Deck 20: Directors Officers And Controlling Shareholders

Question 1

The provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that gives shareholders of most public companies an advisory,nonbinding vote on company payment practices for top executives is called the "corporate opportunity doctrine."

Answer 1

False

Question 2

In 2015,the SEC adopted a rule that requires public companies to disclose the pay ratio of the median of the annual total compensation of all employees to the annual total compensation of the CEO.

Answer 2

True

Question 3

A person who owns less than a majority of shares in a corporation may still be a controlling shareholder.

Answer 3

True

Question 4

A controlling shareholder has a duty not to transfer the power of management to a purchaser the shareholder knows or has reason to believe will use that power to the detriment of the corporation.

Question 5

Controlling shareholders,but not officers or directors,of a corporation may use the corporation's confidential information for personal gain.

Question 6

A poison pill is a defensive measure that would make any takeover not approved by the directors prohibitively expensive.

Question 7

To comply with their duty of loyalty,directors and managers must subordinate their own interests to those of the corporation.

Question 8

In order to take advantage of the business judgment rule,directors must have made an informed decision and have no conflict of the interest with the corporation.

Question 9

In evaluating a buyout proposal,the directors should consider material nonprice provisions of the proposed agreement.

Question 10

The Delaware Corporation Code allows the certificate of incorporation to include a provision limiting or eliminating the personal liability of directors to the corporation or to its shareholders for monetary damages for breach of the duty of loyalty.

Question 11

Breakup fees are liquidated damages for a terminated proxy fight.

Question 12

The duty of care includes the duty to make informed decisions.

Question 13

The Delaware Supreme Court has held that,regardless of the circumstances,a majority shareholder may never freeze out the minority shareholders.

Question 14

The Securities and Exchange Commission recognizes the affirmative responsibility of officers and directors under federal securities laws to ensure the accuracy and completeness of public company filings with the SEC.

Question 15

In CASE 20.2 In re Citigroup Inc.Shareholder Derivative Litigation (2009),the Delaware Chancery court considered whether shareholders could demand that the board sue the directors for failure to adequately protect the corporation from exposure to the subprime lending market.

Question 16

In certain cases,the duty of good faith may be subsumed within the duty of loyalty.

Question 17

To help make the bidder whole for its out-of-pocket expenses and lost opportunity costs should a deal fail to close because the target terminates the agreement,a negotiation will often include a termination fee.

Question 18

The obligation to act in good faith establishes an independent fiduciary duty that stands on the same footing as the duties of care and loyalty.

Question 19

Companies listed on the New York Stock Exchange must have compensation committees composed entirely of independent directors.

Question 20

A shareholder derivative action is a suit brought by a shareholder on behalf of the corporation.

Question 21

Which of the following are among the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act in relation to shareholder control of pay for top executives?

A) The act provides that shareholders of all privately held as well as publicly traded companies are entitled to vote and set executive compensation on a yearly basis.
B) The act provides that shareholders of public companies have an advisory vote on company payment practices for top executives and that public companies must hold a shareholder advisory vote on golden parachutes for executives.
C) The act provides that shareholders of all privately held as well as publicly traded companies are entitled to vote and set executive compensation on a yearly basis and also that the shareholders must specifically approve any golden parachute provisions for executives.
D) Based on the belief that ill-informed shareholder input negatively affected nationwide corporate performance,the act provides that shareholders need not be involved in setting executive compensation.

Question 22

Which of the following is considered an inside director of a corporation?

A) A director who is also an officer of the corporation
B) A director who is also an officer of any corporation
C) A director who is both an officer of any corporation and who stands to personally profit by an action being considered by the board
D) A director who is qualified as an expert in regard to any product of the company

Question 23

The parties to a friendly merger use deal-protection devices,such as no-talk provisions.The Delaware Supreme Court will generally uphold such devices as long as they:

A) have board approval.
B) preclude any other options.
C) do not permit any type of fiduciary out.
D) do not impair the board's ability to exercise its fiduciary duties.

