Deck 29: The External Responsibilities of a Corporation

Question 1

In Canada, the jurisdiction over the securities industry is

A) divided between federal and provincial governments.
B) with the federal Securities and Exchange Commission.
C) with the federal Parliament.
D) with each of Canada's four stock exchanges.
E) substantially within provincial jurisdiction.

Answer 1

E

Question 2

Under criminal law, corporations are subject to be punished. Punishment can take place by

A) heavy fines on the corporation itself.
B) finding the "directing mind" behind the offence and fining and/or imprisoning this person.
C) imprisonment of the directors.
D) dissolving the corporation.
E) all of the above

Answer 2

E

Question 3

A corporation is liable for an unauthorized act of a corporate officer

A) provided everything appears to be regular on its face.
B) especially where he acts outside his normal and usual authority.
C) provided it is not expressly prohibited in the charter.
D) especially when a contracting third party has read or knows of the restriction.
E) even if the third party notes suspicious circumstances.

Answer 3

A

Question 4

When officers act as agents for the corporation and a third party is aware of some restriction on the officer's authority, then the third party

A) would need to require the contract to be placed under seal.
B) needs to do nothing, since it's up to the corporation to control and regulate their officer's acts.
C) will be bound by such restrictions.
D) can still claim he is relying on apparent authority.
E) can ignore the common law rules of agency.

Question 5

Several years back Dean Pigeon with two friends invested $300,000 equity capital into a new corporation. As it turns out, they have more capital in the business than they can profitably use. Will the CBCA allow them to take out the excess capital?

A) No, since the excess is not accumulated retained earnings.
B) Yes, as long as the corporation can satisfy both parts of the solvency test.
C) Yes, provided the corporation has no creditors.
D) No, because a "capital fund" is not available to shareholders.
E) Yes, provided the corporation can satisfy the court that the capital is truly unutilised.

Question 6

Directors may become personally liable to the corporation for deficiencies, if when they pay out dividends, the corporation cannot meet

A) the test of bankruptcy.
B) a shortage of working capital.
C) a scheduled bond redemption.
D) current corporate indebtedness.
E) the solvency test.

Question 7

The basic purpose of securities legislation is to

A) make the capital market an efficient medium for allocating available funds among competing investment opportunities.
B) register and license those engaged in the various aspects of the securities business.
C) require the issuer of securities to the public to file a prospectus and other related information to the securities commission.
D) require full disclosure of financial information to prospective buyers of stocks and bonds offered to the public.
E) prevent and punish fraudulent practices in the securities industry.

Question 8

Shareholders or directors may wish for the corporation to lend them money as an indirect method to get back some of their investment. The CBCA prohibits this activity

A) only when it would endanger a corporation's solvency, or reduce the value of its assets to less than the amount of its stated capital.
B) under all circumstances.
C) since it always jeopardises the position of existing creditors.
D) but only for directors.
E) but only for shareholders.

Question 9

Since there is normally limited liability for the owners of corporations, special rules have evolved to protect corporate creditors. These rules are primarily concerned with

A) borrowing by the officers of a new corporation.
B) blocking management from impairing capital through business losses.
C) preventing the negligent conduct of officers and/or employees.
D) the sudden substantial impairment of the capital of a company.
E) stopping creditors from making loans to corporate "shells".

Question 10

When it is unlawful to declare dividends because of a deficiency in the capital fund, and yet the shareholders want a quick pay- out, then

A) Revenue Canada can issue "not withstanding" tax credits.
B) shareholders can lend money to the corporation and receive interest payments in return.
C) the corporation can re- capitalise at a lower amount.
D) the corporation needs to earn enough profits to restore the deficiency.
E) wages can be paid to officers instead of dividends.

Question 11

Dividend payment that has the effect of making the corporation insolvent, would fail to meet

A) the solvency test.
B) statutory reserve requirements.
C) the maintenance of capital test.
D) balance sheet convention.
E) the accounting test.

Question 12

Filing a prospectus with a securities commission is a serious and important effort. The commission will refuse to file it should it be misleading or have omitted required data. The filing needs to be made

A) before securities can be issued to the public.
B) or investors can repudiate their stock purchases at any future date.
C) in the maximum required detail as prescribed by statute.
D) so investors have public access to a copy of the prospectus.
E) within 30 days of issuance of securities.

Question 13

Schemes of government regulation resemble traditional criminal law because

A) they prohibit certain kinds of conduct and punish those who ignore the prohibitions.
B) it must be proved the accused not only committed the offence, was at fault, but had mens rea (a guilty mind).
C) they are enforced by the RCMP.
D) conviction for an offence is typically punished by imprisonment.
E) damage is done through committing a tort rather than through breach of a contract.

