Question 1

Aunt Juliet wants to incorporate a small closely held corporation.Which of the following bits of advice,given to her by friends,is false?

Accepted Answer

This advice is false. A corporation cannot enter into contracts or engage in any business activity until it is incorporated. Any contract entered into by Aunt Juliet before incorporation would be personal and not binding on the corporation once it is incorporated.

Question 2

Three classmates incorporated about a week after graduation.The authorized capital was 500,000 common no-par-value shares.Each took one share and each was a director.If the directors decide to issue more shares from the treasury to raise more capital,which of the following provisions ensures that they keep their proportionate holdings?

Accepted Answer

The pre-emptive right provision gives existing shareholders the right to purchase new shares in proportion to their current shareholding before they are offered to the general public. This ensures that the existing shareholders maintain their proportionate holdings and prevent dilution of their ownership.

Question 3

Smith,Jones,and Brown incorporated XYZ Ltd.The three were sole shareholders,directors,officers,and employees.Jones and Brown disliked working with Smith.They knew he was good for the business,but they disliked his personality and politics.After a year,Jones and Brown,as directors,removed Smith as an officer and employee and raised their own salaries as employees.They then voted Smith out as a director at the next shareholders' meeting.Which one of the following provisions would aid Smith?

Accepted Answer

Relief-from-oppression provisions, also known as minority shareholder protections, allow minority shareholders to seek relief from unfair or oppressive treatment by the majority shareholders or the directors. In this case, Smith was unfairly removed as an officer, employee, and director by Jones and Brown, who were the majority shareholders and directors. Smith could use relief-from-oppression provisions to seek legal remedies, such as reinstatement or compensation, for the unfair treatment he received.

Question 4

Which of the following is a fiduciary relationship?

Accepted Answer

The answer of Which of the following is a fiduciary...

Question 5

An agent owes a fiduciary duty to his principal,a director owes a fiduciary duty to the corporation,and partners owe a fiduciary duty to the firm and to the other parties.Which of the following is not true with regard to one's fiduciary duty?

Accepted Answer

While a shareholder has a financial interest in a corporation, they do not owe a fiduciary duty to the corporation. Shareholders can only be held liable for their own wrongful actions and cannot be held liable for the actions of the corporation. However, a shareholder who also serves as a director or officer of the corporation would owe a fiduciary duty to the corporation.

Question 6

After Bill Roles graduated from university,he incorporated Roles Enterprises Ltd.He put $10,000 into the corporation by way of a shareholder's loan and the corporation granted him a security interest in one of its two delivery trucks.You knew Bill at school,so when Roles Enterprises Ltd.needed computer supplies,Bill,on behalf of the corporation,contracted with you,the owner of a business selling computer supplies.As it turned out,Bill placed such orders with you almost every three weeks.Read each of the following separately and indicate which of the following is true.

Accepted Answer

If Bill neglects to file annual returns for the corporation, the corporation could be dissolved, and cease to exist.

Answer: B
 As the employee was acting within the scope of their employment, you could sue the corporation as well as the employee, but not Bill personally.

Answer: C
 As a shareholder loan is considered an unsecured debt, Bill would be less likely to recover his loan than you would be to recover the money owed for supplies.

Answer: D
 If the corporation owed you money and Bill died, you could look to his estate for payment as his personal assets are separate from his corporation's assets.

Answer: E
 If Bill had contracted on behalf of the corporation before it was in existence, the corporation could still ratify the contract. The contract would not be void.

Question 7

With regard to the law of corporations,which of the following is true?

Accepted Answer

A creditor of a corporation could sue for some remedy if the directors of the corporation voted for a resolution to pay a dividend when the corporation was insolvent. This violates the duty of the directors to act in the best interests of the corporation and its creditors. Pre-emptive rights (A) allow existing shareholders to maintain their proportionate ownership in the corporation by having the right to buy new shares before they are offered to the public. Relief from oppression provisions (C) allow a shareholder to seek relief if they have been oppressed, unfairly disregarded or excluded. Lifting the corporate veil (B) is a process by which a court disregards the separate legal personality of a corporation, allowing the court to treat the actions of the corporation as those of its shareholders or directors. Directors (D) may still be personally liable on a promissory note if they signed it in their personal capacity or if they guaranteed the debt personally.

Question 8

Smith,director of ABC Ltd.,intercepted a corporate opportunity for his own benefit and thereby caused the corporation to miss a $45,000 profit.A shareholder urged the board of directors to take action against him.The other directors,all close friends of Smith from school days,did not take any action against him,although they did voice their dissatisfaction with his move.Which of the following provisions would aid the shareholder?

Accepted Answer

The derivative-action provision allows shareholders to bring legal action on behalf of the corporation against a director or officers who breached their fiduciary duties, such as Smith intercepting a corporate opportunity. The fact that the other directors are close friends of Smith increases the likelihood that they may not act in the corporation's best interest, making the derivative action provision an appropriate solution. The other provisions listed do not apply to the given scenario.

Question 9

Lee,a former head of a venture capital firm,sat on the board of directors of Angel Enterprises Ltd.,a broadly held corporation.During a board meeting,she recommended that the corporation invest in a new technology start-up.Lee failed to mention that she owned shares in this new tech corporation.When the prospect of investing was put to the board,Lee voted in favour it.Read each of the following statements separately and choose the true statement.

Accepted Answer

Lee had a fiduciary duty to disclose her interest in the contract and by failing to do so, she breached her duty. As a result, any profits made from the investment must be accounted for and potentially given up.

