Deck 22: Legal Rules for Corporate Governance

Question 1

George wants to get out of his investment in Silver Chair Furniture Inc, a corporation incorporated under the Canada Business Corporations Act. He holds 50 percent of the shares and is fed up dealing with William who holds the remaining 50 percent of the shares and will not listen to him. They cannot agree on how the corporation should be run. William is the sole director and officer of the corporation. George has asked William to buy him out or have the corporation buy his shares but neither William nor the corporation have any money. George is prohibited from selling to a third party under a shareholder agreement he signed with William. Can George have the corporation wound up?

A) No, because George should have protected his interests in a shareholders' agreement.
B) No, because, while his interests may have been oppressed, winding up is not a remedy that a court can order based on oppression.
C) No, because William may still want to carry on the business.
D) Yes, in these circumstances it would be just and equitable to wind up the corporation because the two equal shareholders are deadlocked regarding how to run the corporation and there seems to be no alternative solution.
E) No, because winding up is only available if all shareholders consent.

Answer 1

D

Question 2

Which of the following statements best describes how corporate law protects creditors?

A) Creditors can enforce restrictions on the ability of the corporation to pay dividends to shareholders.
B) Corporate law does not protect creditors.
C) Creditors must protect themselves by contract.
D) Corporate law rules restricting the payment of dividends to shareholders unless certain financial tests are satisfied protect creditors by keeping money in the corporation.
E) Directors have a duty to protect the interests of creditors.

Answer 2

D

Question 3

Which of the following best describes to whom the fiduciary duty is owed? The fiduciary duty is owed

A) to creditors and shareholders.
B) to employees.
C) to shareholders.
D) to the corporation.
E) to the government.

Answer 3

D

Question 4

Which if the following statements are TRUE?

A) Shareholders can participate in meetings without attending through a proxy.
B) A form of proxy must be sent to each shareholder of a public corporation along with a management proxy circular in connection with each shareholders' meeting.
C) A proxy need not be a shareholder.
D) A proxy is a person appointed to represent a shareholder at a meeting and vote their shares.
E) all of the above

Question 5

Melli is the President of Iritech Inc, a grocery supplier. On behalf of Iritech, Melli has been negotiating with Teran Food Stores Ltd for two years for Teran to commit to making Iritech its exclusive supplier. Getting the contract would put Iritech's business on a much firmer financial footing. Melli has recently become frustrated with Iritech and is interested in leaving to form her own grocery supply business. The Teran contract would give her a great start and she thinks that Teran has been sufficiently impressed by her that she would have a chance to get the contract for herself. Which of the following factors would support the conclusion that it would be a breach of her fiduciary duty for her to quit and seek the Teran contract for herself?

A) Melli had access to the opportunity because of her position with the corporation.
B) This is a specific opportunity that the corporation has been actively pursuing.
C) The corporation had done extensive work preparing for the opportunity.
D) This is a significant opportunity for the corporation.
E) all of the above

Question 6

As a result of dealing with Barry, Zita believes that she has entered into a contract with Primus Inc. Zita claims that Barry, who is the president of Primus, acted as the corporation's agent. Which of the following statements is TRUE?

A) The concept of ostensible authority means that it is not enough for Zita to prove that Barry appeared to have been authorized to act as the company's agent.
B) Primus can avoid liability by demonstrating that its bylaws prohibited Barry from incurring liability on its behalf.
C) The indoor management rule states that Primus cannot be held liable on the basis of Barry's actions unless, as a matter of the company's internal affairs, it had actually authorized him to act as its agent.
D) Primus cannot deny that Barry had the authority that is usually held by the president of a corporation.
E) Zita can only enforce the contract if she searched all the corporation's public records and found no restriction on Barry's authority.

Question 7

The defence of due diligence

A) applies only to an absolute liability crime.
B) is available to a corporation, in certain circumstances, if the person with managerial responsibility for the area of the corporation's activities in which a strict liability offence was committed acted reasonably in the circumstances with a view to preventing the offence.
C) applies if a shareholder brings an action against a corporate director for relief under the oppression remedy.
D) applies only to a mens rea crime.
E) is the only defence to a derivative action.

