Deck 20: Directors, Officers, and Controlling Shareholders

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

The business judgment rule is applicable only if the directors make an informed decision.

Question 5

The Dodd-Frank Wall Street Reform and Consumer Protection Act outlaws corporate executives from holding stock in companies for which they work.

Question 6

Under no circumstances do controlling shareholders owe fiduciary duties to other shareholders.

Question 7

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

Question 8

Termination fees are sometimes characterized as liquidated damages.

Question 9

A person must own a majority of shares in a corporation in order to be considered a controlling shareholder.

Question 10

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

Question 11

Once a sale or breakup of the corporation is inevitable,directors have a fiduciary duty to prevent a freeze out of the majority shareholders.

Question 12

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

Question 13

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

Question 14

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

Question 15

Breakup fees are liquidated damages for a terminated proxy fight.

Question 16

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.

Question 17

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

Question 18

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

Question 19

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.

Question 20

In the context of takeovers,board members cannot reject an offer without taking sufficient time to analyze its merit.

Question 21

Which of the following are among the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act in relation to shareholder control of pay for top executives?

A) The act provides that shareholders of all privately held as well as publicly traded companies are entitled to vote and set executive compensation on a yearly basis.
B) The act provides that shareholders of public companies have an advisory vote on company payment practices for top executives and that public companies must hold a shareholder advisory vote on golden parachutes for executives.
C) The act provides that shareholders of all privately held as well as publicly traded companies are entitled to vote and set executive compensation on a yearly basis and also that the shareholders must specifically approve any golden parachute provisions for executives.
D) Based on the belief that ill informed shareholder input negatively affected nationwide corporate performance the act provides that shareholders need not be involved in setting executive compensation.

Question 22

Which of the following is true regarding state rules of corporate governance?

A) Under the U.S. Constitution, a state may only apply its corporate governance rules to corporations incorporated in the state.
B) California imposes state pro-shareholder rules on quasi-foreign corporations.
C) There are no state rules of corporate governance because the Securities and Exchange Commission has preempted the field.
D) By federal law, if a state wishes to impose corporate governance requirements on corporations incorporated in the state, then the same rules must be imposed on corporations operating in the
State but incorporated in another state.

Question 23

Which of the following was the result on appeal in the case in the text Omnicare,Inc.v.NCS Healthcare,Inc.,involving whether directors of an insolvent publicly traded company violated their fiduciary duty when they entered into an agreement for the sale of the company to a particular interested buyer regardless of other offers?

A) That the directors violated their fiduciary duty and lacked the authority to agree to an absolute lock-up guaranteeing the sale and agreeing to forego consideration of future offers.
B) That the directors violated their fiduciary duty because the agreement was kept secret from majority shareholders but that, otherwise, the agreement foregoing consideration of future offers would have been valid.
C) That the directors violated their fiduciary duty because the agreement was kept secret from minority shareholders but that, otherwise, the agreement foregoing consideration of future offers would have been valid.
D) That the directors satisfied all fiduciary duties because there was no evidence of bad faith or self dealing.

Question 24

A[n] _______ gives the person to whom it is granted the right to buy a certain number of shares at a fixed price for a fixed number of years during a period known as the ______ period which is not usually for more than _______.

A) call right, exercise, twelve months
B) option, redemption, twelve months
C) option, redemption, ten years
D) option, exercise, ten years

Question 25

Which of the following was the result in the case in the text involving a no-hand pill under Delaware law?

A) That as a matter of law the pill was valid as a response to a takeover bid regardless of whether independent proof existed that the directors acted reasonably.
B) That the pill was valid because the directors established, based upon reliable expert testimony, that the hostile takeover bid presented a dangerous threat to the continuation of the company.
C) That the pill, which had to be redeemed within one month of a takeover bid or else be allowed to remain in place, was invalid because it impermissibly circumscribed the board's statutory power to manage the business affairs of the company and the directors' ability to fulfill their fiduciary duties.
D) That the pill, which could not be redeemed for six months following a takeover, was invalid because it impermissibly circumscribed the board's statutory power to manage the business affairs of the company and the directors' ability to fulfill their fiduciary duties.

Question 26

What is required by the Sarbanes-Oxley Act of 2002 in regard to the certification of the accuracy of public companies' SEC filings and the adequacy of internal controls?

A) The chief executive officer, the chief financial officer, and all inside directors must certify the accuracy of public companies' SEC filings and the adequacy of internal controls.
B) The chief executive officer, the chief financial officer, and any controlling shareholder must certify the accuracy of public companies' SEC filings and the adequacy of internal controls.
C) The chief executive officer and the chief financial officer must certify the accuracy of public companies' SEC filings and the adequacy of internal controls.
D) The chief executive officer, the chief financial officer, and all outside directors must certify the accuracy of public companies' SEC filings and the adequacy of internal controls.

