California Bar Exam- Business
Associations (Latest 2026/ 2027 Update)
Verified Questions & Answers | Grade A
(100% Correct Elaborations)
How is a corporation formed?
A document, referred to as the "articles of incorporation" or "charter," must be filed with
the state.
Business-judgment rule
In the absence of fraud, illegality, or self-dealing, courts will not disturb the good-faith
judgment of the directors or officers of a corporation.
Promoter liability pre-incorporation
Promoter is personally liable for knowingly acting on behalf of corp before incorporation,
and remains liable after C comes into existence unless (1) subsequent novation, (2) if 3P
looks only to C for performance, or (3) promoter had no actual knowledge that corp's
charter has not been issued.
Promoter can be liable to C for violating fiduciary duties.
C's liability pre-incorporation
Not liable, even those for the benefit of C, unless it expressly or impliedly ADOPTS a K
by accepting the benefits of the transaction, or gives express ACCEPTANCE of liability
for the debt.
mailto:https://www.stuvia.com/user/Wisdoms
, Reqs for Articles of Incorporation
Must include corporate name, NUMBER OF SHARES IT IS AUTHORIZED TO ISSUE, name
and address of its registered agent, and name and address of each incorporator. Must be
filed w/ state.
Ultra vires actions
When a C that has stated a narrow biz purpose in its articles subsequently engages in
activities outside that stated purpose. Shareholder, corp, and state can all initiate
proceedings to enjoin based on ultra vires action.
Modernly, however, most corporations are allowed to engage in any legitimate business
purpose and are not able to void contracts on the mere claim that they are ultra vires.
Ways to create a corp
De jure corp: when all statutory requirements for incorporation have been satisfied.
De facto corp: organizers (1) made GOOD-FAITH effort to comply and (2) have no ACTUAL
KNOWLEDGE of defect in corporate status.
Corp by estoppel: a person who deals w/ an entity as if it were a corporation is estopped
from denying its existence.
mailto:https://www.stuvia.com/user/Wisdoms
, Effect of pre-incorporation subscription
Prior to incorporation, persons may subscribe to purchase stock from the corporation when
it comes into existence.
Irrevocable for 6 months from date of subscription (unless all subscribers agree to revocation).
Shareholder's preemptive rights
Shareholder has right to purchase newly issued shares in order to maintain proportional
ownership share as provided by articles; waiver of preemptive right isn't revocable.
Default in most jdx = shareholders don't have preemptive rights.
Limitations on distributions
Corp can't distribute if insolvent or if distribution would make corp insolvent. Director is
personally liable to corporation for amount in excess of lawful amount if unlawful
distribution is made.
Restrictions on transfer of securities
Can't enforce restriction against person w/o knowledge of restriction unless security is
CERTIFIED and restriction is CONSPICUOUSLY on security certificate.
mailto:https://www.stuvia.com/user/Wisdoms
Associations (Latest 2026/ 2027 Update)
Verified Questions & Answers | Grade A
(100% Correct Elaborations)
How is a corporation formed?
A document, referred to as the "articles of incorporation" or "charter," must be filed with
the state.
Business-judgment rule
In the absence of fraud, illegality, or self-dealing, courts will not disturb the good-faith
judgment of the directors or officers of a corporation.
Promoter liability pre-incorporation
Promoter is personally liable for knowingly acting on behalf of corp before incorporation,
and remains liable after C comes into existence unless (1) subsequent novation, (2) if 3P
looks only to C for performance, or (3) promoter had no actual knowledge that corp's
charter has not been issued.
Promoter can be liable to C for violating fiduciary duties.
C's liability pre-incorporation
Not liable, even those for the benefit of C, unless it expressly or impliedly ADOPTS a K
by accepting the benefits of the transaction, or gives express ACCEPTANCE of liability
for the debt.
mailto:https://www.stuvia.com/user/Wisdoms
, Reqs for Articles of Incorporation
Must include corporate name, NUMBER OF SHARES IT IS AUTHORIZED TO ISSUE, name
and address of its registered agent, and name and address of each incorporator. Must be
filed w/ state.
Ultra vires actions
When a C that has stated a narrow biz purpose in its articles subsequently engages in
activities outside that stated purpose. Shareholder, corp, and state can all initiate
proceedings to enjoin based on ultra vires action.
Modernly, however, most corporations are allowed to engage in any legitimate business
purpose and are not able to void contracts on the mere claim that they are ultra vires.
Ways to create a corp
De jure corp: when all statutory requirements for incorporation have been satisfied.
De facto corp: organizers (1) made GOOD-FAITH effort to comply and (2) have no ACTUAL
KNOWLEDGE of defect in corporate status.
Corp by estoppel: a person who deals w/ an entity as if it were a corporation is estopped
from denying its existence.
mailto:https://www.stuvia.com/user/Wisdoms
, Effect of pre-incorporation subscription
Prior to incorporation, persons may subscribe to purchase stock from the corporation when
it comes into existence.
Irrevocable for 6 months from date of subscription (unless all subscribers agree to revocation).
Shareholder's preemptive rights
Shareholder has right to purchase newly issued shares in order to maintain proportional
ownership share as provided by articles; waiver of preemptive right isn't revocable.
Default in most jdx = shareholders don't have preemptive rights.
Limitations on distributions
Corp can't distribute if insolvent or if distribution would make corp insolvent. Director is
personally liable to corporation for amount in excess of lawful amount if unlawful
distribution is made.
Restrictions on transfer of securities
Can't enforce restriction against person w/o knowledge of restriction unless security is
CERTIFIED and restriction is CONSPICUOUSLY on security certificate.
mailto:https://www.stuvia.com/user/Wisdoms
