Deck 11: Corporations

Question 1

Four years ago, Ben Ratzi incorporated a corporation and became the sole shareholder, director, and officer. He lent the corporation $10,000 and took a General Security Agreement from the corporation as security for repayment of the loan. The corporation prospered. Last year, your brother began supplying the corporation with office supplies. He was paid at the end of each month for supplies delivered during that month. For the last six months, however, he has not been paid. He learned that other suppliers had not been paid either because sales dropped drastically, apparently due to Ratzi's harsh management style, which upset the entire staff. Which of the following is true?

A) If your brother decided to sue for the debt, he could sue Ratzi because he was the sole shareholder and his management style caused all the trouble.
B) Your brother could take an action under statutory "relief from oppression" provisions.
C) If Ratzi dies, his corporation would automatically die too, and there wouldn't be any person to sue.
D) If this corporation were placed into bankruptcy, Ratzi would be in a better position than your brother for receiving proceeds realized from the sale of the assets of the corporation.
E) Your brother has no claim against the corporation because it has limited liability.

Answer 1

D

Question 2

The corporation typically makes a debt commitment to a ________, who then issues shares in the indebtedness to individual bondholders.

A) creditor
B) trustee
C) shareholder
D) bondholder
E) tribunal

Answer 2

B

Question 3

A real estate agent, by virtue of his fiduciary duty to his principal, is not allowed to buy the property being sold by his principal without full disclosure to and consent from his principal. The real estate agent does not want to disclose that he is the buyer of the property, so he forms a corporation and takes an offer to his principal from the corporation. Based on these facts, which of the following is true if the principal finds out the corporation/buyer is owned by the real estate agent and objects to the contract?

A) The court would enforce the contract because the corporation is a separate legal entity in the eyes of the law.
B) The court would enforce the contract because this is not a direct breach of the agent's fiduciary duty.
C) The court would not enforce the contract and would "lift the corporate veil."
D) The court would dissolve the corporation.
E) The court would enforce the contract, but the principal would be able to claim any profits from the agent when he took them out of the corporation.

Answer 3

C

Question 4

Which of the following is not an advantage of incorporation?

A) Shareholders are not liable for debts of the corporation.
B) There may be tax advantages.
C) Shareholders can veto decisions of directors.
D) Shares are easily transferred.
E) Shareholders owe no duty to the corporation.

Question 5

The articles of incorporation jurisdictions (except British Columbia) have abolished

A) dividends.
B) preferred shares.
C) par-value shares.
D) voting shares.
E) promoters.

Question 6

Which of the following is an advantage of incorporation?

A) Shareholders are liable for debts of the corporation.
B) There are no tax advantages as compared to a sole proprietorship.
C) Shareholders can veto decisions of directors.
D) Shares are easily transferred.
E) Shareholders owe a duty to the corporation.

Question 7

If a corporation had been wronged by negligent and fraudulent acts of one of its directors and consequently suffered a $45,000 loss, and the board of directors would not take any action on behalf of the corporation against the wrongdoer, which of the following is true?

A) The shareholders could force the directors to start the action on the basis of their pre-emptive right.
B) If the company failed to commence an action through its authorized agents (e.g., its directors), no action could be taken, because a corporation is merely a legal concept and must act through its authorized agents.
C) The shareholder could proceed under the dissent procedure and force the corporation to pay them a fair market value for their shares.
D) A derivative action allows a shareholder to commence an action on behalf of the corporation.
E) The shareholders could sue the corporation for oppression.

Question 8

When shares are involved, even preferred shares, there is no legal obligation to pay dividends, but a failure to repay ________ constitutes a breach of the corporation's legal obligation.

A) debts
B) assets
C) bondholders
D) shareholders
E) par-value shares

Question 9

When lending money to a closely held corporation, what will a bank usually insist on from the major shareholders or other principals?

A) a debenture
B) a negotiable instrument
C) a fiduciary obligation
D) a pre-emptive right
E) a personal guarantee

Question 10

Which of the following is true with regard to the characteristics of corporations?

A) The corporation is a separate legal person, but can neither sue nor be sued.
B) Directors are responsible for the shareholders of the corporation.
C) Shareholders are liable for the debts and other obligations of the corporation.
D) A shareholder's liability is limited to the amount he or she paid for the shares.
E) The shareholders would be vicariously liable for any damage caused by an employee of the corporation carrying out his or her duties.

Question 11

Shareholders are participants in the corporation, whereas ________ are simply creditors.

A) receivers
B) trustees
C) bondholders
D) preferred shareholders
E) directors

Question 12

Long ago, your friend Harry became wealthy through the tremendous success of a gadget he designed that allowed microchips to be produced without being touched by humans. Ever since, he has been invited to sit on the board of directors of different corporations, and has now decided it is time to accept. He is aware of the increasing number of cases finding directors personally liable. He does not want to be connected with a corporation involved with any wrong-doing. He has hired you to prepare in-depth reports on five corporations. Your reports reveal the following. In which of these is there no legal wrong?