Question 8

Jelena and Patrick are starting a retail sporting goods business. They have incorporated a corporation to carry on the business. Jelena has 60 of the 100 issued common shares and Patrick has 1. They have decided that each should be a director and all decisions relating to the business should require the consent of both of them. Which of the following is a reason that Jelena and Patrick should have a shareholders' agreement? They need to agree

A) that all shareholder decisions require the consent of both Jelena and Patrick.
B) on some process by which shares may be transferred, such as a right of first refusal.
C) that each should be elected a director.
D) to restrict the transfer of shares, except in accordance with the agreement.
E) all of the above

Question 9

The obligation that requires certain people within a corporation to act honestly and in good faith when discharging other responsibilities

A) is known as the duty of care.
B) was recently abolished because it often prevented the sort of calculated risks that can generate large profits.
C) arises under the common law, and not under statute.
D) imposes liability only if a breach causes the corporation to suffer a loss.
E) is broken when a person with this obligation enters into a transaction with the corporation unless certain requirements are met.

Question 10

Denise has been asked to join the board of directors of Summit Corp which carries on a software development business. She is attracted by the prestige and contacts she may gain as a result of joining the board but is concerned about her personal liability. Which of the following are TRUE?

A) She should worry about being vicariously liable for torts for which the corporation is responsible.
B) She has nothing to worry about because corporations are separate legal persons and so there is nothing that she would ever become liable for.
C) She does not need to worry so long as she obtains an indemnity from the corporation because an indemnity will always protect her from all risk.
D) She should worry about personal liability under regulatory statutes.
E) She should worry about being held directly liable for the contracts the corporation enters into.

Question 11

Elroy was the controlling shareholder and sole director of Maxi- Screen Ltd, which carries on a film production business. His wife Ann is a minority shareholder. The corporation was incorporated in 1995 and has paid a substantial dividend each year to its shareholders. In 2009, Ann and Elroy separated. Elroy did not declare a dividend even though the business was more profitable than ever because he did not want to share the profits with Ann. Which of the following statements best reflects Ann's legal position?

A) She could seek relief on the basis that Elroy and the corporation have defeated her reasonable expectations and thereby oppressed her or unfairly disregarded or prejudiced her interests.
B) She has no remedy because the declaration of dividends is a matter within the discretion of the directors.
C) She has no remedy because Elroy is the controlling shareholder and can do what he wants.
D) The only way she could seek relief is to apply to the court for permission to bring a derivative action against Elroy on behalf of the corporation for breaching his fiduciary duty.
E) She has no remedy because the failure to pay dividends is not an action that she can dissent from.

Question 12

Which of the following statements best describes the "business judgment rule"?

A) The courts will never find that a business decision by a director or officer is a breach of the duty of care.
B) Business decisions are presumed not to be a breach of duty, unless the court does not understand the business rationale for the decision.
C) The courts will substitute their business judgment for that of directors and officers if doing so makes sense to them.
D) Business decisions are presumed not to be a breach of duty so long as they fall within the range of reasonable alternatives that were available and the process for making the decision was reasonable.
E) Directors and officers should always exercise their best business judgment in making decisions relating to the corporation.

Question 13

Actual authority of an employee may arise as a result of which of the following?

A) a term in an employee's contract with the corporation
B) a provision in a resolution of the directors
C) the employee is orally delegated authority by a person authorized by the corporation to delegate it
D) the employee is appointed to an office, like president, which has authority attached to it
E) all of the above

Question 14

Which of the following statements is TRUE? A corporation is only bound in contract if the person acting on behalf of the corporation

A) had actual authority or apparent authority.
B) had apparent authority.
C) had actual authority.
D) had actual authority and apparent authority.
E) none of the above

Question 15

Which of the following statements is TRUE? An annual meeting is

A) a meeting of shareholders required to be held every 12 months.
B) a meeting of shareholders with respect to which directors must send shareholders a notice of meeting, form of proxy, and management proxy circular.
C) a meeting of directors required to be held every 12 months.
D) a meeting of shareholders at which directors are elected, an auditor appointed, and financial statements are discussed.
E) a meeting of shareholders at which no dissidents are permitted.

Question 16

Michael was a director of Dot.com Tomorrow Inc, incorporated under the Canada Business Corporations Act. He was charged with failing to ensure that the corporation maintained adequate safety standards for its workers. He was furious, claiming that he was innocent. Michael hired the most expensive lawyer he could find and rented a limousine with driver to take him to the court every day of the three- week trial. Each night of the trial he dined out at the best restaurant in town. Eventually, he was acquitted and has asked the corporation to indemnify him for all these expenses. Which of the following is TRUE regarding the legal obligation of the corporation to indemnify Michael for these expenses?

