BUSA311 - Exam 2 Review

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A company is allowed to hold its annual meeting online _________. a. if a majority of its shareholders approve b. if it also holds a live meeting for shareholders who want to attend in person c. if it simulcasts a video of the meeting d. without shareholder approval

A limited liability company . a. is regulated by a well-established body of law b. pays taxes on its income c. cannot have members that are corporations d. is a form of organization favored by venture capitalists e. can have an oral operating agreement

According to the company's website, "d.light is a global leader in delivering affordable solar-powered solutions designed for the two billion people in the developing world without access to reliable energy." It is a for-profit enterprise. What form of organization makes the most sense for this business. Why?

d.light is a benefit corporation. It is for profit but uses its profits to provide light to people in the developing world.

A limited liability partnership . a. protects partners from liability for their own misdeeds b. protects the partners from liability for the debts of the partnership c. must pay taxes on its income d. has a general partner who is liable for the debts of the organization

A corporate stockholder is entitled to which of the following rights? a. Elect officers b. Receive annual dividends c. Approve dissolution d. Prevent corporate borrowing

The Public Service Loan Forgiveness Program a. applies to everyone who works in public-service jobs. b. applies only to people who are in income-based repayment programs. c. applies to debtors who make payments to the best of their ability. d. allows forgiveness of any student loans.

Question: While working as a plant superintendent at Rodd, Joseph bought stock in the company, which was a close corporation. On his death, he owed 20%, while the founder's children owed the rest. Later, Joseph's widow, Euphemia, found out that Rodd had bought back all of the children's stock, while refusing to buy any of hers. What can Euphemia do? Strategy: Remember that majority shareholders in a close corporation owe a fiduciary duty to minority shareholders.

Euphemia was a minority shareholder. The court ruled that, because the majority shareholders had violated their fiduciary duty to her, the company had to buy her stock too. Otherwise, her shares would have been worthless.

Congressional Airlines was highly profitable operating flights between Washington, D.C., and New York City. The directors approved a plan to offer flights from Washington to Boston. This decision turned out to be a major mistake, and the airline ultimately went bankrupt. Under what circumstances would shareholders be successful in bringing suit against the directors?

Even if the plan was bad, it met the standard of having a "rational business purpose." Only if there had been self-dealing on the part of the board or if they had made an uninformed decision would shareholders have a chance of being successful in their suit.

Under the Williams Act, ____. a. if shareholders offer more stock than the bidder wants, it must purchase shares pro rata b. target companies must reveal the names of any shareholders who acquire more than 5 percent of its stock c. a bidder must file a disclosure statement at least 24 hours before the tender offer begins d. once a shareholder has accepted a tender offer, she cannot withdraw it

A majority of shareholders at Weed, Inc., wanted to reinstate the former CEO of the company and sell off an unprofitable division. Do shareholders have the right to make these two decisions? a. Yes to both. b. No to both. c. The shareholders have the right to sell off an unprofitable division, but not to reinstate the president. d. The shareholders have the right to reinstate the president but not to sell off an unprofitable division.

A sole proprietorship a. must file a tax return b. requires no formal steps for its creation c. must register with the secretary of state d. may sell stock e. provides limited liability to the owner

After an extended hospital stay, Jayla is drowning in debt. Jayla decides to file for bankruptcy, because she sees no other way out. Jayla owes $50,000 to Mercy Hospital, $3,000 to Car Mart for her automobile, and $8,000 to VISA. She is behind on payments to every single one of them! When Jayla's bankruptcy is concluded: a. Car Mart and VISA will be paid first because they are secured creditors. b. Mercy Hospital and VISA will be paid first because they are secured creditors. c. Car Mart will be paid first because it is a secured creditor. d. Car Mart and Mercy Hospital will be paid first because they are secured creditors.

Grass Co. is in bankruptcy proceedings under Chapter 7. Who will serve as trustee? I. The debtor in possession II. A person appointed by the U.S. Trustee III. The head of the creditors committee IV. The U.S. Trustee V. A person elected by the creditors. a. All of these individuals are eligible; the judge decides which one will serve b. III only c. Either II or V d. I only e. IV only

Suppose that a bank loaned money to Facebook at a time when both the bank and Mark Zuckerberg believed that the business had been incorporated, but they were wrong. It had not been. Could Zuckerberg refuse to pay back the loan on the grounds that it was invalid because it had been made to an entity that did not exist?

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Question: After a jury ordered actor Kim Basinger to pay $8 million for breaching a movie contract, she filed for bankruptcy protection, claiming $5 million in assets and $11 million in liabilities. Under which chapter should she file? Why? Strategy: Look at the requirements for each chapter. Was Basinger eligible for Chapter 13? What would be the advantages and disadvantages of Chapters 7 and 11?

Basinger was not eligible to file under Chapter 13 because she had debts of $11 million. She first filed under Chapter 11 in an effort to retain some of her assets, but then her creditors would not approve her plan of reorganization, so she converted to liquidation under Chapter 7.

Question: Midland Fumigant filed a voluntary petition under Chapter 11 of the Bankruptcy Code. It owed money to United Phosphorus, which also happened to be a competitor. United refused to approve Midland's plan of reorganization. What recourse did Midland have? Strategy: What was United's likely motive in voting against the plan? What is the approval process for a plan of organization under Chapter 11?

United was a competing business, so it preferred that Midland not reorganize but instead be liquidated under Chapter 7. The court imposed a cramdown of the plan over United's objection.

Barron files a bankruptcy proceeding under Chapter 7 of the Bankruptcy Code. All of the property Barron owns at the time of the filing goes into the bankruptcy estate. Four months later, Barron's grandfather dies and Barron inherits $100,000. The money that Barron inherits from his grandfather: a. is after-acquired property that would become part of the bankruptcy estate. b. is after-acquired property that would not become part of the bankruptcy estate. c. would be used specifically to pay unsecured creditors. d. is community property and, therefore, part of the bankruptcy estate.

Which of the following statements is/are true? I. Shareholders can amend the bylaws. II. Directors can amend the bylaws. III. Both shareholders and directors must approve any amendment to the bylaws. a. I and II b. III c. I d. II

Ellie, Josie, and Dylan are partners in a car dealership. Ellie gives notice to Josie and Dylan that she wants to withdraw from the business. As a result of Ellie leaving the partnership, Josie and Dylan: a. must continue the partnership unless they get a court order to dissolve the partnership. b. must dissolve the partnership. c. can only dissolve the partnership if the partnership agreement states that it must dissolve when a partner dissociates. d. can either continue the partnership without Ellie or agree to dissolve the partnership.

Question: Hortense and Gus are each starting a business. Hortense's business is an internet start-up. Gus will be opening a yarn store. Hortense needs millions of dollars in venture capital and expects to go public soon. Gus has borrowed $10,000 from his girlfriend, which he hopes to pay back soon. Should either of these businesses organize as an LLC? Strategy: Sole proprietorships may be best for businesses without substantial capital needs and without significant liability issues. Corporations are best for businesses that will need substantial outside capital and expect to go public quickly.

An LLC is not the best choice for either of these businesses. Venture capitalists will insist that Hortense's business be a corporation, especially if it is going public soon. A yarn store has few liability issues, and Gus can always buy insurance. Futhermore, he does not expect to have any outside investors. Hence, a sole proprietorship would be more appropriate for Gus's businesses

Herbert, an artist, entered into an agreement with Randy for the reproduction and distribution of his paintings. Herbert was to receive 50 percent of the gross sales revenues. Randy was responsible for all losses and for management of the business. Before leaving on a trip to Israel, where he feared he might be in some danger, Randy signed a partnership agreement with Herbert stating that they jointly owned the business. Shortly after Randy returned from the trip, the two men terminated their business relationship, and Herbert revoked his authorization for the sale of prints. When Randy continued selling the prints, Herbert filed suit. Randy argued that the two had formed a partnership and that he was authorized to sell assets of the partnership. Were Herbert and Randy partners?

