Question 1

Accepted Answer

***Gomez’s rescission and repayment claim is derivative because the alleged loss and requested recovery belong to Harbor.***
- The alleged unfair service payments injured **Harbor**; a proportional decline in Gomez’s share value does not establish a distinct direct injury under Exhibit 3.
- Gomez owned shares when the contract was approved and still owns them, and his letter requesting that Harbor sue Reed satisfies the ordinary **demand** requirement.

***The approval and committee processes support Harbor’s position, but neither makes a lawsuit automatically dismissible.***
- Reed was **interested**, but he disclosed his ownership before the vote and abstained; Chen and Malik approved after reviewing comparable vendors, supporting protection under Exhibit 2.
- Under Exhibit 4, the committee’s independence, adequate investigation, and reasonable basis matter; its independent counsel, interviews, comparisons, and written cost assessment **support** its recommendation not to sue.

**Traps in this case**

*Treating Reed’s initial nondisclosure as automatically voiding the contract*
- Exhibit 2 permits informed, disinterested approval after full disclosure, which the recorded meeting and vote support.

*Treating Chen as an equally independent committee member*
- Reed’s promise to support Chen’s reelection raises an **independence** concern that Malik’s participation does not present on these facts.

*Treating the committee recommendation as an automatic end to Gomez’s claim*
- Counsel should **preserve the records first**, then acknowledge the demand, explain the recommendation and its reasons, and avoid claiming committee review guarantees dismissal.

Question 2

Accepted Answer

***Solara’s board manages ordinary business, but the proposed sale requires board approval followed by shareholder approval.***
- Under Exhibit 1, the board directs business strategy, shareholders elect directors, and officers may execute ordinary-course contracts within delegated authority.
- Because the Exhibit 4 sale would end Solara’s operating business, the board must approve it, then holders of at least **301 of 600** outstanding voting shares must approve it before closing.

***Priya alleges a corporate injury, but her complaint raises a demand-compliance problem.***
- The alleged overpayment injured **Solara**, so the claim is derivative and any recovery ordinarily belongs to Solara, not Priya personally.
- Exhibit 3 establishes Priya’s contemporaneous ownership and written demand, but filing in her own name for personal payment **two weeks** later, before a board response, raises a substantial demand-compliance issue under Authority 1.

**Traps in this case**

*Treating Mira’s interest as automatically invalidating the contract*
- Mira disclosed her ownership, and Authority 1 permits an interested-director transaction if disinterested directors approve it after material disclosure **or** it is fair to Solara; her interest alone does not void it.

*Treating the benchmarking report as conclusive proof of fairness*
- The **$200,000** fee falls within the reported **$180,000–$220,000** comparable range, but comparable rates and expected operating savings still matter to the fairness assessment.

*Treating board approval as enough to close the sale*
- Mira and Omar hold **450 shares** together, enough to meet the shareholder threshold if they vote for the sale, but their support does not replace the required shareholder vote.

Question 3

Accepted Answer

***The warehouse-overpayment claim belongs to GreenCurrent; the selective records-denial claim belongs to Maya.***
- Under Authority 1, GreenCurrent suffered the alleged overpayment and would receive any recovery, so Maya’s claim is **derivative**; a decline in her share value would not make it direct.
- Maya’s timely, continuous share ownership satisfies the ownership requirement, but she must make a **written demand** absent facts excusing it; the denial of only her proper records request is an independent, direct injury.

***The warehouse approval requires scrutiny, but control and a lawful dividend do not make a shareholder liable for corporate debts.***
- Under Authority 2, Owen withheld the **$3.2 million comparable offer**, and his sibling’s ties to VoltSite undermine disinterested approval; Owen’s abstention and the three votes do not establish protection through fully informed approval, though fairness remains possible.
- Under Authority 3, GreenCurrent’s separate accounts and corporate formalities weigh against entity disregard; the creditor would need evidence of **misuse**, such as commingling, rather than control or receipt of the lawful dividend.

**Traps in this case**

*Treating Maya’s reduced share value as a separate injury*
- The warehouse payment injured **GreenCurrent first**, whereas the selective denial of Maya’s records request affected her personally.

*Treating Maya’s ownership as a substitute for demand*
- Owning shares throughout the relevant period establishes standing but does not itself **excuse written demand** under Authority 1.

*Treating the three approval votes as conclusive*
- The undisclosed comparable offer prevents a finding of **full disclosure**, and the sibling’s substantial VoltSite income calls that director’s disinterestedness into question.

Question 4

Accepted Answer

***The board had authority to approve the $600,000 license, but Chen’s interest required conflict review.***
- Exhibit 1 reserves contracts above the officers’ **$100,000** limit for board approval; Malik cannot direct corporate operations, and Chen could not approve the contract on her own.
- Chen’s **60% ownership** of SourceStream created a material financial conflict, but she disclosed it and abstained while four disinterested directors reviewed competing quotations and approved the higher-priced license for its faster implementation.

***Malik’s claim is derivative, and his demand did not itself clear the way for suit.***
- The alleged overpayment depleted **Orchard’s assets**, and the complaint seeks repayment to Orchard rather than redress for an injury independent of corporate harm.
- Authority 1 ordinarily requires a shareholder to demand board action and allow a **reasonable opportunity** to respond; Malik sued ten days after his demand, before the board responded or investigated.

**Traps in this case**

*Treating the conflict as automatically decisive*
- Under Authority 1, Chen’s interest does not automatically invalidate the license, while disclosure and disinterested approval are relevant but do not automatically establish fairness.

*Treating corporate recovery as Malik’s personal damages*
- A successful derivative recovery belongs to **Orchard**, not Malik, even though he owns 4% of its shares.

