Deck 15: The Corporate Form: Organizational Matters

Question 1

What is the most compelling reason for the creation of a corporate business entity?

A) to extend director's liability in the event of bankruptcy
B) to limit owners' liability in the event of bankruptcy
C) to share joint liability in the event of bankruptcy
D) to proportion liability in the event of bankruptcy

Answer 1

B

Question 2

What is the key feature that distinguishes the corporation from sole proprietorships and partnerships?

A) Corporations are easily formed business entities.
B) Corporations may have more than one owner.
C) The owners' assets in a corporation are at risk.
D) A corporation exists as a separate legal entity.

Answer 2

D

Question 3

Which of the following is a feature of the shares within a private corporation as compared to a widely held corporation?

A) a restriction on the transfer of shares
B) the right to receive preference shares
C) the right to vote
D) the right to vote

Answer 3

A

Question 4

Which of the following was one of the issues that was resolved by the decision in Salomon v.Salomon Ltd.,[1897]
A)C.22 (H.L.)?

A) whether incorporation can be undertaken to limit risk of business bankruptcy
B) whether shareholders are prohibited from becoming highly protected creditors of the company
C) whether companies with few shareholders could be recognized as separate legal entities
D) whether shareholders are totally responsible for their own as well as the entity's obligations

Question 5

What is the possible consequence if one chooses a business name that is too similar to that of an existing business?

A) being sued for abuse of process
B) being sued for the tort of injurious falsehood
C) having the corporation struck from the register
D) being sued for the tort of passing off

Question 6

Suppose Marcella is incorporating a new business entity and must consider the matters relating to shares.Which of the following is a valid question that Marcella must answer?

A) How many classes of shares will affect the control of the issuance?
B) How many classes of shares should be issued,and what are the rights and privileges for each?
C) Who will have the right to manage or control the issuance?
D) Who will receive the rights and privileges that attach to stakeholders?

Question 7

What is the legal term for decision makers who enter contracts on behalf of an artificial entity?

A) internal stakeholders
B) indirect stakeholders
C) direct stakeholders
D) internal shareholders

Question 8

What is a preference right with respect to share ownership?

A) the right to receive a dividend before another class of shareholder
B) the right to manage the corporation
C) the right to buy out other shareholders
D) the right to hire officers

Question 9

Which of the following would a lawyer most likely require the parties to determine before preparing and filing incorporation documents?

A) the number of shares to be issued,and to whom
B) the suitability of federal or provincial jurisdiction
C) the number of token directors needed for the board
D) a suitable method for capitalizing the entity

Question 10

What is required to be set out in the incorporation documents with respect to the number of shares for each class that can be issued?

A) unlimited number and type of classes of shares
B) maximum number or designation of unlimited for each class
C) minimum number or designation of unlimited for each class
D) limited number of shares for each class

Question 11

Marjorie owns 1000 shares in Martina's business entity.Under certain circumstances,Marjorie's investment in the business will involve having the entity purchase her shares at $30.What rights are attached to Marjorie's shares?

A) redemption rights
B) preference rights
C) dividend rights
D) financial rights

Question 12

Amarilla is willing to contribute capital to her son's new business enterprise.She has asked for qualified assurance of the return of her share capital if the entity winds down its business activity at some future time.Which of the following most likely provides the qualified assurance Amarilla is seeking?

A) redemption rights distributed among the classes of shares
B) shares with financial rights for buyback at a set price
C) shares with preferred rights on dissolution
D) preference shares with redemption rights

Question 13

A creditor of an insolvent corporation is unable to seek redress for its losses from the company's shareholders.How will the law discern this outcome?

A) as limiting the perpetual existence of a corporate entity
B) as eminently unjust to the creditor
C) as just if the creditor was also a shareholder of the corporation
D) as perfectly legitimate and eminently just

Question 14

Ilsa and Suri are meeting with their lawyer to discuss the incorporation of their home renovation company.Which type of incorporation will their lawyer most likely recommend?

A) provincial incorporation
B) foreign incorporation
C) federal incorporation and extra provincial registration
D) federal incorporation

Question 15

What is the term,in some jurisdictions,for a corporation that does NOT offer its shares for sale to the public?