Question 27

A shareholder derivative suit is a lawsuit by

A) shareholders on behalf of the corporation.
B) the shareholders directly.
C) the controlling shareholders on behalf of the majority shareholder.
D) the corporation.

Question 28

What was the result in Smith v.Van Gorkom,the case in the text in which it was alleged that directors were grossly negligent in failing to inform themselves adequately before making a decision about a merger?

A) That the board failed to obtain adequate information on merger terms and would not be protected by the business judgment rule.
B That the board was protected by the business judgment rule because there was no conflict of interest.
C) That the board was not protected by the business judgment rule but was protected by the merger business rule.
D) That the board was protected by the business judgment rule because fraud could not be established.

Question 29

In the context of executive compensation,______ stock usually means stock subject to vesting restrictions.

A) regulated
B) restricted
C) illegally issued
D) kickback

Question 30

The ________ requires that officers and directors not take personal advantage of a desirable business investment that rightfully belongs to the corporation.

A) right of first refusal
B) corporate opportunity doctrine
C) line of business test
D) expectancy test

Question 31

Which of the following is true regarding any duties of controlling shareholders in relation to control of a corporation?

A) Controlling shareholders owe no duties other than to maximize their own wealth.
B) Controlling shareholders generally have a duty to control the corporation in a fair, just, and equitable manner, known as the standard of entire fairness.
C) Controlling shareholders may act to maximize their own wealth only so long as they do not intentionally harm and exhibit bad faith toward minority shareholders, a standard known as minority shareholder respect and fair dealing.
D) Controlling shareholders must appoint minority shareholders to vote a certain percentage of their shares in instances in which the minority shareholders demand that right.

Question 32

Which of the following is not a prime consideration in determining whether a fiduciary has taken an opportunity that belongs to a corporation?

A) Whether the opportunity is in the corporation's line of business.
B) The amount of money the fiduciary stands to make.
C) Whether the fiduciary developed the idea using corporation resources.
D) Whether the involvement by the fiduciary will hinder the corporation's purposes.

Question 33

Which of the following was the result on appeal in In re Abbott Laboratories Derivative Shareholders Litigation,the case in the text alleging corporate directors' breach of the duty of good faith through their failure to follow up on repeated notices of regulatory noncompliance?

A) That the directors were not liable and did not breach any duty of good faith because they were unaware of the issues, and accepted corporate governance procedures did not require the disclosure of the noncompliance notices to them.
B) That the directors could not be held liable because the corporation's certificate of incorporation exempted directors from liability for breach of the duty of care.
C) That the business judgment rule applied and that the plaintiffs' allegations could not withstand the protection of that rule.
D) That the plaintiffs sufficiently pleaded allegations that, if true, constituted a breach of the duty of good faith leading to the directors' actions falling outside the protection of the business judgment rule.

Question 34

Some jurisdictions permit the shareholders to amend the articles of incorporation to relieve directors of any financial liability for violations of the duty of

A) care.
B) loyalty.
C) avoiding self dealing.
D) voting.

Question 35

Which of the following is true in regard to the business judgment rule if one or more individual directors have a personal interest in a transaction being considered by the board?

A) The decision may be entitled to the protection of the business judgment rule if the transaction is approved by a majority of the inside directors.
B) The decision may be entitled to the protection of the business judgment rule if the transaction is approved by a majority of the disinterested directors.
C) The decision is not entitled to the protection of the business judgment rule resulting in a higher level of proof regarding the reasonableness of the transaction being required from the board of directors.
D) The decision is not entitled to the protection of the business judgment rule leading to a legally established conclusion of illegality on the part of the board of directors.

Question 36

Which of the following was the result on appeal in the case in the text Air Products & Chemicals,Inc.v.Airgas,Inc.,involving whether the defendant's board of directors breached its fiduciary duties to stockholders by refusing to redeem a poison pill in place and allow a hostile takeover to proceed?

A) That the board satisfied its fiduciary duties because as a matter of law directors may use poison pills to block hostile takeovers that would result in a change of management.
B) That the board satisfied its fiduciary duties because the members acted reasonably in response to the belief, based on reasonable grounds, that the hostile takeover offer was inadequate and posed a legitimate threat if accepted.
C) That the board failed to act reasonably because the members acted in their own self interest, not in the best interests of the shareholders, and that the board failed to properly seek expert opinion regarding the hostile take over offer in relation to the value of the company.
D) That the board failed to act reasonably because as a matter of law it could not leave the poison pill in place in the face of a hostile takeover bid.

Question 37

Which of the following is considered an inside director of a corporation?

