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McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
True/False Questions
1) Shareholders in a corporation incorporated under the Canada Business Corporations Act
are entitled to the remaining assets of the corporation after all the creditors are paid. This
means that they retain all management powers that they have not delegated to the directors.
a. True
b. False
2) Vanna is a director of Quorn Co, which operates a health food supply business. Vanna
manages the business and wants to be the president. Her appointment would have to be
approved by the shareholders to be effective.
a. True
b. False
3) Edmund and Gertrude are the directors of ZipCo, a corporation incorporated under the
Canada Business Corporations Act. They play very little active role in the business, which
is run by their son, Zenon. They have delegated to him full power and responsibility to
manage the corporation, including the power to declare dividends and issue shares. This
delegation is permitted under the Canada Business Corporations Act.
a. True
b. False
4) A director's fiduciary duty is owed to the corporation. This means that directors must act
with a view to maximizing the value of shareholders' investment to the exclusion of the
interests of other stakeholders in the corporation.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
a. True
b. False
5) The fiduciary duty of a director to act in the best interests of the corporation means that a
director may never do business with the corporation. If directors were to negotiate
transactions between themselves and the corporation, there would be in an intolerable
conflict between their personal interests and their obligation to act in the best interests of
the corporation. That is why such transactions are never permitted.
a. True
b. False
6) Daniel has worked as a computer programmer and senior officer of Litem Systems Inc
for several years. He has built up a close relationship with a number of Litem clients. One
of them asks Daniel if he can do some programming work on the side. It is the same kind of
work that Daniel does for clients of Litem. The client would hire and pay Daniel directly.
Daniel would do the work on nights and weekends. Daniel is interested, but he cannot take
the work because it would be a breach of his fiduciary duty and, if he does take it, he could
be forced to pay over all of his profits to Litem.
a. True
b. False
7) For many years, Jeremy worked for Pearl Inc. Over the years, he rose through the ranks
and eventually occupied a very senior position. In that position, he enjoyed access to highly
valuable and confidential information. His fiduciary duties prevented him from taking a
personal benefit from his position. Last year, however, he quit his job and started working
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
for a rival company. By doing so, he necessarily breached his fiduciary duty to the first
company.
a. True
b. False
8) Because the duty of care requires that directors and officers exercise the care that a
reasonably prudent person would exercise in comparable circumstances, the standard is a
subjective one. So long as people are honest and do their best, it does not matter how
incompetent they are.
a. True
b. False
9) Sandy is a director of Plex Manufacturing Inc. She reads in a report to the board that the
corporation has entered into a series of complex financing transactions. One result of the
transactions is that the presentation of the corporation's financial statements has changed to
make the corporation look more profitable. Sandy is concerned that these transactions
might have been designed to hide the true financial position of the corporation. She decides
not to enquire into these transactions, however, because she thinks that if she finds out
more about them she will have to do something about it. In doing so, Sandy is in
compliance with her duty of care and fiduciary duty because she does not have any clear
evidence of wrongdoing.
a. True
b. False
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
10) Tom and Jane are the founders and only shareholders and directors of Shinestone Corp,
which carries on a business selling semi-precious stones. They want to declare and pay a
dividend to themselves. They think that the corporation will be able to pay its debts after
payment of the dividend and have received advice from their accountants that the market
value of the assets of the corporation exceeds the total amount owed to creditors and the
amount they paid into the corporation for shares. One of its creditors, Nova Bank, hears
about their plan to pay a dividend and says that, in its view, the market value of the
corporation's assets is not high enough to meet this test after the dividend is paid. Tom and
Jane can still declare the dividend.
a. True
b. False
11) Angela and Lou are starting a flower store business to be carried on by a corporation.
Angela has substantial personal assets and will be getting 90 percent of the shares of the
corporation. Lou has little money and will be getting 10 percent of the shares. A fair way to
resolve disputes would be to enter into a shareholder's agreement which provides for a
"shotgun buy-sell."
a. True
b. False
12) Alannis and Jake each hold 50 percent of the shares in JagCorp, a limousine rental
business. All management decisions since incorporation have been agreed to by both of
them. Now they find that they cannot agree on how the corporation should be operated.
