Deck 22: Legal Rules for Corporate Governance

Question 1

For many years,Jeremy worked for Pearl Inc.Over the years,he rose through the ranks and eventually occupied a very senior position.In that position,he enjoyed access to highly valuable and confidential information.His fiduciary duties prevented him from taking a personal benefit from his position.Last year,however,he quit his job and started working for a rival company.By doing so,he necessarily breached his fiduciary duty to the first company.

Answer 1

False

Question 2

Nigel is negotiating to sell some lighting fixtures to Abda Corporation for its offices.Nigel has been dealing with Jerome.Jerome appears to be the president of Abda,or at least so it says on his parking spot at Abda's offices.Nigel can rely on Jerome having authority to enter into a contract with him to buy the lighting fixtures.

Answer 2

True

Question 3

Shareholders in a corporation incorporated under the Canada Business Corporations Act are entitled to the remaining assets of the corporation after all the creditors are paid.This means that they retain all management powers that they have not delegated to the directors.

Answer 3

False

Question 4

The fiduciary duty of a director to act in the best interests of the corporation means that a director may never do business with the corporation.If directors were to negotiate transactions between themselves and the corporation,there would be in an intolerable conflict between their personal interests and their obligation to act in the best interests of the corporation.That is why such transactions are never permitted.

Question 5

In practice,it is generally easier for shareholders in public corporations to exercise their legal rights because management is required to send them much more information regarding matters to be dealt with at shareholder meetings than they are required to send to shareholders in smaller corporations.

Question 6

Sarah is a director of Family Educational Testing Services Inc,a corporation incorporated under the Canada Business Corporations Act.She also carries on her own business of finding educational testers and psychometrists needed by testing services businesses.The other members of the board want to hire Sarah to find five testers for the corporation.Which statement best describes the legal rules that would apply to Sarah undertaking such work?

A)She cannot do business with the corporation because there would be a conflict between her personal interest in getting the best price for her services and her fiduciary obligation to act in the best interests of the corporation,which would require her to seek the lowest price.
B)She can do business with the corporation but only if the corporation chooses her after a bidding process open to all of Sarah's competitors.
C)She can do business with the corporation because,as a separate legal person,the corporation is free to decide with whom it does business.
D)She can do business with the corporation only if she gives notice to the board that she has an interest in the transaction,if she does not vote on the resolution of the board approving the contract,and if the transaction is fair and reasonable to the corporation.
E)She can do business with the corporation as long as she agrees to work for a fair price.

Question 7

Melli is the president of Iritech Inc,a grocery supplier.On behalf of Iritech,Melli has been negotiating with Teran Food Stores Ltd for two years for Teran to commit to making Iritech its exclusive supplier.Getting the contract would put Iritech's business on a much firmer financial footing.Melli has recently become frustrated with Iritech and is interested in leaving to form her own grocery supply business.The Teran contract would give her a great start and she thinks that Teran has been sufficiently impressed by her that she would have a chance to get the contract for herself.Which of the following factors would NOT support the conclusion that it would be a breach of her fiduciary duty for her to quit and seek the Teran contract for herself?

A)This is a specific opportunity that the corporation has been actively pursuing.
B)The corporation had done extensive work preparing for the opportunity.
C)This is a significant opportunity for the corporation.
D)Melli had access to the opportunity because of her position with the corporation.
E)The contract is profitable,and if Tritech can restrict Melli from obtaining the contract,this is an impermissible restraint of trade.

Question 8

Sandy is a director of Plex Manufacturing Inc.She reads in a report to the board that the corporation has entered into a series of complex financing transactions.One result of the transactions is that the presentation of the corporation's financial statements has changed to make the corporation look more profitable.Sandy is concerned that these transactions might have been designed to hide the true financial position of the corporation.She decides not to enquire into these transactions,however,because she thinks that if she finds out more about them she will have to do something about it.In doing so,Sandy is in compliance with her duty of care and fiduciary duty because she does not have any clear evidence of wrongdoing.

Question 9

Which of the following statements best describes the responsibilities of directors under the Canada Business Corporations Act?

A)Directors are responsible for managing or supervising the management of the business of the corporation and its internal affairs.
B)Directors are responsible only for those matters delegated to them by shareholders.
C)Directors are responsible only for those management activities that they do not delegated to officers.
D)Directors have no management responsibilities because they are only responsible for supervising others who actually manage the corporation.
E)Directors are responsible only for the internal affairs of the corporation,such as declaring dividends and issuing shares.

Question 10

Aldus is an officer of Accent Interior Designs Inc.While working in one of the houses of Accent's clients,he stole a ring.He gave it back,but was convicted of theft and fined $1000.Accent wants to indemnify him for the fine.It cannot pay an indemnity in these circumstances.

Question 11

Angela and Lou are starting a flower store business to be carried on by a corporation.Angela has substantial personal assets and will be getting 90 percent of the shares of the corporation.Lou has little money and will be getting 10 percent of the shares.A fair way to resolve disputes would be to enter into a shareholder's agreement which provides for a "shotgun buy-sell."

Question 12

Which of the following statements is TRUE? A shareholder has a legal right to participate in the management of the corporation

A)in no circumstances.
B)only if elected as a director or appointed as an officer or employee.
C)only if elected as a director or appointed as an officer or employee or when exercising management powers acquired under a unanimous shareholders agreement.
D)only when the shareholder holds a majority of the shares issued by the corporation.
E)only when exercising management powers acquired under a unanimous shareholders agreement.

