Chapter 35
Corporate Directors,
Officers, and Shareholders
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1. A board of directors govern every corporation.
2. A corporation’s officers and other executive employees are hired by corporate
shareholders.
3. The initial board of directors of a corporation is normally elected at the first
annual shareholders’ meeting by a majority vote of the shareholders.
4. Some states permit a corporate board to have fewer than three directors.
5. A director usually serves on a corporation’s board for a life term.
6. In most states, a director cannot be removed from a corporate board for a
breach of duty.
7. A director can be elected by the other members of the board.
8. After the first board, the directors are chosen by the corporate officers.
9. Pursuing a new product line is a decision that would be made by shareholders.
10. Hiring corporate officers and determining their compensation are decisions that
would be made by a corporation’s board of directors.
11. The minimum number of members of a body of officials that must be present
before business can validly be transacted is known as a quorum.
12. Quorum requirements are the same in all jurisdictions.
13. A corporate officer cannot act as an agent of the corporation.
14. Corporate officers can usually be removed by the board of directors without
cause.
15. A director is a fiduciary of a corporation.
16. A board of directors can delegate some functions to corporate officers.
17. If a director fails to use a reasonable amount of supervision over corporate
officers and employees, then the director can be held liable for negligence.
18. Corporate directors and officers are insurers of business success.
19. Directors can use corporate funds and confidential information for personal
advantage as long as they disclose that they are doing so.
4 UNIT FIVE: BUSINESS ORGANIZATIONS
20. A director does not need to disclose any conflict of interest before voting on a
proposal.
21. Shareholders own a corporation.
22. Shareholders do not need to approve fundamental changes affecting the
corporation before the changes can be effected.
23. Shareholders’ meetings must occur at least annually.
24. The articles of corporation cannot exclude or limit shareholders’ voting rights.
25. Cumulative voting refers to the accumulation of proposals presented annually
for a shareholders’ vote.
26. Shareholder voting agreements are usually held to be invalid and
unenforceable.
27. A preemptive right is a preference over other shareholders to cast the
determining vote on fundamental changes affecting the corporation.
28. The ownership right to stock exists independently of a stock certificate.
29. Dividends can be paid only in stock in other corporations.
30. Every shareholder is entitled to inspect corporate records for a proper purpose.
31. Persons whose names appear in a corporation’s stock book are ordinarily
entitled to notice of shareholders’ meetings and the right to vote.
32. If the corporate directors fail to sue in the corporate name to redress a wrong
suffered by the corporation, then the shareholders can do nothing.
33. If a corporation fails, the shareholders are all individually liable.
34. In certain instances of fraud, a court may “pierce the corporate veil” to hold the
shareholders individually liable.
35. A majority shareholder does not owe a fiduciary duty to minority shareholders
under any circumstances.
MULTIPLE CHOICE QUESTIONS
1. Rhea is a director of Spex Corporation, which makes and sells sunglasses and
other eyewear. As a Spex director, Rhea sits on the board, which
a. governs Spex.
b. is governed by the Spex incorporators.
c. is governed by the Spex officers.
d. is governed by the Spex shareholders.
2. Lexy and Mort act as the incorporators for NuGame Corporation. After the first
board of directors is chosen, subsequent directors are elected by a vote of
NuGame’s
a. board of directors.
b. employees.
c. officers.
d. shareholders.
3. Philip is elected as a director for Fatless Foods, Inc. His term of office will most
probably last for
CHAPTER 35: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 7
a. three months.
b. six months.
c. nine months.
d. one year.
4. Doyle and Emily are officers of Freshé Bottled Water Corporation. As corporate
officers, their compensation is determined by Freshé’s
a. directors.
b. incorporators.
c. other officers.
d. shareholders.
5. Great Gates, Inc. has a board of ten directors. Great Gates’ bylaws do not state
any quorum requirements. In most states, a quorum for Great Gates will be
defined as
a. two directors.
b. six directors.
c. nine directors.
d. ten directors.
6. The board of directors of Integral Components Corporation consists of Frida,
Gayla, and Hart. A quorum is the minimum number of these directors
a. who must be at odds in a dispute to call for its resolution.
b. who must be present to validly transact business.
c. that the shareholders may remove from office at any one time.
d. whose positions must be vacant to warrant an election.
7. RayAnn is a corporate officer for Timmy’s Trees, Inc. As a corporate officer,
RayAnn is
a. the head of the board of directors.
b. involved in the day-to–day operations of Timmy’s Trees.
c. not involved in the day-to–day operations of Timmy’s Trees.
d. in charge of selecting members of the board of directors.
