Deck 25: The Nature of a Corporation and Its Formation

Question 1

Albert is the principal shareholder of a large investment company and holds 45 percent of its common shares,which are valued at $500 000.00.Recently,Albert's company invested heavily in a gold mining company,which fraudulently represented finding and owning a new gold deposit in northern Canada.Albert's company lost a substantial amount of money,with the result that the value of Albert's common shares dropped to $25 000.00.Albert now launches a lawsuit against the gold mining company for the loss in value of his shares.In this case,

A)Albert will be entitled to a quantum meruit claim against the gold mining company.
B)Albert will recover his loss because his cause of action is in fraud or deceit.
C)Albert will not recover his loss because he has no claim for damages for a wrong done to his company.
D)Albert will recover his loss because the court will lift the corporate veil of the gold mining company.
E)Albert will recover his loss because the court will force the gold mining company to insure his shares.

Answer 1

C

Question 2

John and George wish to incorporate their manufacturing business and intend to manufacture and sell their products throughout Canada.In such a case,they should consider incorporating

A)a federal company.
B)an international company.
C)a professional corporation.
D)a private provincial company.
E)none of the above

Answer 2

A

Question 3

A,B,and C are three lawyers who want to start a construction business.Each has enough capital to invest in the business to avoid borrowing money from the bank,and all of them want to limit their liability as much as possible while having a role in the management and operation of the business.In this case,they can protect themselves by

A)setting up a limited partnership.
B)setting up a joint venture.
C)setting up a partnership.
D)setting up a limited liability partnership.
E)incorporating a company.

Answer 3

E

Question 4

John,who has a reputation for dishonesty,recently incorporated an investment company to protect himself from liability for his dishonest activities.John makes himself an employee of the company and fraudulently misrepresents an investment to a new customer who invests a large sum of money,which John pockets.A few days later the company goes bankrupt.In this situation,the investor

A)can sue John for breach of fiduciary duty.
B)can move to have the court pierce the corporate veil and sue John directly for fraud.
C)can sue both the company and John.
D)can sue only the company.
E)none of the above

Question 5

A parent corporation will be liable to creditors of a subsidiary corporation

A)only if the parent corporation and the subsidiary corporation have exactly the same directors.
B)only if the subsidiary corporation is a private (non-distributing)corporation.
C)only if the parent corporation owns more than 50 percent of the shares in the subsidiary corporation.
D)only if the parent corporation owns 100 percent of the shares in the subsidiary corporation.
E)none of the above

Question 6

Use this fact situation to answer the related questions that follow. Mary and Joan are dentists who practise dentistry in Ontario as Mary and Joan PC.A year after incorporation,one of Mary's patients suffers injuries as a result of Mary's negligence.
In this case,who is liable for the patient's injuries?

A)Mary and the corporation only
B)Mary alone
C)the corporation alone
D)Mary,Joan,and the corporation
E)Mary and Joan only

Question 7

Until the nineteenth century,all corporations were created by

A)crown document.
B)royal soliloquy.
C)charter.
D)deed.
E)grant.

Question 8

Use the fact situation in Q5 to answer the related question that follows. Assume that at the time of Mary's negligence,the company has failed to pay one of its suppliers of dental products.In this case,the supplier can sue

A)Mary,Joan,and the corporation.
B)Mary and Joan alone.
C)Mary and the corporation.
D)Mary alone.
E)all of the above

Question 9

The classic case that established the existence of the corporation as a separate legal entity is

A)Hart versus Hart,1868.
B)The Partners' Cases,a series of small cases in 1903.
C)Salomon's Case,1897.
D)The Forms and Processes Case,1902.
E)all of the above

Question 10

Albert is employed by a large company that manufactures aluminum siding.The company allows Albert to use its truck for deliveries and also for his personal use.The truck has the name of the company on it.One evening after the company has closed for business,Albert causes an accident while driving the truck and damages the car of a third party.In this situation,

A)Albert is personally responsible for the damages of the third party and the company has no liability.
B)the company alone is vicariously liable to the third party for the damages.
C)both Albert and the company are liable for the third party's damages.
D)Albert alone as an employee of the company is responsible for the third party's damages.
E)none of the above

Question 11

A and B incorporate a trucking company in which,of the 100 issued common shares,A holds 45 shares and B holds the rest.The company has a fleet of trucks valued at $200 000.In this case,the fleet of trucks is owned by

A)A alone.
B)B alone.
C)A,B,and the company.
D)the company alone.
E)both A and B.

