SU 16

Under the Revised Model Business Corporation Act, a merger of two public corporations usually requires all of the following except A. A formal plan of merger. B. An affirmative vote by the holders of a majority of each corporation's voting shares. C. Receipt of voting stock by all shareholders of the original corporations. D. Approval by the board of directors of each corporation.

C. Receipt of voting stock by all shareholders of the original corporations. Explanation: A corporation is merged into another when shareholders of the target corporation receive cash or shares of the surviving corporation in exchange for their shares. State law usually requires approval of the board and a majority of shareholders of each corporation, and a copy of the merger plan must be provided to the shareholders of each corporation prior to voting.

Boyle, as a promoter of Delaney Corp., signed a 9-month contract with Austin, a CPA. Prior to the incorporation, Austin rendered accounting services pursuant to the contract. After rendering accounting services for an additional period of 6 months pursuant to the contract, Austin was discharged without cause by the board of directors of Delaney. Absent agreements to the contrary, who will be liable to Austin for breach of contract? A. Both Boyle and Delaney. B. Boyle only. C. Delaney only. D. Neither Boyle nor Delaney.

A. Both Boyle and Delaney. Explanation: A promoter who contracts for a nonexistent corporation is personally liable on such contracts. Delaney is also liable because it impliedly adopted the contract by accepting Austin's performance.

To which of the following rights is a shareholder of a public corporation entitled? A. The right to have annual dividends declared and paid. B. The right to vote for the election of officers. C. The right to a reasonable inspection of corporate records. D. The right to have the corporation issue a new class of stock.

C. The right to a reasonable inspection of corporate records. Explanation: A shareholder has a right to inspect corporate books and records during business hours after a proper written notice. But the right must be exercised in good faith, for a proper purpose, and in a proper manner. Use of corporate shareholder records for a personal business is not a proper purpose.

Which of the following actions may a corporation take without its shareholders' consent? A. Consolidate with one or more corporations. B. Merge with one or more corporations. C. Dissolve voluntarily. D. Purchase 55% of another corporation's stock.

D. Purchase 55% of another corporation's stock. Explanation: A purchase of another corporation's stock that gives the purchaser a controlling interest does not imply a merger of two entities. Although the purchaser must prepare consolidated financial statements, it is a legally separate entity. This transaction creates no fundamental corporate change. Thus, shareholder approval is not necessary.

Under the Revised Model Business Corporation Act (RMBCA), which of the following statements is true regarding corporate officers of a public corporation? A. An officer may not simultaneously serve as a director. B. A corporation may be authorized to indemnify its officers for liability incurred in a suit by shareholders. C. Shareholders always have the right to elect a corporation's officers. D. An officer of a corporation is required to own at least one share of the corporation's stock.

B. A corporation may be authorized to indemnify its officers for liability incurred in a suit by shareholders. Explanation: According to the RMBCA, corporations may indemnify their officers for liability incurred in a suit by shareholders, except when inconsistent with public policy, to the extent provided by the articles of incorporation, bylaws, actions of the board, or contract.

Acorn Corp. wants to acquire the entire business of Trend Corp. Which of the following methods of business combination will best satisfy Acorn's objectives without requiring the approval of the shareholders of either corporation? A. A merger of Trend into Acorn, whereby Trend shareholders receive cash or Acorn shares. B. A sale of all the assets of Trend, outside the regular course of business, to Acorn, for cash. C. An acquisition of all the shares of Trend through a compulsory share exchange for Acorn shares. D. A cash tender offer, whereby Acorn acquires at least 90% of Trend's shares, followed by a short-form merger of Trend into Acorn.

D. A cash tender offer, whereby Acorn acquires at least 90% of Trend's shares, followed by a short-form merger of Trend into Acorn. Explanation: A merger, consolidation, or purchase of substantially all of a corporation's assets requires approval of the board of directors of the corporation whose shares or assets are acquired. An acquiring corporation may bypass shareholder approval by using a short-form merger. No shareholder approval is required if a corporation that owns at least 90% of a subsidiary merges with the subsidiary using a short-form merger.

The essential difference between a stock dividend and a stock split is that a A. Stock split will increase the amount of equity. B. Stock split will increase a shareholder's percentage of ownership. C. Stock dividend must be paid in the same class of stock as held by the shareholder. D. Stock dividend of newly issued shares will result in a decrease in retained earnings.

D. Stock dividend of newly issued shares will result in a decrease in retained earnings. Explanation: A stock dividend is an issuance of additional shares of the company's stock proportionate to current holdings. Total equity is unaffected because it is merely represented by a greater number of shares. Generally accepted accounting principles require a transfer from retained earnings to contributed capital of the fair value of the shares distributed as a stock dividend.A stock split differs in that par value rather than retained earnings is reduced, and the number of authorized shares is increased.

