Management Of Corporations Chapter.43 Exam Prep

Business Law, 17e (Langvardt)

Chapter 43 Management of Corporations

1) The traditional corporate objective is to make money for the shareholders.

2) Corporate constituency statutes direct the board of directors to act in the best interests of the corporation, not just the interests of the shareholders, and to maximize corporate profits over the long term.

3) The Model Business Corporation Act has made the inclusion of purpose clause in the articles of incorporation compulsory.

4) The primary source of power for a corporation is the GATT (General Agreement on Trade and Tariffs).

5) A director has the right to inspect corporate books and records that contain corporate information essential to the director's performance of her duties.

6) Directors must be shareholders of the corporation on whose board they serve.

7) Straight voting permits a single holder of more than 30 percent of the shares of a corporation to dominate the management of the corporation.

8) The most common committee created from board of directors is an executive committee, which typically is given the power to act for the board on most matters when the board is not in session.

9) Unless the articles of incorporation provide otherwise, directors cannot be removed with or without cause.

10) Officers of a corporation are also agents of the corporation.

11) When an officer or director of a corporation exceeds his powers, he may be liable to the corporation if it is damaged by the act exceeding that person's authority.

12) Directors and officers are liable to the corporation for losses resulting from their lack of care.

13) The two easiest ways to freeze out minority shareholders are the freeze-out acquisition and the share split.

14) The total fairness test permits a shareholder to require the corporation to purchase his shares at a fair price.

15) Alvin and Billy own 70 percent of Beta Corporation. Claude owns 30 percent of Beta Corporation. Alvin and Billy consistently vote and act in ways that only benefit them and harm Claude. Claude may claim oppression as a minority shareholder.

16) Delta Corporation's board of directors is considering a resolution that may cause severe liability to the directors. Wayne, a board member, disagrees with the decision. Unless he clearly registers his dissent, he may be liable.

17) The term "raiders" refers to outsiders who attempt to gain control of a corporation.

18) The traditional view was that a corporation is not liable for a crime because criminal guilt requires the presence of intent.

19) Generally, under the doctrine of respondeat superior, a corporation is liable for an employee's tort that is reasonably connected to the authorized conduct of the employee.

20) Under the MBCA, only directors of a corporation are entitled to mandatory indemnification rights.

21) Forty-one states have enacted corporate constituency stakeholder laws that ________ directors to weigh the interests of constituencies other than shareholders.

A) require

B) command

C) expect

D) permit

22) The traditional objective of the business corporation has been to:

A) act in a socially and morally responsible manner.

B) act consistently with the purpose clause of the corporation.

C) serve the community in which the business resides.

D) enhance corporate profits and shareholder gain.

23) Most states have enacted ________ statutes, which broaden the legal objectives of corporations.

A) Good Samaritan

B) corporate constituency

C) control share acquisition

D) business combination

24) Under the Model Business Corporation Act (MBCA), ultra vires may be asserted by:

A) a shareholder seeking to enjoin a corporation from executing a proposed action that is ultra vires.

B) a federal judge who may have the power to dissolve a corporation that exceeds its powers.

C) the management suing the corporation for damages caused by exceeding the corporation's powers.

D) the secretary of state who may have the power to enjoin an ultra vires act.

25) The ultra vires doctrine states that:

A) the corporation may engage in any lawful business.

B) a corporation is liable for an employee's tort that is connected to the authorized conduct of the employee.

C) any action of a corporation beyond its stated powers is void.

D) the board of directors must manage the corporation.

26) A nonprofit corporation will limit its powers pursuant to what?

A) The nonprofit corporation's purpose clause

B) The nonprofit corporation's articles of organization

C) The majority vote of the general class of shareholders

D) The majority vote of the preferred class of shareholders

27) Which of the following corporate actions is included in a corporation's board of directors' authority?

A) Adopting and amending bylaws

B) Amending the articles of incorporation

C) Approving merger of the corporation

D) Approving voluntary dissolution

28) Rules of the New York Stock Exchange (NYSE) and the NASDAQ, which apply to firms listed on the NYSE or NASDAQ, require that audit committees comprise only ________.

A) inside directors

B) independent directors

C) outside directors

D) top level officers

29) The ________ requires periodic shareholder approval of executive compensation.

A) Dodd-Frank Wall Street Reform and Consumer Protection Act

B) Burnett Act

C) Sarbanes-Oxley Act

D) Debbie Smith Act

30) Which of the following committees of a board of directors reviews and approves salaries of high-level corporate executives?

