Question 1

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

Accepted Answer

The rules governing the internal regulations of a company in jurisdictions using the registration system of incorporation are called the articles or articles of association. The other options refer to different documents or procedures involved in the process of incorporating a company.

Question 2

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 secured creditor with a debenture, would have priority over unsecured creditors like your brother in the event of bankruptcy.

Question 3

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

Preemptive rights give shareholders the right to maintain their proportional ownership in the corporation by being offered a portion of any new shares issued. This is intended to prevent dilution of their ownership and voting power. Option B is only true if the corporation's bylaws provide for such a right. Option C is not necessarily true, as there may be different classes of shares or other provisions that affect voting rights. Option D is incorrect, as officers are responsible for managing the day-to-day operations of the corporation, while shareholders have a more limited role in electing directors and voting on major decisions. Option E is not necessarily true, as shareholders may have restrictions on their ability to transfer or sell their shares, as set out in the corporation's bylaws or shareholder agreement.

Question 4

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 preemptive right provision gives existing shareholders the right to purchase new shares in proportion to their current holdings, ensuring that they can maintain their proportionate ownership if more shares are issued.

Question 5

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 dissent procedure is typically triggered when major changes are made that adversely affect a group of shareholders, allowing them to demand the corporation buy back their shares at market value.

Question 6

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

The answer of After Bill Roles graduated from university, he...

Question 7

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

Preemptive right provisions give existing shareholders the right to purchase newly issued shares before they are offered to anyone else, which can prevent dilution of their ownership and control over the corporation. In this case, if ABC Ltd. had preemptive right provisions in its articles of incorporation, the two directors would not be able to issue themselves more shares without first offering them to the other shareholders. This would ensure that the other shareholders have a fair opportunity to maintain their percentage of ownership and voting control.

Question 8

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

Each director owes a fiduciary duty to the corporation, not its creditors (Option A is incorrect). While a closely-held corporation may have fewer regulatory requirements than a publicly-held one, it is still subject to various laws and regulations (Option B is incorrect). Shareholders in a closely-held corporation can seek relief from oppressive conduct by other shareholders or directors through the courts (Option C is correct). The statement that the corporation is a legal fiction and must act through principals is true, but not relevant to the question (Option D is incorrect). While directors may owe a duty to the corporation, they do not owe a fiduciary duty to other shareholders (Option E is incorrect).

Question 9

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

The relief-from-oppression provisions would aid Smith in this situation, as he is being unfairly treated by the other two directors who are also shareholders. These provisions allow a minority shareholder to apply to the court for relief if they believe they are being treated oppressively or unfairly by the majority shareholders or directors.

Question 10

A real estate agent, by virtue of his fiduciary duty to his principal, is not allowed to buy the property being sold by his principal without full disclosure to and consent from his principal. The real estate agent does not want to disclose that he is the buyer of the property, so he forms a corporation and takes an offer to his 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

The real estate agent is breaching his fiduciary duty by not disclosing that he is the buyer of the property. By using a corporation to make the offer, the agent is attempting to hide his ownership of the corporation and his conflict of interest. If the principal finds out and objects to the contract, the court would likely "lift the corporate veil" and hold the agent personally responsible for the breach of fiduciary duty. Therefore, the court would not enforce the contract in this case.

Question 11

Which of the following is an advantage of incorporation?

Accepted Answer

One advantage of incorporation is that shares are easily transferred, which allows for greater flexibility in ownership and investment in the company. Options A, B, D, and E are incorrect. Option A is incorrect because there can be tax advantages to incorporation, such as the ability to deduct certain expenses. Option B is incorrect because shareholders owe a duty to the corporation, not the other way around. Option D is incorrect because shareholders typically are not personally liable for the debts of the corporation. Option E is incorrect because shareholders typically do not have veto power over decisions of the board of directors.

Question 12

Which of the following statements about pre-incorporation contracts is false?

Accepted Answer

This statement is false. Promoters can be held liable for losses incurred before the incorporation of the corporation, regardless of the doctrine of corporate myth.

Question 13

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

Accepted Answer

Par value shares may be misleading because the value of the share after being issued will depend on market forces and may not be the same as the value listed on the face of the share. This is because the market value of the stock may rise above or fall below its par value. All of the other options are incorrect: A is not always true as shares may be subject to transfer restrictions or pre-emptive rights; B is incorrect as the objects clause is no longer required under the Business Corporations Act in BC; C is incorrect as federal corporations can be created through the Canada Business Corporations Act; D is incorrect as the board of directors, not the shareholders, is responsible for managing the company.

Question 14

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

A shareholder of a closely-held corporation may sue on behalf of the corporation with permission of the court if the corporation has been wronged by the negligent and fraudulent acts of one of its directors, but the corporation refused to take any action against the wrongdoer. This is known as a derivative action. The other choices do not meet the criteria for a shareholder to sue on behalf of the corporation.

Question 15

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 pursue legal action on behalf of the corporation when the board of directors refuses to do so. In this scenario, the shareholders can use derivative-action provisions to recover the $15,000 lost due to the director's breach of duty.

Question 16

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 against the directors or officers of a corporation when they have breached their fiduciary duties to the company. This includes cases where a director has diverted a corporate opportunity for their personal benefit, which is what Smith did in this scenario. The fact that the other directors are close friends of Smith and have not taken action against him does not prevent the shareholder from using this provision to seek relief.

Question 17

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 from its shareholders, so it continues to exist and owes its debts even if the shareholder dies.

Question 18

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

Accepted Answer

Intercepting a business opportunity intended for the corporation for personal benefit is a clear example of breach of fiduciary duty. Fiduciary duty requires officers of the corporation to act in the best interest of the corporation. This action clearly benefits the officer and not the corporation.

Question 19

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

Accepted Answer

The characteristic of limited liability is one of the key features of corporations. It means that the liability of shareholders is limited to the amount they have invested in the corporation through purchasing shares. They are not personally liable for the debts or other obligations of the corporation beyond that amount. The other options are incorrect: A is false because corporations can sue and be sued; B is false because shareholders are not personally liable for the corporation's debts; C is false because directors are responsible for managing the corporation and acting in its best interests, not directly responsible to shareholders; and E is false because shareholders are not vicariously liable for the actions of employees in the corporation.

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