Deck 39: Corporations: Directors, Officers, and Shareholders

Question 1

How are directors typically chosen after the incorporation process?

A) By majority vote of the shareholders.
B) By majority vote of all officers.
C) By a two-thirds vote of shareholders.
D) The president appoints them in his or her discretion.
E) By a unanimous vote of the shareholders.

Answer 1

By majority vote of the shareholders.

Question 2

The French Penal Code adopts what is called the _______ which requires that corporate criminal liability be applied only in cases that pertain to an "express mention in the law or in a French regulation."

A) Strict liability rule
B) Res ipsa standard
C) Specialty principal
D) High priority rule
E) Protectionist principal

Answer 2

Specialty principal

Question 3

In most states, a corporation's bylaws can negate preemptive rights.

Answer 3

True

Question 4

Each director has one vote.

Question 5

Which of the following was the result on appeal in the Case Opener, the case in which a majority shareholder voted to award a bonus to her son, the president of the company, over the objection of minority shareholders?

A) That in awarding the bonus, the majority shareholder violated the duty of loyalty she owed to the company.
B) That in awarding the bonus, the majority shareholder violated the duty of care she owed to the company.
C) That in awarding the bonus, the majority shareholder violated the business judgment rule.
D) That the majority shareholder was guilty of no violation in awarding the bonus.
E) That the majority shareholder's vote to award the bonus would be upheld only if she submitted additional proof that the bonus was deserved.

Question 6

A shareholder can file a direct suit against a director if the director has caused harm to the business by violating a fiduciary duty.

Question 7

Which of the following is true regarding how directors are chosen during incorporation?

A) Prior to incorporation, either the incorporators appoint them or the corporate articles name them.
B) Prior to incorporation, either the incorporators appoint them or by a majority vote of the shareholders.
C) Prior to incorporation, directors may only be named through the incorporators appointing them.
D) Prior to incorporation, directors may only be named by the corporate articles naming them.
E) Prior to incorporation, directors may only be named by the president appointing them.

Question 8

A shareholder may not be held personally liable to a corporation for receiving watered stock.

Question 9

Which of the following is true regarding the Revised Model Business Corporation Act?

A) It has been adopted at least in part in over half of the states.
B) It has been fully rejected in over half of the states in favor of the Model Business Corporation Act.
C) It has been adopted fully by seventy-five percent of the states.
D) It has been rejected in over half of the states in favor of the Model Corporate Act.
E) There is no Revised Model Business Corporation Act.

Question 10

Which of the following was the result in Patrick v. Allen, the case in the text involving whether the business judgment rule exempted directors of a corporation from liability for renting land to a private golf course, of which several directors were members, at a price sufficient to cover only property taxes?

A) That the directors could not benefit from the rule because the business judgment rule applies to officers, not directors.
B) That while the business judgment rule applies to directors, it did not apply to provide protection to the directors because they stood to benefit personally.
C) That the business judgment rule applied to shield the directors from liability because no fraud was involved in the transaction.
D) That the business judgment rule applied to shield the directors from liability because the directors received no money directly from the golf course.
E) That the business judgment rule applied to shield the directors from liability because the transaction was properly recorded on the company's books and not hidden.

Question 11

Which of the following was the result in State of Wisconsin Investment Board v. William Bartlett, the case in the text in which a shareholder sought an injunction blocking the merger of the pharmaceutical company in which it owned shares, Medco, with another pharmaceutical company?

A) That the injunction would be granted because the plaintiff's allegations demonstrated that the Medco board failed to inform itself of all material facts concerning the proposed merger.
B) That because of disputed issues of material fact, the injunction would be temporarily denied and the case scheduled for a hearing on whether the board adequately informed themselves of all material information necessary to execute the merger agreement.
C) That the injunction would be granted because the plaintiff's allegations established that the board failed to act in good faith and in the honest belief that the merger was in the best interests of the company.
D) That the injunction would be granted because the plaintiff's allegations established that the board willfully left themselves uninformed in order to serve their own self-interest.
E) That the injunction would be denied because the plaintiff's allegations of self-interest did not meet the threshold necessary to rebut the presumption of the business judgment rule.