A) 123456 Canada Ltd.: In a closely held corporation with four members, each owning 25% of the outstanding shares, the two members who served as directors voted to issue more shares, which they sold directly to themselves to give them voting control of the corporation, despite a provision providing for pre-emptive rights in a shareholders agreement.
B) 167354 Canada Ltd.: A director who learned of a business opportunity while serving on the board of directors intercepted the opportunity for himself before the company could act on it.
C) 1999872 Canada Ltd.: A minority shareholder joined with a group that protested the corporation's involvement in a logging operation and tried to prevent the planned logging.
D) 3721956 Canada Ltd.: The majority of the directors voted on a measure that was not in the best interest of the corporation, but that would financially weaken the position of a shareholder whom they personally disliked.
E) 12376252 Canada Ltd.: In this broadly held computer software corporation, a director, without the knowledge or consent of the board of directors, started a competing business that he ran from his home.

Question 13

You have been asked by two fellow graduates to join them in incorporating a closely held corporation that would commence a consulting business. One was in your class, so you know him quite well, but the other is graduating from a different school. You have been discussing the law to review the protection it gives you. Read each of the following statements separately and indicate which is False.

A) As a shareholder, you will have the right to vote for the directors, who in turn will choose the officers.
B) A shareholder's agreement would lessen any misunderstandings about rights and obligations.
C) If you each take one-third of the first allotment of the shares, you will necessarily be a minority shareholder.
D) If you have pre-emptive rights and the directors decide to issue a new allotment of shares, the corporation must offer you a portion of the new issue to allow you to keep your proportional share of the corporation.
E) If you were voted out as a director by the others, who could show that it was in the best interests of the corporation, you could always sell your shares to any interested buyer without interference from the other directors.

Question 14

Jack Kihn incorporated and put $20,000 into the corporation by way of a shareholder's loan and took back a Security Agreement on the corporation's equipment. The corporation created decorative boxes. An employee of the company delivered some boxes to a customer who complained about the colour used. The employee became so angry that he shoved the customer, who fell into a glass display case, causing $30,000 damage to the customer and the case. On these facts, which of the following is False?

A) The employee is liable for the tort of battery.
B) The employee is liable for his tort and his employer is also liable.
C) Kihn himself is vicariously liable for the damage caused by the employee.
D) If the corporation went bankrupt, Kihn himself would be a secured creditor.
E) Although Kihn is the sole shareholder of the corporation, he is not responsible for company debts.

Question 15

In Salomon v. Salomon & Co., Mr. Salomon incorporated a business to which he loaned money, secured by a mortgage on the business assets. When the business failed, the creditors turned to Mr. Salomon, arguing that he should not be able to claim priority as a secured creditor and, in fact, should be responsible for the company's debts. What did the Court find?

A) Mr. Salomon, as the incorporator, should be responsible for paying the creditors of his business, on the grounds of unjust enrichment.
B) Mr. Salomon could not claim priority as a secured creditor, because this would amount to a conflict of interest.
C) The company was a legal entity separate from Mr. Salomon, so Mr. Salomon could have priority as a secured creditor and bore no responsibility for the company's debts.
D) The company was a legal entity separate from Mr. Salomon, but it would not be fair to allow him to claim his money ahead of arm's length parties.
E) Mr. Salomon, by creating a fictionalized legal entity, had committed a fraud on the business' creditors, and so should bear total responsibility for the creditors' claims.

Question 16

The corporation can also borrow funds, thereby accumulating

A) shares.
B) debt.
C) bonds.
D) assets.
E) trustees.

Question 17

Since a variety of rights and restrictions can be incorporated into ________, depending on the interests of the parties, it is important that these matters be negotiated before they are issued.

A) preferred shares
B) bonds
C) par-value shares
D) securities
E) founders

Question 18

Usually, a ________ will bear a promise to pay a specific dividend each year.

A) bond
B) par-value share
C) preferred share
D) debt
E) bearer bond

Question 19

Mark wants to incorporate. Which one of the following statements is correct with regard to incorporating in Nova Scotia?

A) Articles of incorporation is the document used to incorporate the company.
B) These are "letters patent" jurisdictions.
C) The documents to be sent to the registrar of companies are called the "memorandum" and the "articles."
D) The "objects" of the company must be set out in the charter document so that the shareholders understand the limits on the capacity of the corporation.
E) You can't incorporate a closely held company in this jurisdictions.

Question 20

Another term commonly used where a bond is involved is

A) a loan.
B) a negotiable instrument.
C) a debenture.
D) a personal property security.
E) a share.

