Question 1

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

B

Question 2

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

Accepted Answer

Par value shares are assigned an arbitrary face value, but the actual value of the share will be determined by market forces after it is issued, making the face value potentially misleading.

Question 3

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 bring a legal action on behalf of the corporation when the board of directors has refused to do so, which is the case in this scenario. The other options listed are not relevant to the situation described.

Question 4

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 chattel mortgage document.An employee of the corporation,Jack,delivering some graphs to a customer,Roth,got into an argument with Roth,who was complaining that the graph was in red and not in pink as requested.It ended with Jack punching Roth,who fell onto a microscopic camera.The damage to the nose and camera: $35 000.Which of the following is true?

Accepted Answer

A corporation is a separate legal entity, so it continues to exist and owes its debts even if the shareholder dies.

Question 5

A real estate agent,by virtue of her fiduciary duty to her principal,is not allowed to buy the property being sold by her principal without full disclosure to and consent from her principal.The real estate agent does not want to disclose that she is the buyer of the property,so she forms a corporation and takes an offer to her principal from the corporation.Based on these facts,which of the following is true if the principal finds out the corporation/buyer is owned by the real estate agent and objects to the contract?

Accepted Answer

In this scenario, the real estate agent breached her fiduciary duty by not disclosing her ownership of the corporation to her principal. Therefore, the principal has the right to object to the contract and the court would likely not enforce it. The court may also "lift the corporate veil" and hold the real estate agent personally liable for any damages suffered by the principal as a result of the breach.

Question 6

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

The answer of You have been asked by two fellow...

Question 7

Three classmates incorporated about a week after graduation.The authorized capital was 500 000 common no-par-value shares.Each took one share; 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 allows existing shareholders to maintain their proportionate ownership in the company when new shares are issued. It gives them the right to purchase new shares before they are offered to the general public. This ensures that the three classmates will keep their proportionate holdings if the directors decide to issue more shares from the treasury to raise more capital.

Question 8

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

This situation falls under the doctrine of "derivative action." If the corporation has a claim against a director or officer for fraud, mismanagement, or other wrongdoing, and the corporation fails to take action, a shareholder may seek permission from the court to sue on behalf of the corporation.

Question 9

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 bring legal action on behalf of the corporation against a director who has caused harm to the corporation, such as intercepting a corporate opportunity for personal benefit. In this case, the shareholder can bring a derivative action against Smith for causing the corporation to miss out on a $45,000 profit. The other provisions (pre-emptive right, indoor-management rule, dissent procedure, and relief-from-oppression provision) do not directly apply to the situation described.

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 answer of Which of the following attracts the dissent...

Question 11

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 chattel mortgage of one of its two delivery trucks as security.You knew Bill at school; therefore,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

Filing annual returns is necessary for the continued existence of a corporation. If annual returns are not filed, the corporation may be dissolved.

Answer: B
 As the employee was acting within the scope of their employment with Roles Enterprises Ltd., the corporation would be liable for the damages caused by the employee's negligent driving. However, Bill could only be personally liable if he was also negligent in his supervision or control of the employee.

Answer: C
 As a creditor of Roles Enterprises Ltd., you would be among the unsecured creditors in the event of the corporation's bankruptcy. Bill, on the other hand, as a shareholder who loaned money to the corporation, would be considered a secured creditor and would have a higher priority for repayment.

Answer: D
 If the corporation owed you money and Bill, the shareholder, died, his estate would become responsible for any outstanding debts or obligations of the corporation.

Answer: E
 If Bill had inadvertently contracted with you before incorporating Roles Enterprises Ltd., the corporation would not have the ability to ratify the contract because it did not exist at the time the contract was made. However, this would not automatically make the contract void, as it could still be enforceable against Bill personally.

Question 12

In jurisdictions in which the registration system of incorporation is used,the rules governing the internal regulations of a company are called

Accepted Answer

In jurisdictions where the registration system of incorporation is used, the rules governing the internal regulations of a company are called the articles, or articles of association. The memorandum or memorandum of association outlines the company's purpose and powers, while the letters patent and certificate of incorporation are documents proving the company's legal existence. The notice of offices is a document that provides information about the company's registered office address.

Question 13

Four years ago,Ben Ratzi incorporated a corporation and became the sole shareholder,director,and officer.He lent the corporation $10 000 and took a debenture from the corporation as security for repayment of the loan.The corporation prospered.Last year,your brother began supplying the corporation with office supplies.He was paid at the end of each month for supplies delivered during that month.For the last six months,however,he has not been paid.He learned that other suppliers had not been paid either because sales dropped drastically,apparently due to Ratzi's harsh management style,which has upset the entire staff.Which of the following is true?

Accepted Answer

Ratzi, as a debenture holder, would have priority over unsecured creditors like your brother in the event of bankruptcy.

Question 14

Which of the following is an advantage of incorporation?

Accepted Answer

Shares of a corporation can be easily transferred from one person to another, making it easy to buy or sell ownership in the company as compared to a sole proprietorship.

Question 15

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

Accepted Answer

A breach of fiduciary duty occurs when an individual in a position of trust breaches their duty to act in the best interest of the party they represent. In this case, the officer learned of a business opportunity intended for the corporation and used it for their own benefit, rather than presenting it to the corporation to consider. This is a clear breach of their fiduciary duty to act in the best interest of the corporation. The other options do not involve a breach of fiduciary duty.

Question 16

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

Shareholders have the right to seek relief from oppression if the corporation is unfairly prejudicial to any one shareholder. A is incorrect because directors owe a fiduciary duty to the corporation, not its creditors. B is incorrect because the level of regulation and government control depends on the nature of the business, not whether it is closely held or broadly held. C is incorrect because directors owe a fiduciary duty to the corporation and its shareholders as a whole, not to each other individually. D is incorrect because while the corporation is a legal fiction, it operates through agents, not principals.

Question 17

Which of the following is true with regard to the characteristics of corporations?

Accepted Answer

One of the most significant characteristics of a corporation is limited liability. Shareholders' financial responsibility for the corporation's debts and obligations is limited to the amount they paid for their shares. This limitation of liability is one of the most significant advantages of incorporating a business. This means shareholders are not personally liable for the corporation's financial obligations.

Question 18

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 19

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 provide protection to minority shareholders in situations where the majority shareholders are abusing their power and unfairly prejudicing the minority shareholders. In this situation, Smith was removed as an officer, employee, and director by the majority shareholders who disliked him personally. Therefore, Smith may be able to seek relief under oppression provisions.

Question 20

Which of the following is a fiduciary relationship?

Accepted Answer

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

Quiz 12: Corporations