R8 M6 - Business Structures: Part 2
***Under the Revised Model Business Corporation Act, which of the following statements is correct regarding corporate officers of a public corporation? A. An officer may not simultaneously serve as a director. B. A corporation may be authorized to indemnify its officers for liability incurred in a suit by stockholders. C. Stockholders always have the right to elect a corporation's officers. D. An officer of a corporation is required to own at least one share of the corporation's stock.
*B. A corporation may be authorized to indemnify its officers for liability incurred in a suit by stockholders. * Explanation Choice "B" is correct. A corporation may indemnify its officers for liabilities incurred in a suit by stockholders, especially if the officer prevails. Choice "A" is incorrect. There is no restriction against serving as both a director and an officer. Choice "C" is incorrect. The RMBCA provides that officers are to be appointed by the board unless the bylaws provide otherwise. Choice "D" is incorrect. There is no requirement that an officer own stock in the corporation in which he or she serves.
***A stockholder's right to inspect books and records of a corporation will be properly denied if the purpose of the inspection is to: A. Commence a stockholder's derivative suit. B. Obtain stockholder names for a retail mailing list. C. Solicit stockholders to vote for a change in the board of directors. D. Investigate possible management misconduct.
*B. Obtain stockholder names for a retail mailing list.* Explanation Choice "B" is correct. In general, a shareholder has a right to inspect the books and records of a corporation for purposes related to the stockholder's interest in the corporation. This right will be denied where the purpose is not reasonably related to their status as a shareholder. Obtaining stockholder names to create a retail mailing list is a personal purpose. Choices "A", "C", and "D" are incorrect. The following reasons for shareholders to inspect the books of the corporation are reasonably related to their status as shareholders: A. To commence a stockholder's derivative suit. C. To solicit stockholders to vote for a change in the board of directors. D. To investigate possible management misconduct.
***Hughes and Brody start a business as a closely-held corporation. Hughes owns 51 of the 100 shares of stock issued by the firm and Brody owns 49. One year later, the corporation decides to sell another 200 shares. Which of the following types of rights would give Hughes and Brody a preference over other purchasers to buy shares to maintain control of the firm? A. Shareholder derivative rights. B. Pre-emptive rights. C. Cumulative voting rights. D. Inspection rights.
*B. Pre-emptive rights.* Explanation Choice "B" is correct. The *right to purchase new issuances of additional stock in order to maintain current proportional ownership* is known as a *pre-emptive right*. Choice "A" is incorrect. A shareholder's derivative right is the right of a shareholder to enforce a legal obligation, for example, by filing a lawsuit, owed to the corporation by a third party when the corporation does not seek to vindicate its own rights. Choice "C" is incorrect. Cumulative voting rights refers to the right of a shareholder to cast votes in the election of directors equal to the product of the number of shares the shareholder owns times the number of directors being elected (e.g., if a shareholder owns 100 shares and three directors are being elected, the shareholder may cast 300 votes). Cumulative voting is often used to help assure representation of minority shareholders. Choice "D" is incorrect. A shareholder's inspection rights refer to the right of a shareholder to inspect and copy certain shareholder records (e.g., minutes of shareholder meetings, list of shareholders, etc.).
The corporate veil is most likely to be pierced and the shareholders held personally liable if: A. The corporation has elected S corporation status under the Internal Revenue Code. B. The shareholders have commingled their personal funds with those of the corporation. C. An ultra vires act has been committed. D. A partnership incorporates its business solely to limit the liability of its partners.
*B. The shareholders have commingled their personal funds with those of the corporation. * Explanation Choice "B" is correct. Generally, a corporation is treated as an entity distinct from its shareholders and shareholders are not liable for the corporation's debts. However, where the shareholders do not treat the corporation as a distinct entity, such as where they commingle their personal funds with the corporation's funds, courts are likely to ignore the corporate form as well. Choice "A" is incorrect. An election to be taxed like a partnership under Subchapter S is not grounds to pierce the corporate veil. Choice "C" is incorrect. An ultra vires act is one beyond the corporation's powers. The persons who authorized the ultra vires act can be held personally liable for damages caused, but it is not a ground for piercing the corporate veil. Choice "D" is incorrect. Limiting personal liability is the main reason to incorporate. It is a ground for piercing the corporate veil only if it is done fraudulently (i.e., to avoid paying present creditors).
***Davis, a director of Active Corp., is entitled to: A. Serve on the board of a competing business. B. Take sole advantage of a business opportunity that would benefit Active. C. Rely on information provided by a corporate officer. D. Unilaterally grant a corporate loan to one of Active's shareholders.
*C. Rely on information provided by a corporate officer.* Explanation Choice "C" is correct. As a director of the corporation Davis may rely on information provided to him/her by a corporate officer. A corporate director is under no obligation to verify information given to him by management (corporate officers). Choice "A" is incorrect. A director is not entitled to serve on the board of a competing business. Doing so would be a breach of fiduciary duty. Choice "B" is incorrect. A director may not take sole advantage of a business opportunity that would benefit the corporation. Doing so would be a breach of fiduciary duty. Choice "D" is incorrect. A director may not unilaterally grant a corporate loan to one of the corporation's shareholders. Directors generally must act through a majority vote at a directors' meeting.
Which of the following statements is correct regarding a shareholder's right to inspect corporate books and records? The right: A. Is absolute. B. Is conditioned upon the demanding shareholder owning at least $5,000 worth of stock. C. Requires that the demand to inspect be for a proper purpose. D. Exists only when fraud or illegality is alleged.
*C. Requires that the demand to inspect be for a proper purpose.* Explanation Choice "C" is correct. A shareholder in a corporation can inspect its books upon five days' notice if the shareholder offers a proper purpose (one relating to the shareholder's position as a shareholder). Choice "A" is incorrect. The right to inspect is not absolute. At a minimum, the shareholder must give five days' notice and state a proper purpose. Choice "B" is incorrect. There is no requirement that the requesting shareholder own $5,000 in shares. Choice "D" is incorrect. Inspection can be for any proper purpose and is not limited to fraud or illegality. For example, investigating mismanagement and waging a proxy war would be considered proper purposes, and do not involve fraud or illegality.
***Which of the following statements best describes an advantage of the corporate form of doing business? A. Day to day management is strictly the responsibility of the directors. B. Ownership is contractually restricted and is not transferable. C. The operation of the business may continue indefinitely. D. The business is free from state regulation.
*C. The operation of the business may continue indefinitely.* Explanation Choice "C" is correct. Corporate existence may be perpetual, which is an advantage of the corporate form of doing business. Choice "A" is incorrect. Day to day management usually is vested in the officers, and not the responsibility of the board of directors. Choice "B" is incorrect. In a corporation, ownership (of shares) is usually freely transferable. Choice "D" is incorrect. Corporations are creatures of state law and are regulated by each state.