Question 1

A _____ authorizes any corporation to adopt a specific amendment to its articles of incorporation that removes breach of duty as a cause of action for monetary damages against directors.

Accepted Answer

The most popular type of state statutes limiting directors' liabilities for breach of the duty of care are charter option statutes. It authorizes any corporation to adopt a specific amendment to its articles of incorporation that removes breach of duty as a cause of action for monetary damages against directors.

Question 2

Which of the following statements is true of the lawsuits in which minority shareholders complain that they have been unfairly treated by the directors?

Accepted Answer

There have been many lawsuits in which minority shareholders complain that they have been unfairly treated by the directors. Usually, these involve close corporations. The suits may claim a freeze-out.

Question 3

The board of directors of Meckes Corporation,at a regular meeting of the board,entered into a contract with Peter,one of the directors.The agreement called for the sale of a retail store the corporation operated to Peter.There were 12 board members,10 of whom were present at the meeting.Nine directors,including Peter,voted in favor of the contract and one voted against it.In view of these facts,which of the following is correct?

Accepted Answer

Directors and officers are not prohibited from entering into transactions with the corporation. At one time, courts held that such deals were voidable by the corporation, but today the majority of courts hold them voidable only if unfair to the corporation.

Question 4

The vice president of a corporation:

Accepted Answer

The vice president of a corporation has no authority by virtue of that office. However, if the title indicates that the person is the principal officer of some area of the business, she has considerable implied authority.

Question 5

Distanet Corporation and Telenex Corporation are competitors in the gaming accessories market.Telenex has been the market leader for over five years.After examining the price and sales data of products from both companies and consulting an economist and an accountant,Distanet's directors vote for a reduction in price of Distanet's products.They believe that reducing prices would make the company more competitive.The decision to reduce prices does not improve sales significantly.In fact,Distanet's revenues decrease as a result of the decision.Aileen,a stockholder of Distanet,seeks to hold Distanet's directors liable for the failure of the plan to improve Distanet's position in the computer market and for the losses experienced by the corporation as a result of the implementation of the plan.Will she succeed in her suit?

Accepted Answer

Under the given circumstances, Aileen cannot sue the directors because the directors' decision is subject to the business judgment rule. According to the business judgment rule, directors are not liable for mere errors of judgment when they act with care and good faith. In order to obtain the protection of the business judgment rule, the directors must meet three requirements in arriving at their decision: an informed decision; no conflict of interest; and rational basis.

Question 6

A law that holds that directors will have no liability for breach of the duty of care in the absence of willful misconduct or recklessness and that does not require board or shareholder action is called a(n):

Accepted Answer

A law that holds that directors will have no liability for breach of the duty of care in the absence of willful misconduct or recklessness and that does not require board or shareholder action is called a self-executing statute. These are called self-executing statutes because they are automatically effective. No board or shareholder action is necessary to trigger their applicability.

Question 7

When notice of a special meeting is defective,the defect may be cured if:

Accepted Answer

Reasonable notice must be given for special meetings. If all of the directors attend a meeting, this cures any defect in or failure to give notice. However, a director who has not received a proper notice may attend solely to complain of the notice. In this case, he or she would not be held to have been in attendance.

Question 8

To obtain the protection of the business judgment rule,a director must meet certain requirements in arriving at his or her decisions.He or she must:

Accepted Answer

In order to obtain the protection of the business judgment rule, the directors must meet three requirements in arriving at their decision: First, they must make an informed decision. Second, the decision makers must be free from conflicts of interest. Third, the board of directors must have a rational basis for believing that the decision is in the best interests of the corporation.

Question 9

The _____ binds the corporation on receipts,checks,and endorsements.

Accepted Answer

The treasurer has charge of the funds of the corporation. He or she has power to pay out corporate funds for proper purposes and is the person who receives payments to the corporation. The treasurer binds the corporation on receipts, checks, and endorsements. However, the treasurer does not have authority by virtue of the office alone to borrow money or issue negotiable instruments.

Question 10

Under the MBCA,a director:

Accepted Answer

Under the MBCA, a director will not have dissented unless he refuses to vote for the proposed course of action and makes this dissent clear to the other board members by having it appear in the minutes or by giving a written notice of dissent to the chairman or secretary immediately following the meeting.

Question 11

A _____ places ceiling on director liability for breach of duty; the board and the shareholders,however,may amend the corporate charter to reduce the cap.

Accepted Answer

Cap on monetary damages statute places ceiling on director liability for breach of duty. This statute has a charter option quality in that the board and shareholders of a corporation may amend the corporate charter to reduce the cap (they may not increase it).

Question 12

Vacancies on the board can be filled:

Accepted Answer

Vacancies on the board can be filled only by a vote of the shareholders unless the state statute, the articles, or the bylaws give this power to the board itself. The MBCA permits a majority of the remaining directors, even though less than a quorum, to elect directors to serve out unexpired terms.

Question 13

When a corporate manager makes an honest error in judgment,the business judgment rule directs that the manager will:

Accepted Answer

Directors are not liable for mere errors of judgment when they act with care and good faith. This is the business judgment rule. The rule precludes the courts from substituting their business judgment for that of the corporation's managers. In short, it protects officers and directors from personal liability for honest mistakes in judgment.

Question 14

A charter option statute authorizes a corporation to adopt a specific amendment to its articles of incorporation to:

Accepted Answer

A charter option statute authorizes any corporation to adopt a specific amendment to its articles of incorporation that removes breach of duty as a cause of action for monetary damages against directors. Under this approach, both the board of directors and the shareholders would have to approve the limitation on director liability.

Question 15

Which of the following does "ex officio" authority refer to?

Accepted Answer

The power of the officers to bind the corporation on contracts they make on its behalf is the same as that of any agent. In addition to their express authority, they have implied and apparent authority. "Ex officio" authority is the authority by virtue of their offices. This, however, is more restricted than is generally believed. The president or chairman of the board has no power to bind the corporation solely because of his position.

Question 16

The cap on monetary damages statute holds that the maximum liability that may be imposed on directors is the greater of:

Accepted Answer

The cap on monetary damages statute holds that the maximum liability that may be imposed on directors is the greater of $100,000 or the amount of cash compensation that the director received from the corporation during the previous 12 months. This was adopted by the state of Virginia.

Question 17

A _____ is a majority of the number of directors fixed by the articles or bylaws.

Accepted Answer

A quorum is a majority of the number of directors fixed by the articles or bylaws. Actions taken by a board are ineffective unless a quorum is present. If there is a quorum present, the vote of a majority of the directors is the act of the board.

Question 18

A director:

Accepted Answer

The MBCA permits shareholders to remove directors with or without cause. A director who has failed to or is unable to attend and participate in directors' meetings or who has acted contrary to the interests of the corporation can be removed for cause.

Question 19

A director or officer will be held to have failed to act with due care and diligence if he or she:

Accepted Answer

The duty of care requires that directors and officers make a reasonable investigation before making any corporate decisions. These standards, however, take into consideration the complexities of many corporate decisions and understand that it would be impossible for any manager to personally investigate every facet of every business decision.

Question 20

The _____ usually keeps the minutes of meetings of the shareholders and directors and other general corporate records such as stockholder records.

Accepted Answer

The corporate secretary (called clerk in some states) keeps the minutes of meetings of the shareholders and directors and other general corporate records such as stockholder records. The office gives the secretary no authority to bind the corporation on contracts. However, there is a presumption that a document to which the secretary has affixed the corporate seal has been properly authorized.

Quiz 29: Management of the Corporate Business