Deck 29: Formation and Ownership of a Corporation

Question 1

If a business says it is a corporation, and a third party deals with it as a corporation, neither party can question the validity of the business's status.

Answer 1

True

Question 2

Federal law does not require that investors receive financial and other important information concerning the securities being offered for public sale.

Answer 2

False

Question 3

Acts of a corporation that are beyond the authority granted to it under its charter or under the statutes by which it was incorporated are ultra vires acts .

Answer 3

True

Question 4

A corporation is recognized by law as a "person."

Question 5

A prospectus is a disclosure document that describes the securities being offered for sale and the company's financial operations.

Question 6

A corporation may not be held liable for the criminal acts of its agents and employees.

Question 7

An S corporation qualifies for special income tax treatment.

Question 8

A corporation is a legal entity created and recognized by federal law.

Question 9

The doctrine of respondeat superior applies to corporations in the same way as it applies to other agency relationships.

Question 10

A close corporation is one whose shares are held by a single person, members of a family, or relatively few unrelated persons.

Question 11

To pierce the corporate veil is to disregard the corporate form and hold the directors personally liable for a corporate obligation.

Question 12

A corporation enjoys many of the same rights under the law that natural persons enjoy.

Question 13

Because bonds do not represent debt, they need never be repaid.

Question 14

Issuing securities is the only way for a new corporation to raise capital.

Question 15

Implied powers of a corporation can be found in the state and federal constitutions.

Question 16

A benefit corporation is designed to make a profit and maximize the benefit to shareholders.

Question 17

If the procedures for incorporation are not followed precisely , others may be able to challenge the existence of the corporation.

Question 18

The primary document needed to incorporate a business is the bylaws.

Question 19

Stocks, or equity securities, represent the purchase of ownership in the business firm.

Question 20

Corporate bylaws and resolutions of the corporation's board of directors provide guidelines but cannot grant or restrict corporate powers.

Question 21

Generally, a shareholder has no right to transfer his or her shares to another party without the consent of the corporation.

Question 22

The primary document needed to incorporate a business is

A) the website of the secretary of state of the state of incorporation.
B) the minutes of the first organizational meeting.
C) the articles of incorporation.
D) the bylaws.

Question 23

Shareholders must approve a merger of the corporation .

Question 24

A corporation is owned by

A) the board of directors.
B) the officers.
C) the employees.
D) the shareholders.

Question 25

A shareholder who has a preemptive right has the right to preempt the declaration of a dividend.

Question 26

Shareholders typically have one vote for each share that they own.

Question 27

Securities of publicly held corporations do not need to be registered before they can be resold.

Question 28

If a shareholder's derivative suit is successful, any damages recovered normally go into the corporation's treasury.

Question 29

For shareholders to act during a meeting, a proxy must be presented.

Question 30

A majority shareholder has fiduciary duties to the corporation but not to the minority shareholders.

Question 31

Burgers & Brew Inc. prepares its articles of incorporation. The articles are likely to include

A) the internal rules of management.
B) the process completed in soliciting prospective buyers.
C) the social security number of all the directors.
D) the corporation's registered agent.

Question 32

Securities fraud occurs when a material misrepresentation is made in connection with the trading of securities, even if no party relied on that misrepresentation.

Question 33

EZ Hauling holds itself out to customers as being a corporation but makes no attempt to incorporate. In this circumstance, EZ Hauling is most likely

A) a corporation by estoppel.
B) a de facto corporation.
C) an S corporation.
D) ultra vires .

Question 34

Many states allow dividends to be paid out of corporate savings, but not out of undistributed net profits.

Question 35

The Securities and Exchange Commission does not exempt any securities from the registration requirement of the Securities Act of 1933.

Question 36

A breach of fiduciary duties by those who own a close corporation normally constitutes what is known as oppressive conduct.

Question 37

Insider trading occurs when persons buy or sell securities on the basis of information that is not available to the public.

Question 38

The acquisition of a share of stock makes a person a shareholder, but not an owner, of a corporation.

Question 39

A corporation is generally formed under

A) city or county codes.
B) none of the choices.
C) federal administrative rules.
D) state law.

Question 40

The Securities Exchange Act of 1934 requires that a regulated corporation make periodic disclosures about its organization and financial situation.

Question 41

Sharon is a shareholder in Travel Adventures Inc. As a shareholder, Sharon

A) must approve fundamental changes affecting the corporation.
B) is responsible for the corporation's daily management.
C) determines overall corporate strategy and policy.
D) is personally liable for the corporation's debts.