Alannis wants the corporation to give up the limousine rental business and become an Avis
rent-a-car franchisee. Jake wants to continue with the existing business as it is. They have
been battling for six months but are deadlocked. In these circumstances, Alannis could get a
court to order that the corporation be wound up.
a. True
b. False
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
13) In practice, it is generally easier for shareholders in public corporations to exercise their
legal rights because management is required to send them much more information
regarding matters to be dealt with at shareholder meetings than they are required to send to
shareholders in smaller corporations.
a. True
b. False
14) Nigel is negotiating to sell some lighting fixtures to Abda Corporation for its offices.
Nigel has been dealing with Jerome. Jerome appears to be the president of Abda, or at least
so it says on his parking spot at Abda's offices. Nigel can rely on Jerome having authority
to enter into a contract with him to buy the lighting fixtures.
a. True
b. False
15) Aldus is an officer of Accent Interior Designs Inc. While working in one of the houses
of Accent's clients, he stole a ring. He gave it back, but was convicted of theft and fined
$1000. Accent wants to indemnify him for the fine. It cannot pay an indemnity in these
circumstances.
a. True
b. False
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
Multiple Choice Questions
1) Which of the following statements is TRUE? A shareholder has a legal right to
participate in the management of the corporation
a. in no circumstances.
b. only if elected as a director or appointed as an officer or employee.
c. only if elected as a director or appointed as an officer or employee or when exercising
management powers acquired under a unanimous shareholders agreement.
d. only when the shareholder holds a majority of the shares issued by the corporation.
e. only when exercising management powers acquired under a unanimous shareholders
agreement.
2) Which of the following statements best describes the responsibilities of directors under
the Canada Business Corporations Act?
a. Directors are responsible for managing or supervising the management of the business of
the corporation and its internal affairs.
b. Directors are responsible only for those matters delegated to them by shareholders.
c. Directors are responsible only for those management activities that they do not delegated
to officers.
d. Directors have no management responsibilities because they are only responsible for
supervising others who actually manage the corporation.
e. Directors are responsible only for the internal affairs of the corporation, such as declaring
dividends and issuing shares.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
3) Which of the following best describes to whom the fiduciary duty is owed? The
fiduciary duty is owed
a. to shareholders.
b. to creditors and shareholders.
c. to the corporation.
d. to employees.
e. to the government.
4) Sarah is a director of Family Educational Testing Services Inc, a corporation
incorporated under the Canada Business Corporations Act. She also carries on her own
business of finding educational testers and psychometrists needed by testing services
businesses. The other members of the board want to hire Sarah to find five testers for the
corporation. Which statement best describes the legal rules that would apply to Sarah
undertaking such work?
a. She cannot do business with the corporation because there would be a conflict between
her personal interest in getting the best price for her services and her fiduciary obligation to
act in the best interests of the corporation, which would require her to seek the lowest price.
b. She can do business with the corporation but only if the corporation chooses her after a
bidding process open to all of Sarah's competitors.
c. She can do business with the corporation because, as a separate legal person, the
corporation is free to decide with whom it does business.
d. She can do business with the corporation only if she gives notice to the board that she
has an interest in the transaction, if she does not vote on the resolution of the board
approving the contract, and if the transaction is fair and reasonable to the corporation.
e. She can do business with the corporation as long as she agrees to work for a fair price.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
5) Melli is the president of Iritech Inc, a grocery supplier. On behalf of Iritech, Melli has
been negotiating with Teran Food Stores Ltd for two years for Teran to commit to making
Iritech its exclusive supplier. Getting the contract would put Iritech's business on a much
firmer financial footing. Melli has recently become frustrated with Iritech and is interested
in leaving to form her own grocery supply business. The Teran contract would give her a
great start and she thinks that Teran has been sufficiently impressed by her that she would
have a chance to get the contract for herself. Which of the following factors would NOT
support the conclusion that it would be a breach of her fiduciary duty for her to quit and
seek the Teran contract for herself?
a. This is a specific opportunity that the corporation has been actively pursuing.
b. The corporation had done extensive work preparing for the opportunity.
c. This is a significant opportunity for the corporation.
d. Melli had access to the opportunity because of her position with the corporation.
e. The contract is profitable, and if Tritech can restrict Melli from obtaining the contract,
this is an impermissible restraint of trade.
6) Aldo is the vice-president of finance for Euro Mining Inc, which operates several
diamond mines in the Northwest Territories. He also sits on the board. One day, the board
heard a presentation from a geologist about a new area she had found that showed results
consistent with the presence of diamonds. The board, which reviews dozens of such
presentations each month, decided not to pursue exploration into the area. Aldo thought the
area sounded very promising and arranged to meet with the geologist to discuss it with her.
