Business Legal Exam 4

8. Scienter is not a requirement for liability under Section 10(b) of the Securities Exchange Act of 1934.

FALSE

9. No one who receives inside information as a result of another's breach of his or her fiduciary duty can be liable under SEC Rule 10b-5.

FALSE

5. Oldway, Inc., is unprofitable. In a suit against Oldway, a court might order dissolution if the firm does not a. buy its stock from its shareholders. b. declare a dividend. c. make a profit this year. D.

D.

10. No security can be resold without registration.

FALSE

5. Private offerings of securities in unlimited amounts that are not generally solicited or advertised must be registered before they can be sold.

FALSE

3. A foreign corporation is formed in another country but does business in the United States.

FALSE. A corporation formed in a country other than the United States, but that does business in the United States, is an alien corporation. A foreign corporation is a corporation formed in one state, but doing business in another state.

7. S corporations cannot avoid federal taxes at the corporate level.

FALSE. An S corporation has tax imposed only at the shareholder level. Other corporations are subject to double taxation, however, which was one of the reasons for the enactment of the S corporation statute. Only corporations with seventy-five or fewer shareholders can qualify for S-corporation status, although in some circumstances, a corporation can be an S-corporation shareholder.

2. Appraisal rights are always available to shareholders.

FALSE. Appraisal rights are available only when a statute specifically provides for them. The rationale for appraisal rights is that shareholders should not be forced to become owners of corporations that are different from the ones in which they originally invested

6. Dissolution of a corporation cannot occur without the unanimous approval of its shareholders.

FALSE. Dissolution can occur by this means, but there are many other ways to bring about the dissolution of a corporation. Also, liquidation, which is the other step in the termination of a corporation, can be performed without court supervision.

9. State corporation laws are completely uniform.

FALSE. Each state has its own body of corporate law, and these laws are not identical. Most states have adopted, at least in part or at least in principle, the Model Business Corporation Act or its revision, the Revised Model Business Corporation Act. There is still variation among the states, however, some of which do not follow either act.

10. Appraisal rights are not normally available in sales of substantially all the corporate assets not in the ordinary course of business.

FALSE. In those states that provide for shareholder appraisal rights, they are usually available in sales of substantially all of a corporation's assets. Note that once a shareholder chooses to exercise appraisal rights, he or she loses his or her status (to vote, receive dividends, and so on) in many jurisdictions.

8. A corporation that buys the assets of another corporation always assumes the debts of the selling corporation.

FALSE. Ordinarily, a corporation that purchases the assets of another corporation does not assume the other's liabilities. In some cases, however, the purchasing corporation may be held responsible for the seller's liabilities (for example, if the purchasing corporation continues the seller's business with the same personnel).

4. Any power set out in a corporation's charter or bylaws is ultra vires.

FALSE. Powers set out in corporate documents (and in the laws of the state of incorporation and state and federal constitutions) are express powers. Acts of a corporation that exceed its express and implied powers are called ultra vires (which means "beyond the powers"). Legal and illegal acts can be ultra vires.

4. Shareholder approval is not required when a corporation sells all of its assets to another company.

FALSE. Shareholder approval is not normally required to buy all, or substantially all, of another corporation's assets. It is necessary, however, that the selling corporation's shareholders approve the sale of all or substantially all of its assets to another corporation.

3. Shareholder approval is not required to amend articles of incorporation.

FALSE. Shareholder approval is required to amend articles of incorporation (and to undertake other extraordinary business matters, such as selling all of a corporation's assets outside the ordinary course of business).

3. Preemptive rights entitle shareholders to bring a derivative suit against the corporation.

False

5. Damages recovered in a shareholder's derivative suit are paid to the shareholder who filed the suit.

False. Any damages recovered in a shareholder's derivative suit are normally paid to the corporation on whose behalf the shareholder or shareholders exercised the derivative right.

7. Directors, but not officers, owe a duty of loyalty to the corporation.

False. Officers and directors owe the same fiduciary duties to the corporations for which they work. They both owe a duty of loyalty. This duty requires them to subordinate their personal interests to the welfare of the corporation.

8. The business judgment rule makes a director liable for losses to the firm in most cases.

False. The business judgment rule immunizes directors (and officers) from liability for poor business decisions and other honest mistakes that cause a corporation to suffer a loss. Directors are not immunized from losses that do not fit this category, however.

