55. Officers and directors of a corporation owe to the corporation the subordination of their self-interest to the interest of
the corporation and owe constant loyalty to the corporation. This duty is the:
a. fiduciary duty.
b. business judgment duty.
c. duty of indemnification.
d. duty of diligence.
56. Theodore, as treasurer of Valleyview Corporation, had the duty to invest corporate earnings as he deemed best for
the company. When Valleyview Corporation went public, the new board decided that a committee of the officers
would make such investment decisions. If Theodore thereafter unilaterally contracted to purchase investment
securities with corporate earnings as he had done many times before, such contract would be valid:
a. since Theodore would have express authority.
b. since Theodore had implied authority.
c. under apparent authority if the seller knew of Theodore’s past transactions.
d. because of ratification if the board did not know of his actions.
57. Morales, president of Tradewind Industries, Inc., would have actual implied authority to:
a. issue corporate stock.
b. remove a vice-president of the company from office.
c. bind the company in a sale in the ordinary course of the company business.
d. set the amount for production bonuses of the other officers.
58. Which of the following are directors in publicly held corporations?
a. Inside directors
b. Outside directors
c. Affiliated directors
d. Any of these.
59. Which of the following is the effect of the business judgment rule regarding the liability of officers and directors?
a. Courts will not substitute their judgment for that of the board or an officer acting in good faith with due care.
b. Officers and directors will never have liability for their decisions relating to the corporation.
c. Officers and directors may have liability for bad faith decisions, but cannot be liable for failure to act.
d. Directors and officers will not be held liable for conduct that is only negligent.
60. An officer who breaches the fiduciary duty to the corporation will be:
a. discharged, but not required to pay anything.
b. required to return to the corporation profits obtained through breach of a fiduciary duty and forfeit the right to
compensation during the period of the breach
c. required to pay back all compensation received during the period of the breach.
d. None of these.
61. Marjorie is a member of the board of directors of Techno Ko Corp. She would like to have the corporation lend her
some money so that she can begin another business venture. Which of the following is correct regarding loans of a
corporation to one of its directors?
a. The Model Act permits a corporation to lend money to its directors with a majority vote of the other directors.
b. The Sarbanes-Oxley Act prohibits any publicly held corporation from making personal loans to its directors or
executive officers, with certain limited exceptions.
c. Both the Model Act and the Revised Act prohibit loans to directors in all cases.
d. The Sarbanes-Oxley Act permits a publicly held corporation to make personal loans to its directors or
executive officers only with the consent of the shareholders.
62. With respect to the board of directors of a corporation, which of the following is NOT correct?
a. They manage the business and affairs of the corporation.
b. They are the shareholders’ elected representatives.
c. They must always obtain shareholder approval before deciding questions of operating policy.
d. They have the authority to delegate power to officers and agents.
63. The minimum number of board members necessary to be present at a meeting in order to transact business is known
as:
a. a plurality.
b. the entire board of directors.
c. a quorum.
d. a minority.
64. The nominating committee of the board of directors actually determines the board’s membership because:
a. they are the only ones who can vote on this matter.
b. virtually all shareholders who vote for directors do so through the use of a proxy, and the majority of
shareholders who return their proxies vote as management advises.
c. very few institutional investors exercise their right to vote their shares, so the choice of the nominating
committee usually prevails.
d. most individual investors exercise their right to vote their shares, and they tend to rely on the recommendation
of the nominating committee.
65. Shares in a publicly held corporation typically are:
a. owned mostly by management of the corporation.
b. widely dispersed and about two-thirds are held by institutional investors.
c. owned by a few investors holding many shares each.
d. owned mostly by individual investors, and these investors usually exercise their right to vote by attending
shareholder meetings.
66. One of the fiduciary duties of directors is the duty not to compete with the corporation. They may pursue their own
business interest, but they may not:
a. use corporate resources.
b. hire away personnel for their own business.
c. use corporate facilities.
d. All of these.
67. Which of the following is not an established right of a shareholder?
a. The right to vote
b. The right to inspect the books of the corporation
c. The right to participate directly in the management of the corporation
d. The right to bring lawsuits to enforce their rights
68. With respect to the voting rights of shareholders, a shareholder is entitled to vote:
a. only at annual shareholder meetings.
b. one vote for every two shares of stock owned.
c. only in person.
d. at annual and special shareholder meetings, ordinarily with one vote for each share owned.
69. Arthur is a shareholder of Sigma Corp. He has evidence to suggest that its president/CEO has allowed the
corporation to engage in acts that are ultra vires. Based upon this evidence, Arthur contacts an attorney and sues
the corporation on behalf of the corporation. The lawsuit Arthur has filed is known as a(n):
a. direct suit.
b. derivative suit.
c. class action suit.
d. unauthorized suit.
70. If shareholders agree to vote in a specified manner for the election or removal of directors, this is known as:
a. a proxy.
b. cumulative voting.
c. a voting trust.
d. a shareholder voting agreement.
71. The right of a shareholder to examine the books and records of the corporation is a valuable right. However, it may
be denied if the shareholder:
a. seeks information to determine the financial condition of the corporation.
b. desires to know the amount of executive salaries.
c. seeks information to embarrass or cause loss to the corporation.
d. desires the names and addresses of other shareholders.