Question 21

John Hollin was an officer, director, and employee of a large broadly held corporation. At a directors' meeting, he learned that the corporation was voting on a resolution to buy a piece of property from Sam Keanu for $100,000. It happened that Hollin was one of three co-owners of that property. Hollin voted for the purchase and the resolution passed without discussion by a vote of 5-0. Several months after completion of the purchase, the other directors learned of Hollin's ownership and called on him to account to the corporation for any profit made. Which of the following is False?

A) Hollin owed a fiduciary duty to the corporation and breached that duty by his actions.
B) If the directors failed to take action, the shareholders could have brought an action on behalf of the corporation against Hollin.
C) Hollin must account for any profit made because he failed to disclose his interest and voted on the question.
D) The shareholders could proceed under the dissent procedure and force the corporation to buy them out.
E) Hollin should have disclosed his interest and refrained from voting or otherwise influencing the decision.

Question 22

A securities commission is

A) a provincial agency that serves as watchdog on the issuance and trading of shares.
B) a collateral right to debt.
C) a fee or percentage allowed to a shareholder in a share transaction.
D) an authorization to exchange confidential information.
E) a permission to transfer shares in a closely held company.

Question 23

The promoter of a corporation, called Seymour Holdings Ltd., contracted for $4000 worth of office furniture "on behalf of Seymour Holdings Ltd.," prior to incorporation. After incorporation, the new directors want to ensure that the corporation is bound. They will be able to do so if

A) the corporation ratifies the contract and ratification is permitted in the jurisdiction.
B) the promoter intended that the corporation, and not himself, would be bound by the contract.
C) the promoter made it clear that he was signing on behalf of the corporation.
D) the corporation is closely held and the promoter is a director.
E) the promoter was acting in the best interests of the corporation to be formed.

Question 24

In which of the following relationships is a fiduciary duty owed?

A) A principal to his agent
B) The director of a corporation to the shareholders
C) The director of a corporation to the corporation
D) The officers of a corporation to the shareholders
E) An employer to his employees

Question 25

Ethan got together with a number of friends who all sat on the board of directors of a corporation. They personally disliked Stephen, a minority shareholder with a bad attitude. A new proposal was being put to the board. While they knew that this was not a measure that was in the best interests of the corporation, they also knew it would seriously weaken Stephen's financial position. Accordingly, they voted in favour of it. Which of the following is true?

A) The directors have breached their fiduciary duty to act in the best interests of the shareholders.
B) The directors have breached their fiduciary duty to act in the best interests of the corporation.
C) The directors have acted inappropriately, but because Stephen is a minority shareholder, their conduct is not actionable.
D) The directors have discretion to act how they see fit, even if it is not generally viewed as professional.
E) The directors have breached the Canadian Code of Professional Conduct.

Question 26

You have been asked by two fellow graduates to join them in incorporating a closely held corporation that would commence a consulting business. One was in your class, so you know him quite well, but the other is graduating from a different school. You have been discussing the law to review the protection it gives you. Read each of the following statements separately and indicate which is true.

A) As a shareholder, you will have the right to vote for the officers of the corporation.
B) A shareholder's agreement allows shareholders and not officers to manage the corporation.
C) If you each take one-third of the first allotment of the shares, you will necessarily be a minority shareholder, and have no voting rights in electing the directors of the corporation.
D) If you have pre-emptive rights and the directors decide to issue a new allotment of shares, the corporation must offer you a portion of the new issue to allow you to keep your proportional share of the corporation.
E) If you were voted out as a director by the others, who could show that it was in the best interests of the corporation, you could always sell your shares to any interested buyer without interference from the other directors.

Question 27

Which of the following attracts the dissent procedure, which can result in the corporation being forced to buy the shares of a shareholder at market value?

A) When the directors have hidden behind the corporate structure to do a wrong sufficiently serious that the courts would have lifted the corporate veil.
B) If the directors of a non-reporting corporation fail to allot new shares proportionately to the members.
C) When the directors of the corporation fail to enforce a right, duty, or obligation owed to the corporation that could be enforced by the corporation.
D) When the directors conduct the affairs of the corporation in a manner oppressive to one or more of the members.
E) When major changes are made in the best interests of the corporation that will adversely affect one group of shareholders.

Question 28

Mr. Ace of Oink Inc., a closely held corporation, is one of three shareholders. After several years of considerable success, the corporation hit hard times. The other shareholders, Mr. Bane and Mr. Curr, in the best interests of the corporation, voted Mr. Ace out as a director and voted not to renew his employment contract. Upset by these events, Mr. Ace just wanted to sell his interest and leave the corporation. The other two shareholders, however, refused to buy his shares. Furthermore, when he attempted to sell his shares to his brother, who was interested in the corporation, they refused to register the brother as a member. Which of the following is true?

