Deck 27: The Nature of a Corporation and Its Formation

Question 1

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

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

Answer 1

C

Question 2

Until the 19th century, all corporations were created by

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

Answer 2

B

Question 3

Which of the following best describes the function of the by- laws of a corporation?

A) They regulate the rights of creditors who hold a secured equity position.
B) They contain the licensing statutes of the jurisdiction(s) where the corporation operates.
C) They provide the general operating rules to run the business of the corporation.
D) They describe acts which are illegal and for which the directors of a corporation can be punished by law.
E) They are filed with the incorporating papers and take a special shareholders resolution to change their contents.

Answer 3

C

Question 4

Which of the following is included in the Articles of Incorporation?

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

Question 5

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

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

Question 6

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 the loan made to the corporation. Has the incorporating of the business helped Jim as far as limiting his business liability?

A) No, since all venders and creditors will be more leery about extending credit.
B) No, bankers become more cautious when they see individuals incorporate just to avoid personal liability.
C) Yes, the bank has more confidence in issuing his company the loan.
D) Yes, it might help in other types of liability, such as product liability.
E) No, personal guarantees are required either way.

Question 7

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

A) A corporation is liable for its own debts.
B) A director who drives dangerously and causes an accident while on company business.
C) 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.
D) The trustee in bankruptcy requires shareholders to repay corporate property received prior to bankruptcy.
E) Shareholders of a small, private company provide security or personal guarantees on loans made to their company.

Question 8

Jack, who recently retired, wants to invest in a new upstart local company. 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 a separate side agreement as to avoid clutter and confusion.
B) in the by- laws, since it will need changing.
C) in the charter.
D) under seal since it lacks consideration.
E) in writing since it falls under the Statute of Frauds.

Question 9

In 1975, Parliament passed the Canada Business Corporations Act (CBCA) which adopted a new system for incorporating businesses. It has become the model for most provinces. This system is called

A) the certificate of incorporation system.
B) the CBCA system.
C) the memorandum system.
D) the letter patent system.
E) the articles of incorporation system.

Question 10

James is retired and wants to invest in a local business. He is wishes to choose a corporation for his business structure because he "likes the separation of ownership and management". This way he

A) need not be active in managing the company.
B) knows the entrepreneurial spirit will be operative.
C) can see that the management has good motivation.
D) will need loyalty towards the company.
E) can get more involved with the company.

Question 11

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

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

Question 12

In addition to the Articles of Incorporation, a corporation needs detailed operating rules. These operating rules that are important enough for director's approval yet not contained in the Charter are called

A) by- laws.
B) work rules.
C) Charter exhibits A, B, C, etc.
D) standard operating procedures (SOP directory).
E) the corporate operations roster.

Question 13

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) The Forms and Processes Case, 1902.
D) Salomon's Case, 1897.
E) Actually, it took all of the above.

Question 14

Which of the following is not true about a corporation?

A) A corporation is a person in law.
B) The corporation exists on the same principles as a partnership.
C) The primary advantage of incorporation is limited liability.
D) A corporation has perpetual existence.
E) A corporation has limited liability.

Question 15

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) professional management
C) transfer of ownership
D) continuous existence
E) duty of good faith

Question 16

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

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

Question 17

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

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

Question 18

A shareholder that engages in a conflict on interest with a corporation is which the shareholder holds shares must:

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

Question 19

Which of the following is TRUE?

A) The law recognises every natural person as a legal person.
B) The limited company is no longer a dominant feature of the modern business world.
C) A corporation is a legal person in the eyes of the law.
D) A corporation is actually not a legal person.
E) The most important non- legal person is the limited partnership.

Question 20

To incorporate under the Canada Business Corporations Act is most suitable for

A) any business where the employees receive federal benefits.
B) any business that brings in goods from other provinces.
C) small businesses aiming at an international marketing niche.
D) large businesses that carry on their activity nation- wide.
E) all new and small business.

Question 21

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

Question 22

The Magic Corporation is preparing to sell an issue of debenture bonds. The bond investors are insisting on getting further legal protection. They will, most likely, require a restrictive clause placing a ceiling on

A) further long- term borrowing.
B) using the same security for other debts.
C) the amount of dividends the company pays to management.
D) the salaries paid to board members.
E) the amount of money that goes into research and development.

Question 23

Elvin inherited 1000 shares of 7% 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) the preferred stock is included under the registered class rights.
B) there is any collateral for these shares.
C) rights are cumulative.
D) rights are participating.
E) this preferred stock qualifies for the dividend tax credit.

Question 24

In the event of a corporations liquidation, which group of persons would receive any surplus funds after all creditors have been paid?

A) whatever the corporate charter or by- laws dictate
B) preferred shareholders
C) bond holders
D) preferred and common shareholders (split evenly)
E) management

Question 25

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

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

Question 26

The law requires directors to consult with shareholders before they borrow money on behalf of the corporation.

Question 27

Until the 19th century, all corporations were created by grant.

Question 28

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

Question 29

The case that established the principle of the separate legal personality of the corporation is the High Trees Case.

Question 30

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

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

Question 31

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

Question 32

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

Question 33

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

Question 34

Preferred shares are so called because they are usually preferred by most persons over other kinds of shares.

Question 35

Edith is the only shareholder and director of Edie Inc., a corporation incorporated by Edie 2 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 36

A par value is a value, derived from the game of golf, that is attached to the assets of a corporation.

Question 37

The ultra vires doctrine applies in most provinces in Canada.

Question 38

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

Question 39

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

Question 40

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

Question 41

As compared to a partnership, what are three major advantages of carrying on a business as a corporation?

Question 42

Explain the concept of the preferred shareholder.

Question 43

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 44

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

Question 45

Explain the principle enunciated in Salomon v. Salomon & Co. Ltd.

Question 46

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

Question 47

Milton Brown is a business consultant and 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 which Milton was aware of became public the price of the publicly traded shares increased dramatically and the corporation Milton has 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 defense is that the gain was made by his corporation and not by himself and his corporation is a separate legal entity. Will Milton's defense be successful? Give the legal basis for your answer.

Question 48

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

Question 49

Mario Black has, along with two others, formed a corporation to market specialized computer software. Each partner initially purchased ten common shares at $10 apiece-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 50

What are two disadvantages of carrying on a business as a corporation?

Question 51

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

Question 52

Corporations may be private corporations or public corporations. What are the differences between a public corporation and a private corporation?

Question 53

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

Question 54

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

Question 55

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

Question 56

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