Question 14

When protecting corporate creditors, how does the "maintenance of capital test" differ from the "solvency test"?

A) It is the only one found in the CBCA.
B) It is the one which has a "capital fund" to preserve.
C) They are similar but referred to differently in different provinces.
D) Simply a matter of legal jurisdiction over type of corporation.
E) It is less restrictive on the payment of dividends.

Question 15

Under the regulatory offence of "strict liability", the standard that must be met for obtaining a conviction is

A) to let the accused try to avoid liability by proving that he was completely unaware of the regulation.
B) the same as under the regulatory offence of "absolute liability".
C) to satisfy the court that the breach is of the regulation rather than a statute.
D) to prove the existence of mens rea (a guilty mind).
E) where the doing of the prohibited act raises a presumption that an offence has been committed-unless the accused can prove he took all reasonable care.

Question 16

In spite of the fact that a corporation does not meet the solvency test, it can:

A) pay wages to employees
B) pay dividends
C) buy back shares
D) make loans to directors
E) it can do none of the above

Question 17

The CBCA states that a promoter acting on behalf of a corporation before it comes into existence may avoid personal liability and waive any benefits under the contract by

A) getting the promoter's "warranty of authority" status.
B) including an express term that the promoter will not be bound by the agreement.
C) making it clear to third parties that he is simply an agent for a yet to be established corporation.
D) keeping the contract in escrow until the new corporation has been formed.
E) ratifying the contract under the "non- existent" principal clause.

Question 18

Which of the following is NOT an aim of securities legislation?

A) to provide disclosure to the public
B) to maintain confidence of investors
C) to prevent fraud
D) to ensure directors are suitable
E) to make corporations profitable

Question 19

Mandy had his securities license suspended by the securities commission, yet she continues to buy and sell stock as an investment dealer. Mandy certainly

A) will face private discipline by the investment house where he is an agent.
B) will have all his stock trades cancelled and/or reversed.
C) has committed a criminal offence.
D) will be barred for life from working in the securities industry in Canada.
E) must go up before the discipline committee of the securities commission.

Question 20

According to the CBCA, the rule that "if a corporation's charter is filed in a government office and available to the public for examination, then third parties are deemed to have notice of its contents", is

A) binding on all contracting parties.
B) only to be applied in cases where it can be used against the corporation.
C) established in most legal jurisdictions throughout Canada.
D) abolished.
E) only to be enforced by federally incorporated businesses.

Question 21

The corporation is being charged by the government for a toxic spill. Bernard is the only engineer on the board of directors thought to have expertise in this area. Which of the following is NOT one of the elements to be considered in assessing a director's defence of having shown "due diligence"?

A) The corporate officer in charge was fully apprised of the system and had reported back periodically to the board.
B) Bernard immediately took action when he received notice the system failed.
C) Environmental agency circulars were received and read regularly.
D) The board reviewed each officer's report and felt they could place reliance on them.
E) The pollution prevention system was in place and was being supervised.

Question 22

The indoor management rule means that a third party who enters into a contract with a corporation, is obliged to make an inquiry into the internal management of the corporation to ensure that the contract, when signed, would be a properly authorized contract.

Question 23

Regarding environmental concerns, which of the following is FALSE?

A) When an offence occurs, a presumption arises that the activity was carried on negligently.
B) Over time, the required standard of care has been steadily rising.
C) When harm occurs, a firm is only liable to the extent of its expertise.
D) The courts expect greater diligence from the corporation's senior officers.
E) The greater the likelihood of harm, the higher the duty of care.

Question 24

Pat is one of 16 owners of Camstick Ltd. This corporation has been fined $30,000 for polluting the town's water supply. Pat is on the board and now finds himself charged and being convicted on the same matter. The judge finds that Pat personally knew and did nothing about the polluting. Not only that, but he has no remorse concerning the incident. The judge is now giving him, under the Environmental Protection Act, the maximum prison term of

A) five years plus $10,000.
B) 12 months.
C) 90 days.
D) three years plus $5,000.
E) ten years plus $50,000.

Question 25

What is a mens rea offence?

Question 26

There are no circumstances that will prevent a corporation from paying a dividend to its shareholders.

Question 27

In determining responsibility for environmental harm, ordinarily _ ought NOT to be held personally liable for the offence.

A) the official in charge
B) an inside director
C) the corporate executive officer
D) an outside director
E) the enterprise itself

Question 28

What is the indoor management rule?

