Deck 43: Management of Corporations

Question 1

Directors should be shareholders of the corporation on whose board they serve.

Answer 1

False

Question 2

Corporate constituency statutes permit the board of directors to consider the interests of persons other than the corporation's shareholders when the directors make corporate decisions.

Answer 2

True

Question 3

Under the Model Business Corporation Act (MBCA), ultra vires may be asserted by:

A) a shareholder seeking to enjoin a corporation from executing a proposed action that is ultra vires.
B) a federal judge who may have the power to dissolve a corporation that exceeds its powers.
C) the management suing the corporation for damages caused by exceeding the corporation's powers.
D) the secretary of state who may have the power to enjoin an ultra vires act.

Answer 3

A

Question 4

In order to facilitate the operation of the board of directors, many tasks and decisions are delegated to a committee of the board.

Question 5

Most states have enacted _____ statutes, which broaden the legal objectives of corporations.

A) Good Samaritan
B) corporate constituency
C) control share acquisition
D) business combination

Question 6

The two easiest ways to freeze out minority shareholders are the freeze-out acquisition and the share split.

Question 7

Delta Corporation's board of directors is considering a resolution that may cause severe liability to the directors. Wayne, a board member, disagrees with the decision. Unless he clearly registers his dissent, he may be liable.

Question 8

The primary corporate objective is to make money for the shareholders.

Question 9

The traditional objective of the business corporation has been to:

A) act in a socially and morally responsible manner.
B) act consistently with the purpose clause of the corporation.
C) serve the community in which the business resides.
D) enhance corporate profits and shareholder gain.

Question 10

Under the MBCA, only directors of a corporation are entitled to mandatory indemnification rights.

Question 11

Under the doctrine of respondeat superior, a corporation is liable for an employee's tort that is reasonably connected to the authorized conduct of the employee.

Question 12

The Model Business Corporation Act has made the inclusion of a purpose clause in the articles compulsory.

Question 13

The traditional view is that a corporation is not liable for a crime because criminal guilt requires presence of intent.

Question 14

Straight voting permits a single holder of more than 30 percent of the shares of a corporation to dominate the management of the corporation.

Question 15

Which of the following corporate actions is included in a corporation's board of directors' authority?

A) Adopting and amending bylaws
B) Amending the articles of incorporation
C) Approving merger of the corporation
D) Approving voluntary dissolution

Question 16

Alvin and Billy own 70 percent of Beta Corporation. Claude owns 30 percent of Beta Corporation. Alvin and Billy consistently vote and act in ways that benefit them but harm Claude. Claude may claim oppression as a minority shareholder.

Question 17

Unless the articles of incorporation state otherwise, directors cannot be removed with or without cause.

Question 18

A director has a right to inspect corporate books and records that contain corporate information essential to the director's performance of her duties.

Question 19

The ultra vires doctrine states that:

A) the corporation may engage in any lawful business.
B) a corporation is liable for an employee's tort that is connected to the authorized conduct of the employee.
C) any action of a corporation beyond its stated powers is void.
D) the board of directors must manage the corporation.

Question 20

The total fairness test permits a shareholder to require the corporation to purchase his shares at a fair price.

Question 21

The most perplexing issue with regard to the authority of officers is whether an officer has _____ authority merely by virtue of the title of his office.

A) express
B) implied
C) apparent
D) inherent

Question 22

The proxy solicitation process usually results in:

A) the chief executive officer controlling the corporation.
B) shareholders dominating the management of the corporation.
C) corporate democracy working at its best.
D) the board of directors dominating the management of the corporation.

Question 23

Rules of the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD), which apply to firms listed on the NYSE or NASDAQ, require that independent directors approve _____ committee nominations.

A) executive
B) audit
C) compensation
D) nomination

Question 24

Many corporation statutes, unlike the MBCA, state that the same person may not hold the offices of _____ and _____.

