CALIFORNIA BUSINESS ASSOCIATIONS MASTER TREATISE OUTLINE
California Business Associations is a sprawling, high-frequency subject on the California Bar Examination that fuses five interlocking bodies of law: agency, general and limited partnerships, limited liability partnerships (LLPs), limited liability companies (LLCs), and corporations. The bar examiners love this subject because it cross-pollinates effortlessly: a single fact pattern can ask you to determine whether an agent bound a principal, whether two people inadvertently formed a partnership, whether a corporate officer breached the duty of loyalty, and whether a shareholder may pierce the corporate veil — all in one essay. The doctrinal backbone is statutory. California has enacted its own versions of the uniform acts, codified almost entirely in the California Corporations Code: the California Uniform Partnership Act of 1994 (RUPA) at Corp. Code § 16100 et seq.; the Uniform Limited Partnership Act of 2008 (ULPA 2008) at Corp. Code § 15900 et seq.; the California Revised Uniform Limited Liability Company Act (RULLCA) at Corp. Code § 17701.01 et seq.; and the General Corporation Law at Corp. Code § 100 et seq. This treatise states the majority/MBE-MEE rules but flags every place where California departs — and California departs often. The signature California distinctions tested again and again are: default cumulative voting for non-listed corporations (§ 708); the retained-earnings and solvency tests for distributions (§§ 500–501) that replace the RMBCA's equity-insolvency/balance-sheet framework; the universal-demand and security-for-expenses requirements in derivative litigation (§ 800); and above all the § 2115 "pseudo-foreign corporation" doctrine, under which California imposes many of its own internal-governance rules on out-of-state corporations whose business and ownership are concentrated in California. Master the general rules, then layer the California overlays on top — that two-tier mastery is exactly what the examiners reward.
I. AGENCY
Agency is the doctrinal foundation of all business associations because partners, members, directors, officers, and corporate employees all act as agents. Agency is the fiduciary relationship that arises when a principal manifests assent that an agent shall act on the principal's behalf and subject to the principal's control, and the agent so consents. California agency law is largely common law supplemented by Civil Code §§ 2295–2400; it tracks the Restatement (Third) of Agency closely.
A. Creation of the Agency Relationship
Rule: An agency relationship requires (1) assent (an informal agreement between principal and agent), (2) benefit (the agent acts on the principal's behalf), and (3) control (the principal has the right to control the agent's conduct). No consideration is required — agency may be gratuitous. The principal must have contractual capacity; the agent need only have minimal capacity (even a minor may serve as an agent). Civ. Code § 2295 defines an agent as "one who represents another, called the principal, in dealings with third persons." Agency may be created by act of the parties (express or implied agreement, or estoppel) or by operation of law.
B. Actual Authority — Express and Implied
Rule: Actual authority is the authority the agent reasonably believes she possesses based on the principal's manifestations to the agent. Actual express authority is conveyed by the principal's words (oral or written). It can be conferred orally even if the resulting contract must be in writing — except where the equal dignities rule applies (Civ. Code § 2309): if the underlying transaction must be in writing under the Statute of Frauds (e.g., a contract for the sale of real property), the agent's authority must also be in writing. Actual implied authority is authority the agent reasonably believes she has as a result of the principal's conduct, including authority incidental to express authority, authority arising from custom and usage, and authority arising from prior dealings/acquiescence. Actual authority is terminated by the lapse of a specified or reasonable time, a change in circumstances, breach of fiduciary duty by the agent, either party's unilateral termination, or by operation of law (death or incapacity of either party, though California recognizes durable powers of attorney that survive incapacity).
C. Apparent (Ostensible) Authority
Rule: California uses the term ostensible authority for what the Restatement calls apparent authority. Under Civ. Code § 2300, ostensible authority is "that which a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess." It arises from the principal's manifestations to a third party (not the agent), reasonably leading the third party to believe the agent is authorized. The third party must reasonably rely. Key applications: (1) lingering apparent authority after actual authority terminates, where the third party has not received notice; (2) the principal's act of clothing the agent with a title or position that customarily carries certain powers; and (3) ratification by inference. Note the CA flavor: § 2300's "want of ordinary care" language means a principal can create ostensible authority through negligence in allowing a belief to form, not only through affirmative representations.
D. Ratification
Rule: Ratification (Civ. Code §§ 2307, 2310–2314) occurs when a principal affirms a prior act that was done or purported to be done on the principal's behalf, treating the act as authorized retroactively. Requirements: (1) the principal must have knowledge of all material facts; (2) the principal must accept the entire transaction (no partial ratification); and (3) the principal must have had capacity both at the time of the act and at the time of ratification. The act must have been done by a purported agent (or by someone purporting to act for the principal); an undisclosed principal cannot ratify because the agent did not purport to act on that principal's behalf. Ratification may be express or implied (e.g., by accepting the benefits of the transaction with knowledge of the facts). Ratification relates back to the time of the original act but cannot cut off intervening rights of third parties or where circumstances have materially changed.
E. Liability of Principal on Contracts — Disclosed, Partially Disclosed, Undisclosed Principals
Rule: If the agent acts with authority (actual, apparent, or by ratification), the principal is bound. Disclosed principal: the third party knows of the principal's existence and identity — only the principal is liable on the contract, not the agent. Partially disclosed (unidentified) principal: the third party knows an agency exists but not the principal's identity — both the principal and the agent may be held liable. Undisclosed principal: the third party believes the agent is the principal — both the undisclosed principal and the agent are liable, and the third party, upon discovery, may elect to hold either (though some courts require election before judgment). An undisclosed principal is bound only by the agent's actual authority (express or implied), not apparent authority, because the third party did not know of the principal and therefore could not have relied on any manifestation by the principal.
F. Tort Liability — Respondeat Superior and Scope of Employment
Rule: Under respondeat superior, an employer (master) is vicariously liable for torts committed by an employee (servant) acting within the scope of employment. The threshold question is employee vs. independent contractor: a principal is generally not liable for the torts of an independent contractor. The controlling factor is the right to control the manner and means of the work. Secondary factors (the Borello factors, from S.G. Borello & Sons v. Dept. of Industrial Relations) include the distinct occupation of the worker, the skill required, who supplies the tools and workplace, the length of time of the relationship, the method of payment, and whether the work is part of the principal's regular business. California departure / note: for many statutory wage-and-hour purposes California applies the stricter ABC test from Dynamex (codified at Lab. Code § 2775), but for common-law tort vicarious liability the Borello right-to-control test still governs.
G. Scope of Employment — Frolic and Detour
Rule: An act is within the scope of employment if it is of the kind the employee was hired to perform, occurs substantially within authorized time and space limits, and is motivated at least in part to serve the employer. A minor deviation (a detour) remains within scope; a substantial, independent departure (a frolic) falls outside scope and relieves the employer of vicarious liability until the employee returns to the employer's business. California uses a broad foreseeability test: the employer is liable if the tort was a foreseeable consequence of the enterprise, i.e., not so unusual or startling that it would be unfair to include the loss as a cost of doing business. Intentional torts are usually outside scope, but California holds the employer liable where the tortious conduct is engendered by or an outgrowth of the employment (e.g., a bouncer's assault, a dispute arising from work duties). The coming-and-going rule ordinarily exempts commutes, but exceptions apply (special errand, required vehicle, employer benefit).
H. Duties of Agent and Principal
Rule: The agent owes the principal fiduciary duties of (1) loyalty (act solely for the principal's benefit; no self-dealing, no usurping the principal's opportunities, no competing, no secret profits), (2) care (act with reasonable skill and diligence), and (3) obedience (obey the principal's reasonable instructions), plus duties to account and to disclose material information. The principal owes the agent duties to (1) compensate as agreed, (2) reimburse and indemnify for authorized expenses and losses, and (3) cooperate. A principal's remedy for breach includes constructive trust over secret profits and disgorgement; an agent who breaches the duty of loyalty may forfeit compensation.
