Deck 28: Formation and Termination of Corporations

Question 1

Which of the following types of corporations sells shares to people who often have little interest in it except as investors?

A) Nonprofit corporations
B) Closely held corporations
C) Publicly held corporations
D) Municipal corporations

Answer 1

C
Explanation: For-profit corporations are often divided into publicly held and close corporations. The close corporation can be contrasted with the publicly held corporation, which sells shares to people who often have little interest in it except as investors.

Question 2

An enterprise that conducts its affairs in interstate commerce cannot be incorporated in a state other than the state in which the principal offices are located.

Answer 2

False

Question 3

Under the right of first refusal,either the corporation or its shareholders are given the right to buy shares offered for sale to an outsider willing to purchase them.

Answer 3

True

Question 4

Minority shareholders in close corporations cannot be outvoted on salary and employment decisions.

Question 5

The function of bylaws is to establish rules for the conduct of the internal affairs of a corporation.

Question 6

A corporation is viewed as the alter ego of the shareholder-manager when shareholders mix their personal dealings and corporate transactions as if all were personal.

Question 7

Esther and Salim are promoters for Kale Inc.Prior to its incorporation,Esther negotiated several preincorporation contracts with Ian,an investor.She signed each contract in the name of Kale Inc.Kale subsequently was incorporated,but the Kale Board of Directors refused to adopt the contracts.Ian later sues Kale,Esther,and Salim on the contracts.Which of the following statements is true of this case?

A) Only Kale and Esther are liable as Esther, a promoter of Kale, negotiated several preincorporation contracts with Ian.
B) Esther is solely liable as she signed each contract in the name of Kale Inc.
C) Kale, Esther, and Salim are liable as they are sued by Ian.
D) Esther and Salim are liable as they are promoters of Kale Inc.

Question 8

A corporation that merges into another is dissolved.

Question 9

Helen is a promoter who,prior to forming Bayne Corp.,contracted to purchase tile-manufacturing machinery from Owen Machinery Inc.The contract was negotiated and entered into in the name of Bayne Corp.Subsequently,a certificate of incorporation was issued to Bayne Corp.Which of the following statements is true of this scenario?

A) Only Bayne Corp. is liable for the contract with Owen Machinery Inc. as it received its certificate of incorporation.
B) Helen would be liable for the contract with Owen Machinery Inc.
C) If the board of directors of Bayne Corp. issues a suitable resolution, Helen would be relieved from all liability for the contract with Owen Machinery Inc.
D) Since Bayne Corp. was not in existence at the time the contract was negotiated, the contract is void.

Question 10

Both nonprofit corporations and nontaxing governmental corporations are similar because they are formed and operated by private persons.

Question 11

Governmental corporations always have the power to tax.

Question 12

A corporation domiciled in another country but doing business in the United States cannot be called an alien corporation.

Question 13

The traditional judicial rule is that the court will pierce the veil whenever domination of a corporation by one or more of its shareholders is met,even if it does not result in an improper purpose.

Question 14

A promoter's liability on preincorporation contracts terminates when a novation is signed.

Question 15

Failure to appoint a registered agent in the state of incorporation is grounds for an involuntary dissolution.

Question 16

Nonprofit corporations:

A) are similar to nontaxing governmental corporations.
B) are formed and operated by public entities.
C) do not permit officers and employees to receive salaries.
D) have the power to tax.

Question 17

A municipal corporation:

A) is formed and operated by private persons.
B) does not seek to make a profit.
C) does not have the power to tax.
D) is incorporated under special statute.

Question 18

Generally,businesses start out as publicly traded corporations.

Question 19

Under the Model Business Corporation Act (MBCA),a corporation can issue shares in return for the promoters' preincorporation service.

Question 20

In a de facto corporation,the promoters substantially comply with all mandatory provisions.

Question 21

Joey and his partners have started a corporation in North Dakota.They could get it incorporated in Illinois if:

A) incorporation fees are low even if incorporation taxes are very high.
B) shareholders can actively participate in the management.
C) incorporation fees and taxes are lower, and there is minimal shareholder interference.
D) promoters and shareholders are barred from interfering.

Question 22

Under the revised Model Business Corporation Act (MBCA),if there are business debts following a defective incorporation,liability for the debts will be imposed upon:

A) all purported shareholders who acted as if a corporation had been formed.
B) shareholders and others who took no active part in the defectively formed corporation.
C) shareholders, promoters, managers, directors, and others who mistakenly believe that the corporation is in existence.
D) promoters, managers, and shareholders who participated in management and policy decisions, and also knew of the defective incorporation.

Question 23

Under the revised Model Business Corporation Act,_____.

A) the filing of the articles of incorporation, evidenced by the return of the copy stamped by secretary of state, is conclusive proof of incorporation
B) liability will never be imposed on promoters who participated in management and policy decisions
C) the issuance of the certificate of incorporation is conclusive proof of incorporation to the corporate status, except a quo warranto action brought by the secretary of state
D) managers will be released from any liability in excess of their initial investment

Question 24

Which of the following statements is true about the ultra vires doctrine?

A) It is the only stringent limitation on the enforceability of contracts entered into by corporations.
B) It permits corporate directors to freely prevent enforcement of unattractive contracts.
C) It permits the state attorney general to prevent enforcement of corporate contracts that extend beyond the corporation's authorized powers.
D) It does not permit the corporation to bring a suit for damages to the corporation against the officers of the corporation who have entered into an ultra vires contract.

Question 25

A de facto corporation:

A) could not be challenged by a third party.
B) existed when the promoters substantially complied with all mandatory provisions.
C) did not exist when there was an honest attempt to comply with the mandatory provisions of the corporate statute.
D) was permitted to deny its corporate existence.

