Deck 21: Corporations

Question 1

A corporation is required to have at least one class of stock with voting rights.

Answer 1

True

Question 2

Matt, a shareholder, can run for director by simply placing his name on the company's proxy statement.

Answer 2

False

Question 3

Zach decides to incorporate his business under the name of "Zamm." In addition to "Zamm," the Model Act requires that Zach include one of the following words: "corporation," "incorporated," "limited," or "company."

Answer 3

True

Question 4

A proxy is a vote that is mailed in, like an absentee ballot.

Question 5

A business corporation can be incorporated under either state law or federal law.

Question 6

Terminating a corporation is a three-step process: dissolution, winding up, and termination.

Question 7

A corporation is required to have at least one director, no matter how many shareholders it has.

Question 8

A manager who has engaged in self-dealing has violated the duty of loyalty to the corporation, unless the self-dealing was entirely fair to the corporation.

Question 9

A director violates the corporate opportunity doctrine if he or she competes with the corporation, unless the disinterested directors approve of the director's actions.

Question 10

The NYSE and NASDAQ both require that the members of the nominating committee be independent directors who are less likely to simply go along with whatever the CEO wants.

Question 11

When a corporation accepts legal responsibility for a contract, it is called novation .

Question 12

A corporation officially states its purpose is "to engage in any lawful activity for which corporations may be organized under the General Corporation Law of Idaho." Under corporate law, this purpose is too broad. A corporation's purpose must be more narrowly defined.

Question 13

Sara decided to incorporate her business under the name Gomo, Inc. Before Gomo was incorporated, Sara signed a contract in the name of Gomo, Inc. to lease a store front. Sara did not tell the other party that Gomo was not yet formed. Sara is personally liable on the lease.

Question 14

A fundamental problem of the modern corporation is the conflict of interests between managers, shareholders, and stakeholders.

Question 15

Laurie is incorporating her business. Laurie's home state is Wisconsin. Business will be conducted in California, Michigan, Pennsylvania, and Virginia. Laurie

A)must incorporate the business in Wisconsin, the home state.
B)must incorporate the business in Wisconsin, California, Michigan, Pennsylvania, and Virginia.
C)must incorporate in Delaware.
D)can incorporate the business in any state.

Question 16

A manager who first offers an opportunity to disinterested directors or shareholders who turn it down has the right to take advantage of the opportunity herself.

Question 17

The "business judgment rule" has been replaced by "good faith statutes" in most states.

Question 18

Lawyers often take the role of the incorporator, signing the charter and delivering it to the proper state officials.

Question 19

A corporation must have a registered agent within the state of incorporation only if the corporation maintains an office in that state.

Question 20

Overall, directors get paid very little for the amount of work they perform.

Question 21

What is the first step that must be taken to terminate a corporation?

A)filing
B)vote
C)revocation
D)winding up

Question 22

Which state does your textbook cite as being particularly attractive to companies looking to incorporate?

A)Ohio
B)Alaska
C)Utah
D)Delaware

Question 23

Carey decided to incorporate her business under the name yStar Inc. Before yStar was incorporated, Carey signed a contract in the name of yStar, Inc. to have some office space remodeled. Which statement is correct?

A)yStar is liable on the contract because the contract was signed in its name.
B)yStar becomes liable on the contract as soon as it is incorporated.
C)yStar is liable on the contract if the contractor knows that the corporation does not yet exist.
D)yStar will be liable on the contract only if the corporation adopts the contract.

Question 24

Courts have long ruled that corporate directors and officers owe a fiduciary duty to

A)the corporation only.
B)the corporation and shareholders.
C)shareholders only.
D)society at large.

Question 25

Which of the following describes the duty of loyalty?

A)It requires managers to make decisions they reasonably believe to be in the best interest of the corporation.
B)It prohibits managers from making a decision that benefits them at the expense of the corporation.
C)It requires consideration of the interests of the surrounding community.
D)It requires using care that an ordinarily prudent person would take in a similar situation.

Question 26

Who signs the charter and files it with the secretary of state?

A)the incorporator
B)the chairman of the board
C)the promotor
D)the company president

Question 27

What type of transaction employs special committees made up of disinterested board members who review the transaction to determine if it is entirely fair to the corporation?

A)hostile takeover
B)self-dealing
C)rational business purpose
D)corporate opportunity

Question 28

Alex is a director of ABC, Inc. Alex wants to personally make a major purchase from Bravo Co. If it knew of the opportunity, ABC also might be interested in making that same purchase. Alex must

A)advise the boards of both corporations of his conflict of interest.
B)first offer the opportunity to make the purchase to the disinterested directors of ABC or its shareholders.
C)resign from the board of directors.
D)abandon the idea of making the purchase himself.

Question 29

If a court determines that a manager's corporate decision amounted to self-dealing,

A)the business judgment rule will not apply.
B)the transaction being challenged will be automatically voided.
C)the manager is automatically personally liable to the corporation.
D)the manager will automatically be fired.

Question 30

Fashions, Inc. has 12 shareholders. There is no shareholder agreement concerning the board of directors. The company is subject to the Model Act. How many directors is Fashions, Inc. required to have?

