Deck 17: Corporation Law

Question 1

What does the business judgment rule mean?

A) Directors have an obligation to ensure that effective systems are in place to comply with legislation and to monitor the systems to ensure compliance.
B) Directors must act prudently, and on a reasonably informed basis when making business decisions.
C) Directors must use their judgment to determine whether the use of corporate information would create a personal benefit to the detriment of the corporation.
D) Directors must act in the best interests of the corporation.
E) None of the answers are correct.

Answer 1

E

Question 2

ABC company is insolvent. It has two employees to which it owes $7,000 in wages for the last month, owes Canada Revenue Agency $15,000 and the Bank of Winnipeg $20,000. Jill is the sole director. What is her personal liability

A) $7,000
B) $15,000
C) $22,000
D) $29,000
E) $49,000

Answer 2

D

Question 3

Ali and Tom are both shareholders in ABC Electrical Ltd. Ali has 51% of the shares and Tom has 49%. Ali is offered $100,000 to sell his shares to DEF Electrical Ltd. Tom is not offered anything for his shares. Does Tom have any rights?

A) Tom may have statutory rights under the derivative action.
B) Tom may have contractual rights under a shareholders' agreement.
C) Tom may have statutory rights under the oppression remedy.
D) Tom may have contractual rights under a shareholders' agreement and statutory rights under the oppression remedy.
E) Tom may have contractual rights under a shareholders' agreement and statutory rights under the derivative action.

Answer 3

D

Question 4

A third-party businessperson must be most careful when dealing with

A) a letters patent corporation.
B) a special act corporation.
C) a general act corporation.
D) a statutory corporation.

Question 5

Susan, Alice and Wanda are shareholders in Flip Flop and Fly Inc., a children's yoga store. Each own 33% of the shares. Susan and Alice have decided they no longer want to work with Wanda. They sell all of the corporate assets to Bendy Girl Ltd. Does Wanda have any rights?

A) Wanda may have statutory rights under the derivative action
B) Wanda may have contractual rights under a shareholders' agreement.
C) Wanda may have statutory rights under the oppression remedy
D) Wanda may have contractual rights under a shareholders' agreement and statutory rights under the oppression remedy.
E) Wanda may have contractual rights under a shareholders' agreement and statutory rights under the derivative action.

Question 6

Under corporation law, a person elected by the shareholders of a corporation to manage its affairs is known as a

A) shareholder.
B) officer.
C) director.
D) partner.
E) CEO.

Question 7

Where a shareholder believes that a director has acted improperly as against the interests of the corporation, he or she will commence

A) a rectification action.
B) a dissolution action.
C) a derivative action.
D) a prejudicial relief action.
E) an ultra vires declaration action.

Question 8

Directors have a personal liability for all of the following except

A) losses from a corporate ultra vires act.
B) failure to make filings under corporate legislation.
C) employee wages outstanding on bankruptcy.
D) dividends that impair the corporate capital.
E) losses arising from a good faith business decision.

Question 9

Those persons legally responsible for the execution of management of a corporation are

A) directors.
B) officers.
C) shareholders.
D) employees.
E) incorporators.

Question 10

Braun was a director of Cable Shipping Ltd., a corporation which leased a large wharf from Valdez. Braun gave instructions to the person in charge of the wharf that the S.S. Cambridge would be using the wharf to unload its cargo. The S.S. Cambridge damaged the wharf on its arrival, and the wharf owner brought an action against Cable Shipping Ltd. for repairs. If Cable Shipping Ltd. was the ship owner, it would be liable for the damage.

Question 11

The greatest control over the acts of a corporation may be exercised by

A) the majority owner of preferred shares.
B) the board of directors.
C) the majority owner of common shares.
D) the bond holders.

Question 12

Where a director's acts are in violation of his duty of loyalty to the corporation, the most likely principle to be applied is the

A) doctrine of ultra vires.
B) doctrine of constructive notice.
C) doctrine of corporate opportunity.
D) doctrine of derivative action.

Question 13

If a shareholder believes that he or she suffered loss as a result of a failure of the directors to do their duty,

A) the corporation must sue the directors.
B) the shareholder must sue the directors.
C) the remedy will be found in the Canada Business Corporations Act.
D) the shareholder must bring a derivative action.
E) the shareholder can only resort to internal dispute settlement procedures.

Question 14

A corporation may exempt itself from audit only if

A) qualified examiners review the books.
B) the director agrees.
C) a civil action has been brought.
D) all the shareholders agree.
E) an ultra vires declaration action has commenced.

