Corporations on the Multistate Essay Exam: Highly Tested Topics and Tips
Here, we give you an overview of Corporations on the Multistate Essay Exam (MEE), including an overview of some of the highly tested topics and tips for approaching a Corporations question. (Technically, the NCBE calls it “Corporations and LLCs.” We will address both Corporations and Limited Liability Companies [LLCs] but we are just calling the subject Corporations for simplicity’s sake.)
Corporations is regularly tested on the Multistate Essay Exam. The Examiners often test the same issues semi-frequently and it is worth it to be aware of what those issues are.
In this post, we tell you tips for approaching Corporations on the Multistate Essay Exam and we reveal some of the highly tested issues in Corporations Multistate Essay Exam questions.
Corporations on the Multistate Essay Exam
1. First, be aware of how Corporations is tested
Corporations is tested, on average, a little over once a year. You can see, based on the chart below, that it is often tested when Agency and Partnership is not tested (though they are sometimes tested together—e.g., February 2017). On most exams, you will see Agency and Partnership or Corporations and LLCs, or both subjects. (There are exceptions—like July 2017 and July 2012, where neither was tested.)
The basic principles of Corporations is what tends to be tested on Corporations Multistate Essay Exam questions. Most Multistate Essay Exam answers refer to the Model Business Corporation Act (MBCA) or the Revised Model Business Corporation Act (RMBCA). These are likely in line with the principles you learned in law school if you took a Corporations or Business Organizations class.
2. Be aware of the highly tested Corporations issues
The Examiners tend to test several of the same issues repeatedly in Corporations questions. (We have a nice summary of these in our MEE One-Sheets if you want to see all of them and have them all in one place.)
Some of the highly tested Corporations Multistate Essay Exam issues include:
These duties are tested in both questions that test Corporations and questions that test LLCs.
- The duty of care. Remember the business judgment rule! There is a presumption that, “in making a business decision, the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.” Directors must be informed to an extent that they reasonably believe is appropriate. They are entitled to rely on information, opinions, reports, or statements of corporate officers, legal counsel, public accountants, etc., in making a decision.
- The duty of loyalty—the most common issue. The most common issue when a duty of loyalty issue arises is that a director is on both sides of a transaction. Oftentimes, it is combined with a duty of care issue. For example, a director is on the board of ABC, Inc. The director also owns XYZ, Inc. The director convinces the board that ABC should enter into a contract with XYZ. The board talks it over for 10 minutes, even though it is a major and expensive contract, and all board members, including the interested director, vote to approve the contract. The director has likely breached his duty of loyalty (unless he can show it was a fair contract) since the director is on “both sides” of the deal—he is voting on ABC’s board and he owns XYZ. Further, the board likely breached their duty of care if they only talked it over for 10 minutes.
There are two types of shareholder lawsuits that are heavily tested:
- Direct suits: This is appropriate when the wrong done amounts to a breach of duty owed to the shareholder personally. So, the shareholder is not bringing a suit on behalf of the corporation. They are bringing the suit on behalf of themselves! Examples of when a direct suit is appropriate is if, say, a shareholder is denied preemptive rights, denied payment of a dividend, or is bringing a suit for oppression in a close corporation. The key is that these are all personal to the shareholder. (The shareholder is using the word “I.”—”I was denied my preemptive rights. I was denied my dividend. I was oppressed.”)
- Derivative suits: A derivative suit is appropriate when the injury is caused to the corporation and the shareholder is trying to enforce the corporation’s rights. The shareholder can do this because the shareholder is an owner of the corporation so it has standing to bring such a suit to enforce the corporation’s rights. Filing a derivative suit has the following requirements: (mnemonic = SAD): (1)the shareholder needs standing to bring a lawsuit (it owns stock in the corporation), (2) adequacy (the shareholder represents the interests of the corporation), and (3) demand (generally, the shareholder should file a written demand and wait 90 days before filing a suit unless irreparable injury would result or a demand would be futile). An example of when a derivative suit is appropriate is if the board is making a decision that hurts the corporation. Derivative suits are tested more frequently than direct suits.
Remember that LLCs sometimes are tested instead of Corporations! Many of the same principles that apply to Corporations or Partnerships apply to LLCs. The most common issues in LLC questions are piercing the LLC veil and fiduciary duties.
- Piercing the LLC or corporate veil: Generally, a plaintiff must show that shareholders of the corporation or members of an LLC abused the privilege of incorporating and fairness requires holding them liable. The plaintiff can pierce the LLC veil if it can show undercapitalization of the business, failing to follow formalities, commingling of assets, etc.