Question 13

Daniel has worked as a computer programmer and senior officer of Litem Systems Inc for several years.He has built up a close relationship with a number of Litem clients.One of them asks Daniel if he can do some programming work on the side.It is the same kind of work that Daniel does for clients of Litem.The client would hire and pay Daniel directly.Daniel would do the work on nights and weekends.Daniel is interested,but he cannot take the work because it would be a breach of his fiduciary duty and,if he does take it,he could be forced to pay over all of his profits to Litem.

Question 14

Edmund and Gertrude are the directors of ZipCo,a corporation incorporated under the Canada Business Corporations Act.They play very little active role in the business,which is run by their son,Zenon.They have delegated to him full power and responsibility to manage the corporation,including the power to declare dividends and issue shares.This delegation is permitted under the Canada Business Corporations Act.

Question 15

A director's fiduciary duty is owed to the corporation.This means that directors must act with a view to maximizing the value of shareholders' investment to the exclusion of the interests of other stakeholders in the corporation.

Question 16

Alannis and Jake each hold 50 percent of the shares in JagCorp,a limousine rental business.All management decisions since incorporation have been agreed to by both of them.Now they find that they cannot agree on how the corporation should be operated.Alannis wants the corporation to give up the limousine rental business and become an Avis rent-a-car franchisee.Jake wants to continue with the existing business as it is.They have been battling for six months but are deadlocked.In these circumstances,Alannis could get a court to order that the corporation be wound up.

Question 17

Tom and Jane are the founders and only shareholders and directors of Shinestone Corp,which carries on a business selling semi-precious stones.They want to declare and pay a dividend to themselves.They think that the corporation will be able to pay its debts after payment of the dividend and have received advice from their accountants that the market value of the assets of the corporation exceeds the total amount owed to creditors and the amount they paid into the corporation for shares.One of its creditors,Nova Bank,hears about their plan to pay a dividend and says that,in its view,the market value of the corporation's assets is not high enough to meet this test after the dividend is paid.Tom and Jane can still declare the dividend.

Question 18

Which of the following best describes to whom the fiduciary duty is owed? The fiduciary duty is owed

A)to shareholders.
B)to creditors and shareholders.
C)to the corporation.
D)to employees.
E)to the government.

Question 19

Vanna is a director of Quorn Co,which operates a health food supply business.Vanna manages the business and wants to be the president.Her appointment would have to be approved by the shareholders to be effective.

Question 20

Because the duty of care requires that directors and officers exercise the care that a reasonably prudent person would exercise in comparable circumstances,the standard is a subjective one.So long as people are honest and do their best,it does not matter how incompetent they are.

Question 21

Which of the following statements is TRUE? An annual meeting is

A)a meeting of shareholders required to be held every 12 months.
B)a meeting of directors required to be held every 12 months.
C)a meeting of shareholders held each year at which directors are elected,an auditor appointed if necessary,and financial statements presented and discussed.
D)a meeting of shareholders with respect to which directors must send shareholders a notice of meeting,form of proxy,and management proxy circular.
E)a meeting of shareholders at which no dissidents are permitted.

Question 22

George wants to get out of his investment in Silver Chair Furniture Inc,a corporation incorporated under the Canada Business Corporations Act.He holds 50 percent of the shares and is fed up with dealing with William,who holds the remaining 50 percent of the shares and will not listen to him.They cannot agree on how the corporation should be run.William is the sole director and officer of the corporation.George has asked William to buy him out or have the corporation buy his shares,but neither William nor the corporation has any money.George is prohibited from selling to a third party under a shareholder agreement he signed with William.Can George have the corporation wound up?

A)No,because winding up is available only if all shareholders consent.
B)No,because George should have protected his interests in a shareholders' agreement.
C)No,because,while his interests may have been oppressed,winding up is not a remedy that a court can order based on oppression.
D)Yes,in these circumstances it would be just and equitable to wind up the corporation because the two equal shareholders are deadlocked regarding how to run the corporation and there seems to be no alternative solution.
E)No,because William may still want to carry on the business.

Question 23

Jelena and Patrick are starting a retail sporting goods business.They have incorporated a corporation to carry on the business.Jelena has 60 of the 100 issued common shares and Patrick has 40.They have decided that each should be a director and all decisions relating to the business should require the consent of both of them.Which of the following is a reason that Jelena and Patrick should NOT have a shareholders' agreement? They need to agree

A)that each should be elected a director.
B)to restrict the transfer of shares,except in accordance with the agreement.
C)that all shareholder decisions require the consent of both Jelena and Patrick.
D)on some process by which shares may be transferred,such as a right of first refusal.
E)that the directors will never owe any duties to the corporation,notwithstanding any law to the contrary.

Question 24

Mischa had a consulting business that he carried on as a sole proprietorship.He was negotiating a contract to provide advice to Vengo Inc,a corporation carrying on business as a venture capitalist.Mischa has been dealing with Prashant,an old friend.Prashant is the office manager and Mischa knows that Prashant does not have authority to contract with him.But Vengo is aware that Prashant has been talking with Mischa,so Mischa thinks that if he gets Prashant to sign a contract,it will be binding on Vengo.Is he right?

A)Yes.By acquiescing in Prashant negotiating with Mischa,Vengo has represented that Prashant has authority to bind Vengo.
B)No.The fact that Prashant does not have actual authority means that a contract signed by him on behalf of Vengo will not be binding.
C)No.The fact that Mischa knows that Prashant does not have authority means that he cannot rely on Prashant having apparent authority.
D)Yes.It is within the usual authority of a office manager to hire consultants.
E)No.It is not within the usual authority of a office manager to hire consultants.

