Deck 26: Corporate Governance: the Internal Affairs of Corporations

Question 1

Which of the following is NOT a statutory safeguard when considering disclosure?

A)the financial statement
B)appointment of inspector
C)documents of record
D)pre-emptive rights
E)record of insider trading

Answer 1

D

Question 2

Martin is a newly elected director of the Alliance Corporation.After being told of what would be expected of him,he is not sure he wants the position.However,upon investigating,he finds out that the only thing he will be liable for is

A)employee wages if the corporation becomes insolvent.
B)to attend all regularly scheduled board of director meetings.
C)to exercise a high standard of care,diligence,and skill.
D)to act with the professional standards of a director.
E)to study items on the agenda before each director's meeting.

Answer 2

A

Question 3

Jacob is a minority shareholder in a closely held corporation.Recently he was dismissed from his marketing management position,and now the board of directors is stopping him from transferring his stock to a cousin.He has

A)lost his rights as a minority stock holder.
B)been locked in.
C)been locked in and frozen out.
D)legal claims against the board of directors.
E)been frozen out.

Answer 3

C

Question 4

Joseph is director of Marttel Inc.The company is thinking about buying some land in which Joseph is part owner.At the board of directors meeting where this is discussed and voted on,Joseph should

A)reveal,discuss,and vote on the matter since this is his fiduciary duty.
B)explain fully of his interests in the land,then vote his conscience.
C)abstain from voting on the matter since this is a potential conflict of interests.
D)be silent and refrain from voting on this matter.
E)graciously be absent from the meeting.

Question 5

The winding up (dissolution)of a corporation can be required by a court in order to rescue a

A)bankrupt shareholder.
B)CEO who has reached an impasse with the board of directors.
C)director who has been unjustly dismissed.
D)locked-in shareholder.
E)minority shareholder from a buyout by others.

Question 6

Claude will be a minority shareholder in a new corporation.All interested parties are now in a meeting to draft the incorporating documents.To protect his rights as a minority shareholder,Claude wants certain provisions included in a well-drafted shareholder's agreement.Which of the following provisions is unnecessary and won't be included in such an agreement?

A)the right to participate in management
B)the unanimous approval of all shareholders
C)the right to a fair price for her share interest
D)the right to employment
E)for the agreement to be included inside the charter

Question 7

What are pre-emptive rights?

A)rights to buy as many shares as are available
B)rights to send in a proxy statement for any meeting
C)rights to retain one's proportionate holdings in a firm
D)rights to vote out any director without cause
E)rights to vote cumulatively or in blocks

Question 8

In a distributing public company,auditors are appointed by

A)the directors.
B)the shareholders.
C)the Securities Commission.
D)the audit committee of the board of directors.
E)the treasurer.

Question 9

Directors owe duties to

A)the public.
B)creditors of the corporation.
C)the shareholders.
D)the corporation.
E)all of the above

Question 10

John,the controlling shareholder of a large national company,elected Allan,Edward,and Mary as its directors.John has just heard of a venture that may or may not be beneficial to the company,but using his power as controlling shareholder,wants to go ahead with it and tells the three directors to approve it,which they do.It then turns out that the venture does more harm than good to the company.In this case

A)John owes no fiduciary duty to the corporation.
B)John owes no duty to account to the corporation.
C)John owes no duty to the corporation.
D)John owes no duty of care to the corporation.
E)all of the above

Question 11

The only "document of record" the company need NOT allow access to by the shareholders is

A)minute books of board of directors' meetings.
B)a copy of the company charter.
C)a register of directors.
D)a register of all transfers of shares.
E)a copy of all special resolutions.

Question 12

Which of the following is NOT a duty of the directors of corporations?

A)to adopt by-laws governing the business
B)to issue shares
C)to call meetings of shareholders
D)to take care of the day-to-day business of the corporation
E)to declare dividends

Question 13

A director will be criminally liable where she or he

A)uses corporate information to make personal profit.
B)acts as corporate agent to the determent of the corporation.
C)gets involved with insider trading.
D)intercepts a corporate opportunity.
E)directly competes with the corporation in her or his own business.

