chapter 35

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What is an inside director?

a member of the board of directors who is also an employee of the corporation

Even if not required to proactively disclose certain information, such as its minute book or shareholder lists, a corporation must make it available to shareholders

acting in good faith to manage and protect their investment

Everyone who owns ____________________________ is entitled to vote at an annual or special shareholder meeting.

company stock as of the record date

Companies can avoid providing the extensive disclosures required for proxy solicitations by choosing not to solicit proxies.

false

In a direct suit against a company, the company is obligated to pay a winning shareholder's legal fees.

false

The recent reforms in shareholder voting rights and director election requirements have led to a great deal of turnover of corporate directors.

false

Shareholder proposals on the company proxy statement

historically have been rarely approved

Veritas, Inc. is planning its annual shareholder meeting on June 15. The company

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

Before filing a derivative lawsuit, shareholders must

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

A shareholder is permitted to sue a corporation directly

only if the shower's rights have been harmed

The proceeds, if any, of a derivative lawsuit go to

the corporation

All of the following are shareholder rights EXCEPT

the right to manage the firm

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

true

In a derivative lawsuit, any proceeds awarded by the court must be paid to the corporation, not the shareholders themselves.

true

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

true

Under both state and federal law, a shareholder can generally revoke a proxy at any time.

true

Luella just purchased 5 shares of common stock in TriColor, Inc. for $250. Luella has the right to

vote to elect directors

For publicly traded companies, independent directors must comprise which of the following?

1. a majority of the board 2. the entire nominating committee 3. the entire audit committee

In eBay Domestic Holdings, Inc. v. Newmark, the court required t the directors of Craigslist to establish which of the following?

1. identify the proper corporate objectives served by their actions 2. their actions had a reasonable relationship to proper corporate objective

In which of the following situations would a shareholder be entitled to sue the company directly?

1. the company fails to hold an annual meeting for three years 2. the company fails to disclose executive compensation as required by the SEC

Who may call a special meeting?

1. board of directors 2. shareholders with at least ten percent of the company's stock

Which of the following are requirements the government has imposed in an attempt to rein in executive compensation?

1. mandatory clawback policies, whereby companies can demand a CEO or CFO pay the company any bonus or profits received from selling company stock within one year of releasing inaccurate financials 2. mandatory complete disclosure of executive compensation in SEC filings 3. mandatory non-binding shareholder votes on executive compensation every three years

Which of the following require shareholder approval?

1. mergers with major impact on the company 2. voluntary dissolution 3. amendments to the charter or bylaws 4. sale of substantially all assets

Which of the following are some of the reasons that directors have not cut back on executive compensation?

1. they are spending the corporation's - and shareholder's - money, not their own 2. to stay in the good graces of the CEO, who has influence over director elections 3. to keep executives from leaving during times of crisis or, conversely, during times of success

Under what circumstances may shareholders proceed with a derivative suit without directors' approval?

1. when directors have otherwise violated the business judgment rule 2. directors have a conflict of interest with the corporation 3. if directors lack the independence to act in the company's best interests

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

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

DCAM Corp. stock is held by Rita (5 percent), Jack (50 percent), and Taran (45 percent). DCAM's board of directors has negotiated a merger with EAE, Inc. Jack and Taran support the deal, but Rita thinks it will be disastrous for the company. If DCAM is a privately held corporation, what recourse does Rita have?

Rita may object to the merger and require DCAM to buy back her stock at fair market value

Under new ________ rules, shareholders may now require a vote at ________ to permit proxy ________. The proposal passes if vote in favor. Proxy access bylaws require a company to include names of board nominees selected by ________ in proxy statements. This allows a(n) _________ to be elected to the board without having to prepare __________.

SEC the annual meeting access a majority of shareholders large shareholders outside nominees separate proxy materials

proxy advisory firm

advise shareholders on how to vote in corporate elections

Kian is the chief financial officer of Yonkka, Inc. He is also a member of Yonkka's board of directors. Kian is

an inside director

Shareholders may _________ someone else to vote for them at a shareholder meeting. Both the ___________ and the card the _________ signs appointing the substitute are called a(n) _________.

appoint person shareholder proxy

Under SEC rules, companies

are required to post the information in the annual report and the proxy statement on their Web site, file it with the SEC, and distribute it to shareholders

A Special Litigation Committee is usually comprised of

at least two independent 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

can do any of the above - can reject Meredith's demand or simply fail to respond - can file suit on behalf of the corporation - can appoint a Special Litigation Committee

Anyone who owns _______ stock _______ corporation has _______ duty to _________ shareholders.

enough to control a a fiduciary minority

A derivative lawsuit is filed by a shareholder of the corporation if his or her own rights have been harmed.

false

A proxy is a vote that is mailed in, like an absentee ballot.

false

Alfrieda 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.

false

Controlling shareholders have no fiduciary responsibility to minority shareholders.

false

Minority shareholders have no right to overturn an ordinary business transaction between the corporation and a controlling shareholder.

false

Under SEC regulations, both privately held and publicly traded companies must make certain disclosures to shareholders.