Question 24

The __________ requires that officers and directors not take personal advantage of a desirable business investment that rightfully belongs to the corporation.

A) right of first refusal
B) corporate opportunity doctrine
C) line of business test
D) expectancy test

Question 25

In the context of takeovers,board members cannot reject an offer without taking sufficient time to analyze its merit.

Question 26

In the context of executive compensation,__________ stock usually means stock subject to vesting restrictions.

A) regulated
B) restricted
C) illegally issued
D) kickback

Question 27

Managers or directors who are engaged in self-dealing or have a self-interest other than that of a corporate fiduciary have:

A) followed the corporate opportunity doctrine.
B) breached the duty of loyalty.
C) a defense based on the business judgment rule.
D) to rely on the breakthrough rule.

Question 28

Which of the following is true in regard to the business judgment rule if one or more individual directors have a personal interest in a transaction being considered by the board?

A) The decision may be entitled to the protection of the business judgment rule if the transaction is approved by a majority of the inside directors.
B) The decision may be entitled to the protection of the business judgment rule if the transaction is approved by a majority of the disinterested directors.
C) The decision is not entitled to the protection of the business judgment rule resulting in a higher level of proof regarding the reasonableness of the transaction being required from the board of directors.
D) The decision is not entitled to the protection of the business judgment rule leading to a legally established conclusion of illegality on the part of the board of directors.

Question 29

The Smith v.Van Gorkom decision underscores which of the following regarding statements of officers or directors?

A) An outside director,but not an inside director,may in good faith rely upon any statement of an executive officer.
B) An inside director,but not an outside director,may in good faith rely upon any statement of an executive officer.
C) Any director may in good faith rely upon any statement of an executive officer.
D) Not every statement of an executive officer can be relied upon in good faith.

Question 30

A shareholder derivative suit is a lawsuit by:

A) shareholders on behalf of the corporation.
B) the shareholders directly.
C) the controlling shareholders on behalf of the majority shareholder.
D) the corporation.

Question 31

Which of the following is true regarding hostile takeovers in the European Union?

A) All member states must observe the neutrality rule and the breakthrough rule.
B) Member states may opt out of the neutrality rule and the breakthrough rule.
C) Member states may opt out of the neutrality rule,but all member states must observe the breakthrough rule.
D) Member states may opt out of the breakthrough rule,but all member states must observe the neutrality rule.

Question 32

A(n)__________ gives the person to whom it is granted the right to buy a certain number of shares at a fixed price for a fixed number of years during the __________ period,which is not usually longer than __________.

A) call right; exercise; 12 months
B) option; redemption; 12 months
C) IRS option; redemption; 10 years
D) stock option; exercise; 10 years

Question 33

The business judgment rule is applicable only if the directors make an informed decision.

Question 34

In a shareholder rights plan,any takeover not approved by the directors makes the process prohibitively expensive.This protection of shareholder interests is known as a:

A) termination fee.
B) poison pill.
C) freeze out.
D) constructive trust.

Question 35

In Carmody v.Toll Bros.,Inc.,the Delaware Court of Chancery analyzed the question of the legality of a dead-hand pill under Delaware law.In striking down the dead-hand pill,the court ruled that:

A) the directors appropriately used the dead-hand pill which guaranteed that majority shareholders in place before a hostile bidding attempt were entitled to vote to block any later proposed vote on a merger.
B) the directors appropriately used the dead-hand pill because directors are entitled to use any means necessary in order to block a hostile takeover.
C) the dead-hand pill violated the state general corporation law for a number of reasons including that it violated the directors' duty of loyalty.
D) the dead-hand pill,which could only be redeemed by directors in office after a hostile bidder gained control or by their designated successors,violated the state general corporation law because it prejudiced directors in place prior to the takeover.