Which of the following statements is correct regarding both debt and common shares of a corporation? A. Common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest. B. Common shareholders and debt holders have an ownership interest in the corporation. C. Common shares typically have a fixed maturity date, but debt does not. D. Common shares have a higher priority on liquidation than debt.

A. Common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest. Explanation: Common shares are equity securities. Thus, they are ownership interests. In contrast, debt holders do not have ownership interests. Rather, debt holders have claims on the corporation's assets. In the event of a liquidation, the debt holders' claims must be satisfied before any distribution to common shareholders.

Under the Revised Model Business Corporation Act (RMBCA), which of the following statements regarding a corporation's bylaws is (are) true? I. A corporation's initial bylaws shall be adopted by either the incorporators or the board of directors. II. A corporation's bylaws are contained in the articles of incorporation. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

A. I only. Explanation: The bylaws of a corporation are the rules and regulations that govern its internal management. The adoption of the bylaws is one item of business at the organizational meeting. Under the RMBCA, either the incorporators or the board of directors may adopt the bylaws. Bylaws are independent of the articles of incorporation and do not have to be publicly filed. The articles are filed with the appropriate public official. They include (1) the name of the corporation, (2) the names and addresses of the incorporators, (3) the name of the registered agent, (4) the address of the initial registered office, and (5) the number of authorized shares.

Which of the following circumstances may permit the piercing of the corporate veil of a closely held corporation and thus may cause its shareholders to be held personally liable? I. The corporation is thinly capitalized. II. The corporation borrows money from a shareholder without giving the shareholder a security interest in corporate assets. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

A. I only. Explanation: The corporate veil is pierced when a court finds that the shareholders have not conducted the business on a corporate business level, for example, when (1) it is undercapitalized, (2) the assets of the corporation and the shareholders are commingled, (3) corporate formalities are ignored, or (4) the corporation is established for a sham purpose. However, barring contrary language in the articles of incorporation, a corporation may make contracts, give guarantees, incur liabilities, issue debt, or give security interests. Thus, the law does not prohibit borrowing from a shareholder or other creditor even if a security interest is given.

Which of the following actions may be taken by a corporation's board of directors without shareholder approval? A. Purchasing substantially all of the assets of another corporation. B. Selling substantially all of the corporation's assets not in the regular course of business. C. Dissolving the corporation. D. Amending the articles of incorporation.

A. Purchasing substantially all of the assets of another corporation. Explanation: The board of directors directly controls a corporation by establishing overall corporate policy and overseeing its implementation. In exercising their powers, directors must maintain high standards of care and loyalty but need not obtain shareholder approval except for fundamental corporate changes. Purchasing substantially all of the assets (or stock) of another corporation is a policy decision properly made by the directors, not a fundamental change. It does not require shareholder approval in the absence of a bylaw or special provision in the articles of incorporation.

What is the doctrine under which a corporation is made liable for the torts of its employees, committed within the scope of their employment? A. Respondeat superior. B. Ultra vires. C. Estoppel. D. Ratification.

A. Respondeat superior. Explanation: Respondeat superior, or "let the master answer," is the doctrine that is the basis for a principal's liability for an agent's torts (civil wrongs not arising from a breach of contract, e.g., negligence). For this doctrine to apply, the wrongs must be committed within the scope of the agency.

Which of the following statements about the directors of a corporation is true? A. Under the Revised Model Business Corporation Act, a corporation may dispense with a board of directors in certain circumstances. B. Directors may serve only annual terms. C. Directors may be elected by the shareholders only. D. The number of directors may not exceed the number of shareholders.

A. Under the Revised Model Business Corporation Act, a corporation may dispense with a board of directors in certain circumstances. Explanation: Without a shareholder agreement meeting the requirements of the RMBCA, a corporation must have a board of directors consisting of at least one individual. Some states require a minimum of three directors but permit the number of directors to equal the number of shareholders if less than three. Other states require at least three directors. Given a unanimous agreement, however, the RMBCA permits the shareholders to dispense with directors.

A shareholder's right to inspect books and records of a corporation will be properly denied if the shareholder A. Wants to use corporate shareholder records for a personal business. B. Employs an agent to inspect the books and records. C. Intends to commence a shareholder's derivative suit. D. Is investigating management misconduct.

A. Wants to use corporate shareholder records for a personal business. Explanation: A shareholder has a right to inspect corporate books and records. But the right must be exercised for a proper purpose and in a proper manner. Use of corporate shareholder records for a personal business is not a proper purpose because it does not relate to the shareholder's interest in the corporation.