Aldo invested in a new corporation formed by the geologist to buy property in the new
area. Eventually, the property was sold for a huge profit. Which of the following is TRUE?
a. Aldo breached his fiduciary duty by appropriating an opportunity belonging to Euro
Mining.
b. Aldo did not breach his fiduciary duty because the opportunity ceased to belong to Euro
Mining when the board decided not to pursue it.
c. Aldo breached his fiduciary duty by competing with Euro Mining.
d. Aldo breached his fiduciary duty by investing in the geologist's corporation because he
found out about the opportunity through his position at Euro Mining.
e. Aldo breached his fiduciary duty by investing in the geologist's corporation because the
board had spent time considering the opportunity.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
7) What best describes the circumstances in which a director may transact with the
corporation?
a. Procedural safeguards to avoid conflicts of interest and to provide transparency are
observed in connection with the approval of the transaction and it is fair and reasonable to
the corporation.
b. The corporation receives a benefit from the transaction.
c. A judge has given approval to the transaction.
d. The director abstains from voting when the directors vote on the approval of the
transaction.
e. The director provides a notice to the board of benefits the director will receive from the
transaction.
8) Yasir is a director and the operations manager of Flavell Rubbish Disposal Ltd. All of
the financial aspects of the business are the responsibility of John, another director. Yasir
heard from one of his employees that a representative from the corporation's bank was in
John's office yesterday and there was a lot of shouting. Yasir asked John about it. John said
that the corporation was behind in its loan payments, but that Yasir doesn't need to worry
about it. John tells him that a big customer will be paying its account soon and that money
will be used to bring the loan up to date. Which statement most accurately describes Yasir's
legal position?
a. Yasir complied with his duty of care by asking about the problem.
b. Yasir has no duty of care in relation to the loan payments because that is a matter that the
directors have delegated to John.
c. Now that Yasir is on notice that there is a problem, his duty of care requires him to make
sure that the customer's payment is received and applied against the loan.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
d. Yasir has no duty because the duty of care is defined by reference to a person in
comparable circumstances and Yasir is not in a position to deal with the bank.
e. Yasir must make the loan payments himself to ensure that the corporation does not go
into default.
9) Which of the following statements best describes the "business judgment rule"?
a. The courts will never find that a business decision by a director or officer is a breach of
the duty of care.
b. Business decisions are presumed not to be a breach of duty, unless the court does not
understand the business rationale for the decision.
c. Directors and officers should always exercise their best business judgment in making
decisions relating to the corporation.
d. The courts will substitute their business judgment for that of directors and officers if
doing so makes sense to them.
e. Business decisions are presumed not to be a breach of duty so long as they fall within the
range of reasonable business alternatives that were available and the process for making the
business decision was reasonable.
10) Which of the following statements best describes how corporate law protects creditors?
a. Corporate law does not protect creditors.
b. Corporate law rules restricting the payment of dividends to shareholders unless certain
financial tests are satisfied protect creditors by keeping money in the corporation when the
corporation requires that money to pay debt.
c. Directors have a duty to protect the interests of creditors.
d. Creditors can enforce restrictions on the ability of the corporation to pay dividends to
shareholders.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
e. Creditors must protect themselves by contract.
11) Which of the following statements is TRUE? An annual meeting is
a. a meeting of shareholders required to be held every 12 months.
b. a meeting of directors required to be held every 12 months.
c. a meeting of shareholders held each year at which directors are elected, an auditor
appointed if necessary, and financial statements presented and discussed.
d. a meeting of shareholders with respect to which directors must send shareholders a
notice of meeting, form of proxy, and management proxy circular.
e. a meeting of shareholders at which no dissidents are permitted.
12) Which if the following statements is FALSE?
a. A proxy is a person appointed to represent a shareholder at a meeting and vote their
shares.
b. A proxy need not be a shareholder.
c. A form of proxy must be sent to each shareholder of a public corporation along with a
management proxy circular in connection with each shareholders meeting.
d. Shareholders can participate in meetings without attending through a proxy.
e. A proxy is a way to transfer ownership of shares.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
13) Which of the following statements is TRUE? Under a unanimous shareholder
agreement,
a. the shareholders can agree on how directors are to vote.
b. the shareholders can assume all the powers of the directors.
c. the shareholders are prohibited from assuming only some of the powers of the directors.
d. the shareholders cannot assume the powers of the directors because the directors would
be left with nothing to do.
e. the shareholders cannot assume the powers of the directors because doing so would be
inconsistent with the basic division of powers in the corporation.
