Question 1

The duty of care includes the duty to make informed decisions.

Accepted Answer

The duty of care requires individuals or organizations to make informed decisions based on reasonable research and investigation. This duty ensures that they make decisions that are in the best interest of those affected by their actions. Failing to make informed decisions can result in harm or damage, which violates the duty of care.

Question 2

Breakup fees are liquidated damages for a terminated proxy fight.

Accepted Answer

Breakup fees are typically paid in the context of mergers and acquisitions to compensate a party if the deal falls through, not for terminated proxy fights.

Question 3

A controlling shareholder has a duty not to transfer the power of management to a purchaser that he knows or has reason to believe will use that power to the detriment of the corporation.

Accepted Answer

This is known as the duty of loyalty, which is a legal obligation of controlling shareholders to act in the best interests of the corporation and its shareholders. The controlling shareholder is responsible for making decisions that are in the best interest of the corporation and its shareholders, and this duty extends to any transfer of power or control over the company to a third party. If the controlling shareholder knows or has reason to believe that the purchaser will act in a way that harms the corporation, then the controlling shareholder has a duty not to transfer the power of management to that purchaser.

Question 4

In certain cases,the duty of good faith may be subsumed within the duty of loyalty.

Accepted Answer

The duty of loyalty includes the obligation to act in the best interests of the company and avoid conflicts of interest. The duty of good faith encompasses a broader obligation to act honestly, in good faith, and with integrity towards the company and its stakeholders. In some cases, the duty of good faith may be considered a component of the duty of loyalty.

Question 5

Under no circumstances do controlling shareholders owe fiduciary duties to other shareholders.

Accepted Answer

Controlling shareholders are considered to have a fiduciary duty to the corporation and all shareholders, including minority shareholders. This duty includes acting in good faith, avoiding conflicts of interest, and protecting the interests of all shareholders.

Question 6

In order to take advantage of the business judgment rule,directors must have made an informed decision and have no conflict of the interest with the corporation.

Accepted Answer

The statement is true. Directors must have made an informed decision and have no conflict of interest in order to benefit from the business judgment rule.

Question 7

In 2013,the SEC proposed an amendment to the Dodd-Frank Act,which requires disclosure of the pay ratio of the median of the annual total compensation of all employees to the annual total compensation of the CEO.

Accepted Answer

The SEC did propose an amendment to the Dodd-Frank Act in 2013 that requires disclosure of the pay ratio between the median employee and the CEO.

Question 8

A shareholder derivative action is a suit brought by a shareholder on behalf of the corporation.

Accepted Answer

This is correct. A shareholder derivative action is a lawsuit brought by a shareholder on behalf of the corporation. This type of lawsuit is typically brought when the corporation has been harmed by the actions of its officers or directors and the board of directors is unwilling or unable to take action to remedy the harm. In a shareholder derivative action, the shareholder is suing on behalf of the corporation, rather than on their own behalf, to recover damages for the harm suffered by the corporation.

Question 9

Companies listed on the New York Stock Exchange must have compensation committees composed entirely of independent directors.

Accepted Answer

According to the NYSE's corporate governance standards, listed companies must have compensation committees composed entirely of independent directors.

Question 10

The Delaware Supreme Court has held that,regardless of the circumstances,a majority shareholder may never freeze out the minority shareholders.

Accepted Answer

The Delaware Supreme Court has recognized that there may be circumstances where a freeze-out of minority shareholders by a majority shareholder is permissible, such as when it is based on a legitimate business reason and is conducted in a fair and equitable manner.

Question 11

A poison pill is a defensive measure that would make any takeover not approved by the directors prohibitively expensive.

Accepted Answer

A poison pill is a defensive measure used by a company's directors to make a takeover not approved by them prohibitively expensive. It is intended to make the target company less attractive to potential acquirers and deter them from mounting a hostile takeover bid.

Question 12

The Delaware Corporation Code allows the certificate of incorporation to include a provision limiting or eliminating the personal liability of directors to the corporation or to its shareholders for monetary damages for breach of the duty of loyalty.

Accepted Answer

The answer of The Delaware Corporation Code allows the certificate...

Question 13

A person must own a majority of shares in a corporation in order to be considered a controlling shareholder.

Accepted Answer

A controlling shareholder does not necessarily need to own a majority of shares; they just need enough shares to exert significant influence over the company's decisions, which can be less than 50% if the remaining shares are widely dispersed.

Question 14

In CASE 20.2 In Re Rural Metro Corporation Shareholders Litigation(2014),the Delaware Chancery court considered whether an investment banker could be held liable as an aider and abettor of a breach of fiduciary duty by the board of directors.

Accepted Answer

The Delaware Chancery court did consider whether an investment banker could be held liable as an aider and abettor of a breach of fiduciary duty by the board of directors in the Rural Metro Corporation Shareholders Litigation.

Question 15

Controlling shareholders,but not officers or directors,of a corporation may use the corporation's confidential information for personal gain.

Accepted Answer

Officers, directors, and controlling shareholders are all fiduciaries of the corporation and are generally prohibited from using the corporation's confidential information for personal gain. This is a breach of their fiduciary duties to the corporation and its shareholders.

Question 16

The Dodd-Frank Wall Street Reform and Consumer Protection Act outlaws corporate executives from holding stock in companies for which they work.

Accepted Answer

The Dodd-Frank Wall Street Reform and Consumer Protection Act does not outlaw corporate executives from holding stock in companies for which they work. However, it does require them to disclose their holdings and transactions in a timely manner to prevent insider trading.

Question 17

To comply with their duty of loyalty,directors and managers must subordinate their own interests to those of the corporation.

Accepted Answer

According to the duty of loyalty, directors and managers have a legal and ethical obligation to act in the best interests of the corporation and its shareholders, subordinating their own personal interests or preferences to those of the company. This means that they must avoid conflicts of interest and make decisions that promote the long-term success and profitability of the business. Failing to fulfill this duty can result in legal and reputational consequences for the company and its leadership.

Question 18

In evaluating a buyout proposal,the directors should consider material nonprice provisions of the proposed agreement.

Accepted Answer

It is important for directors to consider nonprice provisions of a buyout proposal as they can have significant impact on the company's operations and future success, such as management changes, employee retention, and post-acquisition strategies.

Question 19

The Securities and Exchange Commission recognizes the affirmative responsibility of officers and directors under federal securities laws to ensure the accuracy and completeness of public company filings with the SEC.

Accepted Answer

The statement is true. The SEC does recognize the affirmative responsibility of officers and directors to ensure the accuracy and completeness of public company filings.

Question 20

Termination fees are sometimes characterized as liquidated damages.

Accepted Answer

Termination fees are often predetermined and agreed upon by both parties in a contract as a reasonable estimation of the damages that would be caused by early termination. This is the definition of liquidated damages.

Quiz 20: Directors, Officers, and Controlling Shareholders.