blaw chapter 36

Loraine is a shareholder of Taley Corp. She would like to inspect and copy the company's minute book, accounting records, and shareholder lists. Under what circumstances is Loraine allowed to inspect or copy corporate records?

A company's obligation to provide shareholders with financial information depends upon whether it is publicly or privately held. Even if a company is not required to volunteer information, shareholders have the right to obtain certain information upon request. Under the Model Act, Loraine has a legal right to inspect and copy corporate records if she acts in good faith and has a proper purpose. A "proper purpose" is one that aids the shareholder in managing and protecting her investment. If she believes the company is being mismanaged and wants a shareholder list to see if others will join her in a lawsuit against the company, the company must make records available to her. If, on the other hand, she only wants a list of shareholders to obtain names/addresses of potential customers for her new business, this would not be a proper purpose.

Discuss how the Sarbanes-Oxley Act affects Haletronne Co., a publicly traded corporation.

The Sarbanes-Oxley Act applies to all publicly traded corporations in the United States, as well as all foreign corporations listed on a U.S. stock exchange. Under the Sarbanes-Oxley Act: the company must adopt effective financial controls; the CEO and CFO must personally certify Haletronne's financial statements; all members of the board's audit committee must be independent; Haletronne cannot make personal loans to its directors or officers; if Haletronne has to restate its earnings, the CEO and CFO must reimburse the company for any bonus or profits they have received from selling company stock within a year of the release of the flawed financial statements; Haletronne must disclose if it has an ethics code and, if it does not, why not; it may not interfere with a federal investigation into fraud without incurring liability for a felony; whistleblowing employees are protected; and Haletronne's auditing will be overseen by a Public Accounting Oversight Board.

Kris, a shareholder of E-Max, Inc., claimed that the business was being mismanaged. Kris notified the board of directors that the corporation has been wronged and asked the board to bring suit in the name of the corporation directly. In response to Kris' demand, what actions may the board take? What could Kris's response be to each alternative?

The board has three choices: 1. It can agree with the shareholders and file suit on behalf of the corporation. In this case, the shareholders cannot bring their own derivative action. 2. The board can reject the demand or fail to respond. To proceed with a derivative suit, the plaintiffs must convince the court that the board has violated the business judgment rule. 3. The board can appoint a Special Litigation Committee. If the SLC determines that the lawsuit is without merit, the court must generally dismiss the case unless the shareholders can show the rejection was uninformed or not in good faith.

Kalina is the CEO of Northfield Corporation. Who sets her compensation, and what types of compensation would she likely receive in addition to her salary? Can shareholders do anything to challenge her level of compensation if they think it is unfairly high in comparison to average employee compensation within the company?

The board of directors sets the level of executive compensation, and it is rarely linked closely to individual performance. It is common for executives to receive not only a salary, but also such things as stock options; termination payments upon death or even firing; retirement plans; death benefits; and perks such as country club memberships, cars, and possibly even a company jet. In 2005, compensation for the top 100 CEOs in the United States was 475 times as much as compensation for the average worker. There is little shareholders can do to challenge Kalina's compensation. To win, shareholders must prove that the board of directors violated the business judgment rule either by making a compensation decision that was grossly uninformed or by setting an amount so high it had no relationship to the value of the services Kalina performed.

Vernon and David are the controlling shareholders in E-treme, Inc. Discuss the obligations that Vernon and David owe to the minority shareholders.

The controlling shareholders: may not enter into unfair business transactions with the corporation; they have a fiduciary duty to minority shareholders; they may not exclude minority shareholders from beneficial arrangements involving stock; and they are prohibited from expelling minority shareholders, unless the expulsion is done for a legitimate business purpose and a fair price is paid for their stock.

Under the Model Act, who has the right to call a special meeting of the shareholders to vote on an emergency issue that cannot wait until the next annual meeting? a. Shareholders who own at least 10 percent of a company's stock. b. The board of directors. c. Both of the above. d. None of the above.

a. Shareholders who own at least 10 percent of a company's stock. b. The board of directors. c. Both of the above.

Who establishes executive compensation? a. The board of directors. b. The shareholders. c. The officers themselves. d. An independent CPA firm.

a. The board of directors.

Kian is the chief financial officer of Yonkka, Inc. He is also a member of Yonkka's board of directors. Kian is: a. an inside director. b. an outside director. c. a revolving director. d. a public director.

a. an inside director.

A corporation's obligation to provide shareholders with financial information: a. depends on whether the company is publicly or privately held. b. depends on the requirements of the Model Business Corporation Act, which is widely followed in regard to the shareholders' right to information. c. is extensive and is carefully regulated by the SEC if the company is privately held. d. All the above.

a. depends on whether the company is publicly or privately held.

