Multistate Essay Examination (MEE) Business Associations Syllabus

Is a partner entitled to remuneration (a salary) for services to the partnership under RUPA's default rules?

No. By default, a partner is not entitled to compensation for services, EXCEPT reasonable compensation for services rendered in winding up the partnership's business.

What is each general partner's liability for partnership obligations?

General partners are jointly and severally liable for all partnership obligations (contracts and torts). A creditor must generally first exhaust partnership assets before reaching an individual partner's personal assets (the exhaustion rule under RUPA).

What is the liability of an incoming partner for obligations incurred before joining?

A newly admitted partner is NOT personally liable for partnership obligations that arose before her admission; her risk is limited to her capital contribution as to those pre-existing debts. She is fully liable for obligations arising after she joins.

How does a partner bind the partnership to third parties under RUPA?

A partner is an agent of the partnership. An act of a partner for apparently carrying on the partnership's business in the ordinary course binds the partnership, unless the partner lacked authority AND the third party knew or had received notice of that lack of authority.

What is partnership property, and may a partner use it for personal purposes or transfer it individually?

Property is partnership property if acquired in the partnership's name or with partnership funds. A partner is not a co-owner of specific partnership property and has no transferable interest in it; it may be used only for partnership purposes. A partner's only transferable interest is her share of profits and distributions.

What is dissociation, and what is the main consequence of a partner's dissociation under RUPA?

Dissociation is a partner's withdrawal from the partnership (e.g., by notice, expulsion, death, or bankruptcy). It does not necessarily dissolve the partnership; the partnership may continue and buy out the dissociated partner's interest, or it may trigger dissolution and winding up.

After a partner wrongfully dissociates from an at-will partnership, what is the partnership's obligation to that partner?

If the partnership continues, it must buy out the dissociated partner's interest at the greater of liquidation value or going-concern value as of the dissociation date. A wrongfully dissociating partner is liable to the partnership for damages caused and may have the buyout amount reduced/offset and payment deferred.

For how long does a dissociated partner retain power to bind the partnership and remain liable for new obligations?

A dissociated partner can bind the partnership (apparent authority) and remain liable on new partnership obligations to third parties for up to two years after dissociation, unless the third party had notice of the dissociation or a statement of dissociation has been filed (effective 90 days after filing).

Distinguish 'dissociation' from 'dissolution' of a partnership.

Dissociation is the change in relationship caused by one partner ceasing to be associated—the partnership often continues. Dissolution is the beginning of the end of the partnership entity itself, triggering winding up of its business and termination.

What are the main events causing dissolution and winding up of a general partnership under RUPA?

In an at-will partnership, a partner's notice of intent to withdraw. In a term partnership, expiration of the term or unanimous consent. Also: an event making the business unlawful, a judicial decree (e.g., not reasonably practicable to continue), or the occurrence of an agreed event.

What is the order of priority for distributing assets when a partnership winds up under RUPA?

Partnership assets are applied first to creditors (including partners who are creditors), then the remaining surplus or deficit is settled among the partners' accounts according to their profit/loss shares. There is no longer a statutory preference repaying capital before profits separately—both run through the partner accounts.

How is a limited partnership (LP) formed, and what are its two classes of partners?

An LP is formed by filing a certificate of limited partnership with the state. It must have at least one general partner (manages the business, personally liable) and at least one limited partner (passive investor, liability limited to capital contributed).

Under RULPA/ULPA, may a limited partner participate in management without losing limited liability?

Under modern ULPA (2001), a limited partner has a full liability shield even if she participates in management—there is no 'control rule.' Under older RULPA, a limited partner who took part in control could lose limited liability to creditors who reasonably believed she was a general partner.

What is an LLP (limited liability partnership), and how does it change partner liability?

An LLP is a general partnership that files a statement of qualification. In an LLP, partners are NOT personally liable for the partnership's obligations (whether in contract or tort), including the malpractice of other partners. Each partner remains liable for her own wrongful acts.

What are the defining liability and tax/management features of an LLC?

