Business law exam 6

An ___ ___ is also an officer of the corporation. Ex: CEO, CFO, General Counsel

Inside director

Offerings up to $50M in 12-month period

Regulation A

The 1934 securities exchange act applies to companies that have assets over $___ and ___ or more shareholders.

10 million; 500

One of the hallmarks of the corporate form is that shareholders may lose their investment in the corporation but no more than that. a. True b. False

a. True

Liability under Section 16(b) is strict liability, which means that: a. neither scienter nor negligence is required. b. scienter is not required. c. negligence is not required.

a. neither scienter nor negligence is required.

Ordinarily, who is entitled to vote at an annual corporate meeting? a. All persons who are past and present shareholders. b. All persons who are shareholders designated by the state. c. Only persons whose names appear on the corporation's stockholder records as owners are entitled to vote.

c. Only persons whose names appear on the corporation's stockholder records as owners are entitled to vote.

California has a state law that requires registration and disclosure requirements for securities sold within the state known as a: a. white sky law. b. red sky law. c. blue sky law. d. green sky law.

c. blue sky law.

SEC ___ __ is the initial registration form for new securities required by the SEC for public companies that are based in the U.S.

Form S-1

The directors who also are officers of the corporation

Inside directors

Any individual who wrongfully obtains inside information and trades on it for her or his personal gain is liable.

Misappropriation Theory

The directors who do not hold management positions at the corporation

Outside directors

Preferred stock, common stock, stock options and warrants, and ownership interests of LLC's are examples of ___ ___

Ownership interest

The minimum number of directors that must be present for business to be validly transacted

Quorum of Directors

The primary means of accomplishing these goals is the disclosure of important financial information through the ___ __ ___ before they are sold to the public.

Registration of securities

Various rules that permit issuers to raise private capital without registration and principally sophisticated investors who do not need as much protection.

Regulation D

Regulates the initial sale of a corporate stock

The securities act of 1933

Regulates the resale of a corporate stock

The securities act of 1934

Anyone who acquires information about a security from a corporate insider can be liable for insider training.

Tipper/Tippee Theory

A corporate director who sits on more than one board is engaging in illegal activity. a. True b. False

b. False

Loans, Promissory notes, bonds, and certificates of deposit are examples of ___ ___

debt interests

directors are ___ and owe the company fiduciary duties.

fiduciaries

An ___ ___ is a director who is not an owner or employee

outside director

Issuing corporations must also file a ___ ___ with the SEC and must provide all investors with a ___

registration statement; prospectus

The 1934 Securities Exchange Act provides for the regulation and registration of securities exchanges, brokers, dealers, and national securities associations such as the National Association of Securities Dealers (NASD). a. True b. False

a. True

Today, every state has its own corporate securities laws that regulate the offer and sale of securities within its borders. a. True b. False

a. True

When a violation of Section 16(b) occurs, a corporation can bring an action to recover the short-swing profits. a. True b. False

a. True

Lysco, Inc., gives to all 15,000 of its shareholders the right to purchase newly issued shares of Lysco, Inc., stock in proportion to the percentage of shares they currently own and before anyone else is offered the shares. This right is known as: a. a proxy right. b. an attachment right. c. a cumulative voting right. d. a preemptive right.

d. a preemptive right.

Carmen is the vice president for marketing for Nita's Web Design. She also sits on the board of directors. Carmen would be considered: a. an illegal director. b. an outside director. c. ineligible to serve on the executive committee. d. an inside director.

d. an inside director.

When Craig sells securities in his company, he deliberately overstates the value of the company in the prospectus and begins selling the shares one week before the effective date of the registration. What is Craig subject to? a. Prosecution by the Department of Justice and liability for fines and damages if investors are harmed by his acts. b. Only to criminal prosecution by the state attorney general in the state where he committed the crime. c. Only to civil fines and damages imposed by the SEC. d. Only to civil fines and damages imposed by the state attorney general.

a. Prosecution by the Department of Justice and liability for fines and damages if investors are harmed by his acts.