Charles owned 1,000 shares of stock in Temperan, Inc. Charles wants to obtain corporate records including the corporation's minute book and accounting records. Under the Model Act, Charles is entitled to this information if he requests it in good faith and: a. he has a proper purpose. b. he owns at least 1 percent of the company or $2,000 of stock. c. he is an employee of Temperan. d. he is a controlling shareholder.

a. he has a proper purpose.

In a derivative lawsuit, the named plaintiff: a. is the corporation on whose behalf the lawsuit is filed. b. is the particular class of shareholders primarily injured by the wrong. c. consists of all the corporation's shareholders. d. is the board of directors for the corporation.

a. is the corporation on whose behalf the lawsuit is filed.

A majority of shareholders of FamLi Co. wish to expel Glenn, a minority shareholder. In most states, the company cannot expel Glenn unless: a. it pays a fair price for Glenn's stock. b. there is a legitimate business purpose for expelling him. c. Both of the above. d. Neither a nor b.

a. it pays a fair price for Glenn's stock. b. there is a legitimate business purpose for expelling him. c. Both of the above.

Before filing a derivative lawsuit, shareholders must: a. notify the board that the corporation has been wronged and ask the board to bring suit in the name of the corporation directly. b. notify the Secretary of State that the corporation has been wronged and ask the Attorney General to file the lawsuit on behalf of the corporation. c. hold a special meeting, and a majority of the shareholders must vote to file the lawsuit. d. place the lawsuit on the company's proxy statement, and the proposal must receive a majority vote.

a. notify the board that the corporation has been wronged and ask the board to bring suit in the name of the corporation directly.

To be successful in a court challenge regarding an executive's compensation, shareholders must prove that: a. the board was grossly uninformed before it set the compensation amount. b. the executive's performance caused the business to become unprofitable. c. the amount of the executive's compensation was too high in relation to the compensation of the typical employee within the company. d. the compensation level is not in the company's best interests.

a. the board was grossly uninformed before it set the compensation amount.

Under SEC rules, companies: a. can require electronic delivery of proxy statements to save mailing costs and improve operating efficiency of the corporation. b. are required to post the information in the annual report and the proxy statement on their Web site, but must mail to shareholders either hard copies of all the information or a card telling them how the vote online. c. must solicit proxies because a shareholder meeting is invalid unless a certain percentage of shareholders attend in person or by proxy. d. must give each shareholder a proxy, but not a proxy statement or an annual report, if the company is a public company.

b. are required to post the information in the annual report and the proxy statement on their Web site, but must mail to shareholders either hard copies of all the information or a card telling them how the vote online.

Lucy owns 10 shares of stock in Quamba, Inc. Lucy wishes to place a proposal in a company's proxy statement to be voted on at the shareholders' meeting. Pursuant to the SEC rules, before Lucy is allowed to place her proposal on the proxy statement she must: a. have owned continuously for one year at least one percent of the company and $2,000 or more of the stock. b. have owned continuously for one year at least one percent of the company or $2,000 or more of the stock. c. have the permission of the board of directors. d. have been a stockholder for at least two years.

b. have owned continuously for one year at least one percent of the company or $2,000 or more of the stock.

Quick Supply House breached a contract with MegaCorp. The breach resulted in the loss of a great deal of money to MegaCorp. The board of directors for MegaCorp vote not to sue the supply house since it believes the legal costs would be more than it would probably recover. If a group of shareholders wish to sue the supply house, this would: a. be a type of direct lawsuit. b. have to be a derivative lawsuit. c. be a settlement lawsuit. d. be an SEC lawsuit.

b. have to be a derivative lawsuit.

Unless the form provides for a longer period, a proxy is valid for how long under the Model Act? a. 90 days. b. six months. c. 11 months. d. one year.

c. 11 months.

Ev-R-Green Co., a private corporation, decides to sell substantially all of the company's assets. Under the Model Act and many state statutes: a. the sole remedy for dissenting shareholders is to sell their stock on the stock exchange. b. the board must first get unanimous shareholder approval for this fundamental change. c. Ev-R-Green must buy back, at fair value, the stock of any shareholders who object to the decision. d. the company may buy back, at fair value, the stock of any shareholders who object to the decision or the shareholders who object may receive the right of first refusal to purchase corporate assets.

c. Ev-R-Green must buy back, at fair value, the stock of any shareholders who object to the decision.

Shareholder proposals on the company proxy statement: a. must be stated in the form of a request or recommendation according to SEC rules. b. may only be implemented by the company if they receive support from at least a simple majority of the shareholders. c. are, in about half of the cases, withdrawn before a vote because the company decides to implement the proposal. d. may address only corporate-governance issues, such as cumulative voting or executive compensation, but may not address the shareholder's political agenda, such as saving the environment.

c. are, in about half of the cases, withdrawn before a vote because the company decides to implement the proposal.