3. Be aware of Corporations and LLCs basics
Many examinees do not understand the basic principles of Corporations and LLCs. This is especially the case for those that did not take a Corporations class in law school. And, it can be very difficult to become well versed in Corporations and LLCs by watching just one bar exam lecture. If you don’t understand basic principles (like the role of directors and the role of shareholders) then you will find it very hard to memorize the law. Further, even if you are able to memorize the law, you will have a hard time applying it to fact patterns.
So, it is a good idea to get the basics down first!
Here are a few notes on Corporations and LLCs basics:
- Directors manage the corporation. Thus, they meet regularly. They must vote responsibly, so they cannot vote by proxy or voting agreement. (Their judgment should not be unfairly affected by a proxy or voting agreement!). The business judgment rule applies and they are presumed to act reasonably.
- Shareholders own the corporation. Because they are merely owners, they don’t meet that often but are entitled to annual meetings. They need special notice for meetings. They can vote by proxy or agreement because they aren’t the ones managing the corporation.
- Officers are agents of the corporation. They are the president, secretary, treasurer, etc. They are the “hands and feet” of the corporation because they have the power to enter into transactions. (Look for an agency crossover if you see an officer, say, enter into a contract on behalf of the corporation. They likely have actual or apparent authority to do so!).
- A corporation must be incorporated (i.e., articles must be filed with the state) in order for a valid corporation to be formed.
- Similar to Corporations, in order for an LLC to be formed, articles of organization must be filed with the state. Members of an LLC are similar to officers—they may have actual or apparent authority to bind the LLC.
Being familiar with the basics will help you memorize the nuances. The basics will serve as “building blocks” and some of the details will make more sense (and be more memorable) once you have the basics down.
4. Get the vocabulary down!
Many examinees struggle with the vocabulary used in Corporations and LLCs questions. A lot of the vocabulary will be nuanced and unfamiliar—particularly if you are learning Corporations and LLCs for the first time. Here, we give a layman’s version of some vocabulary terms that may help you remember them!
Layman’s version of Corporations and LLCs vocabulary
- “Articles of incorporation”: A fancy word for “contract” (the corporation’s contract with the state).The articles include basic information like the corporation’s name, address, names of incorporators, etc. Additional provisions can be added. The corporation files these with the state (they are public).
- “Dividend”: A fancy word for “profits.” The whole reason shareholders buy shares is because they want to be paid profits.
- “Subscription”: A fancy word for “offer.” A subscription is an offer to buy shares. In general, it must be in a signed writing and state a price.
- “Promoter”: This is someone who is “promoting” a corporation before it is even formed. So let’s say you and I want to form a corporation to sell coffee. We send in our articles to the state (but it takes a while to get them back) and we are eager to get started on our very lucrative business idea. Thus, I personally sign a lease with a landlord agreeing to rent space for one year. I sign my name, “John Doe, on behalf of Coffee, Inc., a corporation to be formed.” I am “promoting” the corporation by entering into leases on its behalf before it is even in existence. Thus, I am the promoter. I am liable on the lease.
- “Ratify”: A fancy word for “approve.” The corporation in the above example is liable if it ratifies or approves of the contract. It could expressly ratify the lease by signing its name to it (and becoming liable) or impliedly ratify the lease (e.g., by moving in and acting as if it is part of the lease agreement!)
- “Directors”: Remember that directors “direct” or manage the corporation! (Shareholders merely hold shares of, or own, the corporation.)
- “Quorum”: Quorum is a term that states when voting can take place. A quorum is a fancy word for “majority.” It means a majority of people or shares have to show up at a meeting (and then more have to vote for than against the proposal) for it to pass.
Being familiar with key vocabulary will help you gain credibility with the grader and it will help you maximize your bar exam essay score!
The best way to excel at Corporations on the Multistate Essay Exam is to practice writing answers to essay questions. This will help you become acquainted with how Corporations is tested. And it will help you master the highly tested issues.
Here we give you some links to (free) Corporations questions and NCBE point sheets. (If you would like to purchase a book of Corporations questions and NCBE point sheets from 2000 to the present, check out our MEE books here. You also can see some exams on the NCBE website for free here.)
- July 2012 MEE: this one covers an LLCs issue.
- February 2010 MEE: this is a good overview of how you may see Corporations on the Multistate Essay Exam.
- February 2009 MEE: this one covers some basic Corporations issues (like the business judgment rule) and is good practice!
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