Argument for Herbert: A partnership agreement does not create a partnership. Randy alone managed the business. Herbert shared only revenues, not profits or losses. Argument for Randy: Herbert and Randy both provided services to the business: Randy paid for the printing, and Herbert did the artwork. These two men signed a partnership agreement, and they obviously intended to be partners.

To finance her education at DeVry Institute of Technology, Lydia borrowed $20,000 from a private lender. After graduation, she could not find a job in her field, so she went to work as a clerk at an annual salary of $12,500. Lydia and her daughter lived with her parents free of charge. After setting aside $50 a month in savings and paying bills that included $233 for a new car and $50 for jewelry, her disposable income was $125 per month. Lydia asked the bankruptcy court to discharge her debt. Would paying this debt impose an undue hardship on her?

Argument for Lydia: Although she saves money by living with her parents, she would still have to spend every single penny of her disposable income for nearly 15 years to pay back her $20,000 debt. That would be an undue hardship. Argument for the Creditor: Paying back this debt would not constitute undue hardship because Lydia could easily reduce her expenses. She should not be buying new cars and jewelry. Nor does she have the right to save money when she has outstanding debt.

Question: José was an employee and shareholder of Birdsong, a company that sold farm equipment. José showed Marta how to use the hay baler she had just bought from the company. He also gave her an instructional pamphlet that Birdsong had prepared. Unfortunately, because all of this advice was wrong, Marta was injured while using the baler. It turned out that Birdsong's charter had been revoked for failure to make the required annual filings with the Arkansas secretary of state. In all other ways, Birdsong operated as a corporation. Were Birdsong and José liable to Marta? Strategy: José faces potential liability as a shareholder because the charter of the corporation had been revoked and the corporate veil could be pierced. He could also be personally liable for his own wrongdoing.

Birdsong was held liable for its carelessness in preparing the pamphlet. Although Birdsong was not technically a corporation, it had operated as one. Therefore, under the theory of corporation by estoppel, José was not liable for that corporate wrongdoing. Nor had Birdsong done anything to warrant its veil being pierced. José was, however, liable for his own negligence. Therefore, he was liable for the bad advice he gave Marta.

Question: Someone stole a truck full of cigarettes. Zeke found the vehicle abandoned at a truck stop. Not being a thoughtful fellow, he took the truck and sold it with its cargo. Although Tobacco Company never found out who stole the truck originally, it did discover Zeke's role. A court ordered Zeke to pay Tobacco $50,000. He also owed his wife $25,000 in child support. Unfortunately, he only had $20,000 in assets. After he files for bankruptcy, who will get paid what? Strategy: There are two issues: the order in which the debts are paid and whether they will be discharged.

Child support is a priority claim, so that will be paid first. And it cannot be discharged. In a similar case, the court also refused to discharge the claim over the theft of the truck, ruling that it was an intentional and malicious injury. So Zeke will still owe both debts, but the child support must be paid first.

Question: Eddie and Lola appeared to be happily married. But then Eddie's business failed, and he owed millions. Suddenly, Lola announced that she wanted a divorce. In what had to be the friendliest divorce settlement of all time, Eddie quickly agreed to transfer all of the couple's remaining assets to her. Are you suspicious? Is there a problem? Strategy: Was this a voidable preference or a fraudulent transfer? What difference does it make?

In a voidable preference, the debtor makes an unfair transfer to a creditor. In a fraudulent transfer, the bankrupt's goal is to hold on to assets himself. In a case similar to this one, the court ruled that the transfer was fraudulent because Eddie intended to shield his assets from all creditors.

Question: Consider these two entrepreneurs: Judith formed a corporation to write a blog, which is unlikely to general substantial revenues. Drexel operated his contraction business as a sole proprietorship. Were these forms of organization right for these businesses? Strategy: Prepare a list of the advantages and disadvantages of each form or organization. Sole proprietorships are best for businesses without substantial capital needs. Corporations can raise capital but are expensive to operate.

Judith would be better off with a sole proprietorship - her revenues will not support the expenses of a corporation. Also, her debts are likely to be small, so she will not need the limited liability of a corporation. And no matter what her form of organization, she would be personally liable for any negligent acts she commits, so a corporation would not provide any additional protection. But for Drexel, a sole proprietorship could be disastrous because his construction company will have substantial debts and a large number of employees. If an employee causes an injury, Drexel might be personally liable. And if his business fails, the court would take his personal assets. He would be better off with a form of organization that limits his liability, such as a corporation or an LLC.

Asher and Stephen owned and worked for a corporation named "Ampersand" that produced plays. Stephen decided to write Philly's Beat, focusing on the history of rock and roll in Philadelphia. As the play went into production, however, the two men quarreled. Stephen resigned from Ampersand and formed another corporation to produce the play. Did the opportunity to produce Philly's Beat belong to Ampersand? Argument for Stephen: Ampersand was formed for the purpose of producing plays, not writing them. When Stephen wrote Philly's Beat, he was not competing against Ampersand. Furthermore, Ampersand could not afford to produce the play even if it had had the opportunity. Argument for Asher: Ampersand was in the business of producing plays, and it wanted Philly's Beat. Ampersand was perfectly able to afford the cost of production—until Stephen resigned.

Producing Philly's Beat was clearly within the scope of Ampersand's business. Although it was not clear if Ampersand could have raised enough money to produce the play, any doubt should be resolved in favor of Ampersand. Stahl was ordered to disgorge any profits from the play. Ampersand Productions, Inc. v. Stahl (Feb. 20, 1986), No. 85-435 (Dt. Ct., E.D. Pa.).

Question: Huma and Zuma want to start Spring High, a business that would take high school students on educational trips during spring break. Eventually, they hope to seek venture capital money and expand the business nationally. What form of organization should they choose? Strategy: They do not want to be a partnership because who knows what liability they could face when dealing with teenagers. They could qualify as 1. a close corporation (because they only have two shareholders), 2. an S corp (as long as neither of them is a nonresident alien), and 3. an LLC.

Spring High should not be an LLC because that would discourage venture capital investment. What type of corporation should they choose? There is little downside to being a close corporation. Indeed, in some states, they would qualify for close corporation status without having to do anything. Whether to be an S corporation or not and have income flow through to their personal returns depends on their individual tax situation. If not an S corp, then they could form a C corporation.

Question: Shareholders of Beazer Homes USA asked for a proposal requiring disclosure about the construction company's risks in the mortgage market. This was a time when many companies were struggling with bad loans to home buyers. Beazer asked the SEC for permission to exclude this proposal from its proxy statement. What did the SEC rule? Strategy: The SEC allows companies to exclude proposals that relate to the ordinary business operations of the company.

The SEC ruled that Beazer Homes was required to include the mortgage proposal because these risks directly affected the value of the company in a time of extraordinary challenges in this industry. Shortly thereafter, Beazer announced that it would stop originating mortgages.

On November 5, Hawes, Inc., a small subcontractor, opened an account with Basic Corp., a supplier of construction materials. Hawes promised to pay its bills within 30 days of purchase. Although Hawes purchased a substantial quantity of goods on credit from Basic, it made few payments on the accounts until the following March, when it paid Basic over $21,000. On May 14, Hawes filed a voluntary petition under Chapter 7. Why did Hawes pay Basic in March? Does the bankruptcy trustee have a right to recover this payment? Is it fair to Hawes's other creditors if Basic is allowed to keep the $21,000 payment?

The bankruptcy court ruled that this payment was a voidable preference. It was not made in the ordinary course. Although Hawes was supposed to pay its bills within 30 days, it had in fact made no payments for four months and then promptly made a large one just before it filed for bankruptcy. In re Fred Hawes Org., Inc., 957 F.2d 239, 1992 U.S. App. LEXIS 2300 (6th Cir. 1990).

Question: Employees of Exxon Corp. paid some $59 million in corporate funds as bribes to Italian political parties to secure special favors and other illegal commitments. The board of directors decided not to sue the employees who had committed the illegal acts. Were these decisions protected by the business judgment rule? Strategy: Two decisions are at issue here: illegal payments and the decision not to sue.

