Ch42 Organization And Financial Structure Complete Test Bank

Business Law, 17e (Langvardt)

Chapter 42 Organization and Financial Structure of Corporations

1) Corporations are generally liable on preincorporation contracts signed by their promoters.

2) Promoters are personally liable on a preincorporation contract but are released from liability when the corporation adopts the contract.

3) Only when the promoter is liable on the preincorporation contract is the other party liable on the contract.

4) Under the Model Business Corporation Act (MBCA), a prospective shareholder may not revoke a preincorporation subscription for a one-year period, in the absence of a contrary provision in the subscription.

5) A corporation is required to reimburse a promoter for her reasonable expenses incurred on behalf of the corporation prior to incorporation.

6) An organizer is the individual that incorporates a business.

7) A promoter is not an agent of the future corporation.

8) Two corporations in a state may have the same name.

9) Under the MBCA, an incorporator may become jointly and severally liable for preincorporation contracts just by being an incorporator.

10) A passive investor who believes she has invested in a corporation has no liability for the obligations of the business if the corporation has not in fact been formed.

11) As per the Model Nonprofit Corporation Act (MNCA), a nonprofit corporation need not have members for its existence.

12) If the secretary of state's office approves a company's articles of incorporation then it is returned with a stamp indicating "Filed" and with a receipt for the fees paid.

13) Regardless of what state a corporation files in, that business will need to produce an annual report and pay a fee or tax to the state.

14) In order to capitalize a newly formed corporation, a company will usually seek cash in exchange for equity securities, debt securities, or both.

15) Mandatory dividend provisions enacted in corporate laws have generally been held legal.

16) Under the Model Business Corporation Act, a corporation may not issue its shares in return for any benefit to the corporation.

17) Watered shares are shares issued for consideration that has been overvalued impermissibly by the board of directors.

18) A right of first refusal on a share certificate allows the corporation to match the offer that a selling shareholder receives for his shares.

19) Memberships in a nonpublic corporation are generally freely transferable.

20) There is no limit on the number of members in a nonprofit corporation.

21) A(n) ________ occurs when a corporation accepts a preincorporation contract by action of its board of directors, by which the corporation becomes liable for the contract.

A) adoption

B) novation

C) ratification

D) assumption of contract

22) A promoter:

A) may have liability on the contracts he negotiates on behalf of the prospective corporation.

B) does not hold any liability to third parties on preincorporation contracts.

C) automatically becomes one of the initial directors of the corporation.

D) is not liable on a preincorporation contract after the corporation's adoption of the contract.

23) When a promoter is liable on a preincorporation contract, the promoter is released from liability on the contract:

A) only after the contract has been fully performed.

B) when the corporation ratifies the contract.

C) when the corporation and the other party to the contract agree to release the promoter from liability.

D) when the corporation's articles have been filed by the secretary of state.

24) A party who makes a preincorporation contract with a corporate promoter is liable on the preincorporation contract:

A) only after the corporation's board of directors adopts the contract after the corporation has come into existence.

B) only after the corporation's articles have been filed with the secretary of state.

C) when the party agrees to look only to the prospective corporation for performance of the contract.

D) only when the promoter is liable on the contract.

25) Rice is a promoter of a corporation to be known as Dex Corp. On January 1, 1985, Rice signed a nine-month contract with Roe, a CPA, which provided that Roe would perform certain accounting services for Dex. Rice did not disclose to Roe that Dex had not been formed. Prior to the incorporation of Dex on February 1, 1985, Roe rendered accounting services pursuant to the contract. After rendering accounting services for an additional period of six months pursuant to the contract, Roe was discharged without cause by the board of directors of Dex. In the absence of any agreements to the contrary, who will be liable to Roe for breach of contract?

A) Both Rice and Dex

B) Rice only

C) Dex only

D) Neither Rice nor Dex

26) Joe is the promoter of New Corporation (NC). He entered into various preincorporation contracts. NC was properly formed on January 1, 2006. As a result:

A) Joe is no longer personally liable on those preincorporation contracts.

B) NC is automatically liable on those preincorporation contracts.