When a company distributes a portion of its income or profits in cash, property or stock to its shareholders in proportion to their shares, it is called: a. a dividend. b. a dissolution. c. a proxy. d. an assumption.

a. a dividend.

The purpose of regulating securities was to accomplish all of the following except: a. provide investors with more information. b. prohibit deceptive practices. c. curb highly profitable transactions. d. prevent unfair practices.

c. curb highly profitable transactions.

Insider trading involves individuals who are: a. inside the SEC and have employment in a position of trust and confidence. b. inside prison at the time the allegedly illegal trade occurred. c. insiders within publicly traded companies, including officers, directors, and majority shareholders.

c. insiders within publicly traded companies, including officers, directors, and majority shareholders.

Doug is the vice president of product development for a corporation that makes flavored honey. Doug proposes to the board that they approve three new products: chili-flavored honey, seaweed-flavored honey, and black-licorice honey. Doug and his team have market tested the flavors and they received positive reviews from focus groups. The board approves the flavors, which then fail miserably and cost the company thousands of dollars. If some shareholders sue the board for its decision to market the flavors, the board most likely will: a. be held responsible because of the business judgment exception. b. not be held responsible because of the duty of loyalty. c. not be held responsible because of the business judgment rule. d. be held responsible for letting such horrible flavors go to market.

c. not be held responsible because of the business judgment rule.

Suzy signs a written agreement with Phillip giving him the right to cast her votes for a certain group of people nominated for the board of directors at Syllibar Corporation. This agreement between Suzy and Phillip is known as a: a. cumulative voting agreement. b. derivative agreement. c. subpoena. d. proxy.

d. proxy.

Issuers must comply with both federal and state securities laws, and exemptions from federal law are not expemptions from state laws.

Concurrent Regulation

An ownership or debt interest in a company can be considered a ___

Security

If a corporation issues shares of stock for less than their fair market value, the shares are referred to as: a. preferred stock. b. common stock. c. split stock. d. watered stock.

d. watered stock.

What happens when the Internet is used for the delivery of a prospectus? a. The same rules apply that apply to the delivery of a paper prospectus. b. The delivery is voidable. c. There is, in effect, no legal delivery because the SEC has not yet developed rules to cover this situation.

a. The same rules apply that apply to the delivery of a paper prospectus.

An important structure in corporate governance is the board of directors, because the board makes major decisions about the future of the corporation. a. True b. False

a. True

Before a shareholder's meeting, a group of shareholders can create a shareholder voting agreement by agreeing in writing to vote their shares together in a specified manner. a. True b. False

a. True

Corporate officers are hired by the directors. a. True b. False

a. True

Directors and officers may be liable for the actions of corporate employees under their supervision as well as for their own torts and crimes. a. True b. False

a. True

Effective corporate governance is essential in large corporations because corporate ownership, by shareholders, is separated from corporate control, by officers and managers. a. True b. False

a. True

If a board of directors declares a dividend to "pay back" investors but that dividend would cause them to have to miss paying several bills as they become due, the members of that board will be personally responsible for any loss to the corporation. a. True b. False

a. True

Sections 302 and 404 of the Sarbanes-Oxley Act require high-level managers and many senior officers to establish and maintain an effective system of internal controls. a. True b. False

a. True

Securities generally are defined as any instruments representing corporate ownership, such as stock, or debts, such as bonds. a. True b. False

a. True

he SEC is NOT responsible for: a. supervising mutual funds. b. issuing government bonds. c. regulating trade of securities. d. investigating securities fraud.

b. issuing government bonds.

Blue sky laws are: a. state laws regulating intrastate sales of securities. b. federal laws regulating mutual funds. c. interstate laws governing bond sales.

a. state laws regulating intrastate sales of securities.

Bonner Industries, Ltd., a private company, is considering an initial public offering. If the company goes public, it will be regulated by the: a. FTC. b. SEC. c. FCC. d. DOJ.

b. SEC.