Question 12

The Revised Model Business Corporation Act forbids directors' meetings being held via telephone.

Question 13

How is the number of corporate directors determined?

A) In the discretion of the president of the corporation.
B) By vote of the stockholders.
C) According to the corporate articles or bylaws.
D) According to the number of shares issued.
E) According to the amount of profit projected by incorporators for the first year.

Question 14

When directors or officers violate their duty of loyalty, they are self-dealing.

Question 15

A board of directors may take no action that benefits a director in his or her personal capacity.

Question 16

If a corporation has fewer than _____ shareholders, the Revised Model Business Corporation Act allows companies to eliminate the board of directors entirely.

A) 100
B) 50
C) 30
D) 25
E) 10

Question 17

Which of the following was the result on appeal in McCann v. McCann, the case in the text involving whether a corporation engaged in a "squeeze-out" as to a minority shareholder?

A) That the business judgment rule does not apply in such situations and that so long as there is any business reason for a transaction, a corporation cannot be found liable for a "squeeze-out" resulting in dismissal of the plaintiff's claims.
B) That while the business judgment rule applied, the corporation submitted sufficient evidence to establish legitimate reasons for all questioned transactions and that it, therefore, could not be held liable to the complaining minority shareholder.
C) That a material question of fact as to whether the directors could be found to have engaged in a "squeeze-out" of the beneficiary, causing him harm beyond every other shareholder, and that the case would be remanded for further proceedings.
D) That because he owned over 20% of the stock, the failure to grant the complaining minority shareholder a seat on the board in and of itself was sufficient under the facts presented to establish that the corporation was guilty of behavior constituting an illegal "squeeze-out."
E) That the failure to declare a dividend when sufficient assets existed with which to do so in and of itself was sufficient under the facts presented to establish that the corporation was guilty of behavior constituting an illegal "squeeze-out."

Question 18

A stock subscription agreement signed before incorporation may obligate a person to purchase shares in the corporation.

Question 19

Directors and officers have a fiduciary duty of care.

Question 20

Shareholders are directly responsible for the daily management of a corporation.

Question 21

Generally, a quorum of shareholders exists when shareholders holding more than ______ percent of the outstanding shares are present.

A) 80
B) 70
C) 60
D) 50
E) 25

Question 22

Which of the following are sent to shareholders prior to an annual meeting containing proposals made by shareholders?

A) Meeting agenda
B) Proxy materials
C) Presidential materials
D) Officer materials
E) Meeting proposals

Question 23

Which of the following are directors who are not officers or employees of the corporation?

A) Approved directors
B) Outside directors
C) Inside directors
D) Affiliated directors
E) Unaffiliated directors

Question 24

Which of the following is false regarding officers of a corporation?

A) Officers are executive managers.
B) Officers run the day-to-day business of the corporation.
C) In most cases an individual may serve as both a director and an officer.
D) The rules of agency do not apply to the work of officers.
E) Qualifications required of officers are set forth in the corporate articles and bylaws.

Question 25

Which of the following is a term for a requirement that a minimum number of directors be present at a meeting for decisions made at the meeting to be valid?

A) Quorum
B) Substantial group
C) Adequate group
D) Adequate assembly
E) Substantial assembly

Question 26

Which of the following is false regarding the liability of directors and officers for criminal behavior in the U.S.?

A) Directors and officers can be held personally responsible for their own crimes.
B) Directors and officers can be held personally responsible for the crimes of other employees within the organization when they have failed to adequately supervise the employee's behavior.
C) According to the responsible person doctrine, an officer can be held criminally liable for conduct of an employee if the court determines that a responsible person would have known about and could have prevented the illegal activity.
D) Directors and officers who use insider information to trade the corporation's stock for a profit can be held liable for breaching their fiduciary duty.
E) A court may not find a corporate officer criminally liable for conduct of an employee unless the officer profited personally from the illegal activity.

Question 27

Although some states allow for longer terms under certain circumstances, for how long do directors typically serve?

A) Three years
B) Two years
C) One year
D) Four years
E) Five years

Question 28

Which of the following are outside directors who have business contacts with the corporation?

A) Approved directors
B) Associated directors
C) Inside directors
D) Affiliated directors
E) Unaffiliated directors

Question 29

Which of the following are outside directors who do not have business contacts with the corporation?