Question 25

Which of the following statements is TRUE? A corporation is only bound in contract if the person acting on behalf of the corporation

A)had actual authority.
B)had actual authority and apparent authority.
C)had actual authority or apparent authority.
D)had apparent authority.
E)had written authority from the corporation.

Question 26

Which of the following statements best describes the role of the auditor?

A)Auditors help management prepare the financial statements for the corporation.
B)Auditors prepare the financial statements of the corporation.
C)Auditors advise the directors on whether management has done a good job in managing the corporation's business
D)Auditors provide an independent assessment of the corporation's financial statements prepared by management usually for the benefit of shareholders.
E)Auditors advise the corporation on how to set up its bookkeeping system.

Question 27

Ola holds 75 percent of the shares of Henrik Shipping Co.Anatoly holds 25 percent.The board has called a shareholders' meeting to consider a proposal to amalgamate Henrik with Norwegian Shipping Inc.Ola is in favour of the transaction.Anatoly is opposed.Which of the following best describes Anatoly's legal position?

A)As a minority shareholder,he has no way to block the transaction or obtain any relief.
B)The majority shareholder cannot vote in favour of the transaction without taking Anatoly's interests into account.
C)Because he holds 25 percent of the shares,he can block the transaction by voting against it.
D)The only thing Anatoly can do is try to convince Ola to change his mind.
E)Anatoly is entitled to vote against the transaction and,if it is approved,to dissent and require the corporation to buy his shares for fair value.

Question 28

Actual authority of an employee may NOT arise as a result of which of the following?

A)a term in an employee's contract with the corporation
B)a provision in a resolution of the directors
C)the employee being appointed to an office,such as president,which has authority attached to it
D)the employee being orally delegated authority by a person authorized by the corporation to delegate it
E)the employee telling third parties that they have authority even though this is obviously untrue to any reasonable person

Question 29

Elroy was the controlling shareholder and sole director of Maxi-Screen Ltd,which carries on a film production business.His wife,Ann,is a minority shareholder.The corporation was incorporated in 1995 and has paid a substantial dividend each year to its shareholders.In 2009,Ann and Elroy separated.Elroy did not declare a dividend even though the business was more profitable than ever because he did not want to share the profits with Ann.Which of the following statements best reflects Ann's legal position?

A)She has no remedy because the declaration of dividends is a matter within the discretion of the directors.
B)She has no remedy because Elroy is the controlling shareholder and can do what he wants.
C)She could seek relief in court on the basis that Elroy and the corporation have defeated her reasonable expectations as a shareholder and thereby oppressed her or unfairly disregarded or prejudiced her interests as a shareholder.
D)The only way she could seek relief is to apply to the court for permission to bring a derivative action against Elroy on behalf of the corporation for breaching his fiduciary duty.
E)She has no remedy because the failure to pay dividends is not an action that she can dissent from.

Question 30

Jordan has been negotiating to sell office supplies to Softstuff Ltd,a software developer.He has been dealing with Ira exclusively.Jordan has visited Ira's office at the premises of Softstuff Ltd and noticed the sign on the door that says "Purchasing Manager." Ira has told Jordan that he has authority to enter into the contract.Which of the following is TRUE?

A)Jordan cannot rely on Ira having any authority to bind the corporation because he has no proof that Ira actually has authority to contract on behalf of Softstuff.
B)Jordan cannot rely on Ira having apparent authority because no one in the corporation has represented to him that Jordan has authority.
C)Jordan can rely on Ira having authority because Ira told him he has authority.
D)Jordan can rely on Ira having apparent authority because the corporation has made a representation that Ira has the usual authority of a purchasing manager by allowing him to use an office indicating that he has that title.
E)Jordan cannot rely on Ira having apparent authority because Ira might not actually have authority to contract on behalf of the corporation.

Question 31

Which of the following statements best describes the "business judgment rule"?

A)The courts will never find that a business decision by a director or officer is a breach of the duty of care.
B)Business decisions are presumed not to be a breach of duty,unless the court does not understand the business rationale for the decision.
C)Directors and officers should always exercise their best business judgment in making decisions relating to the corporation.
D)The courts will substitute their business judgment for that of directors and officers if doing so makes sense to them.
E)Business decisions are presumed not to be a breach of duty so long as they fall within the range of reasonable business alternatives that were available and the process for making the business decision was reasonable.

Question 32

Unanimous shareholders' agreements have special legal characteristics that distinguish them from ordinary shareholders' agreements.Which of the following statements most accurately describes how unanimous shareholders' agreements are different?

A)Unanimous shareholders' agreements allow shareholders to transfer some or all of the powers and responsibilities of the directors to the shareholders.
B)Not all shareholders are parties to unanimous shareholders' agreements.
C)Under a unanimous shareholders' agreement,all shareholders must agree on all matters requiring shareholder approval.
D)Under a unanimous shareholders' agreement,share transfers must be subject to a right of first refusal.
E)A unanimous shareholders' agreement cannot be amended without the consent of all shareholders.

Question 33

Which of the following statements best describes how corporate law protects creditors?

A)Corporate law does not protect creditors.
B)Corporate law rules restricting the payment of dividends to shareholders unless certain financial tests are satisfied protect creditors by keeping money in the corporation when the corporation requires that money to pay debt.
C)Directors have a duty to protect the interests of creditors.
D)Creditors can enforce restrictions on the ability of the corporation to pay dividends to shareholders.
E)Creditors must protect themselves by contract.

