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
Elena is one of seven directors on the board of Pinnacle Corp. She is also the sole owner of GreenLeaf LLC, a landscaping company. At a board meeting, Elena proposes that Pinnacle Corp. enter into a five-year, $2 million landscaping contract with GreenLeaf LLC. Elena fully discloses her ownership interest in GreenLeaf to the board. The remaining six directors vote 4-2 to approve the contract after reviewing comparable market bids. Elena abstains from voting. Two months later, a shareholder sues to void the contract, arguing it is an interested director transaction that should be set aside. Under the MBCA approach to interested director transactions, what is the most likely outcome?
- The contract will be voided because an interested director may never do business with the corporation she serves.
- The contract will be upheld because a majority of the disinterested directors approved the transaction after Elena's full disclosure of her interest.
- The contract will be voided because Elena's abstention from voting does not cure the inherent conflict of interest.
- The contract will be voided unless Elena can independently prove that the contract terms were entirely fair to Pinnacle Corp.
Show answer
Correct: The contract will be upheld because a majority of the disinterested directors approved the transaction after Elena's full disclosure of her interest.
Under MBCA § 8.61(b)(1) and § 8.62, an interested director transaction is not voidable if it is approved by a majority of the qualified (disinterested) directors after required disclosure of the conflict of interest. Here, Elena fully disclosed her ownership of GreenLeaf LLC, she abstained from voting, and four of the six disinterested directors (a majority) voted to approve the contract. This satisfies the safe harbor provision for board approval of interested director transactions.
Allison owns 500 shares of Greenfield Industries, Inc., a publicly traded corporation incorporated in Delaware. Allison believes that the company's CEO engaged in self-dealing by causing the corporation to purchase real estate from a company the CEO secretly owned at a price $4 million above fair market value. Allison made a written demand on Greenfield's board of directors to commence litigation against the CEO. After conducting a 60-day investigation, a special litigation committee composed of two independent directors concluded that pursuing the lawsuit was not in the corporation's best interests and formally refused Allison's demand. Allison now wishes to file a derivative suit on behalf of the corporation. Which of the following is the most significant obstacle Allison will face in proceeding with this derivative action?
- Allison lacks standing because she did not own shares at the time the self-dealing transaction occurred.
- The board's refusal of her demand will receive deference under the business judgment rule, requiring Allison to plead particularized facts showing the refusal was wrongful.
- Allison's claim will be dismissed because only the corporation, not an individual shareholder, has standing to sue for injuries to the corporation.
- The derivative suit must be dismissed because Allison failed to make a demand on the corporation's shareholders before filing suit.
Show answer
Correct: The board's refusal of her demand will receive deference under the business judgment rule, requiring Allison to plead particularized facts showing the refusal was wrongful.
Under Delaware law, when a shareholder makes a demand on the board and the board refuses, the shareholder may proceed with a derivative suit only by pleading particularized facts creating a reasonable doubt that the board's decision to refuse the demand was a valid exercise of business judgment. See Spiegel v. Buntrock, 571 A.2d 767 (Del. 1990); Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981). By making the demand, Allison effectively conceded that a majority of the board was disinterested and independent enough to evaluate the claim. The special litigation committee's refusal is therefore protected by the business judgment rule, and Allison bears the burden of overcoming that presumption—a high and often decisive hurdle. This is the most significant obstacle she faces.
Garcia and Hwang, both experienced real estate investors, orally agreed to purchase a commercial building together, split renovation costs equally, and divide any profits or losses from the venture 50/50. They did not file any formation documents with the state, did not sign a written agreement, and never discussed what to call their arrangement. After the building was purchased in both their names, Hwang secretly purchased an adjacent parcel of land that she learned about through their joint renovation efforts, intending to develop it solely for her own benefit. When Garcia discovered the purchase, he demanded that Hwang hold the adjacent parcel in constructive trust for their joint benefit. Which of the following is the strongest basis for Garcia's claim?
- Garcia and Hwang formed a partnership by their conduct, and Hwang breached her fiduciary duty to account for profits derived from partnership opportunities.
- Garcia and Hwang formed a joint venture, but joint venturers do not owe each other fiduciary duties, so Garcia must rely solely on an unjust enrichment theory.
- Because there was no written partnership agreement and no filing with the state, no partnership was formed, and Garcia has no fiduciary duty claim against Hwang.
- Garcia's claim fails because the duty of loyalty in a partnership only prohibits competing with the partnership, not the taking of business opportunities discovered through partnership activities.
Show answer
Correct: Garcia and Hwang formed a partnership by their conduct, and Hwang breached her fiduciary duty to account for profits derived from partnership opportunities.
Under the Uniform Partnership Act (UPA) § 202(a) (RUPA § 202(a)), a partnership is formed by the 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 file any documents. Here, Garcia and Hwang agreed to co-own property, share profits and losses equally, and jointly manage renovations—classic indicia of partnership formation. No written agreement or filing is required. Once a partnership exists, each partner owes fiduciary duties to the other, including the duty to account under UPA § 21 (RUPA § 404(b)(1)), which requires a partner to hold as trustee any profits or benefits derived from the partnership's business or from the use of partnership property or opportunities. Hwang learned of the adjacent parcel through the partnership's renovation activities, making it a partnership opportunity. Her secret acquisition breached this duty, supporting Garcia's constructive trust claim.
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