Don, Keith, Jack, and Diane are shareholders in a close corporation. Don and Keith, as majority shareholders, owe which of the following duty to Jack and Diane as minority shareholders: a. a goodwill duty. b. a fiduciary duty. c. a good faith and fair dealing duty. d. no duty.

b. a fiduciary duty.

The business judgment rule states that directors and officers: a. must make good business judgments or be held personally liable for any loss to the corporation. b. are immune from liability for bad business decisions, provided they exercised due care and used their best judgment in guiding corporate management. c. are never liable for bad business decisions if they attend all their meetings and vote for the actions.

b. are immune from liability for bad business decisions, provided they exercised due care and used their best judgment in guiding corporate management.

Officers and directors have a special relationship with the corporation and its shareholders and are called: a. registered agent. b. fiduciaries. c. responsible parties. d. managers.

b. fiduciaries.

If directors of a company learn that a large lawsuit will be filed against the company, they: a. are subject to criminal and civil penalties for insider trading under all circumstances if they sell their stock. b. must disclose that they know about the lawsuit if they want to sell their stock before news about the lawsuit becomes public knowledge. c. cannot sell their stock until one year after the lawsuit is filed.

b. must disclose that they know about the lawsuit if they want to sell their stock before news about the lawsuit becomes public knowledge.

Section 16(b) of the Securities Exchange Act of 1934 provides for the: a. exemption of certain small companies from registration requirements. b. recapture by a corporation of short-swing profits resulting from insider trading. c. exemption of credited investors from registration requirements.

b. recapture by a corporation of short-swing profits resulting from insider trading.

The reason that most states either permit or require cumulative voting when electing directors is to: a. reduce fraud among voters. b. allow directors to have greater input in the election process. c. allow minority shareholders a chance at electing a director. d. allow minority shareholders to control the election process.

c. allow minority shareholders a chance at electing a director.

To encourage shareholders to pay attention to the board's actions, when a shareholder's derivative suit is won, the damages: a. are fully paid to the shareholders who brought the suit. b. are paid to the shareholders, but only up to fifty percent of the damages. c. are paid into the corporation's treasury.

c. are paid into the corporation's treasury.

A corporation is governed by a ___ __ ___ elected by the ___.

board of directors; shareholders

The Securities Act of 1933 was designed to: a. regulate the operations of national stock exchanges. b. oversee and regulate national security contracts. c. require disclosure of all relevant information concerning the issuance of securities to the public. d. promote the use of proxies by shareholders.

c. require disclosure of all relevant information concerning the issuance of securities to the public.

The chief executive officer (CEO) and chief marketing officer (CMO) of North Systems Co. filed a statement under Section 906 of the Sarbanes-Oxley Act. This statement certified that filed financial reports fully comply with SEC requirements, and that the information reported fairly represents the financial conditions and operations of the company. Regarding Section 906, the statement: a. does not comply, because the chief financial officer (CFO) is missing from the statement. b. complies, because both the CEO and CMO signed the statement. c. does not comply, because the chief learning officer (CLO) is missing from the statement. d. complies, because the CEO signed the statement, and only her signature is necessary.

a. does not comply, because the chief financial officer (CFO) is missing from the statement.

Marianne makes a false statement about the future earnings potential of her company, DexaCom. Shareholders sue Marianne for securities fraud. These shareholders can file their lawsuit pursuant to: a. federal and state securities laws. b. federal laws only, as states generally do not have securities antifraud provisions. c. state laws only, as federal law generally does not have securities antifraud provisions. d. neither federal nor state securities laws, but rather through administrative agency proceedings.

a. federal and state securities laws.

Epsilon Corporation has been struggling for a number of years. Zeta Corporation is interested in purchasing and making productive use of Epsilon's assets, but dissolving the corporation. In order for this sale to occur: a. Epsilon must be on the verge of bankruptcy. b. Epsilon's shareholders must approve it. c. the president of Epsilon must sign the contract. d. the Federal Stock Commission must approve it.

b. Epsilon's shareholders must approve it.