false

The proceeds of a derivative litigation go to

go entirely to the corporation

In recent decades, shareholders have paid a steep price for the mistakes of corporate managers while

have been richly compensated, and often remained in their executive positions

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

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

Charles owns 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

he has a proper purpose

The NYSE and NASDAQ both require that the members of the nominating committee for director elections be

independent directors

George is a majority shareholder in Soda Pop, Inc., a large soft drink maker. Citizens in India are threatening to sue Soda Pop for stealing water in rural villages, ruining crops, and depriving livestock of water. If they are successful in their suit, will George be liable to the Indian plaintiffs?

no, because George has no right to control Soda Pop operations

Drug Co. paid $3 billion to settle a lawsuit and pay a criminal fine after it illegally marketed 13 of its most important drugs. Shareholders filed a derivative suit against the Drug Co. board and top executives. Defendants responded with a motion to dismiss on the grounds that shareholders had not made demand on the board. Should the court grant the motion to dismiss?

no, if the shareholders can show that demand was futile

Wanda, a realtor, owns stock in Mackey Land, a publicly traded real estate development company. To market her own realty business, Wanda demands that Mackey Land provide her the list of Mackey Land shareholders. Is Wanda entitled to this information?

no. this is not a proper purpose to access company information

Pro Threads, Inc., an international designer clothing manufacturer, is acquiring by merger D-Satisfaction, a small manufacturer that specializes in fitted dresses. Dresses of this type account for one half of one percent of Pro Threads' sales. Do Pro Threads and D-Satisfaction shareholders need to approve the merger?

only D-Satisfaction shareholders need to approve the merger

Certain shareholders are entitled to make proposals for company action that are subject to a vote at the annual meeting, which are

only binding if they are within the realm of shareholder power, such as the corporate bylaws

Dissenter's rights refers to the requirement that

private corporations allow minority shareholders to sell their stock at fair market value if they disagree with a fundamental change

A corporation must obtain shareholder approval before the company

sells off a major portion of its business to another company

activist investor

shareholder with a large block of stock whose goal is to influence management decisions and strategic direction

What was the basis of the shareholder suit in In Re eBay, Inc. Shareholders Litigaiton?

shareholders filed a derivative suit because eBay directors allegedly engaged in self-dealing when hiring its underwriter

A public company instituted a clawback policy. What does this mean?

the company can require the CEO and CFO to reimburse the company for any bonus or profits they recieved from selling company stock within a year of the release of flawed financials

In many states, minority shareholders cannot be expelled by a company unless

the company pays a fair price for the shares and the expulsion has a legitimate business purpose

Most shareholder litigation involves derivative suits, which are brought on behalf of __________, to remedy harm suffered by _____________.

the corporation; the corporation itself

At issue in Chopra v. Helio Solutions, Inc. is whether

the shareholder has a proper purpose with respect to all of the documents requested

Although not required to solicit proxies, nearly all corporations do because it is the only practical way to obtain a quorum needed to make shareholder votes at meetings effective.

true

Because making a demand to the board of directors for a derivative suit will almost always fail in practice, shareholders must realistically be able to prove that demand is not required in order to recover for wrongs committed against the corporation.

true

Minority shareholders have the right to overturn ordinary business transactions between the corporation and a controlling shareholder unless the corporation can show that the transaction is fair to the minority shareholders.

true

The NYSE and NASDAQ both require that the members of the nominating committee be independent directors who are less likely to simply go along with whatever the CEO wants.

true

Today the vast majority of corporate stock is held by institutional investors.

true

Connor owns ten percent of the stock issued by Outdoorsmen, Inc., an outdoor sporting supply company. The nominating committee has nominated an executive from a private equity firm for the open seat on the Outdoorsmen board. Connor believes the nominee does not have the industry knowledge to properly manage Outdoorsmen and that his good friend, Michael, who has produced popular nature documentaries and has a CPA, will be much more effective. Connor demands that Michael be included in the proxy materials sent to shareholders. Must the Outdoorsmen board comply with Michael's request?

yes, if the company has proxy access bylaws

Unhappy with the management of Jackpot Enterprises, Inc., a shareholder asked the company to include a proposal in the proxy statement that would require the board of directors to sell or merge the company. Must Jackpot include this proposal in its proxy statement?

yes, if the shareholder has owned at least one percent or $2,000 of Jackpot's stock continuously for a year

After Classic Corp. went public at $12 a share, it began suffering many years of losses. Isaac Fogel, who owned 64 percent of the stock, decided to take the company private again by buying shareholders' stock at a price of 20 cents a share. Classic hired two financial advisers who opined that the buyout price was fair. The board of directors voted in favor of the sale and then scheduled a special shareholder meeting to vote on the buyout. Do the minority shareholders have any rights?

yes, they have legal protection and are owed a fiduciary duty from the majority shareholders

The SEC discovered that Alliant's annual report contained misleading financial statements, which concealed the fact that Alliant would not be able to collect $2 million worth of debt. When the SEC releases a statement concerning Alliant's fraudulent filings, the company's stock drops from $38 to $15 a share. Six months prior to the SEC's announcement, Alliant's CFO sold half of his shares at the company's all-time high stock price of $43. May Alliant recover any money from the CFO that he earned from his sale of stock?

yes. Alliant may claw back all of the profits the CFO received from the sale of the stock six months ago

Gerald is the sole nominee to fill the open position on ABC Corp.'s board of directors. Gerald has been on the board for the past ten years and his management style is extremely unpopular. At the annual meeting, Gerald receives two of the 1,000 shareholder votes. May Gerald remain on the ABC board?

yes. Gerald has received the necessary number of votes


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