Deck 20: Directors, Officers, and Controlling Shareholders.

Question 1

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

Answer 1

True

Question 2

Breakup fees are liquidated damages for a terminated proxy fight.

Answer 2

False

Question 3

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.

Answer 3

True

Question 4

In certain cases,the duty of good faith may be subsumed within the duty of loyalty.

Question 5

Under no circumstances do controlling shareholders owe fiduciary duties to other shareholders.

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

In 2013,the SEC proposed an amendment to the Dodd-Frank Act,which requires disclosure of the pay ratio of the median of the annual total compensation of all employees to the annual total compensation of the CEO.

Question 8

A shareholder derivative action is a suit brought by a shareholder on behalf of the corporation.

Question 9

Companies listed on the New York Stock Exchange must have compensation committees composed entirely of independent directors.

Question 10

The Delaware Supreme Court has held that,regardless of the circumstances,a majority shareholder may never freeze out the minority shareholders.

Question 11

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

Question 12

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 13

A person must own a majority of shares in a corporation in order to be considered a controlling shareholder.

Question 14

In CASE 20.2 In Re Rural Metro Corporation Shareholders Litigation(2014),the Delaware Chancery court considered whether an investment banker could be held liable as an aider and abettor of a breach of fiduciary duty by the board of directors.

Question 15

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

Question 16

The Dodd-Frank Wall Street Reform and Consumer Protection Act outlaws corporate executives from holding stock in companies for which they work.

Question 17

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

Question 18

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

Question 19

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 20

Termination fees are sometimes characterized as liquidated damages.

Question 21

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 22

Which of the following is considered an inside director of a corporation?

A) A director who is also an officer of the corporation.
B) A director who is also an officer of any corporation.
C) A director who is both an officer of any corporation and who stands to personally profit by an action being considered by the board.
D) A director who is qualified as an expert in regard to any product of the company.

Question 23

In CASE 20.1Smith v.Van Gorkom (1985)discussed in the text,plaintiff-shareholders alleged the directors were grossly negligent in failing to inform themselves adequately before making a decision about a merger.How did the court rule and why?

A) For plaintiff-shareholders, because the board failed to obtain adequate information on merger terms and therefore was not protected by the business judgment rule.
B) For directors, because the board was protected by the business judgment rule since there was no conflict of interest.
C) For the directors, but the board was not protected by the business judgment rule but rather by the business merger rule.
D) For the directors, because the board was protected by the business judgment rule since fraud could not be established.

Question 24

In the Air Products & Chemicals,Inc.v.Airgas,Inc.case discussed in the text,defendant's boardof directors allegedly breached its fiduciary duties to stockholders by refusing to redeem a poison pill in place and allow a hostile takeover to proceed.The court ruled that:

A) the board satisfied its fiduciary duties because as a matter of law directors may use poison pills to block hostile takeovers that would result in a change of management.
B) the board satisfied its fiduciary duties because the members acted reasonably in response to the belief, based on reasonable grounds, that the hostile takeover offer was inadequate and posed a legitimate threat if accepted.
C) the board failed to act reasonably because the members acted in their own self interest, not in the best interests of the shareholders, and that the board failed to properly seek expert opinion regarding the hostile takeover offer in relation to the value of the company.
D) the board failed to act reasonably because as a matter of law it could not leave the poison pill in place in the face of a hostile takeover bid.

Question 25

Which of the following are among the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act in relation to shareholder control of pay for top executives?

A) The act provides that shareholders of all privately held as well as publicly traded companies are entitled to vote and set executive compensation on a yearly basis.
B) The act provides that shareholders of public companies have an advisory vote on company payment practices for top executives and that public companies must hold a shareholder advisory vote on golden parachutes for executives.
C) The act provides that shareholders of all privately held as well as publicly traded companies are entitled to vote and set executive compensation on a yearly basis and also that the shareholders must specifically approve any golden parachute provisions for executives.
D) Based on the belief that ill informed shareholder input negatively affected nationwide corporate performance the act provides that shareholders need not be involved in setting executive compensation.

Question 26

Which of the following is true regarding any duties of controlling shareholders in relation to control of a corporation?

A) Controlling shareholders owe no duties other than to maximize their own wealth.
B) Controlling shareholders generally have a duty to control the corporation in a fair, just, and equitable manner, known as the standard of entire fairness.
C) Controlling shareholders may act to maximize their own wealth only so long as they do not intentionally harm and exhibit bad faith toward minority shareholders, a standard known as minority shareholder respect and fair dealing.
D) Controlling shareholders must appoint minority shareholders to vote a certain percentage of their shares in instances in which the minority shareholders demand that right.