A) Executive committee

B) Compensation committee

C) Nominating committee

D) Audit committee

31) ________ voting permits a holder of more than 50 percent of the shares of a corporation to dominate the corporation.

A) Preference

B) Cumulative

C) Ranked

D) Straight

32) ________ voting may permit minority shareholders to obtain representation on the board of directors.

A) Preference

B) Cumulative

C) Ranked

D) Straight

33) Several statutes, including the California statute, require at least ________ directors to form the board of directors.

A) 5

B) 9

C) 1

D) 3

34) What was the original purpose of staggered terms?

A) To permit continuity of management.

B) To help insurgent shareholders transform the management of the corporation.

C) To help minority shareholders exercise cumulative voting power.

D) To make it easier for the corporation to remove existing directors.

35) The person who is designated to vote on behalf of the shareholder is called a(n):

A) sharebroker.

B) agent.

C) voter.

D) proxy.

36) The proxy solicitation process usually results in:

A) the chief executive officer controlling the corporation.

B) shareholders dominating the management of the corporation.

C) corporate democracy working at its best.

D) the board of directors dominating the management of the corporation.

37) Passive investors follow the ________ rule: Either support management or sell the shares.

A) co-determination

B) vicarious liability

C) Wall Street

D) business judgment

38) Directors' meetings:

A) require a majority number of directors to attend, called a quorum.

B) are always called after reasonable notice to the directors.

C) are always required in order for the board to take action.

D) permit directors to cast up to three votes each.

39) Many corporation statutes, unlike the MBCA, state that the same person may not hold the offices of ________ and ________.

A) president; treasurer

B) president; secretary

C) vice-president; secretary

D) vice-president; treasurer

40) The most perplexing issue with regard to the authority of officers is whether an officer has ________ authority merely by virtue of the title of his office.

A) express

B) implied

C) apparent

D) inherent

41) Which officer of the corporation has custody of the corporation's funds?

A) Treasurer

B) Chief Information Officer

C) Secretary

D) Vice President

42) A supermajority vote is rarely required to:

A) decide with which suppliers the corporation should deal.

B) terminate the employment contract of an employee-shareholder.

C) reduce the level of dividends.

D) change the corporation's line of business.

43) Which of the following is correct concerning the management of close corporations?

A) The MBCA Statutory Close Corporation Supplement grants the shareholders unlimited power to restrict the discretion of the board of directors.

B) Modern close corporation statutes require close corporations to comply with most management formalities.

C) The MBCA Statutory Close Corporation Supplement permits a close corporation to dispense with shareholders and directors.

D) The California General Corporation Law permits a close corporation to be managed as if it were a sole proprietorship.

44) The board of directors of a nonprofit corporation must have at least ________ director(s).

A) one

B) three

C) eight

D) five

45) Directors and officers owe what kind of duty to the corporation?

A) Fiduciary duty

B) Duty to make a profit

C) A duty to be innovative

D) A duty to be generous

46) Who amongst the following owes a fiduciary duty to the corporation?

A) Directors

B) Employees

C) Shareholders

D) Secretary of state

47) What is the standard applied to examine managers' duty of care?

A) The degree of care expected from an intelligent person faced with a complex problem.

B) The care expected from a shopkeeper while selling expensive goods.

C) The care expected from an ordinarily prudent person in similar circumstances.

D) The degree of care expected from a prudent businessperson during economic downturn.

48) Under the business judgment rule, corporate managers:

A) must not make uninformed decisions.

B) may have conflicts of interest.

C) are not required to make reasonable investigations.

D) may not benefit even as shareholders.

49) What is meant by rational basis?

A) A decision has the consent of all board members.

B) A decision has been taken after protracted negotiations.

C) A decision has a logical connection to the facts.

D) A decision has been taken after a long discussion.

50) The ________ rule has been criticized frequently as providing too much protection for the managers of corporations.

A) co-determination

B) vicarious liability

C) Wall Street

D) business judgment

51) Ted is the president of Soprano Corporation (SC). Ted decided to have SC manufacture large, gas-guzzling SUV automobiles just before gasoline prices rose dramatically. As a result, SC lost billions of dollars. The shareholders of SC want to sue Ted for this bad decision that cost them billions. However, Ted made a reasonable investigation before making this decision, he had a rational basis for it, and he had no conflicts of interest regarding this decision. What would be the probable outcome if the shareholders file a suit?

