Deck 21: Corporations

Question 1

A corporation officially states its purpose is "to engage in any lawful activity for which corporations may be organized under the General Corporation Law of Idaho." Under corporate law, this purpose is too broad. A corporation's purpose must be more narrowly defined.

Answer 1

False

Question 2

The "business judgment rule" has been replaced by "good faith statutes" in most states.

Answer 2

False

Question 3

Generally, managers that make informed decisions will not be liable even if their decision turned out badly.

Answer 3

True

Question 4

A business corporation can be incorporated under either state law or federal law.

Question 5

Zach decides to incorporate his business under the name of "Zamm." In addition to "Zamm," the Model Act requires that Zach include one of the following words: "corporation," "incorporated," "limited," or "company."

Question 6

Stock is divided into categories called series, and these series can be further divided into subcategories called classes.

Question 7

The lawyer who forms the corporation cannot legally serve as its incorporator.

Question 8

Common stock is the last stock in line for any corporate payouts, including dividends and liquidation payments.

Question 9

When a corporation accepts legal responsibility for a contract, it is called novation .

Question 10

Directors have the authority to manage the corporate business.

Question 11

Sara decided to incorporate her business under the name Gomo, Inc. Before Gomo was incorporated, Sara signed a contract in the name of Gomo, Inc. to lease a store front. Sara did not tell the other party that Gomo was not yet formed. Sara is personally liable on the lease.

Question 12

To adopt a contract means to form a new contract with different parties.

Question 13

Incorporators are required to sign the charter, deliver it to the proper state officials, and purchase a certain percentage of the initial stock offering.

Question 14

Terminating a corporation is a three-step process: dissolution, winding up, and termination.

Question 15

A corporation must have a registered agent within the state of incorporation only if the corporation maintains an office in that state.

Question 16

A corporation is required to have at least one director, no matter how many shareholders it has.

Question 17

A promoter is personally liable on any contract he or she signs before the corporation is formed.

Question 18

A manager who has engaged in self-dealing has violated the duty of loyalty to the corporation, unless the self-dealing was entirely fair to the corporation.

Question 19

A director violates the corporate opportunity doctrine if he or she competes with the corporation, unless the disinterested directors approve of the director's actions.

Question 20

When a company dissolves, preferred stockholders typically have the right to receive their share of corporate assets before common shareholders.

Question 21

Which state does your textbook cite as being particularly attractive to companies looking to incorporate?

A)Ohio
B)Alaska
C)Utah
D)Delaware

Question 22

Courts are sympathetic to managers acting in the best interests of the corporation, even when the acts are illegal.

Question 23

Alfrieda purchased an ownership interest in a corporation. This gives her the right to use the equipment owned by the corporation, as long as her usage does not interfere with the normal operation of the business.

Question 24

Larry has owned $5,000 of stock in E-prise, Inc. for the past 18 months. Under SEC rules, Larry can require that one proposal be placed in the company's proxy statement to be voted on at the shareholder meeting.

Question 25

A manager who first offers an opportunity to disinterested directors or shareholders who turn it down has the right to take advantage of the opportunity herself.

Question 26

A corporation is required to have at least one class of stock with voting rights.

Question 27

Carey decided to incorporate her business under the name yStar Inc. Before yStar was incorporated, Carey signed a contract in the name of yStar, Inc. to have some office space remodeled. Which statement is correct?

A)yStar is liable on the contract because the contract was signed in its name.
B)yStar becomes liable on the contract as soon as it is incorporated.
C)yStar is liable on the contract if the contractor knows that the corporation does not yet exist.
D)yStar will be liable on the contract only if the corporation adopts the contract.

Question 28

Corporate stock can be divided into categories called ________, which can be further divided into ________.

A)authorized shares, classes
B)classes, series
C)equity, assets
D)debentures, classes

Question 29

Overall, directors get paid very little for the amount of work they perform.

Question 30

In a derivative lawsuit, any proceeds awarded by the court must be paid to the corporation, not the shareholders themselves.