Question 15

ABC Oil Company Ltd. owns 40 oil wells, 4 have potential environmental liability resulting from contamination. DEF Oil Company Ltd. wants to acquire ABC. Should it purchase assets or shares?

A) All of the shares.
B) All of the shares but exclude the four wells.
C) All of the assets.
D) All of the assets but exclude the four wells.
E) Do not buy any of the shares or assets.

Question 16

The priorities of corporate security are usually

A) fixed charges in preference over floating charges, debentures in preference over mortgage bonds.
B) fixed charges in preference over floating charges, mortgage bonds in preference over debentures.
C) floating charges in preference over fixed charges, debentures in preference over mortgage bonds.
D) floating charges in preference over fixed charges, mortgage bonds in preference over debentures.

Question 17

The Quebec Charter of the French Language (Articles 63 and 64) requires corporations to utilize the French version of their name within the province. Translations may be offered

A) in a distinct colour.
B) in a less predominant typeface.
C) in a document on file with the province.
D) in a more predominant typeface.
E) only in a footnote format.

Question 18

Braun was a director of Cable Shipping Ltd., a corporation which leased a large wharf from Valdez. Braun gave instructions to the person in charge of the wharf that the S.S. Cambridge would be using the wharf to unload its cargo. The S.S. Cambridge damaged the wharf on its arrival, and the wharf owner brought an action against Cable Shipping Ltd. for repairs. If the S.S. Cambridge was owned by another corporation in which Braun had an undisclosed financial interest, Braun would be liable to Cable Shipping Ltd. for granting unauthorized permission for the ship to use the wharf.

Question 19

A person may rely on the acts of the officers of a corporation without inquiry by virtue of

A) the doctrine of constructive notice.
B) the doctrine of promissory estoppel.
C) the doctrine of ultra vires.
D) the indoor management rule.

Question 20

Braun was a director of Cable Shipping Ltd., a corporation which leased a large wharf from Valdez. Braun gave instructions to the person in charge of the wharf that the S.S. Cambridge would be using the wharf to unload its cargo. The S.S. Cambridge damaged the wharf on its arrival, and the wharf owner brought an action against Cable Shipping Ltd. for repairs. Braun would be personally liable to Valdez for the damage, because he gave permission for the corporation's ship to use the wharf.

Question 21

The Freestanding Company Limited is the owner of a number of commercial buildings in a large Ontario city. One of the directors, Denise, suggested that the corporation purchase a large apartment building. Another director, Zaida, was the owner of a one-third interest in the building. Zaida has a duty to disclose her interest in the apartment building and must refrain from voting on the proposal.

Question 22

In all but limited circumstances, an investor lending money to a corporation need not be concerned that the act of borrowing money by that corporation is ultra vires.

Question 23

Marisa was the Secretary-Treasurer of HotShot Enterprises Inc., a tea and coffee importer. She contacted Wes, who carried on business as a wholesaler, to determine if Wes might be interested in the purchase of the corporation's coffee import business. Wes expressed an interest in the purchase, and Marisa advised Wes that she would arrange to have the sale of the coffee business approved by the shareholders, as required by the corporation's bylaws. Marisa eventually produced a shareholders' resolution authorizing the sale. Later, it was discovered that proper notice of the shareholders' meeting had not been given, and no quorum of shareholders was present at the meeting. Wes may enforce the contract notwithstanding the mistake, on the basis of the "indoor management rule."

Question 24

The "indoor management rule" governs the activities of officers and directors but not agents of the corporation.

Question 25

An application for incorporation of a non-Special Act corporation is either a memorandum of association, or articles of incorporation.

Question 26

The Freestanding Company Limited is the owner of a number of commercial buildings in a large Ontario city. One of the directors, Denise, suggested that the corporation purchase a large apartment building. Another director, Zaida, was the owner of a one-third interest in the building. If the corporation must sell securities to the public to raise the capital, a prospectus must be prepared and approved by the Ontario Securities Commission before a sale of securities may be made.

Question 27

All corporations must identify to the general public their corporate nature, except letters patent corporations.

Question 28

Shareholders and directors of a corporation both have personal limited liability as against the liabilities of the corporation, but shareholders have their liability even more limited than do the directors.

Question 29

Beta Corporation is about to be wound up. The Corporation has cash assets of $1.5 million, liabilities of $1.1 million, 50 000 preferred shares with a fixed 10% dividend, and 50 000 common shares. Sufficient information is present to determine the value of the common share on winding up.

Question 30

A chartered bank, e.g., The Bank of Nova Scotia, is not a partnership.

