Deck 42: Organization and Financial Structure of Corporations

Question 1

Under the Model Business Corporation Act, a corporation may not issue its shares in return for any benefit to the corporation.

Answer 1

False

Question 2

Joe is the promoter of New Corporation (NC). He entered into various preincorporation contracts. NC was properly formed on January 1, 2006. As a result:

A) Joe is no longer personally liable on those preincorporation contracts.
B) NC is automatically liable on those preincorporation contracts.
C) Joe is jointly and severally liable on preincorporation contracts.
D) Joe is not liable because NC released him from personal liability.

Answer 2

C

Question 3

Mandatory dividend provisions enacted in corporate laws have generally been held legal.

Answer 3

False

Question 4

A party who makes a preincorporation contract with a corporate promoter is liable on the preincorporation contract:

A) only after the corporation's board of directors adopts the contract after the corporation has come into existence.
B) only after the corporation's articles have been filed with the secretary of state.
C) when the party agrees to look only to the prospective corporation for performance of the contract.
D) only when the promoter is liable on the contract.

Question 5

As per the Model Nonprofit Corporation Act (MNCA), a nonprofit corporation need not have members for its existence.

Question 6

A promoter:

A) may have liability on the contracts he negotiates on behalf of the prospective corporation.
B) does not hold any liability to third parties on preincorporation contracts.
C) automatically becomes one of the initial directors of the corporation.
D) is not liable on a preincorporation contract after the corporation's adoption of the contract.

Question 7

A right of first refusal on a share certificate allows the corporation to match the offer that a selling shareholder receives for his shares.

Question 8

A passive investor who believes she has invested in a corporation has no liability for the obligations of the business if the corporation has not in fact been formed.

Question 9

Under the MBCA, an incorporator may become jointly and severally liable for preincorporation contracts just by being an incorporator.

Question 10

Two corporations in a state may have the same names.

Question 11

A corporation is required to reimburse a promoter for his reasonable expenses incurred on behalf of the corporation prior to incorporation.

Question 12

In order to capitalize a newly formed corporation, the company will usually seek cash in exchange for equity securities, debt securities, or both.

Question 13

Memberships in a nonpublic corporation are freely transferable.

Question 14

When a promoter is liable on a preincorporation contract, the promoter is released from liability on the contract:

A) only after the contract has been fully performed.
B) when the corporation ratifies the contract.
C) when the corporation and the third party to the contract agree to release the promoter from liability.
D) when the corporation's articles have been filed by the secretary of state.

Question 15

Rice is a promoter of a corporation to be known as Dex Corp. On January 1, 1985, Rice signed a nine-month contract with Roe, a CPA, which provided that Roe would perform certain accounting services for Dex. Rice did not disclose to Roe that Dex had not been formed. Prior to the incorporation of Dex on February 1, 1985, Roe rendered accounting services pursuant to the contract. After rendering accounting services for an additional period of six months pursuant to the contract, Roe was discharged without cause by the board of directors of Dex. In the absence of any agreements to the contrary, who will be liable to Roe for breach of contract?

A) Both Rice and Dex
B) Rice only
C) Dex only
D) Neither Rice nor Dex

Question 16

Under the Model Business Corporation Act (MBCA), a prospective shareholder may not revoke a preincorporation subscription for a six-month period, in the absence of a contrary provision in the subscription.

Question 17

Only when the promoter is liable on the preincorporation contract is the other party liable on the contract.

Question 18

Promoters are personally liable on a preincorporation contract but are released from liability when the corporation adopts the contract.

Question 19

Corporations are generally liable on preincorporation contracts signed by their promoters.

Question 20

Watered shares are shares issued for consideration that has been overvalued impermissibly by the board of directors.

Question 21

The fiduciary duty to the corporation is owed by its:

A) shareholders.
B) promoters.
C) investors.
D) creditors.

Question 22

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

A) The number of shares that the corporation has authority to issue.
B) The name and address of each incorporator.
C) The address of the initial registered office of the corporation.
D) The names and addresses of the individuals who are to serve as the initial directors.

Question 23

Which of the following occurs at a corporation's organization meeting?

A) Adoption of preincorporation contracts.
B) Authentication of the articles of incorporation.
C) Adoption of bylaws to supplement the articles of incorporation.
D) Creation of preincorporation contracts.

Question 24

To retain its status as a corporation in good standing, a corporation must:

A) pay an annual franchise fee or tax.
B) hold an annual shareholders' meeting.
C) pay an annual dividend to shareholders.
D) hold an annual board of directors' meeting.

Question 25

Which of the following is included in the articles of incorporation?

A) The number of shares a corporation is authorized to issue.
B) The standards for declaring dividends.
C) The procedures for calling special meetings of shareholders.
D) The procedures for maintenance of share records.

Question 26

Sharon entered into a preincorporation share subscription agreement on January 1, 2006. The corporation was formed on February 1, 2006. What is the status of this agreement on March 1, 2006, under the Model Business Corporation Act?