1. A shareholder can sue a corporation, and a corporation can sue a shareholder.

TRUE

10. A corporation is liable for torts of its officers committed within the course and scope of employment.

TRUE

2. Before a security can be sold to the public, prospective investors must be provided with a prospectus.

TRUE

2. Generally, a promoter is personally liable on a preincorporation contract.

TRUE

3. Stock splits are generally exempt from the registration requirements of the Securities Act of 1933.

TRUE

4. Sales of securities may not occur until twenty days after registration.

TRUE

5. To a corporation, stocks represent corporate ownership.

TRUE

6. A proxy statement must fully and accurately disclose all of the facts that are pertinent to the matter on which shareholders are being asked to vote.

TRUE

6. To a corporation, bonds represent corporate debt.

TRUE

7. All states have disclosure requirements and antifraud provisions that cover securities.

TRUE

8. In some states, a close corporation can operate without formal shareholders' or directors' meetings.

TRUE

1. A security that does not qualify for an exemption must be registered before it is offered to the public.

True

1. In a short-form merger, the merging corporation's shareholders do not need to approve the merger.

True

1. The business judgment rule immunizes officers from liability for poor decisions made in good faith.

True

10. At a shareholders' meeting, a quorum must be present to vote on resolutions.

True

2. An officer is a fiduciary of a corporation.

True

4. Only certain funds are legally available for paying dividends.

True

6. Generally, shareholders are not personally responsible for the debts of the corporation.

True

7. In a consolidation, the new corporation inherits all of the rights of the consolidating corporations.

True

9. Shareholders may vote to remove members of the board of directors.

True

4. Daystar Company is a private, for-profit corporation that (1) was formed to market business office software, (2) is owned by ten shareholders, (3) is subject to double taxation, and (4) has made no public offering of its shares. Daystar is a. a closely held corporation. b. a nonprofit corporation. c. an S corporation. d. a professional corporation.

a. a closely held corporation.

8. Macro Corporation and Micro Company combine and a new organization, MM, Inc., takes their place. This is a. a consolidation. b. a merger. c. a purchase of assets. d. a purchase of stock.

a. a consolidation.

7. Tasty Pastries, Inc., is a consumer products firm. As a source of authority for its organization and functions, its articles of incorporation are a. a primary source. b. a secondary source. c. a source of final resort. d. not a reliable source.

a. a primary source.

2. Elmo, a director of Far East Development Company, learns that a Far East engineer has developed a new, improved product. Over the next six months, Elmo buys and sells Far East stock for a profit. Of Elmo's profit, Far East may recapture a. all. b. half. c. 10 percent. d. none.

a. all.

1. Frank, an officer of Gyra Gizmo, Inc., learns that Gyra has developed a new source of energy. Frank tells Huey, an outsider. They each buy Gyra stock. When the development is announced, the stock price increases, and they each immediately sell their stock. Subject to liability for insider trading a. are Frank and Huey. b. is Frank only. c. is Huey only d. is Gyra, but neither Frank nor Huey.

a. are Frank and Huey.

3. Precision Corporation and Quotient Company consolidate to form PQ, Inc. PQ assumes Precision's and Quotient's a. assets and liabilities. b. assets only. c. liabilities only. d. neither assets nor liabilities.

a. assets and liabilities.

1. Mortar & Brick, Inc., merges with Net Online Corporation. Only Net Online remains. After the merger, Net Online acquires Mortar & Brick's assets a. automatically. b. only after completing certain additional statutory procedures. c. only if Mortar & Brick's former shareholders expressly approve. d. only if the acquisition is a specified result of the merger.

a. automatically.

4. Federico is a director of Green Energy Corporation. As a director, Federico owes Green a duty of a. care and loyalty. b. care only. c. loyalty only. d. neither care nor loyalty.

a. care and loyalty.

2. Joeli is a shareholder of Agro Implement Company. As a shareholder, Joeli does not have a right to a. compensation. b. dividends. c. inspect corporate books and records. d. transfer shares.

a. compensation.

8. Medical Supplies Company issues common stock for sale to the public. If Nero buys ten shares of the stock, he has a proportionate interest with regard to a. control, earnings, and net assets. b. control only. c. earnings and net assets only. d. none of the choices.

a. control, earnings, and net assets.

8. Nanobyte Company makes and sells computer chips. Like most corporations, Nanobyte's officers are hired by its a. directors. b. incorporators. c. officers. d. shareholders.

a. directors.