A) So long as Michael fulfilled his fiduciary duty to act in the best interests of the corporation, Dot.com may be obliged to indemnify him for reasonable expenses.
B) Dot.com can only indemnify for reasonable expenses and, to the extent that Michael's expenses are not reasonable, they cannot be indemnified.
C) Dot.com may be obliged to indemnify because Michael had reasonable grounds for believing his conduct was lawful.
D) Dot.com may be obliged indemnify Michael because he was substantially successful on the merits of his defence.
E) all of the above

Question 17

Ebo Corporation was incorporated under the Canada Business Corporations Act in 1991. It carries on a dress making business. Eben is the CEO and the sole director. He holds 60 percent of the shares. Four employees hold the remaining 40 percent, 10 percent each. Eben has run the corporation as if there were no other shareholders. None of the employees has ever seen a financial statement, nor has there ever been a shareholders' meeting. The employees have received substantial dividends on their shares and do not want to leave the corporation or sell their shares. They do, however, want some better disclosure regarding the corporation's business. Which of the following statements best describes the shareholders' rights?

A) They could apply for an order directing Eben to comply with the Canada Business Corporations Act by distributing financial statements and holding shareholder meetings.
B) They could seek leave to bring a derivative action on behalf of the corporation against Eben on the basis that his failure to send them annual financial statements and call annual meetings is a breach of his fiduciary duty to act in the best interests of the corporation.
C) They could requisition a shareholder meeting to discuss the problem.
D) They could apply for relief on the basis that Eben is oppressing or unfairly disregarding their interests.
E) all of the above

Question 18

A derivative action

A) is a type of crime that allows a corporation to be punished if a director misbehaves.
B) allows a corporation to sue a shareholder who refuses to pay the purchase price for his or her shares.
C) always occurs in connection with a unanimous shareholder agreement.
D) occurs when a corporation feels compelled by the consequences of one decision to act on another decision.
E) is an action by someone on behalf of the corporation that can be pursued only with court approval.

Question 19

Roxanne is a minority shareholder in Sumner Inc. She is very unhappy with the way that the company is being operated. She therefore intends to express her disapproval and advocate changes at the next annual meeting. She will also be encouraging the other 50 shareholders of Sumner to vote against management's proposals. Which of the following statements is TRUE?

A) Roxanne can force the corporation to buy back her shares at the same price that she paid for them.
B) Roxanne is a dissident shareholder.
C) Roxanne has the right to force the corporation into liquidation.
D) Roxanne is entitled to obtain the minutes of the directors' meetings.
E) Roxanne is not entitled to obtain a list of shareholders from the corporation.

Question 20

Which of the following statements is TRUE? Under a unanimous shareholder agreement,

A) the shareholders can assume all the powers of the directors.
B) the shareholders cannot assume the powers of the directors because the directors would be left with nothing to do.
C) the shareholders can agree on how directors are to vote.
D) the shareholders are prohibited from assuming only some of the powers of the directors.
E) the shareholders cannot assume the powers of the directors because doing so would be inconsistent with the basic division of powers in the corporation.

Question 21

Padraig is a director of Eire Inc. Oona, an independent businesswoman, presented Eire with an opportunity to enter into a business venture. The company's board of directors considered the proposal, and identified a number of risks that were associated with it. However, Eire did not reach a conclusion as quickly as Oona had hoped. Even though the board of Eire was still considering the proposal, she took the proposal to Padraig personally. Oona and Padraig had worked together on a number of business ventures in the past. Padraig accepted the proposal within eight hours. Which of the following statements is most likely to be TRUE?

A) Eire can successfully sue Padraig for any profits that he earns from the venture with Oona.
B) Eire can successfully sue Padraig only if it can persuade the judge that it had decided to accept Oona's proposal when it learned that Padraig had already done so.
C) Padraig could have legally accepted Oona's proposal if he had first resigned his position with Eire.
D) Eire can successfully sue Padraig for breach of his duty of care.
E) Eire can successfully sue Oona for breach of fiduciary duty.

Question 22

Which of the following statements best describes the role of the auditor?

A) Auditors advise the corporation on how to set up its bookkeeping system.
B) Auditors provide an independent assessment of the corporation's financial statements prepared by management for the benefit of shareholders.
C) Auditors prepare the financial statements of the corporation.
D) Auditors help management prepare the financial statements for the corporation.
E) Auditors advise the directors on whether management has done a good job in managing the corporation's business

Question 23

Manuel was the Alberta sales manager employed by Vulcan Co which produces and sells gas- burning fireplaces. Manuel was responsible for all aspects of Vulcan's business in Alberta. He determined how the business of the corporation was to be carried on. Manuel was negligent in installing a fireplace and the customer's house burned down. Which of the following best describes the liability of Vulcan based on these facts?

A) Vulcan is not liable because the loss would be covered by insurance.
B) Vulcan is both vicariously and directly liable.
C) Vulcan is not liable because it did not authorize Manuel to be negligent.
D) Vulcan is directly liable because Manuel was the directing mind and will of Vulcan in Alberta.
E) Vulcan is vicariously liable because Manuel was acting within the course of his employment.