14) Which of the following statements best describes the role of the auditor?
a. Auditors help management prepare the financial statements for the corporation.
b. Auditors prepare the financial statements of the corporation.
c. Auditors advise the directors on whether management has done a good job in managing
the corporation's business
d. Auditors provide an independent assessment of the corporation's financial statements
prepared by management usually for the benefit of shareholders.
e. Auditors advise the corporation on how to set up its bookkeeping system.
15) Unanimous shareholders' agreements have special legal characteristics that distinguish
them from ordinary shareholders' agreements. Which of the following statements most
accurately describes how unanimous shareholders' agreements are different?
a. Unanimous shareholders' agreements allow shareholders to transfer some or all of the
powers and responsibilities of the directors to the shareholders.
b. Not all shareholders are parties to unanimous shareholders' agreements.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
c. Under a unanimous shareholders' agreement, all shareholders must agree on all matters
requiring shareholder approval.
d. Under a unanimous shareholders' agreement, share transfers must be subject to a right of
first refusal.
e. A unanimous shareholders' agreement cannot be amended without the consent of all
shareholders.
16) Jelena and Patrick are starting a retail sporting goods business. They have incorporated
a corporation to carry on the business. Jelena has 60 of the 100 issued common shares and
Patrick has 40. They have decided that each should be a director and all decisions relating
to the business should require the consent of both of them. Which of the following is a
reason that Jelena and Patrick should NOT have a shareholders' agreement? They need to
agree
a. that each should be elected a director.
b. to restrict the transfer of shares, except in accordance with the agreement.
c. that all shareholder decisions require the consent of both Jelena and Patrick.
d. on some process by which shares may be transferred, such as a right of first refusal.
e. that the directors will never owe any duties to the corporation, notwithstanding any law
to the contrary.
17) Ola holds 75 percent of the shares of Henrik Shipping Co. Anatoly holds 25 percent.
The board has called a shareholders' meeting to consider a proposal to amalgamate Henrik
with Norwegian Shipping Inc. Ola is in favour of the transaction. Anatoly is opposed.
Which of the following best describes Anatoly's legal position?
a. As a minority shareholder, he has no way to block the transaction or obtain any relief.
b. The majority shareholder cannot vote in favour of the transaction without taking
Anatoly's interests into account.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
c. Because he holds 25 percent of the shares, he can block the transaction by voting against
it.
d. The only thing Anatoly can do is try to convince Ola to change his mind.
e. Anatoly is entitled to vote against the transaction and, if it is approved, to dissent and
require the corporation to buy his shares for fair value.
18) Elroy was the controlling shareholder and sole director of Maxi-Screen Ltd, which
carries on a film production business. His wife, Ann, is a minority shareholder. The
corporation was incorporated in 1995 and has paid a substantial dividend each year to its
shareholders. In 2009, Ann and Elroy separated. Elroy did not declare a dividend even
though the business was more profitable than ever because he did not want to share the
profits with Ann. Which of the following statements best reflects Ann's legal position?
a. She has no remedy because the declaration of dividends is a matter within the discretion
of the directors.
b. She has no remedy because Elroy is the controlling shareholder and can do what he
wants.
c. She could seek relief in court on the basis that Elroy and the corporation have defeated
her reasonable expectations as a shareholder and thereby oppressed her or unfairly
disregarded or prejudiced her interests as a shareholder.
d. The only way she could seek relief is to apply to the court for permission to bring a
derivative action against Elroy on behalf of the corporation for breaching his fiduciary duty.
e. She has no remedy because the failure to pay dividends is not an action that she can
dissent from.
19) Ebo Corporation was incorporated under the Canada Business Corporations Act in
1991. It is a private corporation. It carries on a dress making business. Eben is the CEO and
the sole director. He holds 60 percent of the shares. Four employees hold the remaining 40
percent, 10 percent each. Eben has run the corporation as if there were no other
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
shareholders. None of the employees has ever seen a financial statement, nor has there ever
been a shareholders' meeting. The employees have received substantial dividends on their
shares and do not want to leave the corporation or sell their shares. They do, however, want
some better disclosure regarding the corporation's business. Which of the following
statements does not describe these minority shareholders' rights?
a. They could seek leave to bring a derivative action on behalf of the corporation against
Eben on the basis that his failure to send them annual financial statements and call annual
meetings is a breach of his fiduciary duty to act in the best interests of the corporation and
seek injunctive relief.
b. They could apply to the court for an order directing Eben to comply with the Canada
Business Corporations Act by distributing financial statements and holding shareholder
meetings and to cease conducting the affairs of the corporation in a manner oppressive to
the shareholders.
c. They could requisition a shareholder meeting to discuss the problem.
d. They could apply to the court for relief on the basis that Eben is oppressing or unfairly
disregarding their interests as minority shareholders.
e. They could sell their shares publically on the stock exchange.
