Corporate Law Practice Exam Questions

1. 1.Revlon duties: When a board decides to sell the company, it triggers Revlon duties to maximize shareholder value. The board must conduct a reasonable auction or market check.
2. 2.Business judgment rule: Ordinarily, board decisions are protected if made in good faith, with due care, and without conflicts. However, the abbreviated review (90 minutes), failure to shop the deal, and the conflicted fairness opinion may overcome the presumption.
3. 3.Due care: The 90-minute review and reliance on a potentially conflicted advisor raise questions about whether the directors were adequately informed (Smith v. Van Gorkom).
4. 4.Remedies: If Revlon duties are breached, the court may enjoin the merger or award damages. Enhanced scrutiny applies rather than business judgment deference.

1. 1.Insider trading (tipper-tippee liability): Under SEC Rule 10b-5, the CEO (tipper) breached her fiduciary duty by disclosing material nonpublic information for a personal benefit (benefit to a family member satisfies this). The brother (tippee) is liable if he knew or should have known the information came from an insider breach.
2. 2.Material nonpublic information: FDA drug approval is clearly material (a reasonable investor would consider it important) and was nonpublic at the time of the tip.
3. 3.Fiduciary duty breach: The CEO violated her duty of loyalty to the corporation and its shareholders by using confidential corporate information for personal/family benefit.
4. 4.Penalties: Civil disgorgement of profits, SEC civil penalties up to three times the profit gained, and potential criminal prosecution.

Correct Answer: B

Self-dealing transactions involving a director on both sides trigger entire fairness review, which requires the transaction to be fair in both process and price. While disclosure and abstention are important factors, they do not automatically shift the standard back to the business judgment rule. The above-market price suggests the transaction may not satisfy the fair-price prong of entire fairness.

Correct Answer: B

In jurisdictions following the universal demand requirement (adopted in the MBCA and many states), a shareholder must make a demand on the board in all cases before filing a derivative action. There is no 'demand futility' exception. The shareholder's failure to make demand requires dismissal. The shareholder may refile after making demand and having it refused.

Correct Answer: B

Under the MBCA, shareholders may remove a director with or without cause by a majority vote of the shares entitled to vote at an election of directors. The 60% vote exceeds the majority threshold. Removal may occur at a meeting called for that purpose, not only at the annual meeting.