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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
30) Denise has been asked to join the board of directors of Summit Corp, which carries on a
software development business. She is attracted by the prestige and contacts she may gain
as a result of joining the board but is concerned about her personal liability. Which of the
following is TRUE?
a. She has nothing to worry about because corporations are separate legal persons and so
there is nothing that she would ever become liable for.
b. She should worry about being held directly liable for the contracts the corporation enters
into.
c. She should worry about being vicariously liable for torts for which the corporation is
responsible.
d. She should worry about personal liability under regulatory and tax statutes.
e. She does not need to worry so long as she obtains an indemnity from the corporation
because an indemnity will always protect her from all risk.
31) A strict liability offence is
a. a type of crime for which a person can be convicted only if they acted with a guilty mind.
b. a type of crime for which there is no defence.
c. a type of crime that allows for a defence of due diligence.
d. a type of tort, but not a type of crime.
e. a crime for which an individual, but not a corporation, can be convicted.
32) The defence of due diligence
a. applies only to a mens rea crime.
b. applies only to an absolute liability crime.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
c. applies if a shareholder brings an action against a corporate director for relief under the
oppression remedy.
d. is the only defence to a derivative action.
e. is available to a corporation, in certain circumstances, if the person with managerial
responsibility for the area of the corporation’s activities in which a strict liability offence
was committed acted reasonably in the circumstances with a view to preventing the
offence.
33) The obligation that requires certain people within a corporation to act honestly and in
good faith when discharging other responsibilities
a. arises under the common law, and not under statute.
b. imposes liability only if a breach causes the corporation to suffer a loss.
c. is known as the duty of care.
d. is broken when a person with this obligation enters into a transaction with the
corporation unless certain requirements are met.
e. was recently abolished because it often prevented the sort of calculated risks that can
generate large profits.
34) A derivative action
a. is a type of crime that allows a corporation to be punished if a director misbehaves.
b. occurs when a corporation feels compelled by the consequences of one decision to act on
another decision.
c. allows a corporation to sue a shareholder who refuses to pay the purchase price for their
shares.
d. is an action by someone on behalf of the corporation that can be pursued only with court
approval.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
e. always occurs in connection with a unanimous shareholder agreement.
35) Acme Inc recently came into existence. Owen is the only officer, Dieter is a director,
and Seppo is a shareholder. Which of the following statements is most likely TRUE?
a. Under normal circumstances, Owen has the absolute power to remove Seppo from the
company.
b. Dieter was appointed by Owen.
c. Owen decides whether or not Seppo will receive a dividend.
d. Seppo belongs to a group of people that elected Dieter or Seppo is the only shareholder
and she elected Dieter.
e. Seppo and Owen cannot be closely related by blood or marriage.
36) Prophet Inc has existed for several years. Delilah is a director, Suki is a shareholder,
and Odessa is an officer. Which of the following statements is most likely to be TRUE?
a. Suki owes a duty of care to Delilah.
b. Odessa owes a fiduciary duty to Suki.
c. Delilah and Odessa owe a fiduciary duty to Prophet Inc.
d. Prophet Inc owes a duty of care to Suki.
e. Odessa owes a contractual duty of utmost good faith to Delilah.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
37) Padraig is a director of Eire Inc. Oona, an independent businesswoman, presented Eire
with an opportunity to enter into a business venture. The company’s board of directors
considered the proposal, and identified a number of risks that were associated with it.
However, Eire did not reach a conclusion as quickly as Oona had hoped. Even though the
board of Eire was still considering the proposal, she took the proposal to Padraig
personally. Oona and Padraig had worked together on a number of business ventures in the
past. Padraig accepted the proposal within eight hours. Which of the following statements
is most likely to be TRUE?
a. Eire can successfully sue Padraig for breach of his duty of care but not breach of
fiduciary duty of care.
b. Eire can successfully sue Oona for breach of fiduciary duty.
c. Eire can successfully sue Padraig only if it can persuade the judge that it had decided to
accept Oona’s proposal when it learned that Padraig had already done so.
d. Eire can successfully sue Padraig for any profits that he earns from the venture with
Oona.
e. Padraig could have legally accepted Oona’s proposal if he had first resigned his position
with Eire.
38) Gargantua Inc is a very large company with a very large board of directors. Lada is one
of those directors. The corporation recently became involved in a number of scandals. As a
result, the various members of the board of directors have been named as defendants in
several lawsuits. Lada is, of course, hoping to avoid liability. Which of the following
statements is TRUE?
a. As a director, Lada is personally responsible for the accuracy of any documents that
accountants prepared on behalf of the company.
b. If another director was granted sole responsibility for the corporation’s financial dealings,
Lada cannot possibly be held liable for misconduct that arose in connection with those
financial dealings.
c. The business judgment rule states that business decisions of the directors will not be
found to be a breach of duty so long as they were within the range of reasonable
alternatives available and the process by which the decision was taken was reasonable.
d. In order to protect shareholders, judges require proof that every decision made by a
board of directors was the best decision possible.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
e. Only officers, not directors, are responsible for any corporate wrongdoing.