The business judgment rule would not protect the underlying illegal payments, but it did protect the decision not to sue. In other words, anyone who made an illegal payment had violated the business judgment rule, but the people who decided not to pursue the violators had not themselves breached the business judgment rule because the court determined that they had not violated the duty of care or the duty of loyalty.

Question: Daniel Cowin was a minority shareholder of Bresler & Reiner, Inc., a public company that developed real estate in Washington, D.C. He alleged numerous instances of corporate mismanagement, fraud, self-dealing, and breach of fiduciary duty by the board of directors. He sought damages for the diminished value of his stock. Could Cowin bring this suit as a direct action or must it be a derivative suit? Strategy: If the wrong was to the corporation, then Cowin must bring a derivative lawsuit. He can bring a direct action only if the harm was to him personally.

The court ruled that the injury had fallen equally on all the shareholders and, therefore, a derivative suit was appropriate.

Question: While Warren was representing Betty in divorce proceedings, she inherited $60,000. Warren suggested Betty invest her money in a corporation of which he was president. Although he promised her a substantial return, the company went bankrupt shortly thereafter. Warren was a partner in a law firm. The firm was not in the business of giving investment advice, it did not know that Warren was giving such advice, nor did it receive any fee from Betty for the "investment service." Is the law firm liable for Betty's loss? Strategy: Was Warren acting within the ordinary course of the partnership's business? Was he acting with actual, implied, or apparent authority?

The firm was not in the investment advisory business, so Warren was not acting within the ordinary course of business. He did not have actual authority, but he might have had apparent authority, in which case the firm would be liable.

Question: Otto and his nephew Nick formed a corporation to operate a furniture store in Washington, D.C. Otto owned 51 percent and Nick 49 percent of the company's stock. Otto then entered into an agreement between himself and the furniture store to lease a storefront that he already owned. Otto also purchased a warehouse, which he then leased to the corporation. Nick sued, alleging that the two leases were invalid. Were they? Strategy: Otto violated the business judgment rule twice.

The lease between Otto and the corporation for the storefront was self-dealing—it directly benefited him. When Otto purchased the warehouse, he took a corporate opportunity that he should have offered first to the company. He is personally liable for any damages to the corporation. The company also has the right to cancel both leases and to purchase the warehouse from him.

Question: The five Brown children were all owners of the Roundup Ranch, Inc., in Montana. Peter owned 51 percent of the corporation; the rest was evenly divided among his four siblings. Because coal companies were encroaching on Roundup, Peter traded the Montana ranch for equivalent land in New Mexico. His siblings were unhappy because they had a sentimental attachment to their family homestead. What could they do? Strategy: Because Peter owned a majority of the shares, he had the right to sell the ranch. But because he is undertaking a fundamental change, his siblings do have some rights.

The siblings have appraisal rights—that is, the right to require the company to buy back their stock, which is what the unhappy siblings required the unhappier Peter to do.

Mary Price went for a consultation about a surgical procedure to remove abdominal fat. When Robert Britton met with her, he wore a name tag that identified him as a doctor and was addressed as "doctor" by the nurse. Britton then examined Price, touching her stomach and showing her where the incision would be made. Britton was not a doctor; he was the office manager. Although a doctor actually performed the surgery on Price, Britton was present. The doctor left a tube in Price's body at the site of the incision. The area became infected, requiring corrective surgery. A jury awarded Price $275,000 in damages in a suit against Britton. He subsequently filed a Chapter 7 bankruptcy petition. Is this judgment dischargeable in bankruptcy court?

Under Chapter 7, fraud claims are not dischargeable. In re Britton, 950 F.2d 602, 1991 U.S. App. LEXIS 28487 (9th Cir. 1991).

Question: Ajouelo signed an employment contract with Wilkerson. The contract stated: "Whatever company, partnership, or corporation that Wilkerson may form for the purpose of manufacturing shall succeed Wilkerson and exercise the rights and assume all of Wilkerson's obligations as fixed by this contract." Two months later, Wilkerson formed Auto-Soler Co. Ajouelo entered into a new contract with Auto-Soler that provided that the company was liable for Wilkerson's obligations under the old contract. Neither Wilkerson nor the company ever paid Ajouelo. He sued Wilkerson personally. Does Wilkerson have any obligations to Ajouelo? Strategy: A promoter is not liable for a contract he signed on behalf of a yet-to-be formed corporation if the third party (in this case, Wilkerson) agrees to a novation.

Wilkerson may have had an ethical obligation to Ajouelo but not a legal one. The court held that the second contract was a novation, which ended Wilkerson's obligations under the first contract.

Decal Corp. incurred substantial operating losses for the past three years. Unable to meet its current obligations, Decal filed a petition of reorganization under Chapter 11 of the federal Bankruptcy Code. Which of the following statements is correct? a. A creditors' committee, if appointed, will consist of unsecured creditors. b. The court must appoint a trustee to manage Decal's affairs. c. Decal may continue in business only with the approval of a trustee. d. The creditors' committee must select a trustee to manage Decal's affairs.

Mork and Mindy create a for-profit corporation, Mork's House, to provide shelter to homeless and abused women and children. Mork and Mindy are shareholders of the corporation. Zada is also a shareholder in the corporation, along with five others. Douglas manages the day-to-day operations of the corporation. The bylaws of the corporation provide that the corporation is established for the sole purpose of providing shelter, food, and care for homeless and abused women and children and for no other purpose. When the refrigerator in Mork's House stops working, Douglas purchases a new refrigerator from Home Depot and charges it to the corporation. If Zada challenges the purchase as going beyond the powers of the corporation: a. she will lose, because purchasing the refrigerator falls under the implied powers of the corporation. b. she will win, because purchasing the refrigerator is an ultra vires act. c. she will win, because the bylaws do not address purchases of appliances. d. she will lose, because purchasing the refrigerator is an express power of the corporation.

Summation Management Inc. is the parent company of several different hospitality management corporations. Sleep Inn Inc. seeks to become one of Summation's subsidiaries. Summation and Sleep Inn enter an agreement whereby Sleep Inn will provide to Summation all its stock. For each five shares of Sleep Inn stock that Sleep Inn provides to Summation, Summation will provide to Sleep Inn one share of Summation stock. After the agreement, both Sleep Inn and Summation will remain as separate corporations. Sleep Inn and Summation have formed a: a. share exchange. b. merger. c. short sale. d. consolidation.

Cobb, Inc., a partner in TLC Partnership, assigns its partnership interest to Bean, who is not made a partner. After the assignment, Bean asserts the right to participate in the management of TLC and Cobb's share of TLC's partnership profits. Bean is correct as to which of these rights? a. 1 only b. 2 only c. 1 and 2 d. Neither 1 nor 2

If a partner dissociates, he is entitled to . a. force the termination of the partnership b. receive indemnification from liability for present partnership debt c. receive indemnification from damages he caused the partnership d. receive his share of the value of the partnership assets

Sylvia is really struggling with her finances. She is getting further and further behind on payments to all her creditors. Sylvia is determined, however, that she will not file bankruptcy. Some of Sylvia's creditors get together to discuss what they can do to force Sylvia to file bankruptcy so they can at least recover some of the funds owed to them. Sylvia owes money to eight different creditors. Sylvia's creditors can force her into an involuntary bankruptcy: a. if three or more creditors having unsecured claims of $15,775 or more file the involuntary bankruptcy petition. b. if one or more creditors having a claim of $15,775 or more files the involuntary bankruptcy petition. c. if two or more creditors having a collective claim of $15,775 or more file the involuntary bankruptcy petition. d. under no circumstances; a bankruptcy petition can only be filed by the debtor.

