Deck 28: Formation and Termination of Corporations

Question 1

Minority shareholders in close corporations cannot be outvoted on salary and employment decisions.

Answer 1

False

Question 2

Jones & Co.is a business concern in the process of being set up.Its promoters have entered into preincorporation contracts.After the corporation comes into existence,the promoters can be released from liability through:

A)an agreement with the corporation wherein the corporation agrees that it will be substituted for the promoter.
B)an agreement with the third party before adoption of the preincorporation agreement.
C)an agreement with the corporation and third party wherein all three agree that the corporation will be substituted for the promoter.
D)the preincorporation contract with the third party.

Answer 2

C
Explanation: The promoter is released from liability on the preincorporation contracts only if the corporation,the promoter,and the third party all agree that the corporation will be substituted for the promoter.This agreement is called a novation.

Question 3

A court may pierce the corporate veil if a corporation defrauds its creditors by not having sufficient assets available to meet expected claims.

Answer 3

True

Question 4

Under the MBCA,the corporation can issue shares in return for the promoters' preincorporation service.

Question 5

A municipal corporation:

A)is formed and operated by private persons.
B)does not seek to make a profit.
C)does not have the power to tax.
D)is incorporated under special statute.

Question 6

Which of the following types of corporations sells shares to people who often have little interest in it except as investors?

A)Nonprofit
B)Closely held
C)Publicly held
D)Municipal

Question 7

Under the right of first refusal,either the corporation or its shareholders are given the right to buy shares offered for sale to an outsider willing to purchase them.

Question 8

In a de facto corporation,the promoters substantially complied with all mandatory provisions.

Question 9

A corporation that merges into another is dissolved.

Question 10

The corporation is viewed as the alter ego of the shareholder-manager when shareholders mix their personal dealings and corporate transactions as if all were personal.

Question 11

Both nonprofit corporations and nontaxing governmental corporations are similar in that they are formed and operated by private persons.

Question 12

Nonprofit corporations:

A)are similar to nontaxing governmental corporations.
B)are formed and operated by public persons.
C)do not permit officers and employees to receive salaries.
D)have the power to tax.

Question 13

An enterprise that conducts its affairs in interstate commerce cannot be incorporated in a state other than the state in which the principal offices are located.

Question 14

The promoter's liability on pre-incorporation contracts terminates when a novation is signed.

Question 15

Pam and Sam are promoters for Kale Corporation.Prior to its incorporation,Pam negotiated several preincorporation contracts with Ian,an investor.She signed each contract in the name of Kale Corporation.Kale subsequently was incorporated,but the Kale Board of Directors refused to adopt the contracts.Ian later sues Kale,Pam,and Sam on the contracts.Who is liable?

A)Kale and Pam
B)Pam only
C)Kale,Pam,and Sam
D)Pam and Sam

Question 16

A governmental corporation seeks to make a profit.

Question 17

Failure to appoint a registered agent in the state of incorporation is grounds for an involuntary dissolution.

Question 18

The function of bylaws is to establish rules for the conduct of the internal affairs of the corporation.

Question 19

Generally,businesses start out as publicly traded corporations.

Question 20

Foreign corporations doing business in the U.S.are protected against discriminatory treatment by bilateral investment treaties.

Question 21

A de facto corporation exists where:

A)the promoters had substantially complied with all mandatory provisions.
B)an honest attempt was made to comply with the mandatory provisions of the corporate statue,yet the attempt still failed in some material respect.
C)a person holds himself out to be a representative of a corporation,yet no real attempt to incorporate has been made.
D)the corporation can be challenged by a third party.

Question 22

Which of the following is a useful way of preventing unwanted persons from entering a corporation?

A)Novation
B)Consent restraint
C)Piercing the veil
D)Estoppel

Question 23

Which of the following states has traditionally been considered attractive for incorporation?

A)Delaware
B)New York
C)California
D)Iowa

Question 24

All business corporations derive their existence from:

A)the Commerce Clause of the U.S.Constitution.
B)the common law.
C)the state in which they are incorporated.
D)the federal government.

Question 25

According to the MBCA,which of the following may be included in the articles of incorporation?

A)The name of the corporation.
B)The name and address of each incorporator.
C)The number of shares of capital stock that the corporation shall have authority to issue.
D)The duration of the corporation.

Question 26

Under general incorporation laws:

A)incorporation is a legislative privilege,not a right.
B)the secretary of state has to issue a certificate of incorporation.
C)incorporation is decided by shareholders.
D)incorporation is a legislative privilege and a right.

Question 27

Which of the following statements is true about the ultra vires doctrine?

A)It is the only stringent limitation on the enforceability of contracts entered into by corporations.
B)It permits corporate directors to freely prevent enforcement of unattractive contracts.
C)It permits the state attorney general to prevent enforcement of corporate contracts that extend beyond the corporation's authorized powers.
D)It does not permit the corporation to bring a suit for damages to the corporation against the officers of the corporation who have entered into an ultra vires contract.

Question 28

One of the basic principles of corporation law is that:

A)shareholders are not free to dispose of their shares by gift.
B)shareholders are given the authority to manage the business.
C)majority rule applies to both shareholder and director action.
D)majority rule applies only to director action.

Question 29

Which of the following is true for a close corporation?

A)The shareholders are large in number.
B)Shareholders usually live in different geographic areas.
C)Only few of the shareholders are active in the business.
D)There is no established market for the stock.

Question 30

Which of the following steps governing the incorporation process is included in the MBCA?