A) Because of statutory pre-emptive right provisions, if Ace wants out, the other shareholders must buy him out.
B) Mr. Ace could sue the corporation for breach of its fiduciary duty.
C) The court would "lift the corporate veil" because Mr. Bane and Mr. Curr were hiding behind the corporation to commit a fraud.
D) Mr. Ace can sell his shares to whomever he choses and the remaining shareholders must register the new owner.
E) Mr. Ace could have avoided such a dilemma through provisions of a unanimous shareholders' agreement.

Question 29

Which one of the following is an example of breach of fiduciary duty?

A) The directors of the corporation refuse to give a pay raise to the employees although they had not received a pay raise for five years.
B) A director profited $120,000 from a contract between the corporation and a firm in which he had an interest after he made full disclosure of his interest to the board of directors and abstained from the vote on the contract.
C) An officer of the corporation learned of a business opportunity intended for the corporation and intercepted it for his own benefit.
D) The directors refused to declare a dividend, contrary to the request by its preferred shareholders.
E) A shareholder owning 2% of the outstanding shares started a business in direct competition with the corporation in which he held shares.

Question 30

A person who participates in the initial setting up of a corporation or who assists the corporation in making a public share offering is known in law as

A) a shareholder.
B) an initiator.
C) a promoter.
D) a founder.
E) a preferred shareholder.

Question 31

Which of the following statements about pre-incorporation contracts is False?

A) Promoters will often purchase property on behalf of a corporation prior to incorporation and then have the corporation ratify after incorporation has taken place.
B) Ratification of pre-incorporation contracts is invalid at common law, since the corporation did not exist at the time the contract was made.
C) Many jurisdictions have made legislative changes permitting later-incorporated corporations to ratify pre-incorporation contracts.
D) If a corporation does not ratify a pre-incorporation contract, or if a pre-incorporation contract is signed in a jurisdiction which does not permit ratification, the promoter remains solely liable for any losses.
E) Promoters cannot be held liable for losses due to the doctrine of corporate myth.

Question 32

Which of the following situations would allow a shareholder to sue on behalf of the corporation?

A) If four of the five directors, in the best interests of the corporation, voted against the fifth as director, voted to end the employment contract of the fifth, and voted not to buy his shares.
B) If the corporation had been wronged (lost $30,000) by the negligent and fraudulent acts of one of its directors, but the corporation refused to make any action against the wrongdoer.
C) If the shareholders refused to enter into a shareholder's agreement.
D) If the directors took an action that unfairly prejudiced a shareholder.
E) If the directors issued shares without offering any of the new issue to the present shareholders.

Question 33

The directors held their last meeting on December 31 at 4:30 p.m., and it was conducted more like a party than a usual meeting. A director was negligent in signing a promissory note, which cost the corporation $15,000. Furthermore, the director was in breach of his fiduciary duty because the note was paid to a corporation in which he had an interest. Which of the following is true?

A) The shareholders could force the director to pay the $15,000 to the corporation by insisting on their pre-emptive rights.
B) If the corporation failed to start an action through its authorized agents (e.g., its directors), no action could be taken because a corporation is merely a legal concept and must act through its authorized agents.
C) The proper plaintiffs in the action are the shareholders, under the relief from oppression provision.
D) A shareholder could commence an action on behalf of the corporation against the director if he gets the court's permission to do so.
E) The shareholders could dissent to this act and force the corporation to buy them out at fair market value.

Question 34

Which of the following situations would allow a shareholder of a closely held corporation, with permission of the court, to sue on behalf of the corporation?

A) If four of the five directors, in the best interests of the corporation, voted against the fifth director, voted to end the employment contract of the fifth director, and voted not to buy his shares.
B) If the corporation had been wronged by the negligent and fraudulent acts of one of its directors, but the corporation refused to take any action against the wrongdoer.
C) If the shareholders refused to enter into a shareholder's agreement.
D) If the directors refused to declare a dividend.
E) If the directors solicited proxies from all of the shareholders.

Question 35

Which two of the following are examples of breaches of fiduciary duty?

A) The directors of the corporation, contrary to the request of the shareholders, refused to declare dividends.
B) A director of a corporation, as director, learned of a good deal and took advantage of it for himself before the corporation had the opportunity to do so.
C) A promoter of a corporation sold property to the corporation for three times what he paid for it after he made full disclosure of his interest to an independent board of directors, which voted for the purchase.
D) A shareholder started a business that competed directly with the business.
E) An employer charged his employees for parking after supplying it free for years.

Question 36

John and two friends incorporated a closely held corporation. Each bought an equal number of common shares in the corporation. Each became a director, an officer, and an authorized agent of the corporation. Which of the following is true?