A) Ted is liable under the vicarious liability rule.

B) Ted is liable under the ultra vires rule.

C) Ted is not liable under the business judgment rule.

D) Ted is not liable under the corporate protection rule.

52) Raider Corporation (RC) attempted to take over Targetnorth Corporation (TC) using a tender offer. The tender offer price was twice the market price for TC shares. TC management opposed this takeover, as a result of which it failed. Shareholders of TC who had hoped to sell their shares at a large profit want to sue the management of TC for spoiling the takeover. If they sue TC management, will the shareholders succeed?

A) Yes, if they can show that TC management did not carefully study the RC tender offer.

B) Yes, if they can show that they would have been much better off accepting the tender offer.

C) No, the business judgment rule protects management in all cases of resisting a takeover.

D) No, even if the shareholders can show that management resisted the takeover in their own self-interest.

53) The ________ is a tender offer defense where the target corporation turns the tables on the tender offeror or raider by making a tender offer for the raider's shares.

A) greenmail

B) lock-up option

C) white knight

D) Pac-Man

54) Raider Corporation (RC) attempted to take over Targetnorth Corporation (TC) using a tender offer. The tender offer price was twice the market price for TC shares. As a defense to this, TC proposed to buy its shares owned by RC at triple the market price provided RC agreed not to purchase any more TC shares for the next five years. This kind of tender offer defense is called:

A) greenmail.

B) the lock-up option.

C) white knight.

D) Pac-Man.

55) When Reese Group of Hotels (RGH) was on the verge of facing a hostile takeover bid by rivals Blossoms Group (which held a 14.12 percent stake in RGH), Rely's came forward and bought a 14.98 percent stake in RGH, thereby relieving RGH from the hostile takeover risk. This kind of tender offer defense is called:

A) greenmail.

B) the lock-up option.

C) white knight.

D) Pac-Man.

56) The board of directors of Filex Corporation at a regular meeting of the board entered into a contract with Ginger Grant, one of its directors. This contract called for Filex to purchase 120 acres of land from Ginger. There were ten members on the board, eight of whom were present at the meeting. One of the directors present was Ginger. All the other directors were disinterested in the transaction and not related to Ginger. After a lengthy discussion, six directors voted in favor of the contract and two voted against it. Ginger voted for the contract. Which of the following is true?

A) The contract between Ginger and the corporation is illegal and invalid.

B) The contract is valid since it was approved by a majority of a quorum of the board.

C) The contract becomes void if the corporation proves that the contract was unfair to it.

D) The contract is voidable unless Ginger proves that the contract is fair to the corporation.

57) While at home, Kyle Kinston, the president and CEO of Remstat, Inc. is called by the CEO of Viokam Corporation, who asks Kinston if Remstat would be interested in buying about 25 percent of the outstanding shares of Viokam. Remstat is a billion-dollar conglomerate that has contemplated acquiring Viokam for some time, but Kinston tells Viokam's CEO that Remstat is not interested. Kinston tells the CEO, however, that KKIM, Inc. is willing to buy the shares. Kinston is the 100 percent shareholder of KKIM. Viokam sells the shares to KKIM for $35 million. A year later, KKIM sells the shares for $55 million to a mutual fund company. When Remstat's directors discover KKIM's purchase and sale of the Viokam shares, they sue Kinston on behalf of the corporation. Which of the following is correct?

A) Kinston has exceeded her authority to act for the corporation.

B) Kinston has self-dealt with the corporation.

C) Kinston has done nothing wrong.

D) Kinston has usurped a corporate opportunity.

58) A special term used to define a freeze-out of shareholders of a publicly owned corporation is:

A) oppression.

B) novation.

C) right of appraisal.

D) going private.

59) Tom is the sole director and largest shareholder of Newage Corporation, a close corporation. Jim and Janice, the two other shareholders of Newage Corporation, allege that Tom is paying himself a large salary (no dividend has been paid in the last three years). Tom also refuses to hire them as employees of the corporation. Jim and Janice are complaining of:

A) oppression.

B) novation.

C) right of appraisal.

D) maltreatment.

60) After a reverse share split, corporation law permits a corporation to repurchase any ________ shares, even if the shareholders do not consent.

A) preferred

B) fractional

C) outstanding

D) issued

61) What is the term for a publicly held corporation that receives a tender offer from a raider?

