Deck 7: Corporation Law

Question 1

Gunnar and his brother Henrik were each 26 percent shareholders and directors and officers in Evergold Resources,a mining exploration company with claims in Indonesia.Evergold was undertaking exploration on its claims when Henrik's laboratory results on site yielded the existence of a major gold find.The result was a dramatic departure from other samples and seemed to indicate an isolated high-quality vein of gold.In Vancouver,Gunnar released a press report as to the find.The shares of Evergold began a dramatic run-up in price as a result.Henrik double-checked his work,and the results (though very exceptional)were correct.A week later,Henrik discovered an anonymous note in his tent at the camp that one of his locally hired laboratory geologists had been involved in a tampering scandal some years before.He telephoned this information to Gunnar,who advised Henrik to thoroughly check the results again.Gunnar immediately sold one-third of his own shares in Evergold and reported his trade.The insider trade alarmed the market,which also promptly sold Evergold,depressing its price.The anonymous note proved baseless,and on subsequent announcement of the repeated test confirming the gold strike,Evergold shares rebounded to their previous level.
Gunnar was obligated to file a material change report after receipt of the first test results.

Answer 1

True

Question 2

Gunnar and his brother Henrik were each 26 percent shareholders and directors and officers in Evergold Resources,a mining exploration company with claims in Indonesia.Evergold was undertaking exploration on its claims when Henrik's laboratory results on site yielded the existence of a major gold find.The result was a dramatic departure from other samples and seemed to indicate an isolated high-quality vein of gold.In Vancouver,Gunnar released a press report as to the find.The shares of Evergold began a dramatic run-up in price as a result.Henrik double-checked his work,and the results (though very exceptional)were correct.A week later,Henrik discovered an anonymous note in his tent at the camp that one of his locally hired laboratory geologists had been involved in a tampering scandal some years before.He telephoned this information to Gunnar,who advised Henrik to thoroughly check the results again.Gunnar immediately sold one-third of his own shares in Evergold and reported his trade.The insider trade alarmed the market,which also promptly sold Evergold,depressing its price.The anonymous note proved baseless,and on subsequent announcement of the repeated test confirming the gold strike,Evergold shares rebounded to their previous level.
Gunnar's trade was in violation of the relevant provincial Securities Act.

Answer 2

False

Question 3

Baker was a director of Cable Shipping Ltd. ,a corporation that leased a large wharf from Able.Baker 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 Baker had an undisclosed financial interest,Baker would be liable to Cable Shipping Ltd.for granting unauthorized permission for the ship to use the wharf.

Answer 3

True

Question 4

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

Question 5

Mary was the Secretary Treasurer of T Enterprises Inc. ,a tea and coffee importer.She contacted Wanda,who carried on business as a wholesaler,to determine if Wanda might be interested in the purchase of the corporation's coffee import business.Wanda expressed an interest in the purchase,and Mary advised Wanda that she would arrange to have the sale of the coffee business approved by the shareholders,as required by the corporation's by-laws.Mary 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.
Wanda may enforce the contract notwithstanding the mistake,on the basis of the "indoor management rule."

Question 6

Mary was the Secretary Treasurer of T Enterprises Inc. ,a tea and coffee importer.She contacted Wanda,who carried on business as a wholesaler,to determine if Wanda might be interested in the purchase of the corporation's coffee import business.Wanda expressed an interest in the purchase,and Mary advised Wanda that she would arrange to have the sale of the coffee business approved by the shareholders,as required by the corporation's by-laws.Mary 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.
Mary and the other directors of the corporation may be liable to the shareholders if they acted improperly,and in violation of the corporation's by-laws in the sale of the business.

