Question 1

Jed Wimsey, in auditing the books of various businesses around town, was talking to you, his best friend, about certain practices that he thought improper. Which of the following practices he found would be a breach of fiduciary duty?

Accepted Answer

Starting a competing business without the knowledge or consent of partners is a breach of fiduciary duty, as partners owe each other a duty of loyalty and good faith.

Question 2

A corporation is a fiction that does not exist in reality.

Accepted Answer

A corporation is a legal entity, which means it is a creation of law and does not exist in reality as a physical entity. It is a legal fiction that allows it to act, sue, and be sued as a separate legal entity from its owners or shareholders.

Question 3

Smith, Jones, and Brown incorporated XYZ Ltd. The three were sole shareholders, directors, officers, and employees. Jones and Brown disliked working with Smith. They knew he was good for the business, but they disliked his personality and politics. After a year, Jones and Brown, as directors, removed Smith as an officer and employee and raised their own salaries as employees. They then voted Smith out as a director at the next shareholders' meeting. Which one of the following provisions would aid Smith?

Accepted Answer

Relief-from-oppression provisions grant the courts the authority to intervene when the majority shareholders unfairly treat the minority shareholders. In this case, Jones and Brown unfairly removed Smith as an officer and employee and raised their own salaries, which would be considered oppression.

Question 4

Lee, a former head of a venture capital firm, sat on the board of directors of Angel Enterprises Ltd., a broadly held corporation. During a board meeting, she recommended that the corporation invest in a new technology start-up. Lee failed to mention that she owned shares in this new tech corporation. When the prospect of investing was put to the board, Lee voted in favour it. Read each of the following statements separately and choose the true statement.

Accepted Answer

Lee failed to disclose her interest in the new tech corporation and therefore breached her fiduciary duty to Angel Enterprises Ltd. As a result, she must account for any profit made from the investment. Fiduciary duties cannot be waived through a director's agreement. Lee must act in the best interest of the corporation, and fully disclose any conflicts of interest.

Question 5

Which of the following is a fiduciary relationship?

Accepted Answer

The answer of Which of the following is a fiduciary...

Question 6

Smith, director of ABC Ltd., intercepted a corporate opportunity for his own benefit and thereby caused the corporation to miss a $45,000 profit. A shareholder urged the board of directors to take action against him. The other directors, all close friends of Smith from school days, did not take any action against him, although they did voice their dissatisfaction with his move. Which of the following provisions would aid the shareholder?

Accepted Answer

The derivative-action provision allows shareholders to take legal action on behalf of the corporation against directors or officers who have wrongfully taken advantage of corporate opportunities. In this case, Smith's actions caused the corporation to miss out on a $45,000 profit, and the other directors failed to take action against him despite their dissatisfaction. The shareholder can use the derivative-action provision to take legal action against Smith and potentially recover the missed profit for the corporation. The other provisions listed do not apply to the situation described.

Question 7

With regard to the law of corporations, which of the following is true?

Accepted Answer

This statement is true according to the law of corporations. When a corporation is insolvent, the directors have a duty to act in the best interest of the creditors, and paying a dividend would be a breach of that duty, which could give rise to an action for some remedy.

Question 8

In 2016, Rambolin incorporated Rambolin Industries Ltd. and became its sole shareholder. He lent the corporation $10,000 and took a General Security Agreement from the corporation as security for repayment of the loan. He became director, president, and secretary of the corporation. The corporation prospered. Last year, you began supplying the corporation with office supplies. You were paid at the end of each month for supplies delivered during that month. For the last six months, however, you have not been paid. You learn that other suppliers have not been paid either because sales have dropped drastically, apparently due to Rambolin's nasty temper caused by ill health. Which of the following is true?

Accepted Answer

Rambolin, having lent money to the corporation and secured that loan with a General Security Agreement, would have a secured claim in the event of bankruptcy. This typically places him in a better position than unsecured creditors, such as suppliers who have not been paid, to receive proceeds from the sale of the corporation's assets.

Question 9

Kent incorporated provincially. The corporation worked with small businesses in developing graphs and charts from their data for presentation to bankers, partners, shareholders, etc. If Kent, as promoter and agent of the company, had bought the necessary equipment from Ace Computers Ltd. prior to incorporation, which of the following would be true?

Accepted Answer

In this situation, Kent may be held personally liable for the contract with Ace Computers Ltd. However, he could have protected himself by including a provision in the contract exempting him from personal liability. This type of provision is known as an indemnity clause and is common in pre-incorporation contracts. Therefore, option C is the best choice. Options A and D are incorrect as they imply that pre-incorporation contracts are automatically binding on the corporation, which is not always the case. Option B is incorrect because statutory provisions allowing for ratification of pre-incorporation contracts do exist in some jurisdictions. Option E is incorrect because Kent's liability would not be limited to his investment in the corporation if he did not include an indemnity clause in the contract.

Question 10

Read each of the following separately. In which one of the following cases would the corporation not be bound by the contract made?

Accepted Answer

Jones had no authority or authorization from Corporation A to make the contract, and therefore, the corporation would not be bound by it.

Question 11

ABC Ltd. is a closely held corporation. Two of the shareholders serve as directors. As directors, they voted to issue themselves more shares to increase their voting control of the corporation. Which of the following provisions would aid the other shareholders?

Accepted Answer

Pre-emptive right provisions allow existing shareholders the right to purchase additional shares before the company offers them to the public, thus helping to maintain their proportional ownership and control in the company. This would aid the other shareholders in preventing their dilution of control.