Which of the following statements is true with respect to the differences and similarities between a corporation and a limited partnership? A. Directors owe fiduciary duties to the corporation, and limited partners owe such duties to the partnership. B. A corporation and a limited partnership may be created only under a state statute, and each must file a copy of its organizational document with the proper governmental body. C. Shareholders may be entitled to vote on corporate matters, but limited partners are prohibited from voting on any partnership matters. D. Stock of a corporation may be subject to registration under federal securities laws, but limited partnership interests are automatically exempt from such requirements.

B. A corporation and a limited partnership may be created only under a state statute, and each must file a copy of its organizational document with the proper governmental body. Explanation: A corporation and a limited partnership are formed and exist only under the authority of a statute. Filing organizational documents (articles of incorporation or certificates of limited partnership, respectively) with appropriate state authorities is required for both.

Under the Revised Model Business Corporation Act (RMBCA), which of the following conditions is necessary for a corporation to achieve a successful voluntary dissolution? A. Successful application to the secretary of state in which the corporation holds its primary place of business. B. A recommendation of dissolution by the board of directors and approval by a majority of all shareholders entitled to vote. C. Approval by the board of directors of an amendment to the certificate of incorporation calling for the dissolution of the corporation. D. Unanimous approval of the board of directors and two-thirds vote of all shareholders entitled to vote on a resolution of voluntary dissolution.

B. A recommendation of dissolution by the board of directors and approval by a majority of all shareholders entitled to vote. Explanation: The RMBCA permits voluntary dissolution of a corporation that has not commenced business or issued stock by a majority vote of its incorporators or directors. A corporation that has issued stock and commenced business may be voluntarily dissolved by a shareholder vote at a special meeting called for the purpose if the directors have adopted a resolution of dissolution. Unless the board or the articles of incorporation require otherwise, a majority of the votes entitled to be cast must be represented at the meeting. The dissolution is effective when filed with the secretary of state.

Traditional concepts applicable to large publicly held corporations often do not meet the needs of closely held ones. Accordingly, the RMBCA addresses these needs. Under the RMBCA, A. A qualifying entity is automatically treated as a close corporation if it has fewer than 50 shareholders. B. A shareholder may have power to dissolve a close corporation that is similar to a partner's. C. Transfer of shares of a close corporation is restricted by means of a statutory buy-and-sell arrangement. D. A board of directors is required for a close corporation but shareholders have absolute power to restrict its discretion.

B. A shareholder may have power to dissolve a close corporation that is similar to a partner's. Explanation: Many close corporations are like partnerships in which all of the shareholders are active in management or are friends and relatives of those who are. In a partnership, a partner's interest is protected by his or her power to dissolve the association at any time and receive the value of his or her interest. Traditional corporate law did not provide that option for minority shareholders. The RMBCA allows a shareholder agreement (1) set forth in the articles of incorporation, the bylaws, or a separate signed writing and (2) approved by all shareholders at the time of the agreement to include a provision enabling any shareholder to dissolve the corporation either at will or upon the happening of a certain event.

Golden Enterprises, Inc., entered into a contract with Hidalgo Corporation for the sale of its mineral holdings. The transaction proved to be ultra vires. Which of the following parties may properly assert the ultra vires doctrine and why? A. Golden Enterprises to avoid performance. B. A shareholder of Golden Enterprises to enjoin the sale. C. Hidalgo Corporation to avoid performance. D. Golden Enterprises to rescind the consummated sale.

B. A shareholder of Golden Enterprises to enjoin the sale. Explanation: Under the doctrine of ultra vires, a corporation may not act beyond the powers inherent in the corporate existence or provided in the articles of incorporation and the incorporation statutes. Ultra vires has been eliminated as a defense. The RMBCA states that, with certain exceptions, "the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act." Those exceptions provide a cause of action in three instances in which the power to act may be questioned: (1) A shareholder can seek an injunction, (2) corporations can proceed against directors or officers, and (3) the state attorney general can proceed against the corporation.

Generally, officers of a corporation A. Are elected by the shareholders. B. Are agents and fiduciaries of the corporation, having actual and apparent authority to manage the business. C. May be removed by the board of directors without cause only if the removal is approved by a majority vote of the shareholders. D. May declare dividends or other distributions to shareholders as they deem appropriate.

