NextGen Bar Exam Business Associations and Secured Transactions Flashcards

24 sample cards from the Business Associations and Secured Transactions deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. How can a director cleanse a conflicting (self-dealing) interest transaction?

   A self-dealing transaction is upheld if: (1) approved by a majority of disinterested directors after full disclosure, (2) approved by a majority of disinterested shareholders after full disclosure, or (3) the transaction was fair to the corporation (entire fairness) when entered.

2. What is the corporate opportunity doctrine?

   A director or officer breaches the duty of loyalty by usurping a business opportunity in the corporation's line of business (or in which it has an interest/expectancy) without first presenting it to the corporation and obtaining a rejection. Remedy: the corporation may recover the opportunity or the profits (constructive trust).

3. What inspection rights do shareholders have to corporate records?

   Shareholders may inspect records (e.g., minutes, accounting records, shareholder lists) upon written demand for a proper purpose reasonably related to their interest as a shareholder. Certain records (bylaws, articles, annual reports) are available with minimal showing.

4. Distinguish a direct shareholder suit from a derivative suit.

   A direct suit enforces the shareholder's own rights (e.g., voting, dividends), and recovery goes to the shareholder. A derivative suit enforces the corporation's rights against wrongdoers; recovery goes to the corporation. Derivative suits require contemporaneous ownership, standing throughout, and a written demand on the board (excused only if futile in some states).

5. What is required for a quorum and approval at a shareholder meeting?

   A quorum requires a majority of outstanding shares entitled to vote be represented (unless articles provide otherwise). Once a quorum is present, a matter is approved if votes cast in favor exceed votes against (for most matters); directors are elected by plurality.

6. What is cumulative voting and how is it calculated?

   Cumulative voting lets shareholders multiply their shares by the number of directors being elected and cast all votes for one or distribute among candidates, helping minority shareholders elect a director. Shares needed to elect one director ≈ (total shares voting ÷ (directors to elect + 1)) + 1.

7. What is a shareholder voting agreement versus a voting trust?

   A voting agreement (pooling agreement) is a written contract among shareholders to vote their shares a certain way—specifically enforceable. A voting trust transfers legal title of shares to a trustee who votes them per a written trust agreement, filed with the corporation, typically limited (often 10 years).

8. What is the standard approval process for fundamental corporate changes (merger, sale of substantially all assets, dissolution, charter amendment)?

   Generally: (1) the board adopts a resolution, (2) notice is sent to shareholders, and (3) shareholders approve by the required vote (majority of shares entitled to vote under the RMBCA, sometimes two-thirds). Dissenting shareholders may have appraisal (dissenters') rights.

9. What are appraisal (dissenters') rights and when do they apply?

   Appraisal rights let a dissenting shareholder force the corporation to buy their shares at fair value. They typically arise in mergers, share exchanges, sales of substantially all assets outside the ordinary course, and certain charter amendments. The shareholder must object before the vote, not vote in favor, and timely demand payment.

10. Which transactions are classified as a 'sale of substantially all assets' requiring shareholder approval, and whose shareholders must approve?

    A sale, lease, or exchange of all or substantially all of the corporation's assets outside the ordinary course of business requires approval of the selling corporation's shareholders. The buying corporation's shareholders generally need not approve. 'Substantially all' typically means leaving the seller without a significant continuing business.

11. Under UCC Article 9, what is the difference between tangible goods categories: consumer goods, equipment, inventory, and farm products?

    Classification depends on the debtor's use: Consumer goods—used for personal/family/household purposes; Equipment—used or bought for use in a business (default catch-all for goods); Inventory—held for sale or lease, or materials used/consumed in business; Farm products—crops/livestock/products in a farming operation in the debtor's possession.

12. List the main categories of intangible and quasi-intangible Article 9 collateral.

    Accounts (right to payment for goods/services), chattel paper (record(s) evidencing a monetary obligation plus a security interest/lease), instruments (negotiable instruments/notes), documents (e.g., bills of lading, warehouse receipts), investment property (securities/accounts), deposit accounts, general intangibles (catch-all, e.g., IP, goodwill, payment intangibles), and money.