Question 31

Marisa was the Secretary-Treasurer of HotShot Enterprises Inc., a tea and coffee importer. She contacted Wes, who carried on business as a wholesaler, to determine if Wes might be interested in the purchase of the corporation's coffee import business. Wes expressed an interest in the purchase, and Marisa advised Wes that she would arrange to have the sale of the coffee business approved by the shareholders, as required by the corporation's bylaws. Marisa eventually produced a shareholders' resolution authorizing the sale. Later, it was discovered that proper notice of the shareholders' meeting had not been given, and no quorum of shareholders was present at the meeting. The agreement to sell the coffee business was void, because proper shareholder approval had not been given for the sale.

Question 32

Where a director of a corporation appropriates to himself a benefit that should properly be seized upon by the corporation, a trust is established of the benefit for the corporation by the Doctrine of Corporate Opportunity.

Question 33

The Freestanding Company Limited is the owner of a number of commercial buildings in a large Ontario city. One of the directors, Denise, suggested that the corporation purchase a large apartment building. Another director, Zaida, was the owner of a one-third interest in the building. If the corporation must sell securities to the public to raise the capital, the purpose for which the securities are sold must be set out in the prospectus.

Question 34

Where a director who is a shareholder is accused of a conflict of interest, that director may vote with his or her shares on a motion regarding that conflict at a shareholders' meeting.

Question 35

Smith, a Director of Alfa Industries, discovered a business opportunity mentioned in a foreign magazine that would work well for Alfa in Canada. Rather than bring it up at the next directors' meeting, Mr. Smith takes advantage of it himself. He is in breach of his fiduciary duty to Alfa.

Question 36

Where a corporation issues both debentures and mortgage bonds on its assets, an investor can expect its debentures to pay higher interest.

Question 37

The Freestanding Company Limited is the owner of a number of commercial buildings in a large Ontario city. One of the directors, Denise, suggested that the corporation purchase a large apartment building. Another director, Zaida, was the owner of a one-third interest in the building. Zaida may be obliged to pay over to the corporation any profit earned on the sale of the building if she fails to disclose her interest at the directors' meeting.

Question 38

Jerry is a corporation's sole director, owns 55% of its preferred shares. Sam, the owner of the one common share will have difficulty in having a say in the appointment of officers.

Question 39

Marisa was the Secretary-Treasurer of HotShot Enterprises Inc., a tea and coffee importer. She contacted Wes, who carried on business as a wholesaler, to determine if Wes might be interested in the purchase of the corporation's coffee import business. Wes expressed an interest in the purchase, and Marisa advised Wes that she would arrange to have the sale of the coffee business approved by the shareholders, as required by the corporation's bylaws. Marisa eventually produced a shareholders' resolution authorizing the sale. Later, it was discovered that proper notice of the shareholders' meeting had not been given, and no quorum of shareholders was present at the meeting. Marisa and the other directors of the corporation may be liable to the shareholders if they acted improperly, and in violation of the corporation's bylaws, in the sale of the business.

Question 40

Marisa was the Secretary-Treasurer of HotShot Enterprises Inc., a tea and coffee importer. She contacted Wes, who carried on business as a wholesaler, to determine if Wes might be interested in the purchase of the corporation's coffee import business. Wes expressed an interest in the purchase, and Marisa advised Wes that she would arrange to have the sale of the coffee business approved by the shareholders, as required by the corporation's bylaws. Marisa eventually produced a shareholders' resolution authorizing the sale. Later, it was discovered that proper notice of the shareholders' meeting had not been given, and no quorum of shareholders was present at the meeting. When Wes discovers the mistake, he may sue Marisa personally as a result of her representation that proper authorization had been given for the sale.

Question 41

Many corporations are formed simply so individuals may hide themselves from debts. Serious flaws exist in this respect and are in need of reform. Argue both sides of this statement and render a conclusion.

Question 42

Sharon Sullivan built her business selling Registered Savings Plans as a sole proprietorship and reached the point that for further expansion she would require additional capital. She transformed her sole proprietorship into a corporation and sold shares to a number of friends who had admired her progress in business, a few of whom took positions as salespeople and managers in the expanded company. The business continued to grow in spite of numerous arguments over management and five years after incorporation, Sharon felt she was best off as a sole proprietor. She sold her 50% ownership in the company to the other shareholders and started out once again alone. To prevent a future lawsuit, Sharon left behind her client lists for the use of the remaining shareholders in continuing their business. However, once it became public knowledge that Sharon was on her own, many former clients switched their business to her, preferring her approach to service. On her own, Sharon approached other former clients and suggested to them that if they too preferred her business style, that they were welcome as her clients as well. On discovering this practice, the shareholders of Sharon's former corporation took action against her. Discuss the nature of this cause of action, the rights and duties of the parties, and the appropriate rationale that would be used by a court in rendering a decision. Render a reasoned decision of your own.
C.P.R. (3d) 140 (Nfld. T.D.).