A) The target

B) The enemy

C) The bylaw

D) The liquidation

62) Gath Meat Packing Company is a meat processing business. To reduce costs and increase profits, the president and CEO of Gath orders Gath's employees to violate federal criminal meat processing laws. The United States Department of Justice prosecutes Gath for criminal violations of the meat processing law. Has Gath committed criminal violations?

A) Yes, because the president and CEO, a high-level administrator of Gath, authorized the commissions of the crimes.

B) Yes, because a corporation is always liable for all the crimes committed by its agents.

C) No, because the board of directors did not authorize the president and CEO or the other employees to violate federal law.

D) No, because a corporation is not liable for most crimes committed by its agents.

63) Tony is employed as a truck driver for Soprano Corporation (SC). While making a delivery for SC, Tony negligently ran over a pedestrian. Who is liable for this accident?

A) Tony only.

B) Tony and SC, because of strict liability.

C) Tony and SC, because of vicarious liability.

D) Neither Tony nor SC, because this was an accident, not an intentional injury.

64) Which of the following rules is applicable to determine the liability of a corporation for any torts committed by its agents?

A) Principal-agent relationship

B) Joint and severally liable

C) Strict liability

D) Vicarious liability

65) Under the Model Business Corporation Act, a director who is sued in connection with his/her duties to the corporation may be indemnified by the corporation when:

A) the director acted in good faith and his conduct was lawful.

B) the director failed to act in the best interests of the corporation.

C) the director's actions were grossly negligent but not intentional.

D) the director received unqualified financial benefits.

66) The Model Business Corporation Act states that a corporation has the power to do anything:

A) that an individual may do.

B) that is within its bylaws.

C) permitted under state statute.

D) that is objectively reasonable and customary in the trade.

67) Unless a corporation's articles of incorporation provide otherwise, the purpose clause for a corporation by default is:

A) to provide a service or product that is better for society as a whole.

B) to create wealth.

C) to engage in any lawful business.

D) to serve the community.

68) Which of the following types of persons may not assert the ultra vires defense?

A) A state's attorney general, who may have the power to enjoin an ultra vires act or to dissolve a corporation that exceeds its powers

B) A shareholder seeking to enjoin a corporation from executing a proposed action that is ultra vires

C) A CEO of a corporation suing the board of directors when they fail to meet the qualifications of the business judgment rule

D) The corporation suing its management for damages caused by exceeding the corporation's powers

69) Generally, a nonprofit corporation cannot:

A) use ultra vires as a defense to a contract.

B) sue or be sued.

C) purchase, hold, and sell real property.

D) lend money.

70) Which of the following committees is directly responsible for the appointment, compensation, and oversight of independent public accountants?

A) Executive committee

B) Audit committee

C) Nominating committee

D) Compensation committee

71) Which of the following committees chooses management's slate of directors that is to be submitted to shareholders at the annual election of directors?

A) Compensation committee

B) Nominating committee

C) Executive committee

D) Audit committee

72) In the case in the text, Omnicare, Inc. v. NCS Healthcare, Inc., the court held that:

A) the business judgment rule was irrelevant in its determination of whether the voting agreement was valid and enforceable.

B) the agreements were not valid and enforceable because reasonable doubt was raised as to whether the directors acted in good faith.

C) the agreements were not valid and enforceable because the directors were able to shield themselves from liability under the business judgment rule.

D) under the circumstances of the case, only the merger agreement was valid and enforceable.

73) The MBCA permits directors to fill vacancies on the board as long as it is approved by a ________ of the remaining directors.

A) senior director

B) quorum

C) two-thirds vote

D) majority vote

74) A court does not have the power to remove a director when:

A) petitioned by shareholders.

B) it finds that the director engaged in fraudulent conduct.

C) it finds that the director intentionally inflicted harm on the corporation.

D) it believes removal would help the corporation operate more globally responsibly.

75) Directors are entitled to ________ notice of all special meetings, but not of regularly scheduled meetings.

A) two-days

B) one-day

C) one-week

D) four-days

76) Which of the following would not meet the requirements of a proper directors' meeting?

A) The board meets through an internet platform with audio and video.

B) The board meets by telephone.

C) Each director records himself or herself with the topics of concern and uses e-mail to provide it to the other directors.

D) The board meets by television.

77) Which officer of the corporation usually certifies corporate records as being authentic?

A) Secretary

B) Vice President

C) Treasurer

D) President

78) To protect minority shareholders, close corporations may impose ________ voting requirements for board actions and restrictions on the managerial discretion of the board of directors.