A) It is binding only if Sharon has already paid for the shares.
B) It is binding even if Sharon has not already paid for the shares.
C) It is not binding because the corporation did not exist on January 1, 2006.
D) It is not binding unless Sharon ratifies the agreement after the corporation has been formed.

Question 27

A promoter owes a fiduciary duty to the corporation and to its prospective investors. This implies that:

A) a promoter is an agent of the prospective corporation.
B) prospective investors in the business can control actions of a promoter.
C) a promoter may engage in intrinsically fair transactions with the corporation.
D) a promoter is an agent of the prospective investors in the business.

Question 28

John is the promoter of Wheelies Corp., an automotive wheel manufacturing business. To escape personal liability on preincorporation contracts, John planned to make only nonbinding preincorporation contracts. He made one such contract in March 2011 with his friend David for supplying Wheelies with auto parts. After getting payment for the contract, David refused to make the supply. Wheelies has not been incorporated yet. Is David liable?

A) No, David is not liable because John is not liable on the contract.
B) No, David is not liable because Wheelies has not been formed yet.
C) Yes, David is liable to Wheelies but not to John.
D) Yes, David is liable to both John and Wheelies.

Question 29

When the promoters of a business substantially comply with each of the mandatory conditions precedent to the incorporation of the business, a(n) _____ corporation is formed.

A) "S"
B) de jure
C) de facto
D) estoppel

Question 30

On preincorporation share subscriptions:

A) promoters have no liability.
B) promoters have no liability after incorporation.
C) promoters have personal liability till novation.
D) promoters have maximum liability.

Question 31

Generally, corporate acceptance of preincorporation subscriptions occurs by action of the:

A) board of directors after incorporation.
B) promoters during their issuance.
C) board of directors during their issuance.
D) promoters before incorporation.

Question 32

The basic governing document of the corporation is the:

A) articles of incorporation.
B) bylaws.
C) shareholder agreement.
D) organizational operating agreement.

Question 33

Which of the following is included in the bylaws?

A) The purpose of the corporation.
B) The machinery for the transfer of shares.
C) The par value of shares of the corporation.
D) The duration of the corporation.

Question 34

Promoters of a youth-oriented magazine publishing business substantially complied with each of the mandatory conditions precedent to the incorporation of the business, but they forgot to include the incorporators' addresses in the articles of incorporation. As a result, a(n) _____ corporation was formed.

A) de jure
B) de facto
C) "S"
D) estoppel

Question 35

Under the Model Business Corporation Act, a corporation's existence begins:

A) only after the promoters substantially comply with each of the mandatory conditions precedent to incorporation and hold an organization meeting.
B) only after the articles of incorporation are filed with the secretary of state.
C) when the secretary of state returns to the corporation a copy of the articles stamped "Filed."
D) when the shareholders approve of all the changes in the articles.

Question 36

The Statutory Close Corporation Supplement to the MBCA permits a corporation with _____ shareholders to elect to become a close corporation.

A) fewer than 100
B) 50 to 75
C) 75 to 100
D) fewer than 50

Question 37

Under the Model Business Corporation Act (MBCA), a prospective shareholder may not revoke a preincorporation subscription for a(n) _____ period, in the absence of a contrary provision in the subscription.

A) nine-month
B) one-year
C) two-year
D) six-month

Question 38

Any corporation that has complied with all mandatory provisions is called a:

A) de facto corporation.
B) partnership.
C) de jure corporation.
D) defective incorporation.

Question 39

Because the articles of incorporation embody the basic contract between a corporation and its shareholders, shareholders must approve most changes in the articles. Which of the following is an example of "such changes" in the article?

A) Place of shareholder meeting
B) Increase in the number of authorized shares
C) Amount of annual dividend
D) Date of shareholder meeting

Question 40

A preincorporation share subscription is:

A) a contract binding the corporation at the time of incorporation.
B) irrevocable by the subscriber for six months after the subscription has been issued.
C) a contract binding the corporation at the time of its issuance.
D) preferred by modern corporate promoters over a post incorporation subscription.

Question 41

_____ are long-term, unsecured debt securities.

A) Options
B) Warrants
C) Bonds
D) Debentures

Question 42

N-Ext Corp. (NEC) was defectively organized. As a result, even a corporation by estoppel could not be formed. As representatives of NEC, Pete (a shareholder manager) and Dave (a nonshareholder manager) made a contract with a vendor for supplying raw materials to NEC. The vendor did not get paid as per the contract. Who is liable in this situation?

A) NEC
B) Dave and NEC
C) Pete, Dave, and the management of NEC
D) Pete and NEC

Question 43

According to the MBCA, who amongst the following is liable for a defective corporation's contracts and torts?