A) As director, each owes a fiduciary duty to the creditors of the corporation.
B) The corporation is more highly regulated and less free of government regulations and control than a broadly held corporation would be.
C) Each of them, as directors, owe a fiduciary duty to each of the others, as shareholders.
D) Since the corporation is a legal fiction, all of its activities must be carried out through principals.
E) If the affairs of the corporation are being conducted in a manner that is unfairly prejudicial to any one shareholder, that shareholder could seek relief from such oppression from the courts.

Question 37

Because a director of a closely held corporation breached his duties to the corporation, the corporation lost $15,000. Despite the urging of the shareholders, the board of directors refused to begin an action on behalf of the corporation. Which one of the following provisions would aid the shareholders?

A) Relief-from-oppression provisions
B) Pre-emptive right provisions
C) Indoor-management rule
D) Derivative-action provisions
E) Dissent procedure

Question 38

Art Raskle was an officer, director, and employee of a broadly held corporation. At a directors' meeting, he was surprised but pleased to learn that the corporation was discussing a resolution to contract with the firm of Fielding's Office Supply for $20,000 worth of office equipment. He and a businesswoman had recently bought that business, in which Raskle has a 45% interest. Raskle voted for the contract and the resolution passed without discussion by a vote of 6-0. Several months after completion of the purchase, the other directors learned of Raskle's interest in Fielding's Office Supply and called on him to account to the corporation for any profit made. Which of the following is true?

A) Raskle is not in breach of any fiduciary duty because the dollar value of the contract falls below the minimum statutory threshold.
B) Raskle must account for any profit made because he failed to disclose his interest and voted on the question.
C) Raskle has breached his fiduciary duty but if the sale was "fair" and if the shareholders approved the sale by a special resolution after full disclosure, he need not account to the corporation for any profit made.
D) Raskle is not in breach of his fiduciary duty because directors of corporations vote on contracts in which they have an interest all the time.
E) Raskle has not breached his fiduciary duty because his vote did not determine the matter. Had he not voted, the result would have been the same.

Question 39

Punam was the director of a broadly held corporation that made educational software. Without the knowledge or consent of the board of directors, Punam started a competing business that she ran from home. Which of the following is true?

A) Punam has breached a fiduciary duty owed to the corporation.
B) Punam is only a director, so she owes no special duty to the corporation.
C) Punam can compete with the business, as long as she doesn't use confidential documents belonging to the corporation.
D) Punam owes the shareholders of the corporation a fiduciary duty, so they could sue her if they suffer a loss.
E) Whether or not Punam can compete with the business depends on whether her written contract prohibits it.

Question 40

Mr. A is the sole shareholder of X Ltd., and is also a director of Y Ltd. Y Ltd. is negotiating to buy property from X Ltd. Which of the following is False?

A) Failure to disclose his interest will make Mr. A liable to Y Ltd. for any profits he makes on the transaction and for any losses suffered by Y Ltd.
B) So long as Mr. A discloses his position to the board of directors of Y Ltd., he can vote in favour of the contract at the directors' meeting.
C) Mr. A does not owe a fiduciary duty to X Ltd. or to his fellow X Ltd. shareholders.
D) To protect himself, Mr. A must disclose his interest to the other directors and refrain from voting or influencing the decision.
E) Mr. A has a duty to act in the best interests of Y Ltd., and to avoid any conflict of interest.

Question 41

Jed Wimsey, in auditing the books of various businesses around town, was talking to you, his best friend, about certain practices that he thought improper. Which of the following practices he found would be a breach of fiduciary duty?

A) A partner of a firm that sold hospital supplies had, without the knowledge or consent of his partners, started a competing business that he ran from his own home.
B) A director of a corporation profited $25,000 from a contract between the corporation and sellers of some property in which the director had an interest, after the director made full disclosure of his interest to the board of directors and abstained from the vote.
C) The directors or a corporation failed to declare a dividend for the fourth year in a row.
D) An officer of a corporation took advantage of an opportunity he learned about as an officer of the corporation, but took steps to determine that the corporation was not interested in it and received permission to do so from the board of directors.
E) A shareholder belongs to a group that directly opposes the policy of the corporation with regard to its logging and mining operations.

Question 42

A corporation is a fiction that does not exist in reality.

Question 43

Smith, Jones, and Brown incorporated XYZ Ltd. The three were sole shareholders, directors, officers, and employees. Jones and Brown disliked working with Smith. They knew he was good for the business, but they disliked his personality and politics. After a year, Jones and Brown, as directors, removed Smith as an officer and employee and raised their own salaries as employees. They then voted Smith out as a director at the next shareholders' meeting. Which one of the following provisions would aid Smith?