Question 7

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 8

Gunnar and his brother Henrik were each 26 percent shareholders and directors and officers in Evergold Resources,a mining exploration company with claims in Indonesia.Evergold was undertaking exploration on its claims when Henrik's laboratory results on site yielded the existence of a major gold find.The result was a dramatic departure from other samples and seemed to indicate an isolated high-quality vein of gold.In Vancouver,Gunnar released a press report as to the find.The shares of Evergold began a dramatic run-up in price as a result.Henrik double-checked his work,and the results (though very exceptional)were correct.A week later,Henrik discovered an anonymous note in his tent at the camp that one of his locally hired laboratory geologists had been involved in a tampering scandal some years before.He telephoned this information to Gunnar,who advised Henrik to thoroughly check the results again.Gunnar immediately sold one-third of his own shares in Evergold and reported his trade.The insider trade alarmed the market,which also promptly sold Evergold,depressing its price.The anonymous note proved baseless,and on subsequent announcement of the repeated test confirming the gold strike,Evergold shares rebounded to their previous level.
If Gunnar repurchases his shares at a later date,he will be subject to the provisions respecting takeover bids.

Question 9

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 10

Baker was a director of Cable Shipping Ltd. ,a corporation that leased a large wharf from Able.Baker 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 shipowner,it would be liable for the damage.

Question 11

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

Question 12

The Bigco Company Limited is the owner of a number of commercial buildings in a large Ontario city.One of the directors,Michael,suggested that the corporation purchase a large apartment building.Another director,Christine,was the owner of a one-third interest in the building.
The purpose for which the securities are sold must be set out in the prospectus.

Question 13

Gunnar and his brother Henrik were each 26 percent shareholders and directors and officers in Evergold Resources,a mining exploration company with claims in Indonesia.Evergold was undertaking exploration on its claims when Henrik's laboratory results on site yielded the existence of a major gold find.The result was a dramatic departure from other samples and seemed to indicate an isolated high-quality vein of gold.In Vancouver,Gunnar released a press report as to the find.The shares of Evergold began a dramatic run-up in price as a result.Henrik double-checked his work,and the results (though very exceptional)were correct.A week later,Henrik discovered an anonymous note in his tent at the camp that one of his locally hired laboratory geologists had been involved in a tampering scandal some years before.He telephoned this information to Gunnar,who advised Henrik to thoroughly check the results again.Gunnar immediately sold one-third of his own shares in Evergold and reported his trade.The insider trade alarmed the market,which also promptly sold Evergold,depressing its price.The anonymous note proved baseless,and on subsequent announcement of the repeated test confirming the gold strike,Evergold shares rebounded to their previous level.
Gunnar was obligated to file a material change report on receipt of Henrik's telephone call.

Question 14

The Bigco Company Limited is the owner of a number of commercial buildings in a large Ontario city.One of the directors,Michael,suggested that the corporation purchase a large apartment building.Another director,Christine,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 15

Mary was the Secretary Treasurer of T Enterprises Inc. ,a tea and coffee importer.She contacted Wanda,who carried on business as a wholesaler,to determine if Wanda might be interested in the purchase of the corporation's coffee import business.Wanda expressed an interest in the purchase,and Mary advised Wanda that she would arrange to have the sale of the coffee business approved by the shareholders,as required by the corporation's by-laws.Mary 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 Wanda discovers the mistake,she may sue Mary personally as a result of her representation that proper authorization had been given for the sale.

Question 16

The Bigco Company Limited is the owner of a number of commercial buildings in a large Ontario city.One of the directors,Michael,suggested that the corporation purchase a large apartment building.Another director,Christine,was the owner of a one-third interest in the building.
Christine 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 17

Mary was the Secretary Treasurer of T Enterprises Inc. ,a tea and coffee importer.She contacted Wanda,who carried on business as a wholesaler,to determine if Wanda might be interested in the purchase of the corporation's coffee import business.Wanda expressed an interest in the purchase,and Mary advised Wanda that she would arrange to have the sale of the coffee business approved by the shareholders,as required by the corporation's by-laws.Mary 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 18

Baker was a director of Cable Shipping Ltd. ,a corporation that leased a large wharf from Able.Baker 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.
Baker would be personally liable to Able for the damage,because he gave permission for the corporation's ship to use the wharf.