Question 31

Laurie is incorporating her business. Laurie's home state is Wisconsin. Business will be conducted in California, Michigan, Pennsylvania, and Virginia. Laurie

A)must incorporate the business in Wisconsin, the home state.
B)must incorporate the business in Wisconsin, California, Michigan, Pennsylvania, and Virginia.
C)must incorporate in Delaware.
D)can incorporate the business in any state.

Question 32

Alberta is not employed by E-prise, Inc. but she is a member of E-prise's board of directors. Alberta is an outside director.

Question 33

A finding by a court that a manager's decision had a rational business purpose does not necessarily protect the manager from a finding that he breached a duty of care.

Question 34

Controlling shareholders have no fiduciary responsibility to minority shareholders.

Question 35

A proxy is a vote that is mailed in, like an absentee ballot.

Question 36

In reality, the officers of the large corporations have a great deal of influence on who will be nominated and elected as directors.

Question 37

The person who creates a corporation is called the

A)promoter.
B)partner.
C)agent.
D)incorporator.

Question 38

Conversion rights

A)specify the order in which classes of stockholders are paid upon dissolution.
B)are designed to prevent dilution of a shareholder's ownership in the company.
C)allow investors to convert to a different class.
D)establish whether shareholders are entitled to dividends.

Question 39

A derivative lawsuit is filed by a shareholder of the corporation if his or her own rights have been harmed.

Question 40

If a public company decides not to solicit proxies for a shareholder meeting, it need not give shareholders the information that would have been required in a proxy statement.

Question 41

Who elects the officers of a corporation?

A)the agents
B)the shareholders
C)the incorporators
D)the directors

Question 42

Who signs the charter and files it with the secretary of state?

A)the incorporator
B)the chairman of the board
C)the promotor
D)the company president

Question 43

In the late 1960s, a shareholder of the company that owned the Chicago Cubs baseball team sued the company because the directors refused to install lights in Wrigley Field. The court decided that the directors

A)had a rational purpose for not installing lights and were not liable for doing anything improper.
B)were not protected by the business judgment rule.
C)had not acted with any rational purpose and were liable to its shareholders for damages caused by their actions.
D)had the right to make decisions for the team without any concern for the desires of the shareholders.

Question 44

Mike is planning on incorporating his business in the state of Delaware. Which of the following regarding the name of Mike's business is TRUE?

A)He will be able to use the words "Association" or "Institute" in his company name.
B)He will not be able to use abbreviations (such as Inc. or Corp.)in his company name.
C)His company name will not have to include one of the following words: Corporation, Incorporated, Company or Limited.
D)His company name can be the same as another corporation that already exists in Delaware.

Question 45

Hank owns 100 shares of cumulative preferred stock in Wayside Transport, Inc. Kelsey owns 50 non-cumulative preferred shares, and Oleg owns 120 shares of common stock. Wayside does not pay dividends in 2015. In 2019

A)Hank and Kelsey must receive their 2019 dividends before Oleg is paid any 2019 dividends.
B)Oleg cannot receive any 2019 dividends until Hank is paid for the 2015 dividends.
C)Kelsey cannot receive the dividends Wayside could not afford to pay in 2015. She will just lose them.
D)All of these are correct.

Question 46

MegaCorp is incorporated under Delaware law. It is registered to do business in New York. Legally, in New York MegaCorp is known as what kind of corporation?

A)domestic
B)foreign
C)secondary
D)cumulative

Question 47

Fashions, Inc. has 12 shareholders. There is no shareholder agreement concerning the board of directors. The company is subject to the Model Act. How many directors is Fashions, Inc. required to have?

A)none
B)one
C)two
D)five

Question 48

Which of the following describes the duty of loyalty?

A)It requires managers to make decisions they reasonably believe to be in the best interest of the corporation.
B)It prohibits managers from making a decision that benefits them at the expense of the corporation.
C)It requires consideration of the interests of the surrounding community.
D)It requires using care that an ordinarily prudent person would take in a similar situation.

Question 49

What is the first step that must be taken to terminate a corporation?