A) president; treasurer.
B) president; secretary.
C) vice-president; secretary.
D) vice-president; treasurer.

Question 25

A supermajority vote is rarely required to:

A) decide with which suppliers the corporation should deal.
B) terminate the employment contract of an employee-shareholder.
C) reduce the level of dividends.
D) change the corporation's line of business.

Question 26

Directors meetings:

A) require a minimum number of directors to attend, called a quorum.
B) are always called after reasonable notice to the directors.
C) are always required in order for the board to take action.
D) permit directors to cast up to three votes each.

Question 27

What was the original purpose of staggered terms?

A) To permit continuity of management.
B) To help insurgent shareholders transform the management of the corporation.
C) To help minority shareholders exercise cumulative voting power.
D) To make it easier for the corporation to remove existing directors.

Question 28

What is meant by rational basis?

A) A decision has the consent of all board members.
B) A decision has been taken after protracted negotiations.
C) A decision has a logical connection to the facts.
D) A decision has been taken after a long discussion.

Question 29

Passive investors follow the _____ rule: Either support management or sell the shares.

A) co-determination
B) vicarious liability
C) Wall Street
D) business judgment

Question 30

Which of the following is correct concerning the management of close corporations?

A) The MBCA Statutory Close Corporation Supplement grants the shareholders unlimited power to restrict the discretion of the board of directors.
B) Modern close corporation statutes require close corporations to comply with most management formalities.
C) The MBCA Statutory Close Corporation Supplement permits a close corporation to dispense with shareholders and directors.
D) The California General Corporation Law permits a close corporation to be managed as if it were a sole proprietorship.

Question 31

Who amongst the following owes a fiduciary duty to the corporation?

A) Directors
B) Employees
C) Shareholders
D) Secretary of state

Question 32

The _____ requires periodic shareholder approval of executive compensation.

A) Dodd-Frank Wall Street Reform and Consumer Protection Act
B) Burnett Act
C) Sarbanes-Oxley Act
D) Debbie Smith Act

Question 33

The board of directors of a nonprofit corporation must have at least _____ director(s).

A) one
B) three
C) eight
D) five

Question 34

According to several state statutes including the California statute, what is the least number of directors required to form the board of directors?

A) 5
B) 9
C) 1
D) 3

Question 35

_____ voting may permit minority shareholders to obtain representation on the board of directors.

A) Preference
B) Cumulative
C) Ranked
D) Straight

Question 36

Under the business judgment rule, corporate managers:

A) must not make uninformed decisions.
B) may have conflicts of interest.
C) are not required to make reasonable investigations.
D) may not benefit even as shareholders.

Question 37

_____ voting permits a holder of more than 50 percent of the shares of a corporation to dominate the corporation.

A) Preference
B) Cumulative
C) Ranked
D) Straight

Question 38

The person who is designated to vote on behalf of the shareholder is called a(n):

A) sharebroker.
B) agent.
C) voter.
D) proxy.

Question 39

Which of the following committees of a board of directors reviews and approves salaries of high-level corporate executives?

A) Executive committee
B) Compensation committee
C) Nomination committee
D) Audit committee

Question 40

What is the standard applied to examine managers' duty of care?

A) The degree of care expected from an intelligent person faced with a complex problem.
B) The care expected from a shopkeeper while selling expensive goods.
C) The care expected from an ordinarily prudent man in similar circumstances.
D) The degree of care expected from a prudent businessman during economic downturn.

Question 41

Nordex Corporation is in the business of manufacturing furniture. Because the industry has matured, Nordex is considering adding a new product line, manufacturing plastic products such as casings for telephones and videotapes. No director will have a personal interest in the decision to expand into those lines. To avoid liability for making a poor decision, what standard of conduct should Nordex's board of directors comply with? Briefly explain what the board must do to comply with that standard.

Question 42

After a reverse share split, corporation law permits a corporation to repurchase any _____ shares, even if the shareholders do not consent.