Directors are hired by the shareholders through an interview process. a. True b. False

b. False

In order to improve corporate governance, most large corporations have eliminated the use of outside directors. a. True b. False

b. False

Preemptive rights are not important in close corporations because all of the shareholders are family or close friends. a. True b. False

b. False

SEC Rule 10b-5 applies only to cases that involve the trading of securities on organized exchanges, such as the New York Stock Exchange. a. True b. False

b. False

Shareholders must approve any corporate decision that would cost more than $10,000. a. True b. False

b. False

State securities laws generally do not provide for the registration of securities offered or issued because that is governed by federal law. a. True b. False

b. False

The directors and officers of Sports Color, Inc., vote to refuse to declare a dividend. Believing that the refusal is unreasonable, the shareholders can: a. return treasury shares in exchange for a dividend. b. file an action to require the directors to declare a dividend. c. demand that a court declare a dividend. d. overrule the directors and vote to declare a dividend themselves.

b. file an action to require the directors to declare a dividend.

Betty, a corporate director, has engaged in a number of acts that constitute a conflict of interest between her and Global Mfg., Inc. The corporation shareholders want to remove her, and in most jurisdictions can do so: a. in good faith. b. for cause. c. when the shareholders vote at the next annual meeting. d. only when her term expires.

b. for cause.

The board of directors of Consolidated Freight, Inc., are concerned about the potential for financial mismanagement by executives of the firm. In order to obtain more information about the firm's internal financial reporting processes, the board of directors would most likely rely on the: a. compensation committee. b. development committee. c. shareholder committee. d. audit committee.

d. audit committee.

As a director and officer of Max Transport, Inc., Max would most likely be considered to have breached his duty of loyalty if he: a. becomes a director of CineMax, a chain of multiplex theaters. b. personally takes advantage of a business opportunity that the officers and directors of Max Transport voted against. c. suggests to the other members of the board that the company should purchase a new line of trucks. d. buys stock in Arnold's Transport, Inc., a competing trucking firm.

d. buys stock in Arnold's Transport, Inc., a competing trucking firm.

Mandy's Muffins, Inc., makes a profit in 2015. The managers of Mandy's Muffins, Inc., decide to distribute the profits to the corporation's shareholders in proportion to the number of shares held. The profits distributed to the shareholders are known as: a. retained earnings. b. shareholder profits. c. public earnings. d. dividends.

d. dividends.

Each state has its own corporate securities laws, or ___ ___ ___, that regulate the offer and sale of securities within its borders.

blue sky laws

Securities that at the time of issue were not of the same class as securities listed on a national securities exchange or quoted in a U.S. automated interdealer quotation system may be resold under Rule 144A. a. True b. False

a. True

Gary is an employee of Thomaston Scientific. Gary learns that the R&D department discovered a new drug that will help treat heart disease better than similar medicines already on the market. Gary tells his friend Patrick about the discovery, discloses where the information came from and asks Patrick to keep it private. Instead, Patrick purchases stock on Thomaston Scientific and profits from the transaction. Patrick will be: a. found liable for insider trading as a tippee. b. found liable under the Private Securities Litigation Reform Act. c. not found liable for insider trading because Gary did not breach his duty to the company when he told a friend. d. not found liable for insider trading, because Patrick did not have a fiduciary duty to Thomaston Scientific.

a. found liable for insider trading as a tippee.

Mark is a director of Bromley Corp. Mark also owns a printing company named BooksMark. If Bromley Corp. needs a marketing brochure printed and BooksMark is being considered as the printer for that brochure, Mark must: a. fully disclose his interest to the other board members and abstain from voting on the matter. b. never enter into a contract like this. c. resign from the board if anyone questions the conflict of interest. d. do nothing other than vote for the contract.

a. fully disclose his interest to the other board members and abstain from voting on the matter.

Jackson owns a large apple orchard. Jackson sells buyers a standard plot of land on the orchard for a uniform price. The buyers then lease the land back to Jackson, who completely manages the apple orchards on the buyers' behalf. Buyers then share in the profits of the apples when sold. This arrangement: a. is an investment contract, because it satisfies the Howey test. b. is not an investment contract, because it does not satisfy the Howey test. c. is not an investment contract, because it does not deal with stocks or bonds. d. is an investment contract, because it involves agricultural products.

a. is an investment contract, because it satisfies the Howey test.