39) Roxanne is a minority shareholder in Sumner Inc. She is very unhappy with the way
that the company is being operated. She therefore intends to express her disapproval and
advocate changes at the next annual meeting. She will also be encouraging the other 50
shareholders of Sumner to vote against management’s proposals. Which of the following
statements is TRUE?
a. Roxanne is entitled to obtain the minutes of the directors’ meetings.
b. Roxanne is a dissident shareholder.
c. Roxanne can force the corporation to buy back her shares at the same price that she paid
for them.
d. Roxanne has the right to force the corporation into liquidation.
e. Roxanne is not entitled to obtain a list of shareholders from the corporation in any
circumstances.
40) As a result of dealing with Barry, Zita believes that she has entered into a contract with
Primus Inc. Zita claims that Barry, who is the president of Primus, acted as the
corporation’s agent. Which of the following statements is TRUE?
a. Primus can avoid liability by demonstrating that its by-laws prohibited Barry from
incurring liability on its behalf.
b. The indoor management rule states that Primus cannot be held liable on the basis of
Barry’s actions unless, as a matter of the company’s internal affairs, it had actually
authorized him to act as its agent.
c. The concept of ostensible authority means that it is not enough for Zita to prove that
Barry appeared to have been authorized to act as the company’s agent.
d. Primus cannot deny that Barry had the authority that is usually held by the president of a
corporation.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
e. Zita can only enforce the contract if she searched all the corporation’s public records and
found no restriction on Barry’s authority.
41) Frank and Emma are shareholders in a cell phone company that they started together.
Emma provided $10 000 for the hardware, while Frank provided $40 000 for the software
and the store itself. Frank decided to make a shareholders’ agreement with Emma prior to
starting the company to ensure she would not sell her shares to competitors at any time in
the future. By doing this, Frank has most likely created which type of share transfer rule?
a. A non-competition agreement
b. A right of first refusal
c. A shotgun buy-sell
d. A share protection agreement
e. A unanimous shareholder’s agreement
42) Robyn and his eight friends bought shares in company XYZ. Since it was their first
time investing in a company, they became minority shareholders and did not closely follow
the actions of that company. Three months later, they each received a letter stating the
company planned to eliminate all minority shareholders as of that day. Robyn believes they
are entitled to some form of remedy for XYZ’s actions. Which of the following is the best
course of action for Robyn and his friends?
a. Robyn and friends should ignore this because minority shareholders can be eliminated
without notice.
b. Robyn and friends should sue the company for its total value in shares.
c. Robyn and friends should each individually ask the courts for permission to take
derivative action.
d. Robyn and friends should simply send a letter asking for at least half of their share value.
e. Robyn and friends should file a class action claim for an oppression remedy.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
43) Levi is the director for a milk production company. On the side, he and his brother Ray
own a McDonalds close by that uses sweetened milk products to make ice cream. Recently,
that McDonalds’ contract with a different milk production company was ended due to price
disagreements. Levi has offered a contract on behalf of his own milk company to the
McDonalds he owns with his brother for sweetened milk. Which of the following regarding
this potential transaction is false?
a. The transaction is possible if procedural safeguards are observed.
b. The transaction must be fair and reasonable to the milk production company.
c. Levi must give adequate notice of his interests in the contract to the board of directors of
the milk company.
d. Levi must vote to approve the contract with the board of directors.
e. The rules governing these transactions are found in the CBCA.
44) Ryan was an engineer and the Vice President for a technology company called App
Ville that specialized in creating applications (apps) for smartphones. He spent most of his
time working on an app that could tell if you were impaired by alcohol by breathing onto
the screen of the phone. Just before he could complete the app, he resigned and
incorporated his own app creation business, App City. The local police force asked for bids
on an app that could detect an impaired driver and accepted App City’s bid over App
Ville’s. Is App Ville able to take any legal action against anyone in this situation?
a. Yes, they can sue App Ville for taking a corporate opportunity of App City.
b. Yes, they can sue Ryan for taking a corporate opportunity and therefore breaching his
fiduciary duty to App Ville, but only if they can show that the opportunity was identified
and actively being pursued by App Ville.
c. Yes, they can sue Ryan for taking a corporate opportunity and therefore breaching his
fiduciary duty to App Ville, but only if they can show that the app was at least 50% of App
Ville’s business.
