principal isn’t vicariously liable.

Q. Independent contractor (Exceptions)
Ans: Following are the exceptions list:
– inherently dangerous activities;
– non-delegable duties arising out of relationship w/ specific π or public (activities that are inherently risky or that affect public at large);
– duty of storekeeper to keep premises in reasonably safe condition; and
– in minority of jdx, duty to comply w/ state safety statutes.

Q. List the ways in which a principal may be contractually liable for an agent’s actions.
Ans: Following are the ways in which a principal may be contractually liable for an agent’s actions:
– Express actual authority
– Implied actual authority
– Apparent authority
– Ratification

Q. Express apparent authority
Ans: Can be created with either: (1) oral or written words; (2) clear, direct and definite language; or (3) specific, detailed terms and instructions.
– INTENT: principal’s manifestation must cause agent to believe that agent is doing what principal wants (subjective) and agent’s belief must be reasonable (objective).
– DISSENT: principal must give clear notice if principal disagrees w/ agent’s actions.

Q. Implied actual authority
Ans: Allows agent to take whatever actions are properly NECESSARY to achieve principal’s objectives, based on agent’s REASONABLE understanding of the manifestations and objectives of the principal.
– CUSTOM: agent has implied authority to act w/in accepted biz customs or general trade usage w/in industry.
– ACQUIESCENCE: implied by principal’s acceptance of agent’s acts or principal’s failure to object to unauthorized actions of agent that affirm agent’s belief regarding principal’s objectives.
– CAN’T DELEGATE: generally agent is prohibited from delegating either express or implied authority to a 3P w/o express authorization.

Q. Apparent authority
Ans: PRINCIPAL’s behavior derives from reasonable reliance of 3P on that party’s perception of level of authority granted to agent by principal’s behavior. To determine reasonable belief, look to:
– Past dealings b/w principal and agent
– Trade customs
– Relevant industry standards
– Principal’s written statements of authority
– Transactions that don’t benefit principal
– Extraordinary transactions for principal

Q. AGENT’s position
Ans: By appointing agent to a specific position, principal makes manifestation to public that agent has customary level of authority of that position.

Q. Ratification Requirements
Ans: Requirements for Ratification are as follows:
– Principal must ratify the ENTIRE ACT/transaction;
– Principal must have legal CAPACITY;
– Ratification must be TIMELY;
– Principal must have KNOWLEDGE of material facts involved in the original act.

Q. Termination of agent’s authority
– Revocation/renunciation: effective as soon as notice is given to another party;
– Agency agreement;
– Change of circumstances: should cause an agent to reasonably believe that principal no longer consents to the agent acting on principal’s behalf (e.g., change in law, insolvency, dramatic change in biz conditions, destruction of subject matter, disaster);
– Passage of time
-Principal’s death or suspension of powers: not automatic; the modern trend is authority terminates upon notice.
– Principal’s loss of capacity: the modern trend is authority terminates upon notice.
– A’s death or suspension of powers: automatically terminates authority.
– Statutorily mandated termination or A’s breach of fiduciary duty.

Q. Principal’s vicarious liability for agent’s torts
– Respondeat superior: principal is liable to 3P harmed by agent who is an employee and who committed an act w/in the scope of employment
– Employee is w/in scope of employment when either performing WORK ASSIGNED by an employer or engaging in course of conduct subject to employer’s CONTROL.
– Intentional torts: may fall w/in the scope of employment when conduct is w/in SPACE AND TIME LIMITS of employment, employee was motivated to act for EMPLOYER’S BENEFIT, and an act was of the KIND that the employee was hired to perform.
– A’s apparent authority: if 3P reasonably believes that the agent acted w/ actual authority and it is traceable to principal’s manifestation, then the principal is vicariously liable for agent’s tort, even if agent’s conduct isn’t beneficial to the principal.

Q. Agent’s contractual liability
Ans: Depends on whether agent is a party to a contract:
– DISCLOSED principal: when 3P (1) knows agent is acting for principal; and (2) knows identity of principal. Liability: if agent had authority to bind principal to K or principal ratified –> parties to K = 3P and principal.
– PARTIALLY DISCLOSED principal: 3P knows that agent is acting for principal, but doesn’t know principal’s identity. Liability: if agent had authority to bind principal to K or principal ratified –> parties to K = 3P, principal, and agent.
– UNDISCLOSED principal: –> parties to K:
-Agent: party
-3P: party unless principal is excluded by contract terms or principal’s existence was fraudulently concealed.
– Principal: liable if 3P detrimentally changes position b/c of agent w/o actual authority, and principal knew of agent’s conduct and did not take reasonable steps to notify 3P.