13. What three elements are required for a security interest to attach (become enforceable)?

    (1) Value given by the secured party; (2) the debtor has rights in the collateral; and (3) either the debtor authenticates a security agreement describing the collateral, or the secured party takes possession or control of the collateral. Once all three coexist, the interest attaches.

14. What is a purchase-money security interest (PMSI)?

    A PMSI arises when (1) a seller retains a security interest in goods to secure their price, or (2) a lender advances funds enabling the debtor to acquire the goods and the funds are so used. PMSIs receive special priority ('superpriority') if timely perfected.

15. What are the principal methods of perfecting a security interest?

    (1) Filing a financing statement; (2) possession of the collateral (pledge); (3) control (deposit accounts, investment property, letter-of-credit rights, electronic chattel paper); (4) automatic perfection (e.g., PMSI in consumer goods); and (5) notation on a certificate of title (vehicles).

16. What must a valid financing statement contain, and where is it filed?

    It must include the debtor's correct legal name, the secured party's name, and an indication of the collateral (a supergeneric 'all assets' description suffices for a financing statement, though not for the security agreement). It is filed centrally with the Secretary of State (real-property-related collateral like fixtures is filed locally).

17. When is a PMSI in consumer goods automatically perfected, and what is the exception?

    A PMSI in consumer goods is perfected automatically upon attachment—no filing required. Exception: filing/perfection is needed to defeat a buyer of consumer goods who buys for value, for personal use, without knowledge of the security interest, before a filing (the 'garage sale' rule).

18. Why does perfection by control take priority for deposit accounts and investment property?

    For deposit accounts (as original collateral), control is the ONLY method of perfection; for investment property, control beats filing. A secured party with control has priority over one who perfected by filing, because control gives the secured party the ability to dispose of the collateral without further debtor consent.

19. State the general priority rule among conflicting secured creditors and unperfected interests.

    General rule: the first to file or perfect wins (whichever is earlier, provided there is no gap). A perfected security interest beats an unperfected one. Between two unperfected interests, the first to attach prevails. An unperfected secured party loses to a lien creditor.

20. What is the PMSI superpriority rule for inventory versus non-inventory collateral?

    Non-inventory (e.g., equipment) PMSI: priority if perfected within 20 days after the debtor receives possession. Inventory PMSI: priority only if perfected BEFORE the debtor receives possession AND the PMSI holder sends authenticated notice to prior conflicting filed secured parties before delivery.

21. Who is a buyer in the ordinary course of business (BIOCB) and what protection do they receive?

    A BIOCB is a person who buys goods in good faith, without knowledge that the sale violates another's rights, in the ordinary course from a seller in the business of selling goods of that kind. A BIOCB takes free of a security interest created by the buyer's seller, even if perfected and even if the buyer knows it exists.

22. What rights does a secured party have upon the debtor's default under Article 9?

    The secured party may (1) take possession of the collateral by self-help repossession if it can be done without a breach of the peace (or via judicial action), and (2) dispose of the collateral by sale/lease, or in some cases retain it in full/partial satisfaction (strict foreclosure). The secured party may also sue on the underlying debt.

23. What are the requirements for disposition of collateral after default and how are proceeds applied?

    Every aspect of the disposition must be commercially reasonable, and reasonable authenticated notice must be sent to the debtor and certain other parties. Proceeds are applied: (1) reasonable expenses of repossession/sale, (2) satisfaction of the secured debt, (3) subordinate security interests; any surplus goes to the debtor, and the debtor remains liable for any deficiency.

24. What is strict foreclosure and the consumer-goods limitation on it?

    Strict foreclosure lets the secured party retain the collateral in full or partial satisfaction of the debt after sending notice and receiving no timely objection. Limitation: it is barred (mandatory disposition) for consumer goods where the debtor has paid 60% or more of the cash price (PMSI) or obligation—the secured party must sell within 90 days or face liability.

What this deck covers

Business Associations and Secured Transactions flashcards FAQ