d. No, a fiduciary duty is only owed by directors to a company, not by officers, and Ryan is
not a director, only an officer of App Ville.
e. No, Ryan was the creator of the app, so he is free to take it with him when he leaves the
company.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
45) Byron was the director and president of a construction company. At an annual meeting,
the construction company’s biggest shareholder, Sask-Wheat, voted to elect some new
directors because they were unsatisfied with the construction company revenue. Knowing
the election would almost inevitably result in favor of Sask-Wheat, the construction
company’s lawyers advised Byron to rule their votes invalid, which he did. However, in
subsequent court hearings, the votes were ruled to be valid. Byron claimed indemnification
from the construction company for his legal costs. Which of the following is most likely
false?
a. Byron should be entitled to indemnity because he complied with his fiduciary duty.
b. Byron should be entitled to indemnity because he had reasonable grounds to believe his
conduct was lawful.
c. Indemnification commitments are only as good as the indemnifier’s ability to pay them.
d. Byron acted illegally and therefore cannot seek indemnity.
e. Indemnity is a form of compensation.
46) Maria is a manager for Silverman Racks investment bank. She decides one day to give
herself a hefty $250 000 bonus, which will directly reduce the value of each share in the
company. Since she only owns 5% of the total shares, she sees a net benefit because she is
able to enjoy the entire $250 000 herself. This is an example of what type of cost?
a. Sunk costs
b. Legal costs
c. Prospectus costs
d. Material costs
e. Agency costs
47) Miller’s Mining company shareholders decided to write up a unanimous shareholders’
agreement so they could directly manage the everyday actions of the company. This
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
agreement removed the directors’ ability to release employees, sign contracts, or to vote in
meetings, and it also absolved them of their liabilities. Three days earlier, a director of
Miller’s Mining signed a large contract with a dynamite company. Miller’s Mining believes
the provision to their company made with the unanimous shareholders’ agreement will
allow them to void the contract created by the director. Which of the following is true?
a. Miller’s Mining cannot void the contract because of the indoor management rule.
b. The director was acting outside of his responsibilities as a director which will allow the
contract to be voided.
c. The director did not have actual authority at the time of the contract creation, therefore it
can be voided.
d. Miller’s Mining cannot void the contract because the director committed a strict liability
offence.
e. Miller’s Mining cannot void the contract because the director committed an absolute
liability offence.
48) Jared works at a store that sells hockey equipment. Jared is a salesman in the stick
department, where he is responsible for placing price tags on the appropriate sticks.
Recently, the store has caught onto salespeople purposely leaving price tags off of sticks
until someone decides to purchase one, then placing the highest possible price on that stick,
despite its quality, in order to earn commission. The store policy clearly prohibits this
activity, as it is against the law. When a customer decides to sue the store after realizing he
lost over $4999 to wrongful price tags, the store seeks legal advice on whether or not they
can divert the liability to Jared. The advice they were most likely given was that
a. Jared is a directing mind and therefore can be held liable.
b. the indoor management rule allows the store to hold Jared liable as an individual.
c. Jared cannot be held liable because the damages sought are less than $5000.
d. Jared cannot be held liable because the courts will impose strict liability on the store for
Jared’s actions.
e. Jared will be held liable because stores are not responsible for their commissioned
employees.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
Essay Questions
1) The nature of the claim on the corporation represented by common shareholders’ shares
is that they are entitled only to the remaining property of the corporation on dissolution
after other claims have been paid and that they have a right to vote for the election of
directors, to appoint the auditor, and on proposals made to them. As such, the shareholders’
role is essentially a passive one. They are not involved in management. Is this a complete
and accurate description regarding the role that shareholders play in corporations?
2) Elise and Kim are trying to decide how to set up the internal management structure of
the corporation they have just incorporated to carry on their engineering consulting
business. They each hold 35 percent of the shares, with the remaining 30 percent being held
by five employees. Elise will run the business. She will be responsible for all aspects of the
management of the office. Kim will be a passive investor, but is nevertheless interested in
being kept informed regarding what is going on in the business. Kim and Elise decide that
they will both be directors and then delegate all management powers to Elise, subject only
to an obligation to report to the board every two months as to what is happening. Will this
structure work? Support your answer.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
3) What does the fiduciary duty require of directors and officers?
4) Forest is the majority shareholder in ForCo Inc, a corporation carrying on a business of
providing investment advice. She is also a director of DevCo, a corporation incorporated
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
under the Canada Business Corporations Act engaged in real estate development. Is there a
legal problem if ForCo provides advice on regular commercial terms to DevCo? How can
Forest make sure that no problems arise in connection with her corporation doing business
with DevCo?