A) closely held corporation
B) unlimited liability entity
C) non public corporation
D) limited liability entity

Question 16

Jasmine is the sole shareholder of FashionPlusYou Inc.,which is planning to borrow $100 000 from the bank to finance a second store location.What is Jasmine's legal position should FashionPlusYou Inc.default on the loan?

A) She and the corporation are jointly liable for the debt.
B) She has no personal liability with respect to the debt.
C) She and the corporation are jointly and severally liable for the debt.
D) She can be personally sued by the bank but only if FashionPlusYou Inc.defaults on the loan.

Question 17

Bertrand runs a small moving company as a sole proprietorship and is considering operating his business through a corporation.What is a disadvantage of the corporation as a business form that Bertrand should consider before proceeding?

A) It is difficult to transfer ownership.
B) Its shareholders cannot be directors.
C) There are higher costs associated with filing fees and legal costs.
D) It has entirely secured debt arrangements.

Question 18

Which of the following is a distinguishing feature of a widely held or public corporation?

A) They are exempt from most of the obligations of security legislation.
B) Letters patent are filed in each jurisdiction.
C) Shares are normally traded on the stock exchange.
D) Articles of association are filed in each jurisdiction.

Question 19

Which of the following is a feature of shares in a "widely held" corporation?

A) Shares are almost always freely transferable.
B) There is a limit on the number of shareholders.
C) There are limited rights attaching to a share class.
D) It has a lower income tax rate.

Question 20

Greta and Raven are going to be the sole shareholders of a new catering business that will operate in their city.What type of corporation are Greta and Raven most likely considering?

A) a closely held corporation
B) an issuing corporation
C) a public corporation
D) a federal corporation

Question 21

How is a single purpose document,used to facilitate formal communications with a corporate entity,consistently described in each provincial jurisdiction?

A) as a Notice of Directors
B) as a Notice of Incorporating Office
C) as a Notice of Registered Office
D) as a Notice of Incorporation

Question 22

Which of the following exempts entities from most of its requirements,provided the definition of a private corporation is met?

A) corporate legislation
B) corporate law regulating winding up transactions
C) securities legislation
D) securities law regulating redemption on dissolution

Question 23

Which of the following describes the purpose of a "prospectus"?

A) to provide notice of changes in directors
B) to forecast expected profits
C) disclosure of financial and other information to potential investors
D) disclosure of insider trading

Question 24

ABC Inc.is issuing 10 000 new shares to raise money for its upcoming expansion.What is the name for this type of financing?

A) debt financing
B) interim financing
C) equity financing
D) conditional financing

Question 25

Why are shareholders required to hold a meeting within the first 18 months of the date of incorporation?

A) to authorize the issuance of shares and other securities by the directors
B) to replace first directors with directors who have made banking arrangements
C) to replace first directors with directors who will hold office until the annual meeting
D) to authorize the appointment of officers to manage the operations of the corporation

Question 26

Why is it wise from a risk management perspective to obtain a NUANS report when setting up a new corporation?

A) It is will reveal whether there are already businesses engaged in that industry.
B) It provides notice to creditors of the corporate status of the new entity.
C) It provides a list of entities that can provide services to the new corporation.
D) It will reveal if existing businesses are already using the new business' proposed name.

Question 27

Why might a business choose to incorporate federally instead of provincially?

A) Provincial corporations can carry on business in only one province at a time.
B) It is generally cheaper to register as a federal corporation if carrying on business in more than two provinces.
C) It is more expensive to incorporate a provincial corporation than a federal corporation.
D) Unlike provincial corporation,federal incorporation allows a business to conduct international operations.

Question 28

"Bonds" and "debentures" are terms used interchangeably to refer to financing methods.How is it possible to understand precisely which type of financing either instrument actually pertains to?

A) by noting the securities listed in the corporation's borrowing bylaws
B) by searching the corporate registry
C) by noting the securities listed in the corporation's debt ledger
D) by reading the document itself

Question 29

Daenna resides in Manitoba and is creating a new business entity.She has not settled on a name.She does intend to carry on business in the Western provinces and will be importing goods from Scandinavian countries in the near term.Which of the following business names will most likely accommodate Daenna's business needs and expectations,as well as legislative requirements?