Question 27

The Omnicare,Inc.v.NCS Healthcare,Inc.casediscussed in the text,involved a question of whether directors of an insolvent publicly traded company violated their fiduciary duty when they entered into an agreement for the sale of the company to a particular interested buyer regardless of other offers.The court ruled that:

A) the directors violated their fiduciary duty and lacked the authority to agree to an absolute lock-up guaranteeing the sale and agreeing to forgo consideration of future offers.
B) the directors violated their fiduciary duty because the agreement was kept secret from majority shareholders but that, otherwise, the agreement foregoing consideration of future offers would have been valid.
C) the directors violated their fiduciary duty because the agreement was kept secret from minority shareholders but that, otherwise, the agreement foregoing consideration of future offers would have been valid.
D) the directors satisfied all fiduciary duties because there was no evidence of bad faith or self dealing.

Question 28

In theCarmody v.Toll Bros.,Inc.case discussed in the text,the Delaware Court of Chancery analyzed the question of the legality of a dead-hand pill under Delaware law.In striking down the dead-hand pill,the court ruled that:

A) the directors appropriately used the dead-hand pill which guaranteed that majority shareholders in place before a hostile bidding attempt were entitled to vote to block any later proposed vote on a merger.
B) the directors appropriately used the dead-hand pill because directors are entitled to use any means necessary in order to block a hostile takeover.
C) the dead-hand pill violated the state general corporation law for a number of reasons including that it violated the directors' duty of loyalty.
D) the dead-hand pill, which could only be redeemed by directors in office after a hostile bidder gained control or by their designated successors, violated the state general corporation law because it prejudiced directors in place prior to the takeover.

Question 29

The business judgment rule is applicable only if the directors make an informed decision.

Question 30

A(n)__________ gives the person to whom it is granted the right to buy a certain number of shares at a fixed price for a fixed number of years during a period known as the __________ period which is not usually for more than __________.

A) call right; exercise; twelve months
B) option; redemption; twelve months
C) option; redemption; ten years
D) option; exercise; ten years

Question 31

A shareholder derivative suit is a lawsuit by:

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

Question 32

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 33

What is required by the Sarbanes-Oxley Act of 2002 in regard to the certification of the accuracy of public companies' SEC filings and the adequacy of internal controls?

A) The chief executive officer, the chief financial officer, and all inside directors must certify the accuracy of public companies' SEC filings and the adequacy of internal controls.
B) The chief executive officer, the chief financial officer, and any controlling shareholder must certify the accuracy of public companies' SEC filings and the adequacy of internal controls.
C) The chief executive officer and the chief financial officer must certify the accuracy of public companies' SEC filings and the adequacy of internal controls.
D) The chief executive officer, the chief financial officer, and all outside directors must certify the accuracy of public companies' SEC filings and the adequacy of internal controls.

Question 34

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 35

Which of the following is true regarding hostile takeovers in the European Union?

A) All member states must observe the neutrality rule and the breakthrough rule.
B) Member states may opt out of the neutrality rule and the breakthrough rule.
C) Member states may opt out of the neutrality rule, but all member states must observe the breakthrough rule.
D) Member states may opt out of the breakthrough rule, but all member states must observe the neutrality rule.

Question 36

The Smith v.Van Gorkam decision underscores which of the following regarding statements of officers or directors?

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

Question 37

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

Question 38

In the context of executive compensation,__________ stock usually means stock subject to vesting restrictions.

A) regulated
B) restricted
C) illegally issued
D) kickback

Question 39

Which of the following is true in regard to the business judgment rule if one or more individual directors have a personal interest in a transaction being considered by the board?

A) The decision may be entitled to the protection of the business judgment rule if the transaction is approved by a majority of the inside directors.
B) The decision may be entitled to the protection of the business judgment rule if the transaction is approved by a majority of the disinterested directors.
C) The decision is not entitled to the protection of the business judgment rule resulting in a higher level of proof regarding the reasonableness of the transaction being required from the board of directors.
D) The decision is not entitled to the protection of the business judgment rule leading to a legally established conclusion of illegality on the part of the board of directors.

Question 40

Which of the following was the result in the Quickturn Design Sys.,Inc.v.Shapiro case,which involved a Delaware court's ruling on the "no-hand pill"?

A) As a matter of law the pill was valid as a response to a takeover bid regardless of whether independent proof existed that the directors acted reasonably.
B) The pill was valid because the directors established, based upon reliable expert testimony, that the hostile takeover bid presented a dangerous threat to the continuation of the company.
C) The pill, which had to be redeemed within one month of a takeover bid or else be allowed to remain in place, was invalid because it impermissibly circumscribed the board's statutory power to manage the business affairs of the company and the directors' ability to fulfill their fiduciary duties.
D) The pill, which could not be redeemed for six months following a takeover, was invalid because it impermissibly circumscribed the board's statutory power to manage the business affairs of the company and the directors' ability to fulfill their fiduciary duties.

Question 41

A contractual provision insisted upon by a bidder limiting the ability of board members to negotiate with other bidders is referred to as a(n)__________ clause.