Ted Fein, a partner in the ABC Partnership, wishes to withdraw from the partnership and sell his interest to Gold. All of the other partners in ABC have agreed to admit Gold as a partner and to hold Fein harmless for the past, present, and future liabilities of ABC. A provision in the original partnership agreement states that the partnership will continue upon the death or withdrawal of one or more of the partners. As a result of Fein's withdrawal and Gold's admission to the partnership, Gold . a. is personally liable for partnership liabilities arising before and after his admission as a partner b. has the right to participate in the management of ABC c. acquired only the right to receive Fein's share of the profits of ABC d. must contribute cash or property to ABC in order to be admitted with the same rights as the other partners

Assuming all other requirements are met, a corporation may elect to be treated as an S corporation under the Internal Revenue Code if it has . a. both common and preferred stockholders b. a partnership as a stockholder c. 100 or fewer stockholders d. the consent of a majority of the stockholders

Participating preferred stockholders: a. only receive payment after other preferred shareholders have been paid. b. only receive payment after common shareholders have been paid. c. are treated like both a preferred shareholder and a common shareholder. d. receive all their payments before all other shareholders.

Bly and Ahmik are partners in a sandwich shop. They have been struggling for the last couple of years and, finally, decide to close the sandwich shop and dissolve the partnership. During the winding-up process, Ahmik spends most of his time pursuing his next venture, so Bly is handling most of the work involved in collecting and preserving partnership assets and paying the debts of the partnership. If Bly requests payment for his services in winding up the partnership: a. he is entitled to payment for those services only if the partnership agreement provides for it. b. he is not entitled to payment for those services, because he receives a share in the partnership profits. c. he is not entitled to payment for those services, because it is part of his duty as a partner. d. he is entitled to payment for those services.

Question: An institutional investor wants Tech Company to permit large shareholders to comment on the company's financial performance in its proxy statement. Which would be a better strategy for achieving this goal: a shareholder proposal or an amendment to the company's bylaws? Strategy: Shareholder proposals are treated differently from bylaw amendments. Which one is more likely to affect the behavior of the company?

A shareholder proposal is not binding on the company. Even if the shareholders approved a proposal, Tech Company would be under no obligation to implement it. A bylaw amendment, on the other hand, would be binding on the company.

Question: Mark and Shania are students who also have a business on the side selling baskets of fruits and vegetables that are cut to look like flowers. They advertise that all ingredients are organic. One day, Mark is in a hurry, and instead of driving across town to the organic food co-op, he purchases ingredients from the closest grocery store, Unsafeway. Hannibal has a chemical allergy, so when he eats fruit from Mark's basket, he becomes ill. He sues Mark and Shania and is awarded $10,000 in damages. Is Shania personally liable? Strategy: First decide if Mark and Shania have a partnership. If so, is the partnership liable for Mark's actions? Is Shania liable for the debts of the partnership that were incurred by Mark?

Although Mark and Shania are students, they also run a business for profit and, therefore, are partners for purposes of that business. The partnership is liable for Mark's actions because he was acting in the ordinary course of the partnership business. Hannibal must first try to recover the judgment from the partnership. Only if the partnership has no assets can he recover from Mark or Shania individually. At that point, Hannibal has the right to recover from Shania, even though she personally did nothing wrong.

Two shareholders of Bruce Co., Harry and Yolanda Gilbert, were fighting management for control of the company. They asked for permission to inspect Bruce's stockholder list so that they could either solicit support for their slate of directors at the upcoming stockholder meeting, attempt to buy additional stock from other stockholders, or both. Bruce's board refused to allow the Gilberts to see the shareholder list on the grounds that the Gilberts owned another corporation that competed with Bruce. Do the Gilberts have the right to see Bruce's shareholder list?

Argument for the Gilberts: If shareholders of a company have a proper purpose, they are entitled to inspect shareholder lists. Soliciting votes and buying stock are both proper purposes. Argument for Bruce: The Gilberts are simply offering a pretext. They could use this information to compete against the company. No shareholder has the right to cause harm.

Auto sold used luxury vehicles. Steven owned 90 percent of Auto while his son, Joshua, was a 10 percent owner. Steven controlled Auto's finances. While Steven generally maintained appropriate, separate corporate records, the address listed on Auto's bank account was his personal address, not Auto's place of business. Steven initially capitalized Auto with a few thousand dollars, but afterward was not sure of the exact amount because he contributed funds as needed. He also claimed to have loaned $900,000 to Auto, but there was no documentation. He deposited and withdrew money from Auto's bank account at his sole discretion. Joshua worked one year at Auto, for a salary of $474,850, at a time when the company had many debts. A group of customers who never received the cars they had paid for filed suit against Auto, Steven, and Joshua. Who is liable?

Auto was liable. The court pierced the corporate veil and held Steven liable too because he treated Auto's assets as his own. He freely deposited and withdrew Auto's funds. He ignored corporate formalities by having the bank statements sent to his house and by not documenting the loan. Joshua was not liable because he did not ignore corporate formalities nor did he commingle his assets with those of the corporation. Based on Azte Inc. v Auto Collection, Inc., 36 Misc. 3d 1238(A) (N.Y. Sup. Ct. 2012).

Question: Tom and Penelope start a test prep business. The partnership agreement specifies that Penelope is entitled to 30 percent of the profits (and 30 percent of the voting rights), but that Tom is the managing partner with the right to run the day-to-day affairs of the business. Because students love Penelope's gentle demeanor, the business flourishes. A large university offers the partnership a contract to provide test prep services to all of its students. Tom decides to take that business himself without telling Penelope. He also decides to reduce her payments from the partnership. She asks for data on the partnership's profitability, but Tom refuses to give it to her. He then moves the business into a shabbier, cheaper building that Penelope hates. What rights does Penelope have? Strategy: The partnership agreement determines most of the rights between partners, but some rights are mandatory and cannot be changed by the partners.

Because Tom is the managing partner, he has the right to move the partnership into a different building. However, he has a mandatory duty of loyalty to the partnership, which prohibits him from taking the opportunity to provide services to the university without Penelope's consent. Also, as a partner, Penelope has the automatic right to see the books and records of the partnership.

Question: You are about to form a corporation. What do you have to do before filling out the form? Which provisions are boilerplate and, therefore, do not require special effort on your part? Strategy: Review the description of required and optional charter provisions.

Before filling out the form, you need to choose a name and check to make sure it is available. If you are incorporating someplace where you do not have an office, you must also hire a registered agent. You do not have to decide the purpose of the corporation; standard boilerplate works here. Unless you will have outside investors from the beginning, you do not have to think a lot about your capital structure—that is, the number and par value of your shares. Just authorize as many shares as you can for the base filing fee and choose a nominal par value. It makes sense to add an exculpatory clause to protect your directors from liability, especially if you are going to be one. There is no need for cumulative voting at this stage.

Question: Does par value matter? Strategy: Par value does not matter much, except that choosing the wrong one could cost the company more money. Question: Suppose that Internet Start-up, Inc., has 2.8 million shares outstanding and eight directors. Without cumulative voting, how many shares would you have to purchase to be sure of electing yourself to the board? If the company's charter required cumulative voting, how many shares would you have to buy to achieve this goal? Strategy: The formula for cumulative voting is: Number of shares needed to elect one director = (Number of shares outstanding/(Number of directors being elected + 1)) + 1

First question: Par value is important only because it determines the corporation's filing fee. It should be set low enough that it does not trigger a higher-than-necessary filing fee. Second question: Without cumulative voting, you would have to buy one share more than 1.4 million shares. With cumulative voting, you would have to buy 311,112 shares.

Question: Vern owned 32 percent of Coast Oyster and served as president and director. Coast was struggling to pay its debts, so Vern suggested that the company sell some of its oyster beds to Keypoint. After the sale, officers at Coast discovered that Vern owned 50 percent of Keypoint. They demanded that he give the Keypoint stock to Coast. Did Vern violate the business judgment rule? Strategy: Here, Vern has violated the business judgment rule not once, but twice.

If the shareholders and directors did not know of Vern's interest in Keypoint, they could not evaluate the contract properly. Vern should have told them before he engaged in self-dealing. Also, by purchasing stock in Keypoint, Vern took a corporate opportunity. The court ordered him to turn over to Coast any profits he had earned on the transaction, as well as his stock in Keypoint.