B. Are agents and fiduciaries of the corporation, having actual and apparent authority to manage the business. Explanation: Officers are agents of a corporate principal, and agency law prescribes their real and apparent authority to bind the corporation. The bylaws and board resolutions may specifically limit that authority. Usual duties of an officer also define the officer's apparent authority. Any principal, including a corporation, may be estopped (prevented) from asserting a lack of actual authority on the part of its officers and other employees. Officers also are fiduciaries. Like directors, they owe a duty of loyalty, good faith, and fair dealing when transacting business with or on behalf of the corporation.

Which of the following states a disadvantage of debt financing for a corporation? A. Interest on debt is a tax deductible expense. B. Debt must be repaid at fixed times even if the entity is not profitable. C. Upon liquidation of a corporation, the holders of debt securities receive no more than the amount of their claims. D. Debt securities do not usually provide voting rights and therefore do not dilute the shareholder's control of the corporation.

B. Debt must be repaid at fixed times even if the entity is not profitable. Explanation: A corporation may choose to obtain some of the financing of its operations by issuing debt securities. These instruments, usually in the form of bonds or notes, represent an obligation of the corporation to repay the holder within a stated amount of time, accompanied by interest. The greatest disadvantage of debt financing is that it increases the risk of the corporation. Debt must be repaid at fixed times even if the entity is not profitable.

All of the following are powers that a corporation possesses except the right to A. Acquire and dispose of real or personal property. B. Engage in activities beyond its implied powers. C. Sue and be sued in the corporate name. D. Engage in any transactions involving interests in, or obligations of, any other entity.

B. Engage in activities beyond its implied powers. Explanation: The RMBCA grants a corporation the "same powers as an individual to do all the things necessary or convenient to carry out its business and affairs." A corporation may not exceed its express or implied powers.

Johns owns 400 shares of Abco Corp. cumulative preferred stock. In the absence of any specific contrary provisions in Abco's articles of incorporation, which of the following statements is true? A. Johns is entitled to convert the 400 shares of preferred stock to a like number of shares of common stock. B. If Abco declares a cash dividend on its preferred stock, Johns becomes an unsecured creditor of Abco. C. If Abco declares a dividend on its common stock, Johns will be entitled to participate with the common shareholders in any dividend distribution made after preferred dividends are paid. D. Johns will be entitled to vote if dividend payments are in arrears.

B. If Abco declares a cash dividend on its preferred stock, Johns becomes an unsecured creditor of Abco. Explanation: The holder of preferred stock must be paid the stated dividend before a common shareholder may receive any dividends. If payment of the stated dividend is not made to a cumulative preferred shareholder in any year(s), the dividends accumulate and must be paid in full prior to payment of any dividends to common shareholders. But a dividend on any stock does not become a payment obligation (debt) of the corporation until it has been declared.

Smith was an officer of CCC Corp. As an officer, the business judgment rule applied to Smith in which of the following ways? A. Because Smith is not a director, the rule does not apply. B. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused. C. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, but CCC may elect to reimburse Smith for any damages Smith paid. D. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, and CCC is prohibited from reimbursing Smith for any damages Smith paid.

B. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused. Explanation: Officers, like directors, owe fiduciary duties to the corporation. As an agent, an officer has a duty to act within authority granted by the articles, the bylaws, and the board. Officers are subject to the same duties of care and loyalty to the corporation as are directors. Likewise, absent bad faith, fraud, or breach of a fiduciary duty, the business judgment rule applies to officers. Like a director, the officer is insulated by the business judgment rule if the management decision is informed, conflict-free, and rational. Officers may be indemnified to the extent consistent with public policy, provided by the articles of incorporation, bylaws, actions of the board, or contract.

Lobo Manufacturing, Inc., is incorporated under the laws of New Mexico. 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 true? A. California may validly demand that Lobo incorporate under the laws of the State of California. B. Lobo must obtain a certificate of authority to transact business in California and the other states in which it does business. C. Lobo is a foreign corporation in California, but not in the other states. D. California may prevent Lobo from operating as a corporation if the laws of California differ regarding organization and conduct of the corporation's internal affairs.

B. Lobo must obtain a certificate of authority to transact business in California and the other states in which it does business. Explanation: Because Lobo has its principal place of business in California, it has sufficient contact to qualify as "doing business" in the state. A corporation doing business but not incorporated in that state is considered a foreign corporation and must obtain a certificate of authority to transact business.

The business judgment rule is a rule that immunizes corporate A. Management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith but are not within the power of the corporation or the authority of management to make. B. Management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of management to make. C. Shareholders from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of shareholders to make. D. Shareholders from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith but are not within the power of the corporation or the authority of shareholders to make.