ESSAY WRITING TIP: Always resolve agency in a rigid sequence — first establish that an agency relationship exists (assent, benefit, control), then march through the four authority pathways in order: actual express, actual implied, apparent/ostensible, and ratification. For tort liability, separate the employee/independent-contractor question from the scope-of-employment question and address each under its own header; graders award points for the structural separation even before the analysis.
CA BAR TIP: Use California's own vocabulary. Write "ostensible authority" and cite Civ. Code § 2300, not "apparent authority," and quote the statute's "intentionally or by want of ordinary care" language — that phrasing signals to the grader that you know California codifies agency in the Civil Code. Remember the equal dignities rule (Civ. Code § 2309) whenever the underlying deal touches real property.
EXAMPLE: P, a winery owner, tells store managers that A "runs my operations." A, without express permission, signs a contract on P's behalf to buy grapes from T, a longtime supplier who has dealt with A before. P is bound: A had actual implied authority from custom and prior dealings, and ostensible authority because P's "runs my operations" statement caused T reasonably to believe A could contract. If A had instead signed a one-year real-property lease, the equal dignities rule would require A's authority to be in writing.
II. GENERAL PARTNERSHIPS
The general partnership is governed in California by the California Uniform Partnership Act of 1994 (RUPA), Corp. Code § 16100 et seq. RUPA treats the partnership as an entity distinct from its partners (a departure from the old aggregate theory), which matters for property ownership, suit, and continuity. The partnership agreement governs relations among partners, with mandatory statutory floors that cannot be waived (e.g., the duty of loyalty's core, access to books, the power to dissociate).
A. Formation and the Sharing-of-Profits Presumption
Rule: A partnership is "the association of two or more persons to carry on as co-owners a business for profit," whether or not the persons intend to form a partnership (Corp. Code § 16202(a)). No writing or filing is required. The single most important formation rule: the receipt by a person of a share of the profits of a business is prima facie (presumptive) evidence that he or she is a partner (§ 16202(c)(3)) — unless the profits were received as payment of a debt, wages/compensation to an employee or independent contractor, rent, an annuity to a retired partner, interest on a loan, or for the sale of business goodwill. Sharing of gross returns alone does not establish a partnership (§ 16202(c)(2)), and common ownership of property does not by itself create one (§ 16202(c)(1)). Intent to share profits and losses and to co-manage is the hallmark.
B. Partnership by Estoppel
Rule: Under Corp. Code § 16308, a person who, by words or conduct, represents himself (or consents to being represented) as a partner is liable to a third party who reasonably relies on that representation and extends credit on the faith of it — even if no actual partnership exists ("purported partner"). Likewise, a person who holds another out as a partner makes that other person an agent able to bind him as to the relying third party. This protects creditors who deal with apparent partnerships.
C. Partnership Property
Rule: Property is partnership property if acquired in the partnership's name, or in a partner's name where the instrument indicates partnership capacity or the partnership's existence, or if purchased with partnership funds (§§ 16203, 16204 — a rebuttable presumption arises when partnership funds are used). A partner is not a co-owner of partnership property and has no transferable interest in specific partnership property (§ 16501); the partnership owns it as an entity. A partner's only transferable economic interest is the partner's share of profits, losses, and distributions (§ 16502).
D. Partner as Agent; Liability of Partners
Rule: Each partner is an agent of the partnership for the purpose of its business (§ 16301). An act of a partner for apparently carrying on the partnership business in the ordinary course binds the partnership unless the partner lacked authority and the third party knew or had received notification of that lack of authority. Partners may file a statement of partnership authority (§ 16303) to expand or limit authority of record. Liability: all partners are jointly and severally liable for all obligations of the partnership, whether arising in tort or contract (Corp. Code § 16306(a)) — a California/RUPA point, as the older UPA made contract liability merely joint. However, a judgment creditor must generally exhaust partnership assets first before reaching an individual partner's personal assets (§ 16307(d) — the exhaustion rule). An incoming partner is not personally liable for obligations incurred before admission (§ 16306(b)); the new partner's liability for pre-admission debts is limited to that partner's capital contribution.
E. Fiduciary Duties — Loyalty and Care
Rule: Corp. Code § 16404 imposes on each partner the fiduciary duties of loyalty and care, plus the obligation of good faith and fair dealing. The duty of loyalty (§ 16404(b)) requires a partner to (1) account to the partnership for any property, profit, or benefit derived from the partnership's business or use of its property, including the appropriation of a partnership opportunity; (2) refrain from dealing with the partnership as or on behalf of an adverse party; and (3) refrain from competing with the partnership before dissolution. The duty of care (§ 16404(c)) limits a partner to refraining from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law — a partner is not liable for ordinary negligence in managing the business. The partnership agreement may not eliminate the duty of loyalty, but it may identify specific types of permitted conduct if not manifestly unreasonable (§ 16103).
F. Management Rights and Profit/Loss Sharing
Rule: Absent agreement, each partner has equal rights in management and conduct of the partnership business (§ 16401(f)), regardless of capital contribution. Ordinary-course decisions are made by majority vote; decisions outside the ordinary course or amendments to the partnership agreement require unanimous consent (§ 16401(j)). Default profit sharing is equal, regardless of contributions; losses follow profits in the same proportions (§ 16401(b)). Partners are not entitled to compensation for services (§ 16401(h)) except reasonable compensation for winding up.
G. Transfer of Partnership Interest
Rule: A partner may transfer his transferable economic interest (right to distributions) without consent of the other partners (§ 16503), but the transferee does not thereby become a partner and acquires no management or information rights; admission as a partner requires unanimous consent of existing partners (§ 16401(i)). A creditor of an individual partner may obtain a charging order (§ 16504) against the partner's transferable interest — the exclusive remedy — entitling the creditor to distributions but not to management.
H. Dissociation
Rule: Dissociation (Corp. Code § 16601) is a partner's withdrawal from the partnership, triggered by events such as the partner's express will to withdraw, an agreed event, expulsion, bankruptcy, death or incapacity, or appointment of a guardian. A partner always has the power to dissociate at any time by express will, even if he lacks the right to do so; a wrongful dissociation (in breach of the agreement or before the end of a term) subjects the partner to liability for damages (§ 16602). Following dissociation, the partnership either (a) buys out the dissociated partner's interest and continues (§§ 16603, 16701), or (b) winds up and dissolves. A dissociated partner can still bind the partnership for up to two years on transactions with third parties who reasonably believed he was still a partner and lacked notice (§ 16702), and remains liable to creditors for pre-dissociation obligations; filing a statement of dissociation (§ 16704) cuts off this lingering authority/liability after 90 days as to those with notice.
I. Dissolution and Winding Up
Rule: Dissolution (Corp. Code § 16801) and the consequent winding up occur upon specified events: in an at-will partnership, a partner's notice of express will to withdraw; in a term partnership, expiration of the term or unanimous consent (or, after a partner's wrongful dissociation or death, the express will of at least half the remaining partners within 90 days); an agreed event; an event making the business unlawful; or judicial dissolution (§ 16801(5), available where it is not reasonably practicable to carry on, the economic purpose is frustrated, or a partner's conduct makes continuation impracticable). During winding up, the partnership continues only for the purpose of liquidating assets, discharging liabilities, and distributing the surplus; partners retain apparent authority to wind up but not to undertake new business.
J. Distribution Priority on Winding Up
Rule: Corp. Code § 16807 sets the order of distribution of partnership assets. First, the partnership must pay creditors, including partners who are creditors (i.e., who made loans, as distinguished from capital contributions). Second, each partner's account is settled: the partnership pays each partner the net amount in the partner's account (capital contributions plus the partner's share of profits, minus losses and prior distributions). In RUPA there is a single accounting in which the partner's loans, capital, and profit share are folded into the account balance. If the partnership's assets are insufficient, partners must contribute to cover the deficiency in the proportion in which they share losses; if a partner fails to contribute, the others must contribute proportionally to make up that partner's share.