Question 34

Aldo is the vice-president of finance for Euro Mining Inc,which operates several diamond mines in the Northwest Territories.He also sits on the board.One day,the board heard a presentation from a geologist about a new area she had found that showed results consistent with the presence of diamonds.The board,which reviews dozens of such presentations each month,decided not to pursue exploration into the area.Aldo thought the area sounded very promising and arranged to meet with the geologist to discuss it with her.Aldo invested in a new corporation formed by the geologist to buy property in the new area.Eventually,the property was sold for a huge profit.Which of the following is TRUE?

A)Aldo breached his fiduciary duty by appropriating an opportunity belonging to Euro Mining.
B)Aldo did not breach his fiduciary duty because the opportunity ceased to belong to Euro Mining when the board decided not to pursue it.
C)Aldo breached his fiduciary duty by competing with Euro Mining.
D)Aldo breached his fiduciary duty by investing in the geologist's corporation because he found out about the opportunity through his position at Euro Mining.
E)Aldo breached his fiduciary duty by investing in the geologist's corporation because the board had spent time considering the opportunity.

Question 35

Yasir is a director and the operations manager of Flavell Rubbish Disposal Ltd.All of the financial aspects of the business are the responsibility of John,another director.Yasir heard from one of his employees that a representative from the corporation's bank was in John's office yesterday and there was a lot of shouting.Yasir asked John about it.John said that the corporation was behind in its loan payments,but that Yasir doesn't need to worry about it.John tells him that a big customer will be paying its account soon and that money will be used to bring the loan up to date.Which statement most accurately describes Yasir's legal position?

A)Yasir complied with his duty of care by asking about the problem.
B)Yasir has no duty of care in relation to the loan payments because that is a matter that the directors have delegated to John.
C)Now that Yasir is on notice that there is a problem,his duty of care requires him to make sure that the customer's payment is received and applied against the loan.
D)Yasir has no duty because the duty of care is defined by reference to a person in comparable circumstances and Yasir is not in a position to deal with the bank.
E)Yasir must make the loan payments himself to ensure that the corporation does not go into default.

Question 36

Which of the following statements is TRUE? The scale of a corporation makes a difference to how the rules of corporate law operate because

A)large and small corporations are incorporated under different statutes.
B)only large corporations can carry on business in more than one jurisdiction.
C)small corporations are taxed at different rates than large corporations.
D)large corporations are better able to bear the risk of unauthorized liabilities than small corporations.
E)in large corporations,the separation between management and shareholders makes it more difficult for shareholders to exercise control over management and to align the interests of management with those of shareholders.

Question 37

Which of the following statements is TRUE? Under a unanimous shareholder agreement,

A)the shareholders can agree on how directors are to vote.
B)the shareholders can assume all the powers of the directors.
C)the shareholders are prohibited from assuming only some of the powers of the directors.
D)the shareholders cannot assume the powers of the directors because the directors would be left with nothing to do.
E)the shareholders cannot assume the powers of the directors because doing so would be inconsistent with the basic division of powers in the corporation.

Question 38

Ebo Corporation was incorporated under the Canada Business Corporations Act in 1991.It is a private corporation.It carries on a dress making business.Eben is the CEO and the sole director.He holds 60 percent of the shares.Four employees hold the remaining 40 percent,10 percent each.Eben has run the corporation as if there were no other shareholders.None of the employees has ever seen a financial statement,nor has there ever been a shareholders' meeting.The employees have received substantial dividends on their shares and do not want to leave the corporation or sell their shares.They do,however,want some better disclosure regarding the corporation's business.Which of the following statements does not describe these minority shareholders' rights?

A)They could seek leave to bring a derivative action on behalf of the corporation against Eben on the basis that his failure to send them annual financial statements and call annual meetings is a breach of his fiduciary duty to act in the best interests of the corporation and seek injunctive relief.
B)They could apply to the court for an order directing Eben to comply with the Canada Business Corporations Act by distributing financial statements and holding shareholder meetings and to cease conducting the affairs of the corporation in a manner oppressive to the shareholders.
C)They could requisition a shareholder meeting to discuss the problem.
D)They could apply to the court for relief on the basis that Eben is oppressing or unfairly disregarding their interests as minority shareholders.
E)They could sell their shares publically on the stock exchange.

Question 39

Which if the following statements is FALSE?

A)A proxy is a person appointed to represent a shareholder at a meeting and vote their shares.
B)A proxy need not be a shareholder.
C)A form of proxy must be sent to each shareholder of a public corporation along with a management proxy circular in connection with each shareholders meeting.
D)Shareholders can participate in meetings without attending through a proxy.
E)A proxy is a way to transfer ownership of shares.

Question 40

What best describes the circumstances in which a director may transact with the corporation?

A)Procedural safeguards to avoid conflicts of interest and to provide transparency are observed in connection with the approval of the transaction and it is fair and reasonable to the corporation.
B)The corporation receives a benefit from the transaction.
C)A judge has given approval to the transaction.
D)The director abstains from voting when the directors vote on the approval of the transaction.
E)The director provides a notice to the board of benefits the director will receive from the transaction.

Question 41

Gargantua Inc is a very large company with a very large board of directors.Lada is one of those directors.The corporation recently became involved in a number of scandals.As a result,the various members of the board of directors have been named as defendants in several lawsuits.Lada is,of course,hoping to avoid liability.Which of the following statements is TRUE?

