Business Associations on the NextGen Bar Exam
Business Associations is the wild card. It's the newest foundational subject on the NextGen exam, which means there's a thinner bank of prior questions to study from compared to the other seven subjects. If you took a Business Organizations or Corporations course in law school, you have a real edge. If you didn't, this is the subject where baseline knowledge varies the most between candidates — and targeted study pays off disproportionately.
Agency law is the foundation that everything else sits on. Before you can analyze partnership liability, corporate authority, or LLC governance, you need to understand how agency works. The key distinction: actual authority (based on the principal's manifestation to the agent) vs. apparent authority (based on the principal's manifestation to a third party). The exam tests this constantly because it determines whether a transaction is binding. If an employee signs a contract on behalf of a company, the question is always: did they have authority? Actual authority comes from what the principal told the agent. Apparent authority comes from what the principal communicated (or allowed) to the outside world. Ratification is the safety valve — the principal can retroactively approve an unauthorized act.
Partnership is the default business form and most candidates don't realize that. Two people co-owning a business for profit? That's a general partnership — no filing, no agreement, no formalities required. And every general partner is personally liable for all partnership debts. Joint and several liability under RUPA means a creditor can go after any single partner for the full amount. This scares people in real life and it generates good exam questions. Limited partnerships protect limited partners from liability only as long as they don't participate in management — step into management decisions and you lose the shield.
LLCs are tested through their operating agreements. The critical fact to identify in any LLC question: is it member-managed or manager-managed? The default rules differ significantly. In a member-managed LLC, every member has authority to bind the LLC in ordinary business matters. In a manager-managed LLC, only the managers have that authority. The operating agreement can vary most default rules — so if the question specifies operating agreement terms, those control over statutory defaults.
Corporate fiduciary duties are the exam's favorite Business Associations topic. The Business Judgment Rule protects duty-of-care decisions: if directors act in good faith, on an informed basis, and honestly believe the action serves the corporation's best interest, courts won't second-guess the outcome — even if it turned out badly. The BJR is a presumption, and the challenger bears the burden of overcoming it.
But the BJR has a hard limit: it does NOT protect duty-of-loyalty violations. Self-dealing (director on both sides of a transaction), corporate opportunity usurpation (taking a business opportunity that belongs to the corporation without offering it first), and competing with the corporation all fall outside BJR protection. These are analyzed under the entire fairness standard — fair price AND fair dealing — and the burden shifts to the director to prove both.
Derivative suits are the procedural mechanism for enforcing fiduciary duties. The requirements are formulaic: contemporaneous stock ownership at the time of the wrongdoing, demand on the board (or showing demand futility), and adequate representation of the corporation's interest. The exam tests these requirements as a checklist.
Exam Tips
- Agency authority is the threshold question for any transaction-binding issue. Ask: actual authority (principal → agent) or apparent authority (principal → third party)? If neither exists, the transaction isn't binding unless ratified.
- Partnership trap: co-owning a business for profit = general partnership by default, even without any agreement. All general partners are personally liable for ALL partnership debts.
- Business Judgment Rule protects duty of care ONLY. It does NOT protect duty of loyalty violations (self-dealing, corporate opportunities, competition). Know which duty is at issue before applying BJR.
- LLC questions: immediately identify member-managed vs. manager-managed. The authority to bind the LLC and the voting rules differ significantly between the two structures.
- Derivative suit checklist: contemporaneous ownership + demand on board (or demand futility) + adequate representation. Miss any element and the suit is dismissed procedurally.
Key Rules to Know
- Agency: actual authority (principal's communication to agent) vs. apparent authority (principal's communication to third party) — determines if transaction binds
- General partnership: automatic formation when co-owning business for profit; joint and several personal liability for all partners (RUPA)
- Business Judgment Rule: presumption protecting informed, good-faith, conflict-free director decisions — challenger bears burden to overcome
- Duty of loyalty: self-dealing, corporate opportunity usurpation, and competing with the corporation — entire fairness standard (fair price + fair dealing)
- Derivative suit: contemporaneous ownership + demand or demand futility + adequate representation — suit belongs to corporation, not shareholder individually
Sample Practice Questions
Hernandez, Kapoor, and Liu formed a general partnership to operate a consulting firm. The partnership agreement provides for a five-year term and is silent on the issue of dissolution. Two years into the term, Hernandez sends a written notice to Kapoor and Liu expressly stating his will to withdraw from the partnership immediately. Kapoor and Liu wish to continue the business. Under the Revised Uniform Partnership Act (RUPA), which of the following best describes the legal effect of Hernandez's notice?
- Hernandez's notice immediately dissolves the partnership, and Kapoor and Liu must wind up the business unless all partners agree to continue.
- Hernandez's notice constitutes a dissociation but does not dissolve the partnership, although Hernandez may be liable to the other partners for damages caused by the wrongful dissociation.
- Hernandez's notice is legally ineffective because a partner in a term partnership lacks the power to withdraw before the term expires.
- Hernandez's notice causes dissolution of the partnership because within 90 days at least half of the remaining partners did not agree to wind up the partnership business.
