Question 1

The provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that gives shareholders of most public companies an advisory,nonbinding vote on company payment practices for top executives is called the "corporate opportunity doctrine."

Accepted Answer

The provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that gives shareholders of most public companies an advisory, nonbinding vote on company payment practices for top executives is called the "say-on-pay" vote, not the "corporate opportunity doctrine."

Question 2

In 2015,the SEC adopted a rule that requires public companies to disclose the pay ratio of the median of the annual total compensation of all employees to the annual total compensation of the CEO.

Accepted Answer

The SEC did adopt a rule in 2015 that requires public companies to disclose the pay ratio of the median of the annual total compensation of all employees to the annual total compensation of the CEO.

Question 3

A person who owns less than a majority of shares in a corporation may still be a controlling shareholder.

Accepted Answer

The number of shares owned is not the only factor in determining if someone is a controlling shareholder. Other factors, such as the ability to influence decision-making and control the direction of the corporation, can also be taken into account.

Question 4

A controlling shareholder has a duty not to transfer the power of management to a purchaser the shareholder knows or has reason to believe will use that power to the detriment of the corporation.

Accepted Answer

This is known as the duty of loyalty, which states that controlling shareholders must act in the best interest of the corporation and not in their own personal interest. Transferring power to a purchaser who will harm the corporation violates this duty.

Question 5

Controlling shareholders,but not officers or directors,of a corporation may use the corporation's confidential information for personal gain.

Accepted Answer

Officers, directors, and controlling shareholders are all fiduciaries of the corporation and are generally prohibited from using the corporation's confidential information for personal gain. This is a breach of their fiduciary duties to the corporation and its shareholders.

Question 6

A poison pill is a defensive measure that would make any takeover not approved by the directors prohibitively expensive.

Accepted Answer

A poison pill is meant to discourage hostile takeovers by making the target company less appealing or more difficult to acquire. It often involves implementing measures such as issuing new shares at a discounted price or granting existing shareholders the right to buy additional shares at a reduced price, which dilutes the value of the company and makes it more expensive for the acquiring company to purchase a controlling interest.

Question 7

To comply with their duty of loyalty,directors and managers must subordinate their own interests to those of the corporation.

Accepted Answer

Directors and managers have a responsibility to act in the best interests of the corporation, which means putting the corporation's interests ahead of their own personal interests. This is known as the duty of loyalty, and failing to adhere to it can result in legal and ethical issues.

Question 8

In order to take advantage of the business judgment rule,directors must have made an informed decision and have no conflict of the interest with the corporation.

Accepted Answer

The business judgment rule states that directors must have made an inform decision, meaning they have conducted enough research and received any necessary advice to make an educated decision, and they must not have any conflict of interest with the corporation, meaning they must always act in the best interest of the corporation, not their own personal interests.

Question 9

In evaluating a buyout proposal,the directors should consider material nonprice provisions of the proposed agreement.

Accepted Answer

Material nonprice provisions of a buyout proposal, such as financing terms, restrictions on operations, and management changes, can have a significant impact on the company's future viability and should be carefully evaluated by the directors.

Question 10

The Delaware Corporation Code allows the certificate of incorporation to include a provision limiting or eliminating the personal liability of directors to the corporation or to its shareholders for monetary damages for breach of the duty of loyalty.

Accepted Answer

The Delaware Corporation Code allows for the limitation or elimination of personal liability of directors for monetary damages for breaches of fiduciary duty, except for breaches of the duty of loyalty, acts or omissions not in good faith, intentional misconduct, or knowing violations of law.

Question 11

Breakup fees are liquidated damages for a terminated proxy fight.

Accepted Answer

Breakup fees are typically paid in the context of mergers and acquisitions to compensate a party if the deal falls through, not for terminated proxy fights.

Question 12

The duty of care includes the duty to make informed decisions.

Accepted Answer

The duty of care requires individuals to make informed decisions based on the circumstances and information available to them in order to avoid harm or injury to others. This includes remaining informed about changes to regulations, laws, and industry standards that may affect their duties of care. Therefore, the statement is true.

Question 13

The Delaware Supreme Court has held that,regardless of the circumstances,a majority shareholder may never freeze out the minority shareholders.

Accepted Answer

While the Delaware Supreme Court has placed limitations on when a majority shareholder may freeze out minority shareholders, such as requiring a valid business purpose and a fair price, there are certain circumstances in which it may be permissible.

Question 14

The Securities and Exchange Commission recognizes the affirmative responsibility of officers and directors under federal securities laws to ensure the accuracy and completeness of public company filings with the SEC.

Accepted Answer

The statement is accurate and reflects the SEC's position on the responsibilities of officers and directors under federal securities laws.

Question 15

In CASE 20.2 In re Citigroup Inc.Shareholder Derivative Litigation (2009),the Delaware Chancery court considered whether shareholders could demand that the board sue the directors for failure to adequately protect the corporation from exposure to the subprime lending market.

Accepted Answer

This is an accurate statement of the case.

Question 16

In certain cases,the duty of good faith may be subsumed within the duty of loyalty.

Accepted Answer

The duty of loyalty often includes the duty of good faith, as a loyal agent or fiduciary is expected to act in good faith towards their principal or beneficiary.

Question 17

To help make the bidder whole for its out-of-pocket expenses and lost opportunity costs should a deal fail to close because the target terminates the agreement,a negotiation will often include a termination fee.

Accepted Answer

A termination fee is often included in a negotiation to compensate the bidder for its expenses and lost opportunities if the deal fails to close due to the target terminating the agreement.

Question 18

The obligation to act in good faith establishes an independent fiduciary duty that stands on the same footing as the duties of care and loyalty.

Accepted Answer

The obligation to act in good faith is considered an integral part of the duties of care and loyalty, rather than an independent fiduciary duty standing on its own. It is often seen as a subset or a manner in which the duties of care and loyalty are fulfilled, rather than a separate duty.

Question 19

Companies listed on the New York Stock Exchange must have compensation committees composed entirely of independent directors.

Accepted Answer

The New York Stock Exchange (NYSE) requires that compensation committees of listed companies be composed entirely of independent directors in order to ensure that compensation decisions are made objectively and in the best interests of shareholders.

Question 20

A shareholder derivative action is a suit brought by a shareholder on behalf of the corporation.

Accepted Answer

This type of lawsuit is known as a shareholder derivative action because the shareholder is essentially bringing the claim on behalf of the corporation, seeking to remedy harm done to the company by its own officers or directors.

Quiz 20: Directors Officers And Controlling Shareholders