Question 1

Shares are ______ when the corporation will not issue physical stock certificates.

Accepted Answer

In most states, shares may be uncertificated, meaning that the corporation does not issue physical stock certificates. In this case, shareholders usually have a right to receive a letter from the corporation giving the information typically included on the face of a stock certificate.

Question 2

Which of the following was the result on appeal in Auerbach v. Bennett the case in the text in which a shareholder brought a derivative action after an internal audit of the GTE Corporation suggested that the corporation's management had paid significant amounts in bribes and kickbacks over a period of several years?

Accepted Answer

The Court of Appeals of New York held that the business judgment rule exempted the GTE directors from liability for their poor business decisions.

Question 3

"Machine Malfunction." Bruno, the president of a health club operation called ABC Health Club, convinced the board of directors to approve a large purchase of a type of fitness machine called "Perfect Body." Bruno had carefully investigated the machine and did a presentation to the board on its purported benefits. Unfortunately, after the purchase, it was announced that "Perfect Body" was actually a very dangerous machine that should not be used. The manufacturer of "Perfect Body" went bankrupt, and ABC lost $200,000 on the purchase of the machines. The shareholders are furious and want to sue Bruno and the directors. In an attempt to appease her, the board of directors agrees to allow Frances, the ring leader of the shareholders, to purchase stock of the company at below its fair market value. Frances purchases a considerable amount of stock on that basis, but says that the shareholders plan to continue with an action against Bruno and the board members.
-Which of the following is a term for stock such as that issued to Frances?

Accepted Answer

Watered stock is stock issued below its fair market value.

Question 4

"Kite Sales." Wendy is president of a business that manufactures kites. The kites of her company, ABC Kites, are sold to large toy stores. After Wendy learned a great deal about kites at ABC, she started to make kites at home. She started selling kites to friends. She also started to make inquiries regarding selling her kites to larger toy stores in the area, and she began making a few sales to them. Her plan was to start small and then leave ABC after she had increased sales. She did not work on her side project while she was on the clock with ABC. Some of the directors learned about her kite sales and accused her of wrongdoing. Wendy denied any wrongdoing and pointed out that she did not work on her project while she was on the job with ABC.
-In which of the following objectionable activities was Wendy involved, if any, in selling the kites?

Accepted Answer

Directors and officers can also breach their fiduciary duty of loyalty by preventing corporate opportunity. This breach usually happens when directors or officers own other companies that compete with their corporation without the consent of the board of directors or the shareholders.

Question 5

Which of the following is false regarding corporate decisions that might personally benefit a particular director or officer?

Accepted Answer

If the board addresses an issue that might personally benefit a particular director, that director is required not only to disclose the self-interest, but also to abstain from voting on that issue.

Question 6

"Kite Sales." Wendy is president of a business that manufactures kites. The kites of her company, ABC Kites, are sold to large toy stores. After Wendy learned a great deal about kites at ABC, she started to make kites at home. She started selling kites to friends. She also started to make inquiries regarding selling her kites to larger toy stores in the area, and she began making a few sales to them. Her plan was to start small and then leave ABC after she had increased sales. She did not work on her side project while she was on the clock with ABC. Some of the directors learned about her kite sales and accused her of wrongdoing. Wendy denied any wrongdoing and pointed out that she did not work on her project while she was on the job with ABC.
-What remedy will be imposed on Wendy, if any, for her home kite sales?

Accepted Answer

A director or officer convicted of breaching the duty of loyalty is required to cede to the corporation all profits earned as a result of the breach.

Question 7

Which of the following may be redeemed for a certain number of shares at a specified price within a given time period?

Accepted Answer

If preemptive rights exist, all shareholders receive stock warrants, which they can redeem for a certain number of shares at a specified price within a given time period.

Question 8

"Self-Centered President." Tina is president of "We Manage You," a corporation set up to manage physician practices. Tina has never been very concerned with minority shareholders based on her belief that they have little influence over the company because they cannot even elect a director. She is told, however, that her state just instituted the practice of cumulative voting. An election is coming up in which 10 directors will be elected. Minority shareholders own 2,000 shares, while majority shareholders own 8,000 shares. Tina tells her vice president, George, that she wants to ignore minority shareholders and focus her interests on majority shareholders and the directors. She also tells George that she wants to be particularly conscientious toward directors because the directors appoint officers, and she does not believe that she owes any actual duties to shareholders. She further orders George to destroy some documents subpoenaed in a criminal investigation against the company for illegal dumping. When George protests, Tina tells him not to worry because officers cannot be held responsible for criminal actions so long as the actions are done as part of the duties of an officer. She explains to him that only the corporation can be charged with liability in such cases.
-Is Tina accurate that she owes no duties to shareholders?

Accepted Answer

Directors and officers have duties to the shareholders and to the corporation. Their two primary fiduciary duties are the duty of care and the duty of loyalty.

Question 9

Which of the following is a term for stock issued to individuals below its fair market value?

Accepted Answer

Watered stock is stock issued below its fair market value.

Question 10

How much must a shareholder who signs a stock subscription pay for no-par shares?

Accepted Answer

For no-par shares, or shares without a par value, the shareholder must pay the fair market value.

Question 11

Which of the following may be issued to shareholders as proof of ownership in the corporation?

Accepted Answer

Some corporations issue stock certificates to shareholders as proof of ownership in the corporation.

Question 12

Which of the following gives preference to shareholders to purchase shares of a new issue of stock?

Accepted Answer

Under common law, shareholders have preemptive rights, which give preference to shareholders to purchase shares of a new issue of stock.