Four friends pooled their money to buy a small airplane because they enjoyed flying. Sometimes they flew separately, other times they went on vacation trips together. Abbi, who was one of the owners, heard that a boat was missing out on the Gulf of Mexico. She took a neighbor's son Sam along with her in the plane to help search for the boat. After Abbi carelessly took off in bad weather, the plane crashed and both Abbi and Sam were killed. Sam's father sued the other three owners, alleging that they were partners who were liable for Abbi's negligence. Is there a partnership? If there was a partnership, were the partners liable?

In a similar case, the court ruled that there was no partnership because ownership of the plane was not a profitmaking enterprise. If there was a partnership, the partners would be liable if the trip was in the ordinary course of the partnership's business.

If you were to look online for a description of a professional corporation, you might find websites stressing that, in a PC, shareholders are still responsible for their own wrongdoing. For example: "In some states, these professionals can form a corporation, but with the distinction that each professional is still liable for his or her own wrongful professional actions." Why is this statement at best unnecessary and at worst misleading?

In every organization, the professional is responsible for his or her own wrongful acts.

Question: The board of Harmony, Inc., is concerned that the company may be the target of a hostile takeover. It has decided to adopt antitakeover devices. Which one of the following statements is false? Harmony may divest one of its divisions, as long as it does so at fair market value. Harmony may adopt a poison pill, but only if the board's primary concern is enhancing shareholder welfare, not protecting their own jobs. If it becomes clear that Harmony is going to be sold, the directors have an obligation to auction the company off to the highest bidder, even if they think that another company would be a better fit. If Harmony offers to buy back any of its stock, it must treat its shareholders equally. Strategy: Apply the principle established in the Unocal case earlier in the chapter.

In the Unocal case, the court permitted the company to exclude one shareholder from its buyback offer. Thus, (d) is the correct answer.

Question: What outcome would you predict for the cases in which HP shareholders sued the board of directors over Mark Hurd's severance payments? What process would they have to follow to get their day in court? Strategy: Shareholders can bring suit directly only if they have been personally harmed. If the harm is to the corporation, then shareholders must bring a derivative action in the name of the company.

In these cases, the harm was to the corporation. The shareholders were harmed only indirectly, when the price of their stock went down. A derivative action was their only option. Because the HP board refused to approve the lawsuit against itself, shareholders could proceed only if they showed that the board's decision was wrongly made. The court ruled that the shareholders had not been able to show wrongdoing on the part of the board.

Question: Alan Dershowitz, a law professor known for his famous clients, joined with other lawyers to open a kosher delicatessen, Maven's Court. Dershowitz met with greater success at the bar than in the kitchen—the deli failed after barely a year in business. One supplier sued for unpaid bills. What form of organization would have been the best choice for Maven's Court? Strategy: A sole proprietorship would not have worked because there was more than one owner. A partnership would have been a disaster because of unlimited liability. They could have met all the requirements of an S corporation or an LLC.

In this situation, most entrepreneurs would choose an LLC because it would be easier than forming an S corp and registering with the IRS. However, they really should have a good operating agreement. A sole proprietorship would not have worked because there was more than one owner. A partnership would have been a disaster because of unlimited liability. An LLP was a possibility, as long as the owners did not anticipate selling their shares. A limited liability partnership would have worked too. An S corporation would have been possible because the owners could have deducted their losses on this investment from their (substantial) other income and still enjoyed limited liability. The owners would probably not have been troubled by the restraints of an S corporation—only one class of stock, for example—but the technicalities involved in forming and maintaining an S corporation can be vexing. Like many start-ups today, Maven's Court probably would have been an LLC.

Dickens, Inc., is a bookstore incorporated in Nevada. From its warehouse in Montana, it ships books to all 50 states. The company's owner lives in New York, and its web designer lives in California. Where is Dickens a domestic corporation? Where must it qualify to do business?

It is a domestic corporation in Nevada. It must qualify to do business in Montana, because it has a permanent presence there. If the web designer in California is a full-time employee, it would also have to register there.

Ned and Sarah formed an LLC to buy and renovate apartment buildings. They did not sign an operating agreement but they orally agreed that they would dissolve the LLC if they could not get along. The two owners argued repeatedly and Ned refused to meet with Sarah, although he was willing to take her phone calls. Ned continued to work on the renovation that was then underway. Sarah asked a court to dissolve the LLC. Under state law, an LLC without an operating agreement could only be dissolved if the management of the entity is unwilling to reasonably promote the stated purpose of the entity or continuing the entity is financially unfeasible. What result in Sarah's lawsuit? What is the moral of this story?

Laws relating to LLC vary by state and generally LLCs have a perpetual existence but this also varies from one state to another. In this case dissolving of the LLC will be determined as per the state law. From the facts of the case Ned is working on the renovation and so one of promoters of the LLC is willingly working for the stated purpose of the entity. Secondly there are no indications that the LLC is financially unfeasible. Thus the rule and law of the state will prevail and Sarah will not be able to dissolve the LLC. Result: The moral of this story is that when forming a LLC an operation agreement should be put in place if the founders want to dissolve the LLC on their own terms. Otherwise they will have to follow the rules of the State

Question: In their spare time, Maisy and Roland like to build widgets for websites and blogs. After this sideline becomes profitable, Maisy tells Roland that she is going to start building widgets on her own without him because she feels she is more creative than Roland. Does Maisy have the right to exclude Roland? Strategy: There are three questions to answer: Is there a partnership? If so, what kind of partnership? Does Maisy have the right to withdraw from it?

Maisy and Roland do have a partnership—they are carrying on as co-owners of a business for profit. It does not matter that the word partnership has never passed their lips. Because there is no partnership agreement, they have a partnership at will. With this form of partnership, Maisy can withdraw at any time for any reason.

Question: Why did Marrama first file under Chapter 7 and then try to switch to Chapter 13 after he was caught lying? Strategy: This question is a good test of your understanding of the advantages and disadvantages of the different chapters. For help in answering this question, you might want to look at the chart at the end of the chapter. Remember that Chapter 7 is a liquidation provision—it takes more of the bankrupt's money upfront but then discharges his debts and gives him a fresh start for the future. Chapter 13 does not take as many assets during the bankruptcy process but may attach all the debtor's disposable income for the next five years.

Marrama filed under Chapter 7 in the hope that he could hold on to his house while all his debts were discharged. Once that plan failed, he tried to switch to Chapter 13 hoping that he could keep the house and give up his disposable income instead. This case illustrates the different emphases of Chapters 7 and 13.

After filing for bankruptcy, Yvonne Brown sought permission of the court to reaffirm a $6,000 debt to her credit union. The debt was unsecured, and she was under no obligation to pay it. The credit union had published the following notice in its newsletter: If you are thinking about filing bankruptcy, THINK about the long-term implications. This action, filing bankruptcy, closes the door on TOMORROW. Having no credit means no ability to purchase cars, houses, credit cards. Look into the future—no loans for the education of your children. Should the court approve Brown's reaffirmation?

Sometimes, a debtor is willing to reaffirm a debt, meaning they promise to pay even after the debt is discharged. The court should not approve Yvonne's reaffirmation since the debt is unsecured and she was not under any obligation to pay it. Discharge is a fundamental part of the bankruptcy process and creditors are not permitted to pressure the bankrupt unfairly. Yvonne took a debt from her credit union. The credit union published the article which says that on action of bankruptcy petition, no further credit would be given to them for buying a house, car, or the education of their children. Yvonne wants to reaffirm the debt as she does not want to lose the contact from the credit union which might be helpful for her in the future. The action of the credit union can be regarded as forceful, therefore, the reaffirmation should not be approved.

DeVry Inc. runs for-profit schools. Its shareholders submitted a proposal that would require the company to "annually report to shareholders on the expected ability of students at Company-owned institutions to repay their student loans." Must DeVry include this proposal in its proxy material for its annual meeting?