A) supermajority

B) cumulative

C) straight

D) class

79) In a nonprofit corporation, when a director engages in fraudulent conduct, members holding at least ________ percent of the voting power may petition a court to remove the wrongdoing director.

A) fifty

B) five

C) ten

D) twenty-five

80) In Brehm v. Eisner, the case in the text, the court concluded that:

A) the defendants could not meet the requirements of the business judgment rule because Eisner acted quickly without researching and consulting others.

B) Eisner breached the fiduciary duty he owed when he hired a friend to be president when there were more qualified candidates.

C) the decisions of defendants through all interactions with Ovitz were protected business judgments.

D) Disney had cause to fire Ovitz because his conduct while serving as president violated the agreement.

81) In the case in the text, Paramount Communications, Inc. v. Time, Inc., what rule expansion did the Supreme Court of Delaware create?

A) A board may oppose a hostile takeover as long as it had a preexisting, deliberately conceived corporate plan justifying its opposition.

B) A board may oppose a hostile takeover as long as it has reasonable grounds for believing that a danger to corporate policy and effectiveness existed.

C) A board may oppose a hostile takeover as long as the defensive measure adopted was reasonable in relation to the threat posed.

D) A board may oppose a hostile takeover when there is a "better deal."

82) The ________ recognizes that directors may be conflicted by their interest in saving their jobs, yet it allows directors to oppose the takeover if they mostly are concerned about protecting the company from the takeover's threat to the company's policies.

A) Sarbanes-Oxley Act

B) Unocal test

C) business judgment rule

D) Dodd-Frank Wall Street Reform and Consumer Protection Act

83) In Guth v. Loft, Inc., the case in the text, what remedy did the court impose after its finding that an opportunity to become the manufacturer of a Pepsi-Cola syrup was usurped?

A) Nominal damages

B) Compensatory damages for the cost of all losses related to the bad act

C) Punitive damages

D) Forfeiture to the corporation of all benefits received

84) In the case in the text, Coggins v. New England Patriots Football Club, Inc., the court held that:

A) Freezing out the minority shareholders was necessary to further the corporation's purpose.

B) The freeze-out of majority shareholders failed to meet the business purpose test.

C) The freeze-out of majority shareholders failed to meet the intrinsic fairness test.

D) Freezing out minority shareholders merely to allow the corporation to repay the majority shareholder's personal debts was not a proper business purpose.

85) In United States v. Jensen, the case in the text, which of the following was not considered in determining whether Jensen knowingly violated the law?

A) She concealed the way options were dated

B) She directed employees not to communicate about options over the phone or email

C) She attempted to minimize the obviousness of backdated options

D) She participated in prior corporate trainings on SEC reporting

86) Alan, Bob, Charles, David, and Edward are the only shareholders of Harbin Corporation. It is a close corporation. Each owns 20 percent of the shares. There are five director positions and each serves as a director. One day the other four find out that Edward has committed a serious crime. They decide that they wish to expel him from the corporation. What action may the others take? Discuss.

87) Nordex Corporation is in the business of manufacturing furniture. Because the industry has matured, Nordex is considering adding a new product line, manufacturing plastic products such as cases for compact discs (CDs). No director will have a personal interest in the decision to expand into those lines. To avoid liability for making a poor decision, what standard of conduct should Nordex's board of directors comply with? Briefly explain what the board must do to comply with that standard.

88) The board of directors of Lorantan Corporation has 12 members. Lorantan's bylaws provide that a majority of seven or more directors is necessary to form a quorum. At a meeting of the board of directors, a resolution is adopted authorizing the sale of a substantial portion of the corporate assets to Pam Park, a director. Pam is one of the eight directors present. What must the directors do for Pam to avoid liability for buying the assets from the corporation?

89) Ed is an officer and director of Baldwin Properties, Inc. Ed is primarily responsible for finding and purchasing property for development. While on a business trip financed by Baldwin, Ed found property for sale at 65 percent of the fair market value. Ed wanted to purchase the property for himself. May he do so? Discuss.

90) Tim and Julia are the majority shareholders of Eduventures, Inc. Together they own 800 of the company's shares. The remaining 200 shares are held by passive shareholders. The profits of Eduventures dwindled to just 8 percent last year. Furthermore, Tim and Julia realized that as much as 3 percent of profits are being spent in complying with the rules of public ownership. Suggest a way for them to "go private" without forming a new corporation.