C) Joe is jointly and severally liable on preincorporation contracts.

D) Joe is not liable because NC released him from personal liability.

27) John is the promoter of Wheelies Corp., an automotive wheel manufacturing business. To escape personal liability on preincorporation contracts, John planned to make only nonbinding preincorporation contracts. He made one such contract in March 2011 with his friend David for supplying Wheelies with auto parts. After getting payment for the contract, David refused to make the supply. Wheelies has not been incorporated yet. Is David liable?

A) No, David is not liable because John is not liable on the contract.

B) No, David is not liable because Wheelies has not been formed yet.

C) Yes, David is liable to Wheelies but not to John.

D) Yes, David is liable to both John and Wheelies.

28) A preincorporation share subscription is:

A) a contract binding the corporation at the time of incorporation.

B) irrevocable by the subscriber for six months after the subscription has been issued.

C) a contract binding the corporation at the time of its issuance.

D) preferred by modern corporate promoters over a post incorporation subscription.

29) Generally, corporate acceptance of preincorporation subscriptions occurs by action of the:

A) board of directors after incorporation.

B) promoters during their issuance.

C) board of directors during their issuance.

D) promoters before incorporation.

30) Under the Model Business Corporation Act (MBCA), a prospective shareholder may not revoke a preincorporation subscription for a ________ period, in the absence of a contrary provision in the subscription.

A) nine-month

B) one-year

C) two-year

D) six-month

31) Sharon entered into a preincorporation share subscription agreement on January 1, 2006. The corporation was formed on February 1, 2006. What is the status of this agreement on March 1, 2006, under the Model Business Corporation Act?

A) It is binding only if Sharon has already paid for the shares.

B) It is binding even if Sharon has not already paid for the shares.

C) It is not binding because the corporation did not exist on January 1, 2006.

D) It is not binding unless Sharon ratifies the agreement after the corporation has been formed.

32) On preincorporation share subscriptions:

A) promoters have no liability.

B) promoters have no liability after incorporation.

C) promoters have personal liability till novation.

D) promoters have maximum liability.

33) A promoter owes a fiduciary duty to the corporation and to its prospective investors. This implies that:

A) a promoter is an agent of the prospective corporation.

B) prospective investors in the business can control actions of a promoter.

C) a promoter may engage in intrinsically fair transactions with the corporation.

D) a promoter is an agent of the prospective investors in the business.

34) The fiduciary duty to the corporation is owed by its:

A) shareholders.

B) promoters.

C) investors.

D) creditors.

35) A clause in a contract that states that a promoter of a contract will cease to be liable under the contract once a corporation has adopted it, is called:

A) an automatic novation clause.

B) an automatic agency clause.

C) an incorporation clause.

D) a bylaws clause.

36) The basic governing document of the corporation is the:

A) articles of incorporation.

B) bylaws.

C) shareholder agreement.

D) organizational operating agreement.

37) Which of the following is included in the articles of incorporation?

A) The number of shares a corporation is authorized to issue

B) The standards for declaring dividends

C) The procedures for calling special meetings of shareholders

D) The procedures for maintenance of share records

38) According to the MBCA, which of the following may, rather than must, be included in the articles of incorporation?

A) The number of shares that the corporation has authority to issue

B) The name and address of each incorporator

C) The address of the initial registered office of the corporation

D) The names and addresses of the individuals who are to serve as the initial directors

39) Under the Model Business Corporation Act, a corporation's existence begins:

A) only after the promoters substantially comply with each of the mandatory conditions precedent to incorporation and hold an organization meeting.

B) only after the articles of incorporation are filed with the secretary of state.

C) when the secretary of state returns to the corporation a copy of the articles stamped "Filed."

D) when the shareholders approve of all the changes in the articles.

40) Which of the following occurs at a corporation's organization meeting?

A) Adoption of preincorporation contracts.

B) Authentication of the articles of incorporation.

C) Adoption of bylaws to supplement the articles of incorporation.

D) Creation of preincorporation contracts.

41) Which of the following is included in the bylaws?

A) The purpose of the corporation.

B) The machinery for the transfer of shares.

C) The par value of shares of the corporation.