A) preferred
B) fractional
C) outstanding
D) issued

Question 43

Ted is the president of Soprano Corporation (SC). Ted decided to have SC manufacture large, gas-guzzling SUV automobiles just before gasoline prices rose dramatically. As a result, SC lost billions of dollars. The shareholders of SC want to sue Ted for this bad decision that cost them billions. However, Ted had made a reasonable investigation before making this decision, he had a rational basis for it, and he had no conflicts of interest regarding this decision. What would be the probable outcome if the shareholders file a suit?

A) Ted is liable under the vicarious liability rule.
B) Ted is liable under the ultra vires rule.
C) Ted is not liable under the business judgment rule.
D) Ted is not liable under the corporate protection rule.

Question 44

Alan, Bob, Charles, David, and Edward are the only shareholders of Harbin Corporation. It is a close corporation. Each owns 20 percent of the shares. There are five director positions and each serves as a director. One day the other four find out that Edward has committed a serious crime. They decide that they wish to expel him from the corporation. What action may the others take? Discuss.

Question 45

The board of directors of Filex Corporation at a regular meeting of the board entered into a contract with Ginger Grant, one of the directors. This contract called for Filex to purchase 120 acres of land from Ginger. There were ten members on the board, eight of whom were present at the meeting. One of the directors present was Ginger. All the other directors were disinterested in the transaction and not related to Ginger. After a lengthy discussion, six directors voted in favor of the contract and two voted against it. Ginger voted for the contract. Which of the following is true?

A) The contract between Ginger and the corporation is illegal and invalid.
B) The contract is valid since it was approved by a majority of a quorum of the board.
C) The contract becomes void if the corporation proves that the contract was unfair to it.
D) The contract is voidable unless Ginger proves that the contract is fair to the corporation.

Question 46

Gath Meat Packing Company is a meat processing business. To reduce costs and increase profits, the president and CEO of Gath orders Gath's employees to violate federal criminal meat processing laws. The United States Department of Justice prosecutes Gath for criminal violations of the meat processing law. Has Gath committed criminal violations?

A) Yes, because the president and CEO, a high-level administrator of Gath, authorized the commissions of the crimes.
B) Yes, because a corporation is always liable for all the crimes committed by its agents.
C) No, because the board of directors did not authorize the president and CEO or the other employees to violate federal law.
D) No, because a corporation is not liable for most crimes committed by its agents.

Question 47

The _____ rule has been criticized frequently as providing too much protection for the managers of corporations.

A) co-determination
B) vicarious liability
C) Wall Street
D) business judgment

Question 48

Tom is the sole director and largest shareholder of Newage Corporation, a close corporation. Jim and Janice, the two other shareholders of Newage Corporation, allege that though Tom is paying himself a large salary, no dividend has been paid in the last three years. Tom also refuses to hire them as employees of the corporation. Jim and Janice are complaining of:

A) oppression.
B) novation.
C) right of appraisal.
D) maltreatment.

Question 49

Tony is employed as a truck driver for Soprano Corporation (SC). While making a delivery for SC, Tony negligently ran over a pedestrian. Who is liable for this accident?

A) Tony only.
B) Tony and SC, because of strict liability.
C) Tony and SC, because of vicarious liability.
D) Neither Tony nor SC, because this was an accident, not an intentional injury.

Question 50

_____ is a tender offer defense where the target corporation turns the tables on the tender offeror or raider by making a tender offer for the raider's shares.

A) Greenmail
B) Lock-Up Option
C) White Knight
D) Pac-Man

Question 51

Tim and Julia are the majority shareholders of Eduventures, Inc. Together they own 800 of the company's shares. The remaining 200 shares are held by passive shareholders. The profits of Eduventures dwindled to just 8 percent last year. Furthermore, Tim and Julia realized that as much as 3 percent of profits are being spent in complying with the rules of public ownership. Suggest a way for them to "go private" without forming a new corporation.