20) George wants to get out of his investment in Silver Chair Furniture Inc, a corporation
incorporated under the Canada Business Corporations Act. He holds 50 percent of the
shares and is fed up with dealing with William, who holds the remaining 50 percent of the
shares and will not listen to him. They cannot agree on how the corporation should be run.
William is the sole director and officer of the corporation. George has asked William to buy
him out or have the corporation buy his shares, but neither William nor the corporation has
any money. George is prohibited from selling to a third party under a shareholder
agreement he signed with William. Can George have the corporation wound up?
a. No, because winding up is available only if all shareholders consent.
b. No, because George should have protected his interests in a shareholders' agreement.
c. No, because, while his interests may have been oppressed, winding up is not a remedy
that a court can order based on oppression.
d. Yes, in these circumstances it would be just and equitable to wind up the corporation
because the two equal shareholders are deadlocked regarding how to run the corporation
and there seems to be no alternative solution.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
e. No, because William may still want to carry on the business.
21) Which of the following statements is TRUE? The scale of a corporation makes a
difference to how the rules of corporate law operate because
a. large and small corporations are incorporated under different statutes.
b. only large corporations can carry on business in more than one jurisdiction.
c. small corporations are taxed at different rates than large corporations.
d. large corporations are better able to bear the risk of unauthorized liabilities than small
corporations.
e. in large corporations, the separation between management and shareholders makes it
more difficult for shareholders to exercise control over management and to align the
interests of management with those of shareholders.
22) Which of the following statements is TRUE? A corporation is only bound in contract if
the person acting on behalf of the corporation
a. had actual authority.
b. had actual authority and apparent authority.
c. had actual authority or apparent authority.
d. had apparent authority.
e. had written authority from the corporation.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
23) Actual authority of an employee may NOT arise as a result of which of the following?
a. a term in an employee's contract with the corporation
b. a provision in a resolution of the directors
c. the employee being appointed to an office, such as president, which has authority
attached to it
d. the employee being orally delegated authority by a person authorized by the corporation
to delegate it
e. the employee telling third parties that they have authority even though this is obviously
untrue to any reasonable person
24) Jordan has been negotiating to sell office supplies to Softstuff Ltd, a software
developer. He has been dealing with Ira exclusively. Jordan has visited Ira's office at the
premises of Softstuff Ltd and noticed the sign on the door that says "Purchasing Manager."
Ira has told Jordan that he has authority to enter into the contract. Which of the following is
TRUE?
a. Jordan cannot rely on Ira having any authority to bind the corporation because he has no
proof that Ira actually has authority to contract on behalf of Softstuff.
b. Jordan cannot rely on Ira having apparent authority because no one in the corporation has
represented to him that Jordan has authority.
c. Jordan can rely on Ira having authority because Ira told him he has authority.
d. Jordan can rely on Ira having apparent authority because the corporation has made a
representation that Ira has the usual authority of a purchasing manager by allowing him to
use an office indicating that he has that title.
e. Jordan cannot rely on Ira having apparent authority because Ira might not actually have
authority to contract on behalf of the corporation.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
25) Mischa had a consulting business that he carried on as a sole proprietorship. He was
negotiating a contract to provide advice to Vengo Inc, a corporation carrying on business as
a venture capitalist. Mischa has been dealing with Prashant, an old friend. Prashant is the
office manager and Mischa knows that Prashant does not have authority to contract with
him. But Vengo is aware that Prashant has been talking with Mischa, so Mischa thinks that
if he gets Prashant to sign a contract, it will be binding on Vengo. Is he right?
a. Yes. By acquiescing in Prashant negotiating with Mischa, Vengo has represented that
Prashant has authority to bind Vengo.
b. No. The fact that Prashant does not have actual authority means that a contract signed by
him on behalf of Vengo will not be binding.
c. No. The fact that Mischa knows that Prashant does not have authority means that he
cannot rely on Prashant having apparent authority.
d. Yes. It is within the usual authority of a office manager to hire consultants.
e. No. It is not within the usual authority of a office manager to hire consultants.