A)filing
B)vote
C)revocation
D)winding up

Question 50

For the business judgment rule to apply, the manager must

A)be trying to resolve a conflict of interest.
B)have exercised extraordinary care in resolving the situation.
C)have acted in the best interests of the corporation.
D)prove he or she was aware of the decision being made.

Question 51

What term identifies stock that has been authorized and sold?

A)authorized and paid stock
B)outstanding stock
C)treasury stock
D)authorized and unissued stock

Question 52

Alex is a director of ABC, Inc. Alex wants to personally make a major purchase from Bravo Co. If it knew of the opportunity, ABC also might be interested in making that same purchase. Alex must

A)advise the boards of both corporations of his conflict of interest.
B)first offer the opportunity to make the purchase to the disinterested directors of ABC or its shareholders.
C)resign from the board of directors.
D)abandon the idea of making the purchase himself.

Question 53

The business judgment rule accomplishes all of the following EXCEPT

A)permits directors to do their jobs.
B)keeps judges out of corporate management.
C)encourages directors to serve.
D)totally protects managers from all liability.

Question 54

Amy is on the board of directors of Computers Plus. Computers Plus is looking for a warehouse to purchase. Amy owns a warehouse. In order for Amy to sell her warehouse to Computers Plus,

A)the transaction must be fair to both Amy and Computers Plus.
B)the disinterested members of the board of directors must approve the transaction.
C)she must resign her position on the board of directors of Computers Plus before any negotiations for the warehouse begin.
D)a court must review the opportunity to determine its favorability.

Question 55

Under the Model Act, a corporation must have at least one director unless all shareholders agree to eliminate the board or the corporation has fewer than _____ shareholders.

A)10
B)25
C)50
D)100

Question 56

If a court determines that a manager's corporate decision amounted to self-dealing,

A)the business judgment rule will not apply.
B)the transaction being challenged will be automatically voided.
C)the manager is automatically personally liable to the corporation.
D)the manager will automatically be fired.

Question 57

Fashions, Inc. has 12 shareholders. The company is subject to the Model Act. What officers is Fashions, Inc. required to have?

A)a president, secretary, and treasurer
B)a president and a secretary, and they can be the same person
C)a president, at least one vice-president, a secretary, and a chief financial officer
D)whatever officers are described in the corporate bylaws

Question 58

Courts have long ruled that corporate directors and officers owe a fiduciary duty to

A)the corporation only.
B)the corporation and shareholders.
C)shareholders only.
D)society at large.

Question 59

The executives of Jornaginn Corporation have decided they need to sell 50,000 additional shares of stock to finance their expansion plans. The executives

A)cannot sell that many shares unless they were authorized initially in the corporate charter.
B)can sell as many shares as the market will bear.
C)are limited by the number of shares authorized in the corporate charter, but this number can be increased by amending the charter and paying a fee.
D)can sell the shares only if the shares have a par value which is close to the current market price.

Question 60

In which case did the court find managers liable, even though the special committee and shareholders approved a self-dealing transaction?

A)Anderson v. Bellino
B)In re Dole Food Co .
C)Unocal Corp. v. Mesa Petroleum Co.
D)RSL Communications v. Bildirici

Question 61

Charles owns 1,000 shares of stock in Temperan, Inc. Charles wants to obtain corporate records including the corporation's minute book and accounting records. Under the Model Act, Charles is entitled to this information if he requests it in good faith and

A)he has a proper purpose.
B)he owns at least 1 percent of the company or $2,000 of stock.
C)he is an employee of Temperan.
D)he is a controlling shareholder.

Question 62

When can shareholders sue a corporation directly?

A)only if their own rights have been violated
B)only if the corporation has been wronged
C)only if they hold at least 10 percent of company stock
D)at any time they wish

Question 63

All of the following are shareholder rights EXCEPT

A)the right to manage the firm.
B)the right to vote.
C)the right to information.
D)the right to dissent.

Question 64

Management's duty to have a rational business purpose, avoid illegal behavior, and make informed decisions refers to its

A)duty of care.
B)duty of loyalty.
C)duty of openness.
D)duty of fairness.

Question 65

A manager used her position in the company to develop a new business the company might have pursued on its own. This is a breach of the

A)duty of care.
B)duty of non-competition.
C)duty of loyalty.
D)duty of recognition.