An LLC is a hybrid entity: its owners (members) enjoy limited liability (like corporate shareholders) and pass-through taxation by default (like a partnership). It is formed by filing articles of organization and may be member-managed or manager-managed.

How is a corporation formed (the de jure incorporation requirements)?

By filing articles of incorporation with the state that include the corporate name, the number of authorized shares, the name and address of the registered agent/office, and the name(s) of the incorporator(s). The corporation's existence begins upon filing (the articles serve as conclusive proof of valid formation).

What is a promoter, and what is a promoter's liability on pre-incorporation contracts?

A promoter procures capital and contracts on behalf of a corporation not yet formed. A promoter is personally liable on pre-incorporation contracts and remains liable even after incorporation—unless there is a novation releasing him. The corporation becomes liable only if it adopts the contract.

Distinguish a de facto corporation from corporation by estoppel.

De facto corporation: despite a defective filing, an entity made a good-faith effort to incorporate and operated as a corporation, so its owners get limited liability. Corporation by estoppel: a party who dealt with the business as a corporation is estopped from later denying its corporate status to reach owners personally (applies mainly in contract).

What is the difference between authorized, issued, and outstanding shares?

Authorized shares are the maximum the articles permit the corporation to issue. Issued shares are those actually sold/distributed by the corporation. Outstanding shares are issued shares currently held by shareholders (issued minus any reacquired treasury shares). Only outstanding shares vote.

What is par value, and what is the rule on issuing stock below par?

Par value is the minimum issue price set for a share. Stock issued for less than par is 'watered stock'; the shareholder is liable to the corporation for the difference (the water). Modern statutes (e.g., the MBCA) have largely eliminated mandatory par value.

What is a preemptive right, and does it exist by default?

A preemptive right lets an existing shareholder buy newly issued shares to maintain her proportional ownership. Under the MBCA, preemptive rights do NOT exist unless the articles of incorporation expressly provide for them ('opt-in').

Distinguish common stock from preferred stock.

Common stock typically carries voting rights and residual claims to dividends and liquidation proceeds. Preferred stock has a preference—priority over common in dividends and/or liquidation distributions—and may be cumulative, participating, and/or convertible; it often has limited or no voting rights.

Under the modern MBCA, what is the legal test for whether a corporation may lawfully pay a dividend or make a distribution?

A distribution is prohibited if, after it, the corporation could not pay its debts as they come due in the ordinary course (equity insolvency test) OR its total assets would be less than its total liabilities plus any liquidation preference of senior shares (balance sheet/bankruptcy test). Directors authorizing an unlawful distribution can be personally liable.

What is the role and standard of conduct of a corporation's board of directors?

The board manages or directs the management of the corporation's business and makes major policy decisions. Directors must act in good faith, with the care of an ordinarily prudent person in a like position, and in a manner they reasonably believe to be in the corporation's best interests.

How does the board take valid action, and what are the quorum and voting defaults?

The board acts by majority vote at a duly called meeting where a quorum (a majority of directors, unless changed) is present, or by unanimous written consent without a meeting. A director cannot vote by proxy. Quorum is broken if directors leave.

What is required for a valid shareholder vote at an annual or special meeting?

A quorum—a majority of the outstanding voting shares—must be represented (in person or by proxy). Once quorum is present, an action other than the election of directors passes if votes cast in favor exceed votes against; directors are elected by a plurality. Quorum is determined at the outset and is not broken if shares leave.

What is cumulative voting, and how does it help minority shareholders?

In electing directors, cumulative voting lets each shareholder multiply her shares by the number of directors being elected and cast all those votes for one or a few candidates. This helps minority shareholders elect at least one director. It applies only if the articles provide for it.

What is a voting trust and a voting (pooling) agreement?

A voting trust is a written agreement transferring legal title of shares to a trustee who votes them per the agreement (often limited, e.g., 10 years; must be filed with the corporation). A voting agreement (pooling agreement) is a written contract among shareholders to vote their shares a certain way; it is specifically enforceable and need not be filed.

State the business judgment rule and when it does NOT protect a director.