5) Regal Cinemas Inc operates a movie theatre in a small town in Manitoba. It has a chance
to enter into long-term leases on the only other theatres in town. The landlord has refused to
enter into the lease, however, unless Regal can put up a deposit of $50 000 and Regal has
no money. Regal is very anxious to get the leases because there is an outstanding offer from
MoviePlex Inc for all the shares of the corporation if the corporation has the leases on these
other cinemas. The directors of the board, consisting of five people, decide that the best
way to get Regal the money is for each of them to buy 100 shares for $100 each. The
directors buy the shares, cause Regal to enter the leases, and then, on the next day, all the
shareholders of Regal, including the directors, sell their shares to MoviePlex for $150.
Once MoviePlex has all the shares, it elects new directors. The new directors cause the
corporation to sue the former directors for the profits they made on the share sale, claiming
that participating in the transaction in the way they did was a breach of their fiduciary duty.
Do you agree? Explain you reasons.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
6) Salima is a director of Commercial Depot Inc, an office supply business. Salima thinks it
would be a good idea if the corporation were to buy the building the corporation is
currently renting. In her view, the price the landlord is offering is a good one. She thinks
that if the corporation does not buy it, someone else might, and that person would want to
significantly increase the corporation’s rent. She has been trying to get the other members
of the board to agree to buy the building for the past six months, but the purchase has not
yet been approved. There just never seems to be time to get to it at the directors’ meetings.
She is very worried about other buyers and wonders whether she should just buy the
building herself. She could always sell it again for a gain and she would not have to
increase the rent to Commercial Depot to ensure that she receives a good cash flow. Do you
see any problems with Salima’s plan to buy the building herself? Explain how Salima could
achieve her objective while avoiding any legal problems.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
7) Identify and briefly explain the significance of Canadian Air Services Ltd v O’Malley
(Case Brief 22.1).
8) Trudy and Aline have incorporated a corporation to carry on an antique shop business.
They each hold 20 percent of the common shares. Aline’s aunt, Louise, holds the remaining
60 percent of the common shares. Trudy and Aline will share responsibility for carrying on
the business on a daily basis. Louise has no interest in participating in the business. She
invested to help out her niece, to get a nice return when she sells her shares and would like
to have a veto right over any substantial changes to the corporation. How would the parties
set up their desired allocation of power and responsibilities?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
9) The shotgun buy-sell is a drastic but effective mechanism for resolving shareholder
disputes. Do you agree with this statement? Please give your reasons.
10) The oppression remedy is not just a shareholder remedy. It creates a standard of
behaviour for management that is different from the fiduciary duty and duty of care, and
one that is potentially more important for shareholders because it can be enforced by
shareholders directly. Do you agree with this description of the oppression remedy?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
11) In corporations where there are few shareholders, the basic division of powers and
responsibilities between shareholders, directors, and officers is formalistic and irrelevant.
Do you agree with this statement? Be sure to provide reasons for your response
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
12) On behalf of her employer, MasterFood Inc, Claire has been negotiating the purchase of
the business of Watson Corp for a price of $1 million. She has been dealing with Barry,
who has told her that he is the chief financial officer of Watson Corp. She has visited him at
the offices of Watson Corp him many times and, with her team, gone over Watson Corp’s
books. They have agreed on a form of contract to give effect to the sale from Watson Corp
to MasterFood Inc. At the closing of this transaction, what should she do to ensure that
Barry has sufficient authority to bind Watson Corp to sell its business?
13) Shazad is the manager of a bookstore that is one of a chain owned by Tebsco Markets
Inc. Shazad advertised a special low price for Harry Potter books as a way of getting people
to come to the store. Shazad knew at the time that he had no Harry Potter books.
Advertising in this manner is an offence under the Competition Act. Shazad was convicted,
and Tebsco was too on the basis that Shazad was a senior officer of the corporation in
relation to its operation of his bookstore. Is there anything that Tebsco could do to avoid
this liability in the future?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
14) New World Construction Co had contracted to build a new building at the University of
British Columbia. New World employed Ellen as a project manager to determine how the
construction would be completed and to supervise all aspects of the construction. Ellen was
negligent in failing to make sure that a retaining wall was properly built. The wall
collapsed, causing substantial property damage. The university is suing New World and
Ellen for negligence. Assuming that Ellen is liable personally, explain the bases upon
which New World would be responsible for her negligence.
15) Jae was asked to join the board of directors of Western Trucking Ltd, a new firm in the
trucking business incorporated under the Canada Business Corporations Act. The president
of the corporation has told her that she should not worry about director’s liability because
Western will indemnify her. Would the indemnity fully protect her?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 22: Legal Rules for Corporate Governance