B. Management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of management to make. Explanation: Courts avoid substituting their business judgment for that of the corporation's officers or directors. The rule protects an officer or a director from personal liability for honest mistakes of judgment if (s)he (1) acted in good faith; (2) was not motivated by fraud, conflict of interest, or illegality; and (3) was not grossly negligent. To avoid personal liability, directors and officers must (1) make informed decisions (educate themselves about the issues), (2) be free from conflicts of interest, and (3) have a rational basis to support their position.

Following the formation of a corporation, which of the following terms best describes the process by which the promoter is released from, and the corporation is made liable for, preincorporation contractual obligations? A. Assignment. B. Novation. C. Delegation. D. Accord and satisfaction.

B. Novation. Explanation: The parties to a contract may discharge each other from performance without breaching the contract. A novation substitutes a new party (the corporation) for an original party (a promoter of that corporation). For the novation to be effective, the corporation must agree to assume the promoter's obligations, and the third party must agree to release the promoter.

For several years, Joe Skipper was the principal shareholder, director, and chief executive officer of the Canarsie Grocery Corporation. Canarsie is in bankruptcy. Several creditors are seeking to hold Skipper personally liable as a result of his stock ownership and as a result of his being an officer-director. Skipper in turn filed with the bankruptcy judge a claim for $1,400 salary due him. Which of the following is true? A. Skipper's salary claim will be allowed and he will be entitled to a priority. B. Skipper has no personal liability to the creditors as long as Canarsie is recognized as a separate legal entity. C. Skipper cannot personally file a petition in bankruptcy for seven years. D. Skipper is personally liable to the creditors for Canarsie's losses.

B. Skipper has no personal liability to the creditors as long as Canarsie is recognized as a separate legal entity. Explanation: A fundamental characteristic of the corporation is that it is a separate legal entity apart from its shareholders. The shareholders have no personal liability for corporate debts. Thus, Skipper will have no personal liability if the corporation is considered a separate legal entity.

Which of the following actions is required to ensure the validity of a contract between a corporation and a director of the corporation? A. An independent appraiser must render to the board of directors a fairness opinion on the contract. B. The director must disclose the interest to the independent members of the board and refrain from voting. C. The shareholders must review and ratify the contract. D. The director must resign from the board of directors.

B. The director must disclose the interest to the independent members of the board and refrain from voting. Explanation: To protect the corporation against self-dealing, a director is required to make full disclosure of any financial interest (s)he may have in any transaction to which both the director and the corporation may be a party. Under modern corporate law, a transaction is not voidable merely on the grounds of a director's conflict of interest if the transaction (1) is fair to the corporation or (2) has been approved by a majority of informed, disinterested directors or shareholders.

Under the Revised Model Business Corporation Act (RMBCA), when a corporation's bylaws grant shareholders preemptive rights, which of the following rights is (are) included in that grant? I. The Right to Purchase a Proportionate Share of Newly Issued Stock II. The Right to a Proportionate Share of Corporate Assets Remaining on Corporate Dissolution A. Yes Yes B. Yes No C. No Yes D. No No

B. Yes No Explanation: Preemptive rights give a shareholder an option to subscribe to a new issuance of shares in proportion to the shareholder's current interest in the corporation. They limit dilution of shareholders' equity in the corporation. Most states recognize preemptive rights. However, preemptive rights may not exist unless they are specifically reserved in the articles of incorporation. Under the RMBCA, preemptive rights do not apply to stock issued as (1) an incentive to officers, directors, or employees; (2) in satisfaction of conversion or option rights; (3) within 6 months from the effective date of incorporation; or (4) for something other than money. However, the right to a proportionate share of the corporate assets remaining on corporate dissolution is a liquidation, not a preemptive, right.

Which of the following statements, if any, is (are) true regarding the methods a target corporation may use to ward off a takeover attempt? I. The target corporation may make an offer ("self-tender") to acquire stock from its own shareholders. II. The target corporation may seek an injunction against the acquiring corporation on the grounds that the attempted takeover violates federal antitrust law. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

C. Both I and II. Explanation: Managers of target corporations have implemented diverse strategies to counter hostile tender offers. Examples of antitakeover strategies include self-tender, legal action, and increasing outstanding stock.

Under the Revised Model Business Corporation Act (RMBCA), which of the following actions by a corporation would entitle a shareholder to dissent from the action and obtain payment of the fair value of his or her shares? I. An amendment to the articles of incorporation that materially and adversely affects rights in respect of a dissenter's shares because it alters or abolishes a preferential right of the shares II. Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the shareholder is entitled to vote on the plan A. I only. B. II only. C. Both I and II. D. Neither I nor II.