ESSAY WRITING TIP: When a fact pattern shows two or more people sharing the proceeds of a venture, lead with the § 16202(c)(3) profit-sharing presumption — state it, then test the facts against the statutory exceptions (debt repayment, wages, rent, interest, goodwill). For any partner-liability question, always pair § 16306 joint-and-several liability with the § 16307(d) exhaustion-of-partnership-assets rule; the second half is the part students forget.
CA BAR TIP: California abolished the old aggregate-theory accounting and uses RUPA's single-account model under § 16807 — do not write the obsolete UPA distribution rules. And distinguish dissociation (§ 16601, one partner leaving — the partnership may continue) from dissolution (§ 16801, the whole partnership winding up); examiners deliberately set traps where a partner's departure dissociates but does not dissolve.
EXAMPLE: A and B run a catering business, splitting net profits 50/50 and jointly deciding menus. They never signed anything. A partnership exists under § 16202 despite the absence of any agreement, with equal management and equal profit/loss shares (§ 16401). If a guest is injured by spoiled food, both A and B are jointly and severally liable (§ 16306), but a creditor must first exhaust the catering business's assets (§ 16307(d)). If A later tells B "I'm out," A has the power but, if there was a fixed term, perhaps not the right to dissociate — a wrongful dissociation exposing A to damages under § 16602.
III. LIMITED PARTNERSHIPS (LPs)
The limited partnership is a creature of statute governed in California by the Uniform Limited Partnership Act of 2008 (ULPA 2008), Corp. Code § 15900 et seq. An LP has at least one general partner (who manages and bears unlimited personal liability) and at least one limited partner (a passive investor whose liability is limited to the capital contributed). Unlike a general partnership, an LP requires a public filing to exist.
A. Formation
Rule: A limited partnership is formed by filing a Certificate of Limited Partnership (Form LP-1) with the California Secretary of State (Corp. Code § 15902.01). The certificate must state the LP's name (which must contain "limited partnership" or "LP"), the agent for service of process, and the name and address of each general partner. The LP exists when the certificate is filed (or on a later specified date). The partnership agreement governs internal affairs.
B. General Partners — Management and Liability
Rule: General partners have the exclusive right to manage the LP's ordinary business (§ 15904.06) and, as agents, can bind the LP. Each general partner is jointly and severally liable for the LP's obligations (§ 15904.04) — the same unlimited personal liability as a partner in a general partnership. A general partner owes the LP and the other partners the fiduciary duties of loyalty and care (§ 15904.08), mirroring § 16404.
C. Limited Partners — The Liability Shield and the Control Rule
Rule: A limited partner is not personally liable for the LP's obligations solely by reason of being a limited partner — the liability shield (Corp. Code § 15903.03(a)). California departure / modernization: ULPA 2008 abolished the old "control rule." Under the prior law, a limited partner who participated in control of the business could lose the shield and be liable as a general partner to those who reasonably believed him to be a general partner. Under § 15903.03, the shield applies even if the limited partner participates in management — there is no longer a control-rule exception. This is a frequently tested change: a limited partner may now take an active role without forfeiting limited liability. Limited partners have information rights (§ 15903.04) and the right to vote on extraordinary matters as provided in the agreement, but they owe no fiduciary duties to the LP merely by being limited partners (§ 15903.05) — only the duty of good faith and fair dealing.
D. Distributions, Transfer, and Dissolution
Rule: Distributions are made on the basis agreed; absent agreement, on the basis of the value of each partner's contributions (§ 15904.03). A partner's transferable interest may be assigned (§ 15905.02), with a charging order as the exclusive creditor remedy (§ 15905.03). The LP dissolves on the happening of an event specified in the agreement, the consent of all general partners and a majority-in-interest of limited partners, the dissociation of the last general partner (unless a replacement is admitted within 90 days), the passage of 90 days with no limited partners, or judicial decree (§ 15908.01). On winding up, assets pay creditors first (including partner-creditors), then partners per § 15908.12.
ESSAY WRITING TIP: When an LP appears, immediately classify every named person as a general partner (manager, unlimited liability) or a limited partner (passive, shielded), and watch for a limited partner who has been managing — the issue the examiner planted. State the old control rule, then explain that ULPA 2008 abolished it under § 15903.03, so the limited partner keeps the shield.
CA BAR TIP: The single highest-yield LP point in California is the death of the control rule. Older study aids and bar outlines still teach that a controlling limited partner loses limited liability — that is no longer California law under ULPA 2008. Cite § 15903.03 and note the change expressly.
EXAMPLE: LP is a real-estate fund with G as general partner and L as a limited partner who contributed $500,000. L attends weekly meetings and votes on which properties to buy. A creditor sues, arguing L participated in control and is liable as a general partner. Under former law L might have lost the shield, but under § 15903.03 the control rule is abolished — L's liability remains capped at the $500,000 contributed, regardless of L's management participation.
IV. LIMITED LIABILITY PARTNERSHIPS (LLPs)
The limited liability partnership is a general partnership that has registered for a liability shield, governed in California by Corp. Code §§ 16951–16962, integrated into RUPA. In California, the LLP form is restricted to specified licensed professions — practitioners of public accountancy, law, and architecture (and certain related fields) — a notable California limitation.
A. Formation and the Professional Restriction
Rule: An LLP is formed by filing a registration (Form LLP-1) with the Secretary of State (§ 16953); the name must include "Registered Limited Liability Partnership," "Limited Liability Partnership," "LLP," or "RLLP." California departure: unlike many states that allow any business to operate as an LLP, California restricts LLPs to the practice of law, public accountancy, and architecture (and certain related licensed services), per § 16951/§ 16101. California also requires LLPs to maintain specified levels of security for claims (insurance or segregated funds, §§ 16956), as a condition of the shield.
B. The Liability Shield
Rule: A partner in an LLP is not personally liable, directly or indirectly (including by indemnification or contribution), for debts, obligations, or liabilities of the partnership — whether in tort, contract, or otherwise — arising while the partnership is an LLP, solely by reason of being a partner (Corp. Code § 16306(c)). The shield protects partners from vicarious liability for the firm's obligations and for the malpractice of other partners. Important limit: the shield does not protect a partner from liability for his or her own negligence, wrongful acts, or misconduct, nor for the misconduct of a person under that partner's direct supervision and control. Each partner remains liable for his own torts.
ESSAY WRITING TIP: For an LLP, separate the two liability buckets cleanly: (1) the partnership's own obligations and other partners' torts — shielded under § 16306(c); versus (2) the defendant partner's personal malpractice or supervisory failure — not shielded. The examiner is almost always testing whether the negligent partner himself is on the hook (he is) while his co-partners are protected (they are).
CA BAR TIP: Flag California's profession-only restriction. If the fact pattern involves a restaurant, a tech startup, or a construction company organized as an "LLP," note that in California only law, accounting, and architecture firms may use the LLP form — a fact pattern signal that the form may be invalid (the entity would default to a general partnership with no shield).
EXAMPLE: A law firm registers as an LLP. Partner P negligently misses a client's filing deadline; the client sues all five partners. Under § 16306(c), the other four partners are shielded from vicarious liability for P's malpractice, and the firm's assets are reachable, but P remains personally liable for P's own negligence. Had the firm been a restaurant calling itself an LLP, the form would be unavailable in California and all owners would face general-partnership joint-and-several liability.
V. LIMITED LIABILITY COMPANIES (LLCs)
The LLC is a hybrid entity combining the limited liability of a corporation with the pass-through flexibility and informal governance of a partnership. California governs LLCs under the California Revised Uniform Limited Liability Company Act (RULLCA), Corp. Code § 17701.01 et seq., effective January 1, 2014. Members own the LLC; management may rest with the members (member-managed, the default) or with designated managers (manager-managed).
