Chapter 18: Corporations

Quorum:

The directors required to make a decision or take official action

When a single shareholder owns sufficient shares to exercise ___ control over the corporation, that shareholder is called a ___ shareholder and owes ___ duties to the minority shareholders.

De facto; Majority; Fiduciary

Corporations ___ enjoy many of the same rights and privileges under state and federal law that people enjoy.

Do

Individual corporate directors ___ have the ability, as agents of the corporation, to bind the corporation.

Do not

Alien Corporation:

A corporation doing business in a state but organized in another country

Directors are hired by the shareholders through an interview process.

False

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

False

There is no difference between a public corporation and a publicly held corporation.

False

Common Stock:

Stock that gives the owner a residual position in the financial structure of the business along with the greatest risk of loss and the greatest potential for gain

Preferred Stock:

Stock that gives the owner priority as to payment of dividends and distribution of assets on dissolution

Inside Directors:

The directors who also are officers of the corporation

Outside Directors:

The directors who do not hold management positions at the corporation

Retained Earnings:

The portion of the corporation's profits or income that is not paid out to shareholders

A corporation automatically will be taxed under subchapter C unless it elects to become an S corporation.

True

Corporate officers are hired by the directors.

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.

True

Did Delaware's highest state court support the conclusion of the trial court?

Yes

To become an S corporation, a corporation must meet specific criteria, with restriction on the ___ of shareholders, as well as the types of ___ that can be issued.

Number; Stock

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.

True

To encourage shareholders to pay attention to the board's actions, when a shareholder's derivative suit is won, the damages: A. Are paid to the shareholders, but only up to 50% of the damages. B. Are paid in to the corporation's treasury. C. Are fully paid to the shareholders who brought the suit.

B. Are paid in to the corporation's treasury.

Officers and directors have a special relationship with the corporation and its shareholders and are called: A. Responsible parties. B. Fiduciaries. C. Registered agents. D. Managers.

B. Fiduciaries.

Corporation by Estoppel:

An entity that has not attempted to incorporate, but holds itself out to others as a corporation

De Facto Corporation:

An entity that has not substantially complied with all statutory requirements. These only are recognized in a few states

De Jure Corporation:

An entity that has substantially complied with all statutory requirements for incorporation

Management of a close corporation often resembles that of a ___, but a corporation must meet the statutory requirements to remain a corporation. Often, shareholders in a close corporation ___ the transferability of shares. If a majority shareholder misappropriates company funds, the normal remedy for the other shareholders is to have their shares ___ to determine value and then ___ that value.

Partnership; Restrict; Appraised; Receive

For shareholders to exercise control, a ___ must be present, either in person or through proxies.

Quorum

Today most state corporate statutes are at least partially based on the:

Revised Model Business Corporation Act

Corporations normally are financed by ___. One type of security consists of borrowing funds and is called a ___. The other main type of security consists of ownership in the corporation and is called a ___, or equity security.

Securities; Bond; Stock

A corporation is a legal entity: A. Created by local ordinance. B. Created by state statute. C. That naturally occurs when two or more people do business. D. Created by an agency regulation.

B. Created by state statute.

One main disadvantage of the corporate form of business is:

Double Taxation of Distributed Income

A shareholder ___ have a stock certificate to prove ownership of the stock.

Need not

One of the key advantages of the corporate form of business is:

Limited Liability of Ownership

Dividends:

A distribution of profits or income to shareholders

Shareholders have a right to inspect the corporate records for ___ purpose.

A proper

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 business judgment rule states that directors and officers: A. Are immune from liability for bad business judgments so long as they exercised reasonable care. B. Are never liable for bad business decisions if they attend all their meetings and vote for the actions. C. Must always make good business decisions for the corporation.

A. Are immune from liability for bad business judgments so long as they exercised reasonable care.

When Guth became dissatisfied with Coca Cola's high price for syrup, how should he have dealt with the acquisition of the Pepsi Cola trademark and formula? A. He should have brought this business opportunity to Loft, Inc.'s full board of directors. B. He should have created a new, independent corporation to purchase the Pepsi trademark and formula. C. He should have resigned as an officer and director of Loft, Inc. and purchased Pepsi's trademark and formula personally.

A. He should have brought this business opportunity to Loft, Inc.'s full board of directors.

Could Guth have successfully argued in court that he was not liable to Loft, Inc., because of the business judgment rule? A. No, because Loft's mistake in judgment involved a violation of his loyalty to the corporation. B. Yes, the court should have taken into account the business judgment rule because as an officer and director, Guth was not an insurer of the corporation's success. C. No, because the business judgment rule only applies in situations in which there is a conflict of interest between two directors.

A. No, because Loft's mistake in judgment involved a violation of his loyalty to the corporation.

John is on the board of directors at Adidas Corporation. May John also serve on the board of directors at Nike Corporation? A. Yes, a director can serve on more than one board, provided that the corporations are in the same business. B. No, a director cannot sit on more than one board where the corporations are competitors. C. No, directors are legally only allowed to be on one board of one corporation.

B. No, a director cannot sit on more than one board where the corporations are competitors.

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 to 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.

Select the three names that close corporations also often are called. A. Benefit corporations B. Unprofitable corporations C. S corporations D. Privately held corporations E. Family corporations F. Closely held corporations

D. Privately held corporations E. Family corporations F. Closely held corporations

When a corporation enters into a contract or engages in business with another corporation in which one of the board members has a personal interest, that board member must fully ___ the conflict and ___ voting.

Disclose; Abstain from

Venture Capital:

Financing provided by professional outside investors to new business ventures

Private Equity Capital:

Funds invested by professional firms for an existing business venture

Crowdfunding:

Funds that come from a cooperative network usually through the internet

Foreign Corporation:

In a given state, a corporation that does business in the state without being incorporated in that state

Domestic Corporation:

In a given state, a corporation that is organized under the laws of that state

Directors and officers have a duty to act ___, to exercise the care that a(n) ___ person would exercise in similar circumstances, and to do what the director or officer believes is in the ___ of the corporation.

In good faith; Ordinarily prudent; Best interest

Because shareholders with a very small percentage of shares may not be able to travel to annual meetings, the law allows them to appoint someone else to vote their shares using a ___ authorization form. Management often ___ these.

Proxy; Solicits

The ___, or owners, of a corporation elect the ___ who then hire the ___ to run the daily operations.

Shareholders; Directors; Officers