A) Approved directors
B) Associated directors
C) Inside directors
D) Affiliated directors
E) Unaffiliated directors

Question 30

Which of the following references shares that have a fixed face value noted on the stock certificate?

A) No par-value shares
B) Par-value shares
C) Watered stock
D) Valued stock
E) No-valued stock

Question 31

The Securities and Exchange Commission has established that any shareholder who owns more than ______ worth of stock in the corporation can submit proposals to be included in proxy materials.

A) $5,000
B) $4,000
C) $3,000
D) $2,000
E) $1,000

Question 32

Decisions of courts in ______ have a significant impact because more than half of U.S. public traded corporations are incorporated there.

A) New York
B) California
C) Florida
D) Delaware
E) New Jersey

Question 33

Which of the following owns a corporation?

A) Directors
B) Officers
C) Shareholders
D) Affiliates
E) The State

Question 34

Which of the following, if any, is an authorization of a shareholder to allow someone else to vote in his or her place?

A) Approval
B) Acknowledgement
C) Proxy
D) Permissive voucher
E) There is no such document because a shareholder may not allow someone else to vote in the shareholder's place.

Question 35

Under the Revised Model Business Corporation Act, how long do proxies last if they are not withdrawn?

A) Nine months
B) Eleven months
C) One year
D) Sixteen months
E) Two years

Question 36

For which of the following may a director generally be removed?

A) At the will of the president.
B) In the discretion of the shareholders upon majority vote.
C) In the discretion of the shareholders upon a two-thirds vote.
D) In the discretion of other directors upon a majority vote.
E) For cause.

Question 37

Which of the following are directors who are also officers or employees of the corporation?

A) Approved directors
B) Outside directors
C) Inside directors
D) Affiliated directors
E) Unaffiliated directors

Question 38

An individual shareholder can enter a voting trust in which he or she transfers share titles to a trustee in exchange for a ____.

A) Voting trust certificate
B) Proxy
C) Voting acknowledgement
D) Trustee voting agreement
E) Trust acknowledgement

Question 39

In a closely held corporation, a breach of the duty of a majority shareholder to act with care and loyalty when selling his or her shares is known as ____.

A) Oppressive conduct
B) Majority holder misconduct
C) Minority oppression
D) Minority discrimination
E) Disloyal procedure

Question 40

While ordinary decisions made by directors require a ______ vote, more important decisions sometimes require a _____ vote.

A) Majority; two-thirds
B) Majority; three-fourths
C) Two-thirds; three-fourths
D) One-third; majority
E) Majority; unanimous

Question 41

Shares are ______ when the corporation will not issue physical stock certificates.

A) Approved
B) Unapproved
C) Unacknowledged
D) Acknowledged
E) Uncertificated

Question 42

Which of the following was the result on appeal in Auerbach v. Bennett the case in the text in which a shareholder brought a derivative action after an internal audit of the GTE Corporation suggested that the corporation's management had paid significant amounts in bribes and kickbacks over a period of several years?

A) The court ruled that the business judgment rule exempted the directors from liability.
B) The court ruled that the business judgment rule exempted the directors from liability only so long as the directors could establish that the shareholders did not lose money on account of their actions.
C) The court ruled that the business judgment rule exempted the directors from liability unless the shareholder could establish that the shareholders lost money on account of their actions.
D) The court ruled that the business judgment rule did not apply because illegality was involved and that the corporation was, therefore, liable.
E) The court ruled that the business judgment rule shielded the lawsuit insofar as foreign wrongdoing was alleged, but not for wrongdoing committed in the U.S.

Question 43

"Machine Malfunction." Bruno, the president of a health club operation called ABC Health Club, convinced the board of directors to approve a large purchase of a type of fitness machine called "Perfect Body." Bruno had carefully investigated the machine and did a presentation to the board on its purported benefits. Unfortunately, after the purchase, it was announced that "Perfect Body" was actually a very dangerous machine that should not be used. The manufacturer of "Perfect Body" went bankrupt, and ABC lost $200,000 on the purchase of the machines. The shareholders are furious and want to sue Bruno and the directors. In an attempt to appease her, the board of directors agrees to allow Frances, the ring leader of the shareholders, to purchase stock of the company at below its fair market value. Frances purchases a considerable amount of stock on that basis, but says that the shareholders plan to continue with an action against Bruno and the board members.