Question 52

Under the Model Business Corporations Act, a director who is sued in connection with his/her duties to the corporation may be indemnified by the corporation when:

A) the director acted in good faith and his conduct was lawful.
B) the director failed to act in the best interests of the corporation.
C) the director's actions were grossly negligent but not intentional.
D) the director received unqualified financial benefits.

Question 53

A special term used to define a freeze-out of shareholders of a publicly owned corporation is:

A) oppression.
B) novation.
C) right of appraisal.
D) going private.

Question 54

The board of directors of Lorantan Corporation has 12 members. Lorantan's bylaws provide that a majority of seven or more directors is necessary to form a quorum. At a meeting of the board of directors, a resolution is adopted authorizing the sale of a substantial portion of the corporate assets to Pam Park, a director. Pam is one of the eight directors present. What must the directors do for Pam to avoid liability for buying the assets from the corporation?

Question 55

Which of the following rules is applicable to determine the liability of a corporation for any torts committed by its agents?

A) Principle-agent relationship
B) Joint and severally liable
C) Strict liability
D) Vicarious liability

Question 56

While at home, Kyle Kinston, the president and chief executive officer of Remstat, Inc., is called by the CEO of Viokam Corporation, who asks Kinston if Remstat would be interested in buying about 25 percent of the outstanding shares of Viokam. Remstat is a billion dollar conglomerate that has contemplated acquiring Viokam for some time, but Kinston tells Viokam's CEO that Remstat is not interested. Kinston tells the CEO, however, that KKIM, Inc., is willing to buy the shares. Kinston is the 100 percent shareholder of KKIM. Viokam sells the shares to KKIM for $35 million. A year later, KKIM sells the shares for $55 million to a mutual fund company. When Remstat's directors discover KKIM's purchase and sale of the Viokam shares, they sue Kinston on behalf of the corporation. Which of the following is correct?

A) Kinston has exceeded her authority to act for the corporation.
B) Kinston has self-dealt with the corporation.
C) Kinston has done nothing wrong.
D) Kinston has usurped a corporate opportunity.

Question 57

When Reese Group of Hotels (RGH) was on the verge of facing a hostile takeover bid by rivals Blossoms Group (which held a 14.98 percent stake in RGH), Rely's came forward and bought a 14.12 percent stake in RGH, thereby relieving RGH from the hostile takeover risk. This kind of tender offer defense is called:

A) Greenmail.
B) the lock-up option.
C) White Knight.
D) Pac-Man.

Question 58

Raider Corporation (RC) attempted to take over Targetnorth Corporation (TC) using a tender offer. The tender offer price was twice the market price for TC shares. TC management opposed this takeover, as a result of which it failed. Shareholders of TC who had hoped to sell their shares at a large profit want to sue the management of TC for spoiling the takeover. If they sue TC management, will the shareholders succeed?

A) Yes, if they can show that TC management did not carefully study the RC tender offer.
B) Yes, if they can show that they would have been much better off accepting the tender offer.
C) No, the business judgment rule protects management in all cases of resisting a takeover.
D) No, even if the shareholders can show that management resisted the takeover in their own self-interest.

Question 59

Ed is an officer and director in Baldwin Properties Inc. Ed is primarily responsible for finding and purchasing property for development. While on a business trip financed by Baldwin, Ed found property for sale at 65 percent of the fair market value. Ed wanted to purchase the property for himself. May he do so? Discuss.

Question 60

Raider Corporation (RC) attempted to take over Targetnorth Corporation (TC) using a tender offer. The tender offer price was twice the market price for TC shares. As a defense to this, TC proposed to buy its shares owned by RC at triple the market price provided RC agreed not to purchase any more TC shares for the next five years. This kind of tender offer defense is called:

A) Greenmail.
B) the lock-up option.
C) White Knight.
D) Pac-Man.