C. Both I and II. Explanation: Shareholders who disagree with fundamental corporate changes may have dissenters' or appraisal rights. The corporation must pay dissenting shareholders the fair value of their stock in cash. Under the RMBCA, an existing dissenters' right may be invoked only when a shareholder has a right to vote on a fundamental change, does not vote in favor, and gives written notice of a demand for payment. Fundamental changes include an amendment to the articles that materially and adversely affects rights in respect of a dissenter's shares because it alters or abolishes a preferential right. These rights also may derive from (1) a merger required to be voted on by the shareholders, (2) the merger of the corporation into its parent, (3) the sale or exchange of substantially all of the property of the corporation in a transaction not in the ordinary course of business, and (4) consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired.

Blanche was vice president of the Jupiter Corporation, a major weapons dealer. She used corporate funds to bribe a government official of a small European country. Blanche also caused advertisements to be published in the U.S. press that defamed Jupiter's chief competitor. What is the legal effect of Blanche's actions? A. Jupiter cannot be found guilty of a crime because a corporation cannot form the requisite intent. B. Jupiter will prevail on a defense of ultra vires. C. Both Jupiter and Blanche are liable in tort and guilty of a crime. D. Blanche is guilty of a crime but is not liable in tort.

C. Both Jupiter and Blanche are liable in tort and guilty of a crime. Explanation: The facts indicate that Blanche, acting as an agent for Jupiter, committed the tort of defamation and the crime of bribing a foreign governmental official. An agent is personally liable for his or her crimes and torts. Under agency law, Jupiter is liable for the torts of its agents acting within the scope of their employment.

Limited liability of shareholders is one of the advantages of incorporation. Generally, a shareholder is personally liable A. For torts of the corporation although (s)he did not participate in them. B. For crimes of the corporation although (s)he did not participate in them. C. Only for his or her investment in the corporation. D. For the corporation's debts.

C. Only for his or her investment in the corporation. Explanation: One of the principal advantages of incorporation is limited liability. If the corporation is properly formed and operated as an entity distinct from its owners, the shareholders ordinarily have no personal liability beyond the amount of their investment. The corporation is a separate legal person capable of being held liable for its independent actions. Thus, a corporation can be held liable for torts and crimes, but a shareholder who did not participate in the wrongful conduct or to whom the actions are not otherwise attributable is protected from liability.

Davis, a director of Active Corp., is entitled to A. Serve on the board of a competing business. B. Take sole advantage of a business opportunity that would benefit Active. C. Rely on information provided by a corporate officer. D. Unilaterally grant a corporate loan to one of Active's shareholders.

C. Rely on information provided by a corporate officer. Explanation: In the course of exercising good business judgment and reasonable care, a director is entitled to rely on information provided by an officer (or professional specialist) if the director reasonably believes the officer has competence in the relevant area.

Which of the following statements describes the same characteristic for both an S corporation and a C corporation? A. Both corporations can have more than 100 shareholders. B. Both corporations have the disadvantage of double taxation. C. Shareholders can contribute property into a corporation without being taxed. D. Shareholders can be either residents of the United States or foreign countries.

C. Shareholders can contribute property into a corporation without being taxed. Explanation: A transfer of assets for stock of any corporation is tax-free if the transferors are in control of the corporation immediately after the exchange. A person who transfers appreciated property will receive the benefit if another transferor transfers property and together they meet the control test. Property includes money. Control is ownership of stock having at least 80% of the total combined voting power of (1) all classes of stock entitled to vote and (2) total number of shares of all other classes of stock of the corporation.

The owner of cumulative preferred stock has the right to A. Convert preferred stock into common stock. B. A residual share in dividends after a fixed dividend has been paid to both common and preferred shareholders. C. The carryover of fixed dividends to subsequent periods from years in which they were not paid. D. Receive the par value of their shares but not unpaid dividends before common shareholders receive anything in liquidation.

C. The carryover of fixed dividends to subsequent periods from years in which they were not paid. Explanation: Normally, a preferred shareholder is entitled to a fixed dividend that must be paid before dividends are received by the common shareholders. If the preferred stock is cumulative, any dividends not paid in preceding years are carried over and must be paid before the common shareholders may receive anything. Under case law, preferred stock dividends are impliedly cumulative unless stated otherwise, but the RMBCA suggests that whether stock is cumulative or noncumulative should be included in the articles.

In general, which of the following statements concerning treasury stock is true? A. A corporation may not reacquire its own stock unless specifically authorized by its articles of incorporation. B. On issuance of new stock, a corporation has preemptive rights with regard to its treasury stock. C. Treasury stock may be distributed as a stock dividend. D. A corporation is entitled to receive cash dividends on its treasury stock.