-Which of the following is a term for stock such as that issued to Frances?

A) No-par stock
B) Reduced stock
C) Watered stock
D) Less-value stock
E) Unapproved stock

Question 44

"Kite Sales." Wendy is president of a business that manufactures kites. The kites of her company, ABC Kites, are sold to large toy stores. After Wendy learned a great deal about kites at ABC, she started to make kites at home. She started selling kites to friends. She also started to make inquiries regarding selling her kites to larger toy stores in the area, and she began making a few sales to them. Her plan was to start small and then leave ABC after she had increased sales. She did not work on her side project while she was on the clock with ABC. Some of the directors learned about her kite sales and accused her of wrongdoing. Wendy denied any wrongdoing and pointed out that she did not work on her project while she was on the job with ABC.

-In which of the following objectionable activities was Wendy involved, if any, in selling the kites?

A) She was not involved in any objectionable activities.
B) She prevented corporate opportunity.
C) She prevented profit maximization.
D) She committed private-profit allocation.
E) She committed corporate profit reduction.

Question 45

Which of the following is false regarding corporate decisions that might personally benefit a particular director or officer?

A) There must be full disclosure of the interest by a director who might personally benefit from a corporate decision.
B) There must be full disclosure of the interest by an officer who might personally benefit from a corporate decision.
C) The director to benefit may vote on the issue although a majority of all directors must approve the transaction.
D) The duty to disclose an interest that might personally benefit a director is a fiduciary duty.
E) The duty to disclose an interest that might personally benefit an officer is a fiduciary duty.

Question 46

"Kite Sales." Wendy is president of a business that manufactures kites. The kites of her company, ABC Kites, are sold to large toy stores. After Wendy learned a great deal about kites at ABC, she started to make kites at home. She started selling kites to friends. She also started to make inquiries regarding selling her kites to larger toy stores in the area, and she began making a few sales to them. Her plan was to start small and then leave ABC after she had increased sales. She did not work on her side project while she was on the clock with ABC. Some of the directors learned about her kite sales and accused her of wrongdoing. Wendy denied any wrongdoing and pointed out that she did not work on her project while she was on the job with ABC.

-What remedy will be imposed on Wendy, if any, for her home kite sales?

A) Nothing because Wendy did not engage in any wrongdoing.
B) She will be required to cede to the corporation all the profits she earned as a result of the breach.
C) She will be required to cede to the corporation only profits she earned as a result of the breach that the corporation can prove by a preponderance of the evidence it lost as a result of her actions.
D) She will be required to cede to the corporation any profits she earned as a result of the breach unless she can by a preponderance of the evidence prove that the corporation lost no sales as a result of her actions.
E) She will be required to cede to the corporation half of any profits she earned as a result of the breach.

Question 47

Which of the following may be redeemed for a certain number of shares at a specified price within a given time period?

A) Preemptive shares
B) Share allowances
C) Allocated shares
D) Stock warrants
E) Share grants

Question 48

"Self-Centered President." Tina is president of "We Manage You," a corporation set up to manage physician practices. Tina has never been very concerned with minority shareholders based on her belief that they have little influence over the company because they cannot even elect a director. She is told, however, that her state just instituted the practice of cumulative voting. An election is coming up in which 10 directors will be elected. Minority shareholders own 2,000 shares, while majority shareholders own 8,000 shares. Tina tells her vice president, George, that she wants to ignore minority shareholders and focus her interests on majority shareholders and the directors. She also tells George that she wants to be particularly conscientious toward directors because the directors appoint officers, and she does not believe that she owes any actual duties to shareholders. She further orders George to destroy some documents subpoenaed in a criminal investigation against the company for illegal dumping. When George protests, Tina tells him not to worry because officers cannot be held responsible for criminal actions so long as the actions are done as part of the duties of an officer. She explains to him that only the corporation can be charged with liability in such cases.

-Is Tina accurate that she owes no duties to shareholders?