4. Superior, Inc., is a private, noninvestment company. In one year, Superior advertises a $300,000 offering. Concerning registration, this offering is a. exempt because of the low amount of the issue. b. exempt because it was advertised. c. exempt because the issuer is a private company. d. not exempt.

a. exempt because of the low amount of the issue.

10. Great Lakes Company is a private, noninvestment company. Last year, as part of a $250,000 advertised offering, Great Lakes sold stock to Jon, a private investor. Jon would now like to sell the shares. Concerning registration, this resale is a. exempt because of the low amount of the original issue. b. exempt because the offering was advertised. c. exempt because all resales are exempt. d. not exempt.

a. exempt because of the low amount of the original issue.

10. Koz is a shareholder of Lil' Biz Company, Inc. A court might "pierce the corporate veil" and hold Koz personally liable for Lil's debts a. if Koz's personal interests commingle with Lil's interests to the extent it has no separate identity. b. if Little calls too many shareholders' meetings. c. if Little is overcapitalized. d. under no circumstances.

a. if Koz's personal interests commingle with Lil's interests to the extent it has no separate identity.

3. Responsibility for the overall management of Fashionista Stores, Inc., a corporation, is entrusted to a. the board of directors. b. the corporate officers and managers. c. the owners of the corporation. d. the promoters of the corporation.

a. the board of directors.

4. Based on a Sample CPA Exam Question. Digital Equipment, Inc., sells computer products. Which of the following may Digital's board of directors do without shareholder approval? a. Amend the articles of incorporation b. Buy substantially all of the assets of another corporation c. Dissolve the corporation d. Sell substantially all of the assets of Digital

b. Buy substantially all of the assets of another corporation

7. Fat City Games, Inc.'s registration statement must include a. a description of the accounting firm that audits Fat City. b. a description of the security being offered for sale. c. a financial forecast for Fat City's next five years. d. a marketing and management plan to ensure Fat City's success.

b. a description of the security being offered for sale.

7. HomeBase Corporation invests in intrastate businesses. In HomeBase's state, as in most states, the minimum number of directors that must be present before its board can transact business is a. all of the directors authorized in the articles. b. a majority of the number authorized in the articles or bylaws. c. any odd

b. a majority of the number authorized in the articles or bylaws.

6. Spice Corporation and Sugar, Inc., combine so that only Spice remains, as the surviving corporation. This is a. a consolidation. b. a merger. c. a purchase of assets. d. a purchase of stock.

b. a merger.

8. Natural Soy, Inc., wants to make an offering of securities to the public. The offer is not exempt from registration. Before Natural Soy sells these securities, it must provide investors with a. a marketing and management plan. b. a prospectus. c. a registration statement. d. samples of its products.

b. a prospectus.

1. The board of directors of Orion, Inc., announces a cash dividend. A cash dividend may not be paid from a. accumulated surplus. b. gross profits. c. net profits. d. retained earnings.

b. gross profits

9. Based a Sample CPA Question. Under the Securities Exchange Act of 1934, the Securities and Exchange Commission is responsible for all of the following activities EXCEPT a. investigating securities fraud. b. prosecuting criminal violations of federal securities laws. c. regulating the activities of securities brokers. d. requiring disclosure of facts concerning offerings of securities listed on national securities exchanges.

b. prosecuting criminal violations of federal securities laws.

2. Farsight Software, Inc., plans to consolidate with Games Unlimited, Inc., to form Farsight Games Corporation. This requires the approval of a. neither their boards of directors nor their shareholders. b. their boards and their shareholders. c. their boards only. d. their shareholders only.

b. their boards and their shareholders.

6. Jeans & Sweats Corporation uses cumulative voting in its elections of directors. Kyla owns 3,000 shares. At an annual meeting at which three directors are to be elected, Kyla may cast for any one candidate a. 1,000 votes. b. 3,000 votes. c. 9,000 votes. d. 27,000 votes.

c. 9,000 votes.

7. Chewy files a suit against Dinner Café Company. While the suit is pending, Eateries, Inc., merges with Dinner Café. Eateries absorbs Dinner Café. After the merger, liability in the suit rests with a. Chewy. b. Dinner Café. c. Eateries. d. the court.

c. Eateries.