A)As a director,Lada is personally responsible for the accuracy of any documents that accountants prepared on behalf of the company.
B)If another director was granted sole responsibility for the corporation's financial dealings,Lada cannot possibly be held liable for misconduct that arose in connection with those financial dealings.
C)The business judgment rule states that business decisions of the directors will not be found to be a breach of duty so long as they were within the range of reasonable alternatives available and the process by which the decision was taken was reasonable.
D)In order to protect shareholders,judges require proof that every decision made by a board of directors was the best decision possible.
E)Only officers,not directors,are responsible for any corporate wrongdoing.

Question 42

Roxanne is a minority shareholder in Sumner Inc.She is very unhappy with the way that the company is being operated.She therefore intends to express her disapproval and advocate changes at the next annual meeting.She will also be encouraging the other 50 shareholders of Sumner to vote against management's proposals.Which of the following statements is TRUE?

A)Roxanne is entitled to obtain the minutes of the directors' meetings.
B)Roxanne is a dissident shareholder.
C)Roxanne can force the corporation to buy back her shares at the same price that she paid for them.
D)Roxanne has the right to force the corporation into liquidation.
E)Roxanne is not entitled to obtain a list of shareholders from the corporation in any circumstances.

Question 43

A derivative action

A)is a type of crime that allows a corporation to be punished if a director misbehaves.
B)occurs when a corporation feels compelled by the consequences of one decision to act on another decision.
C)allows a corporation to sue a shareholder who refuses to pay the purchase price for their shares.
D)is an action by someone on behalf of the corporation that can be pursued only with court approval.
E)always occurs in connection with a unanimous shareholder agreement.

Question 44

Robyn and his eight friends bought shares in company XYZ.Since it was their first time investing in a company,they became minority shareholders and did not closely follow the actions of that company.Three months later,they each received a letter stating the company planned to eliminate all minority shareholders as of that day.Robyn believes they are entitled to some form of remedy for XYZ's actions.Which of the following is the best course of action for Robyn and his friends?

A)Robyn and friends should ignore this because minority shareholders can be eliminated without notice.
B)Robyn and friends should sue the company for its total value in shares.
C)Robyn and friends should each individually ask the courts for permission to take derivative action.
D)Robyn and friends should simply send a letter asking for at least half of their share value.
E)Robyn and friends should file a class action claim for an oppression remedy.

Question 45

A strict liability offence is

A)a type of crime for which a person can be convicted only if they acted with a guilty mind.
B)a type of crime for which there is no defence.
C)a type of crime that allows for a defence of due diligence.
D)a type of tort,but not a type of crime.
E)a crime for which an individual,but not a corporation,can be convicted.

Question 46

As a result of dealing with Barry,Zita believes that she has entered into a contract with Primus Inc.Zita claims that Barry,who is the president of Primus,acted as the corporation's agent.Which of the following statements is TRUE?

A)Primus can avoid liability by demonstrating that its by-laws prohibited Barry from incurring liability on its behalf.
B)The indoor management rule states that Primus cannot be held liable on the basis of Barry's actions unless,as a matter of the company's internal affairs,it had actually authorized him to act as its agent.
C)The concept of ostensible authority means that it is not enough for Zita to prove that Barry appeared to have been authorized to act as the company's agent.
D)Primus cannot deny that Barry had the authority that is usually held by the president of a corporation.
E)Zita can only enforce the contract if she searched all the corporation's public records and found no restriction on Barry's authority.

Question 47

The defence of due diligence

A)applies only to a mens rea crime.
B)applies only to an absolute liability crime.
C)applies if a shareholder brings an action against a corporate director for relief under the oppression remedy.
D)is the only defence to a derivative action.
E)is available to a corporation,in certain circumstances,if the person with managerial responsibility for the area of the corporation's activities in which a strict liability offence was committed acted reasonably in the circumstances with a view to preventing the offence.

Question 48

Frank and Emma are shareholders in a cell phone company that they started together.Emma provided $10 000 for the hardware,while Frank provided $40 000 for the software and the store itself.Frank decided to make a shareholders' agreement with Emma prior to starting the company to ensure she would not sell her shares to competitors at any time in the future.By doing this,Frank has most likely created which type of share transfer rule?

A)A non-competition agreement
B)A right of first refusal
C)A shotgun buy-sell
D)A share protection agreement
E)A unanimous shareholder's agreement

Question 49

Manuel was the Alberta sales manager employed by Vulcan Co,which produces and sells gas-burning fireplaces.Manuel was responsible for all aspects of Vulcan's business in Alberta.He determined how the business of the corporation was to be carried on.Manuel was negligent in installing a fireplace and the customer's house burned down.Which of the following best describes the liability of Vulcan based on these facts?

A)Vulcan is directly liable because Manuel was the directing mind and will of Vulcan in Alberta.
B)Vulcan is vicariously liable because Manuel was acting within the course of his employment.
C)Vulcan is both vicariously and directly liable.
D)Vulcan is not liable because it did not authorize Manuel to be negligent.
E)Vulcan is not liable because the loss would be covered by insurance.

Question 50

Padraig is a director of Eire Inc.Oona,an independent businesswoman,presented Eire with an opportunity to enter into a business venture.The company's board of directors considered the proposal,and identified a number of risks that were associated with it.However,Eire did not reach a conclusion as quickly as Oona had hoped.Even though the board of Eire was still considering the proposal,she took the proposal to Padraig personally.Oona and Padraig had worked together on a number of business ventures in the past.Padraig accepted the proposal within eight hours.Which of the following statements is most likely to be TRUE?