The SEC ruled that DeVry could exclude this proposal because it relates to the company's ordinary business operations. In particular, the proposal relates to the quality of its educational products and proposals that concern product quality are generally excludable.

Michael incorporated Erin Homes, Inc., to manufacture mobile homes. He issued himself a stock certificate for 100 shares for which he made no payment. He and his wife served as officers and directors of the organization, but during the eight years of its existence, the corporation held only one meeting. Erin always had its own checking account, and all proceeds from the sales of mobile homes were deposited there. It filed federal income tax returns each year using its own federal identification number. John and Thelma purchased a mobile home from Erin, but the company never delivered it to them. John and Thelma sued Erin Homes and Michael, individually. Should the court pierce the corporate veil and hold Michael personally liable?

The appeals court pierced the corporate veil and held the shareholder liable because the corporation had grossly inadequate capitalization, had disregarded corporate formalities, and the shareholder was also actively participating in the operation of the business. Laya v. Erin Homes, Inc., 177 W. Va. 343, 352 S.E.2d 93 (1986).

Pfizer Inc. paid $2.3 billion to settle civil and criminal charges alleging that it had illegally marketed 13 of its most important drugs. This settlement made history, but not in a good way. It was both the largest criminal fine and the largest settlement of civil healthcare fraud charges ever paid. Shareholders filed a derivative suit against the Pfizer board and top executives. The board refused to approve the lawsuit. Could the shareholders proceed with the lawsuit anyway?

The court excused demand because the Complaint alleged "misconduct of such pervasiveness and magnitude, undertaken in the face of the board's own express formal undertakings to directly monitor and prevent such misconduct, that the inference of deliberate disregard by each and every member of the board [was] entirely reasonable." In short, the board was so careless in exercising its responsibilities that demand would be futile.

Arthur, John, and George formed a partnership to drill and maintain cesspools for two years. After less than two months, John and George sent a letter to Arthur, informing him that they were dissolving the partnership. Arthur sued the two other men, asking the court to declare that the partnership still existed and he had the right to continue in the business. Do John and George have the power to dissolve a term partnership before the end of the term? Aside from the legal issue, is it fair to Arthur for the court to allow his two partners to walk away from their partnership? He had counted on a two-year commitment; they gave only two months.

The court refused to re-create the partnership. It held that the defendants could terminate the partnership any time they wanted, even in violation of the partnership agreement, but they would be ordered to pay damages for breaching the agreement. Engelbrecht v. McCullough, 80 Ariz. 77, 292 P.2d 845 (1956).

Wallace, Inc. adopted a poison pill. Five years later, Moore Corp. offered to buy all Wallace's stock for $56 a share, which was 27 percent over the existing market price. However, the offer was contingent upon the Wallace board eliminating the poison pill. Wallace consulted with its investment banker, which advised the company that the offer was inadequate but did not indicate what the shares were really worth. Moore then raised its offer price to $60 per share, and again the bankers opined that the offer was inadequate. Both the board and its banker believed that Wallace's recently adopted corporate strategy would lead to an increased stock price. Indeed, the company's recent financial results had been better than expected. Despite these improved results, more than 73 percent of Wallace shareholders offered their shares to Moore. When Wallace refused to remove the poison pill, Moore filed suit. Was the board's refusal to remove the poison pill a violation of the business judgment rule?

The court ruled for Wallace on the grounds that the board had a good faith belief that the offer was inadequate. The board was in a better position to assess the offer than shareholders. In the end, though, the shareholders were right. Eight years later, Wallace agreed to merge with Moore at a price that was $5 per share less than originally offered. In the interim, the stock market had gone up by 20 percent.

When Michael Eagan married James Gory's daughter Jennifer, the two men started a business flipping houses. Eagan found the houses and supervised their renovation. Gory provided the funds, purchased the houses in his name, and made all major decisions. He gave Eagan 50 percent of the net profits, but did not make Eagan responsible for any losses. After Eagan and Jennifer divorced, Gory sold two houses that he had purchased with Eagan's help, but he did not share any of the profits. Eagan sued, claiming they had a partnership and he was entitled to 50 percent of the profit. Did the two men have a partnership?

The court ruled that there was no partnership because: The obligation to share losses is one of the most important indications of a partnership and that was missing here. Eagan had no right to make decisions. Not every business arrangement involving profit-sharing is a partnership—profit-sharing is but one relevant factor. Eagan v. Gory, 374 Fed. Appx. 335 * (3d Cir. N.J. 2010).

Dr. Ibrahim Khan caused an automobile accident in which a fellow physician, Dr. Dolly Yusufji, became a quadriplegic. Khan signed a contract to support her for life. When he refused to make payments under the contract, she sued him and obtained a judgment for $1,205,400. Khan filed a Chapter 11 petition. At the time of the bankruptcy hearing, five years after the accident, Khan had not paid Yusufji anything. She was dependent on a motorized wheelchair; he drove a Rolls-Royce. Is Khan's debt dischargeable under Chapter 11?

The court would not permit this debt to be discharged because Dr. Khan was not acting in good faith. In re M. Ibrahim Khan, P.S.C., 34 Bankr. 574 (Bankr. W.D. Ky. 1983).

Question: You are the CEO of an app company. You will only allow your engineers to create apps for iPads, not for Android or Microsoft tablets because you think iPads are cooler. Some of your shareholders disagree with this policy. Is your decision protected by the business judgment rule? Strategy: Remember that, under the business judgment rule, you must have a rational business purpose for your decision.

The courts are very generous in defining a rational business purpose. They would probably uphold your decision as long as it is not in some way personally benefiting you, for example, as long as you are not a major shareholder of Apple.

Question: When Chase, Bailey, and Zack started working together to build a house, they signed a document stating, "The undersigned expressly agree that they are not partners." If they continued to work together, sharing the profits and the management, would they be partners? Strategy: Remember that, in the case of partnerships, actions speak louder than words.

The document would have had no impact. So long as they act like partners, they are partners.

Question: Mark Milbank repeatedly borrowed money from his wife and her father to fund his furniture business. He promised that the loans would enable him to spend more time with his family. Instead, he spent more time in bed with his next-door neighbor. After the divorce, his ex-wife and her father demanded repayment of the loans. Milbank filed for protection under Chapter 13. What could his ex-wife and her father do to help their chances of being repaid? Strategy: First ask yourself what kind of creditor they are: secured or unsecured. Then think about what creditors can do to get special treatment.

The father and the ex-wife were unsecured creditors who, as a class, come last on the priority list. However, the court granted their request that their loans not be discharged, on the grounds that Milbank had acted in bad faith.

Question: Bryan was giving flying lessons to Edward. With both men standing on the ground, Edward cranked up the engine of the airplane. The throttle was set too far open, so the plane began to move. Edward chased the plane on foot, grabbed its left wing, and swung the airplane in a semicircle, crashing it into Helen's new car, which was in the parking lot. Bryan operated his flying business under the name Bryan-Carl Air Service. Bryan and Carl were not partners, but Helen sued them both on a theory of partnership by estoppel. She argued that they had used a name for their business that sounded like a partnership. She had never heard of their business until the collision. Is Carl liable to Helen as a partner by estoppel? Strategy: These elements are required for partnership by estoppel: The participants must have held themselves out as partners even though they are not; a third party must have relied on that representation and suffered harm.

Two of the three elements are there—Brian and Carl held themselves out as partners and Helen suffered harm. But Carl was not a partner by estoppel because, before the accident, Helen did not know that Carl had held himself out as Bryan's partner. She had not relied on their representation.

Question: Dr. Warfield hired Wolfe, a young carpenter, to build his house. A week or so after they signed the contract, Wolfe incorporated Wolfe Construction, Inc. Warfield made payments to the corporation. Unfortunately, the work on the house was shoddy. The architect said he did not know whether to blow up the house or try to salvage what was there. Warfield sued Wolfe and Wolfe Construction, Inc., for damages. Wolfe argued that if he was liable as a promoter, then the corporation must be absolved and that, conversely, if the corporation was held liable, he, as an individual, must not be. Who is liable to Warfield? Does it matter if Wolfe signed the contract in his own name or in the name of the corporation? Strategy: Wolfe's argument is wrong. Warfield does not have to choose between suing him individually or suing the corporation. He can certainly sue both.