72. Which of the following is not true about a corporation’s ratification of an officer’s act?
a. It applies to an authorized act of an officer.
b. It relates back to the original transaction.
c. It may be either express or implied from the corporation’s acceptance of contractual benefits.
d. The corporation must have full knowledge of the facts in order to ratify the act.
73. Which of the following is correct regarding the removal of Mr. X from the board of XYZ?
a. The common law does not permit removal of a director for any reason.
b. The RMBCA permits the removal of a director without cause.
c. The articles of incorporation cannot provide for the removal of directors.
d. Under common law and statutory law, a director can never be removed without cause.
74. Zeron Corporation stock may be summarized as follows:
100,000 authorized
90,000 issued
75,000 outstanding
15,000 treasury stock
How many shares or proxies will have to be present for a quorum (assuming no special provision and that the
Revised Act is not in effect)?
a. 45,001
b. 37,501
c. 30,001
d. 50,001
75. OmegaByte Corp. has 1,000 shares of stock outstanding that are permitted to vote for directors. If OmegaByte
Corp. permits cumulative voting, a minority shareholder would need to vote how many shares to elect one of three
directors?
a. 251
b. 501
c. 751
d. 334
76. Assume that 12,000 shares are represented at a shareholder meeting and a quorum exists. How many votes are
normally necessary to carry a motion?
a. 4,001
b. 8,001
c. 6,001
d. 10,000
77. Which of the following would be likely to result in liability to a director of a textile company? The director:
a. sells stock in the textile company before a merger is announced.
b. buys stock in the textile company using the computer in the office of the company.
c. owns stock in an automobile company.
d. agrees to hire as president a man he has not personally investigated.
78. Gerhardt is the president of the Speedway Bicycle Company. He also serves as a director of the Flexible Tire
Company. It occurs to Gerhardt that both companies could benefit from a contract in which Flexible agrees to supply
Speedway with tires for its bicycles. If Gerhardt wishes to negotiate a contract between Speedway and Flexible,
which of the following is correct?
a. The contract will be void as a conflict of interest.
b. In most states, the contract might be permitted if it is fair and reasonable to both corporations and if Gerhardt
fully discloses all information relating to the transaction.
c. The contract is a clear conflict of interest and will be avoidable by either company even with disclosure.
d. None of these.
79. The board of directors is delegated the power to manage the business of the corporation, which includes:
a. determining the capital structure and financial policy of the corporation.
b. declaring the amount and type of dividends.
c. formulating major management policy.
d. All of these.
80. To whom does a large, publicly held corporation and its management have obligations?
a. The corporation’s shareholders
b. Its employees, customers, and suppliers
c. Communities in which the corporation is located
d. All of these.
81. What is the role of shareholders in managing the corporation?
a. Election of directors
b. Approval of corporate transactions that are void or avoidable unless ratified
c. Right to bring enforcement suits
d. All of these
82. What are some of the matters involving fundamental changes in the corporation?
a. Amendments to articles of incorporation
b. Sale or lease of all or substantially all of the corporate assets not in the regular course of business
c. Mergers, consolidations, compulsory share exchanges
d. All of these
83. What are some of the areas where the board determines corporation policy?
a. Selecting and removing officers
b. Setting management compensation
c. Initiating fundamental changes and declaring dividends
d. All of these.
84. A director’s right of inspection of corporate books and records is:
a. similar to a shareholder’s right to inspect.
b. considerably broader than a shareholder‘s right, but is still subject to limitations.
c. narrower than a shareholder’s right.
d. unnecessary for most directors, since the books and records relate to officers’ duties, not directors’ duties.
85. Answer the following:
Compare the respective roles of the officers, board of directors, and the shareholders of a
a. corporation. Who runs the corporation? Explain your answer and give examples of the kinds of
tasks each performs.
b. How does the management structure of a closely held corporation differ from that of a publicly
traded corporation?
86. Answer the following:
a. Who selects the officers of a corporation under most state corporate statutes? Who removes
them? Explain.
b. What duties do the officers and directors of a corporation owe to the corporation? Explain.
87. Answer the following:
a. What is a quorum of the board of directors for purposes of conducting corporate business?
What do most states and the RMBCA say with regard to what constitutes a quorum?
The directors of Schmalley’s, Inc. can’t decide whether to declare a dividend, so the board
appoints a committee consisting of the president of the corporation, the vice-president of the
b. corporation, and the treasurer to decide whether to pay a dividend. If the committee wants to
declare a dividend, the directors say the officers can pay it immediately before the next board
meeting. Is this a permissible delegation of corporate authority? Explain.
88. Answer the following:
Ron Rader wants to buy all of the stock of Radmore, Inc. He approaches the officers and
directors and offers to pay them $200 per share for each of the shares they hold. The officers
a. and directors agree and then convince the majority of shareholders to sell their stock for $100
per share. Do the other stockholders have a cause of action against the officers and directors?
Explain.
Anne, Bob, and Clark are three of the five board members of Starzitz, Inc. One day they meet
b. by chance for breakfast and decide to transact some corporate business while they are all
together. If they decide to declare a dividend and to purchase another building for the
corporation at this meeting, will their actions be binding on the corporation? Explain.
89. Discuss the business judgment rule.
90. Who usually determines the compensation of officers and directors? What are some of the executive compensations
available?