Question 24

Ola holds 75 percent of the shares of Henrik Shipping Co. Anatoly holds 25 percent. The board has called a shareholders' meeting to consider a proposal to amalgamate Henrik with Norwegian Shipping Inc. Ola is in favour of the transaction. Anatoly is opposed. Which of the following best describes Anatoly's legal position?

A) Anatoly is entitled to vote against the transaction and, if it is approved, to dissent and require the corporation to buy his shares for fair value.
B) The majority shareholder cannot vote in favour of the transaction without taking Anatoly's interests into account.
C) As a minority shareholder he has no way to block the transaction or obtain any relief.
D) Because he holds 25 percent of the shares he can block the transaction by voting against it.
E) The only thing Anatoly can do is to try to convince Ola to change his mind.

Question 25

Nick was a foreman working for Capital City Construction Ltd at the site of a major home renovation that Capital City Construction was doing. He was supervised by a site manager who came by two or three times per day to check on how things were going. The site manager set the schedule for the work, hired the workers, and ensured that the site met all applicable safety standards. Nick was responsible for supervising the workers and all the work done on the site. He decided how they should carry out their tasks at the site. One day, a large pile of painted boards were torn off the house. Because the paint contained lead, it was an offence under an environmental statute to leave them on the site. The statute provides for a "due diligence" defence. Nick knew that it would cost his employer a lot to take the boards to the dump and have them disposed of. He decided to throw the boards into a crawl space under the house. The site supervisor knew that there were boards painted with lead paint on the house, but did not enquire regarding how they had been disposed of. A building inspector found them and Nick was charged and convicted under the statute. Capital City Construction had a policy which it insisted that all its employees read which says that no employee may break the law. Is Capital City Construction also liable for the offence?

A) Yes. Nick was responsible for determining how the work was done within the parameters set by the site manager, so that he was responsible for managing the business of corporation in relation to the activity that constituted the offence. As a result, Nick was the directing mind and will of the corporation and Capital City Construction should be liable. The corporation cannot rely on the due diligence defence because it failed to act reasonably in the circumstances in its supervision of Nick.
B) No. The site manager was responsible for ensuring compliance with environmental standards and he was not the one who committed the offence.
C) Yes. Capital City Construction is responsible because Nick thought he was acting for the benefit of the corporation.
D) No. Capital City Construction had a policy which it insisted that all its employees read which says that no employee may break the law.
E) No. The site manager did not know that Nick was going to commit the offence and so could not have prevented him from doing so.

Question 26

Which of the following statements is TRUE? The scale of a corporation makes a difference to how the rules of corporate law operate because

A) small corporations are taxed at different rates from large corporations.
B) large corporations are better able to bear the risk of unauthorized liabilities than small corporations.
C) large and small corporations are incorporated under different statutes.
D) in large corporations the separation between management and shareholders makes it more difficult for shareholders to exercise their legal rights.
E) only large corporations can carry on business in more than one jurisdiction.

Question 27

Which of the following statements is TRUE? A shareholder has a legal right to participate in the management of the corporation

A) only if elected as a director or appointed as an officer or employee.
B) only when exercising management powers acquired under a unanimous shareholders agreement.
C) only when the shareholder holds a majority of the shares issued by the corporation.
D) in no circumstance.
E) only if elected as a director or appointed as an officer or employee or when exercising management powers acquired under a unanimous shareholders agreement.

Question 28

Aldo is the Vice- President of Finance for Euro Mining Inc, which operates several diamond mines in the Northwest Territories. He also sits on the board. One day the board heard a presentation from a geologist about a new area she had found which showed results consistent with the presence of diamonds. The board, which reviews dozens of such presentations each month, decided not to pursue exploration into the area. Aldo thought the area sounded very promising and arranged to meet with the geologist to discuss it with her. Aldo invested in a new corporation formed by the geologist to buy property in the new area. Eventually, the property was sold for a huge profit. Which of the following is TRUE?

A) Aldo breached his fiduciary duty by investing in the geologist's corporation because the board had spent time considering the opportunity.
B) Aldo breached his fiduciary duty by investing in the geologist's corporation because he found out about the opportunity through his position at Euro Mining.
C) Aldo breached his fiduciary duty by competing with Euro Mining.
D) Aldo did not breach his fiduciary duty because the opportunity ceased to belong to Euro Mining when the board decided not to pursue it.
E) Aldo breached his fiduciary duty by appropriating an opportunity belonging to Euro Mining.