Question 36

The Omnicare,Inc.v.NCS Healthcare,Inc.case,involved a question of whether directors of an insolvent publicly traded company violated their fiduciary duty when they entered into an agreement for the sale of the company to a particular interested buyer regardless of other offers.The court ruled that:

A) the directors violated their fiduciary duty and lacked the authority to agree to an absolute lock-up guaranteeing the sale and agreeing to forgo consideration of future offers.
B) the directors violated their fiduciary duty because the agreement was kept secret from majority shareholders but that,otherwise,the agreement foregoing consideration of future offers would have been valid.
C) the directors violated their fiduciary duty because the agreement was kept secret from minority shareholders but that,otherwise,the agreement foregoing consideration of future offers would have been valid.
D) the directors satisfied all fiduciary duties because there was no evidence of bad faith or self-dealing.

Question 37

The Revlon duty can be summed up as:

A) blocking all unwanted takeover attempts.
B) controlling the corporation in a fair,just,and equitable manner.
C) maximization of the company's value at a sale for the stockholders' benefit.
D) ensuring minority shareholder representation to vote a certain percentage of overall shares.

Question 38

In CASE 20.1 Smith v.Van Gorkom (1985),plaintiff-shareholders alleged the directors were grossly negligent in failing to inform themselves adequately before making a decision about a merger.How did the court rule and why?

A) For plaintiff-shareholders,because the board failed to obtain adequate information on merger terms and therefore was not protected by the business judgment rule.
B) For directors,because the board was protected by the business judgment rule since there was no conflict of interest.
C) For the directors,but the board was not protected by the business judgment rule but rather by the business merger rule.
D) For the directors,because the board was protected by the business judgment rule since fraud could not be established.

Question 39

What is required by the Sarbanes-Oxley Act of 2002 in regard to the certification of the accuracy of public companies' SEC filings and the adequacy of internal controls?

A) The chief executive officer,the chief financial officer,and all inside directors must certify the accuracy of public companies' SEC filings and the adequacy of internal controls.
B) The chief executive officer,the chief financial officer,and any controlling shareholder must certify the accuracy of public companies' SEC filings and the adequacy of internal controls.
C) The chief executive officer and the chief financial officer must certify the accuracy of public companies' SEC filings and the adequacy of internal controls.
D) The chief executive officer,the chief financial officer,and all outside directors must certify the accuracy of public companies' SEC filings and the adequacy of internal controls.

Question 40

Which of the following is true regarding state rules of corporate governance?

A) Under the U.S.Constitution,a state may only apply its corporate governance rules to corporations incorporated in the state.
B) California imposes state pro-shareholder rules on quasi-foreign corporations.
C) There are no state rules of corporate governance because the Securities and Exchange Commission has preempted the field.
D) By federal law,if a state wishes to impose corporate governance requirements on corporations incorporated in the state,then the same rules must be imposed on corporations operating in the state but incorporated in another state.

Question 41

__________ is a purchase of a dissident shareholder's stock by the issuer at a premium over market,often in exchange for a standstill agreement,whereby the shareholder agrees not to commence a tender offer or proxy contest or to buy additional shares of the issuer for a period of time.

A) Greenmail
B) A freeze out
C) Choice agreement
D) Equitable agreement

Question 42

A __________ occurs when minority shareholders are forced to convert their shares into cash,for example,when a subsidiary merges with its parent.

A) hostile takeover
B) sale of assets
C) freeze-out
D) tender offer

Question 43

Yoshi,a ballroom dance instructor,was recently asked to be a director of ABC Company,which is publicly traded.Although Yoshi is honored and excited,a friend,Joey,asks whether Yoshi had any experience in accounting,business,or SEC requirements.Yoshi explained that the president of ABC had given assurances that the only responsibility of a director was acting as a figurehead because the officers took care of all detailed corporate business.Yoshi believes accepting the position will provide greater exposure in the community and perhaps increase dance clientele.Is Yoshi correct regarding the responsibilities of a director,and why or why not?

