Question 1

Mr. Ace of Oink Inc., a closely held corporation, is one of three shareholders. After several years of considerable success, the corporation hit hard times. The other shareholders, Mr. Bane and Mr. Curr, in the best interests of the corporation, voted Mr. Ace out as a director and voted not to renew his employment contract. Upset by these events, Mr. Ace just wanted to sell his interest and leave the corporation. The other two shareholders, however, refused to buy his shares. Furthermore, when he attempted to sell his shares to his brother, who was interested in the corporation, they refused to register the brother as a member. Which of the following is true?

Accepted Answer

A unanimous shareholders' agreement could have included terms for selling shares, thus avoiding the current issue.

Question 2

Art Raskle was an officer, director, and employee of a broadly held corporation. At a directors' meeting, he was surprised but pleased to learn that the corporation was discussing a resolution to contract with the firm of Fielding's Office Supply for $20,000 worth of office equipment. He and a businesswoman had recently bought that business, in which Raskle has a 45% interest. Raskle voted for the contract and the resolution passed without discussion by a vote of 6-0. Several months after completion of the purchase, the other directors learned of Raskle's interest in Fielding's Office Supply and called on him to account to the corporation for any profit made. Which of the following is true?

Accepted Answer

Raskle must account for any profit made because he failed to disclose his interest in Fielding's Office Supply and voted on the contract, which is a breach of his fiduciary duty to avoid conflicts of interest without disclosure.

Question 3

Which of the following situations would allow a shareholder to sue on behalf of the corporation?

Accepted Answer

In situation B, a shareholder can sue on behalf of the corporation (a derivative suit) when the corporation itself has been wronged (e.g., financial loss due to a director's negligent and fraudulent acts) and the corporation refuses to take action against the wrongdoer. This allows shareholders to seek justice and recover losses for the corporation when its own management fails to do so.

Question 4

You have been asked by two fellow graduates to join them in incorporating a closely held corporation that would commence a consulting business. One was in your class, so you know him quite well, but the other is graduating from a different school. You have been discussing the law to review the protection it gives you. Read each of the following statements separately and indicate which is true.

Accepted Answer

Pre-emptive rights allow existing shareholders to purchase additional shares before the company offers them to the public, maintaining their proportional ownership.

Question 5

Which of the following statements about pre-incorporation contracts is false?

Accepted Answer

Promoters can be held liable for losses on pre-incorporation contracts if the corporation does not ratify the contract or if ratification is not permitted by law, contradicting the idea of the "corporate myth" which suggests that only the corporation can be held liable.

Question 6

Punam was the director of a broadly held corporation that made educational software. Without the knowledge or consent of the board of directors, Punam started a competing business that she ran from home. Which of the following is true?

Accepted Answer

Punam has breached a fiduciary duty owed to the corporation by starting a competing business without the board's knowledge or consent, as directors have a duty of loyalty to act in the best interest of the corporation.

Question 7

The directors held their last meeting on December 31 at 4:30 p.m., and it was conducted more like a party than a usual meeting. A director was negligent in signing a promissory note, which cost the corporation $15,000. Furthermore, the director was in breach of his fiduciary duty because the note was paid to a corporation in which he had an interest. Which of the following is true?

Accepted Answer

A shareholder can initiate a derivative suit on behalf of the corporation against a director for breach of fiduciary duty if they obtain permission from the court. This allows the corporation to recover losses caused by the director's actions.

Question 8

John Hollin was an officer, director, and employee of a large broadly held corporation. At a directors' meeting, he learned that the corporation was voting on a resolution to buy a piece of property from Sam Keanu for $100,000. It happened that Hollin was one of three co-owners of that property. Hollin voted for the purchase and the resolution passed without discussion by a vote of 5-0. Several months after completion of the purchase, the other directors learned of Hollin's ownership and called on him to account to the corporation for any profit made. Which of the following is false?

Accepted Answer

Hollin's failure to disclose his conflict of interest and participation in the vote breaches his fiduciary duty, and shareholders could indeed bring a derivative action on behalf of the corporation. However, the dissent procedure typically applies to shareholder disagreements with certain corporate actions, not as a remedy for director conflicts of interest.