Question 29

A strict liability offence is

A) a type of crime for which there is no defence.
B) a type of crime for which a person can be convicted only if they acted with a guilty mind.
C) a crime for which an individual, but not a corporation, can be convicted.
D) a type of tort, but not a type of crime.
E) a type of crime that is not committed if the accused acted reasonably in the circumstances.

Question 30

Punishing a corporation convicted of a criminal offence raises which of the following issues?

A) Fines imposed on corporations weaken it financially, increasing the risk for creditors and other stakeholders with financial claims against the corporation.
B) Fines imposed on corporations may be passed on to shareholders or customers.
C) Corporations cannot be put in prison.
D) The stigma of a criminal conviction is not likely to have the same deterrent effect on a corporation as it will on an individual.
E) all of the above

Question 31

Prophet Inc has existed for several years. Delilah is a director, Suki is a shareholder, and Odessa is an officer. Which of the following statements is most likely to be TRUE?

A) Suki owes a duty of care to Delilah.
B) Odessa owes a fiduciary duty to Suki.
C) Prophet Inc owes a duty of care to Suki.
D) Odessa owes a contractual duty of utmost good faith to Delilah.
E) Delilah and Odessa owe a fiduciary duty to Prophet Inc.

Question 32

Acme Inc recently came into existence. Owen is the only officer, Dieter is a director, and Seppo is a shareholder. Which of the following statements is most likely TRUE?

A) Seppo belongs to a group of people that elected Dieter.
B) Owen decides whether or not Seppo will receive a dividend.
C) Under normal circumstances, Owen has the absolute power to remove Seppo from the company.
D) Seppo and Owen cannot be closely related by blood or marriage.
E) Dieter was appointed by Owen.

Question 33

Mischa had a consulting business which he carried on as a sole proprietorship. He was negotiating a contract to provide advice to Vengo Inc, a corporation carrying on business as a venture capitalist. Mischa has been dealing with Prashant, an old friend. Prashant is the office manager and Mischa knows that Prashant does not have authority to contract with him. But Vengo is aware that Prashant has been talking with Mischa, so Mischa thinks that if he gets Prashant to sign a contract, it will be binding on Vengo. Is he right?

A) No. It is not within the usual authority of a office manager to hire consultants.
B) Yes. It is within the usual authority of a office manager to hire consultants.
C) Yes. By acquiescing in Prashant negotiating with Mischa, Vengo has represented that Prashant has authority to bind Vengo.
D) No. The fact that Mischa knows that Prashant does not have authority means that he cannot rely on Prashant having apparent authority.
E) No. The fact that Prashant does not have actual authority means that a contract signed by him on behalf of Vengo will not be binding.

Question 34

Unanimous shareholders' agreements have special legal characteristics that distinguish them from ordinary shareholders' agreements. Which of the following statements most accurately describes how unanimous shareholders' agreements are different?

A) A unanimous shareholders' agreement cannot be amended without the consent of all shareholders.
B) Under a unanimous shareholders' agreement, share transfers must be subject to a right of first refusal.
C) All shareholders are parties to unanimous shareholders' agreements.
D) Under a unanimous shareholders' agreement, all shareholders must agree on all matters requiring shareholder approval.
E) Unanimous shareholders' agreements allow shareholders to transfer some or all of the powers and responsibilities of the directors to the shareholders.

Question 35

Which of the following statements best describes the responsibilities of directors under the Canada Business Corporations Act?

A) Directors are responsible only for those management activities that they do not delegate to officers.
B) Directors have no management responsibilities because they are only responsible for supervising others who actually manage the corporation.
C) Directors are responsible only for those matters delegated to them by shareholders.
D) Directors are responsible for managing or supervising the management of the business of the corporation and its internal affairs.
E) Directors are responsible only for the internal affairs of the corporation, such as declaring dividends and issuing shares.

Question 36

Gargantua Inc is a very large company with a very large board of directors. Lada is one of those directors. The corporation recently became involved in a number of scandals. As a result, the various members of the board of directors have been named as defendants in several lawsuits. Lada is, of course, hoping to avoid liability. Which of the following statements is TRUE?

A) If another director was granted sole responsibility for the corporation's financial dealings, Lada cannot possibly be held liable for misconduct that arose in connection with those financial dealings.
B) The business judgment rule states that business decisions of the directors will not be found to be a breach of duty so long as they were within the range of of reasonable alternatives available and the process by which the decision was taken was reasonable.
C) As a director, Lada is personally responsible for the accuracy of any documents that accountants prepared on behalf of the company.
D) In order to protect shareholders, judges require proof that every decision made by a board of directors was the best decision possible.
E) none of the above

Question 37

Sarah is a director of Family Educational Testing Services Inc, a corporation incorporated under the Canada Business Corporations Act. She also carries on her own business of finding educational testers and psychometrists needed by testing services businesses. The other members of the board want to hire Sarah to find five testers for the corporation. Which best describes the legal rules which would apply to Sarah undertaking such work?