Acme, Inc., a publicly traded company with a market value of $50 million: a. is exempt from filing an auditor's report on management's assessment of internal controls. b. is exempt from the requirement that its CFO certify the accuracy of the corporate financial statements. c. is exempt from filing stock transaction reports with the SEC. d. is exempt from the requirement to improve the directors' monitoring of officer's activities.

a. is exempt from filing an auditor's report on management's assessment of internal controls.

JR Shipment, Inc., a public company, has formed a corporate audit committee in order to monitor the financial operations of the firm. The corporate audit committee has four outside directors and three inside directors on the committee. Under Section 906 of the Sarbanes-Oxley Act, this committee: a. is improper, because it has inside directors on the committee. b. is properly formed, because it has more outside directors than inside directors. c. is improper, because no members of the board of directors can serve on this committee. d. is properly formed, because it is composed of at least nine members from the board of directors.

a. is improper, because it has inside directors on the committee.

Jeremy is a director of Cloud Energy. He and his wife, Janice, own a large number of shares of stock in the company. Janice is an attorney in a law firm. She finds out that her firm is planning to file a class-action lawsuit against Cloud Energy. Jeremy and Janice now know that the price of the stock will drop as soon as the lawsuit hits the news. Jeremy and Janice: a. must disclose what they know about the lawsuit if they want to sell their stock before news about the lawsuit becomes public knowledge. b. cannot sell their stock until one year after the lawsuit is filed. c. are subject to criminal and civil penalties for insider trading if they sell their stock. d. are fortunate to have this information so they can improve the condition of their investment portfolio.

a. must disclose what they know about the lawsuit if they want to sell their stock before news about the lawsuit becomes public knowledge.

Galen and Leslie are directors, but not officers, of Tropical Travels, Inc. Tropical Travels, Inc., becomes embroiled in a controversy over airline kickbacks. As directors, Galen and Leslie can be named in any lawsuit that may result from the company's actions. If they have any expenses related to the lawsuit, they may be compensated for those under their right of: a. compensation. b. indemnification. c. participation. d. inspection.

b. indemnification.

Irene is a representative of Baroque Minerals, a publicly-traded mining company. Irene states publicly that it has discovered a significant deposit of a rare mineral in China, which promises to substantially increase the long-term revenue of the company. Unbeknownst to Irene, an unexpected earthquake that same day destroys the mine in China and blocks access to the rare mineral for years to come. The company's stock drops as a result. Baroque Minerals will likely be: a. not liable under SEC Rule 10b-5, because Irene because of the natural exigency defense to such claims. b. not liable under SEC Rule 10b-5, because Irene did not have a wrongful state of mind. c. liable under SEC Rule 10b-5. d. not liable under SEC Rule 10b-5, because Irene did not make a material misrepresentation.

b. not liable under SEC Rule 10b-5, because Irene did not have a wrongful state of mind.

Genevieve is a member of the board of directors and the chief financial officer of The Shoe Fits, Inc. Under the duty of care that she owes the corporation, Genevieve does not need to: a. attend board meetings and oversee the corporation's employees and other officers. b. oversee every aspect of the business, including such things as ordering merchandise and arranging for janitorial services. c. attend presentations and make a careful study of business choices before making decisions. d. read reports and other materials to be reasonably informed.

b. oversee every aspect of the business, including such things as ordering merchandise and arranging for janitorial services.

What is a major difference between the Securities Act of 1933 and the Securities Exchange Act of 1934? a. There is no difference because they basically regulate the same activities. b. The type of securities that are regulated, particularly in the area of Internet securities. c. The 1933 act is a one-time disclosure law, whereas the 1934 act provides for continuous, periodic disclosures by publicly held corporations.

c. The 1933 act is a one-time disclosure law, whereas the 1934 act provides for continuous, periodic disclosures by publicly held corporations.