Show answer
Correct: Hernandez's notice constitutes a dissociation but does not dissolve the partnership, although Hernandez may be liable to the other partners for damages caused by the wrongful dissociation.
Under RUPA § 602(a), a partner has the power to dissociate at any time by express will. However, under RUPA § 602(b)(2), dissociation before the expiration of a definite term is wrongful. A wrongful dissociation does not dissolve the partnership under § 801; instead, the remaining partners may continue the business. Under § 602(c), the wrongfully dissociating partner is liable to the partnership and the other partners for damages caused by the dissociation. The partnership must buy out the dissociated partner's interest under § 701, subject to an offset for damages.
Apex Industries, a publicly traded Delaware corporation, has a classified board with three classes of directors serving staggered three-year terms. When Viking Capital announces an unsolicited tender offer at a 40% premium to the current share price, Apex's board unanimously adopts a shareholder rights plan (poison pill) and refuses to redeem it despite Viking's offer. Viking then launches a proxy contest and successfully replaces the one class of directors up for election that year with its own nominees. Viking demands that the newly constituted board redeem the poison pill to allow the tender offer to proceed. The remaining incumbent directors, who still hold a two-thirds majority, refuse to redeem the pill, arguing that the tender offer is inadequate and threatens the company's long-term strategic plan. Viking sues, arguing that the board's refusal to redeem the pill is a breach of fiduciary duty. Under Delaware law, which of the following is the most accurate statement regarding the likely outcome?
- The board's refusal to redeem the pill will be upheld because, under Unocal, the classified board structure and the directors' good-faith belief that the offer is inadequate provide a reasonable basis for maintaining the defensive measure.
- The board's refusal to redeem the pill will likely be enjoined because once shareholders have replaced one class of directors in a proxy contest, the board is obligated to respect the shareholder mandate and redeem the pill.
- The board's refusal to redeem the pill will likely be upheld because, under the Unocal/Unitrin framework, maintaining a poison pill in conjunction with a classified board is not preclusive where shareholders retain the ability to eventually replace the entire board through successive annual elections.
- The board's refusal to redeem the pill triggers Revlon duties because Viking's tender offer put the company 'in play,' requiring the board to maximize immediate shareholder value by redeeming the pill and allowing shareholders to tender.
Show answer
Correct: The board's refusal to redeem the pill will likely be upheld because, under the Unocal/Unitrin framework, maintaining a poison pill in conjunction with a classified board is not preclusive where shareholders retain the ability to eventually replace the entire board through successive annual elections.
This is the correct answer under Delaware law as established in Airgas, Inc. v. Air Products & Chemicals, Inc., 16 A.3d 48 (Del. Ch. 2011). The court held that a board acting in good faith may maintain a poison pill even after losing a proxy contest for one class of directors. Under the Unocal/Unitrin framework (Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985); Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995)), the defense is not preclusive because shareholders retain the theoretical ability to replace the entire board over successive elections. The court deferred to the board's substantive judgment that the offer was inadequate, even though it required shareholders to wait through multiple election cycles.
Dawson incorporated Dawson Logistics, Inc. in Delaware, filing the certificate of incorporation and paying all required fees. However, Dawson never held an organizational meeting, never elected directors, never issued stock certificates, and never adopted bylaws. Dawson used the corporate bank account interchangeably with his personal account, paying personal mortgage payments and vacation expenses from the corporate account while depositing corporate revenue into his personal account. Dawson also never maintained corporate minutes or records. When a delivery truck operated by Dawson's employee struck and injured Parker, Parker sued both Dawson Logistics, Inc. and Dawson personally. Dawson moved to dismiss the claim against him individually, arguing that the corporation is a separate legal entity that shields him from personal liability. How should the court rule on Dawson's motion?
- Grant the motion, because Dawson properly filed the certificate of incorporation in Delaware, creating a valid corporate entity that provides limited liability regardless of how it was subsequently operated.
- Deny the motion, because Dawson's complete failure to observe corporate formalities and his extensive commingling of personal and corporate funds demonstrate that the corporation was his alter ego, justifying piercing the corporate veil.
- Grant the motion, because piercing the corporate veil requires a showing of actual fraud by the shareholder, and there is no indication that Dawson incorporated for a fraudulent purpose.
- Deny the motion, because the failure to issue stock certificates means the corporation was never validly formed, so Dawson is automatically personally liable as a sole proprietor.
Show answer
Correct: Deny the motion, because Dawson's complete failure to observe corporate formalities and his extensive commingling of personal and corporate funds demonstrate that the corporation was his alter ego, justifying piercing the corporate veil.
Correct. Courts pierce the corporate veil under the alter ego doctrine when (1) there is such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, and (2) adherence to the fiction of separate existence would sanction fraud or promote injustice. See Walkovszky v. Carlton, 18 N.Y.2d 414 (1966); Minton v. Cavaney, 56 Cal.2d 576 (1961). Dawson's complete disregard of corporate formalities—no organizational meeting, no directors, no bylaws, no minutes—combined with pervasive commingling of funds satisfies the first element. The injustice of allowing Dawson to use the corporate form to avoid tort liability to an innocent party satisfies the second element.
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