Question 12

Regarding corporations,which statement follows the principle of limited liability?

A)a director who drives dangerously and causes an accident while on company business
B)shareholders of a small,private company provide security or personal guarantees on loans made to their company
C)a corporation is liable for its own debts
D)the trustee in bankruptcy requires shareholders to repay corporate property received prior to bankruptcy
E)a dividend is paid to a shareholder although the corporation make no profits-the shareholder is liable for the corporation's debt to the extent of the dividend

Question 13

Megacorp Ltd.is a large private Ontario construction company in which Albert,John,and Michael are the shareholders and George,Mary,and Sam are the directors.Recently,Albert and John started up a building supplies business,which now has a contract to provide building supplies to Megacorp Ltd.However,Michael objects to this.In this situation,

A)Michael is not correct in objecting because Albert and John have no fiduciary duty to Megacorp Ltd.
B)Michael is correct in objecting because Albert and John are shareholders in Megacorp Ltd.
C)Michael is correct in objecting because Albert and John have a fiduciary duty to Megacorp Ltd.
D)Michael is not correct in objecting because Albert and John have a duty of good faith to Megacorp Ltd.
E)none of the above

Question 14

A shareholder who engages in a conflict of interest with a corporation in which the shareholder holds shares must

A)pay damages to the corporation.
B)disgorge any profit the shareholder makes through the conflict of interest.
C)sell the shareholders shares to the corporation.
D)get the consent of the corporation in which the shareholders holds shares.
E)none of the above

Question 15

The doctrine of ultra vires,as applied to corporations,has now been abolished throughout Canada.This means that Canadian corporations

A)do not have the capacity and all the rights,powers,and privileges of a natural person.
B)can only act through the authority vested in their agents.
C)cannot be held to contracts entered into that are outside of their charter.
D)cannot act beyond their constitutional powers.
E)have broadened powers and capacity to contract.

Question 16

Which of the following will NOT end the existence of a corporation?

A)a dissolution order by the court
B)the death of all shareholders in a single accident
C)a resolution of the shareholders
D)a failure to pay the annual corporation franchise fee
E)a failure to comply with statutory regulations

Question 17

Associated corporations constitute a statutory limitation on the concept of separate corporate identities.In the legal sense,what is an associated corporation?

A)corporations that have interlocking directorates
B)corporations producing the same product type,such as Coca Cola and Pepsi or Apple and IBM
C)corporations that buy and sell to each other
D)corporations that sell to the same market
E)where one corporation controls another or where two or more corporations are controlled by the same person

Question 18

Jim incorporated his small business so that he would obtain limited liability on company indebtedness.But when he applied for a bank loan,the bank insisted that he give a personal guarantee for the loan made to the corporation.Has the incorporating of the business helped Jim as far as limiting his business liability?

A)No,it has not,since all venders and creditors will be more leery about extending credit.
B)Yes,it has,because it might help in other types of liability,such as product liability.
C)No,it has not,because bankers become more cautious when they see individuals incorporate just to avoid personal liability.
D)No,it has not,because personal guarantees are required either way.
E)Yes,it has,because the bank has more confidence in issuing his company the loan.

Question 19

In comparison with a partnership,which of the following is NOT considered to be an advantage of the corporate form of business?

A)limited liability
B)continuous existence
C)duty of good faith
D)transfer of ownership
E)professional management

Question 20

John and Peter wish to incorporate their grocery business as Happy Groceries Ltd.To do so,among other things,they must

A)decide on the by-laws of the corporation.
B)complete articles of incorporation.
C)obtain a certificate of incorporation.
D)conduct a name search.
E)all of the above

Question 21

In rare circumstances,courts are prepared to disregard the separate existence of a corporation and "lift the veil" to impose liabilities on those who control it.Which of the following is NOT one of the conditions that must be met for the court to impose liability on an individual?

A)The individual must control the corporation.
B)The individual must be a shareholder of the corporation.
C)The individual exercises the control of the corporation to commit a fraud,a wrong,or a breach of duty.
D)The misconduct must be the cause of the plaintiff's injury.