A) Relief-from-oppression provisions
B) Pre-emptive right provisions
C) Indoor-management rule
D) Derivative-action provisions
E) Dissent procedures

Question 44

Lee, a former head of a venture capital firm, sat on the board of directors of Angel Enterprises Ltd., a broadly held corporation. During a board meeting, she recommended that the corporation invest in a new technology start-up. Lee failed to mention that she owned shares in this new tech corporation. When the prospect of investing was put to the board, Lee voted in favour it. Read each of the following statements separately and choose the true statement.

A) Lee must account for any profit made because she failed to disclose her interest and voted on the matter.
B) Lee does not have to disclose her interest in the contract, as long as her director's agreement relieves her of her fiduciary duties.
C) Lee must disclose her interest in a contract before the board, but she is entitled to vote for it.
D) Lee has breached her fiduciary duty, but she does not need to give up any profits as long as the investment turns out to have been sound.
E) Lee does not owe a fiduciary obligation to the company, only to individual shareholders.

Question 45

Which of the following is a fiduciary relationship?

A) Agent and the third party
B) Officer of the corporation and the shareholders
C) Director of the corporation and the shareholders of the corporation
D) Shareholders and the corporation
E) Directors of the corporation and the corporation

Question 46

Smith, director of ABC Ltd., intercepted a corporate opportunity for his own benefit and thereby caused the corporation to miss a $45,000 profit. A shareholder urged the board of directors to take action against him. The other directors, all close friends of Smith from school days, did not take any action against him, although they did voice their dissatisfaction with his move. Which of the following provisions would aid the shareholder?

A) Pre-emptive right provision
B) Indoor-management rule
C) Derivative-action provision
D) Dissent procedure
E) Relief-from-oppression provision

Question 47

With regard to the law of corporations, which of the following is true?

A) In many jurisdictions, pre-emptive rights entitle a shareholder to pass on their right to vote to someone else.
B) If a minority shareholder is treated unfairly, the appropriate relief to request is that the court lift the corporate veil.
C) Relief from oppression provisions allow a party who has contracted with the corporation to force the corporation to honour a contract it has signed in an irregular manner.
D) A director of a corporation could not be personally liable on a promissory note even if he just signed his own name as long as at the time he intended to sign on behalf of the corporation.
E) A creditor of a corporation could sue for some remedy if the directors of the corporation voted for a resolution to pay a dividend when the corporation was insolvent.

Question 48

In 2016, Rambolin incorporated Rambolin Industries Ltd. and became its sole shareholder. He lent the corporation $10,000 and took a General Security Agreement from the corporation as security for repayment of the loan. He became director, president, and secretary of the corporation. The corporation prospered. Last year, you began supplying the corporation with office supplies. You were paid at the end of each month for supplies delivered during that month. For the last six months, however, you have not been paid. You learn that other suppliers have not been paid either because sales have dropped drastically, apparently due to Rambolin's nasty temper caused by ill health. Which of the following is true?

A) If you decided to sue for the debt, you could sue Rambolin because he is the sole shareholder and his nasty temper caused all the trouble.
B) You could take an action under the pre-emptive right provisions under the relevant legislation.
C) If Rambolin dies, his corporation would automatically die too, and there wouldn't be any person to sue.
D) If this corporation were placed into bankruptcy, Rambolin would be in a better position than you for receiving proceeds realized from the sale of the assets of the corporation.
E) Shareholders have a statutory obligation to manage the corporation, so Rambolin, as shareholder, must exercise care in that task.

Question 49

Kent incorporated provincially. The corporation worked with small businesses in developing graphs and charts from their data for presentation to bankers, partners, shareholders, etc. If Kent, as promoter and agent of the company, had bought the necessary equipment from Ace Computers Ltd. prior to incorporation, which of the following would be true?

A) At common law, pre-incorporation contracts are binding on the corporation, but only from the moment the corporation comes into existence.
B) Many jurisdictions have recently enacted statutory provisions preventing a corporation from ratifying pre-incorporation contracts.
C) Kent may have been able to protect himself by including a provision in the contract with Ace exempting him from personal liability.
D) A corporation is legally bound to ratify all contracts made prior to incorporation, but only if those contracts were made with the intention that the corporation be bound.
E) Kent's liability on the contract would be limited to his investment in the corporation.

Question 50

Read each of the following separately. In which one of the following cases would the corporation not be bound by the contract made?

A) Jones, without the knowledge or authorization of Corporation A, approached one of their suppliers claiming to be an employee of Corporation A. He selected several valuable watches and took them with him, putting the bill on Corporation A's account. No one in Corporation A had ever heard of Jones before.
B) Contrary to company policy, Gore, the purchasing agent for the corporation, contracted for supplies by using the green form instead of using the blue form.
C) Brian, a purchasing agent for the corporation for ten years, was fired for just cause. The next day, he visited suppliers as usual and contracted for the corporation as usual. They had not been told that he had been fired.
D) Kim, an agent for a small closely held corporation which sold Canadian art, had authority to purchase some photographs of Clayoquot Sound, but instead she bought several oil paintings of the sea. When they were sent to the store, they were sold immediately.
E) A salesperson working for a corporation operating a car dealership sold a car and took a trade-in without first getting approval of the manager as required in his employment contract.