26) Punishing a corporation convicted of a criminal offence DOES NOT raise which of the
following issues?
a. Corporations cannot be put in prison.
b. The stigma of a criminal conviction is not likely to have the same deterrent effect on a
corporation as it will on an individual.
c. Fines imposed on corporations may be passed on to shareholders or customers.
d. Fines imposed on corporations weaken it financially, increasing the risk for creditors and
other stakeholders with financial claims against the corporation.
e. A corporation can only be punished by putting the shareholders and their spouses in
prison.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
27) Nick was a foreperson working for Capital City Construction Ltd at the site of a major
home renovation that Capital City Construction was doing. He was supervised by a site
manager who came by two or three times per day to check on how things were going. The
site manager set the schedule for the work, hired the workers, and ensured that the site met
all applicable safety standards. Nick was responsible for supervising the workers and all the
work done on the site. He decided how they should carry out their tasks at the site. One
day, a large pile of painted boards was torn off the house. Because the paint contained lead,
it was an offence under an environmental statute to leave them on the site. The statute
provides for a "due diligence" defence. Nick knew that it would cost his employer a lot to
take the boards to the dump and have them disposed of. He decided to throw the boards into
a crawl space under the house. The site supervisor knew that there were boards painted with
lead paint on the house, but did not enquire regarding how they had been disposed of. A
building inspector found them and Nick was charged and convicted under the statute.
Capital City Construction had a policy that it insisted that all its employees read, which said
that no employee may break the law. Is Capital City Construction also liable for the
offence?
a. Yes. Capital City Construction is responsible because Nick thought he was acting for the
benefit of the corporation.
b. No. The site manager was responsible for ensuring compliance with environmental
standards and he was not the one who committed the offence.
c. No. The site manager did not know that Nick was going to commit the offence and so
could not have prevented him from doing so.
d. Yes. Nick was responsible for determining how the work was done within the parameters
set by the site manager, so he was responsible for managing the business of corporation in
relation to the activity that constituted the offence. As a result, Nick was the directing mind
and will of the corporation, and Capital City Construction could be liable. The corporation
cannot rely on the due diligence defence because arguably it failed to act reasonably in the
circumstances in its supervision of Nick.
e. No. Capital City Construction had a policy that it insisted that all its employees read,
which said that no employee may break the law.
28) Manuel was the Alberta sales manager employed by Vulcan Co, which produces and
sells gas-burning fireplaces. Manuel was responsible for all aspects of Vulcan's business in
Alberta. He determined how the business of the corporation was to be carried on. Manuel
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
was negligent in installing a fireplace and the customer's house burned down. Which of the
following best describes the liability of Vulcan based on these facts?
a. Vulcan is directly liable because Manuel was the directing mind and will of Vulcan in
Alberta.
b. Vulcan is vicariously liable because Manuel was acting within the course of his
employment.
c. Vulcan is both vicariously and directly liable.
d. Vulcan is not liable because it did not authorize Manuel to be negligent.
e. Vulcan is not liable because the loss would be covered by insurance.
29) Michael was a director of Dot.com Tomorrow Inc, incorporated under the Canada
Business Corporations Act. He was charged with failing to ensure that the corporation
maintained adequate safety standards for its workers. He was furious, claiming that he was
innocent. Michael hired the most expensive lawyer he could find and rented a limousine
with driver to take him to the court every day of the three-week trial. Each night of the trial,
he dined out at the best restaurant in town. Eventually, he was acquitted and has asked the
corporation to indemnify him for all these expenses. Which of the following is FALSE
regarding the legal obligation of the corporation to indemnify Michael for these expenses?
a. Dot.com may be obliged to indemnify Michael because he was substantially successful
on the merits of his defence.
b. Dot.com can only indemnify for reasonable expenses and, to the extent that Michael's
expenses are not reasonable, they cannot be indemnified.
c. Dot.com may be obliged to indemnify because Michael had reasonable grounds for
believing his conduct was lawful.
d. So long as Michael fulfilled his fiduciary duty to act in the best interests of the
corporation, Dot.com may be obliged to indemnify him for reasonable expenses.
e. Dot.com has to pay for everything but the limousine.