Question 26

Which of the following steps governing the incorporation process is included in the Model Business Corporation Act (MBCA)?

A) Preparing, signing, and authenticating the articles of incorporation
B) Filing the articles with the attorney general
C) Filing the articles by paying part of the required fees to the partnership creditor
D) Contributing a minimum of $5,000 to receive a certificate of incorporation

Question 27

A _____ existed when there was an honest attempt to comply with the mandatory provisions of the corporate statute,yet the attempt still failed in some material respect.

A) de jure corporation
B) de facto corporation
C) corporation by estoppel
D) close corporation

Question 28

According to the traditional judicial rule,courts can pierce the corporate veil when:

A) there is undercapitalization coupled with strict adherence to corporate formalities.
B) there is strict adherence to corporate formalities such as holding shareholders' but not directors' meetings.
C) there is undercapitalization.
D) shareholders deal with their corporate transactions as if all were professional.

Question 29

Which of the following states has traditionally been considered attractive for incorporation?

A) Delaware
B) New York
C) California
D) Iowa

Question 30

Jones Corp.is a business concern in the process of being set up.Benito,its promoter has entered into preincorporation contracts.After the corporation comes into existence,Benito can be released from liability on the preincorporation contracts through:

A) an agreement with Jones Corp., wherein Jones Corp. agrees that it will be substituted for Benito.
B) an agreement with the third party before adoption of the preincorporation agreement.
C) an agreement with Jones Corp., Benito, and their third party, wherein all agree that Jones Corp. will be substituted for Benito.
D) another preincorporation contract with the third party.

Question 31

According to the Model Business Corporation Act (MBCA),which of the following is an optional content that could be included in the articles of incorporation?

A) The name of the corporation
B) The name and address of each incorporator
C) The number of shares of capital stock that the corporation shall have authority to issue
D) The purpose of the corporation

Question 32

Before a corporation comes into existence,it _____.

A) can be liable as principal
B) cannot ratify a contract made by the promoter
C) is illegal to pay promoters for their services
D) is liable if the board acts to adopt the contract

Question 33

The bylaws of a corporation:

A) usually set up procedures for the holding of shares.
B) do not involve financial matters such as declaring and paying dividends.
C) usually set out the duties and authority of the officers and the conduct of meetings.
D) need not be consistent with state laws or the articles of incorporation.

Question 34

A basic principle of corporation law is that:

A) shareholders are not free to dispose of their shares by gift.
B) shareholders are given the authority to manage the business.
C) majority rule applies to both shareholder and director action.
D) there is an established market for the stock.

Question 35

Which of the following is a useful way of preventing unwanted persons from entering a corporation?

A) Novation
B) Consent restraint
C) Piercing the corporate veil
D) Estoppel

Question 36

Which of the following is a common trait of close corporations?

A) The shareholders are large in number.
B) Shareholders usually live in different geographic areas.
C) Only few of the shareholders are active in the business.
D) There is no established market for the stock.

Question 37

Massachusetts courts require that the parties expressly create a(n)_____ before a corporation can be held liable for preincorporation contracts.

A) adoption agreement
B) novation
C) incorporation regulation
D) operating agreement

Question 38

Under general incorporation laws,_____.

A) incorporation is a legislative privilege, not a right
B) the secretary of state has to issue a certificate of incorporation
C) the corporation's shareholders have to make a decision regarding incorporation
D) incorporation is a legislative privilege as well as a right

Question 39

All business corporations derive their existence from the:

A) Commerce Clause of the U.S. Constitution.
B) common law.
C) state in which they are incorporated.
D) federal government.

Question 40

A de facto corporation:

A) could be challenged by a third party.
B) was not permitted to deny its corporate existence.
C) never involves a quo warranto action.
D) existed when the promoters substantially complied with all mandatory provisions.

Question 41

Why might a U.S.investor choose to incorporate its business in the country where it is conducting its overseas operations? What special constraints might exist?

Question 42

Explain the promoters' liability to third parties before a corporation is formed.

Question 43

If articles of incorporation provide for a limited life,the corporation _____.

A) automatically terminates at the end of the designated time
B) usually appeals to the secretary of state for dissolution
C) dissolves only by amendment to the contract
D) terminates at the end of the designated time only with the written consent of all shareholders

Question 44

Under the Model Business Corporation Act,a shareholder may ask a court to dissolve a corporation when:

A) a corporation uses assets for public welfare.
B) directors are in conflict, their deadlock cannot be broken by shareholders, and the corporation faces ruin.
C) directors are maintaining registered agents without the approval of the shareholders.
D) creditors are acting unfairly or illegally.

Question 45

Mention the matters that must be included in the articles of incorporation according to the Model Business Corporation Act (MBCA).

Question 46

Under the revised Model Business Corporation Act (MBCA),who will be liable for the business debts if the business has been defectively incorporated?

Question 47

Which of the following statements is true for the dissolution of a corporation by agreement?

A) As a corporation is not an entity created by the state, it need not have the state's consent to dissolve.
B) A corporation can be dissolved by oral consent of all shareholders.
C) If two corporations consolidate into a new corporation, only the old corporation with major shareholders is dissolved.
D) Corporations with more than one class of shareholders sometimes provide for voting on dissolution and other matters by class.

Question 48

Which of the following would be a justification for involuntary dissolution of a corporation by a creditor?

A) When there is misapplication or waste of corporate assets
B) When directors are in conflict, deadlock cannot be broken by shareholders, and the corporation faces ruin
C) When corporation is insolvent and not paying its debts
D) When directors are acting illegally or unfairly

Question 49

_____ is a basic restriction governing the transferability of shares in a close corporation.

A) Piercing the veil
B) Quo warranto
C) Right of first refusal
D) Ultra vires

Question 50

Mention the requirements that are essential for a court to pierce the veil of a corporation.