A. Formation
Rule: An LLC is formed by filing Articles of Organization (Form LLC-1) with the California Secretary of State (Corp. Code § 17702.01). The name must contain "Limited Liability Company," "LLC," or "L.L.C." The LLC exists when the articles are filed. Members should adopt an operating agreement (which may be oral, written, or implied, § 17701.02(s)) governing internal affairs; the operating agreement controls over the default statutory rules in most respects, subject to non-waivable provisions (§ 17701.10). California departure: California LLCs may not render professional services for which a license is required (with narrow exceptions); licensed professionals must use a professional corporation or LLP instead (§ 17701.04(e)).
B. Management — Member-Managed vs. Manager-Managed
Rule: An LLC is member-managed unless the articles or operating agreement provide that it is manager-managed (Corp. Code § 17704.07). In a member-managed LLC, each member has equal rights in management; ordinary decisions are by majority of members, and extraordinary matters (e.g., amending the operating agreement, admitting members, selling all assets) require unanimous consent. In a manager-managed LLC, the managers run the business; members generally do not, except they retain a vote on fundamental matters. Each member (member-managed) or manager (manager-managed) is an agent able to bind the LLC for acts in the ordinary course (note: RULLCA eliminated statutory apparent authority by status, so authority is analyzed under general agency principles and any filed statement of authority).
C. Limited Liability and Veil Piercing
Rule: Members and managers are not personally liable for the LLC's debts, obligations, or liabilities solely by reason of being a member or acting as a manager (Corp. Code § 17703.04(a)). The shield falls away only through veil piercing. California applies the same alter-ego doctrine used for corporations to LLCs (§ 17703.04(b) expressly incorporates corporate veil-piercing law): a court may pierce where there is (1) such a unity of interest and ownership that the separate personalities of the LLC and the member no longer exist, and (2) an inequitable result (fraud or injustice) would follow from treating the acts as those of the LLC alone. Notably, § 17703.04(b) provides that the failure to observe formalities relating to the exercise of management is not a ground for imposing personal liability — recognizing that LLCs are designed to operate informally. So undercapitalization and commingling matter, but lack of meetings/minutes does not.
D. Fiduciary Duties
Rule: In a member-managed LLC, each member owes the LLC and the other members the fiduciary duties of loyalty and care (Corp. Code § 17704.09), defined in parallel to partnership law: loyalty requires accounting for benefits, avoiding adverse-interest dealing, and refraining from competing; care is limited to refraining from grossly negligent or reckless conduct, intentional misconduct, or knowing legal violations. In a manager-managed LLC, these duties are owed by the managers, and a non-managing member owes no fiduciary duties solely by reason of being a member (§ 17704.09(g)). All members and managers owe the obligation of good faith and fair dealing.
E. Distributions, Transfer, Dissociation, and Dissolution
Rule: Distributions are shared equally among members by default (Corp. Code § 17704.04 — note California's default is per capita, not by contribution, absent agreement). A member's transferable interest (economic rights) may be assigned, but the transferee does not become a member or gain management rights without consent (§ 17705.01–.02); a charging order is the exclusive creditor remedy (§ 17705.03). A member may dissociate at any time (§ 17706.02); wrongful dissociation creates liability. Dissolution (Corp. Code § 17707.01) occurs on an event specified in the operating agreement, the consent of a majority of members (or as the agreement provides), the passage of 90 days with no members, or a judicial decree (e.g., where it is not reasonably practicable to carry on, or for member oppression/deadlock). On winding up, assets pay creditors first, then members (§ 17707.05).
ESSAY WRITING TIP: First classify the LLC as member-managed (the default) or manager-managed — the fiduciary-duty and authority analysis flips entirely on that classification. For piercing, recite the two-prong California alter-ego test verbatim (unity of interest + inequitable result) and then expressly note the § 17703.04(b) carve-out that failure to follow formalities is not a piercing ground for LLCs, which distinguishes LLCs from corporations.
CA BAR TIP: Two California-specific traps: (1) California LLCs cannot provide licensed professional services — if doctors or lawyers form an "LLC," flag the invalidity. (2) Default distributions and management votes under RULLCA are per capita (equal per member), not proportional to capital contributions — a frequent California departure from members' intuitive expectations.
EXAMPLE: Three friends form a manager-managed LLC to run an app, naming M as manager. Investor-member I contributes 80% of the capital but is not a manager. Under § 17704.09(g), I owes no fiduciary duties; M owes duties of loyalty and care. If a creditor seeks to reach M's personal assets after the LLC fails, the creditor must satisfy the two-prong alter-ego test — and cannot rely merely on the LLC's failure to hold meetings, because § 17703.04(b) excludes formalities-based piercing for LLCs.
VI. CORPORATIONS — FORMATION AND CORPORATE STATUS
Corporations are governed by the California General Corporation Law, Corp. Code § 100 et seq. A corporation is a legal entity separate from its owners (shareholders), managed by a board of directors, run day-to-day by officers, and characterized by limited shareholder liability, free transferability of shares, centralized management, and perpetual existence.
A. Formation — Articles of Incorporation
Rule: A corporation is formed by filing Articles of Incorporation with the California Secretary of State (Corp. Code §§ 200, 202). The articles must state the corporate name, a statement of purpose (California permits a general "any lawful act" purpose), the agent for service of process, and the number of authorized shares (and, if more than one class, the rights, preferences, and restrictions). The corporation's existence begins upon filing (§ 200(c)). After filing, the incorporators or initial directors hold an organizational meeting to adopt bylaws, elect directors, and appoint officers. Bylaws govern internal management but are not filed.
B. Promoters and Pre-Incorporation Liability
Rule: A promoter is a person who acts on behalf of a corporation not yet formed. A promoter who enters a contract on behalf of a planned corporation is personally liable on that contract, and remains liable even after the corporation is formed, unless there is a novation (an agreement among the promoter, the third party, and the corporation to substitute the corporation for the promoter). The corporation is not automatically bound by pre-incorporation contracts; it becomes liable only if it adopts the contract (expressly or by knowingly accepting its benefits) — and adoption does not by itself release the promoter absent a novation. Promoters owe fiduciary duties to each other, to the corporation, and to prospective investors (full disclosure of any profit on property sold to the corporation; secret profits are recoverable).
C. De Jure, De Facto, and Corporation by Estoppel
Rule: A de jure corporation is one formed in substantial compliance with the incorporation statute — its existence cannot be challenged by anyone. Where formation is defective: (1) the de facto corporation doctrine treats the entity as a corporation (shielding owners from personal liability) if there was a valid incorporation statute, a good-faith colorable attempt to comply, and actual use of corporate powers; and (2) corporation by estoppel prevents a party who dealt with the business as if it were a corporation from later denying its corporate status to reach the owners personally (applies mainly in contract, not tort). California note: these common-law doctrines survive in limited form; California courts have applied de facto and estoppel principles, but because § 200(c) makes corporate existence turn on the act of filing, a total failure to file generally defeats de jure status and limited liability. Owners who do business knowing no corporation was formed may be liable as partners.
D. Ultra Vires
Rule: Under Corp. Code § 208, the validity of corporate action is not invalidated by the fact that the corporation lacked capacity or power to act. The ultra vires doctrine is sharply limited: a corporation's lack of power may be asserted only (1) in a shareholder's suit to enjoin a proposed ultra vires act; (2) in a suit by the corporation (or through a derivative action) against the directors or officers for taking unauthorized action; or (3) by the Attorney General. Third parties cannot avoid contracts on ultra vires grounds, and the corporation cannot use ultra vires as a defense to its own contracts.
ESSAY WRITING TIP: Handle promoter liability with a two-step move: state that the promoter is personally liable on pre-incorporation contracts and stays liable absent a novation, then separately analyze whether the corporation became liable by adoption. Keep "adoption" (corporation accepts benefits, becomes liable) and "novation" (substitution that releases the promoter) as distinct concepts — conflating them loses points.