Question 51

ABC Ltd. is a closely held corporation. Two of the shareholders serve as directors. As directors, they voted to issue themselves more shares to increase their voting control of the corporation. Which of the following provisions would aid the other shareholders?

A) Relief-from-oppression provisions
B) Pre-emptive right provisions
C) Derivative-action provisions
D) Dissent procedure
E) Indoor-management rule

Question 52

An agent owes a fiduciary duty to his principal, a director owes a fiduciary duty to the corporation, and partners owe a fiduciary duty to the firm and to the other parties. Which of the following is not true with regard to one's fiduciary duty?

A) An agent would be in breach of his fiduciary duty if he let his interest conflict with his duty.
B) A fiduciary is in a position of trust and owes true loyalty to the person depending on him.
C) A shareholder owning a business that secretly competes with the corporation is in breach of fiduciary duty.
D) A partner secretly competing with his own firm would be in breach of his fiduciary duty.
E) An agent failing to disclose to his principal all information relating to the principal's business transaction would be a breach of his fiduciary duty.

Question 53

Kent incorporated Dynamite Data Ltd., which worked with small businesses in developing graphs and charts from their data for presentations to bankers, shareholders, etc. Kent lent the company $25,000 by way of a shareholder's loan and took as security computers, plotters, and printers under a General Security Agreement. An employee of the corporation, Jack, got into an argument with a customer named Roth while making a delivery. Roth was complaining that the graph was in red and not in pink as requested. It ended with Jack punching Roth, who fell onto a camera. The damage to Roth's nose and the camera totalled $35,000. Which of the following is true?

A) The corporation is not liable for the damage caused by the action of its employee, Jack.
B) Kent is liable for the damage to Roth and the camera if neither Jack nor the employer/corporation has sufficient funds.
C) If the corporation went bankrupt but owed creditors (other than Roth), Kent would be in a worse position than unsecured creditors to collect proceeds realized from the sale of the corporation's assets.
D) Even if Kent, the only shareholder, died, the corporation would not die and would still owe its outstanding debts.
E) Roth's action against Jack is for the tort of assault.

Question 54

Aunt Juliet wants to incorporate a small closely held corporation. Which of the following bits of advice, given to her by friends, is False?

A) She can enter into a contract on behalf of the corporation even before incorporation and the corporation will automatically be bound when it is incorporated.
B) The incorporation document to be submitted in Ontario is the "Articles of Incorporation."
C) The incorporation documents to be submitted in B.C. are called the "Memorandum" and the "Articles."
D) In some jurisdictions in Canada, she could be personally responsible for a pre-incorporation contract.
E) She has the option of incorporating federally if she wants.

Question 55

In Peoples Department Stores Inc. et al. v. Wise et al., the Supreme Court of Canada had to clarify to whom a director owes its duties. What did the Court hold?

A) A fiduciary duty is owed only to the corporation, while a duty of care can also be owed to other stakeholders.
B) A duty of care is owed only to the company, while a fiduciary duty can also be owed to other stakeholders.
C) A fiduciary duty is owed to the company and to other stakeholders.
D) A fiduciary duty is owed only to creditors, while a duty of care can also be owed to other stakeholders.
E) A duty of care is owed only to creditors, while a fiduciary duty can also be owed to other stakeholders.

Question 56

Andrea agreed to form a corporation with two friends, but lay awake last night rethinking her decision. They agreed that they all wanted to be directors and officers and that they all would have signing authority with the bank from whom the corporation is borrowing the money. Nevertheless, she began to review her assumptions. Which of the following is true?

A) When she signs the promissory note at the bank on behalf of the corporation, she can just sign her own name; she will not be personally liable as long as she intended to sign on behalf of the corporation.
B) As a major shareholder, she would be elected as a director every year even without such a provision in the shareholders' agreement.
C) She would be able to ask the court for relief from oppression if she disliked a decision passed by the majority of the directors.
D) As a shareholder, she is free to compete with the company even if she is a director as well.
E) She would be able to bring an action on behalf of the company if one of the directors breached his fiduciary duty to the corporation and the other directors refused to do anything about it.

Question 57

After Bill Roles graduated from university, he incorporated Roles Enterprises Ltd. He put $10,000 into the corporation by way of a shareholder's loan and the corporation granted him a security interest in one of its two delivery trucks. You knew Bill at school, so when Roles Enterprises Ltd. needed computer supplies, Bill, on behalf of the corporation, contracted with you, the owner of a business selling computer supplies. As it turned out, Bill placed such orders with you almost every three weeks. Read each of the following separately and indicate which of the following is true.