D) The duration of the corporation.

42) To retain its status as a corporation in good standing, a corporation must:

A) pay an annual franchise fee or tax.

B) hold an annual shareholders' meeting.

C) pay an annual dividend to shareholders.

D) hold an annual board of directors' meeting.

43) Because the articles of incorporation embody the basic contract between a corporation and its shareholders, shareholders must approve most changes in the articles. Which of the following is an example of "such changes" in the article?

A) Place of shareholder meeting

B) Increase in the number of authorized shares

C) Amount of annual dividend

D) Date of shareholder meeting

44) The Statutory Close Corporation Supplement to the MBCA permits a corporation with ________ shareholders to elect to become a close corporation.

A) fewer than 100

B) 50 to 75

C) 75 to 100

D) fewer than 50

45) Any corporation that has complied with all ________ is called a de jure corporation.

A) mandatory bylaw provisions

B) mandatory conditions subsequent

C) mandatory conditions precedent

D) mandatory statutory provisions

46) When the promoters of a business substantially comply with each of the mandatory conditions precedent to the incorporation of the business, a(n) ________ corporation is formed.

A) "S"

B) de jure

C) de facto

D) estoppel

47) Promoters of a youth-oriented magazine publishing business substantially complied with each of the mandatory conditions precedent to the incorporation of the business, but they forgot to include the incorporators' addresses in the articles of incorporation. As a result, a(n) ________ corporation was formed.

A) de jure

B) de facto

C) "S"

D) estoppel

48) N-Ext Corp. (NEC) was defectively organized. As a result, even a corporation by estoppel could not be formed. As representatives of NEC, Pete (a shareholder manager) and Dave (a nonshareholder manager) made a contract with a vendor for supplying raw materials to NEC. The vendor did not get paid as per the contract. Who is liable in this situation?

A) NEC

B) Dave and NEC

C) Pete, Dave, and the management of NEC

D) Pete and NEC

49) N-Gate Corporation (NGC) was defectively organized. As a result, not even a corporation by estoppel was formed. An NGC truck driver negligently ran over a pedestrian while delivering goods manufactured by NGC. The pedestrian now wants to sue. Who is liable in this situation?

A) The managers of NGC only

B) The truck driver only

C) The truck driver and the managers of NGC

D) The truck driver, the managers of NGC, and all purported shareholders of NGC

50) According to the MBCA, who amongst the following is liable for a defective corporation's contracts and torts?

A) A shareholder manager who knows that the corporation does not exist.

B) A passive shareholder who knows that the corporation does not exist.

C) A nonshareholder manager who believes that the corporation exists.

D) A member of the board of directors who believes that the corporation exists.

51) According to the Model Nonprofit Corporation Act (MNCA), what is the minimum number of members that a nonprofit corporation is required to have?

A) 50

B) 1

C) 10

D) 0

52) What is the only function of an incorporator of a business?

A) To bring a corporation into existence

B) To serve as the corporation's first CEO

C) To issue public offerings of stock

D) To act as attorney in fact on a permanent basis for the business

53) A bank may lend money to a corporation in exchange for the corporation's short-term promissory notes, which are called:

A) shares.

B) commercial paper.

C) debentures.

D) bonds.

54) Equity securities consist of:

A) debentures and promissory notes.

B) short-term notes payable.

C) common and preferred shares.

D) bonds and debentures.

55) Under the MBCA, which of the following is correct concerning shares repurchased by the corporation?

A) They are no longer issued or outstanding, which means that they may be resold only for par value or more.

B) They may either be restored to unissued status or held as treasury shares, which means they may be sold at any price.

C) They may be canceled, in which case they are no longer authorized and cannot be reissued.

D) They are issued but not outstanding, which means they may be resold at any price.

56) Shares permitted to be issued by a corporation are called:

A) preference shares.

B) issued shares.

C) authorized shares.

D) outstanding shares.

57) ________ shares are shares that have been sold to shareholders.

A) Preference

B) Issued

C) Authorized

D) Outstanding

58) If repurchased shares are neither canceled nor restored to unissued status, they are called ________ shares.