A)Preparation,signing,and authenticating the articles of incorporation.
B)Filing the articles with the attorney general.
C)Filing the articles with the secretary of state and paying part of the required fees.
D)Contributing a minimum of $5,000 to receive a certificate of incorporation.

Question 31

Alex and his partners have started a corporation in North Dakota.They can get it incorporated in Illinois if:

A)incorporation fees are lower than taxes.
B)shareholders can actively participate in the management.
C)fees and taxes are lower,and there is minimal shareholder interference.
D)promoters and shareholders are barred from interfering.

Question 32

Under the revised MBCA,if there are business debts following a defective incorporation,liability for the debts will be imposed upon:

A)all purported shareholders who acted as if a corporation had been formed.
B)promoters,managers,or purported shareholders who only participated in management and policy decisions in the business.
C)all shareholders and directors who participated actively or inactively.
D)promoters,managers,and shareholders who participated in management and policy decisions,and also knew of the defective incorporation.

Question 33

Under the revised MBCA's liability rules for defective incorporation:

A)the filing of the articles of incorporation,evidenced by a return of the copy stamped by secretary of state,is conclusive proof of incorporation.
B)liability will never be imposed on promoters who participated in management and policy decisions.
C)the issuance of the certificate of incorporation is conclusive proof of incorporation to the corporate status,except a quo warranto action brought by the secretary of state.
D)managers will be released from any liability in excess of their initial investment. The filing of the articles of incorporation,evidenced by the return of the copy stamped by the secretary of state,is conclusive proof of incorporation under the revised MBCA.

Question 34

In a de jure corporation:

A)the promoters have substantially complied with all mandatory provisions.
B)the promoters have only complied with directory provisions.
C)the business intends to be treated as a corporation.
D)the omission of directory provisions will destroy the enterprise's corporate identity.

Question 35

Massachusetts courts require that the parties expressly create a(n)_____ before a corporation can be held liable for preincorporation contracts.

A)adoption agreement
B)novation
C)incorporation regulation
D)operating agreement

Question 36

Before a corporation comes into existence:

A)it can be liable as principal.
B)it cannot ratify a contract made by the promoter.
C)it is illegal to pay promoters for their services.
D)it is liable if the board acts to adopt the contract.

Question 37

In a ____,the promoters substantially complied with all mandatory provisions.

A)de jure corporation
B)de facto corporation
C)corporation by estoppel
D)close corporation

Question 38

The bylaws of a corporation:

A)usually set up procedures for the holding of shares.
B)do not involve financial matters such as declaring and paying dividends.
C)establish rules for the conduct of internal affairs.
D)need not be consistent with state laws or the articles of incorporation.

Question 39

Helen is a promoter who,prior to forming Tile Co.,contracted to purchase tile-manufacturing machinery from Owen Machinery Co.The contract was negotiated and entered into in the name of Tile Co.Subsequently,a certificate of incorporation was issued to Tile Co.In view of the facts stated which of the following statements is true?

A)When Tile received its certificate of incorporation,it became liable for the contract with Owen.
B)Helen is liable for the contract with Owen Machinery Co.
C)If Tile's board of directors issue a suitable resolution,Helen will be relieved from all liability for the contract with Owen.
D)Since Tile was not in existence at the time the contract was negotiated,the contract is void.

Question 40

According to the traditional judicial rule,under which of the following situation can courts pierce the corporate veil?

A)When there is undercapitalization coupled with strict adherence to corporate formalities.
B)When there is strict adherence to corporate formalities such as holding shareholders' but not directors' meetings.
C)When there is undercapitalization.
D)When shareholders mixed their personal dealings and corporate transactions as if all were professional.

Question 41

Which of the following would be a justification for involuntary dissolution of a corporation by a creditor?

A)Misapplication or waste of corporate assets.
B)Directors are in conflict,deadlock cannot be broken by shareholders,and the corporation faces ruin.
C)Corporation is insolvent and not paying its debts.
D)Directors are acting illegally or unfairly.

Question 42

Under the Model Business Corporation Act,a shareholder may ask a court to dissolve a corporation when:

A)a corporation uses assets for public welfare.
B)directors are in conflict,their deadlock cannot be broken by shareholders,and the corporation faces ruin.
C)directors are maintaining registered agents without the approval of the shareholders.
D)creditors are acting unfairly or illegally.

Question 43

What must be included in the articles of incorporation according to the MBCA?

Question 44

If articles of incorporation provide for a limited life:

A)the corporation automatically terminates at the end of the designated time.
B)the corporation must appeal to the Secretary of State for dissolution.
C)the corporation dissolves only by amendment to the contract.
D)the corporation terminates at the end of the designated time only with the written consent of all shareholders.

Question 45

Under the revised MBCA,who will be liable for the business debts if the business has been defectively incorporated?

Question 46

Which of the following statements is true for the dissolution of a corporation by agreement?

A)It doesn't require the state's consent to dissolve.
B)A corporation can be dissolved by oral consent of all shareholders.
C)If two corporations consolidate into a new corporation,only the old one with major shareholders is dissolved.
D)A corporation that merges into another is dissolved.

Question 47

Explain the promoters' liability to third parties before the corporation is formed.

Question 48

When will a court pierce the veil of a corporation?

Question 49

Why might a U.S.investor choose to incorporate its business in the country where it is conducting its overseas operations? What special constraints might exist?

Question 50

______ is a basic restriction governing the transferability of shares in a close corporation.

A)Piercing the veil
B)Quo warranto
C)Right of first refusal
D)Ultra vires