Deck 21: Directors, Officers, and Controlling Shareholders

Question 1

Shareholders,but not officers or directors,of a corporation may use the corporation's confidential information for personal gain.

Answer 1

False

Question 2

The line of business test is the most widely used test to determine whether or not an officer or director has taken advantage of a corporate opportunity.

Answer 2

True

Question 3

As fiduciaries,directors have a responsibility to exercise reasonable supervision over corporate operations.

Answer 3

True

Question 4

Once a sale or breakup of the corporation is inevitable,directors have a fiduciary duty to obtain the best available price for the shareholders.

Question 5

The Delaware Corporation Code allows the certificate of incorporation to include a provision limiting or eliminating the personal liability of directors to the corporation or to its shareholders for monetary damages for breach of the duty of loyalty.

Question 6

In order to take advantage of the business judgment rule,directors must have made an informed decision and have no conflict of the interest with the corporation.

Question 7

Controlling shareholders do not owe any fiduciary duties to other shareholders.

Question 8

The Securities and Exchange Commission recognizes the affirmative responsibility of officers and directors under federal securities laws to ensure the accuracy and completeness of public company filings with the SEC.

Question 9

Breakup fees are liquidated damages for a terminated proxy fight.

Question 10

A poison pill is a defensive measure that would make any takeover not approved by the directors prohibitively expensive.

Question 11

Officers owe a duty of care to the directors but not to the corporation and its shareholders.

Question 12

Once a sale or breakup of the corporation is inevitable,directors have a fiduciary duty to prevent a freeze out of the shareholders.

Question 13

In the context of takeovers,board members cannot reject an offer without taking sufficient time to analyze its merit.

Question 14

The duty of care includes the duty to make informed decisions.

Question 15

The business judgment rule protects all decisions made by the board of directors.

Question 16

To comply with their duty of loyalty,directors and managers must subordinate their own interests to those of the corporation.

Question 17

In evaluating a buyout proposal,the directors should consider material nonprice provisions of the proposed agreement.

Question 18

A controlling shareholder has a duty not to transfer the power of management to a purchaser that he knows or has reason to believe will use that power to the detriment of the corporation.

Question 19

Officers and directors should act with the care reasonable persons would use in the management of their own property.

Question 20

Passive reliance on the outside reports of experts in making decisions will usually be protected by the business judgment rule.

Question 21

The ________ requires that officers and directors not take personal advantage of a desirable business investment that rightfully belongs to the corporation.

A)right of first refusal
B)corporate opportunity doctrine
C)line of business test
D)expectancy test

Question 22

What is the "all holders rule" of the Securities and Exchange Commission?

A)That an offer to purchase one class of stock must be extended to cover all classes of stock.
B)That a selective stock repurchase plan is deemed a tender offer in which all holders of securities of the same class must be allowed to participate.
C)That all directors holding stock in a corporation must withdraw from consideration of a hostile takeover bid.
D)That all officers holding stock in a corporation must refrain from giving advice to directors during a hostile takeover bid.

Question 23

A controlling shareholder normally owes a fiduciary duty to

A)minority shareholders.
B)officers and directors.
C)officers,directors and minority shareholders.
D)officers and minority shareholders

Question 24

Which of the following is true regarding state rules of corporate governance?

A)Under the U.S.Constitution,a state may only apply its corporate governance rules to corporations incorporated in the state.
B)California imposes state pro-shareholder rules on quasi-foreign corporations.
C)There are no state rules of corporate governance because the Securities and Exchange Commission has preempted the field.
D)By federal law,if a state wishes to impose corporate governance requirements on corporations incorporated in the state,then the same rules must be imposed on corporations operating in the
State but incorporated in another state.

Question 25

The business judgment rule will not protect a director who

A)has a conflict between personal interests and the interests of the corporation and its shareholders.
B)is an outside director.
C)is an inside director.
D)all of the responses are correct.

Question 26

The amount of money above market value paid to a controlling shareholder for his shares is known as a

A)corporate asset.
B)control premium.
C)freeze out premium.
D)golden parachute.

Question 27

The action of an officer or director in taking personal advantage of a business opportunity that rightfully belongs to the corporation is known as ________.

A)ownership of another corporation
B)payment of hushmail
C)payment of greenmail
D)seizing of a corporate opportunity

Question 28

The courts have held that officers and directors that usurp a corporate opportunity must disgorge the illegal profits to the

A)individual shareholders.
B)courts.
C)majority shareholder.
D)corporation.

Question 29

A repurchase of stock at ________ from an unhappy shareholder may violate the director's duty to the corporation.

A)any time
B)a premium
C)below market value
D)none of the above

Question 30

Which of the following corporate members do not have a fiduciary duty to the corporation?

A)Officers.
B)Directors.
C)Shareholders.
D)Controlling shareholders.

Question 31

A shareholder derivative suit is a lawsuit by

A)shareholders on behalf of the corporation.
B)the shareholders directly.
C)the majority shareholder.
D)the corporation.

Question 32

Which of the following is true regarding statements of officers?

