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
Garcia and Hernandez, both experienced real estate investors, orally agreed to combine their respective expertise and capital to purchase, renovate, and resell residential properties in the same metropolitan area. They never filed any documents with the state, never drafted a written partnership agreement, and each referred to the other as a 'business associate' rather than a 'partner.' Over eighteen months, they jointly purchased four properties, split renovation costs equally, made all major decisions together, and divided the net profits 50/50 after each sale. During the renovation of the fifth property, Garcia secretly purchased an adjacent lot that was being sold at a below-market price, renovated it himself, and resold it for a $200,000 profit without informing Hernandez. When Hernandez discovered the transaction, he demanded that Garcia share the profits. Garcia argued that because they never formed a formal partnership, he owed no fiduciary duty to Hernandez. Which of the following best states the likely outcome?
- Garcia must account to Hernandez for the profits because a partnership was formed by their conduct, giving rise to fiduciary duties that Garcia breached.
- Garcia owes no duty to Hernandez because the absence of a written partnership agreement and formal state filing means no partnership was ever created.
- Garcia has no obligation to share profits because the adjacent lot was a separate transaction outside the scope of any agreement between the parties.
- Garcia and Hernandez formed only a joint venture, not a partnership, so Garcia's fiduciary obligations were limited to the specific properties they agreed to purchase together.
Show answer
Correct: Garcia must account to Hernandez for the profits because a partnership was formed by their conduct, giving rise to fiduciary duties that Garcia breached.
Under the Uniform Partnership Act (UPA) § 202(a) (revised) and Revised Uniform Partnership Act (RUPA) § 202(a), a partnership is 'an association of two or more persons to carry on as co-owners a business for profit,' regardless of whether the persons intend to form a partnership or call themselves partners. Key factors—sharing of profits (UPA § 202(c)(3)), joint decision-making, co-investment of capital, and carrying on a business together—are all present here. Once a partnership exists, each partner owes fiduciary duties of loyalty and care to the other partners. Under RUPA § 404(b)(1), a partner's duty of loyalty includes accounting to the partnership for any benefit derived from the appropriation of a partnership opportunity. Garcia's secret purchase of an adjacent lot in the same line of business constitutes appropriation of a partnership opportunity, requiring him to account for the profits.
Harmon, a shareholder of Delphic Corp., a Delaware corporation, became concerned that the company's CEO had been engaging in self-dealing transactions that harmed the corporation. Harmon purchased her shares six months after the alleged self-dealing began but before any of the transactions became publicly known. Without first contacting the board of directors, Harmon filed a derivative suit on behalf of Delphic Corp. against the CEO. The CEO has moved to dismiss. Which of the following is the strongest basis for dismissal of Harmon's derivative suit?
- Harmon lacks standing because she did not own shares at the time the alleged wrongdoing occurred.
- Harmon failed to make a pre-suit demand on the board of directors or adequately allege that such demand would have been futile.
- Harmon cannot bring a derivative suit because self-dealing claims belong exclusively to the corporation and may only be brought by the board of directors.
- The business judgment rule protects the CEO's transactions from judicial review, barring Harmon's claims on the merits.
Show answer
Correct: Harmon failed to make a pre-suit demand on the board of directors or adequately allege that such demand would have been futile.
Under FRCP Rule 23.1(b)(3) and Delaware law (see Aronson v. Lewis, 473 A.2d 805 (Del. 1984)), a shareholder bringing a derivative suit must either make a demand on the board to take corrective action or plead with particularity why demand would have been futile. Harmon filed suit without contacting the board at all and the facts do not indicate she alleged demand futility. Failure to satisfy the demand requirement is one of the most commonly invoked and strongest grounds for dismissal of a derivative suit. The board is presumed to be capable of exercising independent business judgment regarding litigation decisions, and the demand requirement must be satisfied or excused before a derivative suit may proceed.
Apex Technologies Corp. is a publicly traded Delaware corporation. Its board of directors approved a $200 million acquisition of a smaller competitor after a single two-hour meeting. Before the meeting, the directors received a 15-page memorandum from the CEO summarizing the deal terms, but the board did not retain independent financial advisors, did not request a fairness opinion, and did not review the target's audited financial statements. One director, Harris, owns 30% of the target company's shares and stands to receive $60 million from the acquisition. Harris participated in the board discussion and voted in favor of the deal. A shareholder brings a derivative action challenging the transaction. Which of the following most accurately states how a Delaware court would likely analyze the board's decision?
- The business judgment rule protects the board's decision because directors are entitled to rely on management summaries, and the shareholder must prove the directors acted in bad faith.
- The entire fairness standard applies to the entire transaction because an interested director participated in the vote, and the board bears the burden of proving the deal involved both fair dealing and fair price.
- The transaction is automatically void because Harris's conflict of interest violated DGCL § 144, which prohibits interested director transactions absent a supermajority vote of disinterested shareholders.
- The court will apply heightened Revlon duties because the transaction involves a sale of corporate assets, requiring the board to prove it sought the highest price reasonably available for Apex's shareholders.
Show answer
Correct: The entire fairness standard applies to the entire transaction because an interested director participated in the vote, and the board bears the burden of proving the deal involved both fair dealing and fair price.
Under Delaware law, when a board member has a direct financial interest in a transaction, the duty of loyalty is implicated, and the court applies the entire fairness standard rather than the business judgment rule. See Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983). The entire fairness test requires the board to demonstrate both fair dealing (the process by which the transaction was negotiated) and fair price. Because Harris had a material financial interest in the target and participated in the deliberation and vote, and the transaction was not approved by a majority of disinterested directors or conditioned on approval by disinterested shareholders under DGCL § 144, the burden shifts to the defendants to prove entire fairness. The inadequate process—no fairness opinion, no independent advisors, and no review of audited financials—further undermines a finding of fair dealing.
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