A) 36993636 Canada Corp.
B) 12361239 Manitoba Inc.
C) 36993636 Incorporated
D) Daenna's Import Co.

Question 30

Which documents typically set out the rules governing the day to day operations of a corporation incorporated anywhere in Canada (depending on jurisdiction)?

A) general bylaws,banking bylaws,articles of association
B) memorandum of association,bylaws,articles
C) articles,bylaws,articles of association
D) banking bylaws,memorandum of association,general bylaws

Question 31

Amber has received a lucrative offer to purchase her shares in a closely held corporation.She is required to give her fellow shareholders an opportunity to acquire her shares at the same price offered by the outsider.Why is Amber required to do so?

A) A shareholders' agreement gives the remaining shareholders a right of first refusal.
B) A shareholders' agreement provides the legal elements for valuing the entity's shares.
C) The corporation is listed on an exchange as a publicly traded entity.
D) The share structure prohibits the transfer of shares to outside parties.

Question 32

Which stakeholder has the most to gain if the corporation is profitable?

A) shareholders
B) bondholders
C) creditors
D) directors

Question 33

What is an advantage of a closely held or private corporation?

A) the ability to sell preferred shares on the stock exchange
B) refund of the GST paid on the first $500 000 of annual business income
C) the ability to raise funds by soliciting private investors
D) reduced tax rate on the first $500 000 of business income earned in each fiscal year

Question 34

Sam recently assumed an equity position in a corporation rather than continuing as one of its unsecured creditors.What right has Sam exercised?

A) his redemption right on a convertible debenture
B) his redemption right on a convertible bond
C) his conversion right on a convertible debenture
D) his conversion right on a convertible bond

Question 35

A court has been asked to answer profound questions raised in a lawsuit regarding the alleged ability of empire builders to readily defraud investors and shareholders.What would the presiding judge most likely have to develop a working knowledge of?

A) the corporation's fractional share structures
B) the corporations' governance structures
C) each of the corporation's respective tax structures
D) each of the corporation's securities disclosure reports

Question 36

The term "bond" is synonymous with which of the following?

A) preferred share
B) debenture
C) fractional ownership
D) share

Question 37

In August,Martina decided to seek preferable tax status for her business income.She negotiated the novation of all contractual obligations acquired since November with each of her sole proprietorship's customers.Novation will allow those obligations to rest with her new corporate entity.What did Martina require in order to realize the tax benefit retroactively?

A) a novation ruling from the Canada Revenue Agency allowing the transfer of contracts
B) a shelf company with an incorporation date predating the earliest of her contracts
C) a numbered company active in business on the date of the earliest of her contracts
D) a novation ruling from the Canada Revenue Agency allowing the transfer of earnings

Question 38

Which provision in an incorporating document would most strongly support the intention to incorporate a private company?

A) a provision for preference share subscriptions
B) a distinct,approved entity name
C) a maximum of 50 shareholders
D) a provision for common share subscriptions

Question 39

Which term is synonymous with a bond?

A) equity share
B) preferred share
C) debenture
D) convertible note

Question 40

Remmie Ltd.owns all of the Class B shares in Rex Holdings Inc.,giving it 40 percent of the equity and 82 percent of the voting power.How is Remmie able to exert control over Rex?

A) through a dual share structure
B) through a fractional share structure
C) through a multi class share structure
D) through a flow through share structure

Question 41

The board of directors of a corporation is charged with the management functions,including policy development,and is answerable directly to the shareholders,who may vote them out of office should they perform poorly.

Question 42

Prior to incorporation,directors are required to hold an organizational meeting to complete the incorporation documents and make bylaws,which are the rules specifying the day to day operating procedures of a corporation.

Question 43

Which of the following is a feature of the legislation that regulates securities in Canada?