C. Treasury stock may be distributed as a stock dividend. Explanation: Shares may be issued pro rata and without consideration to the shareholders by an action of the directors. Treasury shares have the status of authorized but unissued shares that may be used for stock dividends. The RMBCA, however, abolishes treasury shares. It treats reacquired shares as authorized but unissued.

Peters owned 500 shares of common stock in Kidsmart, Inc. Accordingly, Peters had the right to A. Automatically receive a dividend in any quarter in which the corporation made a profit. B. Inspect the corporate records on demand. C. Vote for the election and removal of the board of directors. D. Vote for and remove the corporate officers and set their compensation.

C. Vote for the election and removal of the board of directors. Explanation: Shareholders' primary participation is by meeting annually and electing directors. They also must approve fundamental corporate changes.

Which of the following statements is true regarding the fiduciary duty? A. A director's fiduciary duty to the corporation may be discharged by merely disclosing his or her self-interest. B. A director owes a fiduciary duty to the shareholders but not to the corporation. C. A promoter of a corporation to be formed owes no fiduciary duty to anyone, unless the contract engaging the promoter so provides. D. A majority shareholder as such may owe a fiduciary duty to fellow shareholders.

D. A majority shareholder as such may owe a fiduciary duty to fellow shareholders. Explanation: Directors and officers owe a fiduciary duty to the corporation to (1) act in its best interests, (2) to be loyal, (3) to use due diligence in carrying out their responsibilities, and (4) to disclose conflicts of interest. Controlling and majority shareholders owe similar duties. For example, courts often protect the interests of minority shareholders by (1) ordering the payment of dividends that were withheld in bad faith or (2) by compelling a seller of a controlling block of shares to distribute ratably among all shareholders any control premium paid in excess of the fair value of the stock.

Under the Revised Model Business Corporation Act (RMBCA), following what type of corporate acquisition does the acquiring corporation automatically become liable for all obligations of the acquired corporation? A. A leveraged buyout of assets. B. An acquisition of stock for debt securities. C. A cash tender offer. D. A merger.

D. A merger. Explanation: Under the RMBCA, when a merger becomes effective, (1) the entity designated in the plan of merger as the survivor comes into existence, (2) every entity merged ceases to exist separately, (3) the property and contract rights of the merged entities are vested in the survivor, and (4) the liabilities of the merged entities also are vested in the survivor.

Which of the following statements is correct regarding the declaration of a stock dividend by a corporation having only one class of par value stock? A. A stock dividend has the same legal and practical significance as a stock split. B. A stock dividend increases a stockholder's proportionate share of corporate ownership. C. A stock dividend causes a decrease in the assets of the corporation. D. A stock dividend is a corporation's ratable distribution of additional shares of stock to its stockholders.

D. A stock dividend is a corporation's ratable distribution of additional shares of stock to its stockholders. Explanation: A stock dividend is payable in the stock of the dividend-paying corporation. New stock generally is issued for this purpose. A shareholder's equity in the corporation is not increased because a stock dividend does not increase the recipient's proportional ownership.

The principle that protects corporate directors from personal liability for acts performed in good faith on behalf of the corporation is known as the A. Clean hands doctrine. B. Full disclosure rule. C. Responsible person doctrine. D. Business judgment rule.

D. Business judgment rule. Explanation: Courts avoid substituting their business judgment for that of the corporation's officers or directors. The rule protects an officer or a director from personal liability for honest mistakes of judgment if (s)he (1) acted in good faith; (2) was not motivated by fraud, conflict of interest, or illegality; and (3) was not grossly negligent. To avoid personal liability, directors and officers must (1) make informed decisions (educate themselves about the issues), (2) be free from conflicts of interest, and (3) have a rational basis to support their position.

Donald Walker is a dissident shareholder of the Meaker Corporation, which is listed on a national stock exchange. Walker is seeking to oust the existing board of directors and has notified the directors that he intends to sue them for negligence. Under the circumstances, Walker A. Can be validly denied access to the corporate financial records. B. Can be legally prohibited from obtaining a copy of the shareholder list because his purpose is not bona fide. C. Must show personal gain on the part of the directors if he is to win his lawsuit. D. Can insist that the corporation mail out his proxy materials as long as he pays the cost.

D. Can insist that the corporation mail out his proxy materials as long as he pays the cost. Explanation: Under federal securities law, a dissident shareholder may require the corporation to provide a list of the shareholders and mail proxy materials to those shareholders if the dissident shareholder pays the cost of the mailing.

A major characteristic of the corporation is its status as a separate legal entity. Thus, it must withstand attempts to pierce the corporate veil. The corporation that is least likely to withstand such attempts successfully is one that A. Was formed for tax savings. B. Was formed to insulate its owners from personal liability. C. Is a wholly owned subsidiary. D. Holds assets only to defraud creditors.