Q. Causes of action against agent w/o authority
Ans: Breach of Implied Warranty of Authority. FRAUDULENT CONCEALMENT: requires that principal or agent had notice that 3P wouldn’t have dealt w/ principal if she had known it was him.

Q. Tort liability of agent
Ans: Agent liable to 3P for negligent and intentional conduct, but not for principal’s torts.

Q. Rights of principal
– CONTROL of agent
– Agent’s DUTY OF CARE: must follow principal’s instructions and perform duties, tasks, and transactions w/ reasonable care, diligence, and judgment.
– Agent’s DUTY OF LOYALTY/OBEDIENCE: must avoid acts in agent’s self-interest in agency matters. Must act SOLELY FOR THE BENEFIT of principal, including not dealing w/ principal as adverse party w/o principal’s knowledge, not acquiring a material benefit in actions on principal’s behalf, not usurping biz opportunities or competing with principal, and not using principal’s confidential information.
– NOTICE/ACCOUNTING: principal entitled to notice of ALL RELEVANT ISSUES, and an accounting of prop or funds used on behalf of principal.

Q. Rights of agent
– DUTY TO DEAL FAIRLY AND IN GOOD FAITH PER K TERMS: principal must provide agent w/ information concerning risks of physical or financial harm/loss that principal knows but agent does not
– Duty not to injure agent’s biz reputation.
– DUTY NOT TO INTERFERE w/ agent’s completion of agency work.
– DUTY TO INDEMNIFY against pecuniary loss suffered in connection w/ agency relationship and w/in scope of agent’s actual authority (but not for agent’s negligence or wrongful conduct).
– Right to safe work environment

Q. Partnership requirements (and non-requirements)
– Two or more persons must intend to carry on a FOR-PROFIT business as CO-OWNERS but do not need specific intent to form a partnership (dividing profit and control).
– PROFIT-SHARING TEST: if there is profit sharing, presumed to be a partnership.
– Partnership agreement in writing not required, but SOF requires writing for K that can’t be performed in one year.

Q. Purported Partners
Ans: Purported partners are agents of the person making the representation.

Q. Elements of partnership by estoppel (Purported Partner)
(1) REPRESENTATION that a person is a partner in a partnership;
(2) person MAKES OR CONSENTS to representation;
(3) 3P REASONABLY RELIES on representation; and
(4) 3P suffered DAMAGES as a result of that reliance.

Q. Nature of partnerships
– Separate legal entity that can sue and be sued
– Partners aren’t protected from personal liability for partnership’s obligations
– If a formal partnership agreement, it generally governs when it conflicts w/ RUPA.

Q. Duties of a partner
Ans: Duty of loyalty, duty of care, duty of good faith and fair dealing.

Q. When does a partner’s liability as an agent end?
Ans: Upon partner’s dissociation or the partnership’s dissolution, unless partner is engaged in winding up partnership’s business.

Q. How are profits and losses of a partnership distributed?
Ans: If partnership agreement is silent, profits are split 50/50; if PA only specifies division of profits, then losses are shared in same manner as profits.

Q. Transferring Partnership Rights
Ans: A partner can transfer all or part of the partnership interest. The transferor partner retains all rights and duties of a partner except interest in the distributions. Transfer doesn’t cause dissolution or dissociation.

Q. Transferee’s Right
Ans: Transferee has the right to receive distributions, to seek judicial order for dissolution, and to an accounting upon dissolution. No right to participate in the management or conduct of partnership business, access partnership’s records, or demand other information.

Q. Liability of partnership for partner’s tortious acts
Ans: Partnership is liable for partner’s tortious acts committed in ordinary course of partnership business or w/ partnership authority.

Q. Liability for partnership obligations (civil and crim)
Ans: Partners are jointly and severally liable for all partnership obligations. A partnership can be convicted of a crime and a penalty levied on partnership assets.


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The California bar exam under BUSINESS ASSOCIATIONS is a challenging topic but rewarding experience. By following the above answers , you can ensure you are well-prepared for the exam and have the best chance of success. Good luck!

The California Bar Exam includes several components related to Business Associations. The topics covered in this section include Agency, Partnerships, Corporations, Limited Liability Companies and Professional Corporations.

Applicants will be tested on the different characteristics of these types of business entities as well as their formation, operation and termination.

Additionally, applicants must have a basic knowledge of the law governing contracts, sales, secured transactions and negotiable instruments as they relate to Business Associations. This component is designed to assess an applicant’s understanding of fundamental business principles, as well as their ability to apply these concepts to hypothetical scenarios.

Understanding these topics will be essential for anyone looking to pass the California Bar Exam for the topic Business Association.


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