Question 42

Spicy Wings Corporation makes a good faith attempt to incorporate but there is a defect in its incorporation. Spicy undertakes business as a corporation. In this circumstance, Spicy's is most likely

A) a corporation by estoppel .
B) a de facto corporation .
C) an S corporation .
D) an ultra vires corporation.

Question 43

Rob owns Solar Corporation. He uses one bank account for all of his personal money and the corporation's money to the extent that the corporation cannot be separately identified financially. This most likely warrants

A) an adoption of new corporate bylaws.
B) a recognition of de facto corporate status.
C) a pierce of the corporate veil.
D) a fundamental change to the articles of incorporation.

Question 44

Soap Products Inc. is a corporation. Soap can be held liable for the acts of its agents or employees that constitute

A) neither crimes nor torts.
B) crimes only.
C) torts only.
D) crimes or torts.

Question 45

Paddle & Portage Corporation is poised to issue securities that, under the Securities Act of 1933, are "exempt." This means that the securities can be sold

A) on the basis of a material omission or misrepresentation.
B) on the basis of nonpublic information .
C) within any six-month period by certain insiders.
D) without being registered.

Question 46

Track Lights Inc. is a corporation. Its express powers can be found in

A) the federal corporation code.
B) its annual tax return.
C) the law of the state of incorporation.
D) its relationship with other corporations.

Question 47

Tech Talent Inc. is a corporation. Its implied powers enable it to

A) avoid paying income taxes on foreign income.
B) depart significantly from traditional corporate formalities.
C) act beyond the authority given to it under its charter.
D) borrow funds, lend funds, and extend credit.

Question 48

Bonds

A) represent the true ownership of a corporation.
B) are equity securities.
C) represent the long-term borrowing of funds by a corporation.
D) provide a proportionate interest in a corporation with regard to control.

Question 49

Integrated Devices, Inc., is a private, for-profit corporation that is owned by five shareholders who are members of the same family. Integrated most likely is

A) a publicly traded corporation .
B) a close corporation.
C) a benefit corporation.
D) a public corporation and a private corporation.

Question 50

Pipe Inc.'s stated purpose is to roast coffee beans and prepare coffee and tea products. Pipe contracts with Quality Contracting to pour a new building's foundation because Pipe has an employee with some skill in this area. This is most likely

A) an ultra vires act.
B) within the corporation's express powers.
C) within the corporation's implied powers.
D) allowable and proper as an act to profit corporate shareholders.

Question 51

Trail Bike Corporation offers a new issue of securities for sale. Under the Securities Act of 1933, Trail Bike is required to

A) contribute to the operations of national stock exchanges.
B) disclose financial and other information about the proposed sale.
C) engage in market surveillance to deter undesirable practices.
D) make periodic disclosures about the corporate organization and finances.

Question 52

Health Food Inc. coordinates the purchase, sale, and delivery of organic products. The stated corporate purpose is to make a profit and to have a material positive impact on society and the environment. Health Food is

A) a nonprofit corporation.
B) not a corporation.
C) a benefit corporation.
D) a private corporation.

Question 53

Exempt from the registration requirement of the Securities Act of 1933 are offerings of securities

A) issued by for-profit organizations.
B) involving a large dollar amount.
C) made to a small number of knowledgeable investors.
D) purchased by charitable organizations.

Question 54

Sweetwater Corporation is incorporated in Texas. In that state, the firm is referred to as

A) a domestic corporation.
B) a foreign corporation.
C) an alien corporation.
D) a corporation by estoppel.

Question 55

The main government agency that administers the federal securities laws is

A) the Securities and Exchange Commission.
B) EDGAR.
C) the New York Stock Exchange.
D) the Federal Registration and Prospectus Agency.

Question 56

Gwen is a holder of preferred stock in Hearthstone Hotels, Inc. Gwen

A) has no ownership interest in the corporation.
B) has priority over holders of common stock as to payment of dividends.
C) follows common stockholders as to payment on the firm's termination.
D) has extra votes in the corporation with regard to control.

Question 57

Instead of issuing securities, Artificial Intelligence Inc. pursues other sources of funds. To obtain venture capital financing, the firm ' s owners most likely will

A) borrow funds to be returned on a designated maturity date.
B) give up a share of its ownership.
C) pool funds to invest in a business venture.
D) pay periodic dividends.