CA BAR TIP: Because Corp. Code § 200(c) ties corporate existence to the act of filing, lead with whether the articles were actually filed. If filed, you have a de jure corporation and need not reach de facto/estoppel. If not filed, raise de facto and corporation by estoppel as fallback shields — but flag that California treats actual existence as turning on the filing.
EXAMPLE: Promoter P signs a lease "for Newco, a corporation to be formed." Before incorporating, P is personally bound. After Newco files articles and moves into the leased space, paying rent, Newco has adopted the lease and is now also liable — but P remains liable too, because the landlord never agreed to a novation releasing P.
VII. ISSUANCE OF SHARES AND CAPITAL STRUCTURE
A. Authorized, Issued, and Outstanding Shares; Consideration
Rule: The articles fix the number of authorized shares; the board issues shares up to that number. Under Corp. Code § 409, shares may be issued for any consideration the board values in good faith — money paid, labor or services actually rendered, debts cancelled, or tangible/intangible property actually received. California departure: California historically did not permit issuing shares for promissory notes or future services as valid consideration in the way the RMBCA now allows; § 409 permits future services or notes only under specified, restricted conditions (e.g., adequately secured notes, or shares placed in escrow pending performance). The board's good-faith valuation of consideration is conclusive absent fraud. Watered stock issues arise when shares are issued for less than par or stated value; in California, which has largely abandoned mandatory par value, the focus is on adequacy of consideration and director good faith.
B. Preemptive Rights
Rule: Preemptive rights — the right of existing shareholders to buy newly issued shares to maintain their proportionate ownership — do not exist by default in California; they exist only if granted in the articles (Corp. Code § 406). This is the modern majority rule.
ESSAY WRITING TIP: When shares are issued for something other than cash, identify the form of consideration and test it against § 409. Flag any issuance for a bare promissory note or unperformed future services as potentially invalid under California's stricter rule, then note the board's good-faith valuation is otherwise conclusive.
CA BAR TIP: Remember that preemptive rights are opt-in in California (§ 406) — a shareholder complaining of dilution has no preemptive right unless the articles granted one. And California's restriction on shares-for-future-services/notes (§ 409) is a tested departure from the permissive RMBCA approach.
EXAMPLE: A startup issues 100,000 shares to a founder in exchange for the founder's promise to work for two years. Under § 409, an unsecured promise of future services is not valid consideration in California unless the shares are escrowed pending performance; absent that, the issuance is vulnerable. Cash, property actually transferred, or services already rendered would qualify.
VIII. PIERCING THE CORPORATE VEIL
A. The California Two-Part Alter Ego Test
Rule: A shareholder is generally not personally liable for corporate debts (limited liability). A court will pierce the corporate veil and hold a shareholder personally liable under the alter ego doctrine only upon a two-part showing: (1) unity of interest and ownership such that the separate personalities of the corporation and the individual no longer exist; and (2) that an inequitable result (fraud or injustice) will follow if the acts are treated as those of the corporation alone (the seminal California case is Automotriz del Golfo de California v. Resnick, and the factors are catalogued in Sonora Diamond Corp. v. Superior Court). Factors bearing on unity of interest include: commingling of funds and assets; treating corporate assets as one's own; failure to maintain adequate corporate records or observe formalities; undercapitalization (inadequate capital for the reasonably anticipated risks of the business); identical equitable ownership; use of the same office and employees; and using the corporation as a mere shell or conduit for an individual's affairs. Both prongs are required — bad acts alone without unity of interest, or unity of interest without inequity, will not pierce.
B. Enterprise Liability and Reverse Piercing
Rule: Where a single enterprise is fragmented among affiliated corporations, California courts may apply the single-enterprise (or "single business enterprise") theory to hold sister corporations liable for one another's debts when there is unity of interest and an inequitable result. Reverse veil piercing (reaching corporate assets to satisfy a shareholder's personal debt) is recognized in California but applied cautiously, especially where it would harm innocent shareholders or creditors.
ESSAY WRITING TIP: Never assert piercing on a single factor. Build the unity-of-interest prong by stacking the present factors (commingling, undercapitalization, ignored formalities, shell use), then independently argue the inequitable-result prong — a plaintiff left without recovery because of the abuse. The two prongs must each be satisfied; spell that out.
CA BAR TIP: California requires both unity of interest and an inequitable result; undercapitalization is a powerful but not sufficient factor on its own. Contrast this with the LLC context (§ 17703.04(b)), where failure to observe formalities is not a piercing ground — a distinction examiners love to test side by side.
EXAMPLE: Sole shareholder S runs a delivery corporation, pays personal bills from the corporate account, never holds meetings, and capitalizes it with only $1,000 despite operating a fleet of trucks. After a truck crash injures a pedestrian who obtains a judgment the corporation cannot pay, a court may pierce: unity of interest (commingling, no formalities, gross undercapitalization) plus an inequitable result (an injured plaintiff left uncompensated) satisfy both prongs.
IX. DIRECTORS AND OFFICERS
A. The Board's Powers and Meetings
Rule: The business and affairs of a corporation are managed by, or under the direction of, the board of directors (Corp. Code § 300(a)). Directors must act as a board, at a properly noticed meeting with a quorum (a majority of authorized directors, unless the bylaws set a different number, but never fewer than one-third or two, § 307), or by unanimous written consent (§ 307(b)). Directors may participate by conference telephone or electronic means. A director generally may not vote by proxy (directors owe personal judgment). Action requires the approval of a majority of directors present at a meeting at which a quorum is present (§ 307(a)(7)).
B. Duty of Care and the Business Judgment Rule
Rule: Under Corp. Code § 309(a), a director must perform the duties of a director in good faith, in a manner the director believes to be in the best interests of the corporation and its shareholders, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. A director is entitled to rely in good faith on information, opinions, reports, and financial statements prepared by officers, employees, board committees, or experts (lawyers, accountants) whom the director reasonably believes competent (§ 309(b)). The business judgment rule is the corollary: a court will not second-guess an informed, good-faith, disinterested business decision rationally believed to be in the corporation's best interest, even if it turns out badly. The rule shields directors from liability for honest errors of judgment; it does not protect fraud, bad faith, gross negligence, conflicts of interest, or failure to become informed. A director who meets the § 309 standard "shall have no liability" for an alleged failure to discharge the director's duties (§ 309(c)).
C. Duty of Loyalty — Interested-Director Transactions
Rule: A director owes the corporation a duty of loyalty, requiring the director to act in good faith and not to advance personal interests at the corporation's expense. Self-dealing/interested-director transactions are governed by Corp. Code § 310. A contract or transaction between the corporation and one or more of its directors (or another entity in which a director has a material financial interest) is not void or voidable solely because of the interest if any one of the following is satisfied: (1) the material facts of the transaction and the director's interest are fully disclosed or known to the shareholders, and the transaction is approved in good faith by a vote of disinterested shares; (2) the material facts are disclosed or known to the board or committee, the board authorizes the transaction in good faith by a vote of the disinterested directors sufficient without counting the interested director's vote, and the transaction is just and reasonable (fair) to the corporation; or (3) the transaction is, as to the corporation, just and reasonable (entirely fair) at the time it is authorized. California nuance: board approval alone does not fully cleanse the transaction — § 310 generally still requires fairness (the just-and-reasonable showing) where board (rather than disinterested-shareholder) approval is used, so the interested director bears the burden of proving fairness unless disinterested shareholders approved.
D. Corporate Opportunity Doctrine
Rule: A director or officer may not usurp for personal benefit a corporate opportunity — a business opportunity that the corporation has an interest or expectancy in, is in the corporation's line of business, or which the director learned of through his corporate position. The director must first present the opportunity to the corporation and may take it only if the corporation, after full disclosure, rejects it (by disinterested decision). California uses the "interest or expectancy" and "line of business" tests; financial inability of the corporation to take the opportunity may be a defense but is treated cautiously. Wrongful taking results in a constructive trust for the corporation's benefit.