A)none
B)one
C)two
D)five

Question 31

The person who creates a corporation is called the

A)promoter.
B)partner.
C)agent.
D)incorporator.

Question 32

The business judgement rule is designed to protect

A)only the manager.
B)only the manager's decision.
C)both the manager and the manager's decison.
D)a business from a conflict of interest.

Question 33

Mariposa is a shareholder of Tuscan Corporation. If she is acting in good faith, under the Model Act she has the right to

A)inspect the company's accounting records.
B)vote on a merger proposal.
C)examine the company's minute book.
D)All of these are correct.

Question 34

The Levitt Corporation charter authorizes 500,000 shares of stock. This stock is referred to as

A)treasury stock.
B)preferred stock.
C)authorized stock.
D)common stock.

Question 35

Amy is on the board of directors of Computers Plus. Computers Plus is looking for a warehouse to purchase. Amy owns a warehouse. In order for Amy to sell her warehouse to Computers Plus,

A)the transaction must be fair to both Amy and Computers Plus.
B)the disinterested members of the board of directors must approve the transaction.
C)she must resign her position on the board of directors of Computers Plus before any negotiations for the warehouse begin.
D)a court must review the opportunity to determine its favorability.

Question 36

Fashions, Inc. has 12 shareholders. The company is subject to the Model Act. What officers is Fashions, Inc. required to have?

A)a president, secretary, and treasurer
B)a president and a secretary, and they can be the same person
C)a president, at least one vice-president, a secretary, and a chief financial officer
D)whatever officers are described in the corporate bylaws

Question 37

For the business judgment rule to apply, the manager must

A)be trying to resolve a conflict of interest.
B)have exercised extraordinary care in resolving the situation.
C)have acted in the best interests of the corporation.
D)prove he or she was aware of the decision being made.

Question 38

A manager used her position in the company to develop a new business the company might have pursued on its own. This is a breach of the

A)duty of care.
B)duty of non-competition.
C)duty of loyalty.
D)duty of recognition.

Question 39

MegaCorp is incorporated under Delaware law. It is registered to do business in New York. Legally, in New York MegaCorp is known as what kind of corporation?

A)domestic
B)foreign
C)secondary
D)cumulative

Question 40

Mike is planning on incorporating his business in the state of Delaware. Which of the following regarding the name of Mike's business is TRUE?

A)He will be able to use the words "Association" or "Institute" in his company name.
B)He will not be able to use the word "Limited" in his company name.
C)His company name will not have to include one of the following words: Corporation, Incorporated, Company or Limited.
D)His company name can be the same as another corporation that already exists in Delaware.

Question 41

What is an inside director?

A)a shareholder charged with the illegal act of insider trading
B)a member of the board of directors who is also a board member of a competing firm
C)a shareholder who is a board member of a competing firm
D)a member of the board of directors who is also an employee of the corporation

Question 42

A corporation must obtain shareholder approval before the company

A)sells off a major portion of its business to another company.
B)opens additional offices.
C)hires or fires a significant number of employees.
D)expands into foreign markets.

Question 43

Management's duty to have a rational business purpose, avoid illegal behavior, and make informed decisions refers to its

A)duty of care.
B)duty of loyalty.
C)duty of openness.
D)duty of fairness.

Question 44

What is the definition of the business judgment rule?

Question 45

Discuss how a corporation is terminated.

Question 46

Charles owns 1,000 shares of stock in Temperan, Inc. Charles wants to obtain corporate records including the corporation's minute book and accounting records. Under the Model Act, Charles is entitled to this information if he requests it in good faith and

A)he has a proper purpose.
B)he owns at least 1 percent of the company or $2,000 of stock.
C)he is an employee of Temperan.
D)he is a controlling shareholder.

Question 47

Identify four circumstances that might persuade a court to pierce the corporate veil.

Question 48

Kian is the chief financial officer of Yonkka, Inc. He is also a member of Yonkka's board of directors. Kian is

A)an inside director.
B)an outside director.
C)holding an illegal position.
D)a public director.

Question 49

What are some of the advantages for a business to incorporate in Delaware?

Question 50

At least once every three years, companies must take a nonbinding shareholder vote on the compensation of the five highest-paid executives. This is referred to as

A)clawback pay action.
B)voting out the directors.
C)activist investing.
D)say-on-pay.

Question 51

One of the directors of Independent Pallet Mill purchases 100 acres of timberland. In order for him to sell the timber from this land to Independent, what must he do? If he does not act properly in this situation, what duty would he violate and what would be the result?

Question 52

Which of the following is the most appropriate term to use when describing management's duty to its shareholders?

A)official duty
B)legal duty
C)fiduciary duty
D)statutory duty

Question 53

A public company instituted a clawback policy. What does this mean?

A)The company can require the CEO and CFO to reimburse the company for any bonus or profits they recieved from selling company stock within a year of the release of flawed financials.
B)At least once every three years, companies must take a nonbinding shareholder vote on the compensation of the five highest-paid executives.
C)The company is prohibited from expelling shareholders unless the firm pays a fair price for the minority stock and the expulsion has a legitimate business purpose.
D)The company has decided that the compensation level of its executives is not in the company's best interests, so it reduces all executive pay levels by a certain percentage.