A) She can do business with the corporation because, as a separate legal person, the corporation is free to decide with whom it does business.
B) She can do business with the corporation but only if the corporation chooses her after a bidding process open to all of Sarah's competitors.
C) She can do business with the corporation only if she gives notice to the board that she has an interest in the transaction, does not vote on the resolution of the board approving the contract, and the transaction is fair and reasonable to the corporation.
D) She cannot do business with the corporation because there would be a conflict between her personal interest in getting the best price for her services and her fiduciary obligation to act in the best interests of the corporation which would require her to seek the lowest price.
E) She can do business with the corporation as long as she agrees to work for a fair price.

Question 38

What best describes the circumstances in which a director may transact with the corporation?

A) Procedural safeguards are observed in connection with the approval of the transaction and it is fair and reasonable to the corporation.
B) The director abstains from voting when the directors vote on the approval of the transaction.
C) A judge has given approval to the transaction.
D) The corporation receives a benefit from the transaction.
E) The director provides a notice to the board of benefit the director will receive from the transaction.

Question 39

Yasir is a director and the operations manager of Flavell Rubbish Disposal Ltd. All of the financial aspects of the business are the responsibility of John, another director. Yasir heard from one of his employees that a representative from the corporation's bank was in John's office yesterday and there was a lot of shouting. Yasir asked John about it. John said that the corporation was behind in its loan payments, but that Yasir doesn't need to worry about it. John tells him that a big customer will be paying its account soon and that money will be used to bring the loan up to date. Which statement most accurately describes Yasir's legal position?

A) Yasir must make the loan payments himself to ensure that the corporation does not go into default.
B) Yasir has no duty because the duty of care is defined by reference to a person in comparable circumstances and Yasir is not in a position to deal with the bank.
C) Now that Yasir is on notice that there is a problem, his duty of care requires him to make sure that the customer's payment is received and applied against the loan.
D) Yasir complied with his duty of care by asking about the problem.
E) Yasir has no duty of care in relation to the loan payments because that is a matter that the directors have delegated to John.

Question 40

Jordan has been negotiating to sell office supplies to Softstuff Ltd, a software developer. He has been dealing with Ira exclusively. Jordan has visited Ira's office at the premises of Softstuff Ltd and noticed the sign on the door that says "Purchasing Manager." Ira has told Jordan that he has authority to enter into the contract. Which of the following is TRUE?

A) Jordan can rely on Ira having authority because Ira told him he has authority.
B) Jordan cannot rely on Ira having apparent authority because Ira might not actually have authority to contract on behalf of the corporation.
C) Jordan can rely on Ira having apparent authority because the corporation has made a representation that Ira has the usual authority of a purchasing manager by allowing him to use an office indicating that he has that title.
D) Jordan cannot rely on Ira having any authority to bind the corporation because he has no proof that Ira actually has authority to contract on behalf of Softstuff.
E) Jordan cannot rely on Ira having apparent authority because no one in the corporation has represented to him that Jordan has authority.

Question 41

Edmund and Gertrude are the directors of ZipCo, a corporation incorporated under the Canada Business Corporations Act. They play very little active role in the business which is run by their son, Zenon. They have delegated to him full power and responsibility to manage the corporation, including the power to declare dividends and issue shares. This delegation is permitted under the Canada Business Corporations Act.

Question 42

For many years, Jeremy worked for Pearl Inc. Over the years, he rose through the ranks and eventually occupied a very senior position. In that position, he enjoyed access to highly valuable and confidential information. His fiduciary duties prevented him from taking a personal benefit from his position. Last year, however, he quit his job and started working for a rival company. By doing so, he necessarily breached his fiduciary duty to the first company.

Question 43

Salima is a director of Commercial Depot Inc, an office supply business. Salima thinks it would be a good idea if the corporation were to buy the building the corporation is currently renting. In her view, the price the landlord is offering is a good one. She thinks that if the corporation does not buy it, someone else might, and that person would want to significantly increase the corporation's rent. She has been trying to get the other members of the board to agree to buy the building for the past six months, but it has not yet been approved. There just never seems to be time to get to it at the directors' meetings. She is very worried about other buyers and wonders whether she should just buy the building herself. She could always sell it again for a gain and she would not have to increase the rent to Commercial Depot to ensure that she receives a good cash flow. Do you see any problems with Salima's plan to buy the building herself? Explain how Salima could achieve her objective while avoiding any legal problems.