A) preference

B) treasury

C) Golden

D) outstanding

59) ________ are long-term, unsecured debt securities.

A) Options

B) Warrants

C) Bonds

D) Debentures

60) Generally, ________ have a shorter duration than debentures or bonds.

A) options

B) warrants

C) promissory notes

D) rights

61) Short-term certificated options that are usually transferable are referred to as:

A) options.

B) warrants.

C) bonds.

D) rights.

62) Several states' constitutions place stricter limits than the MBCA on permissible considerations for issuance of common shares by corporations. Which of the following considerations is permissible under the MBCA but not permissible by such state constitutions?

A) A promoter's preincorporation services worth $25,000, which services were performed prior to incorporation.

B) A gratuitous promise to contribute $35,000 in cash to the corporation.

C) Bonds of another corporation, which bonds are worth $15,000.

D) The president's actual performance of services for the corporation, which services are worth $50,000.

63) What article of the Uniform Commercial Code (UCC) governs the issuance of stocks by a corporation?

A) Article 8

B) Article 2

C) Article 13

D) Article 9

64) When close corporation shareholders want to ensure that there is a market for their shares upon their deaths, they should use a:

A) buy-and-sell agreement.

B) right of first refusal.

C) consent restraint.

D) provision disqualifying purchasers.

65) What is the term for an agreement that makes the shareholder sell his shares back to the corporation at a price determined in the agreement and binds the corporation to purchase the shares?

A) Option agreement

B) Buy-and-sell agreement

C) Fiduciary agreement

D) International agent agreement

66) In close corporations, free transferability of shares as a legal matter is a threat to:

A) the balance of power among shareholders.

B) the stock market.

C) the board of directors.

D) the inherent right of freedom of contract.

67) Which of the following is not considered a transfer restriction?

A) Right of first refusal

B) Option agreement

C) Provisions disqualifying purchasers

D) Fiduciary agreement

68) A(n) ________ grants the corporation or other shareholders a choice to buy the selling shareholder's shares at a price determined by the agreement.

A) transferability agreement

B) right of first refusal

C) option agreement

D) buy-and-sell agreement

69) A(n) ________ requires a selling shareholder to obtain the consent of the corporation or the other shareholders before she may sell her shares.

A) buy-and-sell agreement

B) right of first refusal

C) option agreement

D) consent restraint

70) Which of the following would be used to exclude unwanted persons from the corporation?

A) An option agreement

B) A consent restraint

C) A provision disqualifying purchasers

D) A buy-and-sell agreement

71) Consent restraints and provisions disqualifying purchasers may be used as long as:

A) they are not manifestly unreasonable.

B) at least one party consented to the provision.

C) the limitation is not unfair under prevailing professional norms.

D) the provision has a legitimate business interest.

72) Under the MBCA, a purchaser of shares that have a transfer restriction is not put on notice of such restriction if:

A) the restriction is public information.

B) the restriction is conspicuously noted on the face of the share certificate.

C) the restriction is conspicuously noted on the back of the share certificate.

D) he knows of the restriction when he buys the shares.

73) In the case in the text, Coyle v. Schwartz, the buy-and-sell agreement considered by the court is an example of:

A) an agreement that failed to address what would happen in the event of a deadlock.

B) an agreement that failed to clarify what will happen when a shareholder voluntarily retires.

C) an agreement that was able to consider all parties' objectives.

D) an agreement that failed to attain the objectives of all the shareholders.

74) In the states that provide statutory solutions for close corporations that fail to address the share transferability problem, which of the following is not included in these statutes?

A) A right of first refusal provision

B) An option provision

C) A buy-and-sell provision

D) A consent restraint provision

75) When a nonprofit corporation gives its members transfer rights, restrictions on those rights are only valid if approved by:

A) a majority of the members.

B) two-thirds of the members.

C) affected members.

D) all members.

76) A(n) ________ occurs when parties, by mutual agreement, discharge a valid existing obligation by the substitution of a new valid obligation on the part of the debtor or another.

A) adoption

B) novation

C) ratification

D) automatic novation

77) In SmithStearn Yachts, Inc. v. Gyrographic Communications, Inc., the case in the text, why did the court deny the defendant's motion to dismiss?