A) The Supreme Court of Canada has held that federal securities legislation is constitutional.
B) The provinces and federal government share jurisdiction over securities legislation.
C) All securities regulation in Canada falls under the federal jurisdiction.
D) Each province and territory has its own distinct securities legislation.

Question 44

Which term refers to the document that a corporation must publish when offering securities to the public?

A) NUANS report
B) offering memorandum
C) option memorandum
D) prospectus

Question 45

Ownership of a share does not give the owner or holder any right to use the assets of the corporation or any right to directly control or manage the corporation.

Question 46

Shareholders do not have any power to manage the corporation.

Question 47

A NUANS report is required to be submitted with the incorporating documents of a shelf company.

Question 48

A corporation that does not issue its shares to the general public is usually known as a widely held corporation.

Question 49

What is meant by the term "secondary market" in terms of equity trading?

A) purchasing or selling securities from third parties
B) purchasing securities pursuant to a prospectus offering
C) buying or selling securities by a securities exchange takeover bid
D) buying or selling securities directly from a corporate entity

Question 50

A closely held corporation typically has several classes of shares that it offers by invitation to the public.

Question 51

The primary purpose of the legislated requirement that a corporate name contain a legal element is to ensure the entity is distinctly identifiable for tax reporting purposes.

Question 52

If there is only one shareholder,it is not necessary to hold an annual shareholders' meeting.

Question 53

Marion,along with several others,lost substantial funds through an investment based on misrepresentations stated in a secondary market disclosure their broker recommended.The disgruntled group's lawyer advised that recent amendments to provincial securities legislation now provide a meaningful civil remedy and facilitate class actions.Which of the following exemplifies the type of amendment made to achieve these goals?

A) establishing reliance on the defendant's investment misrepresentations
B) removing the issue of proof of a class action group's reliance on the disclosure
C) removing proof of reliance and substituting deemed reliance by the investors
D) pursuing a statutory cause of action for negligent misrepresentations

Question 54

Part of the process of organizing the newly incorporated entity involves the appointment of an auditor to hold office until the first annual meeting of the shareholders.

Question 55

Which of the following is one of the distinctions between shares and bonds?

A) Shares represent units of ownership,whereas bonds are debts owed by the corporation.
B) The issuance of bonds is not regulated by securities legislation,whereas the issuance of shares is.
C) Bonds are unsecured,whereas shares are secured by the assets of the corporation.
D) Shares may be sold at securities exchanges,whereas bonds are never sold on securities exchanges.

Question 56

The fundamental repercussions of a corporation's possessing a separate and distinct legal identity bind the internal stakeholders,who are solely responsible for its debts and other liabilities.

Question 57

All shares carry the right to vote for directors of the corporation.

Question 58

An advantage of private corporation status is the potential for a lower rate of income tax.

Question 59

All Canadian jurisdictions follow a similar procedure for the creation of a corporation,and all require payment of the filing fee,payable to the Receiver General,to be made concurrent with the submission of the incorporating documents for registration.

Question 60

In reality,the distinction between federal and provincial corporations is of little practical significance due to provincial laws that permit the operation of out of province corporations.

Question 61

When a right of first refusal is in place,it means that the shareholder wishing to sell must first offer her shares to the directors at the same price she has negotiated with the outsider.

Question 62

What are the aims of securities legislation?

Question 63

Rolf called Tim to discuss an as yet unannounced corporate takeover.Following Rolf's call,Tim purchased securities of both corporations on the basis of relevant material information he received.The securities are held in a joint trading account co owned by Tim and Rolf.In these circumstances,Rolf is a tippee,Tim is an insider,and both Rolf and Tim are guilty of insider trading.

Question 64

Individuals who engage in insider trading are subject to both criminal and civil liability under securities legislation and corporate legislation.In addition to the penalty of up to ten years in prison for insider trading,amendments to the Criminal Code created a penalty of up to five years in prison for conviction of a tipping offence.

Question 65

Compare role and rights of bondholders and shareholders in a corporation.

Question 66

Among the objectives of securities legislation are to provide a mechanism for the transfer of securities and to regulate the activities of those engaged in the trading of securities.

Question 67

The terms bond and debenture are often used interchangeably and refer to a corporate IOU.