Wolfe is personally liable on any contract signed before incorporation, no matter whose name is on the contract. The corporation is liable only if it adopts the contract. Did it do so here? The fact that the corporation cashed checks that were made out to it means that the corporation is also liable. So Warfield can sue both Wolfe and the corporation.

Pedro and Juan have a business selling ties with fraternity insignia. Pedro finds out that an online shirt business is for sale. It sounds like a great idea—customers send in their measurements and get back a custom-made shirt at a price no higher than an off-the-rack shirt at the local department store. Does Pedro have to let Juan in on the great opportunity?

Yes

Question: The board of directors of Finalco Group, Inc., decided to sell most of the company's assets to Western Savings. Shortly after the proposed sale was announced, Finalco's largest shareholder said he opposed the transaction. Does Finalco need his approval for the sale? Strategy: Shareholders have the right to approve fundamental corporate changes. Was this a fundamental change?

Yes, it was a sale of most of the company's assets. The board could not proceed without the approval of the owners of a majority of shares.

William H. Sullivan, Jr., purchased all the voting shares of the New England Patriots Football Club, Inc. (the Old Patriots). He organized a new corporation called the New Patriots Football Club, Inc. The boards of directors of the two companies agreed to merge. After the merger, the nonvoting stock in the Old Patriots was to be exchanged for cash. Do minority shareholders of the Old Patriots have the right to prevent the merger? If so, under what theory?

Yes, minority shareholders have the right to vote because they own the acquired company

Question: You are the CEO of Bubble Gum, Inc., a publicly traded company. Pink Co. has just made an offer to buy Bubble. Pink is particularly interested in Bubble's farmland, used to grow sweeteners. You despise the CEO of Pink and know if Pink takes over the company, you will be fired. Your friend at ChewCo says his company would be interested in buying Bubble, but at a lower price than Pink is willing to pay. You are convinced that the company is better off long term with ChewCo. What can you do immediately to protect Bubble (and yourself) from Pink? Strategy: Shark repellents that require shareholder approval will not work because you do not have time to call a shareholders' meeting. Remember that your primary duty is to your shareholders.

You cannot simply agree to a sale to ChewCo—once it is clear that the company will be sold, you must auction it to the highest bidder. You could try an asset lockup—selling off the company's farmland. Perhaps that would discourage Pink from making the purchase.

Kaleb is the CEO of Sports City, a sporting goods store. Kaleb wants to increase the sales of Sports City. Kaleb researches the market and discovers that boat sales are soaring, so Kaleb decides to add a line of boats to the inventory of Sports City. Kaleb finds what he believes is a great deal on fishing boats with Fisherman's Boat Supply and enters into a contract for $90,000 worth of fishing boats. During the first year after the fishing boats are delivered to Sports City, only one boat sells. Sports City suffers an $85,000 loss on the deal. If the board of directors tries to hold Kaleb personally liable for the loss: a. they will not be successful, because Kaleb will be protected by the business judgment rule. b. they will be successful, because Kaleb violated his duty of care to the company. c. they will be successful, because Kaleb violated his duty of loyalty to the company. d. they will not be successful, because as CEO, Kaleb has the ultimate authority to make any decision he chooses about the company and cannot be held responsible even for a careless decision.

Mason is the CEO and sole shareholder of Mason Products, Inc., a corporation that manufactures and sells bird calls. Mason regularly uses the corporate credit card to purchase personal items, including furniture and clothes, and even makes monthly payments on his Corvette using the corporate credit card. When Mason Products becomes insolvent, its creditors file suit against Mason personally to seek payment for corporate debts. In this situation, the court is likely to: a. pierce the corporate veil and hold Mason personally responsible. b. not hold Mason personally responsible, because shareholders are not personally responsible for corporate debt. c. hold Mason responsible under the theory of ultra vires. d. not hold Mason responsible because as CEO, he is protected by the business judgment rule.

Which of the following is not necessary to create a partnership? a. Execution of a written partnership agreement b. Agreement to share ownership of the partnership c. Intention of conducting a business for profit d. Intention of creating a relationship recognized as a partnership

Angela is very far behind on her credit card payments! The interest keeps piling on month after month because Angela can only make the minimum payments. The balances on the cards are actually increasing each month instead of decreasing. Angela has a decent job but just doesn't make the kind of money needed to pay down her debt. Because Angela has a job and, therefore, a steady income, Angela's creditors want to force her to file a Chapter 13, so the trustee can make sure the creditors receive payment for at least part of the amount Angela owes them. If Angela's creditors attempt to file a Chapter 13 bankruptcy: a. they will be successful if three or more creditors having unsecured claims of $15,775 or more file the Chapter 13 petition. b. they will not be successful, because only the debtor can file a Chapter 13. c. they will not be successful unless they get Angela's approval on their petition. d. they will be successful if two or more creditors having a collective claim of $15,775 or more file the Chapter 13 petition.

Destiny Manufacturing, Inc., is incorporated under the laws of Nevada. Its principal place of business is in California, and it has permanent sales offices in several other states. Under the circumstances, which of the following is correct? a. California may validly demand that Destiny incorporate under the laws of the state of California. b. Destiny must obtain a certificate of authority to transact business in California and the other states in which it does business. c. Destiny is a foreign corporation in California, but not in the other states. d. California may prevent Destiny from operating as a corporation if the laws of California differ regarding organization and conduct of the corporation's internal affairs.

If a manager engages in self-dealing, which of the following answers will not protect her from a finding that she violated the business judgment rule? a. A special committee of the disinterested members of the board approved the transaction. b. The transaction was of minor importance to the company. c. The disinterested shareholders approved the transaction. d. The transaction was entirely fair to the corporation.

The Rustic Fig, an upscale restaurant, is going out of business. Penelope's Eatery agrees to buy all of Rustic Fig's assets for $100,000. After the transaction is completed, Rustic Fig still has $200,000 in outstanding debt. Who is responsible for Rustic Fig's debt? a. Penelope's Eatery is responsible because this is a merger. b. Rustic Fig is responsible because this is a purchase of assets. c. Penelope's Eatery is responsible because this is a purchase of assets. d. Rustic Fig is responsible because this is a merger.

Ben and Jerry are partners in an ice cream shop. They both work in the ice cream shop and share profits and expenses equally. Jerry thinks that expanding their ice cream shop to include a soda fountain would attract more customers. Without getting Ben's approval on the deal, Jerry signs a contract with the construction company to begin building the soda fountain. When Ben finds out, he is furious and says that he will not be responsible for payment under the contract. The construction company can enforce the contract against: a. Jerry only. b. Ben only. c. both Ben and Jerry. d. neither Ben nor Jerry.

Fatima is on the board of directors of Tyson Inc. Fatima never attends board meetings and never inspects the books of the company. The board hires Alexis as the chief executive officer (CEO) of Tyson. For the next two years, while Alexis is serving as CEO, Alexis delegates important tasks to employees who are not trained for the tasks, fails to monitor the corporate bank accounts, and approves several high-dollar contracts without making reasonable inquiries about them. Alexis also enters into two contracts on behalf of the corporation with other companies in which she owns an interest. If Tyson suffers a loss because of Alexis's actions: a. only Fatima can be held liable, because Alexis is protected by the business judgment rule. b. only Alexis can be held liable, because all these decisions are her responsibility. c. both Alexis and Fatima can be held liable. d. neither Alexis nor Fatima can be held liable.