A) Yes, she is accurate because it is the directors who owe duties to shareholders.
B) No, she is inaccurate because she owes a duty of care to shareholders although she owes no other duties.
C) No, she is inaccurate because she owes a duty of loyalty to shareholders although she owes no other duties.
D) No, she is inaccurate because she owes both a duty of care and a duty of loyalty to shareholders.
E) She is partially accurate. She owes both a duty of care and a duty of loyalty to minority shareholders, but no duties to majority shareholders because the law assumes that they have the power to protect their own interests.

Question 49

Which of the following is a term for stock issued to individuals below its fair market value?

A) No-par stock
B) Reduced stock
C) Watered stock
D) Less-value stock
E) Unapproved stock

Question 50

How much must a shareholder who signs a stock subscription pay for no-par shares?

A) The depreciated value
B) The value on the last sale
C) The value as set by the board of directors
D) The value as voted upon by shareholders
E) The fair market value of the shares

Question 51

Which of the following may be issued to shareholders as proof of ownership in the corporation?

A) Stock subscriptions
B) Stock acknowledgements
C) Paper documentation
D) Stock certificates
E) Acknowledgement documents

Question 52

Which of the following gives preference to shareholders to purchase shares of a new issue of stock?

A) Acknowledged rights
B) Superior rights
C) Preemptive rights
D) Selective rights
E) Benefit rights

Question 53

"Kite Sales." Wendy is president of a business that manufactures kites. The kites of her company, ABC Kites, are sold to large toy stores. After Wendy learned a great deal about kites at ABC, she started to make kites at home. She started selling kites to friends. She also started to make inquiries regarding selling her kites to larger toy stores in the area, and she began making a few sales to them. Her plan was to start small and then leave ABC after she had increased sales. She did not work on her side project while she was on the clock with ABC. Some of the directors learned about her kite sales and accused her of wrongdoing. Wendy denied any wrongdoing and pointed out that she did not work on her project while she was on the job with ABC.

-What duty, if any, did Wendy violate?

A) She did not commit any violation.
B) She violated the duty of loyalty.
C) She violated the duty of care.
D) She violated the duty of understanding.
E) She violated the duty of profit maximization.

Question 54

Which of the following is not a right of corporate directors?

A) The right of compensation
B) The right of participation
C) The right of inspection
D) The right of indemnification
E) The right of obedience

Question 55

In which of the following does a shareholder sue alleging that he has suffered damages caused by the corporation?

A) Investigative action
B) Shareholder action suit
C) Shareholder's direct suit
D) Shareholder derivative suit
E) Active allocation suit

Question 56

Which of the following references a right of a corporation or its shareholder to purchase any shares of stock offered for resale by a shareholder within a specified period of time?

A) Right of adequate refusal
B) Right of first refusal
C) Right of first purchase
D) Right of first acknowledgement
E) Superior right of purchase

Question 57

"Self-Centered President." Tina is president of "We Manage You," a corporation set up to manage physician practices. Tina has never been very concerned with minority shareholders based on her belief that they have little influence over the company because they cannot even elect a director. She is told, however, that her state just instituted the practice of cumulative voting. An election is coming up in which 10 directors will be elected. Minority shareholders own 2,000 shares, while majority shareholders own 8,000 shares. Tina tells her vice president, George, that she wants to ignore minority shareholders and focus her interests on majority shareholders and the directors. She also tells George that she wants to be particularly conscientious toward directors because the directors appoint officers, and she does not believe that she owes any actual duties to shareholders. She further orders George to destroy some documents subpoenaed in a criminal investigation against the company for illegal dumping. When George protests, Tina tells him not to worry because officers cannot be held responsible for criminal actions so long as the actions are done as part of the duties of an officer. She explains to him that only the corporation can be charged with liability in such cases.

-Is Tina correct in that officers cannot be held criminally responsible for their actions on behalf of a corporation?

A) Yes, she is correct.
B) She is correct only so long as the corporation is solvent.
C) She is correct only if the board of directors has accepted all liability for acts of officers.
D) She is correct only if environmental or employment matters are involved.
E) She is incorrect.

Question 58

If corporate directors fail to sue when the corporation has been harmed by an individual, another corporation, or a director, individual shareholders can file a[n] ______ on behalf of the corporation.