Question 58

Thin Ice Inc., a corporation, dissolves. Thin's net corporate assets will be used first to pay

A) federal and state taxes.
B) common stockholders.
C) preferred stockholders.
D) bondholders.

Question 59

Leo, the chief executive officer of Moon Resort Inc., intentionally understates the amount of the firm's debts in the prospectus for an issue of stock. Nell buys the stock and suffers a loss. Leo may be subject to

A) criminal prosecution and a civil suit from Nell.
B) negative publicity, but no prosecution or suit.
C) only criminal prosecution.
D) only a civil suit from Nell.

Question 60

Harry and Ilene want to market a new line of camping gear as a corporation-Journeys Inc. To avoid income taxes at the corporate level, they should form

A) an alien corporation.
B) a foreign corporation.
C) an S corporation.
D) a benefit corporation.

Question 61

Fact Pattern 29-1 Don is a shareholder of Energy Renew Inc. When the directors fail to undertake an action to redress a wrong suffered by the firm, Don files a suit on its behalf.
Refer to Fact Pattern 29-1. Any damages recovered by the suit will go to the firm's

A) shareholders, excluding Don.
B) treasury.
C) directors.
D) shareholders, including Don.

Question 62

Sheila is a shareholder of Travels & Trips Inc. She has the right to inspect corporate books and records

A) only if she is also a director.
B) without restrictions.
C) for a proper purpose.
D) under no circumstances.

Question 63

Rob, an accountant for Space Inc., learns of a secret company discovery of a new system of rocket propulsion and buys 1,000 shares of Space stock. When the firm publicly announces the discovery, Rob sells his shares for a profit. Under the Securities Exchange Act of 1934, he is most likely liable for

A) none of the choices .
B) insider trading.
C) scienter .
D) selling the securities without registration.

Question 64

Mars Mission Inc. is a publicly held corporation. Under the Securities Act of 1934, Mars is required to

A) contribute to the operations of national stock exchanges.
B) disclose information about its organization and financial situation.
C) engage in market surveillance to deter undesirable practices.
D) keep information about its stock sales and ownership confidential.

Question 65

Brad is a shareholder of Cloud Servers Inc. He will be deemed to have a fiduciary duty to Cloud and its minority shareholders if he has a sufficient number of shares to

A) assert a preemptive right.
B) bring a shareholder's derivative suit.
C) exercise actual control over the corporation.
D) participate in a cumulative vote.

Question 66

Power Products Corporation permits its directors to be elected by cumulative voting. This

A) allows minority shareholders to be represented on the board.
B) assures directors that they will be selected by their peers.
C) guarantees Power's executive officers of the final choice.
D) ensures against persons who may "cloud" the corporate direction.

Question 67

Fact Pattern 29-1 Don is a shareholder of Energy Renew Inc. When the directors fail to undertake an action to redress a wrong suffered by the firm, Don files a suit on its behalf.
Refer to Fact Pattern 29-1. Don's suit is

A) a preemptive right.
B) a shareholder's derivative suit.
C) the duty of a majority shareholder.
D) unethical and illegal.

Question 68

Ridley is an officer of Sun Watts, Inc. Ridley knows that a Sun Watts engineer recently developed a new, inexpensive method for collecting, storing, and converting solar power into fuel. Ridley takes advantage of this information to buy Sun Watts stock from Taylor and, after the discovery is announced publicly, to sell the stock to Ulrich at a profit. Taylor claims that this is a violation of federal law. Is Taylor correct? If so, what federal law has Ridley violated? Explain.

Question 69

A corporation is owned by its

A) directors.
B) officers.
C) incorporators.
D) shareholders.

Question 70

Rosa and Sean are shareholders of Tasty Tacos Inc. Rosa's written authorization to Sean to vote Rosa's shares at a shareholders' meeting is

A) a corporate resolution.
B) cumulative voting.
C) a proxy.
D) a quorum requirement.

Question 71

Adam is a shareholder of Bay Boats Inc. with preemptive rights. With these rights, he can

A) buy a prorated share of a new issue of stock before other buyers.
B) choose to have the firm act exclusively in a certain area.
C) preempt managerial decisions that affect shareholders.
D) sell a prorated share of a new issue of stock before other sellers.

Question 72

Guy is Hot Java Company's majority shareholder. Guy is interested in developing a reward system for the company where dividends double for any shareholder who takes a large risk by owning more than 35 percent of the shares. Guy is the only shareholder who owns that much stock. Does Guy owe a duty to Hot Java or its minority shareholders in this situation?