A) A shareholder manager who knows that the corporation does not exist.
B) A passive shareholder who knows that the corporation does not exist.
C) A nonshareholder manager who believes that the corporation exists.
D) A member of the board of directors who believes that the corporation exists.

Question 44

Andrew decides to incorporate his sole proprietorship under the name Sampras Entertainment Corporation. He tells his lawyer to file articles of incorporation, and the lawyer says that the filing will be done on July 1. On June 25, Andrew makes a contract with Wimbledon Corporation. Andrew signs the contract in the name of Sampras Entertainment Corporation only. On July 1, the secretary of state files the articles. Under the MBCA, is Andrew liable on the contract with Wimbledon?

Question 45

The board of directors of Laylow Corporation issued 1,000 shares representing 10 percent of the corporation to Don in exchange for an unsecured promissory note to pay Laylow $50,000 within the next 20 years. Don is the son of Charles, owner of 70 percent of the shares of the corporation. The total book value of the corporation at the time Laylow issued the shares was $5,000,000. Alan and Bob, owners of 20 percent of the total shares, discovered the transaction one month after it occurred. Alan and Bob sued Don on behalf of Laylow Corporation seeking to invalidate the transaction. Should the court invalidate it? Discuss.

Question 46

When close corporation shareholders want to ensure that there is a market for their shares upon their deaths, they should use a:

A) buy-and-sell agreement.
B) right of first refusal.
C) consent restraint.
D) provision disqualifying purchasers.

Question 47

According to the Model Nonprofit Corporation Act (MNCA), what is the minimum number of members that a nonprofit corporation is required to have?

A) 50
B) 1
C) 10
D) 0

Question 48

Shares permitted to be issued by a corporation are called:

A) preferred shares.
B) issued shares.
C) authorized shares.
D) outstanding shares.

Question 49

N-Gate Corporation (NGC) was defectively organized. As a result, not even a corporation by estoppel was formed. An NGC truck driver negligently ran over a pedestrian while delivering goods manufactured by NGC. The pedestrian now wants to sue. Who is liable in this situation?

A) The managers of NGC only.
B) The truck driver only.
C) The truck driver and the managers of NGC.
D) The truck driver, the managers of NGC, and all the purported shareholders of NGC.

Question 50

Equity securities consist of:

A) debentures and promissory notes.
B) short-term notes payable.
C) common and preferred shares.
D) bonds and debentures.

Question 51

Pamela is a corporate promoter for Nulla Corporation, a corporation yet to be formed. Pamela determines that Nulla will need to lease a building in which to conduct its business. Pamela owns an office building that is suitable for Nulla. What should Pamela do if she wants to make a contract for Nulla to lease the building from her?

Question 52

_____ shares are shares that have been sold to shareholders.

A) Preferred
B) Issued
C) Authorized
D) Outstanding

Question 53

ABC is a nonprofit corporation formed by Alex. As its promoter, Alex made a few contracts with Johnsons Inc. The following year, Alex formed another for-profit company. Meanwhile, Johnsons Inc., claimed that Alex has not honored the contracts he made with them as promoter of ABC. Is Alex liable for those contracts? If not, what remedies are available for Johnsons Inc.?

Question 54

Short-term certificated options that are usually transferable are referred to as:

A) options.
B) warrants.
C) bonds.
D) rights.

Question 55

Several states' constitutions place stricter limits than the MBCA on permissible considerations for issuance of common shares by corporations. Which of the following considerations is permissible under the MBCA but not permissible by such state constitutions?

A) A promoter's preincorporation services worth $25,000, which were performed prior to incorporation.
B) A gratuitous promise to contribute $35,000 in cash to the corporation.
C) Bonds of another corporation, which are worth $15,000.
D) The president's actual performance of services for the corporation, which are worth $50,000.

Question 56

If repurchased shares are neither canceled nor restored to unissued status, they are called _____ shares.

A) preferred
B) treasury
C) golden
D) outstanding

Question 57

Under the MBCA, which of the following is correct concerning shares repurchased by the corporation?

A) They are no longer issued or outstanding, which means that they may be resold only for par value or more.
B) They may either be restored to unissued status or held as treasury shares, which means they may be sold at any price.
C) They may be canceled, in which case they are no longer authorized and cannot be reissued.
D) They are issued but not outstanding, which means they may be resold at any price.

Question 58

A bank may lend money to a corporation in exchange for the corporation's short-term promissory notes, which are called:

A) shares.
B) commercial paper.
C) debentures.
D) bonds.

Question 59

Generally, _____ have a shorter duration than debentures or bonds.

A) options
B) warrants
C) promissory notes
D) rights

Question 60

Pedro is a corporate promoter for Nolo Corporation, a corporation yet to be formed. Pedro spends $40,000 of his own money and devotes 400 hours to bring Nolo and its business into existence. When Nolo is incorporated, Pedro asks the board of directors to issue some of its common shares to Pedro as compensation for his expenses and services. Would such an issuance be legal?