A)Eire can successfully sue Padraig for breach of his duty of care but not breach of fiduciary duty of care.
B)Eire can successfully sue Oona for breach of fiduciary duty.
C)Eire can successfully sue Padraig only if it can persuade the judge that it had decided to accept Oona's proposal when it learned that Padraig had already done so.
D)Eire can successfully sue Padraig for any profits that he earns from the venture with Oona.
E)Padraig could have legally accepted Oona's proposal if he had first resigned his position with Eire.

Question 51

Levi is the director for a milk production company.On the side,he and his brother Ray own a McDonalds close by that uses sweetened milk products to make ice cream.Recently,that McDonalds' contract with a different milk production company was ended due to price disagreements.Levi has offered a contract on behalf of his own milk company to the McDonalds he owns with his brother for sweetened milk.Which of the following regarding this potential transaction is false?

A)The transaction is possible if procedural safeguards are observed.
B)The transaction must be fair and reasonable to the milk production company.
C)Levi must give adequate notice of his interests in the contract to the board of directors of the milk company.
D)Levi must vote to approve the contract with the board of directors.
E)The rules governing these transactions are found in the CBCA.

Question 52

The obligation that requires certain people within a corporation to act honestly and in good faith when discharging other responsibilities

A)arises under the common law,and not under statute.
B)imposes liability only if a breach causes the corporation to suffer a loss.
C)is known as the duty of care.
D)is broken when a person with this obligation enters into a transaction with the corporation unless certain requirements are met.
E)was recently abolished because it often prevented the sort of calculated risks that can generate large profits.

Question 53

Prophet Inc has existed for several years.Delilah is a director,Suki is a shareholder,and Odessa is an officer.Which of the following statements is most likely to be TRUE?

A)Suki owes a duty of care to Delilah.
B)Odessa owes a fiduciary duty to Suki.
C)Delilah and Odessa owe a fiduciary duty to Prophet Inc.
D)Prophet Inc owes a duty of care to Suki.
E)Odessa owes a contractual duty of utmost good faith to Delilah.

Question 54

Nick was a foreperson working for Capital City Construction Ltd at the site of a major home renovation that Capital City Construction was doing.He was supervised by a site manager who came by two or three times per day to check on how things were going.The site manager set the schedule for the work,hired the workers,and ensured that the site met all applicable safety standards.Nick was responsible for supervising the workers and all the work done on the site.He decided how they should carry out their tasks at the site.One day,a large pile of painted boards was torn off the house.Because the paint contained lead,it was an offence under an environmental statute to leave them on the site.The statute provides for a "due diligence" defence.Nick knew that it would cost his employer a lot to take the boards to the dump and have them disposed of.He decided to throw the boards into a crawl space under the house.The site supervisor knew that there were boards painted with lead paint on the house,but did not enquire regarding how they had been disposed of.A building inspector found them and Nick was charged and convicted under the statute.Capital City Construction had a policy that it insisted that all its employees read,which said that no employee may break the law.Is Capital City Construction also liable for the offence?

A)Yes.Capital City Construction is responsible because Nick thought he was acting for the benefit of the corporation.
B)No.The site manager was responsible for ensuring compliance with environmental standards and he was not the one who committed the offence.
C)No.The site manager did not know that Nick was going to commit the offence and so could not have prevented him from doing so.
D)Yes.Nick was responsible for determining how the work was done within the parameters set by the site manager,so he was responsible for managing the business of corporation in relation to the activity that constituted the offence.As a result,Nick was the directing mind and will of the corporation,and Capital City Construction could be liable.The corporation cannot rely on the due diligence defence because arguably it failed to act reasonably in the circumstances in its supervision of Nick.
E)No.Capital City Construction had a policy that it insisted that all its employees read,which said that no employee may break the law.

Question 55

Michael was a director of Dot.com Tomorrow Inc,incorporated under the Canada Business Corporations Act.He was charged with failing to ensure that the corporation maintained adequate safety standards for its workers.He was furious,claiming that he was innocent.Michael hired the most expensive lawyer he could find and rented a limousine with driver to take him to the court every day of the three-week trial.Each night of the trial,he dined out at the best restaurant in town.Eventually,he was acquitted and has asked the corporation to indemnify him for all these expenses.Which of the following is FALSE regarding the legal obligation of the corporation to indemnify Michael for these expenses?

A)Dot.com may be obliged to indemnify Michael because he was substantially successful on the merits of his defence.
B)Dot.com can only indemnify for reasonable expenses and,to the extent that Michael's expenses are not reasonable,they cannot be indemnified.
C)Dot.com may be obliged to indemnify because Michael had reasonable grounds for believing his conduct was lawful.
D)So long as Michael fulfilled his fiduciary duty to act in the best interests of the corporation,Dot.com may be obliged to indemnify him for reasonable expenses.
E)Dot.com has to pay for everything but the limousine.

Question 56

Acme Inc recently came into existence.Owen is the only officer,Dieter is a director,and Seppo is a shareholder.Which of the following statements is most likely TRUE?

A)Under normal circumstances,Owen has the absolute power to remove Seppo from the company.
B)Dieter was appointed by Owen.
C)Owen decides whether or not Seppo will receive a dividend.
D)Seppo belongs to a group of people that elected Dieter or Seppo is the only shareholder and she elected Dieter.
E)Seppo and Owen cannot be closely related by blood or marriage.