Question 19

Gunnar and his brother Henrik were each 26 percent shareholders and directors and officers in Evergold Resources,a mining exploration company with claims in Indonesia.Evergold was undertaking exploration on its claims when Henrik's laboratory results on site yielded the existence of a major gold find.The result was a dramatic departure from other samples and seemed to indicate an isolated high-quality vein of gold.In Vancouver,Gunnar released a press report as to the find.The shares of Evergold began a dramatic run-up in price as a result.Henrik double-checked his work,and the results (though very exceptional)were correct.A week later,Henrik discovered an anonymous note in his tent at the camp that one of his locally hired laboratory geologists had been involved in a tampering scandal some years before.He telephoned this information to Gunnar,who advised Henrik to thoroughly check the results again.Gunnar immediately sold one-third of his own shares in Evergold and reported his trade.The insider trade alarmed the market,which also promptly sold Evergold,depressing its price.The anonymous note proved baseless,and on subsequent announcement of the repeated test confirming the gold strike,Evergold shares rebounded to their previous level.
Henrik would be considered a "tipper" under the relevant provincial Securities Act.

Question 20

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

Question 21

Dispute resolution mechanisms are often found in unanimous shareholder agreements.

Question 22

A brokerage firm may not,under any circumstance,have a financial interest in a security that it offers for sale to the public.

Question 23

A prospectus may or may not be required for a new issue of shares,and it is a question that often depends on the nature and number of the proposed purchasers.

Question 24

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 25

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 26

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 27

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

Question 28

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 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 percent dividend,and 5,000 common shares.Sufficient information is present to determine the value of the winding-up common share.

Question 30

Material change reports,financial statements,and the annual information form together are the backbone of the continuous reporting regime.

Question 31

The Canadian Broadcasting Corporation is an example of a special act corporation.

Question 32

A person holding 25 percent of shares of a reporting issuer is considered to be in a "special relationship" with the reporting issuer.

Question 33

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

Question 34

Attempts by a market participant to influence the market price of a security can result in sanctions under both provincial and federal law in Canada.

Question 35

Prospectus disclosure allows the investing public to sensibly decide whether a material event in the affairs of a company makes the continued ownership of shares of that company prejudicial or advantageous to the investor.

Question 36

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

Question 37

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

Question 38

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

Question 39

An application for incorporation of a non-special act corporation is either a memorandum of association or articles of incorporation.

Question 40

The purpose of securities regulation is to seek a balance between market efficiency and market integrity.

Question 41

Canadian public companies with U.S.parents or Canadian companies traded on U.S.stock exchanges may be required to follow the high U.S.standard that pertain to directors of U.S.corporations.

Question 42

If a purchaser wishes to purchase a "business" that is a corporation,the purchaser must purchase all the assets and all the liabilities of the corporation.

Question 43

In order for a director of a corporation to show that she can rely on the defence of due diligence,she must be knowledgeable of the prevailing environmental standards and must take clear action to prevent,report,review,and respond to danger.

Question 44

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.
E)All of these.

Question 45

Business objects of a corporation are often found in unanimous shareholder agreements.

Question 46

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.
E)None of these

Question 47

Which of the following is not an insider of a reporting issuer

A)the reporting issuer itself.
B)a senior officer of a subsidiary firm of the reporting issuer.
C)a shareholder owning 10 percent of voting rights in the reporting issuer.
D)a senior officer of the parent firm of the reporting issuer.
E)any director of the parent firm of the reporting issuer.

Question 48

A prospectus is required if the minimum investment amount is over $150,000 because of the large amount of money involved.

Question 49

To effectively purchase a "business" that is a corporation,one may either purchase the shares of the corporation or purchase its assets directly.

Question 50

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.
E)All of these.

Question 51

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.
E)None of these.

Question 52

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

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

Question 53

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.
E)None of these.

Question 54

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 55

The only way to effectively purchase a "business" (organized as a corporation)is to purchase all the shares of the corporation.

Question 56

In order for a director of a corporation to show that she can rely on the defence of due diligence,she must exercise only the duty of care of a reasonable person.

Question 57

A "private issuer" is a corporation where the issuer's founding documents contain restrictions on transfer of its securities and whose shares are owned by not more than 50 persons.

Question 58

Undisclosed profits gained by some directors of a corporation as a result of a commercial transaction with that corporation put those directors in breach of their fiduciary duty.

Question 59

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 resort only to internal dispute settlement procedures.

Question 60

If a purchaser purchases the shares of a "business" that is a corporation,the purchaser will end up with all the liabilities of that corporation.

