Deck 26: Corporate Governance: the Internal Affairs of Corporations

Question 1

Use the fact situation in Q5 to answer the related question that follows. In the fact situation above,assume that instead of being told about the franchises at the barbecue,Edmund told this to Jane during a meeting with her in her office at the company.In this case,the result of the lawsuit would most likely be

A)that Jane is deemed to have bought the franchises as an agent of the company which now owns them.
B)that Jane must pay damages to the company.
C)that Jane must resign as a director of the company.
D)that Jane must assign the franchises which she bought to the company.
E)none of the above

Answer 1

A

Question 2

Use the fact situation in Q1 to answer the related question that follows. Assume that at the time A,B,and C were making their decision,C also had an interest in Gladstone Inc.,which he did not disclose to A and B,but that C chose not to take part in the vote.Also assume that when Multi Corp went bankrupt,a receiver was appointed,who sued A,B,and C on behalf of the company.In this case,the receiver will

A)succeed against A and B,regardless of whether they were diligent and used the established degree of care.
B)not succeed against A,B,and C because when A and B voted,they were diligent and used the established degree of care.
C)not succeed against A,B,and C because there was no breach of fiduciary duty to Multi Corp Ltd.
D)succeed against C for failure to disclose his interest in Gladstone Inc.
E)succeed against A,B,and C because directors are jointly and severally liable.

Answer 2

B

Question 3

Use this fact situation to answer the related questions that follow. A,B,and C are directors of Multi Corp Ltd.,a private provincial corporation that is presently negotiating the purchase of another company,Gladstone Inc.,whose business should compliment the business of Multi Corp Ltd.Based on a report arising from a review of the books,records,and financial statement of Gladstone Inc.by Multi Corp's accountants,A,B,and C have every reason to believe that the acquisition of Gladstone Inc.will benefit Multi Corp Ltd.and increase its yearly profits substantially.As a result,A,B,and C vote to go ahead with the purchase by Multi Corp Ltd.of Gladstone Inc.However,after the purchase,it is found that the books and records of Gladstone Inc.had been fraudulently manipulated and that it was really in poor financial health.When this information is discovered,the value of Multi Corp Ltd.'s shares falls dramatically and Multi Corp Ltd.is forced into bankruptcy.Needless to say,the shareholders of Multi Corp Ltd.blame A,B,and C for their losses and commence an action against them for damages equal to the lost value of their shares.
In this case,the shareholders will likely argue that A,B,and C

A)did not act in the best interests of Multi Corp Ltd.
B)breached their fiduciary duty to Multi Corp Ltd.
C)did not act in the best interests of the shareholders of Multi Corp.Ltd.
D)breached their duty of care,diligence,and skill to Multi Corp Ltd.
E)breached their duty of care,diligence and skill to the shareholders of Multi Corp Ltd.

Answer 3

D

Question 4

Use the fact situation in Q5 to answer the related question that follows. In the fact situation above,

A)the company will not succeed against Jane because Jane committed no breach of duty of care.
B)the company will succeed against Jane for damages for breach of duty of care.
C)the company will not succeed against Jane because Jane received the information not in her capacity as director of the company.
D)the company will succeed against Jane for damages for improper receipt of corporate information.
E)the company will succeed against Jane for damages for breach of fiduciary duty.

Question 5

Use this fact situation to answer the related questions that follow. Jane is the director of a private national company and has a number of friends who are the directors or officers of other large private national companies.One weekend,Jane and her family are invited to a barbecue at the home of Jane's good friend Edmund,who casually tells Jane as her friend that his company is about to sell a number of franchises and that anyone can pick them up relatively cheap.
In the situation above,if Jane decides to buy one or more of the franchises and the company finds out what she has done and sues her,it will probably argue that

A)Jane breached her duty of care owed to the company.
B)Jane breached her duty of good faith owed to the company.
C)Jane had an undisclosed interest in Edmund's corporation.
D)Jane came into the information in her capacity as a director of the company.
E)none of the above

Question 6

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.

Question 7

Use the fact situation in Q1 to answer the related question that follows. In this situation,assuming that Multi Corp Ltd.brought the lawsuit,at common law,the best argument that A,B,and C would have is that

A)they have not breached the duty of good faith owed to the shareholders of Multi Corp Ltd.
B)they have not committed a breach of fiduciary duty owed to Multi Corp Ltd.
C)they have not committed a breach of fiduciary duty owed to the shareholders of Multi Corp Ltd.
D)the business judgment rule applies and they are not liable.
E)the due diligence rules do not apply at common law.