A) The plaintiff was able to demonstrate that it intended the original corporation to be the primary on the contract with defendant.

B) The plaintiff corporation ratified the agreement between the defendant and the corporation that never came into existence.

C) The defendant failed to render services promised under the service agreement with the plaintiff.

D) The defendant's agent failed to disclose the corporation's identity when contracting with the plaintiff.

78) Which of the following corporation names would be improper?

A) Big Box Company

B) Big Box, Inc.

C) Bog Box, Ltd.

D) Big Box

79) A ________ exists when the incorporators fail in some material respect to comply with all the mandatory provisions of the incorporation statute yet comply with most mandatory provisions.

A) de facto corporation

B) corporation by estoppel

C) de jure corporation

D) false corporation

80) Which of the following is not a requirement for a de facto corporation?

A) An organization meeting was never held.

B) There is a valid statute under which the corporation could be organized.

C) The promoters make an honest attempt to organize under the statute.

D) The promoters exercise corporate powers.

81) A(n) ________ is created when people hold themselves out as representing a corporation and a court will prevent them from denying that a corporation exists.

A) de facto corporation

B) de jure corporation

C) corporation by estoppel

D) equitable corporation

82) In the case in the text, Krupinski v. Deyesso, what did the court decide would be improper for it to determine on summary judgment?

A) Whether a breach of contract occurred between the promoter and the corporation.

B) Whether a person was actually a promoter.

C) Whether the promoter breached his fiduciary duty.

D) Whether the plaintiff was entitled to damages.

83) ________ is the buying back of one's property after it has been sold.

A) Convertible

B) Mandatory dividend

C) Redemption

D) Conversion right

84) ________ shares are issued for less than par value.

A) Capital

B) Bonus

C) Discount

D) Watered

85) In the case in the text, Tedeton v. Tedeton, which of the following was determined to be proper consideration for shares?

A) A promise one was already obligated to pay.

B) A promise in the future to pay the corporation money for shares.

C) Past performance

D) Incorporeal (intangible) property and services rendered

86) Andrew decides to incorporate his sole proprietorship under the name Sampras Entertainment Corporation. He tells his lawyer to file articles of incorporation, and the lawyer says that the filing will be done on July 1. On June 25, Andrew makes a contract with Wimbledon Corporation. Andrew signs the contract in the name of Sampras Entertainment Corporation only. On July 1, the secretary of state files the articles. Under the MBCA, is Andrew personally liable on the contract with Wimbledon?

87) Pamela is a corporate promoter for Nulla Corporation, a corporation yet to be formed. Pamela determines that Nulla will need to lease a building in which to conduct its business. Pamela owns an office building that is suitable for Nulla. What should Pamela do if she wants to make a contract for Nulla to lease the building from her?

88) Pedro is a corporate promoter for Nolo Corporation, a corporation yet to be formed. Pedro spends $40,000 of his own money and devotes 400 hours to bring Nolo and its business into existence. When Nolo is incorporated, Pedro asks the board of directors to issue some of its common shares to Pedro as compensation for his expenses and services. Would such an issuance be legal?

89) ABC is a nonprofit corporation formed by Alex. As its promoter, Alex made a few contracts with Johnsons, Inc. The following year, Alex formed another for-profit company. Meanwhile, Johnsons, Inc. claimed that Alex has not honored the contracts he made with them as promoter of ABC. Is Alex personally liable for those contracts? If not, what remedies are available for Johnsons, Inc.?

90) The board of directors of Laylow Corporation issued 1,000 shares representing 10 percent of the corporation to Don in exchange for an unsecured promissory note to pay Laylow $50,000 within the next 20 years. Don is the son of Charles, owner of 70 percent of the shares of the corporation. The total book value of the corporation at the time Laylow issued the shares was $5,000,000. Alan and Bob, owners of 20 percent of the total shares, discovered the transaction one month after it occurred. Alan and Bob sued Don on behalf of Laylow Corporation seeking to invalidate the transaction. Should the court invalidate it? Discuss.