E. Officers
Rule: Officers (a chairman or president, a secretary, and a chief financial officer/treasurer at minimum, § 312) are agents of the corporation and owe the same fiduciary duties of care and loyalty as directors. Their authority to bind the corporation is governed by agency principles — actual authority from the board/bylaws and apparent authority from their office. Officers serve at the pleasure of the board and may be removed with or without cause (subject to contract rights).
F. Indemnification
Rule: Corp. Code § 317 governs when a corporation may or must indemnify directors and officers for expenses, judgments, and settlements incurred in proceedings arising from their corporate service. Indemnification is mandatory where the agent is successful on the merits in defending the proceeding (§ 317(d)). It is permissive (discretionary, on a finding that the agent acted in good faith and in a manner reasonably believed to be in the corporation's best interest) in third-party actions (§ 317(b)) and, with limits, in derivative actions (§ 317(c)) — but the corporation may not indemnify for amounts paid in settling or on judgment in a derivative suit where the agent is adjudged liable to the corporation, absent court approval. Indemnification is prohibited where it would be inconsistent with the statute or public policy. The corporation may advance expenses and purchase D&O insurance (§ 317(i)).
ESSAY WRITING TIP: Tag the duty at issue precisely. If directors made a bad but informed decision, that is duty of care — invoke § 309 and the business judgment rule, and ask whether they did reasonable inquiry. If a director was on both sides of a deal or took an opportunity, that is duty of loyalty — the business judgment rule does not apply; run the § 310 safe harbors or the corporate-opportunity test instead.
CA BAR TIP: The California self-dealing statute (§ 310) is stricter than the cleansing some students assume from the MBCA: disinterested-director approval generally still requires the interested director to prove the transaction was just and reasonable (fair); only disinterested-shareholder approval, with full disclosure, validates without a separate fairness showing. Always cite § 310 and identify which safe harbor applies.
EXAMPLE: Director D, who owns a supply company, votes to have her corporation buy supplies from her company at market rates. Under § 310, the deal survives if (a) disinterested shareholders approved after full disclosure, or (b) the disinterested directors approved and the price was just and reasonable, or (c) the transaction was entirely fair to the corporation. Because D was interested, the business judgment rule will not by itself shield her; the fairness inquiry of § 310 controls.
X. SHAREHOLDERS
A. Shareholder Meetings and Voting
Rule: Shareholders exercise their power principally by electing and removing directors and approving fundamental changes. An annual meeting elects directors (§ 600); special meetings may be called by the board, the chairman, the president, holders of 5% or more of the shares, or as the bylaws provide (§ 600(d)). A quorum is a majority of the shares entitled to vote, present in person or by proxy (§ 602), unless the articles provide otherwise (but not less than one-third). Shareholders may vote by proxy (§ 705), revocable unless coupled with an interest. Action may also be taken by written consent of the holders of the requisite shares (§ 603). The record date fixes who may vote.
B. Cumulative Voting — California's Default Rule
Rule: California departure (signature): Under Corp. Code § 708, cumulative voting is the default for the election of directors in California corporations. Each shareholder may cast a number of votes equal to the number of shares held multiplied by the number of directors to be elected, and may distribute those votes among one or more candidates (e.g., concentrate all votes on a single nominee). Cumulative voting protects minority shareholders by enabling them to elect at least one director. A shareholder may cumulate votes only if (historically) the candidate's name has been placed in nomination and the shareholder has given notice of intent to cumulate. "Listed" corporations (those listed on a national exchange or with many shareholders meeting statutory criteria, § 301.5) may eliminate cumulative voting and adopt a "listed corporation" status with straight voting and a classified board; but for the typical closely held or non-listed California corporation, cumulative voting applies by default and cannot simply be eliminated by the articles. This contrasts sharply with most states (and Delaware), where cumulative voting is opt-in.
C. Voting Agreements, Voting Trusts, and Proxies
Rule: Shareholders may pool their votes by voting agreements (pooling agreements), which are valid and, in California, specifically enforceable (§ 706). A voting trust transfers legal title to a trustee who votes the shares per the trust agreement; California voting trusts are governed by § 706(b) and were historically limited in duration (the agreement must be in writing and a copy filed with the corporation). Irrevocable proxies are permitted where coupled with an interest (§ 705(e)).
D. Inspection Rights
Rule: A shareholder has the right to inspect and copy corporate records. Under Corp. Code §§ 1600–1602: any shareholder may inspect the shareholder list/record upon at least five business days' written demand for a purpose reasonably related to the holder's interest as a shareholder (§ 1600), and holders of at least 5% of the voting shares (or 1% with a Schedule 14A on file) have an absolute right to inspect and copy the record of shareholders (§ 1600(c)). Shareholders may also inspect the accounting books, records, and minutes at any reasonable time upon written demand for a purpose reasonably related to their interests (§ 1601). Directors have an absolute right to inspect all corporate records (§ 1602).
E. Shareholder Derivative Suits
Rule: A derivative suit is brought by a shareholder to enforce a right belonging to the corporation (e.g., for a director's breach of duty); any recovery goes to the corporation, not the shareholder. Corp. Code § 800 sets the requirements: (1) the plaintiff must have been a shareholder at the time of the transaction complained of (contemporaneous-ownership rule) or have acquired the shares by operation of law from such a holder, and must fairly and adequately represent the corporation's interests; (2) the plaintiff must make a demand on the board to take action (§ 800(b)(2)), pleading with particularity the efforts to secure board action and the reasons for not making the effort. California departure (signature): California requires a demand in essentially all cases — there is no broad "demand futility" excuse comparable to Delaware's; the plaintiff must allege the demand and the board's response. Security for expenses: on motion, the corporation or a defendant may require a plaintiff holding a small stake (less than $50,000 or 1% of outstanding shares) to furnish security for the reasonable defense expenses, where the court finds no reasonable possibility the suit will benefit the corporation or that the moving defendant did not participate in the wrong (§ 800(c)–(d)). Courts may stay the derivative suit while the board or a special litigation committee investigates; a disinterested committee's good-faith recommendation to dismiss may be honored under the business judgment rule.
F. Controlling-Shareholder Fiduciary Duties
Rule: A controlling shareholder owes fiduciary duties of good faith and fair dealing to the corporation and to the minority shareholders, particularly when selling control, freezing out the minority, or causing the corporation to enter conflicted transactions. California (notably Jones v. H.F. Ahmanson & Co.) holds that controlling shareholders may not use their control to obtain an advantage at the expense of, or to the detriment of, the minority — the "inherent fairness" standard applies to conflicted controlling-shareholder transactions.
G. Close Corporations
Rule: A statutory close corporation in California (Corp. Code § 158) is one whose articles state it is a close corporation and limit the number of holders of record to a maximum (not exceeding 35), with a legend on the share certificates. Close corporations may dispense with a board and be managed directly by shareholders, and shareholders may enter binding shareholder agreements governing management (§ 300(b)–(c)) that would otherwise impermissibly restrict the board. Because of the absence of a market for shares and the risk of minority oppression, courts impose heightened fiduciary duties among shareholders (analogous to partners) and provide remedies such as involuntary dissolution for oppression or deadlock (§ 1800).
ESSAY WRITING TIP: For any shareholder-voting question, ask first whether cumulative voting applies — in California it is the default under § 708, so a minority shareholder complaining of board exclusion likely had a cumulative-voting right. For a fiduciary-breach injury, decide whether the harm is to the corporation (derivative — recovery to the corporation, § 800 demand required) or to the shareholder individually (direct suit); misclassifying the suit is a common, costly error.