Question 12

An agent owes a fiduciary duty to his principal, a director owes a fiduciary duty to the corporation, and partners owe a fiduciary duty to the firm and to the other parties. Which of the following is not true with regard to one's fiduciary duty?

Accepted Answer

While a shareholder does have a financial interest in the success of the corporation, they do not owe a fiduciary duty to the corporation itself. Rather, the board of directors owes a fiduciary duty to the corporation and its shareholders. Therefore, a shareholder owning a business that secretly competes with the corporation would not be in breach of fiduciary duty, but could potentially be in violation of other legal or ethical standards.

Question 13

Kent incorporated Dynamite Data Ltd., which worked with small businesses in developing graphs and charts from their data for presentations to bankers, shareholders, etc. Kent lent the company $25,000 by way of a shareholder's loan and took as security computers, plotters, and printers under a General Security Agreement. An employee of the corporation, Jack, got into an argument with a customer named Roth while making a delivery. Roth was complaining that the graph was in red and not in pink as requested. It ended with Jack punching Roth, who fell onto a camera. The damage to Roth's nose and the camera totalled $35,000. Which of the following is true?

Accepted Answer

The answer of Kent incorporated Dynamite Data Ltd., which worked...

Question 14

Aunt Juliet wants to incorporate a small closely held corporation. Which of the following bits of advice, given to her by friends, is False?

Accepted Answer

This advice is false. A corporation does not exist until it is properly incorporated, so any contract entered into before incorporation is not binding on the corporation. It is important for Aunt Juliet to wait until the corporation is incorporated before entering into any contracts on its behalf.

Question 15

In Peoples Department Stores Inc. et al. v. Wise et al., the Supreme Court of Canada had to clarify to whom a director owes its duties. What did the Court hold?

Accepted Answer

The Court held that a director owes a fiduciary duty to the corporation only, while a duty of care can also be owed to other stakeholders. The fiduciary duty includes the duty to act in the best interest of the corporation, while the duty of care includes the duty to exercise reasonable care, skill, and diligence in the management of the corporation's affairs. Other stakeholders, such as employees or creditors, may have rights and interests that the director should consider, but these do not rise to the level of a fiduciary duty owed to them.

Question 16

Andrea agreed to form a corporation with two friends, but lay awake last night rethinking her decision. They agreed that they all wanted to be directors and officers and that they all would have signing authority with the bank from whom the corporation is borrowing the money. Nevertheless, she began to review her assumptions. Which of the following is true?

Accepted Answer

As a shareholder and director, Andrea would be able to bring an action on behalf of the company if one of the directors breached his fiduciary duty to the corporation and the other directors refused to do anything about it. This is known as a derivative action, and it allows a shareholder to bring a lawsuit on behalf of the corporation when the directors or officers have failed to act in the corporation's best interest. However, the other choices are not true. Signing a promissory note on behalf of the corporation can make her personally liable if she does not clearly specify that she is signing on behalf of the corporation, being a major shareholder does not guarantee a director seat unless it is explicitly stated in the shareholders' agreement, relief from oppression can only be granted in extreme circumstances, and a director cannot compete with the corporation without violating their duty of loyalty.

Question 17

After Bill Roles graduated from university, he incorporated Roles Enterprises Ltd. He put $10,000 into the corporation by way of a shareholder's loan and the corporation granted him a security interest in one of its two delivery trucks. You knew Bill at school, so when Roles Enterprises Ltd. needed computer supplies, Bill, on behalf of the corporation, contracted with you, the owner of a business selling computer supplies. As it turned out, Bill placed such orders with you almost every three weeks. Read each of the following separately and indicate which of the following is true.

Accepted Answer

If Bill neglects to file annual returns for the corporation, Roles Enterprises Ltd. could be dissolved by the government due to noncompliance.

Question 18

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

Accepted Answer

This is an example of a breach of fiduciary duty because the partner used information gained through his position in the firm for his personal benefit, rather than for the benefit of the partnership. This goes against the fiduciary duty to act in the best interests of the partnership. The other choices do not involve a breach of fiduciary duty.

(Note: A and E may involve conflicts of interest, but they are not necessarily breaches of fiduciary duty unless it can be shown that the interests of the shareholders were harmed.)

Question 19

Mr. Malik, an investment counsellor by training, sat on the board of directors of Talbot Enterprises Ltd., a broadly held corporation. During a meeting of the board, he advised the corporation to buy some condominiums given the present soft real estate market. Malik did not disclose that he owned shares in the corporation that owned the property, nor did he disclose that he would be entitled to a commission for every unit he helped sell. When the question was put to the board, he voted for it. Read each of the following statements separately and indicate which is true.

Accepted Answer

Malik has a conflict of interest by owning shares in the corporation selling the property and being entitled to a commission. He breached his fiduciary duty by not disclosing this and voting on the matter, thus he must account for any profit made from this transaction.

Question 20

Three classmates incorporated about a week after graduation. The authorized capital was 500,000 common no-par-value shares. Each took one share and each was a director. If the directors decide to issue more shares from the treasury to raise more capital, which of the following provisions ensures that they keep their proportionate holdings?

Accepted Answer

The pre-emptive right provision entitles existing shareholders to maintain their proportionate ownership in the company when new shares are issued. This means that if the directors want to issue more shares, the existing shareholders have the right to purchase their proportionate share of the new shares before they are offered to the public or other investors. This ensures that the founding directors can maintain their proportionate holding in the company. The other options are not relevant to this scenario.

Quiz 11: Corporations