10. Vaughn is a shareholder in Whirly Gigs, Inc. Vaughn could typically exercise appraisal rights if Whirly Gigs was involved in a. a consolidation only. b. a merger only. c. a consolidation or a merger. d. neither a consolidation nor a merger.

c. a consolidation or a merger.

9. Simplex Corporation substantially complies with all conditions precedent to incorporation. Simplex a. is a corporation by estoppel. b. has de facto existence. c. has de jure existence. d. none of the choices.

c. has de jure existence. The certificate of incorporation is viewed as evidence that the firm has met the requirements for corporate existence. A de facto corporation is one as to which there is a defect in complying with state law, but among other things, there was a good faith attempt to comply. A firm that does not have a certificate of incorporation may be held to be a corporation by estoppel when a third party contracts with it and it should not otherwise by allowed to avoid liability.

5. Fillmore Pharmaceutical, Inc., issues bonds. Bonds a. are issued by S corporations only. b. are sometime referred to as "stock with preferences." c. have fixed maturity dates. d. require periodic interest payments from their owners.

c. have fixed maturity dates.

6. Like other corporations, Distribution Services, Inc., issues securities most likely to a. increase its market share. b. increase its visibility. c. obtain financing. d. reduce its distribution costs.

c. obtain financing.

9. Robin is a director of Sherwood Forest Company. Robin has a right to a. compensation. b. first refusal. c. participation. d. preemption.

c. participation.

10. Perla is a director of Quik Purchasing Corporation. Without informing Quik, Perla goes into business with Rapid Buys, Inc., to compete with Quik. This violates a. the business judgment rule. b. the duty of care. c. the duty of loyalty. d. none of the choices.

c. the duty of loyalty.

9. DozeNot Corporation and Eversleep, Inc., plan to merge. Most likely, the articles of merger will be filed with a. a county recording office. b. the Securities and Exchange Commission. c. the state secretary of state. d. the U.S. Treasury Department.

c. the state secretary of state.

5. Huron, Inc., makes a $6 million private offering to twenty accredited investors and less than thirty unaccredited investors. Huron advertises the offering and believes that the unaccredited investors are sophisticated enough to evaluate the investment. Huron gives material information about itself, its business, and the securities to all investors. Concerning registration, this offering is a. exempt because of the low amount of the issue. b. exempt because it was advertised. c. exempt because the issuer believed that the unaccredited investors were sophisticated enough to evaluate the investment. d. not exempt.

d. not exempt.

6. Ontario, Inc., in one year, advertises two $2.25 million offerings. Buying the stock are twelve accredited investors. Concerning registration, this offering is a. exempt because of the low amount of the issue. b. exempt because it was advertised. c. exempt because only accredited investors bought stock. d. not exempt.

d. not exempt.

2. Metal Fasteners Company (MFC) is a corporation. MFC has the implied power to a. amend the corporate charter. b. declare dividends. c. file a derivative suit. d. perform all acts reasonably appropriate and necessary to accomplish its corporate purposes.

d. perform all acts reasonably appropriate and necessary to accomplish its corporate purposes.

3. Centro Associates sells securities. The definition of a security does not include, as an element, a. an investment. b. a common enterprise. c. a reasonable expectation of profits. d. profits derived entirely from the efforts of the investor.

d. profits derived entirely from the efforts of the investor.

5. Based on a Sample CPA Exam Question. The management of Orchards & Vines, Inc., is at odds with the shareholders over some recent decisions. The shareholders may file a shareholders' derivative suit to a. compel dissolution of Orchards & Vines. b. compel payment of a properly declared dividend. c. enforce a right to inspect corporate records. d. recover damages from the management for an ultra vires act.

d. recover damages from the management for an ultra vires act.

1. Blaine and Cory want to incorporate to buy, play, sell, and trade video games. The first step in the incorporation procedure is to a. file the articles of incorporation. b. hold the first organizational meeting. c. obtain a corporate charter. d. select a state in which to incorporate.

d. select a state in which to incorporate.

3. Dylan and Evette are officers of Fullfit Clothing Corporation. As officers, their rights are set out in a. international agreements. b. state corporation statutes. c. the firm's certificate of authority. d. the officers' employment contracts.

d. the officers' employment contracts.

5. A self-tender is a corporation's offer to buy stock from its own shareholders.

true

9. In a merger, the surviving corporation inherits the disappearing corporation's preexisting rights.

true