Question 43

There is little privacy for a director of a public corporation, insofar as that director's personal trading in the shares of his or her own company will be a matter of public record.

Question 44

Discuss some of the issues that may arise in shareholder's agreements.

Question 45

Shareholder agreements are useful devices to protect the interests of minority shareholders in small private corporations.

Question 46

Aztech Oil Corporation and Empire Oil Corporation are two of the world's largest petroleum companies. Aztech Oil Corporation assets are all in Mexico, and all Empire Oil Corporation assets are in Canada. While normally fierce competitors, they agreed that oil developments in Russia were too risky for each of them to handle alone, given the uncertainties of the business environment. Accordingly, they decided to work together on Russian oil ventures. To keep matters financially apart from their other operations, two new companies were formed in Canada, Aztech Oil (Russia) Corporation and Empire Oil (Russia) Corporation. They operated as "Russian North Oil Ventures." The capital of RNOV was $2 million, being the combined assets of AO(R) Corp. and EO(R) Corp. Each had been capitalised with $1 million in cash, which had been then given over to RNOV. Neither AO(R) Corp. nor EO(R) Corp. had any other physical existence beyond their corporate minute books and corporate seals. RNOV set about business and had established base camps on the Russian coast near Japan.
Alan was a director of Empire Oil Corporation, Empire Oil (Russia) Corporation, and worked as an employee of Russian North Oil Ventures. He arranged for $4 million worth of oil exploration equipment from Vancouver and Calgary suppliers to be delivered to the base camps. At that time, RNOV had $750,000 remaining in its bank account, and unknown to Alan, the remaining directors of AOCorp. and EOCorp. were locked in a dispute on a number of matters. Alan's request for another $3.25 million was sent via two copies, one each to AO(R)Corp. and EO(R)Corp. As these two corporations had no more money than that which they were given, they sent requests for funds back up the chain to AOCorp. and EOCorp. The suppliers were looking for payment from RNOV when Alan got word that the alliance had fallen apart, and that there would be no further funds forthcoming. Advise the suppliers, stating the applicable principles of corporate law, and suggest what the final recovery of the suppliers will be.

Question 47

Identify the major aspects in which corporations differ from partnerships and explain why each aspect may be preferred in the corporate form to the partnership arrangement.

Question 48

The most significant percentage in corporate finance and corporate structure is 51%. Discuss.

Question 49

Phillip, Robert, and Mike, are the directors of Smithfield Warehouse Limited. The three directors had decided to increase their warehouse space and were looking for a suitable property to lease. The bylaws of the corporation with respect to entering a lease required such a document to be ratified by a two-thirds majority of the directors. Each director was scouting for possible properties when Phillip chanced upon a warehouse which appeared to suit their purposes. Phillip entered into a lease with the warehouse property owner on behalf of Smithfield Warehousing Limited, telling the owner that before the lease would be valid that it must be approved by his company. To this the owner of the warehouse agreed. Robert viewed the property the following day and paid the $1 000 deposit on rent that was required under the lease. Robert paid this out of his own pocket, and then wrote himself a company cheque for reimbursement. At a later meeting, the three brothers decided that a property found in the meantime by Mike was more suitable for their purposes and informed the warehouse owner that they did not intend to pass a resolution approving the lease, and that the deal was off. The warehouse owner, who was aware that the three brothers represented all the directors, claimed that the company ratified its lease by the actions of the two directors. Discuss the issues raised by this case and render a decision.
D.L.R. 577 (Man.
C.A.).

Question 50

Where an investor is offered either common or preference shares in a corporation on otherwise equally satisfactory terms, the investor who seeks to have his or her voice heard in management will choose to invest in common shares.

Question 51

The doctrine of ultra vires has no place in modern corporate law. The public should be entitled to assume a corporation has all the rights and duties of a natural person, and the doctrine should be abolished. Discuss this statement and any other issues it raises.

Question 52

Tax legislation provides shareholders with a dividend tax credit which protects them from being taxed twice when they receive dividends.

Question 53

The Canadian Broadcasting Corporation is an example of a Letters Patent corporation.