The business judgment rule presumes directors act on an informed basis, in good faith, and in the honest belief the action is in the corporation's best interest; courts will not second-guess such decisions. It does not protect directors who are uninformed (gross negligence), act in bad faith, breach the duty of loyalty, or engage in fraud, illegality, or self-dealing.

What does a director's duty of loyalty prohibit, and what is the conflicting-interest (self-dealing) transaction analysis?

It prohibits acting in the director's own interest at the corporation's expense. A conflicting-interest transaction is upheld (not voidable) if (1) disclosed and approved by a majority of disinterested directors, (2) disclosed and approved by a majority of disinterested shareholders, OR (3) the transaction was fair to the corporation when entered.

What is the corporate opportunity doctrine?

A director or officer may not divert to herself a business opportunity in which the corporation has an interest or expectancy without first offering it to the corporation. If she usurps such an opportunity, the corporation may recover the profits or force a constructive trust on the opportunity.

What is a derivative suit, and what are its key prerequisites?

A derivative suit is a shareholder suing on the corporation's behalf to enforce the corporation's rights (recovery goes to the corporation). Requirements: the plaintiff must (1) have been a shareholder at the time of the wrong (contemporaneous ownership) and remain one, (2) fairly represent the corporation's interests, and (3) make a demand on the board (or show demand is excused/futile).

What is the difference between a direct action and a derivative action by a shareholder?

A direct action enforces the shareholder's own rights (e.g., to vote, receive a declared dividend, inspect records), and recovery goes to the shareholder. A derivative action enforces the corporation's rights for harm to the corporation, and any recovery (minus costs) goes to the corporation.

What are a shareholder's rights to inspect corporate books and records under the MBCA?

A shareholder may inspect on five business days' written notice. Certain records (articles, bylaws, minutes of shareholder meetings, annual reports) are available unconditionally. Other records (accounting records, board minutes, shareholder lists) require a proper purpose reasonably related to the shareholder's interest as a shareholder.

What is the doctrine of piercing the corporate veil, and what is its general effect?

Piercing the corporate veil disregards the corporate entity to hold shareholders personally liable for corporate obligations, preventing fraud or injustice. It is applied cautiously and most often against closely held corporations; it is rarely applied to publicly traded ones.

What are the principal grounds (factors) for piercing the corporate veil?

Courts pierce when shareholders abuse the corporate form, such as: (1) the alter ego/disregard of formalities (commingling assets, no separate identity), (2) undercapitalization at formation, or (3) using the corporation to perpetrate fraud or avoid existing obligations. Courts also more readily pierce for tort victims than voluntary contract creditors.

Generally, are corporate officers liable for the corporation's contracts, and what duties do officers owe?

No—officers acting within their authority bind the corporation, not themselves, on its contracts. Officers are agents of the corporation and owe it the same fiduciary duties of care and loyalty that directors owe; their authority can be actual or apparent.

What is the general procedure for approving a fundamental corporate change (e.g., merger, sale of substantially all assets, or amendment of the articles)?

Fundamental changes require: (1) a resolution by the board adopting the change, (2) written notice to shareholders, and (3) approval by the required shareholder vote (under the MBCA, a majority of shares entitled to vote; many states require a larger majority). The change is then effected by filing the appropriate document with the state.

What are dissenters' (appraisal) rights?

Appraisal rights let a shareholder who objects to certain fundamental changes (e.g., merger, share exchange, sale of substantially all assets) compel the corporation to buy her shares at fair value. The shareholder must follow procedure: file written objection before the vote, not vote in favor, and demand payment. It is generally the exclusive remedy absent fraud.

What is the difference between voluntary and involuntary (judicial) dissolution of a corporation?

Voluntary dissolution is initiated by board resolution plus shareholder approval, followed by filing articles of dissolution. Involuntary dissolution is ordered by a court—e.g., on the state's action, on a creditor's claim, or on a shareholder's petition for director deadlock, oppression of minority shareholders, waste, or fraud.

What happens to a corporation's business after dissolution, and how are remaining assets distributed?

A dissolved corporation continues only to wind up: collecting assets, discharging liabilities, and distributing the remainder. Assets are distributed first to creditors, then to preferred shareholders per their liquidation preferences, and finally to common shareholders pro rata.