A) Investigative action
B) Shareholder action suit
C) Shareholder's direct suit
D) Shareholder's derivative suit
E) Active allocation suit

Question 59

"Machine Malfunction." Bruno, the president of a health club operation called ABC Health Club, convinced the board of directors to approve a large purchase of a type of fitness machine called "Perfect Body." Bruno had carefully investigated the machine and did a presentation to the board on its purported benefits. Unfortunately, after the purchase, it was announced that "Perfect Body" was actually a very dangerous machine that should not be used. The manufacturer of "Perfect Body" went bankrupt, and ABC lost $200,000 on the purchase of the machines. The shareholders are furious and want to sue Bruno and the directors. In an attempt to appease her, the board of directors agrees to allow Frances, the ring leader of the shareholders, to purchase stock of the company at below its fair market value. Frances purchases a considerable amount of stock on that basis, but says that the shareholders plan to continue with an action against Bruno and the board members.

-Under which of the following should Bruno and the board of directors defend themselves in an action brought by shareholders for harming the corporation?

A) The superior judgment rule.
B) The research and investigation rule.
C) The business judgment rule.
D) The rule of corporate integrity.
E) There is no defense.

Question 60

"Self-Centered President." Tina is president of "We Manage You," a corporation set up to manage physician practices. Tina has never been very concerned with minority shareholders based on her belief that they have little influence over the company because they cannot even elect a director. She is told, however, that her state just instituted the practice of cumulative voting. An election is coming up in which 10 directors will be elected. Minority shareholders own 2,000 shares, while majority shareholders own 8,000 shares. Tina tells her vice president, George, that she wants to ignore minority shareholders and focus her interests on majority shareholders and the directors. She also tells George that she wants to be particularly conscientious toward directors because the directors appoint officers, and she does not believe that she owes any actual duties to shareholders. She further orders George to destroy some documents subpoenaed in a criminal investigation against the company for illegal dumping. When George protests, Tina tells him not to worry because officers cannot be held responsible for criminal actions so long as the actions are done as part of the duties of an officer. She explains to him that only the corporation can be charged with liability in such cases.

-How many votes will the minority shareholders have in the election?

A) 2,000
B) 4,000
C) 6,000
D) 10,000
E) 20,000

Question 61

Mary is a director of a company that develops expensive residential subdivisions. The company is considering attempting to purchase a large section of land on which to put a development. Mary happens to own some of the land. What duty, if any, does she have regarding disclosure and why or why not; and what steps, if any should be taken by the board when considering the matter?

Question 62

Which groups owe a duty of care to the corporation, and what does that duty require?

Question 63

List and describe the four rights of directors as listed in the text.

Question 64

What are the requirements for being a director?

Question 65

Set forth and describe the two types of self-dealing in which officers and directors might engage and the penalty for doing so.

Question 66

"Machine Malfunction." Bruno, the president of a health club operation called ABC Health Club, convinced the board of directors to approve a large purchase of a type of fitness machine called "Perfect Body." Bruno had carefully investigated the machine and did a presentation to the board on its purported benefits. Unfortunately, after the purchase, it was announced that "Perfect Body" was actually a very dangerous machine that should not be used. The manufacturer of "Perfect Body" went bankrupt, and ABC lost $200,000 on the purchase of the machines. The shareholders are furious and want to sue Bruno and the directors. In an attempt to appease her, the board of directors agrees to allow Frances, the ring leader of the shareholders, to purchase stock of the company at below its fair market value. Frances purchases a considerable amount of stock on that basis, but says that the shareholders plan to continue with an action against Bruno and the board members.

-Which of the following is true regarding liability of Frances, if any, for purchasing the stock at below its fair market value?

A) If the board wanted to offer it to her, they had that right, and there is no consequence to Frances.
B) She is liable for double the stated corporate value of the stock in addition to any price she already paid.
C) She is liable for the stated corporate value of the stock in addition to any price she already paid.
D) She is liable for paying the difference between the price she paid for the shares and the stated corporate value of the shares.
E) She is liable for paying the difference between the price she paid for the shares and the stated corporate value of the shares plus a $10,000 penalty.