Question 9

Ethan got together with a number of friends who all sat on the board of directors of a corporation. They personally disliked Stephen, a minority shareholder with a bad attitude. A new proposal was being put to the board. While they knew that this was not a measure that was in the best interests of the corporation, they also knew it would seriously weaken Stephen's financial position. Accordingly, they voted in favour of it. Which of the following is true?

Accepted Answer

The directors have breached their fiduciary duty to act in the best interests of the corporation by voting for a proposal that they knew was not in the corporation's best interests.

Question 10

Which of the following attracts the dissent procedure, which can result in the corporation being forced to buy the shares of a shareholder at market value?

Accepted Answer

The dissent procedure is typically triggered when major changes are made that adversely affect a group of shareholders, allowing them to demand the corporation buy back their shares at market value.

Question 11

A person who participates in the initial setting up of a corporation or who assists the corporation in making a public share offering is known in law as

Accepted Answer

A promoter is someone involved in the initial setup of a corporation or assists in making a public share offering, handling tasks such as arranging for the necessary capital, legal documentation, and overall establishment of the corporation.

Question 12

A securities commission is

Accepted Answer

A securities commission is a regulatory body at the provincial or state level responsible for overseeing the securities industry within its jurisdiction. This includes monitoring the issuance and trading of shares to ensure compliance with laws and regulations, protecting investors, and maintaining fair and efficient markets. Choices B, C, D, and E describe different concepts unrelated to the primary function of a securities commission.

Question 13

Which of the following situations would allow a shareholder of a closely held corporation, with permission of the court, to sue on behalf of the corporation?

Accepted Answer

In situation B, a shareholder may be permitted to initiate a derivative suit on behalf of the corporation if the corporation itself has been harmed by the actions of a director and the corporation refuses to take action. This allows the shareholder to seek redress for the harm done to the corporation.

Question 14

In which of the following relationships is a fiduciary duty owed?

Accepted Answer

The answer of In which of the following relationships is...

Question 15

Because a director of a closely held corporation breached his duties to the corporation, the corporation lost $15,000. Despite the urging of the shareholders, the board of directors refused to begin an action on behalf of the corporation. Which one of the following provisions would aid the shareholders?

Accepted Answer

Derivative-action provisions allow shareholders to sue on behalf of the corporation when the board of directors fails to take action against wrongdoing that harms the corporation. This would directly address the issue of the director's breach of duties and the board's refusal to act.

Question 16

The promoter of a corporation, called Seymour Holdings Ltd., contracted for $4000 worth of office furniture "on behalf of Seymour Holdings Ltd.," prior to incorporation. After incorporation, the new directors want to ensure that the corporation is bound. They will be able to do so if

Accepted Answer

The corporation can be bound by the pre-incorporation contract if it ratifies the contract, assuming that ratification of such contracts is allowed under the laws of the jurisdiction. Ratification is a formal way for the corporation to accept responsibility for a contract entered into on its behalf before it was legally formed.

Question 17

John and two friends incorporated a closely held corporation. Each bought an equal number of common shares in the corporation. Each became a director, an officer, and an authorized agent of the corporation. Which of the following is true?

Accepted Answer

The answer of John and two friends incorporated a closely...

Question 18

Mr. A is the sole shareholder of X Ltd., and is also a director of Y Ltd. Y Ltd. is negotiating to buy property from X Ltd. Which of the following is false?

Accepted Answer

Mr. A cannot vote in favour of the contract at the directors' meeting of Y Ltd. even if he discloses his interest, as it would still be a conflict of interest.

Question 19

Which one of the following is an example of breach of fiduciary duty?

Accepted Answer

C) An officer intercepting a business opportunity intended for the corporation for his own benefit directly violates the duty of loyalty, a core component of fiduciary duty, by putting personal interests ahead of the corporation's interests.

Question 20

Which two of the following are examples of breaches of fiduciary duty?

Accepted Answer

A director taking advantage of a corporate opportunity for personal gain before the corporation has the chance to do so is a breach of fiduciary duty.

Quiz 11: Corporations