Question 10

Which of the following is an example of a breach of a fiduciary duty?

Accepted Answer

This is a clear example of a breach of fiduciary duty as the partner used insider information for personal gain, instead of in the best interest of the partnership.

Question 11

ABC Ltd.is a closely held corporation.Two of the shareholders serve as directors.As directors,they voted to issue themselves more shares to increase their voting control of the corporation.Which of the following provisions would aid the other shareholders?

Accepted Answer

Pre-emptive right provisions allow existing shareholders the right to purchase additional shares before the company offers them to the public, thus helping to maintain their proportional ownership and control in the company. This would aid the other shareholders in preventing their dilution of control.

Question 12

Jed Wimsey,in auditing the books of various businesses around town,was talking to you,his best friend,about certain practices that he thought improper.Which of the following practices he found would be a breach of fiduciary duty?

Accepted Answer

Starting a competing business without the knowledge or consent of partners is a breach of fiduciary duty as it goes against the duty of loyalty owed by partners to each other.

Question 13

Kent incorporated provincially.The corporation worked with small businesses in developing graphs and charts from their data for presentation to bankers,partners,shareholders,etc.If Kent,as promoter and agent of the company,had bought the necessary equipment from Ace Computers Ltd.prior to incorporation,which of the following would be true?

Accepted Answer

Since the contract with Ace Computers was entered into prior to incorporation, it would be considered a pre-incorporation contract. At common law, such contracts are not binding on the corporation until it comes into existence. However, Kent as the promoter and agent of the company may be held personally liable for the contract. To protect himself from personal liability, Kent could have included a provision in the contract with Ace exempting him from personal liability. This could be done through an indemnification clause or a provision stating that the contract is binding only on the corporation once it comes into existence.

Question 14

Mr.Malik,an investment counsellor by training,sat on the board of directors of Talbot Enterprises Ltd.,a broadly held corporation.During a meeting of the board,he advised the corporation to buy some condominiums given the present soft real estate market.Malik did not disclose that he owned shares in the corporation that owned the property,nor did he disclose that he would be entitled to a commission for every unit he helped sell.When the question was put to the board,he voted for it.Read each of the following statements separately and indicate which is true.

Accepted Answer

Malik had a conflict of interest and breached his fiduciary duty by failing to disclose his interest in the contract and by voting on the question. Therefore, he must account for any profit made from his actions.

Question 15

In 2016,Rambolin incorporated Rambolin Industries Ltd.and became its sole shareholder.He lent the corporation $10,000 and took a General Security Agreement from the corporation as security for repayment of the loan.He became director,president,and secretary of the corporation.The corporation prospered.Last year,you began supplying the corporation with office supplies.You were paid at the end of each month for supplies delivered during that month.For the last six months,however,you have not been paid.You learn that other suppliers have not been paid either because sales have dropped drastically,apparently due to Rambolin's nasty temper caused by ill health.Which of the following is true?

Accepted Answer

Rambolin, having lent money to the corporation and secured that loan with a General Security Agreement, would have a secured claim in the event of bankruptcy. This typically places him in a better position than unsecured creditors, such as suppliers who have not been paid, to receive proceeds from the sale of the corporation's assets.

Question 16

Andrea agreed to form a corporation with two friends,but lay awake last night rethinking her decision.They agreed that they all wanted to be directors and officers and that they all would have signing authority with the bank from whom the corporation is borrowing the money.Nevertheless,she began to review her assumptions.Which of the following is true?

Accepted Answer

Shareholders have the right to bring a derivative action on behalf of the corporation if the directors have breached their fiduciary duty and the other directors refuse to take action. The other options are not true. A) Signing a promissory note on behalf of the corporation would require her to clearly indicate that she is signing on behalf of the corporation, otherwise, she may be personally liable. B) The shareholders will have to elect her as a director every year for her to become one, even if she is a major shareholder. C) Shareholders can seek relief from oppression, but not for a simple disagreement over a decision. D) A director owes a fiduciary duty to the corporation and cannot compete with the company without incurring liability.

Question 17

Kent incorporated Dynamite Data Ltd.,which worked with small businesses in developing graphs and charts from their data for presentations to bankers,shareholders,etc.Kent lent the company $25,000 by way of a shareholder's loan and took as security computers,plotters,and printers under a General Security Agreement.An employee of the corporation,Jack,got into an argument with a customer named Roth while making a delivery.Roth was complaining that the graph was in red and not in pink as requested.It ended with Jack punching Roth,who fell onto a camera.The damage to Roth's nose and the camera totalled $35,000.Which of the following is true?

Accepted Answer

The answer of Kent incorporated Dynamite Data Ltd.,which worked with...

Question 18

A corporation is a fiction that does not exist in reality.

Accepted Answer

A corporation is a legal entity created by law and exists only on paper. It is not a physical entity and does not have a physical presence. Therefore, it can be considered a fictional entity.

Question 19

In Peoples Department Stores Inc.et al.v.Wise et al.,the Supreme Court of Canada had to clarify to whom a director owes its duties.What did the Court hold?

Accepted Answer

The Supreme Court of Canada in Peoples Department Stores Inc. v. Wise clarified that a director's fiduciary duty is owed solely to the corporation itself, not to other stakeholders, although a duty of care may extend to other stakeholders beyond the corporation.

Question 20

Read each of the following separately.In which one of the following cases would the corporation not be bound by the contract made?

Accepted Answer

In this case, Jones did not have any authority or knowledge from Corporation A to make the purchase, and thus, the corporation would not be bound by the contract made.

Quiz 11: Corporations