Question 14

Regarding financial rights,shareholders have a right to

A)receive dividends when declared by the corporation.
B)dividends when the corporation makes a profit.
C)some discrimination in the payment of dividends.
D)dividends paid in the order of preferences assigned to classes of shareholders-starting with the common shareholders.
E)capital appreciation as a result of retained earnings.

Question 15

To ensure the accuracy of financial statements,business corporation legislation provides for the appointment of an independent ________ by the shareholders.

A)accountant
B)chief financial officer
C)ombudsperson
D)auditor
E)chartered accountant

Question 16

The CEO of a corporation is

A)chosen from the board of directors.
B)appointed or hired by the board of directors.
C)hired by the president.
D)in charge of the board meetings.
E)elected by the shareholders.

Question 17

Sometimes almost all the directors of a company have interests in a contract.They should

A)present the contract to the management for a decision.
B)vote as a total board of directors.
C)present the contract to a general meeting of shareholders for their ratification after full disclosure has been made.
D)gather the remaining independent directors and form a quorum.
E)vote as a corporate committee of the whole.

Question 18

Charles,a minority shareholder in a large private provincial company,has just learned that the controlling shareholder together with the directors of the company intend to sell a large portion of the property owned by the corporation at a price less than its fair market value.If Charles wants to stop this,he will

A)seek the oppression remedy.
B)launch a derivative action.
C)bring an appraisal remedy.
D)seek an order to wind up the company.
E)all of the above

Question 19

Which of the following best describes the appraisal remedy?

A)the right of the court to grant relief to shareholders who are victims of oppressively unfair actions
B)the right of an auditor to have access to all the corporation's information
C)the right of a minority shareholder to apply to the court for a liquidation order
D)the right of a dissenting shareholder to have his or her shares bought out by the corporation
E)the right of shareholders to appoint an auditor

Question 20

A proceeding brought by one or more shareholders in the name of the corporation in respect of a wrong done to the corporation is referred to as

A)an oppression action.
B)a winding-up action.
C)a derivative action.
D)an appraisal action.
E)a negligence action.

Question 21

A director who fails to act in the best interests of a company is liable in damages to the shareholders.

Question 22

Canadian courts have consistently held that a majority shareholder owes ________ to act for the welfare of the corporation.

A)fiduciary duties
B)no positive duty
C)a duty of loyalty
D)a non-compete duty
E)a positive duty

Question 23

A shareholder agreement to which a majority of shareholders are parties is referred to as a unanimous shareholder agreement.

Question 24

Originally,courts did not consider insider trading as harmful to the corporation and so it did not consider it a breach of the fiduciary duty owed to the corporation.

Question 25

A director or officer of a public trading company who uses private information about the company to purchase shares of the company to make a profit is an insider trader.

Question 26

In a small private provincial company where the shareholders are also the directors and officers,does corporate governance really matter?

Question 27

A shareholder who is not a director can operate a business that competes with the business of the company in which she or he is a shareholder.

Question 28

Directors are appointed by the officers of the corporation.

Question 29

Jack is a director of Metallica,a construction corporation.During the course of his work as director of the corporation,Jack learns that the government is about to ask for tenders for the construction of a highway.If Jack resigns from his position as director and then sets up a new corporation that successfully bids for the government contract,he will not be in breach of his duty as a director.

Question 30

A shareholder who is being pushed out of a company by the other shareholders because they hold a majority of common shares can always use the remedy of a derivative action.

Question 31

When a director has a duty to acquire property for the corporation and instead acquires it for herself,she has

A)intercepted an opportunity belonging to the corporation and has committed a breach of duty.
B)an obligation to immediately disclose the acquisition of the property to the shareholders.
C)no obligation to disclose and has not committed any breach of duty.
D)breached her obligation not to compete with the corporation.

Question 32

Notwithstanding legislation designed to impose duties on directors,why do you think that large corporations get away with breaches of duties and even fraud at the level of the directors and controlling shareholders,if any?

Question 33

Generally speaking,the common shares of a minority shareholder will be ordered to be purchased at fair market value by the remaining shareholders who have been found guilty of oppressing him or her.

Question 34

Can a shareholder agreement protect a minority shareholder from oppressive acts of the majority shareholders and,if so,how?

Question 35

An agreement between two or more shareholders that is distinct from the corporation's charters and by-laws is referred to as a shareholder agreement.

Question 36

Directors are responsible for the day-to-day operation of a company's business.