CA BAR TIP: Two California signatures dominate this section. First, default cumulative voting (§ 708) — opposite to most states. Second, the derivative-suit machinery of § 800: a near-universal demand requirement (no broad demand-futility escape) plus security-for-expenses for small holders. Cite both statutes by number and flag them as California departures.
EXAMPLE: A California non-listed corporation has nine directors up for election and a minority bloc holding 15% of shares. Under § 708 cumulative voting, the minority can multiply its shares by nine and concentrate all votes on one nominee, electing at least one director — a right the majority cannot strip by amending the articles (the corporation is not a listed corporation under § 301.5). If the board later loots the corporation, a 0.5% shareholder who sues derivatively may be ordered to post security for expenses under § 800(c).
XI. DISTRIBUTIONS AND DIVIDENDS
A. The Decision to Distribute
Rule: Whether to declare a distribution (dividend, share repurchase, or other transfer of corporate assets to shareholders) is a matter of board discretion protected by the business judgment rule; shareholders cannot compel a dividend absent bad faith or abuse (more likely found in close corporations where a controlling group starves the minority).
B. The California Legality Tests — Retained Earnings and Solvency
Rule: California departure (signature): California does not use the RMBCA's single equity-insolvency/balance-sheet framework. Instead, Corp. Code §§ 500–501 impose two distinct tests, both of which a distribution must satisfy. (1) Retained earnings test (§ 500(a)): a distribution may be made out of retained earnings in an amount not exceeding the corporation's retained earnings; OR, if retained earnings are insufficient, the corporation may still distribute under an alternative asset-coverage test (§ 500(b)) requiring that, immediately after the distribution, the corporation's assets equal at least 1¼ times its liabilities (excluding certain items) and its current assets equal at least its current liabilities (with a higher ratio if average earnings before taxes and interest were less than interest expense). (2) Solvency/equity test (§ 501): a corporation may not make any distribution if it is, or as a result would be, likely to be unable to meet its liabilities as they mature (i.e., the corporation must remain able to pay its debts when due). A distribution that violates §§ 500–501 is unlawful; directors who approve an unlawful distribution may be personally liable to the corporation for the illegal amount (§ 316), and shareholders who knowingly received an unlawful distribution may be required to return it.
ESSAY WRITING TIP: Never analyze a California distribution with the RMBCA's "equity insolvency plus balance sheet" formula — the grader is watching for §§ 500–501. State the retained-earnings test (with the 1¼-to-1 asset/liability backup of § 500(b)) and the separate § 501 ability-to-pay-debts test, and require the distribution to satisfy both. Then reach director liability under § 316.
CA BAR TIP: This is one of the most reliably tested California departures in the whole subject. Memorize the numbers: retained-earnings test, or assets ≥ 1.25 × liabilities and current assets ≥ current liabilities (§ 500), plus the § 501 solvency (ability-to-pay-debts) overlay. Directors who approve unlawful distributions face personal liability under § 316.
EXAMPLE: A corporation with no retained earnings wants to pay a dividend. It may do so only if, immediately after, its assets are at least 1.25 times its liabilities and its current assets at least equal its current liabilities (§ 500(b)) and it remains able to pay its debts as they come due (§ 501). If the dividend would leave it unable to pay maturing obligations, it is unlawful and the approving directors are personally liable under § 316.
XII. FUNDAMENTAL CORPORATE CHANGES
A. Procedure for Fundamental Changes
Rule: Fundamental changes — mergers, sales of substantially all assets outside the ordinary course, conversions, amendments to the articles, and dissolution — follow a common pattern: (1) the board adopts a resolution approving the change; (2) notice is given to shareholders; (3) the shareholders approve, generally by majority of the outstanding shares entitled to vote (Corp. Code §§ 902, 1001, 1201); and (4) any required documents (e.g., a certificate or agreement of merger) are filed with the Secretary of State. Certain transactions trigger class voting and the right of dissent.
B. Mergers and Reorganizations
Rule: California's merger and "reorganization" provisions (Corp. Code §§ 1100–1200 et seq.) classify combinations as merger reorganizations, exchange reorganizations (share exchanges), and sale-of-assets reorganizations. Both the board and shareholders of the constituent corporations generally must approve (§ 1201), with exceptions: a short-form merger of a 90%-or-more-owned subsidiary into its parent requires only the parent's board (§ 1110), and a surviving corporation's shareholders need not vote where the merger does not materially change their rights and the new shares issued do not exceed roughly one-sixth of pre-merger shares. The successor in a merger assumes the constituent's liabilities by operation of law.
C. Sale of Substantially All Assets
Rule: A sale, lease, or other disposition of all or substantially all of a corporation's assets not in the ordinary course of business requires board approval and the approval of a majority of the outstanding shares of the selling corporation (Corp. Code § 1001). The buyer's shareholders ordinarily do not vote. Successor liability may attach to an asset purchaser under the de facto merger, mere-continuation, or fraudulent-transfer theories.
D. Dissolution
Rule: Voluntary dissolution may be elected by the board and a majority of shares, or by 50%+ of the voting power of shareholders (§§ 1900–1901). Involuntary dissolution may be ordered by a court on petition (e.g., of 33⅓% of shares) for grounds including deadlock, abandonment of business, persistent fraud or mismanagement by those in control, or that liquidation is reasonably necessary to protect the complaining shareholders (oppression) (§ 1800). After dissolution, the corporation winds up, pays creditors, and distributes the remainder to shareholders per their liquidation preferences.
E. Dissenters' (Appraisal) Rights
Rule: A shareholder who objects to certain fundamental changes (principally reorganizations/mergers) may have dissenters' rights (also called appraisal rights) — the right to dissent and be paid the fair market value of the shares in cash, in lieu of accepting the deal. California governs these in Corp. Code §§ 1300–1313. To perfect, a dissenting shareholder must: (1) vote against (or abstain in a way the statute treats as dissent from) the transaction (or not consent); (2) make a written demand for purchase and submit the share certificates; and (3) if the corporation and shareholder cannot agree on value, file or join a court proceeding to determine the fair market value as of the day before the terms were announced (§§ 1300–1305). California nuance: dissenters' rights are not available for shares that are listed on a national exchange or that have many holders and a market (unless restrictions apply or more than 5% of a class demands appraisal) — the "market-out" exception (§ 1300(b)(1)). Appraisal is generally the dissenting shareholder's exclusive remedy absent fraud.
ESSAY WRITING TIP: For any combination, build the approval chain in order: board resolution → shareholder notice → shareholder vote (majority of outstanding shares) → filing. Then, in a separate paragraph, ask whether the objecting shareholder qualified for and perfected dissenters' rights under §§ 1300–1313 — graders treat the appraisal remedy as a distinct issue worth its own discussion.
CA BAR TIP: Watch the California "market-out" exception to appraisal (§ 1300(b)(1)): publicly listed shares usually do not get appraisal rights because the market provides an exit. Conversely, in a close corporation merger, dissenters' rights are the minority's key protection — perfect them by voting against, demanding purchase, and litigating fair market value valued the day before the announcement.
EXAMPLE: A closely held California corporation merges into an acquirer. Minority shareholder M opposes the deal. M votes against the merger, submits a timely written demand and her certificates, and the parties dispute value. Under §§ 1300–1305, M is entitled to the fair market value of her shares as of the day before the merger terms were first announced, determined by the court if the parties cannot agree — and because the shares are not exchange-listed, the market-out exception does not bar her appraisal claim.
XIII. THE § 2115 PSEUDO-FOREIGN CORPORATION DOCTRINE
A. The Long Arm of California Corporate Governance
Rule: California departure (signature doctrine): Ordinarily the internal affairs doctrine dictates that a corporation's internal governance is governed by the law of its state of incorporation (so a Delaware corporation's governance is governed by Delaware law). Corp. Code § 2115 overrides this for so-called pseudo-foreign corporations: a corporation incorporated elsewhere but with sufficiently strong California connections is subjected to many of California's own corporate-governance rules. Section 2115 applies if the corporation meets a two-part test: (1) the average of three factors — (a) the percentage of property located in California, (b) the percentage of payroll in California, and (c) the percentage of sales in California — exceeds 50% (the corporation does the majority of its business in California); and (2) more than one-half of its outstanding voting securities are held of record by persons having addresses in California. If both prongs are met, the corporation is a pseudo-foreign corporation.