If directors and officers cause harm to their company, ______. a. shareholders have the right to file suit against them and recover damages b. shareholders have the right to file suit against them and recover damages only if the board permits the suit c. shareholders have the right to file suit against them and recover damages only if the board permits the suit or a court decides the board's decision was wrongly made d. shareholders do not have the right to file suit against them

The duty of care ______. a. is not a requirement of the business judgment rule b. protects directors who make an uninformed decision if it was entirely fair to the company c. protects a decision that has a rational business purpose, even if the activity was illegal d. will not protect directors who make a decision that harms the company

A joint venture is a(n) . a. association limited to no more than two persons in business for profit b. enterprise of numerous co-owners in a nonprofit undertaking c. corporate enterprise for a single undertaking of limited duration d. association of persons engaged as co-owners in a single undertaking for profit

A voluntary petition filed under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code ______. a. is not available to a corporation unless it has previously filed a petition under the reorganization provisions of Chapter 11 of the Code b. automatically stays collection actions against the debtor except by secured creditors c. will be dismissed unless the debtor has 12 or more unsecured creditors whose claims total at least $5,000 d. does not require the debtor to show that the debtor's liabilities exceed the fair market value of assets

Blackriver Partnership is in the process of winding up. It has three partners: Jason, Kiera, and Lancelot. The partnership has assets of $90,000, but debts of $60,000, including $30,000 it owes to Jason. Who gets what? a. Each partner receives $10,000. b. Each partner receives $30,000. c. Jason receives $30,000 and the other two get $10,000 each. d. Jason receives $40,000 and the other two get $10,000 each.

Ellie, Josie, and Dylan are partners in a car dealership. Ellie gives notice to Josie and Dylan that she wants to withdraw from the partnership, and Josie and Dylan decide to continue the partnership without her. Shortly after Ellie leaves the partnership, she has lunch with an old friend, Justin. Justin has been looking for a new car and asks about the price of a particular car he saw on the website of the dealership, because he does not know that Ellie has left the partnership. Instead of telling Justin that she has left the partnership, Ellie quotes Dylan a price for the car, and Dylan accepts. When Dylan goes to the car dealership to complete the deal: a. the dealership must honor the deal and reinstate Ellie as a partner. b. the dealership is not required to honor the deal whether or not it has provided Dylan notice of Ellie's dissociation. c. the dealership is not required to honor the deal because Ellie is no longer a partner. d. the dealership must honor the deal unless it has provided Dylan notice of Ellie's dissociation.

Generally, a corporation's articles of incorporation must include all of the following except the: a. name of the corporation's registered agent. b. name of each incorporator. c. number of authorized shares. d. quorum requirements.

Genna and four others are establishing a business to create monogrammed items of personal clothing to sell to the general public. Genna is concerned about entering into business with others and possibly being liable for their actions, so she convinces the others that they should incorporate. After doing some basic research on how to incorporate a business, Genna starts preparing the articles of incorporation. At a minimum, Genna must make sure that the articles of incorporation include: a. the name of the corporation, the number of shares of stock the corporation is authorized to issue, and the name and address of each incorporator. b. the name of the corporation, the name and street address of the initial registered agent of the corporation and his or her registered office, and the name and address of each incorporator. c. the name of the corporation and the name and address of each incorporator. d. the name of the corporation, the number of shares of stock the corporation is authorized to issue, the name and street address of the initial registered agent of the corporation and his or her registered office, and the name and address of each incorporator.

Jerry Hall and Lawrence Vaught practice law in the same building. They share equally in the overhead expenses, such as rent and utilities, required to keep the business running. Both Jerry and Lawrence handle their own cases, consult and accept their own clients, and purchase their own advertising. Jerry and Lawrence do occasionally handle a case together, and they have stationery that says "Hall and Vaught" on the letterhead. They each have their own stationery as well. Jerry and Lawrence keep their finances separate, except when they handle a case together; then, they split the proceeds equally. When a client of Jerry's becomes dissatisfied and sues Jerry for malpractice, she sues Lawrence as well. In deciding whether or not a partnership exists here, the court will look at: a. whether Jerry and Lawrence have signed a partnership agreement. b. whether Jerry and Lawrence share profits and losses in the business. c. whether Jerry and Lawrence list themselves as partners on their letterhead. d. whether Jerry and Lawrence share profits and losses, whether they own the business jointly, and whether they have an equal right to be involved in the management of the business.

Kelly lives in Arkansas and works in the data division of Acxiom Corporation. Acxiom has its headquarters in Conway, Arkansas. Acxiom is incorporated in Delaware, however, because of the corporate-friendly laws in that state. Kelly works in a(n): a. alien corporation because Acxiom is incorporated in a different state than the division where Kelly works. b. domestic corporation, because Acxiom's headquarters is in the same state where Kelly works. c. close corporation because Kelly works in a division of Acxiom located close to where she lives. d. foreign corporation because Acxiom is incorporated in a different state than the division where Kelly works.

Ralph and Lulu are tired of struggling with their finances, so they decide to file for bankruptcy. Ralph and Lulu know once they file for bankruptcy, they will have trouble getting credit extended to them. Plus, they are tired of just scraping by and doing without. So, in the three weeks before the bankruptcy petition is filed, Ralph and Lulu go on a real spending spree. Ralph and Lulu max out their Mastercard by buying items for their house, going on trips, and eating at expensive restaurants. Because, after all, they won't have to pay it back! If Mastercard objects to the discharge of the recent credit card debt in the bankruptcy: a. the court will not allow Mastercard's objection, because creditors cannot object to purchases made by the debtor on a validly-issued credit card. b. the debt will probably be discharged in the bankruptcy under the after-acquired property rule. c. the debt will probably be discharged in the bankruptcy, and Ralph and Lulu will not have to pay. d. the debt will probably not be discharged in the bankruptcy, and Ralph and Lulu will have to pay.

Tasmo Inc. and Velmo Inc. are both corporations that manufacture metal snaps, so they are competitors. Velmo has a huge part of the market share but also has huge outstanding debt. Tasmo is a newcomer to the market with minimal outstanding debt. Tasmo and Velmo decide to merge their companies to improve their market share and financial picture. After the merger is completed, Tasmo is the company that remains. Who will be responsible for Velmo's outstanding debt? a. Velmo's debt will go away when the parties merge because the original corporation no longer exists. b. Velmo must satisfy all outstanding debt before the merger can be completed. c. Velmo d. Tasmo

Unger owes a total of $50,000 to eight unsecured creditors and one fully secured creditor. Quincy is one of the unsecured creditors and is owed $6,000. Quincy has filed a petition against Unger under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code. Unger has been unable to pay debts as they become due. Unger's liabilities exceed Unger's assets. Unger has filed papers opposing the bankruptcy petition. Which of the following statements regarding Quincy's petition is correct? a. It will be dismissed because the secured creditor failed to join in the filing of the petition. b. It will be dismissed because three unsecured creditors must join in the filing of the petition. c. It will be granted because Unger's liabilities exceed Unger's assets. d. It will be granted because Unger is unable to pay Unger's debts as they become due.

Xavier and Ciara form a corporation to provide cleaning services to local businesses. After two years of trying to make a go of the business, the profits they had hoped for are just not there. Xavier and Ciara decide to dissolve the corporation and go their separate ways. To terminate the corporate entity, Xavier and Ciara must: a. file articles of dissolution with the state. b. file articles of dissolution with the state and notify the creditors of the corporation of the dissolution within 120 days of filing the articles of dissolution. c. file articles of dissolution with the state and notify the creditors of the corporation of the dissolution within 30 days of filing the articles of dissolution. d. file articles of dissolution with the state, notify the creditors of the corporation of the dissolution, and establish a date (at least 120 days after the date of dissolution) by which all claims against the corporation must be received.

Oil Co. was a controlling shareholder of Pogo, a company that drilled for oil and gas in the Gulf of Mexico. When some additional leases became available, Oil Co. purchased all of them for itself. How could Oil Co. avoid liability? I. By first offering the leases to Pogo's board of directors II. By first offering the leases to Pogo's other shareholders III. By proving that Pogo could not afford to pay for the additional leases a. I b. II c. III d. Either I or II e. I, II, or III

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