Question 61

Which of the following are not typically found in unanimous shareholders' agreements?

A)required notice of meetings,and their place and quorum.
B)plans and budgets.
C)dividend policies.
D)terms of employment for executives.
E)the company's articles of incorporation.

Question 62

Takeover bids have required special rules to evolve within securities regulation to promote fairness.Describe the operation of a takeover bid,highlighting why and how the regulation achieves its desired fairness.

Question 63

Which of the following is not an "accredited investor"?

A)a bank.
B)a corporation with net assets of $3 million.
C)an investment dealer.
D)governments.
E)an individual with a net worth of more than $1million.

Question 64

Which of the following will not be purchased by the purchaser of the assets of a corporation?

A)its intellectual property.
B)its customer lists.
C)its shares.
D)its land and buildings.
E)its employment contracts.

Question 65

Explain why the purchaser of the business of a corporation might prefer to purchase assets while the seller might prefer to sell shares?

Question 66

Pollute-it,an Ontario corporation,has been charge under environmental laws because the corporation discharged industrial waste into a nearby stream.Fred Rodrigues,a director of Pollute-it,has also been charged.Fred may be able to successfully defend the charge against him because

A)he "tried" to ensure the company did not pollute.
B)he exercised care and diligence.
C)he acquiesced in the matter but did not encourage the pollution.
D)he followed the same techniques as the company upstream did.
E)he knew that Pollute-it was in financial difficulty and could not spend more money protecting the environment.

Question 67

If a purchaser wishes to purchase the "business" of a corporation but does not wish to purchase any undesirable liabilities,the purchaser

A)would purchase all the assets of the corporation.
B)would purchase only some of the shares of the corporation.
C)would not purchase the corporation because it is not possible to purchase a "business" without purchasing both the good and the bad assets.
D)would purchase only the assets of the corporation that the purchaser wants and would not purchase the rest.
E)would purchase all the assets to take advantage of tax breaks.

Question 68

A financial intermediary who,through deceit or fraudulent means,affects the public market price of securities can face a maximum of

A)a monetary fine of three times the loss avoided or gain received.
B)two years less a day in custody of a provincial institution.
C)five years imprisonment in a federal penitentiary.
D)ten years imprisonment in a federal penitentiary.
E)both a and b.

Question 69

The concept of fiduciary duty applies to

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

Question 70

A firm that chooses to raise funds through a distribution of securities is known as

A)an underwriter.
B)an issuer.
C)an SRO.
D)an open-market trader.
E)a qualified offeror.

Question 71

Which of the following are not typically found in unanimous shareholders' agreements?

A)restrictions on powers of directors.
B)appointment and remuneration of officers.
C)appointment of bankers and auditors.
D)requirements of non-competition.
E)exceptions to the indoor management rule.

Question 72

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 73

Explain the difference between the requirements placed on (a)directors of Canadian federal corporations versus (b)Canadian public companies with U.S.parents or Canadian companies traded on U.S.stock exchanges.

Question 74

Explain what rights a proxy confers,why and by whom are they actively sought,and the procedure that must be followed to conduct such a solicitation.

Question 75

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 76

Which of the following are not exempt from the requirement of registration as investment advisers?

A)brokers.
B)lawyers.
C)bankers.
D)accountants.
E)financial market commentators.

Question 77

When a takeover bid is initiated,the board of directors of the target firm has the legal obligation to its shareholders to

A)recommend acceptance or rejection,or remain neutral,with written reasons.
B)defend against the bid.
C)remain neutral on the merits of the bid.
D)remain silent on the merits of the bid.
E)resign.

Question 78

The most significant figure in corporate finance and corporate structure is 51 percent.Discuss.

Question 79

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 80

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 either 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 $2,000,000,being the combined assets of AO(R)Corp.and EO(R)Corp.Each had been capitalized with $1,000,000 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 and EO(R)Corp,and worked as an employee of RNOV.He arranged for $4,000,000 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 Aztech Oil Corporation and Empire Oil Corporation were locked in a dispute on a number of matters.Alan's request for another $3,250,000 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 Aztech Oil Corporation and Empire Oil Corporation.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.