Deck 28: Formation and Termination of Corporations

Question 1

Most incorporated businesses are close corporations.

Answer 1

True

Question 2

A court may pierce the corporate veil if the corporation is undercapitalized.

Answer 2

True

Question 3

As a general rule, corporations are required to compensate promoters for the services they render during the preincorporation process.

Answer 3

False

Question 4

Close corporation shares are seldom intended to be sold to the public at large.

Question 5

As a general rule, promoters are not liable for contracts they make on behalf of corporations that are not yet formed.

Question 6

Courts have begun to recognize a fiduciary duty in corporate officers and majority shareholders to treat minority shareholders fairly.

Question 7

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 8

Helen is a promoter who, prior to forming Bayne Corp., contracted to purchase tile-manufacturing machinery from Owen Machinery Inc. The contract was negotiated and entered into in the name of Bayne Corp. Subsequently, a certificate of incorporation was issued to Bayne Corp. Which of the following statements is true of this scenario?

A) Only Bayne Corp. is liable for the contract with Owen Machinery Inc. as it received its certificate of incorporation.
B) Helen would be liable for the contract with Owen Machinery Inc.
C) If the board of directors of Bayne Corp. issues a suitable resolution, Helen would be relieved from all liability for the contract with Owen Machinery Inc.
D) Since Bayne Corp. was not in existence at the time the contract was negotiated, the contract is void.

Question 9

Nonprofit corporations:

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

Question 10

Esther and Salim are promoters for Kale Inc. Prior to its incorporation, Esther negotiated several preincorporation contracts with Ian, an investor. She signed each contract in the name of Kale Inc. Kale subsequently was incorporated, but the Kale Board of Directors refused to adopt the contracts. Ian later sues Kale, Esther, and Salim on the contracts. Which of the following statements is true of this case?

A) Only Kale and Esther are liable as Esther, a promoter of Kale, negotiated several preincorporation contracts with Ian.
B) Esther is solely liable as she signed each contract in the name of Kale Inc.
C) Kale, Esther, and Salim are liable as they are sued by Ian.
D) Esther and Salim are liable as they are promoters of Kale Inc.

Question 11

A corporation that merges into another is dissolved.

Question 12

A corporation domiciled in another country but doing business in the United States is called an alien corporation.

Question 13

The traditional judicial rule is that the court will pierce the corporate veil when the corporation has been dominated by one or more of its shareholders and the domination has resulted in an improper purpose.

Question 14

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

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

Question 15

According to the Model Business Corporation Act (MBCA), the number of shares of capital stock the corporation is authorized to issue need not be included in the articles of incorporation.

Question 16

A promoter's liability on preincorporation contracts terminates when a novation is signed.

Question 17

Promoters are not agents of the corporation prior to its incorporation.

Question 18

The articles of incorporation serve the same function as a charter.

Question 19

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

Question 20

The current trend in law is to permit the corporation to issue shares in return for the promoters' preincorporation services.

Question 21

Which of the following is a common trait of close corporations?

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 22

According to the traditional judicial rule, courts can pierce the corporate veil when:

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

Question 23

A de facto corporation:

A) could not be challenged by a third party.
B) existed when the promoters substantially complied with all mandatory provisions.
C) did not exist when there was an honest attempt to comply with the mandatory provisions of the corporate statute.
D) was permitted to deny its corporate existence.

Question 24

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

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

Question 25

Jones Corp. is a business concern in the process of being set up. Benito, its promoter has entered into preincorporation contracts. After the corporation comes into existence, Benito can be released from liability on the preincorporation contracts through:

A) an agreement with Jones Corp., wherein Jones Corp. agrees that it will be substituted for Benito.
B) an agreement with the third party before adoption of the preincorporation agreement.
C) an agreement with Jones Corp., Benito, and their third party, wherein all agree that Jones Corp. will be substituted for Benito.
D) another preincorporation contract with the third party.

Question 26

Which of the following steps governing the incorporation process is included in the Model Business Corporation Act (MBCA)?

A) Preparing, signing, and authenticating the articles of incorporation
B) Filing the articles with the attorney general
C) Filing the articles by paying part of the required fees to the partnership creditor
D) Contributing a minimum of $5,000 to receive a certificate of incorporation

Question 27

Joey and his partners have started a corporation in North Dakota. They may decide to get it incorporated in Illinois if:

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

Question 28

Before a corporation comes into existence, it _____.

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

Question 29

A basic principle 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) there is an established market for the stock.

Question 30

Under the revised Model Business Corporation Act (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) shareholders and others who took no active part in the defectively formed corporation.
C) shareholders, promoters, managers, directors, and others who mistakenly believe that the corporation is in existence.
D) promoters, managers, and shareholders who participated in management and policy decisions, and also knew of the defective incorporation.

Question 31

All business corporations derive their existence from the:

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

Question 32

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 33

According to the Model Business Corporation Act (MBCA), which of the following is an optional content that could 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 purpose of the corporation

Question 34

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) the corporation's shareholders have to make a decision regarding incorporation
D) incorporation is a legislative privilege as well as a right

Question 35

A de facto corporation:

A) could be challenged by a third party.
B) was not permitted to deny its corporate existence.
C) never involves a quo warranto action.
D) existed when the promoters substantially complied with all mandatory provisions.

Question 36

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) usually set out the duties and authority of the officers and the conduct of meetings.
D) need not be consistent with state laws or the articles of incorporation.

Question 37

Under the revised Model Business Corporation Act, _____.

A) the filing of the articles of incorporation, evidenced by the 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

Question 38

A _____ existed when there was an honest attempt to comply with the mandatory provisions of the corporate statute, yet the attempt still failed in some material respect.

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

Question 39

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 40

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

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

Question 41

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

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

Question 42

Mention the requirements that are essential for a court to pierce the veil of a corporation.

Question 43

In the context of the preincorporation process, discuss the legal liability of promoters to the corporation.

Question 44

Discuss the important factors to consider in deciding where to incorporate a business.

Question 45

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 46

Under the revised Model Business Corporation Act (MBCA), who will be liable for the business debts if the business has been defectively incorporated?

Question 47

_____ 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

Question 48

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

A) As a corporation is not an entity created by the state, it need not have 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 corporation with major shareholders is dissolved.
D) Corporations with more than one class of shareholders sometimes provide for voting on dissolution and other matters by class.

Question 49

If articles of incorporation provide for a limited life, the corporation _____.

A) automatically terminates at the end of the designated time
B) usually appeals to the secretary of state for dissolution
C) dissolves only by amendment to the contract
D) terminates at the end of the designated time only with the written consent of all shareholders