A)An outside director,but not an inside director,may in good faith rely upon any statement of an officer.
B)An inside director,but not an outside director,may in good faith rely upon any statement of an officer.
C)Any director may in good faith rely upon any statement of an officer.
D)Not every statement of an officer can be relied upon in good faith.

Question 33

Some jurisdictions permit the shareholders to amend the articles of incorporation to relieve directors of any financial liability for violations of the duty of

A)care.
B)loyalty.
C)avoiding self dealing.
D)voting.

Question 34

The duty of candor refers to

A)the duty directors are under when providing information to shareholders.
B)the duty shareholders are under when discussing matters among themselves.
C)the duty officers and directors are under when deciding whether to oppose a takeover bid.
D)the duty shareholders have to directors when informing directors of concerns.

Question 35

Which state has the nation's toughest state antitakeover statute?

A)California
B)Delaware
C)Pennsylvania
D)Tennessee

Question 36

What was the result in Smith v.Van Gorkom,the case in the text in which it was alleged that directors were grossly negligent in failing to inform themselves adequately before making a decision about a merger?

A)That the board failed to obtain adequate information on merger terms and would not be protected by the business judgment rule.
B That the board was protected by the business judgment rule because there was no conflict of interest.
C)That the board was not protected by the business judgment rule but was protected by the merger business rule.
D)That the board was protected by the business judgment rule because fraud could not be established.

Question 37

In assessing a takeover bid,the directors are not expected to consider the

A)adequacy of the price offered.
B)quality of the securities offered in exchange.
C)prospect of their future employment.
D)basic shareholder interests at stake.

Question 38

Which of the following is not a prime consideration in determining whether a fiduciary has taken an opportunity that belongs to a corporation?

A)Whether the opportunity is in the corporation's line of business.
B)The amount of money the fiduciary stands to make.
C)Whether the fiduciary developed the idea using corporation resources.
D)Whether the involvement by the fiduciary will hinder the corporation's purposes.

Question 39

Which of the following is a key factors directors should consider in deciding whether to sell a company?

A)The amount of compensation available to directors should the sale go through.
B)The reliability of officers' reports to the board.
C)The reasonableness of any defensive tactics.
D)Both the reliability of officers' reports to the board and the reasonableness of any defensive tactics.

Question 40

Directors are always ________ of the corporation.

A)employees
B)agents
C)principals
D)all of the responses are correct

Question 41

Which of the following is true regarding breakup fees?

A)They are sometimes characterized as liquidated damages.
B)The Securities and Exchange Commission prohibits the payment of breakup fees.
C)Breakup fees are typically 20 to 25 percent of the value of the deal.
D)They are sometimes characterized as liquidated damages.,and breakup fees are typically 20 to 25 percent of the value of the deal.

Question 42

A ________ occurs when minority shareholders are forced to convert their shares into cash,for example,when a subsidiary merges with its parent.

A)hostile takeover
B)sale of assets
C)freeze out
D)tender offer

Question 43

A ________ is an agreement in a proposed takeover that allows the board of directors to negotiate with other bidders or to terminate a merger agreement.

A)termination clause
B)fiduciary out
C)revolving door
D)no talk provision

Question 44

In establishing a fair price of a company,the courts will consider

A)market value.
B)earnings.
C)future prospects.
D)all of the responses are correct.

Question 45

Which of the following favors keeping a poison pill in place?

A)A tender offer that is only slightly above the market price of the stock.
B)A tender offer for less than all of the shares.
C)An active attempt by the board to solicit other offers.
D)All the responses are correct.

Question 46

What is a no-shop agreement?

A)An agreement whereby shareholders agree to not replace directors for a certain period of time.
B)An agreement whereby directors agree to not replace officers for a certain period of time.
C)An agreement whereby a target company agrees with a potential purchaser not to actively solicit other bidders but retains the right to negotiate with parties who submit unsolicited bids to the
Target.
D)An agreement whereby shareholders agree to not replace directors or officers for a certain period of time.

Question 47

Yolanda,a ballroom dance instructor,was recently asked to be a director of Big Company which is publicly traded.She is very honored and excited.Her friend,Joe,asked her if she had any experience in accounting,business,or SEC requirements.Yolanda told him no,but that the president of Big had assured her that her only responsibility was to act as a figurehead because the officers took care of all detailed corporate business.Yolanda says that she is accepting the position because it will get her exposure in the community and perhaps increase her dance clientele.Is Yolanda correct,and why or why not?

A)Yes,Yolanda is correct that the primary job of a director is to serve as a figurehead.
B)Yolanda is correct that the primary job of an outside bank director is to serve as a figurehead,but that is not true of inside directors.
C)Yolanda is not entirely correct,but she has no affirmative responsibility to ensure the accuracy of any reports because that is entirely the responsibility of officers of the corporation.
D)Yolanda is incorrect,and the SEC emphasizes the responsibility of directors to ensure the accuracy and completeness of public company filings with the SEC.

Question 48

The duty of ________ requires officers to exercise reasonable supervision over the business affairs of the corporation.