Question 37

Where a controlling group of majority shareholders propose fundamental changes to the corporation,a dissenting shareholder need not go along with the change.She may elect instead to have her shares bought out by the corporation at a fair price.This is referred to as

A)a derivative remedy.
B)an oppression remedy.
C)the unanimous shareholder remedy.
D)the appraisal remedy.
E)a pre-emptive right.

Question 38

A director who refuses to disclose his interest in another company at a directors meeting where the purchase of the other business is being voted on has committed a breach of trust.

Question 39

If a corporation is profitable,directors must declare a dividend to holders of common shares according to their proportionate shareholding.

Question 40

When a corporation has suffered an injury,the corporation may sue the wrongdoers to recover its losses.However,if the directors themselves are the wrongdoers,they are not likely to authorize the commencement of any action against themselves.The common law recognizes the right of a minority shareholder to start an action on behalf of the corporation,and this is referred to as

A)an appraisal action.
B)a winding up action.
C)a derivative action.
D)an insider action.
E)a "locked in" action.

Question 41

Explain what it means for a director to give the corporation the right of first refusal.Give an example.

Question 42

As you have seen in previous chapters,these days it is common in sophisticated contracts to have provisions requiring mandatory mediation or binding arbitration to resolve disputes arising between the parties.As between the majority and minority shareholders of a corporation,who do you think would favour one form of dispute resolution over the other?

Question 43

In what circumstances is the appointment of the auditor of the corporation unnecessary?

Question 44

Qualco Lumber Ltd.owned a timber license over 50 000 hectares of forest in British Columbia.The British Columbia government notified Qualco that it intends to cancel this valuable license.A director of Qualco immediately upon hearing of the cancellation sells all his shares.When would that director be liable for insider trading and when would he not?

Question 45

Have the numerous changes to corporate legislation,which impose more and more duties on directors of corporations,changed the concept of limited liability for shareholders of small privately held companies who are often also the directors and officers,so as to act as a possible deterrent to incorporation as the best method of limiting liability?

Question 46

Why should a director or officer of a corporation ensure that a contract is signed in such a way as to make it clear that it is being signed on behalf of the corporation?

Question 47

The Delphi Corp.owns 60 percent of Lynden Sand & Gravel Inc.Delphi,with its voting power,elected all three directors on Lynden's board.Then the board decided to sell one of Lynden's gravel reserves to Delphi at only half its value.As a minority shareholder in the Lynden corporation,how have you been affected by this transaction?

Question 48

Briefly describe how a minority shareholder can become "locked in" and "frozen out" as a result of the actions of the majority.

Question 49

What duties do directors owe to shareholders of the corporation?

Question 50

Mary,Martha,Marge,and Alice incorporate a private corporation for the purpose of wholesaling sports equipment.Each owns an equal number of shares.Their incorporating documents neither specify what business the corporation is in nor restrict the type of business the corporation can operate.Martha,Mary,and Marge are the three directors and officers of the corporation,while Alice is being frozen out of the company's decision making.She has never been elected as a director,has never had a position in the management,and has not had any of her resolutions passed at the annual shareholder's meeting.Also,the corporation seemed to have abandoned its original purpose and gone into a different business-one that doesn't interest Alice.Explain to Alice the "oppression remedy" and its advantages over two other kinds of remedy.

Question 51

Dan is a director of a corporation,and without disclosing his conflict of interest,he entered into a contract to supply the corporation with widgets.The contract was made in the name of his mother so that the corporation would not know that Dan was involved.Pat is a minority shareholder in the corporation,has found out about the conflict,and intends to bring a derivative action against Dan.Explain what a derivative action is.Why is a derivative action appropriate in the circumstances? What must Pat show in order to bring a derivative action? What remedy might a court award?

Question 52

What is the difference between the business of a corporation and the affairs of a corporation?

Question 53

Which is more preferable: a simple shareholder agreement or a unanimous shareholder agreement? Why?

Question 54

Explain why most corporations issue pre-emptive rights on their new issues of stock when pre-emptive rights are generally not recognized by courts in Canada.

Question 55

Explain how a proxy is used.

Question 56

Briefly describe the three basic groups common to all corporations and how the distinctions between these groups can become blurred in small private corporations.