In 2002, the National Conference of Commissioners on Uniform State Laws substantially revised the _____________ to coordinate state and federal securities regulation and enforcement efforts. a. Uniform Commercial Code b. Uniform Negotiable Instrument Act c. Uniform Securities Act d. Uniform Regulation Act e. Uniform Stock Act

c. Uniform Securities Act

Modern Investments is a small business that focuses primarily on securities trading in South America. The company wants to issue a securities offering to the public worth $500,000. Modern Investments is: a. partially exempted from registration requirements under Rule 144. b. exempted from registration requirements under Rule 505. c. not exempted from registration requirements under Rule 504. d. exempted from registration requirements under Rule 504.

c. not exempted from registration requirements under Rule 504.

Susan is a potential investor in MegaCo. Susan learns of a press conference held by MegaCo in which the CEO knowingly states that there are no merger negotiations between MegaCo and another company. As a result, Susan decides not to purchase stock in MegaCo. Three weeks later, the public learns that, contrary to what the CEO stated, MegaCo was actually in merger negotiations with another company. The stock price of MegaCo rises as a result and Susan sues MegaCo for violation of SEC Rule 10b-5. Susan will likely: a. not win because the CEO of MegaCo did not have a wrongful state of mind when he made the false merger statement. b. prove all elements of her 10b-5 claim. c. not win because the misrepresentation did not occur in connection with a purchase or sale of stock. d. not win because she did not rely on the misstatement.

c. not win because the misrepresentation did not occur in connection with a purchase or sale of stock.

Internet Analytics is a successful search-engine company that wants to become a publicly traded company. As it is an Internet-focused company, company executives want to deliver its prospectus to investors exclusively via the Internet. Internet Analytics may: a. not deliver its prospectus because Internet companies are not regulated by the SEC. b. only use the mail to supply its prospectus to investors, as electronic distribution is not allowed. c. deliver its prospectus electronically, though only Internet companies may do so. d. deliver its prospectus to investors exclusively via the Internet because it is permitted by the SEC.

d. deliver its prospectus to investors exclusively via the Internet because it is permitted by the SEC.

Ruis Corporation, a publicly held corporation, has thirty-five members on its board of directors. In order to conduct business efficiently, the chairman of the board is proposing that five committees be created: the executive committee, the human resources committee, the marketing committee, the research and development committee, and the sales committee. Seven members of the board would serve on each committee and each board member would serve on only one committee. This is: a. legal, because the board may function as it sees fit within the boundaries of the bylaws. b. illegal, because the Sarbanes-Oxley Act requires an international compliance committee. c. illegal, because the federal law sets a maximum of four board committees per corporation. d. illegal, because the Sarbanes-Oxley Act requires all publicly held corporations to have an audit committee.

d. illegal, because the Sarbanes-Oxley Act requires all publicly held corporations to have an audit committee.

Computer Company is planning to make a private stock offering. It hopes to net $4 million from the sale of the stock. It will not advertise the offering and will cap the number of unaccredited investors at thirty-five. It will notify the SEC of the sales and will provide all investors with a prospectus. It will not, however, assess the investment knowledge of the buyers of its stock. Computer Company's sale: a. is exempt from the registration requirements of the Securities Act of 1933 under Rule 506. b. is subject to the registration requirements of the Securities Act of 1933. c. violates the requirements of Rule 505 of the Securities Act of 1933. d. is exempt from the registration requirements of the Securities Act of 1933 under Rule 505.

d. is exempt from the registration requirements of the Securities Act of 1933 under Rule 505.

Nikki and Jim own a corporation together. Nikki owns forty-eight shares of stock and Jim owns fifty-two. They consider themselves investors, so they elect a board of three directors to oversee the business. To ensure that Nikki can elect at least one director, the corporation should: a. use straight voting. b. set aside one director for Nikki, one for Jim, and select the third by random drawing. c. be the directors themselves. d. use cumulative voting.

d. use cumulative voting.