A) obedience
B) loyalty
C) negotiation
D) no-talk

Question 42

In a __________,someone wishing to replace the board with his or her own candidates attempts to acquire a sufficient number of shareholder votes to do so through limited written powers of attorney entitling the holder to vote the shares owned by the person giving the power of attorney.

A) hostile takeover
B) proxy contest
C) poison pill
D) greenmail takeover

Question 43

__________ occurs when a raider acquires stock in a target company and then threatens to comhence a hostile takeover unless the stock is repurchased by the target at a premium over the market price.

A) Revlon mode
B) The Van Gorkom test
C) The Unocal Proportionality test
D) Greenmail

Question 44

Fact Pattern 20-1
Tonya is the president of Big Corporation. Big Corporation 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 Big Corporation 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 20-1.Which of the following is a 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 45

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 46

In CASE 20.4In re Abbott Laboratories Derivative Shareholders Litigation(2003),the shareholder-plaintiffs alleged the corporate directors breached their duty of good faith through their failure to follow up on repeated notices of regulatory noncompliance.How did the court rule?

A) The court ruled the directors were not liable and did not breach any duty of good faith because they were unaware of the issues, and accepted corporate governance procedures did not require the disclosure of the noncompliance notices to them.
B) The court ruledthe directors could not be held liable because the corporation's certificate of incorporation exempted directors from liability for breach of the duty of care.
C) The court ruledthe business judgment rule applied and that the plaintiffs' allegations could not withstand the protection of that rule.
D) The court ruledthe plaintiffs sufficiently pleaded allegations that, if true, constituted a breach of the duty of good faith leading to the directors' actions falling outside the protection of the business judgment rule.

Question 47

In CASE 20.6 Jones v.H.F.Ahmanson & Co.(1969),the court held that the defendants-__________ shareholders,who did not allow the remaining shareholders to exchange their shares,breached a(n)__________ to the plaintiffs-__________ shareholders,and ordered defendants to __________to the plaintiffs.

A) minority, financial duty, majority, pay damages
B) majority, fiduciary duty, minority, return control of the corporation
C) majority, fiduciary duty, minority, pay damages
D) minority, duty of loyalty, majority, return control of the corporation

Question 48

In CASE 20.3 In re Citigroup Inc.Shareholder Derivative Litigation(2009),the Delaware Chancery Court__________ the shareholders' claims,holding that the allegations in the __________ were __________ to show that a demand on the __________ would have been futile.

A) affirmed, complaint, sufficient, shareholders
B) dismissed, answer, insufficient, directors
C) dismissed, complaint, insufficient, directors
D) affirmed, answer, sufficient, directors

Question 49

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 50

Brice is on the board of ABC Corporation.XYZ Corporation has made a move to acquire ABC.Tina,the president of ABC advises the board that the offer made by XYZ is a good one that should be accepted.She did not disclose,however,that XYZ had offered her a generous bonus if she could convince the board members of ABC to take XYZ'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

In CASE 20.5 Third Point LLC v.Ruprecht (2014),the Delaware Court of Chancery considered whether the __________ had breached its __________ duty when it adopted a(n)__________ stock rights plan in response to an activist hedge-fund's increased holdings in the company's stock.

A) board of directors, fiduciary, two-tiered
B) CEO, fiduciary, poison-pill
C) board of directors, loyalty, poison-pill
D) board of directors, fiduciary, poison-pill

Question 52

Fact Pattern 20-1
Tonya is the president of Big Corporation. Big Corporation 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 Big Corporation 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 20-1.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 53

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 54

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 55

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 56

The __________ standard of review comes into place when a(n)__________ implements a defensive measure that touches on issues of shareholder __________.

A) Unocal, board of directors, voting control
B) Blaisus, board of directors, voting control
C) Revlon,board of directors, approval
D) Blasius, CEO, voting control

Question 57

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 these are correct.

Question 58

A shareholder who owns sufficient shares to outvote the other shareholders,or to otherwise set corporate policy,and thus to control the corporation is known as a(n)__________ shareholder.

A) controlling
B) absolute
C) manipulative
D) chargeable

Question 59

__________ 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 60

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 61

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

Question 62

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

Question 63

Maurice is a fairly new director at ABC Corp.Peg,another director,tells him that she believes that the company is in Revlon mode and that the directors should act accordingly.What is Peg referencing?

Question 64

What was the conclusion of the court in Unocal Corporation v.Mesa Petroleum Co.regarding the application of the business judgment rule to actions of directors in response to a takeover attempt?

Question 65

What is meant by the business judgment rule?

Question 66

Fact Pattern 20-1
Tonya is the president of Big Corporation. Big Corporation 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 Big Corporation 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 20-1.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 67

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 68

Yolanda,a ballroom dance instructor,was recently asked to be a director of ABC 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 ABC had assured her that the only responsibility of a director was acting 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 regarding her responsibilities,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 69

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