Question 44

The fiduciary duty of a director to act in the best interests of the corporation means that a director may never do business with the corporation. If directors were to negotiate transactions between themselves and the corporation, they would be in an intolerable conflict between their personal interests and their obligation to act in the best interests of the corporation. That is why such transactions are never permitted.

Question 45

Shareholders in a corporation incorporated under the Canada Business Corporations Act are entitled to the remaining assets of the corporation after all the creditors are paid. This means that they retain all management powers that they have not delegated to the directors.

Question 46

Sandy is a director of Plex Manufacturing Inc. She reads in a report to the board that the corporation has entered into a series of complex financing transactions. One result of the transactions is that the presentation of the corporation's financial statements has changed to make the corporation look more profitable. Sandy is concerned that these transactions might have been designed to hide the true financial position of the corporation. She decides not to enquire into these transactions, however, because she thinks that if she finds out more about them she will have to do something about it. In doing so, Sandy is in compliance with her duty of care and fiduciary duty because she does not have any clear evidence of wrongdoing.

Question 47

Because the duty of care requires that directors and officers exercise the care that a reasonably prudent person would exercise in comparable circumstances, the standard is a subjective one. So long as a person is honest and does their best, it does not matter how incompetent they are.

Question 48

Nigel is negotiating to sell some lighting fixtures to Abda Corporation for its offices. Nigel has been dealing with Jerome. Jerome appears to the President of Abda, or at least so it says on his parking spot at Abda's offices. Nigel can rely on Jerome having authority to enter into a contract with him to buy the lighting fixtures.

Question 49

The oppression remedy is not just a shareholder remedy. It creates a standard of behaviour for management which is different from the fiduciary duty and duty of care, and one which is potentially more important for shareholders because it can be enforced by shareholders directly. Do you agree with this description of the oppression remedy?

Question 50

Forest is the majority shareholder in ForCo Inc, a corporation carrying on a business of providing investment advice. She is also a director of DevCo, a corporation incorporated under the Canada Business Corporations Act engaged in real estate development. Is there a legal problem if ForCo provides advice on regular commercial terms to DevCo? How can Forest make sure that no problems arise in connection with her corporation doing business with DevCo?

Question 51

Daniel has worked as a computer programmer and senior officer of Litem Systems Inc for several years. He has built up a close relationship with a number of Litem clients. One of them asks Daniel if he can do some programming work on the side. It is the same kind of work that Daniel does for clients of Litem. The client would hire and pay Daniel directly. Daniel would do the work on nights and weekends. Daniel is interested, but he cannot take the work because it would be a breach of his fiduciary duty and, if he does take it, he could be forced to pay over all of his profits to Litem.

Question 52

Tom and Jane are the founders and only shareholders and directors of Shinestone Corp, which carries on a business selling semi- precious stones. They want to declare and pay a dividend to themselves. They think that the corporation will be able to pay its debts after payment of the dividend and have received advice from their accountants that the market value of the assets of the corporation exceeds the total amount owed to creditors and the amount they paid into the corporation for shares. One of its creditors, Nova Bank, hears about their plan to pay a dividend and says that in its view, the market value of the corporation's assets is not high enough to meet this test after the dividend is paid. Tom and Jane can still declare the dividend.

Question 53

Elise and Kim are trying to decide how to set up the internal management structure of the corporation they have just incorporated to carry on their engineering consulting business. They each hold 35 percent of the shares with the remaining 30 percent being held by five employees. Elise will run the business. She will be responsible for all aspects of the management of the office. Kim will be a passive investor, but is nevertheless interested in being kept informed regarding what is going on in the business. Kim and Elise decide that they will both be directors and then delegate all management powers to Elise, subject only to an obligation to report to the board every two months as to what is happening. Will this structure work? Support your answer.

Question 54

Alannis and Jake each hold 50 percent of the shares in JagCorp, a limousine rental business. All management decisions since incorporation have been agreed to by both of them. Now they find that they cannot agree on how the corporation should be operated. Alannis wants the corporation to give up the limousine rental business and become an Avis rent- a- car franchisee. Jake wants to continue with the existing business as it is. They have been battling for six months but are deadlocked. In these circumstances, Alannis could get a court to order that the corporation be wound up.

Question 55

A director's fiduciary duty is owed to the corporation. This means that directors must act with a view to maximizing the value of shareholders' investment to the exclusion of the interests of other stakeholders in the corporation.

Question 56

Aldus is an officer of Accent Interior Designs Inc. While working in one of the houses of Accent's clients, he stole a ring. He gave it back, but was convicted of theft and fined $1000. Accent wants to indemnify him for the fine. It cannot pay an indemnity in these circumstances.