8. Mickey is a director of Fine Art Dealers, Inc. Mickey is trained in art valuation.
Fine Art Dealers makes several purchases in which it pays too much money for
artwork. Mickey approves all the transactions without reading the details.
Mickey is most likely
a. liable for breach of the duty of care.
b. not liable for breach of the duty of care.
c. liable for breach of duty of loyalty.
d. liable for violation of the business judgment rule.
9. Nina is a director of Omega, Inc. Under the standard of due care owed by di–
rectors of a corporation, Nina’s decisions must be
a. ambiguous and questionable.
b. arguable and defensible.
c. informed and reasonable.
d. perfect and unassailable.
10. Odell is a director of Price Rite, Inc. As a director, with respect to the
corporation, Odell is
a. a fiduciary.
b. a forum.
c. a proxy.
d. a quorum.
11. Frawsty Corporation distributes beverages in the greater Northwest. Frawsty’s
board of directors can delegate some of its functions to
a. Frawsty’s incorporators.
b. Frawsty’s officers.
c. Frawsty’s shareholders.
d. no one.
12. Coast-to-Coast Distribution, Inc., is a direct-mail distribution company. Like
most corporations, Coast-to–Coast’s employees include its
a. board of directors.
b. incorporators.
c. officers.
d. shareholders.
13. Rafi, a director of Super Service Station Corporation, does not attend a board
meeting for three years. During that time, Twyla, Super’s president, makes
improper loans that cost the company $100,000. Rafi is most likely
a. liable for negligence or mismanagement.
b. liable for violation of the business judgment rule.
c. not liable because missing meetings is an honest mistake.
d. not liable because missing meetings is only poor judgment.
14. Dave is an officer for Sweet Somethings Candies, Inc. In 2012, chocolate
hearts were very popular. Acting within his managerial authority and the powers
of the corporation, Dave signs a contract for an increase in chocolate heart
production for 2013. In 2013 chocolate hearts do not sell well and Sweet
Somethings Candies loses money. Dave is most likely
a. liable for breach of duty of care.
b. liable for breach of duty of loyalty.
c. none of the choices.
d. liable for violation of the business judgment rule.
15. Denise, Ervin, and Flem occupy the positions of directors on the board of
Gallery Corporation. As directors, they may not
a. authorize major corporate policy decisions.
b. decide to issue stock and bonds, and declare dividends.
c. select and remove corporate officers.
d. subordinate the corporation’s welfare to their personal interests.
16. Josh is a director of Sippy Soups, Inc. Josh opposes a tender offer that is in
Sippy’s best interest because its acceptance would cost him his position as a
director. Josh is liable for a breach of duty of
a. no duty or rule.
b. the business judgment rule.
c. the duty of care.
d. the duty of loyalty.
17. Etta is a director of Trendy Stuff Corporation. Without informing Trendy, Etta
goes into business with GR8 Things, Inc., in competition with Trendy. Etta is li-
able for breach of
a. no duty or rule
b. the business judgment rule.
c. the duty of care.
d. the duty of loyalty.
18. Louise is a director for Icy Ices, Inc. Louise is also a director for Creamy
Creams, Inc. When Icy Ices enters into a contract with Creamy Creams, Louise
a. must resign from one of the boards.
b. must resign from both boards.
c. must make a full disclosure of any conflicts of interest and abstain from
voting on the proposed transaction.
d. need not do anything.
19. Rosa and Sean are directors of Tech, Inc. Rosa’s written authorization to Sean
to vote Rosa’s shares at a Tech shareholders’ meeting is
a. a violation of the duty of care.
b. a preemptive right.
c. a proxy.
d. a quorum.
20. Niche Stores, Inc., must hold a shareholders’ meeting
a. once a month.
b. once a year.
c. once every two years.
d. only when it is called by the board of directors.
21. Corporate business matters are presented at a shareholders’ meeting in the
form of
a. resolutions.
b. proxies.
c. articles of incorporation.
d. bylaws.
22. Thor Power Products Corporation permits its directors to be elected by
cumulative voting. This
a. allows minority shareholders to be represented on the board.
b. assures directors that they will be selected by their peers.
c. guarantees Thor’s executive officers of the final choice.
d. ensures against persons who may “cloud” the corporate direction.