Question 29

The reasons that directors and senior officers need to be held personally liable for the crimes committed by a corporation include all EXCEPT:

A) Some closely held corporations are run by shrewd crooks trying to hide behind the corporate veil.
B) Some corporations would view a fine as simply a "license" to do it again.
C) Some corporations are but a "shell", so when faced with a large fine simply go out of business and reorganize into another corporation.
D) This is an effective deterrent against corporate crime.
E) Criminal acts have corporate liability limitations as outlined in the CBCA.

Question 30

Hazel was deliberately cheated by a clerk at the Hamilton Bay Corp. Can the corporation be found guilty of a criminal offence?

A) Yes, there is vicarious liability to the corporation.
B) Yes, since the clerk was an employee working at her job at the time.
C) No, because she was a low- level employee.
D) Yes, since there is obviously a "directing mind" in this act.
E) No, since corporations cannot be criminally found guilty.

Question 31

Corporations may incur civil liability as principals for acts or omissions of its agents and employees.

Question 32

No defence will be available if a director commits an offence that imposes strict liability.

Question 33

Under what circumstances may a corporation purchase its own shares?

Question 34

The principle of limited liability protects directors from liability for the torts and breaches of fiduciary duties they commit.

Question 35

When it comes to damage of the environment, any person who actually commits an offence is personally liable

A) provided he had no significant roll in controlling what happened.
B) provided he had no knowledge of the offence.
C) even if a senior officer ordered him to perform.
D) provided he was not acting within the scope of his authorised activities.
E) if there was no direct participation in the offence.

Question 36

In trying to protect corporate creditors, what is the solvency test?

Question 37

The indoor management rule requires that directors not disclose publicly what each director said at directors' meetings.

Question 38

Jack is entering into a contract with Benson Corporation. Jack is obliged to make inquiries into the decision making process of the corporation to ensure that the contract it is entering into with the corporation is one that has been approved by the corporation per se.

Question 39

Canadian law requires that when a corporation is established it must have a minimum amount of issued capital.

Question 40

Regarding ratification of pre- incorporation contracts, how has the CBCA resolved the problem presented by common law?

Question 41

What is the distinction between civil liability and criminal liability as it relates to environmental damage caused by a corporation?

Question 42

Ward Bond was the sole director of Able Contractors and Hauling Ltd. The corporation entered into a contract to dig up and remove a below- ground storage tank which contained a residue of pesticides. The Corporation dug up the tank and placed it on a flat- bed truck for transportation to an approved disposal facility. While being transported it started to rain and the driver called Ward to ask what he should do as he had no tarpaulin to cover the tank. Ward knew that a tarpaulin would be useful but the cost would be several thousand dollars so Ward instructed the driver to park the truck until the rain stopped. The driver did so in a restaurant parking lot and the rain washed out the pesticide residue from the tank. It leaked onto the parking lot below the truck. The driver noticed this and called Ward to find out what to do and Ward told him to leave immediately and go to the disposal facility. The pesticide residue was ultimately discovered and led to a clean- up at a cost of
$35,000. What potential liability is there as a result of this situation? Who do you think will be liable and what is the nature of their liability?

Question 43

Explain the general purpose of securities legislation in Canada. How are these purposes achieved?

Question 44

In addition to the licensing and prospectus provisions, the legislation has introduced further controls on the securities industry. Give a couple of examples.

Question 45

Who are "outside" directors and what roll do they play in a corporate offence?

Question 46

Explain how directors and senior officers can be held liable when the corporation commits a criminal offence.

Question 47

Traditionally, the role of management has been seen as maximizing corporate profitability for the benefit of its shareholders. Recently, there has been a public focus on corporate social responsibility. What is meant by the term "corporate social responsibility"? Name three things that advocates of corporate responsibility might expect of corporations.

Question 48

What standard of care and skill is usually imposed by the court on an accused corporation and its directors when the activities of the corporation were carried on negligently?

Question 49

Describe three classes of criminal offences in Canada.

Question 50

Does purchasing adequate insurance coverage absolve a corporation from liability for environmental damage caused by their corporation?

Question 51

Mandy and Donald wish to form a corporation to develop a $1,000,000 piece of property they own jointly. Prior to incorporation they hire an architect to design a building for their site. Upon completion of incorporation Mandy and Donald, who are the sole directors of the corporation, pass a directors' resolution ratifying the contract with the architect and seeking to make the corporation liable there under. Will they have any legal problems with this procedure?

Question 52

What is meant by the indoor management rule?