*Treating the demand letter as sufficient by itself*
- Sending the letter was the first procedural step, not a substitute for allowing the board a reasonable opportunity to investigate and respond.

Question 5

Accepted Answer

***The lease claim turns on corporate injury, interested-director approval, and fairness.***
- Under Authority 2, Long’s request to recover rent **for Harbor** is derivative, while the alleged refusal to pay Long alone a dividend paid proportionately to Reed and Shah is a direct claim.
- Authority 1 governs Reed’s **material financial interest** in her wholly owned landlord; Exhibit 1’s $200,000 rent falls within the appraisal’s $180,000–$205,000 range, making fairness a question to evaluate rather than proving the lease proper.

***Harbor must address the premature derivative filing while evaluating the demand.***
- Long filed **ten days** after her written demand, before a board response, so Authority 2 supports an initial objection that she did not allow a reasonable response time.
- Harbor should preserve the records, tell Long the demand is under review, have **qualified decision makers** investigate the lease and approval, then determine and document its response.

**Traps in this case**

*Treating Brooks’s vote as conclusive approval*
- Her friendship with Reed alone does not disqualify her, but the thin minutes leave **independent judgment** and any undisclosed financial relationship worth investigating.

*Treating the appraisal as proof of wrongdoing*
- Exhibit 2 calls the lease unfair, but its enclosed appraisal places the **$200,000** rent within the stated market range.

*Treating a written demand as permission to sue immediately*
- Authority 2 requires a **reasonable response time** unless Harbor rejects the demand earlier, which it had not done.

Question 6

Accepted Answer

***The DataNest agreement is vulnerable to challenge, but Patel’s interest does not automatically void it.***
- Patel’s **70% ownership** of DataNest is a material financial interest; although Patel counted toward the quorum, only **two of four disinterested directors** voted to approve the agreement.
- Under Authority 1, protection through disinterested approval also requires full disclosure; counsel should obtain comparable vendor bids and pricing records to assess fairness in light of the undisclosed **$420,000** offer.

***Ortiz’s appraisal claim is separate from any claim Orchid may have concerning DataNest.***
- Ortiz gave notice before the merger vote, did not vote in favor, and timely returned the payment-demand form, so the current record supports **denying Orchid’s challenge** under Authority 2.
- A court may determine the fair value of Ortiz’s shares, with payment to **Ortiz personally**; that determination does not decide whether the DataNest agreement was fair to Orchid.

**Traps in this case**

*Treating the board vote as conclusive*
- Patel’s vote produced three approvals, but Authority 1 does not treat an **interested director’s vote** as disinterested approval.

*Treating influence as personal liability*
- Authority 3 does not make Patel liable for Orchid’s ordinary trade debts solely because of influence, particularly given Orchid’s separate accounts, adequate capitalization, and observance of corporate formalities.

Question 7

Accepted Answer

***Summit’s private limit restricts Lina’s actual authority, but its dealings with Valley and later conduct raise separate grounds for liability.***
- Exhibit 1 required approval for contracts above **$50,000**, so Lina lacked actual authority for the $80,000 contract; Summit’s payment of three earlier contracts may nevertheless support Valley’s reasonable belief, depending on the Summit conduct and communications Valley relied on.
- Under Authority 1, Summit’s knowing acceptance, use of half the spices, and retention of the rest strongly support **ratification of the entire contract**.

***Omar’s brief detour likely remained within his employment, while the board retains authority over Summit’s response.***
- Omar was returning toward his assigned route after a **permitted, brief coffee stop**, making the collision likely within the scope of employment under Authority 1.
- Authority 1 places corporate management under the **board**, not an unauthorized shareholder, even one owning 55% of Summit.

**Traps in this case**

*Treating the internal limit as a complete answer*
- Valley never received Exhibit 1, so investigate prior contracts and communications, interview Valley’s representative about reliance, and then assess those manifestations under Authority 1 before reaching a qualified apparent-authority conclusion.

*Treating partial use as partial ratification*
- Summit learned the material terms before accepting the shipment, then used half and retained the balance; its conduct supports ratification of the **whole $80,000 contract**, not just the used spices.

*Treating any personal detour as outside employment*
- A two-block, five-minute coffee deviation that Summit generally permits is not necessarily a substantial abandonment of Omar’s delivery.

Question 8

Accepted Answer

***The board directs Pine Health’s affairs, but its warehouse decision requires an informed process to receive business-judgment-rule protection.***
- Under Authority 1, Dana’s role as chief executive officer does not displace the board’s management authority, and the **3–2 approval** alone does not establish protection.
- Exhibit 1 shows that the board approved the **$1.8 million** purchase without an appraisal or comparable sales; evidence of the warehouse’s value when approved is central to assessing the process, but neither that omission nor the alleged overpayment automatically establishes liability.

***The identity of the injured party determines how Iris must pursue each claim.***
- Under Authority 2, the alleged overpayment injured **Pine Health**, so any recovery belongs to the corporation; the refusal to count only Iris’s valid vote supports a **direct claim**.
- Iris meets the stated continuous-ownership requirement, but she has made **no written demand**; ordinarily, she must make one, await rejection or 90 days, and plead those steps before pursuing the derivative claim.

**Traps in this case**

*Treating board approval as conclusive*
- Authority 1 requires an **informed basis**, even when a majority votes for the transaction.

*Seeking the overpayment personally*
- Because Pine Health paid the purchase price, its alleged loss cannot be recovered by Iris **personally** under Authority 2.

*Filing the derivative claim immediately*
- With no stated need to prevent irreparable injury, Authority 2 requires a **written demand** before Iris files.

Management and control — MCQs

Management and control — MCQs

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