Question 57

Ryan was an engineer and the Vice President for a technology company called App Ville that specialized in creating applications (apps)for smartphones.He spent most of his time working on an app that could tell if you were impaired by alcohol by breathing onto the screen of the phone.Just before he could complete the app,he resigned and incorporated his own app creation business,App City.The local police force asked for bids on an app that could detect an impaired driver and accepted App City's bid over App Ville's.Is App Ville able to take any legal action against anyone in this situation?

A)Yes,they can sue App Ville for taking a corporate opportunity of App City.
B)Yes,they can sue Ryan for taking a corporate opportunity and therefore breaching his fiduciary duty to App Ville,but only if they can show that the opportunity was identified and actively being pursued by App Ville.
C)Yes,they can sue Ryan for taking a corporate opportunity and therefore breaching his fiduciary duty to App Ville,but only if they can show that the app was at least 50% of App Ville's business.
D)No,a fiduciary duty is only owed by directors to a company,not by officers,and Ryan is not a director,only an officer of App Ville.
E)No,Ryan was the creator of the app,so he is free to take it with him when he leaves the company.

Question 58

Punishing a corporation convicted of a criminal offence DOES NOT raise which of the following issues?

A)Corporations cannot be put in prison.
B)The stigma of a criminal conviction is not likely to have the same deterrent effect on a corporation as it will on an individual.
C)Fines imposed on corporations may be passed on to shareholders or customers.
D)Fines imposed on corporations weaken it financially,increasing the risk for creditors and other stakeholders with financial claims against the corporation.
E)A corporation can only be punished by putting the shareholders and their spouses in prison.

Question 59

Denise has been asked to join the board of directors of Summit Corp,which carries on a software development business.She is attracted by the prestige and contacts she may gain as a result of joining the board but is concerned about her personal liability.Which of the following is TRUE?

A)She has nothing to worry about because corporations are separate legal persons and so there is nothing that she would ever become liable for.
B)She should worry about being held directly liable for the contracts the corporation enters into.
C)She should worry about being vicariously liable for torts for which the corporation is responsible.
D)She should worry about personal liability under regulatory and tax statutes.
E)She does not need to worry so long as she obtains an indemnity from the corporation because an indemnity will always protect her from all risk.

Question 60

Byron was the director and president of a construction company.At an annual meeting,the construction company's biggest shareholder,Sask-Wheat,voted to elect some new directors because they were unsatisfied with the construction company revenue.Knowing the election would almost inevitably result in favor of Sask-Wheat,the construction company's lawyers advised Byron to rule their votes invalid,which he did.However,in subsequent court hearings,the votes were ruled to be valid.Byron claimed indemnification from the construction company for his legal costs.Which of the following is most likely false?

A)Byron should be entitled to indemnity because he complied with his fiduciary duty.
B)Byron should be entitled to indemnity because he had reasonable grounds to believe his conduct was lawful.
C)Indemnification commitments are only as good as the indemnifier's ability to pay them.
D)Byron acted illegally and therefore cannot seek indemnity.
E)Indemnity is a form of compensation.

Question 61

The oppression remedy is not just a shareholder remedy.It creates a standard of behaviour for management that is different from the fiduciary duty and duty of care,and one that is potentially more important for shareholders because it can be enforced by shareholders directly.Do you agree with this description of the oppression remedy?

Question 62

The nature of the claim on the corporation represented by common shareholders' shares is that they are entitled only to the remaining property of the corporation on dissolution after other claims have been paid and that they have a right to vote for the election of directors,to appoint the auditor,and on proposals made to them.As such,the shareholders' role is essentially a passive one.They are not involved in management.Is this a complete and accurate description regarding the role that shareholders play in corporations?

Question 63

Forest is the majority shareholder in ForCo Inc,a corporation carrying on a business of providing investment advice.She is also a director of DevCo,a corporation incorporated under the Canada Business Corporations Act engaged in real estate development.Is there a legal problem if ForCo provides advice on regular commercial terms to DevCo? How can Forest make sure that no problems arise in connection with her corporation doing business with DevCo?

Question 64

In corporations where there are few shareholders,the basic division of powers and responsibilities between shareholders,directors,and officers is formalistic and irrelevant.Do you agree with this statement? Be sure to provide reasons for your response

Question 65

Elise and Kim are trying to decide how to set up the internal management structure of the corporation they have just incorporated to carry on their engineering consulting business.They each hold 35 percent of the shares,with the remaining 30 percent being held by five employees.Elise will run the business.She will be responsible for all aspects of the management of the office.Kim will be a passive investor,but is nevertheless interested in being kept informed regarding what is going on in the business.Kim and Elise decide that they will both be directors and then delegate all management powers to Elise,subject only to an obligation to report to the board every two months as to what is happening.Will this structure work? Support your answer.

Question 66

Salima is a director of Commercial Depot Inc,an office supply business.Salima thinks it would be a good idea if the corporation were to buy the building the corporation is currently renting.In her view,the price the landlord is offering is a good one.She thinks that if the corporation does not buy it,someone else might,and that person would want to significantly increase the corporation's rent.She has been trying to get the other members of the board to agree to buy the building for the past six months,but the purchase has not yet been approved.There just never seems to be time to get to it at the directors' meetings.She is very worried about other buyers and wonders whether she should just buy the building herself.She could always sell it again for a gain and she would not have to increase the rent to Commercial Depot to ensure that she receives a good cash flow.Do you see any problems with Salima's plan to buy the building herself? Explain how Salima could achieve her objective while avoiding any legal problems.