A) If Bill neglects to file annual returns for the corporation, Roles Enterprises Ltd. could cease to exist.
B) If an employee of Roles Enterprises Ltd. came to your store to pick up supplies and caused $900 damage by his negligent driving, you could sue the employee, Roles Enterprises Ltd., and Bill personally because the employee worked for Bill's corporation.
C) If Roles Enterprises Ltd. owed you $1500 for supplies when it was placed into bankruptcy by its creditors, Bill would be more likely to lose money he lent to the corporation than you would be.
D) If the corporation owed you money and Bill, the only shareholder in the corporation, was killed, you would look to Bill's estate for payment.
E) If Bill had inadvertently contracted with you before the corporation was in existence, the corporation would lose the ability to ratify that contract, and the contract would be considered void.

Question 58

Which of the following is an example of a breach of a fiduciary duty?

A) A shareholder of ABC Ltd., a trucking corporation whose shares are listed on the Vancouver Stock Exchange, is working as an employee for ABC Ltd.'s competitor, Jonstone Trucking.
B) The directors of the corporation, contrary to the request by the shareholders, refused to declare dividends.
C) A partner in a firm learned of a business forced to sell some heavy equipment. Although the partnership could have used the equipment, he bought and sold it at a substantial profit before the partnership was given a chance to buy it.
D) A promoter of a corporation sold property to the corporation for four times what he paid for it after he made full disclosure of his interest to an independent board of directors, which voted for the purchase.
E) A shareholder of a corporation voted in favour of an acquisition by the corporation at the annual general meeting because he secretly had an interest in the corporation being purchased.

Question 59

Mr. Malik, an investment counsellor by training, sat on the board of directors of Talbot Enterprises Ltd., a broadly held corporation. During a meeting of the board, he advised the corporation to buy some condominiums given the present soft real estate market. Malik did not disclose that he owned shares in the corporation that owned the property, nor did he disclose that he would be entitled to a commission for every unit he helped sell. When the question was put to the board, he voted for it. Read each of the following statements separately and indicate which is true.

A) A director must disclose his interest in a contract before the board, but is not required to refrain from voting for it.
B) Malik doesn't have to disclose his interest in the contract if he has signed an agreement with the other directors relieving them of their fiduciary duties.
C) A shareholder, learning of his actions, could proceed under the dissent procedure, which would cause the corporation to buy his shares at fair market value.
D) Malik has breached his fiduciary duty, but if the sale was fair, he need not give up his profits.
E) Malik must account for any profit made because he failed to disclose his interest and voted on the question.

Question 60

Three classmates incorporated about a week after graduation. The authorized capital was 500,000 common no-par-value shares. Each took one share and each was a director. If the directors decide to issue more shares from the treasury to raise more capital, which of the following provisions ensures that they keep their proportionate holdings?

A) Pre-emptive right provision
B) Indoor-management rule
C) Derivative-action provision
D) Dissent procedure
E) Relief-from-oppression provision

Question 61

Shareholders in a closely held corporation can control the rights and responsibilities they have to each other by a unanimous shareholders' agreement.

Question 62

A broadly held corporation has fewer restrictions on it than a closely held corporation.

Question 63

A debenture creates a creditor/debtor relationship.

Question 64

A corporation is considered to be a separate legal entity from the shareholders who make it up.

Question 65

Directors owe a fiduciary duty to the public.

Question 66

There is one common method of creating corporations used across Canada.

Question 67

Owning shares gives the shareholder control of the corporation but no rights to the assets of the corporation upon dissolution.

Question 68

Shareholders in a closely held corporation are entitled to sell their shares to whomever they want without restriction.

Question 69

In Ontario, articles of incorporation are filed in order to incorporate.

Question 70

Directors owe a fiduciary duty to the shareholders.

Question 71

Legislative requirements for distributing corporations are found not only in the Business Corporations Act, but also in the securities legislation, the Securities Act.

Question 72

Where a corporation borrows money, only the corporation is responsible for that debt, not the shareholders.

Question 73

A share refers to a share interest in the indebtedness of a corporation, often used synonymously with debenture.

Question 74

If there is only one class of shares, they will be common shares.

Question 75

A debenture is likely to be secured.

Question 76

Where a corporation is not able to pay the debts it owes, the creditors can turn to the shareholders for payment.

Question 77

It is common practice in Canada and the United States to put a value on the share, making it a par-value share.

Question 78

A par-value share reflects the actual value on the market.

Question 79

When a closely held corporation is involved, it is common to include no restrictions on the transfer or sale of the shares.

Question 80

When a personal guarantee has been signed by a shareholder, the creditor can demand payment from that shareholder despite the separate legal entity nature of the corporation.