Question 8

Use the fact situation in Q13 to answer the related question that follows. Assume that A and B have a unanimous shareholder agreement,which provides that at any time,a shareholder can serve a notice on the other shareholder to buy the other's shares for fair market value.If A and B could not resolve their impasse,then

A)B could serve this notice on A.
B)A could serve this notice on B.
C)if B served this notice on A first,A would have to sell his shares in the company to B at fair market value,
D)if A served the notice on B first,B would have to sell his shares in the company to A for fair market value.
E)all of the above

Question 9

Use the fact situation in Q13 to answer the related question that follows. Assume that A and B have a unanimous shareholder agreement,which provides that for the time being the accountant of the corporation shall have the deciding vote in the event of a deadlock between the shareholders.If the accountant votes with A against B,

A)B is bound by the vote.
B)B can bring a derivative action.
C)B can use the oppression remedy.
D)B can move to wind up the company.
E)B must sell his shares to A.

Question 10

Use the fact situation in Q5 to answer the related question that follows. In the fact situation above,assume that instead of being told about the franchises at the barbecue,Edmund told this to Jane during a meeting with her in her office at the company.In this case,the lawsuit

A)would succeed because Jane was acting in her capacity as director of the company.
B)would not succeed because Jane was not acting in her capacity as a director of the company.
C)would not succeed because it was a friendly meeting.
D)would succeed because Jane was unjustly enriched at the expense of the company.
E)would not succeed because Jane had used due diligence.

Question 11

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 12

Use this fact situation to answer the related questions that follow. A and B are the shareholders of a private Ontario company and each holds 50 percent of the issued common shares.There is no shareholder agreement.At a general meeting,A and B,who have had a falling out,cannot agree on anything,from the business of the company in the next year to the election of the directors and appointment of the officers.
In this situation,

A)B must sell his shares to A.
B)A must sell his shares to B.
C)the company is effectively locked or deadlocked as to its operation.
D)the company will simply continue as it had before the meeting.
E)they will go to court and have the court decide the matter.

Question 13

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 14

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 15

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 16

Use the fact situation in Q11 to answer the related question that follows. The most likely result of the recourse taken by Mary will be that

A)the court will order that Mary's shares be valued and then purchased by the remaining shareholders.
B)the court will order Mary and all of her benefits and positions reinstated.
C)the court will find that the other three directors have breached their obligation to act in the best interests of the company.
D)the court will order the other three out of the company.
E)the court will order the company to pay Mary damages.

Question 17

Use the fact situation in Q1 to answer the related question that follows. In this situation,assuming the company is an Ontario company,the best argument of A,B,and C in their defence of the lawsuit under both federal and Ontario legislation is that

A)on behalf of the shareholders of the company,they exercised reasonable diligence in assessing the value of Gladstone Inc.
B)the shareholders have no cause of action against them as any duty is owed to the company only.
C)they committed no breach of fiduciary duty to Multi Corp Ltd.
D)they committed no breach of fiduciary duty to the shareholders of Multi Corp Ltd.
E)on behalf of the company,they exercised reasonable diligence in assessing the value of Gladstone Inc.

Question 18

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 19

Directors owe duties to

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

Question 20

Use this fact situation to answer the related questions that follow. George,John,Edward,and Mary each own 25 percent of the common shares of a private company that they incorporated five years ago.At that time,they decided that they did not need a shareholders' agreement.Now there has been a falling out between them and the three men have used their majority vote to take away Mary's salary,terminate her employment with the company,and remove her as a director and officer of the company.
In this case,Mary has recourse to

A)a derivative action.
B)an oppression remedy.
C)the appraisal remedy.
D)winding up the company.
E)all of the above

Question 21

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

Question 22

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 23

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 24

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 25

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

Question 26

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 27

Directors are appointed by the officers of the corporation.

Question 28

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 29

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 30

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 31

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 32

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 33

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 34

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 35

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.

Question 36

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 37

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 38

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

Question 39

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 40

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 41

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

Question 42

What duties do directors owe to shareholders of the corporation?

Question 43

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

Question 44

Explain how a proxy is used.

Question 45

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

Question 46

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 47

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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 60

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 61

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 62

Explain the concepts of debt and equity capital.

Question 63

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 64

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.