23. Jaycee is a shareholder for Designer Pet Clothes, Inc. Designer Pet Clothes
uses cumulative voting to elect directors. This means that the number of
Jaycee’s votes is determined by
a. how long Jaycee has been a shareholder.
b. the number of members of the board to be elected multiplied by the total
number of voting shares Jaycee holds.
c. the number of shareholders present at the most recent shareholders’
meeting.
d. the number of shareholders’ meetings Jaycee has attended in the past
year.
24. Fiona owns one share of stock in SK8 Boards Corporation, as evidenced by a
stock certificate. Fiona loses the certificate. Her ownership of the stock is
a. forfeited immediately.
b. forfeited within ten days of a third party’s claim to ownership.
c. forfeited within thirty days if she cannot find the certificate.
d. not affected.
25. Because stock is intangible personal property, a stockholder’s ownership of the
stock
a. exists independently of the stock certificate itself.
b. cannot exist without a tangible stock certificate.
c. cannot exist without the original stock certificate.
d. cannot be transferred to another person.
26. Lovey is a shareholder of Matchless Corporation with preemptive rights. With
these rights, Lovey can
a. buy a prorated share of a new issue of stock before other buyers.
b. choose to have Matchless act exclusively in a certain area.
c. “preempt” managerial decisions that affect shareholders.
d. sell a prorated share of a new issue of stock before other sellers.
27. Ida, Jerzy, and Kit are the directors of Liberty Convenience Stores, Inc. Liberty
has nine officers and forty-six shareholders. Dividends are ordered by the firm’s
a. board of directors.
b. incorporators.
c. officers.
d. shareholders.
28. Generally, Sports Fitness Club Company and other corporations can pay
dividends if
a. the corporation can continue to pay its debts as they come due.
b. the amount of the dividends exceed the corporation’s net worth.
c. the shareholders approve.
d. the corporation’s assets equal its total liabilities.
29. Natalie is a shareholder of Off-Road Vehicle Company. As a shareholder,
Natalie does not have
a. a right to compensation.
b. dividend rights.
c. inspection rights.
d. preemptive rights.
30. Bea is a shareholder of Candy Confections Corporation. The right to inspect
corporate books and records is
a. held by Bea only if she is a director.
b. held by Bea, without restrictions.
c. held by Bea, with some restrictions.
d. not held by Bea.
31. Kelly transfers shares of stock that she owns in Lone Starz Company to Max. A
shareholders’ meeting takes place before Max’s ownership is entered in Lone
Starz’s stock book. A vote at the meeting can be cast by
a. Kelly and Max.
b. Kelly only.
c. Max only.
d. neither Kelly nor Max.
Fact Pattern 35-1 (Questions 32–33 apply)
Ray is a shareholder of Small Biz Company (SBC). When the directors fail to
undertake an action to redress a wrong suffered by SBC, Ray files a suit on the firm’s
behalf.
32. Refer to Fact Pattern 35–1. Ray’s suit is a shareholder’s
a. business-judgment rule suit.
b. derivative suit.
c. duty-of-care suit.
d. duty-of-loyalty suit.
33. Refer to Fact Pattern 35-1. Any damages recovered by Ray’s suit will go to
a. Ray.
b. SBC.
c. SBC’s directors.
d. the state in which SBC is incorporated.
34. Larry is a shareholder for Custom Colors, Inc. If Custom Colors fails, Larry will
a. be liable for Custom Colors’ debts.
b. not be liable for Custom Colors’ debts.
c. be able to reclaim his initial investment in Custom Colors.
d. be able to reclaim his initial investment in Custom Colors plus damages.
35. Cole is a shareholder of Donut Holes, Inc. Cole will be deemed to have a fiduci–
ary duty to Donut Holes and its minority shareholders if he has
a. a restriction on the transferability of his shares.
b. a right of first refusal.
c. a sufficient number of shares to exercise de facto control.
d. voting rights.
ESSAY QUESTIONS
1. Guy is Hot Java Company’s majority shareholder. Guy decides to sell his Hot
Java stock. The sale will be an effective transfer of the control of the company.
Does Guy owe a duty to Hot Java or its minority shareholders in this situation?
2. Mitch is a director and officer of Numero Uno, Inc. Mitch makes a marketing
decision that results in a dramatic decrease in profits for Numero Uno and its
shareholders. The shareholders accuse Mitch of breaching his fiduciary duty to
the corporation. What is Mitch’s best defense against this accusation? Later,
the Numero Uno board considers a resolution for the firm to compete with One–
of-a-Kind Corporation. Mitch is a director and shareholder of One–of-a-Kind.
What is Mitch’s responsibility in this situation?