Question 22

Elvin inherited 1000 shares of 7 percent preferred.She has been assured by her broker that the company is in sound financial health even though it did not pay any dividends this year.Elvin should next find out whether

A)this preferred stock qualifies for the dividend tax credit.
B)rights are cumulative.
C)there is any collateral for these shares.
D)rights are participating.
E)the preferred stock is included under the registered class rights.

Question 23

Restrictions on share transfers are common and can take almost any form.Such restrictions must be set out in the corporation's constitution and must be noted on the share certificate,otherwise

A)the shares are not transferable.
B)the shares have no value.
C)the restrictions are not binding on a purchaser who has no notice of them.
D)a preemptive right is created.
E)any transfer will be ultra vires.

Question 24

A corporation can sue and be sued in its own name.

Question 25

Which of the following is NOT a distinguishing feature of closely held corporations?

A)The number of share holders is restricted.
B)The directors of the company are prohibited from holding more than 60 percent of the outstanding shares.
C)The number of required shareholders can be as small as one.
D)Any invitation to the public to buy shares is prohibited.
E)The right to transfer shares must be restricted in some manner.

Question 26

Jack,who recently retired,wants to invest in a new upstart local company,The Turmoil Corp.As part of the deal for investing in The Turmoil Corp. ,the company has agreed to give Jack "...some sort of maintenance or security job for as long as he feels able." This agreement would best be placed

A)in the charter.
B)under seal,since it lacks consideration.
C)in writing,since it falls under the Statute of Frauds.
D)in the by-laws,since it will need changing.
E)in a separate side agreement,so as to avoid clutter and confusion.

Question 27

When we speak of lifting the corporate veil,we are referring to the ability of a court to recognize a proper case where the corporation has been set up simply as a means of protecting its incorporators from liability for acts of fraud or breach of duty.

Question 28

Bond and share certificates in bearer form are considered to be negotiable instruments.The holder of such instruments,if acquired honestly,is said to have acquired them

A)for value.
B)without notice of defect.
C)in good faith.
D)under apparent ownership.
E)truthfully.

Question 29

In the articles of incorporation jurisdictions,the concept of authorized capital has been abolished.Now,what's important is

A)whether a new issue can be sold to current owners.
B)the total number of shares issued and consideration received for each of those shares.
C)whether there is a par value or a no par value on the shares sold.
D)whether the distinction can be maintained between the preferred and the common shares.
E)the difference between issued capital and paid-up capital.

Question 30

Luzzos Corp.is a closely held corporation where "The right to transfer shares needs to be restricted in some manner." This is most likely to be done by

A)required consent of the board of directors.
B)placing the restriction outside the corporate charter.
C)giving the right of first refusal to the existing shareholders.
D)placing the restriction in a by-law.
E)giving a large shareholder the right of veto.

Question 31

The principle that a corporation has an existence separate from its shareholders is absolute and there are no exceptions.

Question 32

There is no practical difference between the rights of a shareholder and those of the holder of a debenture.

Question 33

Bill and Ted decide to set up a small company to invest in real estate.Before incorporating they find a prime piece of real estate that is suitable for investment purposes.They want to buy the property through a limited company but have not as yet incorporated.They attend at a lawyer's office for purposes of filing articles of incorporation.The lawyer asks them what name they plan to use for the corporation.Bill immediately says "Bill and Ted's Excellent Investments Inc.".The lawyer advises them that she will need some time to have the name approved through the appropriate government office.Bill tells the lawyer there is no time to wait for the name approval.In these circumstances Bill and Ted can

A)Tell the real estate agent to "hold off" for a couple of days until the name is approved.
B)Use a "number name" where the registry simply assigns a number to the new corporation and worry about the name change later.
C)Opt to form a partnership instead.
D)File a "request to delay name of corporation form" at the time of filing the articles of incorporation.
E)Hire a new lawyer.

Question 34

Which of the following is included in the articles of incorporation?

A)any restrictions on the business that may be carried on other provisions that the incorporators choose to include
B)if there are two or more classes of shares,the rights and restrictions attached to each
C)any restrictions on the transfer of shares
D)name of the corporation
E)all of the above

Question 35

When a corporation is liquidated,the first group of persons to be paid are the preferred creditors.