A) Yoshi is correct that the primary job of a director is to serve as a figurehead.
B) Yoshi is correct that the primary job of an outside director is to serve as a figurehead,but that is not true of inside directors.
C) Yoshi is not entirely correct,but has no affirmative responsibility to ensure the accuracy of any reports because that is entirely the responsibility of officers of the corporation.
D) Yoshi is incorrect,and the SEC emphasizes the responsibility of directors to ensure the accuracy and completeness of public company filings with the SEC.

Question 44

Which of the following is NOT a prime consideration in determining whether a fiduciary has taken an opportunity that belongs to a corporation?

A) Whether the opportunity is in the corporation's line of business
B) The amount of money the fiduciary stands to make
C) Whether the fiduciary developed the idea using corporation resources
D) Whether the involvement by the fiduciary will hinder the corporation's purposes

Question 45

Brice is on the board of ABC Corporation.XYZ Corporation has made a move to acquire ABC.Taylor,the president of ABC,advises the board that the offer made by XYZ is a good one that should be accepted.Taylor did not disclose,however,that XYZ had offered a generous bonus if Taylor could convince the board members of ABC to take XYZ's offer.Brice tells the other board members that they should simply rely on Taylor,who is probably right,and under the business judgment rule they are protected even if Taylor is wrong.Which of the following is true regarding Brice's advice?

A) Brice is correct.
B) Brice is correct only if the directors of ABC had been soliciting offers,and Taylor was charged with reviewing them.
C) Brice is incorrect unless it can be established that Taylor has prior experience in mergers and acquisitions.
D) Brice is incorrect because no statement made by an officer is entitled to blind reliance.

Question 46

Which of the following is true regarding breakup fees?

A) They are sometimes characterized as liquidated damages.
B) The Securities and Exchange Commission prohibits the payment of breakup fees.
C) Breakup fees are typically 20-25 percent of the value of the deal.
D) They are sometimes characterized as liquidated damages,and breakup fees are typically 20-25 percent of the value of the deal.

Question 47

The duty of __________ requires officers to exercise reasonable supervision over the business affairs of the corporation.

A) care
B) loyalty
C) obedience
D) ethics

Question 48

__________ occurs when a raider acquires stock in a target company and then threatens to commence a hostile takeover unless the stock is repurchased by the target at a premium over the market price.

A) Revlon mode
B) The Van Gorkom test
C) The Unocal proportionality test
D) Greenmail

Question 49

Even when the board makes an informed decision,the business judgment rule is not applicable if:

A) the transaction is approved by a majority of the disinterested directors after full disclosure of all the facts.
B) the directors have no duty of loyalty or care to the corporation.
C) the directors have a financial or other personal interest in the transaction at issue.
D) the directors neither have an interest on either side of the transaction nor expect to derive any personal financial benefit from the transaction.

Question 50

What is a poison pill? What factors favor keeping a poison pill in place?

Question 51

In a __________,someone wishing to replace the board with his or her own candidate attempts to acquire a sufficient number of shareholder votes to do so through limited written powers of attorney entitling the holder to vote the shares owned by the person giving the power of attorney.

A) hostile takeover
B) proxy contest
C) poison pill
D) greenmail takeover

Question 52

In Case 20.4 Jones v.H.F.Ahmanson & Co.(1996),the court ruled that the majority shareholders who transferred their shares to a holding corporation,then took it public without allowing the minority to exchange their shares,breached their fiduciary duty to the minority shareholders.What did the court award to the minority shareholders in the way of damages?

A) The court awarded damages that would place the minority shareholders in a position at least as favorable as the position the majority shareholders had created for themselves.
B) The court awarded the majority shareholders' shares to the minority shareholders.
C) The court restored the company to its former nonpublic status and granted the issuance of enough shares given to minority shareholders to collectively make them a majority shareholder.
D) The court instructed the company to create a number of new board seats to represent minority shareholders equal to the number of board members representing majority shareholders.