Veritas, Inc. is planning its annual shareholder meeting on June 15. The company: a. need not send notices of the meeting to shareholders since it is the regularly scheduled, annual meeting, which Veritas always holds on the third Thursday of June. b. must send notices to everyone who owns stock as of January 1. c. must send notices to everyone who owns stock on the "record date," which can be no more than 70 days before the meeting. d. is not required to have an annual shareholders meeting if the company is listed only on the NYSE.

c. must send notices to everyone who owns stock on the "record date," which can be no more than 70 days before the meeting.

Frank is a controlling shareholder in E-prise, Inc. Frank: a. may not enter into unfair business transactions with the corporation. b. has a fiduciary duty to minority shareholders. c. may not exclude minority shareholders from beneficial arrangements involving stock. d. All of the above are correct.

d. All of the above are correct.

A "fundamental change" in a corporation would be illustrated by: a. E-prise, Inc. merging with Vitta Corporation. b. the voluntary dissolution of Oldtry, Inc. c. the amendment to bylaws of Chaney Company. d. All of the above.

d. All of the above.

A corporation must obtain shareholder approval before the company: a. sells off a major portion of its business to another company. b. amends its bylaws. c. amends its charter. d. All the above are correct.

d. All the above are correct.

Which of the following is correct concerning the SEC regulations on shareholder resolutions? a. The proposals cannot be used to seek to satisfy a personal grievance against the company. b. The proposals cannot relate to the ordinary business operations of the corporation. c. The proposals must relate to operations accounting for at least 5 percent of total assets, gross sales, or net earnings. d. All the above are correct.

d. All the above are correct.

Maureen, a shareholder of Metra, Inc., was unhappy with how the corporation was being managed. Maureen wanted to be a member of Metra's board of directors. Which statement is correct? a. If Maureen owns at least 1 percent or $2,000 of Metra's stock, she can require the company to include her name as a candidate for the board of directors in its proxy statement. b. If Maureen has a proper purpose, she can require the company to include her name as a candidate for the board of directors in its proxy statement. c. If Maureen can show cause, she can require the company to include her name as a candidate for the board of directors in its proxy statement. d. Maureen cannot require that the company put her name in the proxy statement; she must prepare and distribute her own proxy.

d. Maureen cannot require that the company put her name in the proxy statement; she must prepare and distribute her own proxy.

Who has the right to manage the business of a corporation? a. Shareholders. b. Officers. c. Bondholders. d. The board of directors.

d. The board of directors.

Meredith, a shareholder in Quarto, Inc., notified Quarto's board of directors that the corporation had been wronged and asked the board to bring a lawsuit in the corporation's name. In response to Meredith's demand, the board: a. can file suit on behalf of the corporation. b. can reject Meredith's demand or simply fail to respond. c. can appoint a Special Litigation Committee. d. can do any of the above.

d. can do any of the above.

The proceeds, if any, of a derivative lawsuit go to: a. the shareholders of the corporation. b. the shareholders who actually filed the lawsuit. c. the board of directors. d. the corporation.

d. the corporation.

Luella just purchased 5 shares of common stock in TriColor, Inc. for $250. Luella has the right to: a. manage the day-to-day business of the corporation. b. set executive compensation. c. require that a proposal be placed in the company's proxy statement to be voted on at the shareholder meeting. d. vote to elect directors.

d. vote to elect directors.

A derivative lawsuit is filed by the directors on behalf of the corporation against third parties who have committed wrongful acts and/or breaches of contract. t/f

false

Controlling shareholders have no fiduciary responsibility to minority shareholders. t/f

false

If a public company decides not to solicit proxies for a shareholder meeting, it need not give shareholders the information that would have been required in a proxy statement. t/f

false

If directors serve on the boards of multiple corporations, the executives of those corporations are less likely to be overpaid. t/f

false

In either a derivative lawsuit or a direct shareholder lawsuit, any proceeds awarded by the court must be paid to the corporation, not the shareholders themselves. t/f

false

Ludymilla purchased an ownership interest in a corporation. This gives her the right to use the equipment owned by the corporation, as long as her usage does not interfere with the normal operation of the business. t/f

false

Matt, a dissident shareholder, can run for director by placing his name on the company's proxy statement. t/f

false

A corporation is required to have at least one class of stock with voting rights. t/f

true

A proxy authorizes someone else to vote in place of the shareholder. t/f

true

A shareholder proxy is generally revocable at any time. t/f

true

Alberta is not employed by E-prise, Inc. but she is a member of E-prise's board of directors. Alberta is an outside director. t/f

true

In reality, the officers of the large corporations have a great deal of influence on who will be nominated and elected as directors. t/f

true

Jan is a controlling shareholder in E-treme, Inc. Under the law, controlling shareholders must include minority shareholders in any favorable arrangements that they make for their own stock. t/f

true

Larry has owned $5,000 of stock in E-prise, Inc. for the past 18 months. Under SEC rules, Larry can require that one proposal be placed in the company's proxy statement to be voted on at the shareholder meeting. t/f

true

There is a trend for boards of directors to be made up of more independent directors who are less likely to rubber stamp the CEO's initiatives. t/f

true