D. Holds assets only to defraud creditors. Explanation: A corporation is a separate legal entity that may be organized and used for a variety of purposes. The corporate form may be disregarded, however, if it is used in a manner contrary to public policy, e.g., to defraud creditors.

Jeri Fairwell is executive vice-president and treasurer of Wonder Corporation. She was named as a party in a shareholder derivative action in connection with certain activities she engaged in as a corporate officer. In the lawsuit, she was held liable for negligence in performance of her duties. Fairwell seeks indemnity from the corporation. The board of directors would like to indemnify her, but the articles of incorporation do not contain any provisions regarding indemnification of officers and directors. Indemnification A. Is not permitted because the articles of incorporation do not so provide. B. Is permitted only if Fairwell is found not to have been grossly negligent. C. Cannot include attorney's fees because Fairwell was found to have been negligent. D. May be permitted by court order although Fairwell was found to be negligent.

D. May be permitted by court order although Fairwell was found to be negligent. Explanation: Usually, an officer or director who is liable to the corporation because of negligence in the performance corporate duties is not entitled to indemnification. However, a court may order indemnification of an officer or director of a corporation (even though found negligent) if the court determines (s)he is fairly and reasonably entitled to it in view of all the relevant circumstances.

In general, which of the following must be contained in articles of incorporation? A. Names of states in which the corporation will be doing business. B. Name of the state in which the corporation will maintain its principal place of business. C. Names of the initial officers and their terms of office. D. Number of shares of stock authorized to be issued by the corporation.

D. Number of shares of stock authorized to be issued by the corporation. Explanation: Articles of incorporation must contain (1) the name of the corporation, (2) the number of authorized shares, (3) the address of the initial registered office of the corporation, (4) the name of its first registered agent at that address, and (5) the names and addresses of the incorporators. The articles also may include (1) names and addresses of the initial directors; (2) purpose and duration of the corporation; (3) par value of shares; (4) provisions for managing the corporation and regulating its internal affairs; (5) powers of the corporation, its board, and its shareholders; (6) liability of shareholders for corporate debts; (7) a provision limiting directors' liability (except for certain intentional wrongs); and (8) any provision that may be set forth in the bylaws.

The shares actually held by shareholders are best described as A. Authorized shares. B. Issued shares. C. Treasury shares. D. Outstanding shares.

D. Outstanding shares. Explanation: Shares are outstanding if they are authorized and issued to shareholders but have not been reacquired by the corporation.

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.

D. Quorum requirements. Explanation: Under the RMBCA, only the following must be included in the articles of incorporation: (1) the corporation's name; (2) number of authorized shares; (3) address of initial registered office; (4) name of first registered agent (for service of process) at that address; and (5) the name and address of each incorporator. Other information, such as quorum requirements and additional provisions for managing the corporation and regulating its internal affairs, may but need not be included. Matters relating to governing the corporation are usually covered in the bylaws.

For what purpose will a shareholder of a publicly held corporation be permitted to file a shareholder derivative suit in the name of the corporation? A. To compel payment of a properly declared dividend. B. To enforce a right to inspect corporate records. C. To compel dissolution of the corporation. D. To recover damages from corporate management for an ultra vires management act.

D. To recover damages from corporate management for an ultra vires management act. Explanation: A derivative suit is a cause of action brought by one or more shareholders on behalf of the corporation to enforce a right belonging to the corporation. Shareholders may bring such an action when the board of directors refuses to act on the corporation's behalf. Generally, the shareholder must show (1) (s)he owned stock at the time of the wrongdoing, (2) (s)he made a written demand to the corporation to bring suit or take other appropriate action, and (3) a bad-faith refusal of the board of directors to pursue the corporation's interest. The recovery, if any, belongs to the corporation. An action to recover damages from corporate management for an ultra vires act is an example of a derivative suit. An ultra vires act is one beyond the limits of the corporate purposes defined in the articles of incorporation.

All of the following are legal rights of shareholders in U.S. publicly traded companies except the right to A. Vote on major mergers and acquisitions. B. Receive dividends if declared. C. Vote on charter and bylaw changes. D. Vote on major management changes.

D. Vote on major management changes. Explanation: A corporation is owned by shareholders who elect a board of directors to manage the company. The board of directors then hires managers to supervise operations. Shareholders do not vote on major management changes because the powers of the board include selection and removal of officers and the setting of management compensation. Shareholders do have the right to vote on fundamental corporate changes, e.g., mergers and acquisitions, any changes in the corporate charter (the articles of incorporation) and bylaws, and dissolution.