BUSINESS ASSOCIATIONS — ANNOTATED MODEL ESSAY
This essay models an MBCA corporations question featuring a director's conflicting-interest transaction, a usurped corporate opportunity, and a derivative-suit demand, plus a short LLC veil-piercing wrinkle. Read the black text as your timed answer and the gold boxes for why each move earns points.
Apex Robotics, Inc. is a Delaware-incorporated, MBCA-style corporation with five directors. Director Nina also owns 100% of Maple Land Co. Apex's board voted 3–2 to lease a warehouse from Maple Land Co. at $40,000 per month. Nina sat in on the discussion, advocated for the lease, and voted; the two dissenting directors later learned that comparable warehouses leased for roughly $25,000 per month, and that Nina never disclosed she owned Maple Land.
Separately, while attending an industry conference on Apex's behalf, Nina was offered the chance to buy a robotics-parts supplier that Apex's CEO had previously identified as an acquisition target. Nina bought the supplier personally without telling the board and now resells parts to Apex at a markup.
Pamela, who owns 4% of Apex's shares (held for two years), wants to sue. She sent a written demand to the board; the board took no action for 95 days. Apex also operates through a wholly owned subsidiary LLC that Nina runs out of her home, commingling funds and never observing formalities.
(1) Did Nina breach any duty as to the warehouse lease, and is the lease voidable? (2) Did Nina breach a duty regarding the supplier? (3) May Pamela proceed derivatively? (4) May a creditor of the subsidiary LLC reach Apex?
Model Answer — with annotations
Black text is the answer you could realistically write under timed conditions. The gold boxes explain why each move earns points.
I. The Warehouse Lease — Conflicting-Interest Transaction and Duty of Loyalty
The first issue is whether Nina breached her duty of loyalty by causing Apex to lease the warehouse from a company she wholly owns. Directors owe the corporation a duty of loyalty, requiring them to act in the corporation's best interest and not to engage in self-dealing. A director's conflicting-interest transaction is one in which the director (or a person closely associated with her, including an entity she controls) has a financial interest of such significance that it would reasonably be expected to influence her judgment. Nina's 100% ownership of Maple Land makes the lease a classic conflicting-interest transaction.
A conflicting-interest transaction is not automatically void or voidable. Under the MBCA, the transaction will be upheld, and the director protected from liability, if any one of three safe harbors is met: (1) approval by a majority of the disinterested (qualified) directors after full disclosure of the conflict and material facts; (2) approval by a majority of the disinterested shares after full disclosure; or (3) the transaction was fair to the corporation at the time it was entered.
None of the safe harbors is satisfied here. Director approval fails: Nina never disclosed she owned Maple Land, so there was no full disclosure, and the 3–2 vote included Nina herself, an interested director whose vote and presence cannot count toward disinterested approval. There was no shareholder ratification. And the transaction was not fair: Apex paid $40,000 per month for warehouse space worth roughly $25,000, a substantial overpayment indicating unfair price. Because no safe harbor applies, the lease is voidable by the corporation and Nina is liable for breach of the duty of loyalty, including the excess rent (potential damages of about $15,000 per month).
II. The Supplier — Corporate Opportunity Doctrine
The next issue is whether Nina usurped a corporate opportunity by personally buying the robotics-parts supplier. Under the corporate opportunity doctrine, a director may not take for herself a business opportunity that belongs to the corporation without first disclosing it and offering it to the corporation. An opportunity belongs to the corporation if it is one in the corporation's line of business, in which the corporation has an interest or expectancy, or which the director learned of through her corporate position or using corporate resources.
Here the opportunity plainly belonged to Apex. The supplier is in Apex's line of business (robotics parts), Apex had an identifiable interest or expectancy because its CEO had already targeted the company for acquisition, and Nina learned of and pursued the deal while attending the conference on Apex's behalf, using her corporate position. Nina was required to present the opportunity to the board and could take it personally only if the board, fully informed, declined. She did neither. Nina therefore breached her duty of loyalty.
The remedy is a constructive trust: Apex may compel Nina to convey the supplier to the corporation at her cost and to disgorge profits, including the markup she has charged Apex on resold parts. Her financial gain is measured by the benefit she diverted from the corporation, not merely Apex's loss.
III. Pamela's Derivative Suit
The claims belong to the corporation, so Pamela must sue derivatively. To maintain a derivative action she must satisfy standing and demand requirements. Standing requires that the plaintiff have been a shareholder at the time of the wrong (or have acquired the shares by operation of law from one who was) and remain a shareholder throughout the litigation, and that she fairly and adequately represent the corporation's interests. Pamela has held her 4% stake for two years, spanning the wrongs, so she has standing; the size of her holding is irrelevant.
Under the MBCA, demand is universally required: the shareholder must make a written demand on the board and then wait 90 days before filing, unless the corporation rejects the demand earlier or waiting would cause irreparable injury. Pamela made a written demand, and the board took no action for 95 days, exceeding the 90-day waiting period. Demand is therefore satisfied, and Pamela may proceed. If the board had appointed a disinterested committee that, after a good-faith and reasonable investigation, recommended dismissal, the court could dismiss; but mere inaction for 95 days does not bar the suit.
IV. Reaching Apex for the Subsidiary LLC's Debts — Veil Piercing
Finally, a creditor of the subsidiary LLC seeks to reach Apex, the parent. Members of an LLC, like shareholders, are generally not personally liable for the entity's obligations. A court may pierce the veil, however, where the owner so disregards the separateness of the entity that it is an alter ego and recognizing the separate existence would sanction fraud or injustice. Factors include commingling of funds, failure to observe formalities, undercapitalization, and use of the entity as a mere instrumentality.
Here Nina runs the subsidiary out of her home, commingles funds, and never observes formalities, which are strong piercing factors. If the creditor can also show that respecting the separate entity would work an injustice or that the LLC was undercapitalized, a court may pierce and hold Apex liable as the equitable owner. On these facts the commingling and disregard of formalities make piercing a viable claim.
- Uses exact MBCA terms of art (conflicting-interest transaction, the three safe harbors, universal demand).
- Methodically defeats each loyalty safe harbor with a specific fact and quantifies damages.
- Applies both formulations of the corporate-opportunity test and names the constructive-trust remedy.
- Correctly classifies the claim as derivative and nails the contemporaneous-ownership and 90-day demand mechanics.
- Frames veil piercing as a narrow exception to limited liability and applies the factor list to the facts.
- Reaches a defensible conclusion on each numbered call without overclaiming.
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