A) A director who is also an officer of the corporation.
B) A director who is also an officer of any corporation.
C) A director who is both an officer of any corporation and who stands to personally profit by an action being considered by the board.
D) A director who is qualified as an expert in regard to any product of the company.

Question 38

Which of the following is true regarding hostile takeovers in the European Union?

A) All member states must observe the neutrality rule and the breakthrough rule.
B) Member states may opt out of the neutrality rule and the breakthrough rule.
C) Member states may opt out of the neutrality rule, but all member states must observe the breakthrough rule.
D) Member states may opt out of the breakthrough rule, but all member states must observe the neutrality rule.

Question 39

Which of the following is true regarding statements of officers?

A) An outside director, but not an inside director, may in good faith rely upon any statement of an officer.
B) An inside director, but not an outside director, may in good faith rely upon any statement of an officer.
C) Any director may in good faith rely upon any statement of an officer.
D) Not every statement of an officer can be relied upon in good faith.

Question 40

Which of the following was the result in the case in the text from the Delaware Court of Chancery involving a dead-hand pill under Delaware law?

A) That the directors appropriately used the dead-hand pill which guaranteed that majority shareholders in place before a hostile bidding attempt were entitled to vote to block any later proposed vote on a merger.
B) That the directors appropriately used the dead-hand pill because directors are entitled to use any means necessary in order to block a hostile takeover.
C) That the pill violated the state general corporation law for a number of reasons including that it violated the directors' duty of loyalty.
D) That the pill, which could only be redeemed by directors in office after a hostile bidder gained control or by their designated successors, violated the state general corporation law because it prejudiced directors in place prior to the takeover.

Question 41

Brice is on the board of ABC Corporation. XYZ Corporation has made a move to acquire ABC. Tina,the president of ABC advises the board that the offer made by XYZ is a good one that should be accepted. She did not disclose,however,that XYZ had offered her a generous bonus if she could convince the board members of ABC to take XYZ's offer. Brice tells the other board members that they should simply rely on Tina because she is probably right,and under the business judgment rule they are protected even if she is wrong. Which of the following is true regarding Brice's advice?

A) Brice is correct.
B) Brice is correct only if the directors of Success had been soliciting offers, and Tina was charged with reviewing them.
C) Brice is incorrect unless it can be established that Tina has prior experience in mergers and acquisitions.
D) Brice is incorrect because no statement made by an officer is entitled to blind reliance.

Question 42

Define and explain the purpose of the business judgment rule.Under what circumstances would the rule apply? When would the protection not apply? Discuss fully.

Question 43

A shareholder who owns sufficient shares to outvote the other shareholders,or to otherwise set corporate policy,and thus to control the corporation is known as a _______ shareholder.

A) controlling
B) absolute
C) manipulative
D) chargeable

Question 44

A ________ is an agreement in a proposed takeover that allows the board of directors to negotiate with other bidders or to terminate a merger agreement.

A) termination clause
B) fiduciary out
C) revolving door
D) no talk provision

Question 45

Fact Pattern 20-1
Tonya is the president of Big Corporation. Big Corporation is looking for land on which to build a new facility. Tonya locates suitable land, but purchases it for herself with plans to sell it at a profit at a later date. Rick, the majority shareholder of Big Corporation hears about Tonya's purchase and complains to her about it. She tells Rick that she viewed and purchased the land on her own time and that she did not breach any duties owed to the corporation. Rick tells her that she should reconsider and that he plans to discuss the matter with the rest of the board.
Refer to fact pattern 20-1. Did Tonya violate any duties owed to the corporation?

A) Yes, by buying the land for herself without disclosure to the corporation, she violated the corporate opportunity doctrine.
B) Yes, by buying the land for herself without disclosure to the corporation, she violated the duty of responsible decision making.
C) Only if the land involved was worth over $50,000 did she violate any duties because any smaller amount would be considered de minimus.
D) No.

Question 46

What is meant by the business judgment rule?

Question 47

Fact Pattern 20-1
Tonya is the president of Big Corporation. Big Corporation is looking for land on which to build a new facility. Tonya locates suitable land, but purchases it for herself with plans to sell it at a profit at a later date. Rick, the majority shareholder of Big Corporation hears about Tonya's purchase and complains to her about it. She tells Rick that she viewed and purchased the land on her own time and that she did not breach any duties owed to the corporation. Rick tells her that she should reconsider and that he plans to discuss the matter with the rest of the board.
Refer to fact pattern 20-1. Which of the following is a right of the corporation if it is determined that an officer wrongfully takes an opportunity belonging to the corporation?