Question 57

In practice, it is easier for shareholders in public corporations to exercise their legal rights because management is required to send them much more information regarding matters to be dealt with at shareholder meetings than they are required to send to shareholders in smaller corporations.

Question 58

Angela and Lou are starting a flower store business to be carried on by a corporation. Angela has substantial personal assets and will be getting 90 percent of the shares of the corporation. Lou has little money and will be getting 10 percent of the shares. A fair way to resolve disputes would be to enter into a shareholder's agreement which provides for a "shotgun buy- sell."

Question 59

Vanna is a director of Quorn Co, which operates a health food supply business. Vanna manages the business and wants to be the President. Her appointment would have to be approved by the shareholders to be effective.

Question 60

Identify and briefly explain the significance of Canadian Air Services Ltd v O'Malley (Case Brief 22.1).

Question 61

New World Construction Co had contracted to build a new building at the University of British Columbia. New World employed Ellen as a project manager to determine how the construction would be completed and to supervise all aspects of the construction. Ellen was negligent in failing to make sure that a retaining wall was properly built. The wall collapsed causing substantial property damage. The University is suing New World and Ellen for negligence. Assuming that Ellen is liable personally, explain the bases upon which New World would be responsible for her negligence.

Question 62

The shotgun buy sell is a drastic but effective mechanism for resolving shareholder disputes. Do you agree with this statement? Please give your reasons.

Question 63

Shazad is the manager of a bookstore that is one of a chain owned by Tebsco Markets Inc. Shazad advertised a special low price for Harry Potter books as a way of getting people to come to the store. Shazad knew at the time that he had no Harry Potter books. Advertising in this manner is an offence under the Competition Act. Shazad was convicted, and Tebsco was too on the basis that Shazad was a senior officer of the corporation in relation to its operation of his bookstore. Is there anything that Tebsco could do to avoid this liability in the future?

Question 64

Jae was asked to join the board of directors of Western Trucking Ltd, a new firm in the trucking business incorporated under the Canada Business Corporations Act. The president of the corporation has told her that she should not worry about director's liability because Western will indemnify her. Would the indemnity fully protect her?

Question 65

The nature of the claim on the corporation represented by common shareholders' shares is that they are entitled only to the remaining property of the corporation on dissolution after other claims have been paid and that they have a right to vote for the election of directors, to appoint the auditor, and on proposals made to them. As such the shareholder's role is essentially a passive one. They are not involved in management. Is this a complete and accurate description regarding the role that shareholders play in corporations?

Question 66

On behalf of her employer, MasterFood Inc, Claire has been negotiating the purchase of the business of Watson Corp for a purchase price of $1 000 000. She has been dealing with Barry, who has told her that he is the chief financial officer of Watson Corp. She has visited him at the offices of Watson Corp him many times and, with her team, gone over Watson Corp's books. They have agreed on a form of contract to give effect to the sale from Watson Corp to MasterFood Inc. At the closing of this transaction, what should she do to ensure that Barry has sufficient authority to bind Watson Corp to sell its business?

Question 67

What does the fiduciary duty require of directors and officers?

Question 68

Trudy and Aline have incorporated a corporation to carry on an antique shop business. They each hold 20 percent of the common shares. Aline's aunt Louise holds the remaining 60 percent of the common shares. Trudy and Aline will share responsibility for carrying on the business on a daily basis. Louise has no interest in participating in the business. She invested to help out her niece, to get a nice return when she sells her shares and would like to have a veto right over any substantial changes to the corporation. How would the parties set up their desired allocation of power and responsibilities?

Question 69

In corporations where there are few shareholders, the basic division of powers and responsibilities between shareholders, directors, and officers is formalistic and irrelevant. Do you agree with this statement? Be sure to provide reasons for your response

Question 70

Regal Cinemas Inc operates a movie theatre in a small town in Manitoba. It has a chance to enter into long- term leases on the only other theatres in town. The landlord has refused to enter into the lease, however, unless Regal can put up a deposit of $50 000 and Regal has no money. Regal is very anxious to get the leases because there is an outstanding offer from MoviePlex Inc for all the shares of the corporation if the corporation has the leases on these other cinemas. The directors of the board, consisting of five people, decide that the best way to get Regal the money is for each of them to buy 100 shares for $100 each. The directors buy the shares, cause Regal to enter the leases, and then, on the next day all the shareholders of Regal, including the directors, sell their shares to MoviePlex for $150. Once MoviePlex has all the shares, it elects new directors. The new directors cause the corporation to sue the former directors for the profits they made on the share sale, claiming that participating in the transaction in the way they did was a breach of their fiduciary duty. Do you agree? Explain you reasons.