Question 53

Which of the following provides procedural fairness when controlling shareholder engages in a transaction,such as a merger,with the company it controls?

A) A determination of the target's intrinsic value regardless of maximum shareholder value
B) The use of independent committees,advised by independent financial consultants
C) An arm's-length bias
D) A no-talk provision

Question 54

In CASE 20.3 In re Abbott Laboratories Derivative Shareholders Litigation (2003),the shareholder-plaintiffs alleged the corporate directors breached their duty of good faith through their failure to follow up on repeated notices of regulatory noncompliance.How did the court rule?

A) The court ruled the directors were not liable and did not breach any duty of good faith because they were unaware of the issues,and accepted corporate governance procedures did not require the disclosure of the noncompliance notices to them.
B) The court ruled the directors could not be held liable because the corporation's certificate of incorporation exempted directors from liability for breach of the duty of care.
C) The court ruled the business judgment rule applied and that the plaintiffs' allegations could not withstand the protection of that rule.
D) The court ruled the plaintiffs sufficiently pleaded allegations that,if true,constituted a breach of the duty of good faith leading to the directors' actions falling outside the protection of the business judgment rule.

Question 55

A shareholder who owns sufficient shares to outvote the other shareholders or to otherwise set corporate policy and thus to control the corporation is known as a(n)__________ shareholder.

A) controlling
B) absolute
C) self-dealing
D) chargeable

Question 56

What is a no-shop agreement?

A) An agreement whereby shareholders agree to not replace directors for a certain period of time
B) An agreement whereby directors agree to not replace officers for a certain period of time
C) An agreement whereby a target company agrees with a potential purchaser not to actively solicit other bidders but retains the right to negotiate with parties who submit unsolicited bids to the target
D) An agreement whereby shareholders agree to not replace directors or officers for a certain period of time

Question 57

A contractual provision insisted upon by a bidder limiting the ability of board members to negotiate with other bidders is referred to as a(n)__________ clause.

A) obedience
B) loyalty
C) negotiation
D) no-talk

Question 58

The __________ standard of review comes into place when a __________ implements a defensive measure that touches on issues of shareholder __________.

A) Unocal; board of directors; voting control
B) Blasius; board of directors; voting control
C) Revlon; board of directors; approval
D) Blasius; CEO; voting control

Question 59

In CASE 20.2 In re Citigroup Inc.Shareholder Derivative Litigation (2009),the Delaware Chancery Court __________ the shareholders' claims,holding that the allegations in the __________ to show that a demand on the __________ would have been futile.

A) affirmed; complaint were sufficient; shareholders
B) dismissed; answer were insufficient; directors
C) dismissed; complaint were insufficient; directors
D) affirmed; answer were sufficient; directors

Question 60

A transaction that benefits a director's self-interest is voidable:

A) in all cases.
B) unless the director could show it was fair and reasonable to the corporation.
C) unless no self-dealing was involved.
D) None of these answers is correct.

Question 61

What was the conclusion of the court in Unocal Corporation v.Mesa Petroleum Co.regarding the application of the business judgment rule to actions of directors in response to a takeover attempt?

Question 62

Maury is a fairly new director at ABC Corp.Pax,another director,expresses the belief that the company is in Revlon mode and that the directors should act accordingly.What is Pax referencing?

Question 63

What is greenmail? What is a standstill agreement? When,if ever,is the process of greenmail protected by the business judgment rule?

Question 64

Define and explain the purpose of the business judgment rule.Under what circumstances would the rule apply? When would the protection not apply? Discuss fully.

Question 65

What are the seven key factors that directors should consider in deciding whether to sell a company?

Question 66

What is a fiduciary duty,who must fulfill it,and what other duties are included within fiduciary duty?