A)care
B)loyalty
C)obedience
D)ethics

Question 49

Fact pattern 21-1
Tonya is the president of Growth Corporation.Growth is looking for land on which to build a new facility.Tonya locates suitable land,but purchases it for herself with plans to sell it at a profit at a later date.Rick,the majority shareholder of Growth hears about Tonya's purchase and complains to her about it.She tells Rick that she viewed and purchased the land on her own time and that she did not breach any duties owed to the corporation.Rick tells her that she should reconsider and that he plans to discuss the matter with the rest of the board.
Refer to fact pattern 21-1.Did Tonya violate any duties owed to the corporation?

A)Yes,by buying the land for herself without disclosure to the corporation,she violated the corporate opportunity doctrine.
B)Yes,by buying the land for herself without disclosure to the corporation,she violated the duty of responsible decision making.
C)Only if the land involved was worth over $50,000 did she violate any duties because any smaller amount would be considered de minimus.
D)No.

Question 50

Brice is on the board of Success Corporation.Eager Corporation has made a move to acquire Success.Tina,the president of Success advises the board that the offer made by Eager is a good one that should be accepted.She did not disclose,however,that Eager had offered her a generous bonus if she could convince the board members of Success to take Eager's offer.Brice tells the other board members that they should simply rely on Tina because she is probably right,and under the business judgment rule they are protected even if she is wrong.Which of the following is true regarding Brice's advice?

A)Brice is correct.
B)Brice is correct only if the directors of Success had been soliciting offers,and Tina was charged with reviewing them.
C)Brice is incorrect unless it can be established that Tina has prior experience in mergers and acquisitions.
D)Brice is incorrect because no statement made by an officer is entitled to blind reliance.

Question 51

Define and explain the purpose of the business judgment rule.Under what circumstances would the rule apply? When would the protection not apply? Discuss fully.

Question 52

In a ________,someone wishing to replace the board with his or her own candidates must acquire a sufficient number of shareholder votes to do so.

A)shareholder contest
B)proxy contest
C)director conflict
D)governance conflict

Question 53

Fact pattern 21-1
Tonya is the president of Growth Corporation.Growth is looking for land on which to build a new facility.Tonya locates suitable land,but purchases it for herself with plans to sell it at a profit at a later date.Rick,the majority shareholder of Growth hears about Tonya's purchase and complains to her about it.She tells Rick that she viewed and purchased the land on her own time and that she did not breach any duties owed to the corporation.Rick tells her that she should reconsider and that he plans to discuss the matter with the rest of the board.
Refer to fact pattern 21-1.Which of the following is a right of the corporation if it is determined that an officer wrongfully takes an opportunity belonging to the corporation?

A)An absolute trust
B)A constructive trust
C)A 10% penalty based upon the value of the lost opportunity which is imposed by federal law
D)As imposed by most states,a 10% penalty based upon the value of the lost opportunity

Question 54

You are a director of the PML Corporation.The company needs land to expand its production facilities.You mention to the president that you presently own 50 acres of suitable land,and suggest that she request the board to consider this purchase.What steps should you take to minimize your liability and ensure that the transaction cannot be successfully challenged by the shareholders?

Question 55

Dan is a director of two Internet corporations,ABC.com and XYZ.com.ABC is about to release a new technology-Opt Out-that will automatically disguise an Internet user to protect their privacy.Dan is sure that Opt Out will be highly profitable.Dan convinces XYZ to initiate a hostile takeover bid for ABC,without disclosing any information about the new product.Has Dan breached his fiduciary duties,or other duties,to ABC? To XYZ? Discuss fully.

Question 56

What are the seven key factors that directors should consider in deciding whether to sell a company?

Question 57

Fact pattern 21-1
Tonya is the president of Growth Corporation.Growth is looking for land on which to build a new facility.Tonya locates suitable land,but purchases it for herself with plans to sell it at a profit at a later date.Rick,the majority shareholder of Growth hears about Tonya's purchase and complains to her about it.She tells Rick that she viewed and purchased the land on her own time and that she did not breach any duties owed to the corporation.Rick tells her that she should reconsider and that he plans to discuss the matter with the rest of the board.
Refer to fact pattern 21-1.Which of the following is the most widely used test for determining whether an opportunity belongs to a corporation?

A)The line-of-business test
B)The time-spent test
C)The corporate-interest test
D)The officer-corporate equilibrium test

Question 58

__________ is a purchase of a dissident shareholder's stock by the issuer at a premium over market,often in exchange for a standstill agreement,whereby the shareholder agrees not to commence a tender offer or proxy contest or to buy additional shares of the issuer for a period of time.

A)Greenmail
B)A freeze out
C)Choice agreement
D)Equitable agreement

Question 59

What is a poison pill? What factors favor keeping a poison pill in place?

Question 60

Traditionally,a transaction benefiting a director's self interest is ________ unless the director could show it was fair and reasonable to the corporation.

A)void
B)voidable
C)illegal
D)all of the responses are correct

Question 61

Who would be classified as a controlling shareholder? What duties do controlling shareholders have to other shareholders?

Question 62

What is greenmail? What is a standstill agreement? When,if ever,is the process of greenmail protected by the business judgment rule?