Question 36

In both theory and reality,a corporation always protects the liability of its shareholders.

Question 37

Edith is the only shareholder and director of Edie Inc. ,a corporation incorporated by Edie two years ago.Edie is also the president of Edie Inc.Edie Inc.has no employees and no assets.Edie will be personally liable to creditors of Edie Inc.

Question 38

Several years back,while Tommy was still in school,he mowed the lawn of widow Jerome's large estate.Since she could not pay Tommy in cash,she gave him 100 bearer bonds of the Delray Corp.Tommy believes he will be able to cash in on these bonds because he

A)does not need to obtain endorsement since Mrs.Jerome is now deceased.
B)only suspects they were obtained fraudulently.
C)is an innocent holder for value.
D)is not subject to any real defence,such as forgery.
E)has no idea of how the law works.

Question 39

When a corporation issues more than one class of shares,the specific rights of each class do not have to be set out in the constitution.

Question 40

Six years ago,Michael incorporated his small business in Alberta.Now,in order to do business in Ontario,Michael must

A)resubmit papers to Alberta.
B)register with the Ontario government.
C)re-register as a federal corporation.
D)realize that the CBCA is not suitable for small business.
E)form a corporation federally or with the Province of Ontario.

Question 41

What does it mean to pierce the corporate veil? When can this be done?

Question 42

The "charter" is an unsuitable instrument for reflecting special arrangements and side agreements between shareholders.Explain.

Question 43

A professional corporation is a special type of corporation that may be established by members of a profession.

Question 44

The by-laws of a corporation are always appended to the articles of incorporation.

Question 45

What is the doctrine of ultra vires in corporate law and what is its current effect across Canada?

Question 46

Mario Black has,along with two others,formed a corporation to market specialized computer software.Each partner initially purchased ten common shares at $10 a piece,giving the corporation $300 in capital.The company requires an additional $25 000 to operate.Describe three different ways the corporation could acquire that $25 000 and give a brief reason why you would recommend or not recommend each of the ways.

Question 47

What capacity and powers does a corporation have in the eyes of the law?

Question 48

In a private corporation without a shareholders agreement,why would it be necessary to restrict the transfer of shares by first requiring the consent of the board of directors?

Question 49

Leaving aside certain mandatory requirements for federal corporations,what is the main consideration in deciding whether to incorporate federally or provincially?

Question 50

Explain the concept of the preferred shareholder.

Question 51

A private corporation is one that is not permitted to offer its shares to the public.

Question 52

Florence has $100 000 to invest.She decides to invest in the common shares of a well-known blue chip company.As part owner,how would she expect to participate in the company and to benefit from her investment?

Question 53

Explain the general distinction between the capital of a corporation and indebtedness of a corporation.Who owns the capital of the corporation?

Question 54

If you are a small,local,one-person business,can you incorporate under the federal CBCA (Canada Business Corporations Act)? Explain.

Question 55

There is no practical difference between a limited liability partnership and a professional corporation.Explain.

Question 56

Although the theory is that a private corporation provides the best protection from liability for its incorporators,why is this not always the case in practice?

Question 57

The ultra vires doctrine applies in most provinces in Canada.

Question 58

Milton Brown is a business consultant who obtained confidential information about a publicly traded corporation which,if made public,would cause the stock to rise dramatically.Milton formed a private corporation with himself as the sole shareholder and director and had that corporation purchase stock in the publicly traded corporation.When the news that Milton was already aware of became public,the price of the publicly traded shares increased dramatically and the corporation Milton had formed sold its shareholdings at a substantial profit.Milton is subsequently charged with insider trading,that is,using confidential information for his own personal gain.His defence is that the gain was made by his corporation and not by himself and that his corporation is a separate legal entity.Will Milton's defense be successful? Give the legal basis for your answer.

Question 59

John,Susan,and Terence retain a lawyer to incorporate a company that they expect will be taken public in the future.What basic information should the lawyer give to them concerning the incorporating documents?

Question 60

The attribute of negotiability of bond and share certificates has increased the problem of forged and stolen certificates.Explain.

Question 61

Explain the difference between the rights of a shareholder and a bondholder.