Question 66

What type of transaction employs special committees made up of disinterested board members who review the transaction to determine if it is entirely fair to the corporation?

A)hostile takeover
B)self-dealing
C)rational business purpose
D)corporate opportunity

Question 67

Mariposa is a shareholder of Tuscan Corporation. If she is acting in good faith, under the Model Act she has the right to

A)inspect the company's accounting records.
B)vote on a merger proposal.
C)examine the company's minute book.
D)All of these are correct.

Question 68

What is an inside director?

A)a shareholder charged with the illegal act of insider trading
B)a member of the board of directors who is also a board member of a competing firm
C)a shareholder who is a board member of a competing firm
D)a member of the board of directors who is also an employee of the corporation

Question 69

The percentage increase in stock price appreciation and dividends is referred to as

A)net returns on invested capital.
B)price/earnings ratio.
C)total shareholder return.
D)financial leverage ratio.

Question 70

Kian is the chief financial officer of Yonkka, Inc. He is also a member of Yonkka's board of directors. Kian is

A)an inside director.
B)an outside director.
C)holding an illegal position.
D)a public director.

Question 71

Benjamin sits on the board of directors of Litman Corporation. He has the support of only 30 percent of Litman's shareholders. Benjamin is best characterized as a(n)

A)independent director.
B)zombie director.
C)inside director.
D)outside director.

Question 72

In a derivative lawsuit, the named plaintiff

A)is the corporation on whose behalf the lawsuit is filed.
B)is the particular class of shareholders primarily injured by the wrong.
C)consists of all the corporation's shareholders.
D)is the board of directors for the corporation.

Question 73

Which of the following is the most appropriate term to use when describing management's duty to its shareholders?

A)official duty
B)legal duty
C)fiduciary duty
D)statutory duty

Question 74

The proceeds, if any, of a derivative lawsuit go to

A)the shareholders of the corporation.
B)the shareholders who actually filed the lawsuit.
C)the board of directors.
D)the corporation.

Question 75

Meredith, a shareholder in Quarto, Inc., notified Quarto's board of directors that the corporation had been wronged and asked the board to bring a lawsuit in the corporation's name. In response to Meredith's demand, the board

A)can file suit on behalf of the corporation.
B)can reject Meredith's demand or simply fail to respond.
C)can appoint a Special Litigation Committee.
D)can do any of these options.

Question 76

Lucy owns 10 shares of stock in Quamba, Inc. Lucy wishes to place a proposal in a company's proxy statement to be voted on at the shareholders' meeting. Pursuant to the SEC rules, before Lucy is allowed to place her proposal on the proxy statement, she must

A)have owned continuously for one year at least 1 percent of the company and $2,000 or more of the stock.
B)have owned continuously for one year at least 1 percent of the company or $2,000 or more of the stock.
C)have the permission of the board of directors.
D)have been a stockholder for at least two years.

Question 77

Luella just purchased five shares of common stock in TriColor, Inc. for $250. Luella has the right to

A)manage the day-to-day business of the corporation.
B)set executive compensation.
C)require that a proposal be placed in the company's proxy statement to be voted on at the shareholder meeting.
D)vote to elect directors.

Question 78

Ev-R-Green Co., a private corporation, decides to sell substantially all of the company's assets. Under the Model Act and many state statutes,

A)the sole remedy for dissenting shareholders is to sell their stock on the stock exchange.
B)the board must first get unanimous shareholder approval for this fundamental change.
C)Ev-R-Green must buy back, at fair value, the stock of any shareholders who object to the decision.
D)the company may buy back, at fair value, the stock of any shareholders who object to the decision or the shareholders who object may receive the right of first refusal to purchase corporate assets.

Question 79

The business judgement rule is designed to protect

A)only the manager.
B)only the manager's decision.
C)both the manager and the manager's decision.
D)a business from a conflict of interest.

Question 80

Shareholders must begin the litigation process by asking the board of directors to bring suit, an action called

A)proxy access.
B)proper purpose.
C)making demand.
D)benchmarking.