A) An absolute trust
B) A constructive trust
C) A 10% penalty based upon the value of the lost opportunity which is imposed by federal law
D) As imposed by most states, a 10% penalty based upon the value of the lost opportunity

Question 48

Which of the following is true regarding breakup fees?

A) They are sometimes characterized as liquidated damages.
B) The Securities and Exchange Commission prohibits the payment of breakup fees.
C) Breakup fees are typically 20 to 25 percent of the value of the deal.
D) They are sometimes characterized as liquidated damages, and breakup fees are typically 20 to 25 percent of the value of the deal.

Question 49

A ________ occurs when minority shareholders are forced to convert their shares into cash,for example,when a subsidiary merges with its parent.

A) hostile takeover
B) sale of assets
C) freeze out
D) tender offer

Question 50

Fact Pattern 20-1
Tonya is the president of Big Corporation. Big Corporation is looking for land on which to build a new facility. Tonya locates suitable land, but purchases it for herself with plans to sell it at a profit at a later date. Rick, the majority shareholder of Big Corporation hears about Tonya's purchase and complains to her about it. She tells Rick that she viewed and purchased the land on her own time and that she did not breach any duties owed to the corporation. Rick tells her that she should reconsider and that he plans to discuss the matter with the rest of the board.
Refer to fact pattern 20-1. Which of the following is a widely used test for determining whether an opportunity belongs to a corporation?

A) The line-of-business test
B) The time-spent test
C) The corporate-interest test
D) The officer-corporate equilibrium test

Question 51

In a _______,someone wishing to replace the board with his or her own candidates attempts to acquire a sufficient number of shareholder votes to do so through limited written powers of attorney entitling the holder to vote the shares owned by the person giving the power of attorney.

A) hostile takeover
B) proxy contest
C) poison pill
D) greenmail takeover

Question 52

What is a poison pill? What factors favor keeping a poison pill in place?

Question 53

Yolanda,a ballroom dance instructor,was recently asked to be a director of ABC Company which is publicly traded. She is very honored and excited. Her friend,Joe,asked her if she had any experience in accounting,business,or SEC requirements. Yolanda told him no,but that the president of ABC had assured her that the only responsibility of a director was acting as a figurehead because the officers took care of all detailed corporate business. Yolanda says that she is accepting the position because it will get her exposure in the community and perhaps increase her dance clientele. Is Yolanda correct regarding her responsibilities,and why or why not?

A) Yes, Yolanda is correct that the primary job of a director is to serve as a figurehead.
B) Yolanda is correct that the primary job of an outside bank director is to serve as a figurehead, but that is not true of inside directors.
C) Yolanda is not entirely correct, but she has no affirmative responsibility to ensure the accuracy of any reports because that is entirely the responsibility of officers of the corporation.
D) Yolanda is incorrect, and the SEC emphasizes the responsibility of directors to ensure the accuracy and completeness of public company filings with the SEC.

Question 54

Traditionally,a transaction benefiting a director's self interest is ________ unless the director could show it was fair and reasonable to the corporation.

A) void
B) voidable
C) illegal
D) all of the responses are correct

Question 55

The duty of ________ requires officers to exercise reasonable supervision over the business affairs of the corporation.

A) care
B) loyalty
C) obedience
D) ethics

Question 56

A contractual provision insisted upon by a bidder limiting the ability of board members to negotiate with other bidders is referred to as a[n] _______ clause.

A) obedience
B) loyalty
C) negotiation
D) no-talk

Question 57

What was the conclusion of the court in Unocal Corp.v.Mesa Petroleum Co.regarding the application of the business judgment rule to actions of directors in response to a takeover attempt?

Question 58

What is a no-shop agreement?

A) An agreement whereby shareholders agree to not replace directors for a certain period of time.
B) An agreement whereby directors agree to not replace officers for a certain period of time.
C) An agreement whereby a target company agrees with a potential purchaser not to actively solicit other bidders but retains the right to negotiate with parties who submit unsolicited bids to the
Target.
D) An agreement whereby shareholders agree to not replace directors or officers for a certain period of time.

Question 59

What are the seven key factors that directors should consider in deciding whether to sell a company?

Question 60

__________ is a purchase of a dissident shareholder's stock by the issuer at a premium over market,often in exchange for a standstill agreement,whereby the shareholder agrees not to commence a tender offer or proxy contest or to buy additional shares of the issuer for a period of time.

A) Greenmail
B) A freeze out
C) Choice agreement
D) Equitable agreement

Question 61

What is greenmail? What is a standstill agreement? When,if ever,is the process of greenmail protected by the business judgment rule?

Question 62

Maurice is a fairly new director at ABC Corp. Peg,another director,tells him that she believes that the company is in Revlon mode and that the directors should act accordingly. What is Peg referencing?