Question 67

On behalf of her employer,MasterFood Inc,Claire has been negotiating the purchase of the business of Watson Corp for a price of $1 million.She has been dealing with Barry,who has told her that he is the chief financial officer of Watson Corp.She has visited him at the offices of Watson Corp him many times and,with her team,gone over Watson Corp's books.They have agreed on a form of contract to give effect to the sale from Watson Corp to MasterFood Inc.At the closing of this transaction,what should she do to ensure that Barry has sufficient authority to bind Watson Corp to sell its business?

Question 68

New World Construction Co had contracted to build a new building at the University of British Columbia.New World employed Ellen as a project manager to determine how the construction would be completed and to supervise all aspects of the construction.Ellen was negligent in failing to make sure that a retaining wall was properly built.The wall collapsed,causing substantial property damage.The university is suing New World and Ellen for negligence.Assuming that Ellen is liable personally,explain the bases upon which New World would be responsible for her negligence.

Question 69

What does the fiduciary duty require of directors and officers?

Question 70

Identify and briefly explain the significance of Canadian Air Services Ltd v O'Malley (Case Brief 22.1).

Question 71

Jared works at a store that sells hockey equipment.Jared is a salesman in the stick department,where he is responsible for placing price tags on the appropriate sticks.Recently,the store has caught onto salespeople purposely leaving price tags off of sticks until someone decides to purchase one,then placing the highest possible price on that stick,despite its quality,in order to earn commission.The store policy clearly prohibits this activity,as it is against the law.When a customer decides to sue the store after realizing he lost over $4999 to wrongful price tags,the store seeks legal advice on whether or not they can divert the liability to Jared.The advice they were most likely given was that

A)Jared is a directing mind and therefore can be held liable.
B)the indoor management rule allows the store to hold Jared liable as an individual.
C)Jared cannot be held liable because the damages sought are less than $5000.
D)Jared cannot be held liable because the courts will impose strict liability on the store for Jared's actions.
E)Jared will be held liable because stores are not responsible for their commissioned employees.

Question 72

Jae was asked to join the board of directors of Western Trucking Ltd,a new firm in the trucking business incorporated under the Canada Business Corporations Act.The president of the corporation has told her that she should not worry about director's liability because Western will indemnify her.Would the indemnity fully protect her?

Question 73

Shazad is the manager of a bookstore that is one of a chain owned by Tebsco Markets Inc.Shazad advertised a special low price for Harry Potter books as a way of getting people to come to the store.Shazad knew at the time that he had no Harry Potter books.Advertising in this manner is an offence under the Competition Act.Shazad was convicted,and Tebsco was too on the basis that Shazad was a senior officer of the corporation in relation to its operation of his bookstore.Is there anything that Tebsco could do to avoid this liability in the future?

Question 74

Trudy and Aline have incorporated a corporation to carry on an antique shop business.They each hold 20 percent of the common shares.Aline's aunt,Louise,holds the remaining 60 percent of the common shares.Trudy and Aline will share responsibility for carrying on the business on a daily basis.Louise has no interest in participating in the business.She invested to help out her niece,to get a nice return when she sells her shares and would like to have a veto right over any substantial changes to the corporation.How would the parties set up their desired allocation of power and responsibilities?

Question 75

Regal Cinemas Inc operates a movie theatre in a small town in Manitoba.It has a chance to enter into long-term leases on the only other theatres in town.The landlord has refused to enter into the lease,however,unless Regal can put up a deposit of $50 000 and Regal has no money.Regal is very anxious to get the leases because there is an outstanding offer from MoviePlex Inc for all the shares of the corporation if the corporation has the leases on these other cinemas.The directors of the board,consisting of five people,decide that the best way to get Regal the money is for each of them to buy 100 shares for $100 each.The directors buy the shares,cause Regal to enter the leases,and then,on the next day,all the shareholders of Regal,including the directors,sell their shares to MoviePlex for $150.Once MoviePlex has all the shares,it elects new directors.The new directors cause the corporation to sue the former directors for the profits they made on the share sale,claiming that participating in the transaction in the way they did was a breach of their fiduciary duty.Do you agree? Explain you reasons.

Question 76

Miller's Mining company shareholders decided to write up a unanimous shareholders' agreement so they could directly manage the everyday actions of the company.This agreement removed the directors' ability to release employees,sign contracts,or to vote in meetings,and it also absolved them of their liabilities.Three days earlier,a director of Miller's Mining signed a large contract with a dynamite company.Miller's Mining believes the provision to their company made with the unanimous shareholders' agreement will allow them to void the contract created by the director.Which of the following is true?

A)Miller's Mining cannot void the contract because of the indoor management rule.
B)The director was acting outside of his responsibilities as a director which will allow the contract to be voided.
C)The director did not have actual authority at the time of the contract creation,therefore it can be voided.
D)Miller's Mining cannot void the contract because the director committed a strict liability offence.
E)Miller's Mining cannot void the contract because the director committed an absolute liability offence.

Question 77

Maria is a manager for Silverman Racks investment bank.She decides one day to give herself a hefty $250 000 bonus,which will directly reduce the value of each share in the company.Since she only owns 5% of the total shares,she sees a net benefit because she is able to enjoy the entire $250 000 herself.This is an example of what type of cost?

A)Sunk costs
B)Legal costs
C)Prospectus costs
D)Material costs
E)Agency costs

Question 78

The shotgun buy-sell is a drastic but effective mechanism for resolving shareholder disputes.Do you agree with this statement? Please give your reasons.