B. Which Rules Apply; The Exemption
Rule: When § 2115 applies, an enumerated list of California provisions governs the foreign corporation's internal affairs to the exclusion of the law of the state of incorporation — including provisions on cumulative voting (§ 708), the election and removal of directors, director standards of conduct and liability, distributions (§§ 500–501), dissenters' rights, indemnification, derivative suits, and the like. Crucial exemption: § 2115 does not apply to a corporation with outstanding securities listed on a major national securities exchange (NYSE, NYSE American, or NASDAQ) or, in certain circumstances, designated as a national market security. Thus § 2115 principally reaches closely held out-of-state corporations operating mainly in California with mainly California shareholders. The Delaware Supreme Court in VantagePoint Venture Partners v. Examen declined to enforce § 2115 against a Delaware corporation, holding the internal affairs doctrine constitutionally controlling — so the doctrine's reach is contested, but for California bar purposes you must identify and apply § 2115.
ESSAY WRITING TIP: Whenever the facts mention a Delaware (or other out-of-state) corporation doing most of its business in California with mostly California shareholders, raise § 2115 as a threshold issue before applying any governance rule. Run the two-part test (50% average of property/payroll/sales and majority California-record shareholders), check the public-listing exemption, and only then decide whether California's § 708 cumulative voting, §§ 500–501 distributions, and §§ 1300–1313 appraisal rules displace the law of the state of incorporation.
CA BAR TIP: Section 2115 is the single most distinctive California Business Associations doctrine and a favorite essay hook. Memorize the trigger (>50% average of property, payroll, and sales in California, plus >50% of voting shares held by California-address holders) and the exemption (publicly listed on a major exchange). Note the tension with the internal affairs doctrine and VantagePoint, but apply § 2115 as the examiners expect.
EXAMPLE: Tech Inc. is incorporated in Delaware but has 70% of its property, payroll, and sales in California, and 60% of its voting shares are held by shareholders with California addresses; it is not listed on any exchange. Under § 2115, California law — including default cumulative voting (§ 708), the §§ 500–501 distribution tests, and §§ 1300–1313 dissenters' rights — governs Tech Inc.'s internal affairs despite its Delaware incorporation. Had Tech Inc. been NASDAQ-listed, the exemption would restore Delaware law.
XIV. SECURITIES REGULATION OVERVIEW
A. California Corporate Securities Law of 1968
Rule: The Corporate Securities Law of 1968 (Corp. Code § 25000 et seq.) is California's blue-sky law. It makes it unlawful to offer or sell a security in California unless the offering is qualified (registered) with the Department of Financial Protection and Innovation or is exempt (§ 25110 for issuer transactions; § 25130 for nonissuer transactions). Exemptions include limited-offering exemptions (§ 25102(f) for a limited number of sophisticated purchasers without advertising) and exemptions for securities/transactions paralleling federal law. The Law also imposes antifraud liability: § 25401 prohibits the offer or sale of a security by means of a material misstatement or omission, with civil liability under § 25501 (rescission or damages). California's antifraud provisions reach conduct within the state regardless of federal registration.
B. Federal Overview — Rule 10b-5 and § 16(b)
Rule: Federal securities law supplements California law. SEC Rule 10b-5 (under § 10(b) of the Securities Exchange Act of 1934) prohibits fraud in connection with the purchase or sale of any security — requiring a material misrepresentation or omission (or insider trading on material nonpublic information), scienter (intent or recklessness), reliance, causation, and damages; it applies to insider trading under the classical and misappropriation theories. Section 16(b) of the 1934 Act imposes strict short-swing profit liability: a corporate insider (director, officer, or >10% beneficial owner) of a publicly reporting company must disgorge to the corporation any profit realized from a purchase and sale (or sale and purchase) of the company's equity securities within any six-month period — regardless of intent or possession of inside information. These federal regimes are typically tested only at a survey level on the California essay.
ESSAY WRITING TIP: If a sale of stock appears, ask whether the security was qualified or exempt under the Corporate Securities Law (§ 25110/§ 25102(f)) before reaching fraud, and run § 25401/§ 25501 antifraud liability for misrepresentations. Add federal Rule 10b-5 and § 16(b) only briefly unless the facts (insider trading, short-swing trades by an officer) squarely raise them.
CA BAR TIP: The California essay rewards spotting that an unregistered offering may violate the Corporate Securities Law of 1968 unless an exemption (commonly § 25102(f)) applies — a state-law issue distinct from federal registration. Treat 10b-5 and 16(b) as a federal overlay you mention crisply rather than develop at length.
EXAMPLE: A startup sells shares to 50 strangers via a public website without qualifying the offering. This likely violates § 25110, and the § 25102(f) limited-offering exemption is unavailable because the sale was advertised to non-sophisticated purchasers. If the pitch contained material misstatements, buyers may rescind under §§ 25401/25501. Separately, an officer who bought and sold the company's listed stock within six months would owe short-swing profits to the corporation under federal § 16(b).
XV. THE CALIFORNIA BUSINESS ASSOCIATIONS ATTACK PLAN
Approach every Business Associations essay with this disciplined sequence. Step 1 — Identify the entity (or entities). Determine whether you are dealing with an agency relationship, a general partnership (watch the § 16202 profit-sharing presumption for inadvertent partnerships), a limited partnership, an LLP (California professions only), an LLC, or a corporation. Multiple entities and relationships often coexist in one fact pattern. Step 2 — Resolve agency first. Because partners, members, officers, and employees act as agents, establish whether the actor had actual (express/implied) or ostensible authority, or whether the principal ratified — and whether respondeat superior makes a principal vicariously liable (employee vs. independent contractor; scope of employment; frolic vs. detour). Step 3 — Formation and existence. Confirm the entity was properly formed (filing requirements for LPs, LLPs, LLCs, and corporations; no filing for general partnerships) and address promoter liability, de facto/estoppel, and ultra vires where relevant. Step 4 — Liability and the shield. Determine who bears the entity's obligations: general partners and sole proprietors face unlimited joint-and-several liability (§ 16306, with the § 16307(d) exhaustion rule); limited partners, LLP partners, LLC members, and shareholders enjoy shields — then test whether the veil is pierced (corporate/LLC two-prong alter ego: unity of interest + inequitable result). Step 5 — Governance and fiduciary duties. For partnerships and LLCs apply §§ 16404/17704.09 (loyalty and care); for corporations apply the duty of care and business judgment rule (§ 309), the duty of loyalty and interested-director safe harbors (§ 310), and the corporate-opportunity doctrine; classify any owner suit as direct or derivative (§ 800 demand and security-for-expenses). Step 6 — Layer the California overlays. Affirmatively flag every signature California departure the facts implicate: default cumulative voting (§ 708), the §§ 500–501 distribution tests, derivative-suit demand and security (§ 800), dissenters' rights and the market-out exception (§§ 1300–1313), the abolition of the LP control rule (§ 15903.03), the LLP professional restriction, and — above all — the § 2115 pseudo-foreign-corporation doctrine whenever an out-of-state corporation has majority California operations and shareholders. Step 7 — Fundamental changes and securities. For mergers, asset sales, and dissolutions, run the board-then-shareholder approval chain and the appraisal remedy; for stock sales, check qualification/exemption under the Corporate Securities Law of 1968 and add federal 10b-5/16(b) as a brief overlay. Write in IRAC, cite the Corporations Code by section, and explicitly call out each California-specific rule as a departure from the general/MBE-MEE baseline — that two-tier mastery is what separates a passing answer from a high score.