Question 13

"Kite Sales." Wendy is president of a business that manufactures kites. The kites of her company, ABC Kites, are sold to large toy stores. After Wendy learned a great deal about kites at ABC, she started to make kites at home. She started selling kites to friends. She also started to make inquiries regarding selling her kites to larger toy stores in the area, and she began making a few sales to them. Her plan was to start small and then leave ABC after she had increased sales. She did not work on her side project while she was on the clock with ABC. Some of the directors learned about her kite sales and accused her of wrongdoing. Wendy denied any wrongdoing and pointed out that she did not work on her project while she was on the job with ABC.
-What duty, if any, did Wendy violate?

Accepted Answer

Directors and officers can also breach their fiduciary duty of loyalty by preventing corporate opportunity. This breach usually happens when directors or officers own other companies that compete with their corporation without the consent of the board of directors or the shareholders.

Question 14

Which of the following is not a right of corporate directors?

Accepted Answer

The unique responsibilities of corporate directors call for unique rights. There are four: the rights of compensation, participation, inspection, and indemnification.

Question 15

In which of the following does a shareholder sue alleging that he has suffered damages caused by the corporation?

Accepted Answer

Shareholders can also bring a direct suit against the corporation. In a shareholder's direct suit, the shareholder alleges damages caused by the corporation.

Question 16

Which of the following references a right of a corporation or its shareholder to purchase any shares of stock offered for resale by a shareholder within a specified period of time?

Accepted Answer

One method of restricting stock transferability is the right of first refusal. If a corporation establishes this right in its bylaws, the corporation or its shareholders have the right to purchase any shares of stock offered for resale by a shareholder within a specified period of time.

Question 17

"Self-Centered President." Tina is president of "We Manage You," a corporation set up to manage physician practices. Tina has never been very concerned with minority shareholders based on her belief that they have little influence over the company because they cannot even elect a director. She is told, however, that her state just instituted the practice of cumulative voting. An election is coming up in which 10 directors will be elected. Minority shareholders own 2,000 shares, while majority shareholders own 8,000 shares. Tina tells her vice president, George, that she wants to ignore minority shareholders and focus her interests on majority shareholders and the directors. She also tells George that she wants to be particularly conscientious toward directors because the directors appoint officers, and she does not believe that she owes any actual duties to shareholders. She further orders George to destroy some documents subpoenaed in a criminal investigation against the company for illegal dumping. When George protests, Tina tells him not to worry because officers cannot be held responsible for criminal actions so long as the actions are done as part of the duties of an officer. She explains to him that only the corporation can be charged with liability in such cases.
-Is Tina correct in that officers cannot be held criminally responsible for their actions on behalf of a corporation?

Accepted Answer

Although corporations themselves are liable for the torts and crimes of their directors and officers, directors and officers can be held personally responsible for their own torts and crimes and even for those of other employees whom they have failed to adequately supervise.

Question 18

If corporate directors fail to sue when the corporation has been harmed by an individual, another corporation, or a director, individual shareholders can file a[n] ______ on behalf of the corporation.

Accepted Answer

If corporate directors fail to sue when the corporation has been harmed by an individual, another corporation, or a director, individual shareholders (who held stock at the time of the alleged wrongdoing) can file a shareholder's derivative suit on behalf of the corporation.

Question 19

"Machine Malfunction." Bruno, the president of a health club operation called ABC Health Club, convinced the board of directors to approve a large purchase of a type of fitness machine called "Perfect Body." Bruno had carefully investigated the machine and did a presentation to the board on its purported benefits. Unfortunately, after the purchase, it was announced that "Perfect Body" was actually a very dangerous machine that should not be used. The manufacturer of "Perfect Body" went bankrupt, and ABC lost $200,000 on the purchase of the machines. The shareholders are furious and want to sue Bruno and the directors. In an attempt to appease her, the board of directors agrees to allow Frances, the ring leader of the shareholders, to purchase stock of the company at below its fair market value. Frances purchases a considerable amount of stock on that basis, but says that the shareholders plan to continue with an action against Bruno and the board members.
-Under which of the following should Bruno and the board of directors defend themselves in an action brought by shareholders for harming the corporation?

Accepted Answer

The business judgment rule says that directors and officers are not liable for decisions that harm the corporation if they were acting in good faith at the time.

Question 20

"Self-Centered President." Tina is president of "We Manage You," a corporation set up to manage physician practices. Tina has never been very concerned with minority shareholders based on her belief that they have little influence over the company because they cannot even elect a director. She is told, however, that her state just instituted the practice of cumulative voting. An election is coming up in which 10 directors will be elected. Minority shareholders own 2,000 shares, while majority shareholders own 8,000 shares. Tina tells her vice president, George, that she wants to ignore minority shareholders and focus her interests on majority shareholders and the directors. She also tells George that she wants to be particularly conscientious toward directors because the directors appoint officers, and she does not believe that she owes any actual duties to shareholders. She further orders George to destroy some documents subpoenaed in a criminal investigation against the company for illegal dumping. When George protests, Tina tells him not to worry because officers cannot be held responsible for criminal actions so long as the actions are done as part of the duties of an officer. She explains to him that only the corporation can be charged with liability in such cases.
-How many votes will the minority shareholders have in the election?

Accepted Answer

Cumulative voting ensures that minority shareholders have a voice in electing the board of directors. It gives each group, majority and minority shareholders a certain number of votes to cast by multiplying the number of shares the group owns by the number of open director positions.

Quiz 39: Corporations: Directors, Officers, and Shareholders